5 6170280447000445052 PDF

Preface
Dear friends
It is a great pleasure in presenting this Summary Book on Direct

Tax Laws & International Taxation CA Final Old and New Syllabus.
This Book is mainly prepared to read the entire syllabus of Direct
Tax Laws & International Taxation one day before the exam. It can
be used by students to revise the subject in very less time.
I am thankful to my friend Prof. S. S. Rajagopal FCA, Grad CMA, for

helping me in compiling this work book.
I wish the students all the best for their future endeavors. Students
can approach me for any queries on the subject at the mail id given
below.
R. Soumyanarayanan FCA, Grad CMA
Chennai,
14/04/2019
EMAIL: krsn5976@yahoo.co.in
reachssr@yahoo.co.in
Direct Tax Laws & International
Taxation
(Summary Book)
Index
S.No Chapter Name Page No
1 Basic concepts 1-6
2 Issues in Salary 7-8
3 Issues in IFHP 9-10
4 Taxation of gifts 11-13
5 Capital gains 14-58
5A Chapter VI A deductions 59-67
5B MAT 68-72
5C Miscellaneous amendments 73-73
6 S. 269SS, S.269T, S. 269ST 74-76
7 Business Trust 77-79
8 Mutual fund 80-81
9 New Pension Scheme 82-82
10 Electoral Trust 83-83
11 Taxation of NRI 84-85
12 Taxation of non-resident sportsmen etc 86-86

13 Taxation of FII 87-87
14 Taxation of overseas financial organization 88-88
15 Assessment of Co-operative society 89-90
16 Taxation of dividend 91-95
17 Assessment of Trust 96-108
18 Assessment of political parties 109-109
19 Clubbing provisions 110-114
20 Assessment procedure 115-151
21 Advance tax Interest under S. 234A, S. 234B and 152-157

S. 234C
22 Refund and interest under S. 244A 158-160
23 Revisionary Powers of CIT 161-164
24 Assessment of AOP & BOI 165-168
25 Assessment of Firm 169-172
26 Investment fund 173-174
27 Securitisation Trust 175-175
28 Collection and recovery 176-182
29 Liabilities in special cases 183-187
30 TDS 188-205
31 TCS 206-210
32 Set off and carry forward of losses 211-215
33 Restriction on carry forward of losses 216-217

34 Tonnage taxation 218-219
35 Settlement commission 220-227
36 Advance Ruling 228-231
37 Appeals 232-238
38 Profit linked deductions and investment linked 239-249

deductions
39 Alternate minimum tax 250-251
40 Double Taxation Avoidance Relief 252-256
41 Transfer pricing 257-272
42 GAAR 273-276
43 Taxation of non-residents 277-300
44 PGBP 301-341
45 Penalty for under-reporting and mis-reporting 342-349
46 Equalisation levy 350-350
47 Statement of financial transaction or reportable 351-352

account
Chapter-1: Basic concepts
1. Tax rates applicable for AY 2019-20:

(a) Individual (not covered by (b) & (c)) /HUF/ AOP & BOI (not covered by S. 167B) and every AJP:
Total income Rate of income-tax
Where the TI does not exceed Rs. 2.50L Nil
Where the TI exceeds Rs. 2,50,000 but does not 5% of the amount by which the TI exceeds Rs. 2,50,000
exceed Rs. 5,00,000
Where the TI exceeds Rs. 5,00,000 but does not Rs. 12,500 plus 20% of the amount by which the TI exceeds
exceed Rs. 10,00,000 Rs. 5,00,000
Where the TI exceeds Rs. 10,00,000 Rs. 1,12,500 plus 30% of the amount by which the TI
exceeds Rs. 10,00,000
Note: AOP/BOI covered by S. 167B shall suffer tax @ MMR (35.88%) / Higher rate / combination thereof.
(b) Senior citizen:
Total income Rate of income-tax
Where the TI does not exceed Rs. 3L Nil
exceed Rs. 5,00,000
Where the TI exceeds Rs. 5,00,000 but does not Rs. 10,000 plus 20% of the amount by which the TI exceeds
exceed Rs. 10,00,000 Rs. 5,00,000
Note: The aforesaid slab rates apply to those resident individuals who attained the age of 60 years on or before 01.04.2019.
[CBDT Circular 28 /2016].
(c) Super-senior citizen:

Total income Rates of income-tax
Where the TI does not exceed Rs. 5L Nil
exceed Rs. 10,00,000
Note: The aforesaid slab rates apply to those resident individuals who attained the age of 80 years on or before 01.04.2019.
[CBDT Circular 28 /2016].
(d) Co-operative society:

Total income Rate of tax
Where the TI does not exceed Rs. 10000 10% of TI
Where the TI exceeds Rs. 10000 but does not Rs. 1000 plus 20% of the amount by which the TI exceeds Rs.
exceed Rs. 20000 10000
Above Rs. 20,000 Rs. 3000 plus 30% of the amount by which the TI exceeds Rs.
20000.
(e) Firm/Indian LLP:

Tax rate is 30% on the whole of the TI of the firm. This would apply to an Indian LLP also.
(f) Local authority:

The rate of tax for a local authority is 30% on the whole of the total income.
(g) Company:
(i) Domestic company whose turnover or gross receipt in the 25% of the TI
PY 16-17 ≤ Rs. 250 Crores
(ii) Any other domestic company 30% of the TI (Subject to S. 115BA)
(iii) Foreign company 40% of the TI
MT Educare – CA Final DT Classes – R. SOUMYANARAYANAN. FCA. GRAD CWA. Page-1

Provisions of S. 115BA:
S. 115BA provides that the income-tax payable in respect of the total income of a domestic company for any PY relevant to
AY 2017-18 and thereafter, shall be computed @ 25% (subject to the other provisions of Chapter XII), at the option of
the company, if:
1 The company has been set up and registered on or after 01.03.2016;
2 The company is not engaged in any business other than the business of manufacture or production of any article or
thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
3 The company while computing its TI has not claimed any benefit S. 10AA, S. 32 (1) (iia), S. 32AD, S. 33AB, S. 33ABA,
S. 35 (1) (ii)/(iia)/(iii), S. 35 (2AA), S. 35 (2AB), S. 35AD, S. 35CCC, S. 35CCD, under Chapter VI-A Part-C (other than
S. 80JJAA).
4 The option is exercised in the prescribed manner on or before the due date specified U/s 139 (1) for furnishing the first
of the returns of income which the person is required to furnish under the provisions of the Act.
5 However, once the option has been exercised for any PY, it cannot be subsequently withdrawn for the same or any
other PY.
Applicability of surcharge:
(i) Individual/HUF/AOP/BOI/AJP TI doesn’t exceed Rs. 50L No surcharge
TI exceeds Rs. 50L but doesn’t exceed Rs. Surcharge = 10%
100L
TI exceeds Rs. 100L Surcharge = 15%
(ii) Co-operative society / Local authority / TI doesn’t exceed Rs. 100L No surcharge
Firm / LLP TI exceeds Rs. 100L Surcharge = 12%
(iii) Domestic company TI doesn’t exceed Rs. 100L No surcharge
1000L
(iv) Foreign company TI doesn’t exceed Rs. 100L No surcharge
1000L
Applicability of Health & Education cess (HEC):
(a) Health & Education cess is leviable in case of all assessees (irrespective of the amount of total income)
(b) It shall be quantified by applying 4% on tax plus surcharge.
2. Rebate U/s 87A:

1 Person eligible for rebate Resident individual whose total income does not exceed Rs. 350000.
2 Quantum of rebate Income tax payable or Rs. 2500 (whichever is less)
3 Treatment of rebate It should be reduced against income-tax.
3. Marginal relief:
A. Computation of MR in case of Individual /HUF/AJP/AOP & BOI (not covered by S. 167B):
TI > Rs. 50L but doesn’t exceed Rs. 100L TI > Rs. 100L
1 Tax on TI + surcharge @ 10% ***** 1 Tax on TI + Surcharge @ 15% *****
2 Tax on Rs. 50L (****) 2 Tax on Rs. 100L + Surcharge @ 10% (****)
3 TI – Rs. 50L (****) 3 TI – Rs. 100L (****)
4 Marginal relief (1-2-3) ***** 4 Marginal relief (1-2-3) *****
B. Computation of marginal relief in case of Co-operative society / Local authority / Firm:
1 Tax on TI + surcharge @ 12% *****
2 Tax on Rs. 100L (****)
3 TI – Rs. 100L (****)
4 Marginal relief (1-2-3) *****
C. Computation of marginal relief in case of domestic companies:


3 TI – Rs. 100L (****) 3 TI – Rs. 1000L (****)

D. Computation of marginal relief in case of foreign companies:

3 TI – Rs. 100L (****) 3 TI – Rs. 1000L (****)
4. Tax treatment of various receipts:

1 (i) Lottery winnings (ii) horse race winnings (iii) winning Taxable on gross basis U/H IFOS @ 30%. [S. 115BB].
from cross word puzzles (iv) card game winnings (v)
winnings from betting (vi) winnings from gambling (vii)
winnings from game shows etc.
2 Benefit arising on account of cessation or remission of Capital receipt – not income – not taxable. [Mahindra and
non-trading liability. Mahindra (SC)].
3 Benefit arising on account of cessation or remission of Taxable U/H PGBP. [S. 41 (1)].
trading liability.
4 Forfeiture of advance on a/c of failed negotiation Taxable U/H IFOS. [S. 56 (2) (ix)]. [If the date of forfeiture ≥
relating to transfer of a capital asset. 01.04.2014].
Reduced from the COA of the capital asset. [S. 51]. [If the date
of forfeiture < 01.04.2014].
5 (a) Non-compete fees; (b) Fee for exclusivity of rights; Taxable U/H PGBP. [S. 28 (va)].
6 (a) Retrenchment compensation; (b) Voluntary Profit in lieu of salary. [S. 17 (3) (ii)] – Taxable U/H Salary.
retirement compensation;
7 (a) Compensation paid for termination of agency or Taxable U/H PGBP. [S. 28 (ii)].
modification of the terms of agency to the detriment of
the agent; (b) Compensation to managerial personnel
for loss of office
8 Liquidated damages Capital receipt – not income – not taxable. [Saurashtra
Cement & Chemicals Industries Ltd (SC)].
9 Compensation for loss of profit Revenue receipt – income – Taxable. [Shree Dig Vijay
Cement Co. Ltd (Guj)].
10 Realisation from trial run production Capital receipt – Reduced from the cost of the asset. [Food
specialities Ltd (Del)].
11 Incidental receipts arising from the activities directly Capital receipt – Reduced from the cost of construction.
and inextricably linked to construction. [Bokaro steels (P) Ltd (SC)].
12 Revenue receipts arising from the activities which are Taxable. [Tuticorin Alkali Chemicals & Fertilizers Ltd (SC)].
not directly and inextricably linked to construction.
13 Receipts incidental to acquisition of fixed asset Capital receipt – Reduced from the cost of the asset. [Karnal
Co-operative Sugar Mills Ltd (SC)].
14 Key-man insurance policy proceeds Income – taxable in the hands of business man U/H PGBP. [S.
28 (vi)].
If it is received by the keyman, it is taxable U/H Salary (if there
exists employer-employee relationship). [S. 17 (3)]. Otherwise it
is taxable U/H IFOS. [S. 56 (2) (iv)].
15 Gifts covered by S. 56 (2) (x) Income – Taxable.
16 FMV of inventory as on the date on which it is Income – Taxable U/H PGBP. [S. 28 (iva)].
converted into, or treated as a CA, determined in
the prescribed manner.
17 Any compensation or other payment, due to or Income – Taxable U/H IFOS. [S. 56 (2) (xi)].
received by any person, by whatever name called,
in connection with termination of his employment
or the modification of the terms and conditions
relating thereto.
18 Any compensation or other payment due to or Income – Taxable U/H PGBP. [S. 28 (ii) (e)].
received by any person, by whatever name called,
at or in connection with the termination or the

modification of the terms and conditions of any

contract relating to his business.
19 Claim for export incentives Deemed to be the income of the PY in which reasonable
certainty of its realization is achieved. [S. 145B (2)].
Taxable U/H PGBP.
20 Grants or subsidies [ICDS VII] Income.
Recognition cannot be postponed after receipt though
there is no reasonable assurance regarding compliance
with the conditions. [S. 145B (3)].
Exceptions: (a) asset specific subsidies; (b) Corpus subsidy
received from CG by the trusts created by the CG/SG.
21 Subsidy related to depreciable asset (GG-1) Reduced against the cost of the asset. [S. 43 (1) Explanation-
10]
22 Subsidy related to non-depreciable asset (GG-2) Taxed upon receipt (if no conditions attached)
Taxed over the over the same period over which the cost of
meeting the obligation attached to the grant is incurred (if
conditions are attached).
23 Government grants being compensation for expenses Taxed as income in the period in which it is receivable.
or losses incurred in a PY or for the purpose of giving
immediate financial support with no further related
cost. (GG-3)
24 Other government grants. (GG-4) Taxed as income over the periods necessary to match them
with related costs which they are intended to compensate.
25 Tax treatment of refund of GG-1 Increase the actual cost or WDV.

Claim depreciation on the revised actual cost or WDV
prospectively at the prescribed rate.
26 Tax treatment of refund of GG-3 Charge it to the P&L statement.
27 Tax treatment of refund of GG-2 and GG-4 First charge it against the unamortized deferred credit
remaining in respect of the grant.
If the sum refundable exceeds the deferred credit the balance
shall be charged to the P&L Statement.
28 Income from sale of carbon credits Taxable on gross basis @ 10%. [S. 115BBG].
5. Basic principles clarifying the concept of income:

1 Illegal income Also taxable
2 Real income theory Only real income is taxable and not notional or fictional income
3 Application of income Income applied shall not be excluded while computing the taxable income.
4 Diversion of income by over-riding Income over which any person other than the assessee has over-riding title shall
title be excluded while computing the taxable income of the assessee.
5 Surplus reported by mutual ≠ Income.
concern from mutual activities
6. Important rulings in mutuality:

1 Bankipur club (SC) If a club (Non-profit organisation) receives any surplus arising from sale of drinks,
refreshments etc, or amount by way of rent for letting out the building or amount by
way of admission fees, periodical subscription, then these are not taxable since these
were only charges for the privileges, conveniences and amenities provided to
members, which they are entitled as per the rules and regulations of the club.
2 Chelmsford Club (SC) Annual value of building owned by a mutual concern is also exempt based on the
doctrine of mutuality.
3 Venkatesh Premises Co- Transfer charges, non-occupancy charges common amenity fund charges and
operative Society Ltd (SC). other charges are exempt owing to application of the doctrine of mutuality.
4 Common effluent treatment Interest earned by a mutual concern on short-term deposit placed with non-member
plant Thane-Belapur (Bom) banks out of surplus arising from mutual activities = income. It is taxable.
5 Bangalore club (SC) Also interest earned by a mutual concern on short-term deposit placed with member-
banks out of surplus arising from mutual activities = income. It is taxable. This is
because placing such deposits enables some members (banks) to do profiteering
which results in breach of mutuality.

7. Statutory exceptions to mutuality:
(i) S. 2 (24) (v) + S. 28 (iii) Any surplus arising on account of rendering specific services to its members by a
trade or professional association, though a surplus from mutual activities, still, is
deemed to be income.
It is chargeable to tax U/H PGBP.
(j) Provisions of S. 44A Where the receipts pertaining to general activities carried out by a trade or
professional association exceeds the corresponding expenditure (not being
capital expenditure), there is deficiency.
Such deficiency could be adjusted against the taxable income in the following
manner:
Deficiency could be adjusted only to the extent of 50% of TI.
Before adjusting the deficiency, priority should be given to brought forward losses
and unabsorbed depreciation.
Deficiency should be 1st adjusted against income U/H PGBP. Thereafter, it could be
adjusted against any other income.
Unadjusted deficiency can’t be C/F to the next year.
(k) Provisions of S. 2 (24) (viia) Profits and gains of business of banking (including providing credit facilities) carried
on by a co-operative society with its members = income.
8. Irrelevance of method of accounting in certain cases:

The newly inserted S. 145B provides that the chargeability of the following incomes are not governed by the
method of accounting followed by the assessee:
Income PY of chargeability
Interest received by an It is deemed to be income of the PY in which it is received. [S. 145B (1)].
assessee on any
compensation/enhanced
compensation
Claim for escalation of price in It is deemed to be income of the PY in which reasonable certainty of its
a contract or export incentive realization is achieved. [S. 145B (2)].
Government assistance/ grants It is deemed to be income of the PY in which it is received, if it was not charged
to income tax in any earlier PY. [S. 145B (3)].
9. Important points relating to ICDS:

1 Applicability of ICDS The ten ICDS are to be followed by all assessees (other than an individual or
HUF who is not required to get his accounts of the PY audited in accordance with
the provisions of S. 44AB) following the mercantile system, for the purposes of
computation of income chargeable to tax U/H PGBP and IFOS from AY 2017-18.
2 Chamber of Tax Consultants ICDS cannot over-ride the IT Act and the judicial interpretations thereon.
(Del)
10. Scheme of partial integration (SOPI):

1 Steps involved in 1 Find out the tax payable on Ʃ (AI + NAI)
SOPI 2 Find out the tax payable on Ʃ (AI + BEL)
3 Tax payable on NAI = (Tax in Step 1) – (Tax in Step 2)
4 Add surcharge (if the NAI is more than Rs. 50L)
5 Add HEC @ 4%.
6 Tax liability = Step 3 + Step 4 + Step 5.
2 When SOPI does 1 If the assessee is a firm or a company or a local authority or a co-operative society or
not apply? an AOP or BOI (covered by S. 167B), the SOPI does not apply. That is, simply the AI
has to be ignored and it has no relevance in computing the tax liability on NAI.
2 If the NAI doesn’t > BEL, then also the SOPI does not apply.
3 If the net AI is less than or equal to Rs. 5000, then also the SOPI does not apply.
4 If the NAI purely consists of income suffering at flat rate (like winnings from lottery etc),
then also the SOPI does not apply.
3 Disintegration of Nature of business NAI AI
composite income Growing and manufacturing tea in India (R. 8) 40% 60%
into agricultural and

non-agricultural Growing and manufacturing rubber in India (R. 7A) 35% 65%
Sale of coffee grown and cured by seller (R. 7B (1)) 25% 75%
Sale of coffee grown, cured, roasted and grounded by seller in India 40% 60%
with or without mixing chicory or other flavoring ingredients (R. 7B
(1A))
4 R. M. Chidambaram Salary and interest received by a partner out of AI of the firm is to be regarded as AI. It is
Pillai (SC) exempt in the hands of partner U/s 10 (1). However, while computing tax on his NAI using
SOPI, salary and interest (supra) are considered.
5 Tax treatment of Salary and interest received by a partner from a firm (engaged in tea business or rubber
interest & business or coffee business) is taxable only to the extent of 40 or 35 or 25 or 40% and the
remuneration paid to balance is treated as AI. This agricultural component will be considered while computing tax on
partners out of AI of the NAI of the partner using the SOPI.
firm
6 Dividend is declared It is NAI in the hands of shareholders. This is because the proximate source for this dividend is
out of its AI. investment in shares and not the agricultural activity. [Kumara swami (Mad) + Tata Tea and
others [2017] (SC)].
7 Income from nursery Yes, as per Explanation 3 to S. 2 (1A), income derived from saplings or seedlings grown in
constitutes AI? nursery would be deemed to agricultural income, whether or not the basic operations were
carried out on land.
8 Indirect connection Income from breeding of livestock, income from poultry farming, income from fisheries, income
with agricultural land from dairy farming, income from allowing cinema shooting etc ≠ agricultural income. Indirect
is not enough. connection with agricultural land is not enough to regard an income as AI
11. Latest from Judiciary regarding the scope of CBDT Circulars:

SV Gopala and Others [2017] (SC).
Facts The CBDT had issued a Circular invoking the powers U/s 119. The Circular amended the provisions
contained in Rule 68B of the Second Schedule to the Act relating to time limit for sale of attached
immovable property.
Decision of The SC observed that the CBDT does not have the power to amend legislative provisions in
the SC exercise of its powers U/s 119 by issuing a Circular.

Chapter-2: ESOP, KMIP & Recent case laws and Notifications in ‘Salary’
1. ESOP – S. 17 (2) (vi):

1 Employee stock Employer may offer stock options to his employee. Stock option means the right (not obligation) to
option subscribe to specified number of shares or securities of the employer-company at a specified price
(called strike price which is less than the FMV of the shares or securities) on a future date upon
fulfillment of vesting conditions.
2 Perquisite U/s Perquisites include the value of any security or shares allotted, directly or indirectly, by the
17 (2) (vi) employer, or former employer, free of cost or at concessional rate to the assessee under ESOP.
3 PY of PY of allotment of shares or securities.
chargeability
4 Quantum of [FMV of share or security on the date of exercise of option – strike price paid] * Number of shares
perquisite or securities allotted.
Computation of FMV of equity shares allotted or transferred under ESOP – R. 3 (8):

SN Situation FMV on the date of exercise of Remarks
option (DOE)
1 Equity shares are Average of opening sell price and If on the DOE, there is no trading in shares, the FMV
listed on a single closing sell price of shares on the DOE shall be the closing sell price of the share on RSE on
RSE a closest date immediately preceding the DOE.
2 Equity shares are Average of opening sell price and If on the DOE there is no trading in shares, the FMV
listed on more closing sell price of shares on the DOE shall be the closing sell price of the share on a RSE
than one RSE on a RSE which records the highest which records the highest volume of trading on the
volume in trading in the shares closest date immediately preceding the DOE.
3 Equity shares are Value on specified date as determined Specified date means: (a) The date of exercise of
not listed on a by a category I Merchant banker option or (b) any date earlier than the DOE not being
RSE registered with SEBI a date which is more than 180 days earlier than the
DOE.
Computation of FMV of securities other than equity shares allotted under ESOP – R. 3 (9):
The FMV of any specified security, not being an equity share in a company, on the date on which the option is exercised by
the employee, shall be such value as determined by a merchant banker on the specified date.
2. Key man insurance policy – Tax implications:

1 Tax implications in the Premium paid = Business expense deductible U/s 37 (1). [B.N Exports (Bom) + CBDT
hands of businessman Circular 762 + M/s Ramesh Steels Ltd (2015) (P&H) + CBDT Circular 38/2016].
Businessman will receive the proceeds of policy upon maturity of the policy or death of
keyman. Such proceeds are income in view of S. 2 (24) (xi). It is taxable U/H PGBP. [S. 28
(vi)]. No exemption is available U/s 10 (10D). It shall be subjected to TDS U/s 194DA @ 1%
if it is not less than Rs. 1L.
2 Tax implications in the Businessman may assign the policy in favour of keyman. In such case, the keyman may
hands of keyman receive the proceeds of the policy from the insurance company upon surrender or maturity of
the policy. Such proceeds are income in view of S. 2 (24) (xi).
It is taxable in the hands of keyman U/H salary if the keyman is employee. (S. 17 (3) (ii)). If
keyman is not an employee, it shall be taxed in the hands of keyman U/H IFOS. [S. 56 (2)
(iv)].
No exemption is available U/s 10 (10D). It shall be subjected to TDS U/s 194DA @ 1% if it is
not less than Rs. 1L.
3 Upon assignment also Explanation-1 to S. 10 (10D) clarifies that the KMIP continues to be KMIP even after the
policy continues to be businessman assigns it in favour of keyman during the term of the policy, whether with or
KMIP without consideration.
This Explanation prevents keyman from claiming exemption on KMIP proceeds U/s 10 (10D)
on the ground that upon assignment the policy has lost the character of KMIP and has
become an ordinarily life insurance policy.
3. Recent case laws:
1 ITC Gurgaon Tips collected by the Hotel-employer from the customers and distributed to the waiters does not
(2016) (SC) stem from the contract of employment. Waiters have no enforceable right. This represents
voluntary-gratuitous payment made by customers to waiters through the conduit pipe of Hotel which
collects it in fiduciary capacity. Therefore, such tips are not taxable in the hands of waiters U/H

Chapter-2: ESOP, KMIP & Recent case laws and Notifications in ‘Salary’
Salary. It is taxable U/H IFOS. Hotel has no TDS obligation U/s 192.
2 Director, Delhi Rs. 1000 per month per child referred to in R. 3 (5) represents threshold limit and not standard
Public School deduction.
(2011) (P&H)
3 Shankar Concept of fair rent is alien to R. 3. So it cannot be imported into R. 3. Accordingly, where the
Krishnan employer has given an interest-free security deposit to the landlord for securing an accommodation
(2012) (Bom) to be given as rent-free accommodation to the employee, for determination of perquisite in the
hands of employee U/s 17 (2) (i), the rent paid by the employer shall not be stepped up by notional
interest on the deposit (supra).
4. Amendments in Salary chapter:
1 Amendment Amount of any contribution to an approved superannuation fund by the employer in respect of
brought out by FA the assessee, to the extent it exceeds Rs. 1.50L is perquisite U/s 17 (2) (vi) and hence, it is
2016 taxable U/H Salary. The limit was Rs. 1L earlier. It got enhanced to Rs. 1.50L by the Finance
Act 2016.
2 Amendments S. 16 (ia) has been inserted w.e.f AY 2019-20 to allow a standard deduction of lower of
brought out by FA (a) Rs 40,000 or (b) the amount of salary.
2018 The exemption in clause (v) of first proviso to S. 17 (2) in respect of reimbursement of
medical expenditure up to Rs. 15,000 is withdrawn w.e.f AY 2019-20.
Exemption in respect of transport allowance U/s 10 (14) + R. 2BB (2) shall stand
withdrawn w.e.f AY 2019-20. However, the transport allowance up to Rs. 3,200 p.m to
differently abled person will continue to be exempt.

Chapter-3: Amendments and Recent case laws in IFHP:
1. Amendments in IFHP:
A Amendment Where the property is held as stock-in-trade and is not let during the whole or any part of the PY,
brought out by the annual value of such property for the period up to 1 year from the end of the FY in which the
FA 2017 certificate of completion of construction of the property is obtained from the competent authority,
shall be taken to be nil.
B Amendment brought out by FA 2016
1 Amendment in If the borrowing is in connection with construction or purchase of the property and the borrowing is
S. 24 (b) made after on or 01.04.1999, then the ceiling in respect of deduction U/s 24 (b) is Rs. 200000, if
the gap between the end of the FY of borrowing and the date of completion of construction or
purchase is not more than 5 years (3 years).
2 Insertion of S. As per S. 25A (1), the amount of rent received in arrears from a tenant or the unrealised rent
25A realised subsequently from a tenant by an assessee shall be deemed to be IFHP in the FY in
which such rent is received or realised, and shall be included in the TI of the assessee U/H IFHP,
whether the assessee is the owner of the property or not in that FY.
S. 25A (2) provides a deduction of 30% of arrears of rent or unrealised rent realised subsequently
by the assessee.
3 Insertion of S. Conditions to 1 Assessee = Individual.
80EE be fulfilled for 2 He has taken loan for acquisition (purchase or construction) of a
enjoying residential house property.
deduction U/s 3 Loan is taken from a bank or housing finance company.
80EE 4 Loan has been sanctioned by bank or housing finance company
during the FY 2016-17.
5 Loan sanctioned ≤ Rs. 35L.
6 Value of residential house property ≤ Rs. 50L.
7 The assessee does not own any residential house property on the
date of sanction of loan.
Quantum of Interest payable on the above loan or Rs. 50000 (whichever is less).
deduction
Bar on double If deduction is claimed U/s 80EE, no deduction will be allowed in respect of
deduction interest (to that extent) under any other provisions of the Act for the same or
any other AY.
2. Recent case laws:

1 Chennai Properties Income from letting out of properties by a company, whose main object as per its MOA is to
and Investments Ltd acquire and let out properties and whose entire income as per its ROI was only from letting
(2015) (SC) out of properties, shall be taxable as its business income.
2 Rayala Corporation The assessee had stopped its other business activities and continued only the business of
(P) Ltd (2016) (SC) leasing out its properties and earning rent therefrom. If an assessee is engaged in the
business of letting out house property on rent, then, the income from such property, even
though in the nature of rent, should be treated as business income.
3 Raj Dadarkar and In this case, on account of lack of sufficient material to prove that substantial income of the
Associates [2017] assessee was from letting out of property, the SC held that the rental income has to be
(SC) assessed as IFHP.
4 New Delhi Hotels Ltd The rental income derived from the unsold flats which are shown as stock-in-trade in the
(2014) (Delhi] books of the assessee would be taxable U/H IFHP. This is view is fortified by S. 23 (5).
5 NDR Warehousing P The assessee, as stipulated in the object clause of MOA, was engaged in the business of
Ltd (2015) (Mad) warehousing, handling and transport. It was not just letting out warehouses but provided
storage of goods with rendering of several auxiliary services such as pest control, rodent
control and fumigation service to prevent the goods stored from being affected by vagaries of
moisture and temperature. Further, service of security and protection was also provided to
the goods stored. These activities were carried on an organized manner. These activities are
more than mere letting out of the godown for tenancy. Therefore, the income of the assessee
from letting out of warehouses and godowns is chargeable U/H PGBP and not IFHP.
6 Hariprasad HUF is a group of individuals related to each other either by blood relationship or by marital
Bhojnagarwala (2012) tie. In other words, HUF is a group of natural persons and it can’t consist of artificial persons.
(Guj) (Full Bench It can reside a house belonging to it. Therefore, even HUF can enjoy self-occupied property
benefit contemplated in S. 23 (2).

Chapter-3: Amendments and Recent case laws in IFHP:
7 Asian Hotels Ltd. Notional interest on interest-free deposit received by an assessee in respect of a shop let out
(2010) (Del) on rent cannot be brought to tax as business income or IFHP.
8 Shri. Champalal In, it was observed that where the Karta of the HUF is a partner in the firm in his representative
Jeevraj (1995) (Mad) capacity and the firm occupied a portion of the house belonging to the HUF, the benefit of
exclusion U/s 22 was available to the HUF.

Chapter-4: Taxation of gifts:
S.56 (2) (x) (a): Monetary gifts:

Where any person receives during the PY any sum of money without any consideration from any other person(s) and the
aggregate of such sum of money exceeds Rs. 50000, then the whole of such sum of money shall be charged to tax U/H
IFOS in the PY of receipt.
S. 56 (2) (x) (b) (A): Gift of immovable property:

Where any person receives during the PY any immovable property (being a CA) without consideration from any other
person the SDV of which exceeds Rs. 50000, then such SDV shall be charged to tax U/H IFOS in the PY of receipt.
S. 56 (2) (x) (b) (B): Benefit on a/c of acquisition of immovable property for inadequate consideration:
Where any person receives during the PY any immovable property (being a CA) for a consideration which is less than SDV
and (SDV – Consideration) is more than the higher of [(a) 5% of consideration; (b) Rs. 50000], then the (SDV –
Consideration) shall be charged to tax U/H IFOS in the PY of receipt.
Points common for S. 56 (2) (x) (b) (A)/(B):

1 If the SDV on the DOA is different from the SDV on the DOR, then the SDV on the DOR shall be considered. However,
where the amount of consideration, or a part thereof, has been paid by way of an APC or APBD or use of ECS through
a bank account, on or before the DOA, then the SDV on the DOA is to be taken.
2 If the assessee feels that the SDV of the immovable property received without consideration or received for an
inadequate consideration is more than its FMV, then he can challenge the SDV through an appeal under the Indian
Stamp Act.
3 If the SDV is revised by an order passed by the appellate authority under the Indian Stamp Act, then the AO shall
amend the order of assessment passed in respect of AY relevant to the PY in which the immovable property was
received to re-compute the income chargeable U/H IFOS.
4 This amendment order shall be passed within 4 years from the end of the PY in which the SDV was revised by the
appellate authority under the Indian Stamp Act.
5 Alternatively, the assessee, instead of challenging the SDV in appeal under the Indian Stamp Act, can approach the AO
and request him to determine the FMV.
6 Thereafter, the AO has to refer the matter to the DVO who will determine the FMV. If the FMV is less than the SDV, then
the FMV shall be assessed to tax U/H IFOS. However, if the FMV is more than the SDV, then the AO shall assess the
SDV U/H IFOS.
S. 56 (2) (x) (b) (A): Gift of specified movable property:

1 Where any person receives during the PY any specified movable property(s) without consideration from any other
person(s) and the aggregate FMV of which exceeds Rs. 50000, then the aggregate of such FMV shall be charged to tax
U/H IFOS in the PY of receipt.
2 Specified movable property means the following capital assets of the assessee namely: (a) Shares and securities; (b)
jewellery; (c) archaeological collections; (d) drawings; (e) paintings; (f) sculptures; (g) any work of art; (h) Bullion.
S. 56 (2) (x) (b) (A): Benefit on a/c of acquisition of specified movable property for inadequate consideration:
Where any person receives during the PY any specified movable property(s) for a consideration which is less than the FMV
by an amount exceeding Rs. 50000, then [∑FMV - ∑consideration] shall be charged to tax U/H IFOS in the PY of receipt.
Receipts not covered by S. 56 (2) (x) – Proviso to S. 56 (2) (x):

1 Receipts from relatives;
2 Receipts on the occasion of marriage of individual;
3 Receipts under will or by way of inheritance;
4 Receipts in contemplation of death of the donor;
5 Receipts from local authorities;
6 Receipts from S. 10 (23C) institutions;
7 Receipts from trusts registered U/s 12AA;
8 Receipts by institutions referred to in S. 10 (23C) (iv)/(v)/(vi)/(via);
9 Receipts from an individual by a trust created solely for the benefit of relative of the individual.
10 Receipts by member upon partition of HUF.
11 Receipts by amalgamated Indian company from amalgamating company pursuant to the scheme of amalgamation.
12 Receipts by resulting company being Indian company on demerger of demerged company.
13 Receipt of capital asset being shares in Indian company by foreign company on amalgamation of another foreign
company.
14 Receipt of capital asset being shares in Indian company by the resulting foreign company from the demerged foreign

company upon demerger.

15 Receipt of shares from resulting company on demerger of undertaking by the shareholders of demerged company.
16 Receipt of shares from amalgamated company being an Indian company by the shareholders of the amalgamating
company.
17 Receipts by holding company from wholly-owned subsidiary (Provided the holding company is an Indian
company);
18 Receipts by wholly-owned subsidiary from holding company (Provided the wholly-owned subsidiary is an
Indian company).
Points requiring attention:

1 Relative in relation to individual means (a) Spouse; (b) brother or sister; (c) brother or sister of the spouse; (d) brother or
sister of either of the parents; (e) any lineal ascendant or descendant; (f) any lineal ascendant or descendant of the
spouse; (g) Spouse of the person referred to above other than spouse.
2 Relative in relation to HUF means any member of HUF.
3 Lineal descendents of brothers and sisters + Lineal descendents of brothers and sisters of spouse + Brother and sisters
of grandparents ≠ relative.
4 Gift on the occasion of marriage anniversary is not exempt.
5 To avail exemption, the donee should be bride or bridegroom whose marriage is solemnized. [Rajinder Mohan Lal
[P&H]].
Determination of FMV – R. 11UA:

1 Valuation of jewellery, archaeological collections, drawings, paintings, sculptures or any work of art
The FMV of jewellery, archaeological collections, drawings, paintings, sculptures or any work of art (hereinafter
referred as artistic work) shall be estimated to be price which it would fetch if sold in the open market on the valuation
date;
In case these are received by the way of purchase on the valuation date, from a registered dealer, the invoice value
shall be the FMV;
In case these are received by any other mode and the value exceeds Rs. 50000, then assessee may obtain the report
of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date;
2 Valuation of quoted shares and securities
The FMV of quoted shares and securities shall be determined in the following manner, namely:
(i) if the quoted shares and securities are received by way of transaction carried out through any RSE, the FMV
of such shares and securities shall be the transaction value as recorded in such RSE;
(ii) if such quoted shares and securities are received by way of transaction carried out other than through any
RSE, the FMV of such shares and securities shall be:
(a) the lowest price of such shares and securities quoted on any RSE on the valuation date, and
(b) the lowest price of such shares and securities on any RSE on a date immediately preceding the
valuation date when such shares and securities were traded on such RSE, in cases where on the
valuation date there is no trading in such shares and securities on any RSE;
3 Valuation of non-quoted equity shares
FMV = (A+B+C+D-L)*PV/PE
A = Book value of all assets (other than bullion, jewellery, precious stone, artistic work, shares, securities and
immovable properties).
B = The price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation
report obtained from a registered valuer;
C = FMV of shares &securities as determined in the manner provided in this rule;
D = SDV in respect of the immovable property;
L = Book value of liabilities not being contingent or unascertained liabilities.
PE = Total amount of paid up equity share capital as shown in the B/s.
PV = Paid up value of such equity share.
4 Valuation of unquoted shares and securities other than equity shares
FMV = Price it would fetch if sold in the open market on the specified date on the basis of valuation report from a
merchant banker or FCA.

Consideration received in excess of FMV of shares issued by a CHC to be treated as income of such company,
where shares are issued at a premium [S. 56 (2) (viib)]:
A. Applicability:
S. 56 (2) (viib) applies if the following conditions are satisfied:
1 A company receives consideration for issue of shares from a resident.
2 Such company is not a company in which public are substantially interested.
3 The consideration received exceeds the face value of the shares.
4 The consideration received exceeds the FMV of the shares.
B. Impact of S. 56 (2) (viib):

If the aforesaid conditions are satisfied, the excess of consideration over the FMV of the shares issued shall be regarded as
income of the issuing company (S. 2 (24) (xvi)) and shall be assessed to tax U/H IFOS (S. 56 (2) (viib).
C. Determination of FMV for the purpose of S. 56 (2) (viib) – R. 11UA:

Option- FMV = (A-L)*PV/PE
1 A = Book value of all assets (other than fictitious assets).
L = Book value of liabilities not being contingent or unascertained liabilities.
Option- The FMV of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash
2 Flow method.
D. FMV for this purpose:

The FMV of the shares shall be the higher of
(a) the value as may be determined in accordance with the method as may be prescribed; or
(b) the value as may be substantiated by the company to the satisfaction of the AO, based on the value of its assets,
including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any
other business or commercial rights of similar nature.
Note: S. 56 (2) (viib) shall not apply where the consideration for issue of shares is received—
(i) by a VCU from a VCC or a VCF; or
(ii) by a company from a class or classes of persons as may be notified by the CG in this behalf.
Notification No. 45/2016 & Notification no. G.S.R. 364(E) dated 11.04.2018:
1 S. 56 (2) (viib) shall not apply when a resident makes payment of an amount exceeding the face value of shares of the
“startup” company, as consideration for issue of such shares.
2 A company may be regarded as “startup” up to a period of 7 years from the date of incorporation (10 years in case the
company is engaged in bio-technology sector) if the following conditions are fulfilled:
1 It should be a private company.
2 It is not formed by splitting up or reconstruction of an existing business.
3 The aggregate amount of paid up share capital and share premium of the startup after the proposed issue of
shares should not exceed Rs. 10 Crores.
4 It has obtained a report from a merchant banker specifying the FMV of shares in accordance with R. 11UA
5 The investor who proposes to subscribe to the issue of shares shall have:
(i) an average returned income of Rs. 25L or more for the preceding 3 FYs; or
(ii) a net worth of Rs. 2 Crores or more as on the last date of the preceding FY, and
6 It is working towards innovation, development or improvement of products or processes or services, or if it is a
scalable business model with a high potential of employment generation or wealth creation.
7 Turnover for any of the FYs since incorporation has not exceeded Rs. 25 Crores;
8 It is approved by the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (‘DIPP’).

Chapter-5: Capital gains - Summary
1. Charging section – S. 45 (1):

1 Any profits or gains arising from the transfer of a capital asset effected during the PY shall be chargeable to income-tax
U/H CG and shall be deemed to be the income of the PY in which the transfer took place.
2 However, the profits or gains (supra) shall not be charged to tax to the extent to which it is exempt U/s 54, 54B, 54D,
54EC, 54EE, 54F, 54G, 54GA, 54GB, 10 (37), 10 (37A) and S. 115F.

1 Meaning of capital “Capital asset” means property of any kind held by an assessee, whether or not connected with
asset his business or profession. [S. 2 (14)].
2 Exclusions from (a) Stock-in-trade (SIT); (b) Personal effects; (c) Rural agricultural land; (d) Gold bonds issued
‘capital asset’ under the Gold Deposit Scheme 1999; (e) Deposit certificates issued under the Gold
Monetisation Scheme, 2015 notified by the CG (interest thereon is exempt U/s 10 (15)).
3 Inclusion in ‘Capital Any securities held by a Foreign institutional investor which has invested in such securities in
asset’ accordance with the SEBI Regulations shall be regarded as CA (even if such securities are held
by it as SIT).
4 Assets ≠ personal (a) Jewellery; (b) Archaeological collections; (c) Drawings; (d) Paintings; (e) Sculptures; (f) Any
effect work of art.
5 CBDT Circular Where the assessee itself, irrespective of the POH of the listed shares and securities, opts to
6/2016 treat them as SIT, the income arising from transfer of such shares or securities would be treated
as its business income.
In respect of listed shares and securities held for a period of more than 12 months immediately
preceding the DOT, if the assessee desires to treat the income arising from transfer thereof as
CG, the same shall not be put to dispute by the AO. However, this stand, once taken by the
assessee in a particular AY, shall remain applicable in subsequent AYs also and the taxpayers
shall not be allowed to adopt a different stand in this regard in subsequent years;
6 Letter F. No. Income arising from transfer of unlisted shares would be considered U/H CG, irrespective of
225/12/2016 POH, with a view to avoid disputes or litigation and to maintain uniform approach.
7 Meaning of transfer (a) Sale; (b) Exchange; (c) Relinquishment; (d) Extinguishment of rights; (e) Conversion of CA
[S. 2 (47)]. into SIT; (f) Compulsory acquisition; (g) power of attorney transactions; (h) Transaction having
the effect of transferring or enabling the enjoyment of any immovable property; (i) Maturity of
ZCB.
8 K. R. Srinath (Mad) Sum received for relinquishing the right of specific performance in a contract shall be charged to
tax U/H CG.
9 Karthikeya. V. Reduction of share capital results in extinguishment of rights of shareholders in the shares held
Sarabhai (SC) by them.
10 When transfer Transfer of movable property becomes effective and complete upon delivery pursuant to
becomes effective contract of sale.
and complete? Transfer of immovable property becomes effective after registration of conveyance deed but
with effect from the date of execution of the conveyance deed.
In case of power of attorney transactions, transfer becomes effective once possession is handed
over upon receipt of consideration.
2. Mode of Computation of capital gains – S. 48:

1 Full value of consideration XXX
2 Expenditure incurred wholly and exclusively in connection with transfer (XXX)
3 Net consideration (1-2) XXX
4 Cost of acquisition (XXX)
5 Cost of improvement (XXX)
6 Capital gain (3-4-5) XXX
A. Full value of consideration:

1 FMV of the capital asset transferred has no relevance in computation of capital gains.
2 Only actual consideration received or receivable is relevant for computing capital gains. However, exceptions are
contemplated in S. 50C, S. 50CA and S. 50D.
Full value of consideration in case of real estate transaction: (S. 50C):

SN Situations FVC
1 SDV ≤ 105% of Actual sale consideration (ASC) ASC
2 SDV > 105% of ASC SDV

3 SDV > 105% of ASC - the assessee challenged the SDV in appeal under the Indian ASC (See note below)
Stamp Act – SDV is revised – Revised SDV ≤ 105% of ASC
4 SDV > 105% of ASC - the assessee challenged the SDV in appeal under the Indian Revised SDV (See note
Stamp Act – SDV is revised – Revised SDV > 105% of ASC below)
5 SDV > 105% - the assessee does not challenge the SDV before the court or any FMV determined by VO (See
other authority – note below)
but he pleads before the assessing officer (AO) that SDV > fair market value on the
date of transfer (FMV) - AO refers the matter to the valuation officer (VO) - FMV
determined by VO < SDV – FMV > 105% of ASC
6 SDV > 105% - the assessee does not challenge the SDV before the court or any ASC
other authority - but he pleads before the assessing officer (AO) that SDV > fair
market value on the date of transfer (FMV) - AO refers the matter to the valuation
officer (VO) - FMV determined by VO < SDV – FMV ≤ 105% of ASC
7 SDV > 105% of ASC - the assessee does not challenge the SDV before the court SDV
or any other authority - but he pleads before the AO that SDV>FMV on the date of
transfer - AO refers the matter to the VO - FMV determined by VO > SDV
Note:
1 The AO shall amend the order of assessment passed in respect of AY relevant to the PY in which transfer of immovable
property took place to re-compute the capital gains by taking the ASC or SDV as revised by the appellate authority, as
the case may be.
2 The amendment order shall be passed within 4 years from the end of the PY in which the appellate authority has
passed order revising the SDV. [S. 155 (15)].
3 The AO is bound to consider the report of the VO when it is on record. The CG shall be computed in conformity
with the value determined by the DVO. [Ravjibhai Nagjibhai Thesia (2016) (Guj)].
4 Where the amount of consideration, or a part thereof, has been paid by way of an account payee cheque or account
payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement
for the transfer of such immovable property, then the SDV on the date of agreement fixing the consideration is to be
taken into account.
5 Otherwise, the SDV on the date of registration shall be taken into account.
6 S. 43A plays exactly the same role U/H PGBP which S. 50C plays U/H CG.
TDS on payments on transfer of certain immovable property -S. 194-IA:
1 Payment to be Consideration for transfer (not being compulsory acquisition) of any immovable property
subjected to TDS (other than agricultural land situated in rural area).
2 Payee Resident (Transferor).
May be dealer or investor
3 Payer May be a dealer or investor.
4 Threshold limit If the consideration is less than Rs. 50L, there is no TDS obligation.
5 TDS rate 1% [Subject to S. 206AA]
6 Timing of TDS At the time of credit to the account of payee in the books of the payer or at the time of
payment (whichever is earlier).
7 Time limit for 30th of the month succeeding the month of deduction of tax at source.
remittance of TDS
8 No TAN required Payer need not have TAN for deducting tax under this section.

1 S. 194-IA does not apply if the payee is a non-resident. In such case, tax shall be deducted at source U/s 195 using
rates in force (20% + Surcharge if applicable + EC).
2 Persons jointly purchasing immovable property from a resident shall deduct tax at source U/s 194-IA, if the
consideration payable by them put together is Rs. 50L or more, though individually is less than Rs. 50L.
3 Rs. 50L is to be compared with the actual consideration and not the SDV.
4 THL of Rs. 50L is to be applied in respect of each and every property purchased separately.
5 Where the immovable property is purchased along with some movable assets, then the consideration attributable to the
immovable property alone is to be compared with the threshold limit of Rs. 50L (for deciding the applicability of S. 194-
IA).

FVC in case of transfer of unquoted shares – S. 50CA:

(i) Applicability Capital asset being share in a company (not being quoted share) is transferred for a
consideration less than the FMV of such share determined in accordance with R. 11UA.
(ii) Impact of S. 50CA FMV of such share shall be regarded as FVC. Actual consideration is to be ignored.
(iii) Meaning of quoted Quoted share means share quoted on a RSE with regularity from time to time.
share
(iv) Determination of FMV For the purposes of S. 50CA, the FMV of the share of a company other than a quoted
(R. 11UAA) share, shall be determined in the manner provided in R. 11UA (1) (c) as on the date of
transfer.
FVC in case of transaction where the consideration is not determinable – S. 50D:

Where the consideration involved in transfer of capital asset is not ascertainable, then for the purpose of computing income
chargeable to tax as capital gains, the FMV of the said asset on the date of transfer shall be deemed to be the FVC.
B. Expenses on transfer:
(a) In computing capital gains, the expenditure incurred wholly and exclusively in connection with transfer is allowed as
deduction from the FVC.
(b) However, STT paid in relation to transfer of equity shares/equity oriented units/units of BT shall not be eligible for
deduction while computing CG U/s 48. [Proviso-7 to S. 48].
C. COA of CA:
1 Incidental expenses All expenses incidental to acquisition of the CA shall be added to arrive at the COA. Example:
(a) Advertisement expenses; (b) Travelling expenses; (c) Brokerage; (d) Stamp duty; (e)
Registration charges; (f) legal fee.
2 STT However, STT shall not be added to arrive at the cost of acquisition. [Proviso-7 to S. 48].
3 Option U/s 55 (2) (b) Where the CA transferred was acquired by the assessee before 01.04.2001, the assessee
has option to take the FMV as on 01.04.2001 as the COA. However, such option is not
available in respect of intangible CA.
4 Forfeiture of advance Advance forfeited before 01.04.2014 shall be deducted against COA. [S. 51]. However,
advance forfeited by the previous owner shall not be deducted against COA.
Advance forfeited on or after 01.04.2014 shall be taxed U/H IFOS in the PY of forfeiture. [S. 2
(24) (xvii) + S. 56 (2) (ix)]. It is not adjusted against the COA. [Proviso to S. 51].
5 S. 49 (1) Where the assessee has obtained the asset U/s 49 (1) mode (Say distribution by HUF, will,
inheritance, gift etc), the COA is COA to the previous owner who had not obtained it U/s 49
(1) mode.
If the previous owner has acquired the CA before 01.04.2001, then the COA in the hands of
assessee is higher of the following: (a) COA in the hands of previous owner; (b) FMV as on
01.04.2001. [S. 55 (2) (b)].
6 COA of CA obtained SDV on the DOG (in case the gifted asset = immovable property). [Where the assessee had
by way of gift suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
FMV on the DOG (in case the gifted asset = specified movable property referred to in S. 56
(2) (x)). [Where the assessee had suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
COA to the previous owner. [S. 49 (1)]. [Where the assessee had not suffered tax U/s 56 (2)
(x)]. [S. 49 (4)].
7 COA of CA acquired SDV on the DOA (in case the asset acquired = immovable property). [Where the assessee
for inadequate had suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
consideration. FMV on the DOA (in case the asset acquired = specified movable property referred to in S.
56 (2) (x)). [Where the assessee had suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
Actual COA. [Where the assessee had not suffered tax U/s 56 (2) (x)].
D. COI:
1 Meaning It means any capital expenditure incurred by an assessee in making any additions or
improvement to the capital asset. In other words, any expenditure incurred to increase the value
of capital asset is treated as COI.
2 Exclusion COI incurred by the assessee or previous owner before 01.04.2001 shall be ignored.
Any expenditure deductible in computing the income chargeable U/ H IFHP, PGBP or IFOS shall
not be eligible for deduction in computing income U/H CG.
3 Miss. Piroja C. Expenditure incurred in securing vacant possession of plot (subjected to tenancy) for the purpose
Patel (Bom) of effecting sale amounts to COI.

E. Classification of capital gains based on its nature:

Capital assets (Group-I) POH ≤ 12 POH > 12
months months
(1) Securities (not being units) listed on RSE in India STCA LTCA
(2) Equity oriented units of Mutual fund
(3) Zero coupon bonds
Capital assets (Group-II) POH ≤ 24 POH > 24
months months
(1) Shares of companies not listed on RSE in India STCA LTCA
(2) Immovable property being land or building or both (located in India or in foreign
country)
Capital assets (Group-III) POH ≤ 36 POH > 36
months months
Any other capital asset STCA LTCA

1 POH in S. 49 (1) mode of Starts on the DOA by the previous owner who had not obtained the CA U/s 49 (1) mode.
acquisition [S. 2 (42A) Explanation].
2 POH of gifted asset Starts on the DOG. [Where the assessee had suffered tax U/s 56 (2) (x)].
Starts on the DOA by the previous owner. [Where the assessee had not suffered tax U/s
56 (2) (x)].
3 Smt. Rama Rani Kalia (All) Where the assessee converts his lease hold interest in a property to free hold interest
and subsequently effects sale, the POH starts on the date of taking the property on lease.
Assessee need not be the owner of the CA through the POH. Note the word ‘held’.
F. Benefit of indexation:
1 S. 48 Proviso-2 While computing CG arising on account of transfer of a LTCA, ICOA and ICOI shall be allowed as
deduction.
2 Numerator index Index pertaining to the PY of transfer.
3 Denominator index Situation Denominator index (COA)
(for COA) CA was not obtained U/s 49 (1) Base index (if DOA < 01.04.2001)
mode Index relating the PY of acquisition (if DOA ≥
01.04.2001)
CA was obtained U/s 49 (1) mode Base index (if DOA (by the previous owner) <
(gift) 01.04.2001)
Index relating the PY of acquisition by the previous
owner (if DOA (by the previous owner) ≥ 01.04.2001)
CA was obtained by way of gift + Base index (if DOA (by the previous owner) <
assessee did not suffer tax U/s 56 01.04.2001)
(2) (x) Index relating the PY of acquisition by the previous
owner (if DOA (by the previous owner) ≥ 01.04.2001).
[Manjula Shah (Bom)]
CA was obtained by way of gift + Index relating to the PY of gift.
assessee suffered tax U/s 56 (2)
(x)
4 Denominator index Index pertaining to the PY of incurrence.
(for COI)
5 S. 48 proviso-4 For debentures or bonds, no indexation.
Exception: Indexation is available for (a) SGB issued by RBI; (b) Capital indexed bonds issued by
CG.
6 S. 48 Proviso-3 For equity shares, EOU and units of BT covered by S. 112A, no indexation.
7 S. 47 (viic) No CG in the hands of individuals upon redemption of SGB by RBI.
G. Exchange neutralization benefit - S. 48 Proviso-1 & R. 115A:

1 Applicability Assessee = NR
CA transferred = Shares in, or debentures of, Indian company
CA (supra) was obtained utilizing foreign currency
2 Manner of computation of CG

SN Particulars Amount Procedure Basis of Relevant date

conversion
1. FVC xxx Convert into foreign Average DOT
currency exchange rate
2. COA xxx Convert into foreign Average DOA
3. Expenditure on sale xxx Convert into foreign Average DOT
4. CG xxx Convert into Indian TTBR Quoted by DOT
currency SBI
3 Meaning of average exchange rate (TTBR quoted by SBI + TTSR Quoted by SBI) / 2.
4 Same procedure for every subsequent The same aforesaid procedure shall be applicable in respect of CG
reinvestment in shares or debentures of an accruing or arising from every reinvestment thereafter in, and sale of,
Indian company shares in, or debentures of, an Indian co.
5 No indexation benefit In a case where S. 48 Proviso-1 applies, even if the shares or

debentures are LTCA, indexation benefit is not available.
6 Non-applicability of S. 48 Proviso-1 in 1st Proviso to S. 48 (benefit of indexation) shall not apply to the CG
cases covered by S. 112A. arising from transfer of a LTCA being an equity share or EOU or a
unit of BT referred to in S. 112A. [S. 48 Proviso-3].
7 Relief to the NR investor who bears foreign In case of NR assessees, any gains arising on account of rupee
currency fluctuation risk. [5th proviso to S. appreciation against foreign currency at the time of redemption of
48] RDB of an Indian company subscribed by him shall not be included in
computation of FVC.
8 Immunity from capital gains in respect of off- Any transfer, made outside India, of a CA being RDB of an Indian
shore transfer – S. 47 (viiaa): company issued outside India, by a NR to another NR shall not be
regarded as transfer. It does not attract CG tax.
3. Computation of CG under special circumstances:
A. Computation of CG upon transfer of assets declared under the Income Declaration Scheme, 2016: [S. 49 (5) + S.
2 (42A) Explanation-1 (i) + R. 8AA (3)]:
1 COA of assets declared under the scheme FMV as on 01.06.2016. [S.
49 (5)].
2 POH of assets (supra) – R. 8AA (3):
Asset declared ≠ immovable property POH starts on 01.06.2016
Asset declared = immovable property (the date of acquisition of which is evidenced by a POH starts on the actual
deed registered with any authority of a SG) DOA.
Asset declared = immovable property (in other cases) POH starts on 01.06.2016
(B) Computation of capital gains upon receipt of insurance compensation on account of destruction of capital
asset: [S. 45 (1A)]:
1 When S. 45 (1A) could be Capital asset gets destroyed or damaged.
invoked? Destruction or damage is due to: (a) Flood; (b) Typoon; (c) Hurricane; (d) Cyclone; (e)
Earth quake; (f) Other convulsion of nature; (g) Riot; (h) Civil disturbance; (i) Accidental
fire; (j) Accidental explosion; (k) Action by enemy; (l) Action taken in combating enemy
On account of destruction or damage, the assessee receives compensation from the
insurer.
2 PY of transfer PY in which damage or destruction took place.
3 PY of chargeability PY in which money or other asset is received from the insurer.
4 POH DOA to the day preceding the date of damage/destruction.
5 FVC Money received from insurer or
FMV of asset (on the date of receipt) received from the insurer (where the
compensation is in kind).
6 Depreciable asset In case of depreciable asset, the computation of capital gains is subject to S. 50
7 COA of the new asset The FMV of such asset on the date on which it was received should be taken as its cost
(received as compensation of acquisition.
from the insurer)

(C) Computation of CG upon conversion of capital asset into stock-in-trade S. 45 (2):

As per S. 2 (47), even conversion of capital asset into stock in trade amounts to transfer and hence, CG needs to be
computed. In this regard, the following matters require attention:
1 PY of transfer PY in which capital asset got converted into stock in trade.
2 PY of chargeability PY in which such stock in trade was sold.
3 POH DOA to the day preceding the date of conversion
4 FVC FMV on the date of conversion
5 Numerator index Index relating to the PY in which capital asset got converted into stock in trade.
6 Computation of business In the PY in which the SIT was sold, in addition to the CG, the difference between
income the sale proceeds of SIT and the FMV on the date of conversion shall be assessed
to tax U/H PGBP.
Conversion of stock-in-trade into capital asset – tax implications:

1 S. 2 (24) (xiia) + S. PGBP = FMV on the DOC – Carrying amount of inventory
28 (via)
2 PY of chargeability PY in which entry is passed. [If the assessee follows mercantile system].
PY of realisation. [If assessee follows cash system of accounting].
3 FMV for this Nature of asset FMV
purpose. [R. 11UB]. Immovable property SDV on the DOC
Jewellery, archaeological collections, drawings, Price that could be fetched if sold in
paintings, sculptures, any work of art, shares or the open market on the date of
securities etc conversion
4 Explanation-1A to Upon conversion of inventory into capital asset, if the capital asset is used for the business or
S. 43 (1) profession, depreciation shall be allowed on it. For this purpose, the actual cost is the FMV
referred to in R. 11UB.
5 COA [S. 49 (9)]. FMV referred to in R. 11UB.
6 POH POH starts on the DOC. [Clause (ba) of Explanation-1 to S. 2 (42A)].
7 Denominator index Index relating to the PY of conversion.
(D) Computation of CG on transfer of dematted securities - S. 45 (2A):

1 How to find POH and COA? FIFO basis
2 FIFO method in case of FIFO method shall be applied account-wise. [CBDT Circular- no. 768].
multiple accounts
3 FIFO method on Where in an existing account, old physical securities are dematerialized and entered at
dematerialization of old a later date, under the FIFO method, the basis for determining the movement out of the
physical securities in existing accounts is the date of entry into the account. [CBDT Circular- no. 768].
account
(E) Computation of CG upon transfer of CA by partner/member to a firm/AOP by way of capital contribution or

otherwise - S. 45 (3):
1 CG in the hands of CG is chargeable to tax in the hands of the partner.
partner
2 FVC Amount for which the transferred asset is recorded in the books of the firm.
3 COA of such CA in Amount at which the CA is recorded in the BOA of the firm. [Rajdoot Hotel enterprises (MP)]
the hands of the firm
(F) Computation of CG upon distribution of CA by firm/AOP on dissolution or otherwise: S. 45 (4):

1 Charging CG in the hands of CG is chargeable to tax in the hands of the firm.
firm
2 PY of chargeability PY of distribution (not the PY of dissolution) [Vijayalakshmi metal industries (Mad)]
3 FVC FMV on the date of distribution.
4 A. N. Naik Associates (2004) S. 45 (4) can be invoked even if the firm distributes CA to the partner at the time of
(Bom). his retirement to settle his dues. Note the word ‘otherwise’ in S. 45 (4).
5 COA of the CA in the hands of Value agreed for such asset as per the dissolution deed.
the partner
6 Lingamallu Raghu Kumar (SC) When assets are distributed to the retiring partner upon retirement, what transpires is
the realisation of his pre-existing right to get a share in the net assets of the firm.
Therefore, the question of computing CG in the hands of retiring partner on the

ground that the retiring partner has assigned his interest in the partnership does not
arise.
7 J.M. Mehta and Brothers As per S. 17 (1) (b) of the Registration Act, common immovable properties can’t be
(Bom) divided, possessed and enjoyed severally without a duly executed and registered
document. Therefore, partners of a firm cannot take out immovable property from the
ownership of firm by mutual agreement and by passing entries in the BOA of the firm.
8 Sivalingam Nadar (SC) In case of dissolution of firm, there is no need for a separate document. The
dissolution deed itself stands as a proof of title to the partners.
(G) Computation of capital gains upon compulsory acquisition of capital asset - S. 45 (5):
(i) Computation of capital gains upon receipt of original compensation – S. 45 (5) (a):
S. 2 (47) defines transfer to interalia include compulsory acquisition of capital asset. Where a capital asset is compulsorily
acquired, capital gains shall be computed in accordance with the provisions of S. 45 (5). In this regard, the following matters
require attention:
1 PY of transfer PY in which capital asset is compulsorily acquired.
2 PY of chargeability PY in which the compensation (or part thereof) is first received. .
3 Period of holding Date of acquisition to the date preceding the date of compulsory acquisition
4 FVC Compensation determined under the corresponding law
5 Numerator index Index relating to the PY in which capital asset was compulsorily acquired.
6 Denominator index Index relating to the PY in which the asset was first held by the assessee.
(ii) Tax treatment of enhanced compensation – S. 45 (5) (b):

Where the compensation is enhanced by the court or tribunal or any other authority, capital gains shall be computed and in
this regard, the following points require attention:
1 Year of chargeability PY in which the additional compensation is received.
2 Cost of acquisition Nil
3 Cost of improvement Nil
4 Taxability of additional When the transferor dies before the receipt of additional compensation, the additional
compensation upon death of compensation shall be assessed to tax in the hands of the recipient U/H “CG”.
the transferor
5 Deductibility of litigation Litigation expenses incurred in getting the compensation enhanced shall be allowed
expenses as a deduction in computing the capital gains.
6 Nature of capital gain The capital gains computed upon receipt of additional compensation take the
character of capital gains computed in the first instance.
(iii) Tax treatment of additional compensation received pursuant to interim order of a Court or Tribunal or other
authority – Proviso to S. 45 (5) (b):
Where the assessee receives additional compensation pursuant to interim order of a Court or Tribunal or other authority, it
shall not be charged to tax U/H CG in the PY of receipt, but in the PY in which final order of such Court or Tribunal or other
authority is made.
(iv) Recomputation of capital gains upon subsequent reduction of compensation/consideration by the court/
tribunal/any other authority – S. 45 (5) (c):
Where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the
compensation or, as the case may be, enhanced compensation, and subsequently such compensation is reduced by any
Court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation
as so reduced by such Court, Tribunal or other authority to be the full value of the consideration.
Time limit for Re-computation -S. 155 (16):

The AO can re-compute the CG within 4 years from the end of the PY in which the order reducing the compensation was
passed by the Court or tribunal or any other authority.
Tax treatment of interest on compensation or enhanced compensation – S. 145B (1) +_S. 56 (2) (viii) + S. 57 (iv):
(i) Income by way of interest received on compensation or on enhanced compensation shall be taxable U/H IFOS
in the PY of receipt. [S. 145B (1) + S. 56 (2) (viii)].
(ii) In case of income of nature referred to above, a deduction of sum equal to 50% of such income shall be allowed. No
other deduction shall be allowed against it. [S. 57 (iv].

Connected sections:
(i) Exemption of CG arising on a/c of compulsory acquisition of urban agricultural land - S. 10 (37):
1 Person eligible for Individual or HUF
exemption
2 CA to be transferred for Urban agricultural land.
availing exemption It may be a LTCA or STCA.
(referred to as original It should have been used for agricultural purpose either by the assessee or by his parents
asset) during the period of two years immediately preceding the date of its transfer.
It should have been compulsorily acquired or the consideration for its transfer should have
been determined or approved by the CG or RBI.
3 Condition to be satisfied The compensation or consideration should have been received on or after 01.04.2004.
for availing exemption.
Latest from Judiciary:

Receipt of higher compensation on account of negotiations does not transform the character of compulsory acquisition into a
voluntary sale, so as to deny exemption U/s 10 (37) (iii). [Balakrishnan (2017) 391 ITR 178 (SC)]:
CBDT Circular 36/2016:

The compensation received U/s 96 of RFCTLARR Act even in respect of compulsory acquisition of non-agricultural land is
exempt even if there is no specific provision for providing exemption under the IT Act.
(ii) TDS on payment of compensation on compulsory acquisition – S. 194LA:

1 Payment subjected to TDS Sum being compensation or enhanced compensation on account of compulsory
acquisition of immovable property (not being agricultural land (rural or urban)).
2 Payee Resident
3 Threshold limit Sum paid during a FY > Rs. 2.50L, then there is TDS obligation. Otherwise, there is
no TDS obligation.
4 TDS rate 10% (Subject to S. 206AA)
5 Timing of TDS At the time of payment.
Note It provides that no tax shall be deducted from the compensation awarded U/s 96 of RFCTLARR Act.

1 Interest U/s 28 of the Land Acquisition Act, 1894 which represents enhanced value of land and thus, partakes the
character of compensation and not interest. Hence, the interest U/s 28 is liable to be taxed U/H CG and not U/H IFOS.
2 On the other hand, interest U/s 34 of the Land Acquisition Act, 1894 is for the delay in making payment after the
compensation amount is determined. Such amount is liable to be taxed U/H IFOS. [Movaliya Bhikhubhai Balabhai
(2016) 388 ITR 343 (Guj)].
(iii) Exemption of capital gains arising from compulsory acquisition of land and buildings forming part of an
industrial undertaking - S. 54 D:
1 Person eligible for exemption Any assessee owning industrial undertakings.
U/s 54D
2 Capital asset to be transferred Land or building.
for availing exemption (referred It may be LTCA or STCA.
to as original asset) It should have been used for purpose of business of the industrial undertaking for
a period of atleast two years immediately preceding the date of its transfer.
It should have been compulsorily acquired under any law for the time being in
force.
3 Conditions to be fulfilled for The assessee should invest in another land or building (referred to as new asset)
availing exemption within the stipulated time.
Such land or building should be used for the purpose of re-establishing the
aforesaid industrial undertaking or for the purpose of setting up of a new industrial
undertaking.
4 Manner of investment The assessee can purchase land or building or
He can construct building.
5 Time limit for investment in new The assessee can purchase the new asset within a period of 3 years from the date

asset (S. 54H) of receipt of compensation.

6 Quantum of exemption Lower of (i) CG or (ii) Amount invested in new asset.
7 Depositing in capital gains Where it is not possible for the assessee to make investment in the new asset
account scheme within the due date for filing ROI (U/s S. 139 (1)), still he can avail exemption if he
deposits the amount proposed to be invested in new asset under the “Capital
gains deposit account scheme”.
8 Utilization of amount deposited The amount so deposited should be utilized for investment in the new asset within
the aforesaid time limit.
9 Consequences of non-utilization If the amount deposited is not fully utilized for investment in the new asset within
or partial utilization the aforesaid time limit, then the unutilized amount should be treated as CG of the
PY in which the period of 3 years from the date of receipt of compensation expires.
10 Withdrawal of unutilized amount The assessee can withdraw the unutilized amount from the deposit account for
any other purpose only after a period of 3 years from the date of receipt of
compensation.
11 Withdrawal of exemption upon The exemption granted will be withdrawn if the new asset is transferred within 3
sale of the new asset years from the date of its acquisition.
12 PY in which the exemption is The exemption will be withdrawn in the PY in which the new asset is transferred.
withdrawn
13 Manner of withdrawal of See the table given below
exemption
Computation of capital gains upon transfer of new asset within 3 years from the date of its acquisition and
withdrawal of exemption:
1 Full value of consideration for new asset *****
Less: Expenses wholly and exclusively incurred in connection with transfer of new asset *****
2 Net sale consideration *****
3 Cost of acquisition of new asset *****
Less: Exemption U/s 54D (to the extent remaining unwithdrawn) *****
4 Net cost of acquisition of new asset *****
5 Cost of improvement of new asset *****
6 STCG / LTCG (2-4-5) *****
(H) Special provisions for computation of capital gains in case of joint development agreement – S. 45 (5A) + S. 49
(7):
1 Notwithstanding anything contained in S. 45 (1), where the capital gains arises to an assessee being an individual or a
HUF from transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall
be chargeable to tax as income of the PY in which the certificate of completion for the whole or part of the project is
issued by the competent authority (i.e. authority empowered to approve the building plan by or under any law for the
time being in force). [S. 45 (5A)].
2 For this purpose, the SDV on the date of issue of the said certificate, of his share, being land or building or both in the
project, as increased by the consideration received in cash, if any, shall be deemed to be the FVC received or accruing
as a result of the transfer of the capital asset.
3 However, the provisions of S. 45 (5A) shall not apply where the assessee transfers his share in the project on or before
the date of issue of the said certificate of completion, and the CG shall be deemed to be the income of the PY in which
such transfer takes place and the provisions of the Act, other than the provisions of S. 45 (5A), shall apply for the
purpose of determination of FVC. [Proviso to S. 45 (5A)].
4 For this purpose, ‘specified agreement’ means a registered agreement in which a person owning land or building or
both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of
a share, being land or building or both in such project, whether with or without payment of part of the consideration in
cash;
5 Where the capital gains arises from the transfer of a capital asset, being share in the project, in the form of land or
building, referred to in S. 45 (5A), not being the capital asset referred to in the proviso to S. 45 (5A), the cost of
acquisition of such asset shall be the amount which is deemed as FVC in S. 45 (5A). [S. 49 (7)].
TDS on payment under specified agreement – S. 194-IC:

1 Payment to be subjected Any sum by way of consideration, not being consideration in kind, under the agreement
to TDS referred to in S. 45 (5A).
2 Payee Resident
3 Payer Developer
4 TDS rate 10% (Subject to S.206AA)

5 Timing of TDS At the time of credit to the account of the payee in the books of accounts of the payer or at
the time of payment (whichever is earlier).
6 Threshold limit Not prescribed.
(I) Special exemption to specified people of Andhra Pradesh – S. 10 (37A):

1 Any income chargeable U/H CG in respect of transfer of specified capital asset arising to an assessee, being an
individual or a HUF, if he transfers that specified capital asset under the Land Pooling Scheme of AP Government shall
be exempt from tax.
2 Explanation to S. 10 (37A) defines the term ‘specified capital asset’.
3 ‘Specified capital asset’ means
(a) Land or building or both owned by the assessee as on 02.06.2014 and which has been transferred under the
scheme; or
(b) Land Pooling Certificates issued under the scheme to the assessee in respect of land or building or both
referred to in (a); or
(c) the reconstituted plot or land, as the case may be, received by the assessee in lieu of land or building or both
referred to in (a) in accordance with the scheme, if such plot or land, as the case may be, so received is
transferred within 2 years from the end of the FY in which the possession of such plot or land was handed over
to him.
COA in case of specified CA referred to in Clause (c) of Explanation to S. 10 (37A)- S. 49 (6):

Where the capital gains arise from the transfer of a specified capital asset referred to in clause (c) of Explanation to S. 10
(37A), which has been transferred after the expiry of 2 years from the end of the FY in which the possession of such asset
was handed over to the assessee, the cost of acquisition of such specified CA shall be deemed to be its SDV as on the last
day of the second FY after the end of the FY in which the possession of the said specified capital asset was handed over to
the assessee.
(J) Conversion of bonds, debentures or deposit certificates into shares or debentures – Tax implications: S. 47 (x) +
S. 49 (2A) + R. 8AA (2):
1 Conversion of debentures, bonds or deposit certificate of a company into shares or debentures of that company does
not amount to transfer. [S. 47 (x)]. Hence, the question of computing capital gains does not arise.
2 The cost of acquisition of shares or debentures which the assessee received upon conversion is that part of the cost of
debenture, bond or deposit certificate in relation to which the shares or debentures aforesaid were allotted. [S. 49 (2A)].
3 The period of holding of shares or debentures aforesaid shall include even the period for which the debentures or bonds
or deposit certificate in relation to which the shares or debentures aforesaid were allotted were held. [R. 8AA (2)].
4 If the gain arising from transfer of the aforesaid shares or debentures happens to be long-term, then for indexing the
COA, the denominator index is the index pertaining the PY in which the debentures or bonds or deposit certificate in
relation to which the shares or debentures aforesaid were allotted were acquired.
(K) Conversion of preference shares into equity shares – Tax implications: S. 47 (xb) + S. 49 (2AE) +_ S. 2 (42A)
Explanation-1 Clause (hf):
(i) Conversion of preference shares of a company into equity shares of that company does not amount transfer. [S. 47
(xb)]. Hence, the question of computing capital gains does not arise.
(ii) COA of the aforesaid equity shares = that part of the cost of preference shares in relation to which the equity shares
were allotted. [S. 49 (2AE)].
(iii) Period of holding of the equity shares shall commence on the date of acquisition of the preference shares. [S. 2 (42A)
Explanation-1 Clause (hf)].
(iv) If the gain arising from transfer of equity shares happens to be long-term, then for indexing the COA, the denominator
index is the index pertaining the PY in which the preference shares in relation to which the equity shares were allotted
were acquired.
(L) Computation of capital gains on account of transfer of bonus shares:

In computing the capital gains arising on account of transfer of bonus shares, the following points are to be considered:
1 Cost of acquisition (S. 55 (2) (aa) Nil (if the bonus shares were allotted on or after 01.04.2001)
(iia)) FMV on 01.04.2001 (if the bonus shares were allotted before 01.4.2001)
2 Period of holding - Sub clause (f) of Date of allotment of bonus shares to the day preceding the date of transfer.
clause (i) of Explanation-1 to S. 2
(42A):

Connected provision – S. 94 (8):

Applicability of S. 94 (8):
S. 94 (8) will apply if the following cumulative conditions are satisfied:
1 The assessee purchases units within a period of 3 months prior to the record date.
2 He is allotted additional units without any payment on the basis of holding of units on such date.
3 He sells all or any of the units referred to in (2) within a period of 9 months after the record date.
4 On the date of sale, he shall hold at least one of the additional bonus units allotted.
Effect of S. 94 (8):
Loss arising on account of such purchase and sale of units shall be ignored. However, such loss will be considered to be the
COA of the bonus units held on the date of sale.
(M) Computation of CG on account of transfer of right shares and right entitlement:
Tax implications in the hands of renouncer on account of renouncing the right entitlement in favour of any other
person:
Right entitlement is a capital asset. Renouncing right entitlement amounts to relinquishment of capital asset. CG needs to be
computed in the hands of the renouncer and the following points require attention:
1 COA of right entitlement Nil. (S. 55 (2) (aa) (ii)).
2 Period of holding Date of offer of the right to the day preceding the date of transfer. [Sub clause (e) of
clause (i) of Exp-1 to S. 2 (42A)].
3 Criterion for deciding the 36 months.
nature of capital asset
4 Nature of capital gain Invariably the gain is a STCG, since the offer cannot be kept open for a long period.
Tax implications in respect of transfer of right shares subscribed using the right entitlement:
In computing the CG arising on account of transfer of right shares the following points require attention:
1 COA of right shares Amount actually paid for acquiring such shares. S. 55 (2) (aa) (iii).
2 Period of holding Date of allotment of right shares to the day preceding the date of transfer. Sub clause
(d) of clause (i) of Exp-1 to S. 2 (42A).
Tax implication in the hands of renouncee in the event of sale of shares subscribed using the right entitlement:
In computing the capital gains arising on account of transfer of shares subscribed by the renouncee using the right
entitlement, the following points require attention:
1 Cost of acquisition of Amount paid to the company for acquiring such shares + amount paid to the renouncer for
shares acquiring the right entitlement. [S. 55 (2) (aa) (iv)].
2 Period of holding Date of allotment of shares by the company to the day preceding the date of transfer. [Sub
clause (d) of clause (i) of Exp-1 to S. 2 (42A)].
(N) Computation of CG arising on account of shares or securities allotted under ESOP – S. 49 (2AA):
(i) COA of shares or securities allotted under ESOP = FMV on the date of exercise of option. [S. 49 (2AA)]. Actual COA
shall be ignored. This is intended to avoid over-lapping taxation.
(ii) Period of holding of such shares or securities shall commence on the date of allotment. [S.2 (42A) Explanation-1
Clause (hb)].
(O) Cost of acquisition of intangible capital assets – S. 55 (2) (a):

Capital asset COA (if self-generated) COA (if acquired)
Goodwill of a business Nil Actual COA
Trade mark associated with a business
Brand name associated with a business
Right to manufacture, produce or process an article or
thing
Right to carry on a business or profession
Tenancy rights
Stage carriage permits (i.e. Route permits)


Even if these capital assets were acquired before 01.04.2001, there is no option to take the FMV as on the 01.04.2001.
(P) Cost of improvement of certain intangible capital assets – S. 55 (1) (b) (1):
Capital asset Cost of improvement
Good will of a business Nil
Right to manufacture, produce or process an article or thing Nil
Right to carry on a business or profession Nil
(Q) Transfer of capital asset between holding company and its WOS:
S. 47 (iv) + S. 47 (v) + S.49 (1) + S. 2 (42A) Explanation-1:

1 Where a capital asset is transferred as a capital asset by holding company to its WOS (being an Indian company), this
shall not be regarded as transfer. [S. 47 (iv)]. Hence, the question of computing capital gains does not arise.
2 Where a capital asset is transferred as a capital asset by WOS to its holding company (being an Indian company), this
shall not be regarded as transfer. [S. 47 (v)]. Hence, the question of computing capital gains does not arise.
3 Where the capital asset is acquired by way of transfer referred to in S. 47 (iv) or S. 47 (v), the cost of acquisition of such
capital asset is the cost of acquisition to the previous owner. [S. 49 (1)].
4 The period of holding of such capital asset shall also include the period for which the capital asset was held by the
previous owner. [S. 2 (42A) Explanation-1].
Withdrawal of exemption granted U/s 47 (iv) / (v) – S. 47A (1) & S. 155 (7B):
1 Circumstances in which the Subsidiary company ceases to be WOS within 8 years from the date of
exemption granted U/s 47 (iv) / (v) transfer of capital asset. (or)
could be withdrawn U/s 47A (1) Transferee-company converts the transferred capital asset into stock-in-trade
within 8 years from DOT.
2 Manner of withdrawal The order of assessment passed in respect of AY relevant to the PY of
transfer in respect of transferor shall be amended to re-compute the total
income on account of withdrawal of exemption granted U/s 47 (iv) or S. 47
(v).
The order of amendment shall be passed within 4 years from the end of the
PY of violation. [S. 155 (7B)].
3 COA of capital asset in the hands of Actual cost of acquisition. [S. 49 (3)]. Provisions of S. 49 (1) shall not apply.
transferee (post withdrawal of
exemption through S. 47A (1)).
4 Period of holding of capital asset in the Starts on the actual date of acquisition. Provisions of Explanation-1 to S. 2
hands of transferee (post withdrawal (42A) shall not apply.
of exemption through S. 47A (1)).
(R) Amalgamation and capital gains:
1. Conditions to be fulfilled to be regarded as amalgamation under the Act – S. 2 (1B):

Mergers to be regarded as amalgamation, the following conditions are to be satisfied:
(a) All the properties of the amalgamating company before amalgamation shall become properties of the amalgamated
company.
(b) All the liabilities of the amalgamating company before amalgamation shall become liabilities of the amalgamated
company.
(c) Shareholders holding atleast 75% in the value of shares in amalgamating company shall become shareholders in the
amalgamated company by virtue of amalgamation.
2. Transfer of capital asset to the amalgamated company pursuant to the scheme of amalgamation – S. 47 (vi) + S.
49 (1) + S. 2 (42A) Explanation-1:
1 Where a capital asset gets transferred from the amalgamating company to the amalgamated company (being an India
company) pursuant to the scheme of amalgamation, it shall not be regarded as transfer. [S. 47 (vi)]. Hence, the
question of computing capital gains does not arise.
2 The cost of acquisition of such capital asset in the hands of amalgamated company is the cost of acquisition to the
previous owner (i.e. amalgamating company). [S. 49 (1)].
3 While computing the period of holding of such capital asset in the hands of amalgamated company the period for which

the capital asset was held by the amalgamating company shall also be included. [S. 2 (42A) Explanation-1].
4 Subsequently, if these assets are transferred by the amalgamated company, for computing the capital gains, if the COA
is to be indexed, the denominator index is the index pertaining to the PY in which these assets were acquired by the
amalgamating company. [M. Sankar Trading Corporation and Consultancy (P) Ltd. ITA. No. 2103/Mds/2012]
3. Transfer of shares held in amalgamating company pursuant to amalgamation – S. 47 (vii):

(a) Where amalgamation takes place, the amalgamating company comes to an end. The shares in the amalgamating
company will become valueless. The rights of the shareholders in the amalgamating company get extinguished.
(b) Extinguishment of rights is transfer as per S. 2 (47). If the amalgamated company allots its shares to the shareholders
of amalgamating company as a consideration for such extinguishment of rights, no CG shall be computed in the hands
of such shareholders. This is because S. 47 (vii) provides that nothing contained in S. 45 shall apply to such
extinguishment.
(c) However, this exemption is available only if the amalgamated company is an Indian company.
(d) The consideration for extinguishment shall be only in the form of shares in the amalgamated company. If the
consideration is not in the form of shares in the amalgamated co, the aforesaid exemption is not available. In other
words, CG shall be computed in the hands of the shareholders of the amalgamating company. (Gautham Sarabhai
Trust (Bom))
(e) For example, if the amalgamated company allots debentures to the shareholders of the amalgamating company, the
fair market value of such debentures should be taken as full value of consideration for computing capital gains in the
hands of the shareholders of amalgamating company.
(f) S. 47(vii) was amended with effect from AY 13-14 so as to exclude the requirement of issue of shares to the
shareholder where such shareholder itself is the amalgamated company. However, the amalgamated company will
continue to be required to issue shares to the other shareholders of the amalgamating company.
4. Transfer of shares allotted by amalgamated company to the shareholders of amalgamating company:

Where, pursuant to the scheme of amalgamation, shares are allotted by the amalgamated company to the shareholder of an
amalgamating company and such shares are transferred by such shareholder, capital gains shall be computed and charged
to tax in his hands in the PY of transfer. In this regard, the following points require attention:
1 POH of shares in amalgamated company – DOA of shares in the amalgamating company to the day preceding the
S. 2 (42A) Explanation 1 Clause (i) Sub DOT.
clause (c).
2 Cost of acquisition of shares in the Cost of acquisition of shares in the amalgamating company.
amalgamated company (S. 49 (2))
3 Denominator index for indexing COA of Index of the PY in which the shares were allotted by the amalgamating
shares in amalgamated company for company. (Decision of Bombay HC in Manjula Shah case applied).
computing CG arising on account of transfer
of such shares.
However, the aforesaid provisions are applicable only if the amalgamated company is an IC.
5. Transfer of shares held in an Indian company by one foreign company to another foreign company in a scheme
of amalgamation – S. 47 (via):
If the following conditions are satisfied, nothing is chargeable to tax U/s 45:
(a) Shares held in an Indian company are transferred by one foreign company to another foreign company in a scheme of
amalgamation.
(b) Atleast 25% of the shareholders of the amalgamating company shall become the shareholders of the amalgamated
company.
(c) This transfer shall not attract tax on capital gains in the country, in which the amalgamating company is incorporated.
Note:
COA of shares in Indian company in the hands of COA to the previous owner (i.e. amalgamating foreign
amalgamated foreign company = company). [S. 49 (1)].
Period of holding of shares (supra) for amalgamated Starts on the DOA by the previous owner (i.e. amalgamating
foreign company FC). [S. 2 (42A) Explanation-1].
Denominator index for indexing COA of shares (supra) Index pertaining to the PY in which the shares (supra) were
for computing CG in the hands of amalgamated foreign acquired by the amalgamating foreign company. (Decision of
company arising on account of transfer of shares (supra) Bombay HC in Manjula Shah case applied).

(S) Demerger & Capital gains:
1. Meaning of Demerger, Demerged company & Resulting Company:

(a) The term ‘Demerger’ means transfer, by one company, of its one or more undertakings to another company. Here,
undertaking means a business activity. (S. 2 (19AA).
(b) The transfer of undertaking should be pursuant to a scheme of demerger referred to in S. 391 to S. 394 of the
Companies Act 1956 (i.e. S. 230 to S. 232 of the Companies Act 2013).
(c) The company which transfers the undertaking(s) is called as demerged company. (S. 2 (19AAA).
(d) The company to which the undertaking of the demerged company is transferred is called as resulting co. The resulting
company may or may not be a WOS of the demerged company. (S. 2 (41A)).
2. Conditions to be satisfied to be called as demerger – S. 2 (19AA):

(a) All the properties of the undertaking transferred by the demerged company shall become the properties of the resulting
company.
(b) All the liabilities which arise out of the activities or operations of the undertaking transferred, shall become the liabilities
of the resulting company.
(c) Assets & liabilities are to be transferred to the resulting company at such values appearing in the books of a/c of the
demerged company immediately before demerger (figures before any revaluation shall be taken).
(d) The resulting company shall issue shares to the shareholders of the demerged company on a proportionate basis as a
consideration for demerger.
(e) Shareholders holding atleast 75% in the value of shares in demerged company shall become shareholders in the
resulting company by virtue of demerger
(f) The demerged company shall transfer its undertaking as a going concern. That is the business should be continuing at
the time of demerger.
(g) U/s 72A (5), the CG has powers to notify in the official gazette such conditions as it considers necessary to ensure that
the demerger is for genuine business purposes. Thus, the demerger should be in accordance with the conditions, if
any, notified U/s 72A (5).
(h) S. 2 (19AA) is amended with effect from AY 2013-14 so as to exclude the requirement of issue of shares where
resulting company itself is a shareholder of the demerged company. However, the requirement of issuing shares would
still have to be met by the resulting company in case of other shareholders of the demerged company.
Note: The reconstruction or splitting up of a company, which ceased to be a PSC as a result of transfer of its shares by the
CG, into separate companies, shall be deemed to be demerger, if such reconstruction or splitting up has been made to give
effect to any condition attached to the said transfer of shares and also fulfills such other condition as may be notified by the
CG in the official gazette. [Explanation-5 to S. 2 (19AA)].
3. Transfer of capital asset by the demerged company to the resulting company pursuant to demerger – S. 47 (vib):
1 Pursuant to demerger, all assets of the undertaking transferred become the assets of the resulting company. Such
assets may interalia include CA.
2 No CG shall be chargeable to tax in the hands of the demerged company on account of this transfer. This is because S.
47 (vib) provides that nothing in S. 45 shall apply to such transfer.
3 However, this exemption is available only if the resulting company is an Indian company. The demerged company may
be an Indian company or otherwise.
4 The COA of such capital asset in the hands of resulting company is the COA to the previous owner (i.e. demerged
company). [S. 49 (1)].
5 While computing the period of holding of such capital asset in the hands of resulting company the period for which the
capital asset was held by the demerged company shall also be included. [S. 2 (42A) Explanation-1].
6 Subsequently, if these assets are transferred by the resulting company, for computing capital gains, if the COA needs to
be indexed, the denominator index shall be the index pertaining to the PY in which these assets were acquired by the
demerged company. (Decision of Bombay HC in Manjula Shah case applied).
4. Issue of shares in resulting company pursuant to the scheme of demerger – S. 47 (vid):

1 On account of demerger, the networth of the demerged company gets reduced. Hence, it is followed by reduction of
share capital of demerged company. This results in extinguishment of rights in shares of demerged company which
comes within the transfer definition contemplated in S. 2 (47). The resulting company allots its shares to the
shareholders of demerged company as a consideration for such extinguishment.
2 However, there will be no capital gains computation since such extinguishment is not to be regarded as transfer for the
purpose of S. 45. [S. 47 (vid)].

5. Computation of capital gains arising from transfer of shares in demerged company & resulting company – S. 49
(2C) + S. 49 (2D):
The following points require attention for computation of capital gains arising on account of transfer of shares in the
demerged company and in the resulting company:
SN Particulars Shares in demerged company Shares in resulting (Indian) company
1 POH Date of acquisition of shares in the demerged Date of acquisition of shares in the demerged
company to the date of transfer. company to the date of transfer
2 COA See table given below. (S. 49 (2D)) See table given below. (S. 49 (2C))
3 Denominator Index of the PY in which the shares were Index for the PY in which the shares were
index allotted by the demerged company. allotted by the demerged company.
Cost of acquisition of shares in the resulting company and the demerged company:
1 COA of original shares held by the assessee in the demerged company ****
2 Net book value of assets transferred pursuant to demerger ****
3 Net worth of the demerged company immediately before demerger ****
4 Cost of acquisition of shares in the resulting company (1*2/3) (as per S. 49 (2C)) ****
5 Cost of acquisition of shares in the demerged company (1-4) (as per S. 49 (2D)) ****
Net worth = paid up share capital + General Reserves (immediately before demerger).
6. Transfer of shares held in an Indian company by one foreign company to another foreign company in a scheme
of demerger – S. 47 (vic):
If the following conditions are satisfied, nothing is chargeable to tax U/s 45:
(a) Shares held in an Indian company are transferred by one foreign company to another foreign company pursuant to the
demerger of the undertaking owned by the former.
(b) Shareholders holding not less than 75% in value of the shares of the demerged foreign company continue to remain
shareholders of the resulting foreign company.
(c) This transfer shall not attract tax on capital gains in the country, in which the demerged foreign company is
incorporated.
Note:
Cost of acquisition of shares in Indian company in the hands Cost of acquisition to the previous owner (i.e. Demerged
of Resulting foreign company = foreign company). [S. 49 (1)].
Period of holding of shares (supra) for Resulting foreign Starts on the date of acquisition by the previous owner (i.e.
company Demerged foreign company). [S. 2 (42A) Explanation-1].
Denominator index for indexing COA of shares (supra) for Index pertaining to the PY in which the shares (supra) were
computing capital gains in the hands of Resulting foreign acquired by the Demerged foreign company. (Decision of
company arising on account of transfer of shares (supra) Bombay HC in Manjula Shah case applied).
(T) Reduction of share capital – Tax implications:

1 Dividend U/s 2 (22) (d) Where a company, upon reduction of its share capital, makes any distribution to its
shareholders, such distribution to the extent attributable to the accumulated profits of the
company on the date of distribution shall be regarded as dividend.
Accumulated profits, for this purpose, shall include capitalised profits also. That is, share
capital to the extent attributable to issue of bonus shares shall also be regarded as part
of AP.
If the company reducing share capital happens to be a domestic company, then it has
obligation to pay DDT U/s 115-O.
Dividend U/s 2 (22) (d) is exempt in the hands of shareholders U/s 10 (34). (Subject to S.
115BBDA).
2 Widening the scope of New Explanation 2A is inserted in S. 2 (22) w.e.f 1st April 2018 to widen the scope
meaning of ‘accumulated of the term 'accumulated profits' so as to provide that in the case of an
profits’ for the purpose of amalgamated company, its accumulated profits, whether capitalized or not, or
dividend U/s 2 (22). losses as the case may be, shall be increased by the accumulated profits of the
amalgamating company, whether capitalized or not, on the date of amalgamation.
3 Exclusions from S. 2 (22) Any amount distributed to the preference shareholders upon reduction of preference
(d) shares is not to be regarded as dividend U/s 2 (22) (d). However, in the hands of
preference shareholder, capital gains need to be computed in view of decision of the
SC in Anarkali Sarabhai case.

Any amount distributed to the SH upon buy back of shares by the company shall not be
regarded as dividend U/s 2 (22) (d).
4 Computation of capital When the share capital is reduced by paying off a part of the capital by reducing the face
gains in the hands of value of the share, the share remains but the right of the shareholder to dividends on his
shareholder share capital and the right to share in the distribution of the net assets upon liquidation is
extinguished proportionately to the extent of reduction in capital. Thus, the reduction in
share capital amounts to transfer. (Karthikeya. V. Sarabhai (SC)).
Accordingly, CG needs to be computed in the hands of shareholder.
FVC = Money distributed + FMV of assets distributed – Dividend U/s 2 (22) (d). [G.
Narasimhan (SC)].
Cost of acquisition = COA of share to the extent attributable to extinguished part.
(U) Buy back of shares – Tax implications:

1 S. 2 (22) (d) defines ‘Dividend’ to include any distribution by a company to its shareholders upon reduction of its share
capital to the extent of its accumulated profits.
2 However, S. 2 (22) (iv) specifically excludes from the ambit of the term ‘dividend’ any distribution by a company to its
shareholders upon buy back of its shares in accordance with the provision of the Companies Act. Hence, if a company
makes any distribution pursuant to buy back of its own shares, it is not liable to DDT U/s 115-O.
3 Where a company buys back its shares in accordance with the provisions of the Companies Act, S. 46A requires
computation of capital gains in the hands of the shareholder. The capital gains are to be taxed in the PY of buy-back.
4 For the purpose of S. 48, the FVC is the amount received by the shareholder from the company.
5 However, if a domestic company buys back its unlisted shares, there shall be no computation of capital gains in the
hands of shareholder invoking S. 46A. Exemption is provided in S. 10 (34A).
6 However, the domestic company has to pay an additional income tax (called buy-back distribution tax) U/s 115QA
within 14 days of distribution.
7 Quantum of buy-back distribution tax = (Distributed income * 23.296%).
8 Distributed income = [A –B].
9 A = Consideration paid by the company to its shareholders upon buy back of its shares.
10 B = Amount received by the company for issue of such shares determined in a manner prescribed U/R 40BB.
Determination of amount received by the company for issue of shares – R. 40BB:
R. 40BB (2):
Situation Amount received by the company for issue of shares bought
back
Shares (which are bought back) have been issued by Amount actually received by the company in respect of such
the company to any person by way of subscription. shares including amount received by way of premium.
R. 40BB (3):
Situation Amount received by the company for
issue of shares bought back
Company had at any time, prior to the buyback of share, returned any sum Amount received in respect of such share (–
out of the amount received in respect of such share. ) amount so returned.
Note: If the sum or any part of it so returned was chargeable to DDT U/s 115-O and the company has paid such DDT then
such sum or part thereof, as the case may be, shall not be reduced. [Proviso to R. 40BB (3)].
R. 40BB (4):
Situation Amount received by the company for issue of shares bought back
Shares (which are bought back) were issued by FMV (determined U/R 3 (8)) to the extent credited to the share capital
the company under ESOP and share premium by the company.
R. 40BB (5)
Situation Amount received by the amalgamated company for issue of
shares which are bought back by it
Shares (which are bought back) were issued by Amount received by the amalgamating company in respect of
amalgamated company, under a scheme of shares in amalgamating company in lieu of which shares were
amalgamation, in lieu of shares in amalgamating allotted by the amalgamated company.
company.

R. 40BB (6):
Situation Amount received by the Resulting company for issue of
shares which are bought back by it
Shares (which are bought back) were issued by Resulting Amount received by the Demerged company in respect of
company, under a scheme of demerger, for shares in Demerged company * (Net book value of assets
extinguishment of rights in shares in Demerged company transferred pursuant to demerger/Net worth of Demerged
company immediately before demerger).
R. 40BB (7):
Situation Amount received by the Demerged company for issue of shares which are
bought back by it
Shares of Demerged company Amount received by the Demerged company in respect of original shares in Demerged
(after demerger) are bought back company – [Amount received by the Demerged company in respect of original shares in
by the Demerged company Demerged company * (Net book value of assets transferred pursuant to demerger/Net
worth of Demerged company immediately before demerger)].
R. 40BB (8):
Situation Amount received by the company for issue of shares
which are bought back by it
Shares (which are bought back) have been issued or allotted X÷Y
by the company as a part of consideration for acquisition of
any asset or settlement of any liability
X= An amount being lower of the following amounts:

(a) [FMV of the asset or liability, as determined by a merchant banker] * Part of consideration being paid by issue of
shares/ total consideration;
(b) the amount of consideration for acquisition of the asset or settlement of the liability to be paid in the form of
shares, to the extent credited to the share capital and share premium account by the company;
Y= The number of shares issued by the company as part of consideration;
R. 40BB (9):
Situation Amount received by the company for issue of shares
which are bought back by it
Firm or SPC gets converted into Company (X-Y)/Z
X= Book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at
source or as advance tax payment as reduced by the amount of tax claimed as refund under the IT Act and any
amount shown in the balance-sheet as asset including the unamortized amount of deferred expenditure which
does not represent the value of any asset.
For determining book value of the assets, any change in the value of the assets consequent to their revaluation
shall be ignored.
Y= Book value of liabilities shown in the balance-sheet, but does not include the following amounts, namely:
(a) capital, by whatever name called, of the proprietor or partners of the firm, as the case may be;
(b) reserves and surpluses, by whatever name called, including balance in P&L a/c;
(c) any amount representing provision for taxation, other than amount of tax paid, as deduction or collection at
source or as advance tax payment as reduced by the amount of tax claimed as refund under the IT Act, if any, to
the extent of the excess over the tax payable with reference to the book profits in accordance with the law
applicable thereto;
(d) Any amount representing provisions made for meeting liabilities, other than ascertained liabilities; and
(e) any amount representing contingent liabilities,
Z= Number of shares issued on conversion
R. 40BB (10):
Situation Amount received by the company for issue of shares which
are bought back by it
Shares (which are bought back) have been issued or Nil
allotted without consideration, on the basis of existing
shareholding in the company.

R. 40BB (11):

Shares (which are bought back) have been issued on Amount received by the company in respect of such instrument
conversion of preference shares or bond or debenture, as so converted
debenture-stock or deposit certificate in any form or
warrants or any other security issued by the company
R. 40BB (12):
Share being bought back is held in demat form and the The amount received by the company in respect of such share
same cannot be distinctly identified shall be the amount received for the issue of share determined
in accordance with this rule on the basis of FIFO method.
R. 40BB (13):
In any other case, the face value of the share shall be deemed to be the amount received by the company for issue of the
share.

1 Obligation to pay BBDT is independent of whether the company has obligation to pay tax on its TI computed in
accordance with the provisions of this Act.
2 BBDT payment is a final payment in respect of which no credit is allowed to the company or the shareholder.
3 BBDT is neither eligible for deduction in the hands of the company nor in the hands of shareholders.
4 If there is delay in payment of BBDT, interest is levied @ 1% p.m or part thereof for the period beginning with 15th day
from the date of distribution to the date of payment. [S. 115QB].
5 If there is a default in payment of BBDT, the company and its principal officer becomes assessee in default. Collection
and recovery proceedings could be initiated against them. [S. 115QC].
Summary:
Tax implications Company which buys back shares = Company which buys back shares =
Domestic listed company Domestic unlisted company
In the hands of Distribution pursuant to buy back ≠ Dividend [S. Distribution pursuant to buy back ≠ Dividend
company 2 (22) (iv)]. Company has no DDT obligation U/s [S. 2 (22) (iv)]. Company has no DDT
115-O. obligation U/s 115-O.
No BBDT obligation U/s 115QA. There is BBDT obligation U/s 115QA.
In the hands of Capital gains are computed U/s 46A. Capital gains on buy back of shares are
shareholders exempt U/s 10 (34A).
(V) Distribution of assets by company upon liquidation – Tax implications:

1 Immunity from capital gains tax for the Where a company, upon liquidation, distributes capital assets to its
company in liquidation shareholders, it shall not be regarded as transfer for the purpose of
S. 45 and accordingly, there is no capital gains tax liability in the
hands of company. [S. 46 (1)].
However, if the company sells CAs and distributes the sale
proceeds among the shareholder, the immunity from S. 45 shall not
apply. In other words, the company shall be liable to CG tax. [Shri
Kannan Rice Mills Ltd (Mad)].
2 DDT obligation U/s 115-O for the company Dividend includes any distribution made to the shareholders of a
company on its liquidation, to the extent to which the distribution is
attributable to the accumulated profits of the company immediately
before its liquidation. [S. 2 (22) (c)].
For this purpose, accumulated profits shall include even capitalised
profits.
If the company under liquidation is a domestic co, then it has
obligation to pay DDT U/s 115-O.

Dividend U/s 2 (22) (c) is exempt in the hands of shareholders U/s

10 (34) [Subject to S. 115BBDA].
3 Capital gains in the hands of shareholders. Where a shareholder on the liquidation of a company receives any
money or other assets from the company, he shall be chargeable to
income-tax U/H CG in respect of the money so received or the
market value of the other assets on the date of distribution, as
reduced by the amount assessed as dividend within the meaning of
S. 2 (22) (c) and the sum so arrived at shall be deemed to be the
FVC for the purposes of S. 48. [S. 46 (2)].
4 Manner of computation of capital gains U/s 46 (2) (on a/c of extinguishment of rights in shares in company in
liquidation).
(a) PY of transfer PY of liquidation
(b) PY of chargeability PY of distribution
(c) POH Date of acquisition of shares in the company to the date on which
company goes into liquidation.
(d) Criterion for deciding the nature of CA. 12 months or 24 months (depending upon whether shares are listed
or unlisted).
(e) Full value of consideration Money + FMV of assets distributed – Dividend U/s 2 (22) (c).
(f) Logic behind deducting dividend U/s 2 (22) (c) To the extent of accumulated profits, the assets distributed are to be
regarded as dividend U/s 2 (22) (c) and is traceable to the head
IFOS. Accordingly, the assets distributed to the extent not regarded
as dividend U/s 2 (22) (c) shall alone qualify as FVC. Though
dividend U/s 2 (22) (c) is exempt U/s 10 (34), it gets taxed in the
hands of the company U/s 115-O.
(g) Cost of acquisition Cost of acquisition of shares in the company.
(h) Numerator index Index related to the PY in which company goes into liquidation.
(i) Denominator index Index related to the PY in which shares were acquired.
7 Manner of computing capital gains on account of transfer of capital assets distributed by the company in liquidation.
(a) COA of acquisition of distributed capital asset in the hands of FMV on the date of distribution by the
shareholder company. [S. 55 (2) (b) (iii)].
(b) Period of holding of such capital asset in the hands of shareholder Starts on the date of distribution by the
company.
(X) Reverse mortgage – tax implications:

1 S. 47 (xvi) clarifies that any transfer of a CA in a transaction of reverse mortgage under a scheme made and notified by
the CG would not amount to a transfer for the purpose of capital gains.
2 S. 10 (43) provides that the amount received by the senior citizen as a loan, either in lumpsum or in installments, in a
transaction of reverse mortgage would be exempt from income-tax.
3 Capital gains tax liability would be attracted only at the stage of alienation of the mortgaged property by the bank or
housing finance company for the purpose of recovering the loan.

1 RM. Arunachalam When the previous owner had mortgaged the property, then after his death the legal heir
(SC) inherits only the mortgagor’s interest in the property. By discharging the mortgage debt his
heir who has inherited the property acquires the interest of mortgagee in the property. As a
result of such payment made for clearing off the mortgage, the interest of the mortgagee is
acquired by the heir. The said payment is, therefore, regarded as cost of acquisition.
Therefore, the cost of acquisition to the legal heir is the aggregate of the cost to the previous
owner and the amount paid to clear the mortgage.
2 V. S. M. R. Where the mortgage is created by the assessee himself, there will be no tax treatment of
Jagadishchandran discharge of mortgage debt and the same cannot be said to be cost of acquisition or cost of
(SC) improvement of the property.
3 Conclusion There is distinction between the obligation to discharge the mortgage debt created by the
previous owner and the obligation to discharge the mortgage created by the assessee
himself.
Where the property acquired by the assessee is subject to the mortgage created by the
previous owner, the assessee acquires absolute interest in that property only after the interest
created in the property in favour of the mortgage is transferred to the assessee, that is, after
the discharge of mortgage debt. In such case, the expenditure incurred by the assessee to

discharge the mortgage debt created by the previous owner to acquire absolute interest in the
property is treated as cost of acquisition.
However, the expenditure incurred by the assessee to remove the encumbrance created by
the assessee himself on the property which was acquired by the assessee without any
encumbrance is not allowable as deduction U/s 48.
(Y) Depreciation & Capital gains:
(i) Classification of depreciable assets:

1 Meaning of depreciable asset Depreciable asset means asset in respect of which depreciation allowance is
quantified for claiming deduction U/s 32 (1).
2 Classification of depreciable Depreciable assets are classified into (a) tangible; (b) intangible.
assets
3 Tangible depreciable assets (a) Building; (b) furniture (assets for convenience or decoration); (c) Plant &
machinery.
4 Intangible depreciable assets (a) Patent; (b) know-how; (c) trade-mark; (d) copy-right; (e) licence; (f) franchise;
(g) any other business of commercial rights of similar nature.
5 Building includes (a) Roads laid within factory premises for providing approach to building; [Gwalior Rayon (SC)];
(b) bridges/culverts; (c) wells; (d) tube wells.
6 Furniture It means assets meant for convenience and decoration.
It includes electrical fittings such as (a) Switches; (b) wiring; (c) sockets; (d) fans; (e) other
electrical fittings.
7 Machinery It means assets used in manufacturing or production or processing of goods or articles.
8 Plant It means any tool that is necessary for carrying on business or profession.
It includes (a) Ships; (b) aircrafts; (c) vehicles; (d) books; (e) surgical equipments; (f) scientific
apparatus. [S. 43 (3)].
9 Plant excludes Livestock. [S. 43 (3)].
Building, furniture &fittings. [S.43 (3)]
10 Treatment of loss Loss on sale of animals used for the purpose of business or profession upon their death or they
on sale of becoming permanently useless is allowed as deduction U/s 36 (1) (vi) while computing income
animals used for U/H PGBP.
business.
(ii) Judicial ruling in respect of depreciable assets:

1 Payments made Intangible assets are invaluable assets which are required for carrying on the business acquired
for Goodwill by the assessee without interruption.
In their absence, the assessee would have to commence the business from scratch and go
through the gestation period, whereas by acquiring these intangible assets along with tangible
assets, the assessee got a running business.
Thus, these intangible assets are, therefore, comparable to a license to carry on the existing
business of the transferor.
Therefore, payments made for securing goodwill are eligible for depreciation U/s 32 (1) (ii).
B. Raveendran Pillai (2011) (Ker) + Areva T and D India Ltd (2012) (Del) + Smifs Securities
Ltd (SC) + Mis Bharti Teletech (2015) (Del).
2 Abkari licence It is issued by the Kerala Government under the Foreign liquor Rules to the person carrying on
liquor trade. It is renewed every year unless a general policy decision is taken against it. It is
transferrable. It is, undoubtedly, an intangible depreciable asset which is eligible for depreciation
U/s 32 (1) (ii). [S. Ambika (2011) (Ker)].
3 Non-compete This is payment made for warding off or eliminating competition for a substantially long period. It
fees results in enduring benefit in capital field. Therefore, it is a capital expenditure. It is a payment
made for securing the right to operate in competition-free environment. Thus, it is a payment
made for securing a business or commercial right. Therefore, it is eligible for depreciation U/s 32
(1) (ii). [Medicorp Technologies India (P) Ltd (Chennai ITAT)].
4 Membership card It is a licence to trade in the floor of BSE. Therefore, it is also eligible for depreciation U/s 32 (1)
in BSE (ii).
5 Expenditure on Assessee was engaged in the business of ‘Aquaculture’. It grew prawns in specially designed
specially ponds. Assessee claimed depreciation on the expenditure incurred on pond, treating it as plant.
designed ponds The claim of the assessee was upheld by the SC in Victory Aqua Farm Ltd.

(iv) Conditions to be fulfilled for the purpose of availing deduction in respect of depreciation allowance:
1 Depreciable asset shall be owned by the assessee. The ownership may be complete or partial.
2 Depreciable asset shall be used for the purpose of business or profession carried on by the assessee.
(v) Issues relating to ownership:

1 Beneficial ownership or economic ownership is suffice
Mysore Minerals Ltd ‘Ownership’ for the purpose of S. 32 should be understood in a broader sense. Beneficial or
(SC) + Podar Cements economic ownership is sufficient.
(P) Ltd (SC) + Smt. A.
Sivakami (Mad).
2 Significance of To become entitled to depreciation, it not necessary that the assessee should be a complete
‘Owned wholly or owner. Depreciation can be allowed even on assets partially owned by the assessee, to the
partly’ extent of his share in such assets.
3 Ownership of land not In case of buildings, the assessee must own the superstructure and not necessarily the land
prerequisite on which the building is constructed.
Assessee can claim depreciation on building which he has constructed in a lease hold land,
provided the building is used for the purpose of business or profession carried on by him.
[Revathi C. P. Equipments Ltd (Mad) + Chandra Agro (P) Ltd (All)].
Lease premium paid for securing lease hold interest in the land on which building which is
used for business is constructed cannot be added to the cost of construction of building for
the purpose of claiming depreciation. [Indian Oil Corporation (Bom)].
4 Concept of deemed If the assessee is occupying any building as a tenant for the purpose of carrying on his
building [Explanation- business or profession, any capital expenditure incurred towards renovation, extension or
1 to S. 32 (1)]. improvement to such building can be treated as value of building belonging to him and
depreciation can be claimed on such amount.
Note: This is an exception to the rule that the depreciation is allowed only with respect to the assets owned by the
assessee. This is called the concept of deemed building, since the capital expenditure incurred in construction etc of a
structure in a building taken on lease is regarded as a separate building in itself and is eligible for depreciation.
5 Depreciation on In case of assets purchased on installment basis, ownership passes on to the assessee
assets purchased on immediately. Even if the assessee commits default in paying the installments, the asset
installment basis cannot be repossessed. Only suit can be filed for recovery of arrears of installments. Hence,
depreciation can be allowed on the entire amount agreed to be paid to be paid as price.
[CBDT Circular 9 dated 23.03.1943].
7 Depreciation on Where the terms of agreement provide that the asset shall eventually become the property of
assets purchased on hirer or confer on the hirer an option to purchase an asset, the transaction should be
hire purchase basis regarded as one of hire purchase. In such case, depreciation shall be allowed on the cash
price (i.e. the amount for which the hired asset would have been sold for cash at the date of
agreement.
The difference between the aggregate of periodical payments and the cash price (referred to
as hire charges) shall be allowed as deduction equally over the period of agreement.
6 Depreciation on In case of lease transaction, irrespective of whether it is finance lease or operating lease,
assets taken on lease depreciation shall be allowed only to lessor and not to lessee, since the ownership is only
with lessor. [CBDT circular 2/2001].
If leasing of asset constitutes business, depreciation is to be allowed U/s 32. Even if it
doesn’t constitute business, it shall be allowed as deduction U/s 57 (ii) while computing
income U/H IFOS.
(vi) Issues relating to usage:

1 Depreciation on decoders given to cable Allowable. [Turner International (P) Ltd (Del)].
operators on loan.
2 Even usage of machine for trial run amounts [Ashima Syntax Ltd (Guj) + Mentha and allied products (All) +
to usage for the purpose of S. 32. Vindhyachal Distilleries Ltd (MP) + Chamundeshwari Sugar Ltd (Kar)
+ Escorts Tractors Ltd (Del) + Kosha Cubidor Containers Ltd (Guj)].
3 Passive user - enough

(a) The user of the asset should be understood in a wider sense so as to embrace passive as well as active user.
(b) Specific nature of business of certain assessees requires them to keep stand-by-equipments or spares.
(c) For example, additional boilers are kept as stand-by in factories driven by steam power. Stand-by generators are kept
by electricity supply companies. Spare engines are kept in stores by transport companies. Fire extinguishers,

projectors, visualizers, mike and sound system etc are held by MT educare.
(d) When an asset is devoted to the needs of business, it is actually used for the needs of business, as it is required for
efficient conduct of business. Thus, the same qualifies for depreciation U/s 32. [Pepsu Road Transport Corporation
(P&H) + Shahbad Co-operative Sugar Mills Ltd (2011) (P&H)].
(e) Likewise, machinery spares which can be used only in connection with an item of tangible fixed asset and their use is
expected to be irregular, has to be capitalised.
4 Whether depreciation is available on assets Yes. [Chennai Petroleum Corporation Ltd (2013) (Mad)].
which were not put to use throughout the
relevant PY due to paucity of raw materials?
5 Some machines forming part of block are U/s 32 (1) (ii), depreciation is allowed on WDV basis in respect of
under repairs throughout the PY. Are these block of asset and not in respect of individual assets.
eligible for depreciation? Therefore, the test of user should be applied not in respect of
individual assets forming part of a block but in respect of block as a
whole.
If the block as a whole is used for the purpose of business, though
some assets being part of it were not put to use, it does not affect
the claim of depreciation.
6 Are discarded assets forming part of block Depreciation is allowable on the WDV of the entire block, even
eligible for depreciation U/s 32 (1) (ii)? though the block includes some machinery which has already been
discarded and hence, can’t be put to use during the relevant PY.
The expression ‘used’ in S. 32 in respect of discarded machinery
would mean the use in the business, not in the relevant PY, but in
earlier PYs. [Yamaha Motor India (P) Ltd (2010) (Del)].
Even if the Department wants to disallow depreciation attributable to
discarded machines, there is no computational mechanism available
in this regard. Asset added to the block loses its identity.
(vii) Restriction of the quantum of depreciation U/s 32 (1) Proviso-2:
1 To avail depreciation, the asset need not be put to use throughout the year.
2 Even if the asset is put to use or made available for use during a part of the PY, the assessee would be entitled to claim
depreciation for the whole year.
3 However, an exception is contemplated in the 2nd proviso to S. 32 (1).
4 If the asset is put to use for a period of less than 180 days in the previous year in which it is acquired, the deduction U/s
32 shall be restricted to 50% of the amount of depreciation.
5 The aforesaid restriction is applicable only in the year in which the asset is acquired and not in subsequent years.
6 In other words, in the subsequent years, full deduction will be allowed with respect to depreciation, even if the asset is
put to use for a period of less than 180 days.
7 In the PY of transfer of depreciable asset, assessee is not eligible for depreciation.
(viii) Used partly for business purpose - (S. 38 (2)):

1 Where the building, machinery, plant or furniture is not exclusively used for the purpose of business or profession (say,
the assets are partly used for business or professional purpose and partly for personal purpose), the assessee will not
get deduction with respect to the full depreciation allowance.
2 In view of S. 38 (2), the AO will restrict the depreciation allowance to a fair proportionate part having regard to the user
of the assets for the purpose of business or profession.
(ix) Computation of depreciation:

Classification of depreciable assets for the purpose of computation of capital gains:
For the purpose of computation of depreciation, depreciable assets are divided into two:
(i) Depreciable assets covered by S. 32 (1) (i).
(ii) Depreciable assets covered by S. 32 (1) (ii).
Which depreciable assets are covered by S. 32 (1) (i)?

Tangible DA acquired on or after 01.04.1997 which are used by power generating units and in respect of which option U/R 5
(1A) has not been exercised to depreciate them U/s 32 (1) (ii) are covered by S. 32 (1) (i).
Which depreciable assets are covered by S. 32 (1) (ii)?

All depreciable assets (which are not covered by S. 32 (1) (i)) are covered by S. 32 (1) (ii).


1 Option referred to U/R 5 (1A) shall be exercised on or before the due date for filing return for the AY relevant to the
PY in which power generation commences.
2 Once the option is exercised, it shall be final and shall apply to all the subsequent years.
Purpose of classification of depreciable assets as those covered by S. 32 (1) (i) & S. 32 (1) (ii):
SN DA covered by S. 32 (1) (i) DA covered by S. 32 (1) (ii)
1 These assets are depreciated on an asset to These assets are depreciated on block basis.
asset basis.
2 Straight line method is used for computation WDV method is used for computation of depreciation.
of depreciation.
3 For these assets depreciation rates are given For these assets depreciation rates are given in Appendix-I
in Appendix-IA of IT Rules. of IT Rules.
4 Gain or loss on transfer of these assets are Gain or loss on transfer of these assets are treated U/s 50.
treated U/s 32 (1) (ii), S. 41 (2) and S. 50A.
5 These assets are not eligible for additional These assets may be eligible for additional depreciation U/s
depreciation U/s 32 (1) (iia) 32 (1) (iia) subject to conditions stipulated therein.
Computation of depreciation in respect of assets covered by S. 32 (1) (i):

SN Particulars Amount
1 Actual cost ****
2 Depreciation rate (as per Appendix-1A of IT Rules) **
3 Depreciation (1*2) ***
Tax implications on account of transfer of depreciable assets covered by S. 32 (1) (i):

SN Situation Treatment
1 Moneys payable > Original cost Moneys payable – Original cost = CG; Taxable in the PY of transfer.
Original cost – Opening WDV = Balancing charge (which is charged to tax
U/H PGBP in the PY in which moneys payable becomes due – Vide S. 41
(2)).
2 Moneys payable Moneys payable > Moneys payable – Opening WDV = Balancing charge (which is charged to
< Original cost Opening WDV tax U/H PGBP in the PY in which moneys payable becomes due – Vide S.
41 (2)).
Question of computing capital gains does not arise.
3 Moneys payable Moneys payable < Opening WDV – Moneys payable = Terminal depreciation. It is allowed as
< Original cost Opening WDV deduction U/s 32 (1) (iii) while computing income U/H PGBP in the PY of
transfer.
Question of computing capital gains does not arise.
Note:
Balancing charge is to be taxed in the PY in which moneys payable becomes due U/H PGBP even though the business
does not exist in that PY.
Meaning of moneys payable:

SN Situation Moneys payable
1 Asset is sold Net sale proceeds
2 Asset gets destroyed or demolished Insurance compensation
3 Asset is discarded Realisable scrap value
Format for computing capital gains in case of transfer of assets covered by S. 32 (1) (i):
SN Particulars Amount
1 FVC ****
2 Expenses incurred in relation to transfer (***)
3 Net consideration (1-2) ****
4 COA (= Adjusted WDV) (S. 50A) ***
5 STCG (deemed) (3-4) ****

Meaning of Adjusted WDV:

SN Situation Adjusted WDV
1 Where terminal depreciation arises Opening WDV – Terminal depreciation
2 Where balancing charge arises Opening WDV + Balancing charge
Depreciable assets covered by S. 32 (1) (ii):

In respect of DA covered by S. 32 (1) (ii), both depreciation as well as capital gains are computed only in respect of block of
asset and not in respect of individual assets forming part of block.
Concept of block of asset [S. 2 (11)]:

(i) The term ‘block of assets’ is defined in S. 2 (11). It means group of assets falling under a class of asset being building,
plant, machinery, furniture, know-how, patent, trade mark etc having same rate of depreciation.
(ii) Thus, a group of assets will be regarded as a block of assets if the following cumulative conditions are satisfied:
1 The assets which form the group fall within a class of assets mentioned above.
2 All assets within this group have the same rate of depreciation.
Computation of depreciation in respect of depreciable assets covered by S. 32 (1) (ii): S. 43 (6):

1 Opening WDV of the block ****
2 Actual cost of assets acquired during the PY and falling within ****
this block
3 ‘Moneys payable’ in respect of any asset in the block which is ****
sold, discarded, demolished or destroyed, together with the
scrap value, if any.
4 WDV for the purpose of depreciation (1+2-3) ****
5 Depreciation (4*prescribed rate of depreciation) ****
6 Closing WDV of the block (4-5) ****

1 Netting off Where an asset belonging to the block is sold, in computing the monies payable, we should not
expenses in take the take the gross consideration received from the assessee. All expenses incidental to sale
connection with should be reduced from the gross consideration.
transfer
2 Negative WDV If the WDV for the purpose of depreciation is a negative figure, it shall be taken as nil.
Situations under which no depreciation is admissible:

1 WDV of the block for the purpose of depreciation = 0
2 Block is empty (That is, none of the assets belonging to the block exists on the last day of the PY).
Computation of CG on a/c of transfer of depreciable assets covered by S. 32 (1) (ii) – S. 50:
When S. 50 (1) can be invoked?

S. 50 (1) can be invoked if the following conditions are satisfied:
1 The capital asset transferred should be a depreciable asset.
2 It shall belong to a block to which depreciation has been allowed in earlier years.
3 The block is not empty after the sale of this capital asset. In other words, the block exists at the end of the PY.
4 Sale consideration of the asset transferred > [Opening WDV of the block + cost of additions + expenses wholly and
exclusively for the purpose of transfer].
Computation of capital gains U/s 50 (1):

The capital gains shall be computed as under:
1 Full value of consideration of the asset transferred ****
2 Expenses wholly and exclusively for the purpose of transfer ****
4 Cost of assets added to the block during the previous year ****
5 STCG (1-2-3-4) ****

When S. 50 (2) is applicable?

S. 50 (2) can be invoked if the following conditions are satisfied:
1 All assets belonging a block of asset are transferred during the PY.
2 Depreciation has been allowed with respect to this block in earlier years.
Computation of capital gains U/s 50 (2):
The capital gains shall be computed as under:
1 Full value of consideration of the assets transferred ****
2 Expenses wholly and exclusively for the purpose of transfer ****
4 Cost of assets added to the block during the PY ****
5 STCG/STCL (1-2-3-4) ****
(x) Additional depreciation – S. 32 (1) (iia):

Eligibility
(i) In addition to normal depreciation allowed U/s 32 (1) (ii), an assessee is entitled to get additional depreciation u/s 32
(1) (iia) in the year in which the asset is first put to use. It is not allowed in the subsequent years. In other words, it is a
one-time benefit.
(ii) However, the additional depreciation is available only upon fulfillment of the following conditions:
1 The assessee must be engaged in manufacture or production of an article or thing or generation or
transmission or distribution of power.
2 The assessee should purchase and install a new plant and machinery.
3 Such plant and machinery should be an eligible plant and machinery.
Quantum of additional depreciation

(i) The quantum of additional depreciation is 20% of the actual cost of the eligible plant and machinery.
(ii) In the year of acquisition, if the plant and machinery is put to use only for a period of less than 180 days, the additional
depreciation should be computed at the rate of 10%. This is because the 2nd proviso to S. 32 (1) provides so.
(iii) The unallowed additional depreciation shall be allowed in the immediately succeeding PY. [Proviso-3 to S. 32 (1)].
(iv) However, if the plant and machinery is first put to use in a year subsequent to the year of acquisition, the 2nd proviso to
S. 32 (1) shall not apply. That is, the additional depreciation is to be computed at the rate of 20%.
Plant and machinery not eligible for additional depreciation

1 Ships
2 Aircrafts
3 Any machinery or plant which, before the installation by the assessee, was used either within or outside the India by any
other person
4 Any machinery or plant which is installed in any office premises or any residential accommodation or accommodation in
the nature of a guest house.
5 Any office appliances or road transport vehicles.
6 Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation
or otherwise) in computing the income chargeable U/H PGBP of any one PY.

1 No additional depreciation is available in respect of building or furniture even if the aforesaid conditions are satisfied.
2 No additional depreciation is available in respect of old plant and machinery.
CBDT Circular 15/2016:

Whether or not an assessee engaged in printing or printing and publishing is eligible for grant of additional
depreciation U/s 32 (1) (iia)?
(I) Printing or printing and publishing amounts to manufacturing activity.
(ii) Assessee engaged in printing or printing and publishing is eligible for grant of additional depreciation U/s 32 (1) (iia).

1 Does fork-lift truck Fork-lift-truck used inside the factory would not fall within the definition of ‘vehicle’. Hence, it
eligible for additional is eligible for additional depreciation U/s 32 (1) (iia).
depreciation? As per S. 2 (28) of Motor Vehicles Act 1988, the definition of a vehicle excludes interalia a

vehicle of special type adapted for use only in a factory or in any enclosed premises.
Therefore, fork-lift-truck used within factory ≠ Vehicle.
2 Computers installed at Computers used in factory or in production system are eligible for additional depreciation
factory. U/s 32 (1) (iia). These are not to be viewed as additional depreciation. These are integral
part of production system.
3 WDV of the block can’t The sum total of normal depreciation and additional depreciation can’t exceed the WDV of
be negative. the block and make it negative. In such a case, the additional depreciation shall be
restricted to such figure which makes WDV of the block nil.
(xi) Enhanced additional depreciation – S. 32 (1) (iia) Proviso-1:

If the following conditions are fulfilled, additional depreciation shall be calculated @ 35% on the actual cost:
(i) Assessee sets up an undertaking or enterprise for manufacture or production of an article or thing, on or after
01.04.2015 in any backward area notified by the CG in Andhra Pradesh, Telangana, Bihar or West Bengal.
(ii) Assessee acquires and installs any eligible machinery or plant for the purposes of said undertaking or enterprise
during 01.04.2015 to 31.03.2020 in the said backward area.

(i) Assessee may be a corporate assessee or a non-corporate assessee.
(ii) If the assessee is owning an undertaking or enterprise which is engaged in manufacturing or production in such
backward area even before 01.04.2015, additional depreciation shall be computed only at the rate of 20%.
(iii) If the assessee sets up an undertaking or enterprise in the aforesaid backward areas to carry on the business of
generation or transmission or distribution of power on or after 01.04.2015, still additional depreciation is to be
computed only at the rate of 20%.
(iv) If, in the PY of acquisition, the eligible plant or machinery was put to use for less than 180 days, then the enhanced
additional depreciation is to be calculated at the rate of 17.5%. [In view of S. 32 (1) Proviso-2].
(v) The unallowed additional depreciation shall be allowed in the immediately succeeding PY. [Proviso-3 to S. 32 (1)].
(xii) Additional investment allowance – S. 32AD:

S. 32 AD Applicability Assessee (corporate or non-corporate) sets up an undertaking or enterprise for
(1) manufacture or production of an article or thing, on or after 01.04.2015 in any
backward area notified by the CG in Andhra Pradesh, Telangana, Bihar or West
Bengal.
Assessee acquires and installs any eligible machinery or plant for the purposes of
said undertaking or enterprise during 01.04.2015 to 31.03.2020 in the said
backward area.
Benefit provided under this While computing income U/H PGBP, an additional investment allowance is
section available as deduction.
Quantum of deduction 15% of actual cost of eligible plant or machinery.
PY of deduction PY in which eligible plant or machinery is installed.
Additional benefit Benefit under this section is in addition to the benefit of additional depreciation @
35%.
Quantum unrestricted The quantum of additional investment allowance is not restricted U/s 32 (1)
Proviso-2. In the PY of acquisition, even if the eligible plant or machinery was put
to use for less than 180 days, additional investment allowance is not restricted to
50%.
Block value - not affected Additional investment allowance does not reduce the block value (unlike additional
depreciation).
Eligible plant or machinery Same meaning as in additional depreciation.
Assessees in power sector Not entitled to benefit U/s 32AD.
S. 32 AD Lock-in-period The eligible plant or machinery shall not be transferred within 5 years from the date
(2) & (3) of its installation.
Violation of lock-in-period If the lock-in-period condition is violated, then (a) the amount of deduction allowed
condition (not on account of U/s 32AD (1) in respect of eligible plant or machinery shall be deemed to be
business reorganisation) income of the assessee chargeable U/H PGBP of the PY in which the eligible plant
or machinery is sold or transferred; (b) STCG shall also be computed within the
parameters of S. 50.
Violation of lock-in-period If the lock-in-period condition is violated on account of (a) amalgamation; or (b)
on account of business re- demerger; or (c) conversion of firm into company; or (d) conversion of sole
organisation proprietary concern into company; or (e) conversion of company into LLP, then the

amalgamated company, resulting company or company or LLP, as the case may

be shall not transfer the eligible plant or machinery within the aforesaid 5 years.
If it is transferred, then the deduction allowed U/s 32AD (1) in respect of eligible
plant or machinery (in the hands of amalgamating company or demerged company
or firm or SPC or company) shall be deemed to be income of the amalgamated
company or resulting company or company or LLP in the PY in which the eligible
plant or machinery is sold. In addition, STCG is computed within the parameters of
S. 50.

(i) Fork-lift-truck used inside the factory would not fall within the definition of ‘Vehicle’. Hence, it is eligible for additional
investment allowance U/s 32AD.
As per S. 2 (28) of Motor Vehicles Act 1988, the definition of ‘vehicle’ excludes interalia, a vehicle of special type
adapted for use only in a factory or in an enclosed premises. Therefore, fork-lift-truck used within factory is not vehicle.
(ii) Computers used in factory or in production system are eligible for deduction U/s 32AD. These are not to be regarded
as office appliances.
(xiii) Depreciation in case of succession in business:

(i) On account of amalgamation, demerger, conversion of firm into company, conversion of SPC into company or
conversion of company into LLP, there will be succession in business.
(ii) Income from such business up to the date of succession shall be charged to tax in the hands of predecessor (i.e.
amalgamating company, demerged company, firm or SPC or company). Income thereafter shall be charged to tax in
the hands of successor (i.e. amalgamated company, resulting company, company or LLP). [S. 170 (1)].
(iii) Depreciation on block of assets shall be computed as if there is no succession and it shall be apportioned between the
predecessor and successor based on the number of days of usage of assets.
(xiv) Actual cost – S. 43 (1):

1 ‘Actual cost’ means actual cost of the asset to the assessee as reduced by that portion of the cost thereof, if any, as has
been met directly or indirectly by any other person or authority. [S. 43 (1)].
2 However, where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment or
aggregate payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or
account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs. 10000, such
expenditure shall not form part of actual cost of such asset. [Proviso to S. 43 (1)].
Components of actual cost:

All cost incurred in bringing the asset to be present location and working condition shall be capitalised. An illustrative list of
items of costs which shall form part of actual cost is as under:
1 Purchase price ****
2 Taxes & duties (for which credit is not availed) [Explanation-9 to S. 43 (1)] ****
3 Cost of placing order ****
4 Travelling cost [L. G. Balakrishnan & Bros (P) Ltd (Mad) + J. M. A. Industries Ltd (Del)] ****
5 Loading charges ****
6 Transportation charges ****
7 Transit insurance ****
8 Unloading charges ****
9 Inspection charges ****
10 Interest on borrowing up to the date on which the asset is first put to use [Proviso to S. 36 (1) + Explanation-8 ****
to S. 43 (1)].
11 Erection-commissioning-installation expenses ****
12 Trail run expenses (net of realisation from trial run) ****
13 Subsequent price adjustments ****
14 Adjustment on account of change in duties or taxes ****
15 Trade discounts (****)
16 Asset specific subsidy [S. 43 (1) Explanation-10 and the proviso thereunder] (****)
17 Refund of asset specific subsidy ****
18 Receipts incidental to acquisition of asset (****)
19 Adjustment U/s 43A ****
20 Portion of cost of the asset met by any other person (****)
21 Actual cost of the asset ******


1 Tax paid on fee for technical services availed in connection with installation of machinery which is paid pursuant to tax
insulation clause in the agreement, is also a consideration for the engineering services availed in connection with
installation of machinery. It becomes part and parcel of the installation cost which needs to be capitalised. [Standard
polygraph machines (P) Ltd 243 ITR 788 (Mad)].
2 Expenses incurred in training employees for installation of machinery forms part of actual cost of the asset. [Sunil
Synchem Ltd 163 ITR 0467 (Raj).].
3 Expenditure incurred on account of the foundation stone laying ceremony is to be added to the cost of the factory
building as the foundation is a part of the construction and forms part of the actual cost of the assets for the grant of
depreciation allowance. [Nirlon synthetic fibres & chemicals Ltd 137 ITR 1 (Bom)].
4 A residential building could be used for commercial purpose only after converting into a commercial building. In this
regard, if commercialization charges are paid, it shall form part of actual cost. [Hindustan Times Ltd 231 ITR 741 (SC].
Addition or extension to an existing asset – Tax treatment:

1 ICDS V provides that the cost of an addition or extension to an existing tangible fixed asset which of capital nature and
which becomes an integral part of the exiting tangible fixed asset is to be added to the actual cost.
2 However, if the addition or extension has a separate identity and is capable of being used after the existing tangible
fixed asset is disposed off, it shall be treated as separate asset.
Acquiring assets for consolidated price – Determination of actual cost:

1 Where several assets are purchased for a consolidated price, then the consideration paid shall be apportioned to
various assets on fair basis. [ICDS V].
2 In slump sale, the entire undertaking is transferred by way of sale for a lump sum consideration without values being
assigned to the individual assets and liabilities in such sales.
3 The Act does not prescribe as to what will be the actual cost of the assets transferred pursuant to slump sale in the
hands of the transferee. ICDS V fills this gap.
Fixed assets acquired for non-monetary consideration – What is the actual cost?
SN ICDS-V
1 When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so
acquired shall be its actual cost
2 When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed
asset so acquired shall be its actual cost.
Special provisions consequential to changes in rate of exchange of currency – S. 43A:

1 S. 43A applies only in respect of assets acquired for the purpose of business or profession from a country outside India
through a loan in foreign currency or foreign supplier’s credit.
2 In consequence of a change in exchange rate during the PY after the acquisition of such asset there is an increase or
decrease in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time
of acquisition of the asset) at the time of making payment:
(a) towards the whole or part of the cost of the asset.
(b) towards the repayment of the whole or part of the moneys borrowed by him from any person directly or indirectly, in
any foreign currency specifically for the purpose of acquiring the asset along with interest, if any.
3 The amount by which the liability as aforesaid is so increased or reduced during the PY and which is taken into account
at the time of payment shall be added to the actual cost of the asset or reduced from the actual cost of the asset, as the
case may be.

1 The adjustments referred to in S. 43A shall be made only in the PY in which actual payment is made to the foreign
supplier or repay the foreign currency loan.
2 The adjustments referred to in S. 43A shall not be made if the foreign currency loan or supplier’s credit is re-instated at
the rate of exchange prevailing on Balance sheet date each year and no actual payment is made.
Explanation-3 to S.43A:
Where the assessee has entered into a contract with an authorised dealer for providing him with a specified sum in foreign
currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole
or any part of the liability aforesaid, the amount, if any, to be added to or deducted from, the actual cost of the asset U/s 43A

shall, in respect of so much of the sum specified in the contract is available for discharging the liability aforesaid, be
computed with reference to the rate of exchange specified therein.
Explanation-2 to S. 43 (1):
Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall
be the WDV in the hands of the previous owner at the time of transfer of asset computed by assuming that the asset was
the only asset in the block of assets.
Where before the date of acquisition by the assessee, the assets were at any time used by any other person for the purpose
of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or
indirectly to the assessee, was the reduction of income tax liability (by claiming depreciation with reference to enhanced
cost), the actual cost to the assessee shall be such an amount as the AO may determine with the previous approval of JCIT.
Where any asset which had once belonged to the assessee and had been used by him for the purposes of his business or
profession and thereafter ceased to be his property by reason of transfer or otherwise, is re-acquired by him, then the actual
cost of the asset to the assessee shall be the lower of the following:
(a) WDV of asset at the time of transfer by the assessee computed by assuming that the asset was the only asset in the
block of assets.
(b) the actual price for which the asset is re-acquired by him
Explanation-4A to S. 43 (1):
Where before the date of acquisition by the assessee (referred to as first person), the assets were at any time used by any
other person (referred to as second person) for the purposes of his business or profession and depreciation has been
claimed in respect of such assets by the second person and such second person acquires on lease, hire or otherwise,
assets from the first mentioned person, then notwithstanding anything contained in Explanation-3, the actual cost of the
transferred assets, in case of first person, shall be the WDV of the said assets at the time of transfer thereof by the second
person.
Where a building previously the property of the assessee is brought into use for the purpose of business or profession of the
assessee, the actual cost to the assessee shall be the actual cost of the building to the assessee as reduced by an amount
equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been
used for the purpose of business or profession since the date of its acquisition.
Where an asset which was acquired outside India by an assessee, being a non-resident, is brought by him to India and used
for the purposes of his business or profession, the actual cost of the asset to the assessee shall be the actual cost to the
assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been
allowable had the asset been used in India for the said purposes since the date of its acquisition by the assessee.
Actual cost of a block of asset transferred between holding and WOS companies – Explanation-2 to S. 43 (6):
Where in any PY, any block of assets is transferred by a holding co to its subsidiary or by a subsidiary to its holding co and
the conditions of S. 47 (iv) or S. 47 (v) are satisfied, then the actual cost of the block of assets in the case of the transferee-
co shall be the WDV of the block of assets as in the case of the transferor-co for the immediately preceding PY as reduced
by the amount of depreciation actually allowed in relation to the said preceding PY.
Actual cost of a CA transferred between holding and WOS companies – Explanation-6 to S. 43 (1):
When any capital asset is transferred by a holding company to its subsidiary or by a subsidiary to its holding company, then,
if the conditions of S. 47 (iv) or (v) are satisfied, the actual cost of the transferred capital asset to the transferee-co shall be
taken to be the same as it would have been if the transferor-co had continued to hold the capital asset for the purposes of its
business.
Where any block of assets is transferred by the amalgamating company to amalgamated company and the amalgamated
company is an Indian company, then the actual cost of the block of assets in case of amalgamated company shall be the
WDV of the block of assets in the hands of the amalgamating company for the immediately preceding PY as reduced by the
amount of depreciation actually allowed in relation to the said preceding PY.

Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated
company and the latter is an Indian company, then the actual cost of the capital asset to the amalgamated company shall be
taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the
purposes of its business.
Explanation-2B to S. 43 (6):
Where any asset forming part of a block of assets is transferred by a demerged company to the resulting company, the
WDV of the block of assets in the case of resulting company shall be the WDV of the transferred assets of the demerged
company immediately before demerger.
Explanation-2A to S. 43 (6):
Where in any PY, any asset forming part of a block of assets is transferred by a demerged company to the resulting
company, then the WDV of the block of assets of the demerged company at the beginning of the PY shall be reduced by the
WDV of the assets transferred to the resulting company pursuant to demerger.
Where the income of an assessee is derived, in part from agriculture and in part from business chargeable to income-tax
U/H PGBP, for computing the WDV of assets acquired before the PY, the total amount of depreciation shall be computed as
if the entire income is derived from the business of the assessee U/H PGBP and the depreciation so computed shall be
deemed to be the depreciation actually allowed under this Act.
Leased commercial vehicles used by lorry operators for running them on hire – Whether eligible for higher
depreciation:
1 Even when commercial vehicles are leased by owner thereof and the lessee uses the same for running them on hire,
the owner will be eligible for depreciation @ higher rate of 30%.
2 The expression ‘Motor buses, lorries and taxis used in business of running on hire’ would not only cover the case
of use by the owner for the business of running on hire, but also use by lessee for business of running on hire. [Bansal
Credits Ltd 259 ITR 69 (Del) + Madan & Co 254 ITR 445 (Mad) + Agarwal Finance Co. (P) Ltd 332 ITR 549 (Cal)].
3 Higher depreciation is with reference to the vehicle and not with reference to the nature of business.
Some additional issues relating to depreciation rates:

1 ‘Router’ and ‘Router’ and ‘switches’ can be classified as computer hardware when they are used along with
‘switches’ a computer and when their functions are integrated with a computer. In such a situation, routers
and switches are to be included in block of ‘computer’ for purpose of determining rate of
depreciation applicable to them. [DCIT Vs Data craft India Ltd 40 SOT 295 (Mum-SB)].
2 EPABX and EPABX and mobile phones are communication equipments. Therefore, they cannot be treated
mobile phones as computers to be entitled to higher depreciation at 40%. They are eligible for depreciation at
normal rate of 15% applicable to plant and machinery. [Federal Bank Ltd Vs ACIT [2011] 332
ITR 319 (Ker)].
3 Computer Computer accessories and peripherals (such as printers, scanners, servers etc) form an integral
accessories and part of computer system and they can’t be used without computer. Therefore, these are also
peripherals eligible for higher rate of depreciation of 40%. [BSES Yamuna Powers Ltd (2013) (Del)].
4 UPS UPS is also eligible for higher rate of depreciation @ 40% and not @ general rate of 15%. [Same
reasoning]. [Orient Ceramics and Industries Ltd (Del)].
Depreciation allowance – mandatory – S. 32 (1) Explanation-5:

Depreciation shall be allowed to the assessee in computing his total income whether or not he has claimed it. In other
words, depreciation allowance is mandatory.
(N) Tax treatment of unabsorbed depreciation – S. 32 (2):

Covered in Set off chapter
16. Slump sale – Tax implications:

(A) Meaning of slump sale – S. 2 (42C):
(i) “Slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration
without values being assigned to the individual assets and liabilities in such sales:
(ii) Undertaking means a business activity.
(iii) The determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees
or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities;

(B) Computation of capital gains in case of slump sale – S. 50B:

(i) Any profits or gains arising from the slump sale effected in the PY shall be chargeable to income-tax as capital gains
arising from the transfer of LTCA and shall be deemed to be the income of the PY in which the transfer took place. [S.
50B (1)].
(ii) However, any profits or gains arising from the transfer under the slump sale of any capital asset being undertaking(s)
owned & held by an assessee for not more than 36 months immediately preceding the date of its transfer shall be
deemed to be the capital gains arising from the transfer of STCA. [Proviso to S. 50B (1)].
(iii) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the
undertaking shall be deemed to be the COA and the COI for the purposes of S. 48 and no regard shall be given to the
provisions contained in the 2nd proviso to S. 48 (i.e. Indexation benefit). [S. 50B (2)].
(iv) ‘‘Net worth’’ shall be the aggregate value of total assets of the undertaking or division as reduced by the value of
liabilities of such undertaking or division as appearing in its books of account. [Explanation-1 to S. 50B].
(v) Any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing
the net worth. [Proviso to Explanation-1 to S. 50B].
(vi) For computing the net worth, the aggregate value of total assets shall be, — (a) in the case of depreciable assets,
the WDV of the block of assets determined in accordance with the provisions contained in S. 43 (6) (c) (i) (C); and (b)
in the case of other assets, the book value of such assets. [Explanation-2 to S. 50B].
(vii) Every assessee, in the case of slump sale, shall furnish along with the ROI a report of a Chartered accountant (Form
3CEA) indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying
that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with
the provisions of this section. [S. 50B (3)].
Cost of acquisition & improvement:

1 Cost of acquisition & improvement Net worth of the undertaking
2 Net worth of the undertaking Value of assets of the undertaking transferred- Value of liabilities of the
undertaking transferred.
3 Value of assets of the undertaking Value of depreciable assets + Value of non depreciable assets.
transferred
4 Value of non-depreciable assets Sum total of book value of non-depreciable assets.
5 Value of depreciable assets Value computed as per S. 43 (6) (c) (i) (c)
Value of depreciable assets as per S. 43 (6) (c) (i) (c):

1 Actual cost of assets (transferred by way of slump sale) falling within the block ****
2 Depreciation up to the PY preceding the PY of slump sale (computed as if these assets were the only assets ****
falling within the block)
3 Value of depreciable assets determined as per S. 43 (6) (C) (i) (c). [1-2] ****
WDV of the block for the purpose of depreciation (in the year of slump sale):
2 Actual cost of assets acquired during the PY and falling within this block ****
3 ‘Moneys payable’ in respect of any asset in the block which is sold, discarded, demolished or destroyed, together ****
with the scrap value, if any.
4 Value determined as per S. 43 (6) (c) (i) (c) ****
5 WDV for the purpose of depreciation (1+2-3-4) ****

1 Contingent Ignore contingent liabilities
liabilities
2 Revaluation of Revaluation of assets shall not be considered while computing NW, irrespective of the fact that
assets revaluation is done in the current year or in past years.
17. Succession of firm by company – Tax implications:

A. Immunity to the firm from capital gains tax – S. 47 (xiii):
Where a company succeeds a firm in the business carried on by the latter and as a result there is a transfer of capital asset
by the firm to the company, nothing contained in S. 45 shall apply to such transfer. That is, the firm will not be liable to
capital gains tax. However, this immunity from S. 45 is available only when the following conditions given in Proviso to S. 47
(xiii) are fulfilled:

(a) All assets and liabilities of the firm relating to the business immediately before succession shall be taken over by the
company.
(b) All partners of the firm immediately before succession shall become the shareholders of the company.
(c) The partners shall receive consideration only by way of shares (equity or preference) allotted in the company.
(d) The partners shall become the shareholders in the company in the same proportion in which their capital accounts
stood in the books of the firm on the date of succession.
(e) The partners shall, in aggregate, have atleast 50% voting power in the company, for a period of 5 years from the date
of succession.
B. Cost of acquisition and POH of capital asset received from firm in the hands of company:
1 Cost of acquisition of capital asset received = Cost of acquisition to the previous owner (i.e. firm). [S. 49 (1)].
from firm (in the hands of company)
2 POH Starts on the date of acquisition by the previous owner (i.e. firm). [S. 2
(42A) Explanation].
3 Denominator index for indexing COA in the = Index pertaining to the PY in which the CA was acquired by the
hands of the company previous owner (i.e. firm). [Manjula Shah (Bom)].
C. Computation of depreciation in case of succession – Proviso-5 to S. 32 (1):

Where a firm is succeeded by a company and the requirements of S. 47 (xiii) are satisfied, then in respect of assets
transferred pursuant to succession, both the firm and company are eligible for depreciation. For computing the depreciation
allowable in the hands of the predecessor (firm) and the successor (company), the following steps are to be followed:
1 Find out the depreciation on the assets as if succession had not taken place.
2 Then, apportion the depreciation between the predecessor (firm) and successor (company), in the ratio of number of
days for which the assets are used by them during the PY in which succession took place.
D. Carry forward of losses and depreciation of the firm by the company – S. 72A (6):
1 Where a firm is succeeded by a company fulfilling the conditions laid down in S. 47 (xiii), then, notwithstanding anything
contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor
firm shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose of previous
year in which succession took place and other provisions of this Act relating to set off and C/F of loss and allowance for
depreciation shall apply accordingly.
2 "Accumulated loss" means so much of the loss of the predecessor firm U/H PGBP (not being a loss sustained in a
speculation business) which such predecessor firm would have been entitled to carry forward and set off U/s 72 if the
succession of business had not taken place;
3 "Unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm which remains to
be allowed and which would have been allowed to the predecessor firm under the provisions of this Act, if succession of
business had not taken place.
E. Consequences of violation of the conditions stipulated in Proviso to S. 47 (xiii):

1 Where any of the conditions laid down in the proviso to S. 47 (xiii) are not complied with, the amount of profits or gains
arising from the transfer of such capital asset not charged U/s 45 by virtue of conditions laid down in the proviso to S. 47
(xiii) shall be deemed to be the profits and gains chargeable to tax of the successor company for the PY in which the
requirements of the proviso to S. 47 (xiii) are not complied with. [S. 47A (3)]
2 Further, the set-off of loss or allowance of depreciation made in any PY in the hands of the successor company, shall be
deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.
[Proviso to S. 72A (6)].
18. Succession of SPC by a company – Tax implications:

A. Exemption to the SPC from capital gains tax – S. 47 (xiv) + Proviso:
Where a company succeeds a sole proprietary concern in the business carried on by the latter and as a result, there is a
transfer of capital asset by such concern to the company, nothing contained in S. 45 shall apply to such transfer. That is, the
proprietary concern will not be liable to capital gains tax. However, the following conditions stipulated in the Proviso to S. 47
(xiv) are to be satisfied:
(a) All the assets and liabilities of the sole proprietary concern in relation to the business immediately before succession
shall be taken over by the company.
(b) The sole proprietor shall receive consideration only in the form of shares in the transferee company.
(c) The sole proprietor shall have atleast 50% VP in the co for a period of 5 years from the date of succession.

B. Cost of acquisition and POH of capital asset received from SPC in the hands of company:
1 Cost of acquisition of capital asset received from = Cost of acquisition to the previous owner (i.e. SPC). [S. 49 (1)].
SPC (in the hands of company)
2 POH Starts on the date of acquisition by the previous owner (i.e. SPC).
[S. 2 (42A) Explanation].
3 Denominator index for indexing cost of = Index pertaining to the PY in which the CA was acquired by the
acquisition in the hands of the company previous owner (i.e. SPC). [Manjula Shah (Bom)].
C. Computation of depreciation in case of succession – Proviso-5 to S. 32 (1):

Where a SPC is succeeded by a company and the requirements of S. 47 (xiii) are satisfied, then in respect of assets
transferred pursuant to succession, both the SPC and company are eligible for depreciation. For computing the depreciation
allowable in the hands of the predecessor (SPC) and the successor (company), the following steps are to be followed:
1 Find out the depreciation on the assets as if succession had not taken place.
2 Then, apportion the depreciation between the predecessor (SPC) and successor (company), in the ratio of number of
D. Carry forward of losses and depreciation of the SPC by the company – S. 72A (6):
1 Where a SPC is succeeded by a company fulfilling the conditions laid down in S. 47 (xiv), then, notwithstanding
anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the
predecessor SPC shall be deemed to be the loss or allowance for depreciation of the successor company for the
purpose of previous year in which succession took place and other provisions of this Act relating to set off and carry
forward of loss and allowance for depreciation shall apply accordingly.
2 "Accumulated loss" means so much of the loss of the predecessor SPC U/H PGBP (not being a loss sustained in a
speculation business) which such predecessor SPC would have been entitled to carry forward and set off U/s 72 if the
succession of business had not taken place;
3 "Unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor SPC which remains to
be allowed and which would have been allowed to the predecessor SPC under the provisions of this Act, if succession
of business had not taken place.
E. Consequences of violation of the conditions stipulated in Proviso to S. 47 (xiii):

1 Where any of the conditions laid down in the proviso to S. 47 (xiv) are not complied with, the amount of profits or gains
(xiv) shall be deemed to be the profits and gains chargeable to tax of the successor company for the PY in which the
requirements of the proviso to S. 47 (xiv) are not complied with. [S. 47A (3)]
2 Further, the set-off of loss or allowance of depreciation made in any PY in the hands of the successor company, shall be
[Proviso to S. 72A (6)].
19. Conversion of company into LLP – Tax implications:

A. Exemption of capital gains arising from transfer of capital asset pursuant to conversion of private company/
unlisted public company into LLP - S. 47 (xiiib):
Where there is transfer of a capital asset by a private company or unlisted public company to a LLP as a result of conversion
of the company into a LLP in accordance with the provisions of S. 56 or 57 of the LLP Act, 2008, then it shall not be
regarded as transfer. S. 45 does not get invoked. The question of computing capital gains does not arise. However the
following conditions stipulated in the Proviso to S. 47 (xiiib) are to be complied with:
(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of
the LLP;
(b) all the shareholders of the company immediately before the conversion become the partners of the LLP and their
capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the
company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or
manner, other than by way of share in profit and capital contribution in the LLP;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than
50% at any time during the period of 5 years from the date of conversion;
(e) the total sales, turnover or gross receipts in business of the company in any of the 3 PYs preceding the PY in
which the conversion takes place does not exceed Rs. 60L;
(f) the total value of assets as appearing in the books of accounts of the company in any of the three PYs
preceding the PY in which conversion takes place should not exceed Rs. 5 Crores.
(g) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in

the accounts of the company on the date of conversion for a period of three years from the date of
conversion.

S. 47 (xiiib) exempts also capital gains arising to the shareholders of the converting company due to extinguishment of their
rights in the shares of the company, provided the requirements of Proviso to S. 47 (xiiib) are complied with.
B. Cost of acquisition of transferred capital assets in the hands of LLP – S. 49 (1) (iii) (e):
Where the capital asset becomes the property of LLP on account of conversion of company into LLP, the cost of acquisition
of that capital asset in the hands of LLP shall be the cost of acquisition to the previous owner (i.e. company).
C. Period of holding of the transferred asset in the hands of LLP - Sub-clause (b) of Clause (i) of Explanation to S. 2
(42A):
POH of the capital asset transferred from company to the LLP upon conversion shall start on the date of acquisition by the
previous owner (i.e. company).
Note:
The denominator index for indexing the cost of acquisition in the hands of LLP is the index pertaining to the PY in which the
CA was acquired by the previous owner (i.e. company). [Decision of Bombay HC in Manjula shah case applied].
D. Actual cost of block of assets transferred to LLP – Explanation-2C to S. 43 (6):

Where in any PY, any block of assets is transferred by a private company or unlisted public company to a LLP and the
conditions specified in the proviso to S. 47 (xiiib) are satisfied, then, notwithstanding anything contained in S. 43 (1), the
actual cost of the block of assets in the case of the LLP shall be the WDV of the block of assets as in the case of the said
company on the date of conversion of the company into the LLP.
E. Computation of depreciation in the year of conversion – Proviso-5 to S. 32 (1):

Where a company gets converted into LLP and the requirements of S. 47 (xiiib) are satisfied, then in respect of assets
transferred pursuant to conversion, both the company and LLP are eligible for depreciation. For computing the depreciation
allowable in the hands of the predecessor (Company) and the successor (LLP), the following steps are to be followed:
1 Find out the depreciation on the assets as if conversion had not taken place.
2 Then, apportion the depreciation between the predecessor (company) and successor (LLP), in the ratio of number of
F. Carry forward and set off of losses and depreciation of the company by LLP – S. 72A (6A):
1 Where a company is converted into LLP fulfilling the conditions laid down in S. 47 (xiiib), then, notwithstanding anything
contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor
company shall be deemed to be the loss or allowance for depreciation of the successor LLP for the purpose of PY in
which conversion took place and other provisions of this Act relating to set off and carry forward of loss and allowance
for depreciation shall apply accordingly.
2 “Accumulated loss” means so much of the loss of the predecessor company U/H PGBP (not being a loss sustained in a
speculation business) which such predecessor company would have been entitled to carry forward and set off U/s 72 if
the succession of business had not taken place;
3 “Unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor company which
remains to be allowed and which would have been allowed to the predecessor company under the provisions of this Act,
if succession of business had not taken place.
G. Consequences of violation of the conditions prescribed under Proviso to S. 47 (xiiib) – S. 47A (4) + Proviso to S.
72A (6A):
1 Where any of the conditions laid down in the proviso to S. 47 (xiiib) are not complied with, the amount of profits or gains
(xiiib) shall be deemed to be the profits and gains chargeable to tax of the successor LLP for the PY in which the
requirements of the proviso to S. 47 (xiiib) are not complied with. [S. 47A (4)]
2 Further, the set-off of loss or allowance of depreciation made in any PY in the hands of the successor LLP, shall be
[Proviso to S. 72A (6A)].
3 The capital gains which was exempt U/s 47 (xiiib) in the hands of the shareholders of the converting company will be
taxed in their hands in the PY in the conditions (s) stipulated in the Proviso to S. 47 (xiiib) are violated. [S. 47A (4)].

H. Cost of acquisition of rights of partner in LLP – S. 49 (2AAA):

For computation of CG arising on account of assignment of interest in LLP which was obtained upon conversion of company
into LLP, the COA of shares in converting company which enabled the shareholder to become a partner in LLP shall be
regarded as COA of the interest in LLP. [S. 49 (2AA)].
I. Period of holding of rights of partner in LLP:

It starts with the date of becoming partner in LLP and ends with the date preceding the date of transfer of interest in LLP.
The criterion for deciding whether the gain is LT/ST is 36 months.
20. Other transactions which are not to be regarded as transfer:

S. 47 Any transfer of a capital asset, being a Government security carrying a periodic payment of interest, made outside
(viib) India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident ≠
Transfer.
S. 47 Any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript,
(ix) drawing, painting, photograph or print, to the Government or a University or the National museum, National Art
Gallery, National Archives or any other public museum or institution as may be notified by the CG in the Official
Gazette to be of national importance or to be of renown throughout any state or states ≠ Transfer.
S. 47 (xii)
S. 45 will not apply in case of the following transfer and accordingly, there is no capital gains tax liability for the transferor:
1 Capital asset Land
2 Transferor Sick industrial company managed by its worker’s cooperative.
3 Transfer Transfer is made pursuant to the scheme sanctioned by BIFR.
4 Timing of The transfer takes place during the period commencing on the first day of the previous year in which
transfer the company has become sick and ending with the last day of the PY in which the net worth of the
company >= its accumulated losses.
Exemption in respect of transactions in IFSC (S. 47 (viiab)):

S. 47 (viiab) has been inserted w.e.f AY 2019-20 to provide that a transfer through IFSC will be exempt. The conditions for
exemption are as follows:
(a) There is a transfer of a CA by a NR through RSE;
(b) The capital asset is: (i) a bond referred to in S. 115AC (1); or (ii) a GDR referred to in S. 115AC (1); or (iii) a RDB of an
Indian company; or (iv) a derivative;
(c) The stock exchange is located in any IFSC;
(d) The consideration for such transaction is paid or payable in foreign currency.
21. Exemptions in respect of capital gains:

(A) Exemption of LTCG on transfer of property used for residence- U/s 54:
1 Person eligible for exemption U/s 54 Individual & HUF
2 Capital asset to be transferred for availing LTCA
exemption (referred to as original asset) Residential house whose income is assessable U/H IFHP
3 Condition to be satisfied for availing The assessee should invest the capital gain arising from transfer of
exemption original asset in one residential house located in India (referred to
as new asset).
4 Manner of investment The assessee can purchase a residential house.
Alternatively, he can also construct a residential house.
5 Within what time the new asset is to be Within 1 year before the date of transfer of original asset or
purchased? Within 2 years from the date of transfer of original asset.
6 Within what time the new asset is to be Within 3 years from the date of transfer of original asset.
constructed?
7 Quantum of exemption LTCG arising from transfer of original asset or the amount invested
in the new asset (whichever is less).
8 Depositing in capital gains account Where it is not possible for the assessee to make investment in the
scheme new asset within the due date for filing ROI (specified in S. 139 (1)),
still he can avail exemption if he deposits the capital gains under
“Capital gains deposit account scheme”.
9 Utilization of amount deposited The amount so deposited should be utilised for investment in the
new asset within the aforesaid time limit.

10 Consequences of non-utilization or partial If the amount deposited is not fully utilised for investment in the new
utilization of amount deposited in the asset within the aforesaid time limit, then the unutilized amount
aforesaid account should be treated as LTCG of the PY in which the period of 3 years
from the date of transfer of original asset expires.
11 Withdrawal of unutilized amount for any The assessee can withdraw the unutilised amount from the deposit
other purpose account for any other purpose only after a period of 3 years from the
date of transfer of original asset.
12 Withdrawal of exemption upon sale of the The exemption granted will be withdrawn if the new asset is
new asset transferred within 3 years from the date of its acquisition.
14 PY in which the exemption is withdrawn The exemption will be withdrawn in the PY in which the new asset is
transferred.
15 Manner of withdrawal of exemption See the table given below
Less: Expenses wholly and exclusively incurred in connection with transfer of new asset
*****
Less: Exemption granted U/s 54 (to the extent remaining unwithdrawn) *****
6 STCG / LTCG (2-4-5) *****

1 Property-let out or self occupied. Exemption is available U/s 54 in respect of a residential house which may be
let or self occupied.
2 Cost of land-to be taken The cost of the land is an integral part of the cost of the residential house,
(CBDT Circular 667 dated 18.10.1993). whether purchased or constructed. In computing the amount of capital gains
invested, this shall also be considered.
4 Time limit in case of compulsory Where the original asset is compulsorily acquired, the time limit U/s 54 shall
acquisition (S. 54 H) be reckoned considering only the date of receipt of compensation and not the
date of compulsory acquisition.
If any enhanced compensation is received, it is taxable in the year in which
such compensation is received and for acquiring the new asset, the time limit
shall be determined from the date of receipt of additional compensation.
5 Investment in HP abroad Not eligible for exemption U/s 54.
6 Investment in more than one HP Exemption is restricted to investment in any one HP of the choice of the
assessee.
7 Investment not in the name of the There is no bar in making investment in the name of close kin and kith.
assessee but in the name of his close For enjoying exemption, the Act requires investment and not investment in
kin and kith the name of assessee. [Gurnam Singh (P&H) + Ravinder Kumar Arora
(Delhi) + Mrs. Jennifer Bhide (Kar) + Kamal Wahal (Delhi) + Natarajan
(Mad)].
8 Can exemption U/s 54 be denied on the Investment of CG and not completion of construction is a pre-requisite for
ground that the construction of RHP exemption U/s 54. [Sambandam Udaykumar (Kar)].
was not completed in all aspects within
3 years from the date of transfer of
original asset?
9 Whether exemption U/s 54 could be No. [Chandru L. Raheja (Bom)].
denied merely on the ground that the
construction of new house had begun
before the sale of original asset?
10 Builder handed over the possession of If the payment is made to the builder within the time limit specified, even
flat to the assessee beyond the time- though the builder might have handed over the possession of flat to the
limit specified in S. 54. Whether CG assessee beyond the time limit specified, exemption U/s 54 is available. The
exemption would be available? word ‘purchase’ in S. 54 should not be understood in the sense of legal
transfer. [R. L. Sood (Del) + Balraj (Del)].

(B) Exemption w.r.t LTCG arising on account of transfer of a LTCA (not being a residential house property) – S. 54
F:
1 Person eligible for exemption Individual & HUF
U/s 54F
2 CA to be transferred LTCA
Any capital asset other a residential house
3 Condition to be satisfied for The assessee should invest in one residential house in India (referred to as new
availing exemption asset).
On the date of transfer of original asset, he should not own more than a
residential house other than the new asset.
4 Manner of investment The assessee can purchase a residential house.
Alternatively, he can construct a residential house.
5 Within what time the new asset Within 1 year before the date of transfer or
is to be purchased? Within 2 years from the date of transfer.
6 Restriction on purchasing a Assessee should not purchase a residential house other than the new asset
residential house other than the within 2 year from the date of transfer of original asset.
new asset
7 Within what time the new asset Within 3 years from the date of transfer of original asset.
is to be constructed?
8 Restriction on completion of Assessee should not complete the construction of a residential house other than
construction of a RHP other than the new asset within 3 years from the date of transfer.
the new asset
9 Quantum of exemption (LTCG arising from transfer of the original asset * Amount invested in new
asset)/Net consideration
10 Net consideration FVC accruing from transfer of original asset (Less) Expenses wholly & exclusively
incurred for the purpose of transfer of original asset.
11 Depositing in capital gains Where it is not possible for the assessee to make investment in the new asset
account scheme within the due date for filing ROI (U/s 139), still he can avail exemption if he
deposits the amount proposed to be invested in new asset under “CG deposit
account scheme”.
12 Utilization of amount deposited The amount so deposited should be utilised for investment in new asset within the
TL (supra).
13 Consequences of non-utilization If the amount deposited is not fully utilised for investment in the new asset within
or partial utilization the aforesaid time limit, then [(LTCG * Unutilized amount)/Net consideration]
should be treated as LTCG of the previous year in which the period of 3 years
from the date of transfer of original asset expires.
14 Withdrawal of unutilised amount The assessee can withdraw the unutilised amount from the deposit account for
any other purpose only after a period of 3 years from the DOT of original asset.
15 Withdrawal of exemption upon If the new asset is transferred within 3 years from the date of its acquisition, the
sale of the new asset. LTCG which arose on transfer of original asset and which got exempted U/s 54F,
would be assessed to tax as LTCG in the PY in which the new asset is sold.
In addition, in that year, LTCG or STCG arising on account of transfer of the new
asset, will also be assessed to tax.
16 Consequences of assessee If the assessee purchases a residential house, the income of which is chargeable
purchasing a residential house U/H IFHP, other than the new asset within 2 years from the date of transfer of
other than the new asset within original asset, LCTG, exempted earlier, will be assessed to tax as LTCG of PY in
two years from date of transfer which the residential house is purchased
of original asset
17 Consequences of assessee If the assessee completes the construction of a residential house, the income of
completing the construction of a which is chargeable U/H IFHP, other than the new asset within 3 years from the
residential house other than the date of transfer of original asset, LCTG, exempted earlier, will be assessed to tax
new asset within three years as LTCG of the PY in which the construction of residential house is completed.
from date of transfer of original
asset
Note:
Where the SDV U/s 50C has been adopted as the FVC, the reinvestment made in acquiring a residential property, which is
in excess of the actual net sale consideration, can be considered for the purpose of computation of exemption U/s 54F,
irrespective of the source of funds for such reinvestment. [Gouli Mahadevappa (2013) 356 ITR 90 (Kar)].

(C) Exemption w.r.t capital gain arising on transfer of land used for agricultural purposes - S. 54B:
1 Person eligible for exemption U/s 54B. Individual & HUF.
2 Capital asset to be transferred for Urban agricultural land.
availing exemption under this section It may be a LTCA or STCA.
(referred to as original asset) It should have been used for agricultural purposes either by the
assessee or by his parents or by HUF during the period of 2 years
immediately preceding the date of its transfer.
3 Conditions to be satisfied for availing The assessee should invest in an agricultural land (referred to as new
exemption asset).
The agricultural land may be urban or rural.
4 Within what time the new asset is to be Within 2 years from the date of transfer of original asset.
purchased?
5 Quantum of exemption CG or Amount invested in new asset (whichever is less)
6 Depositing in capital gains account Where it is not possible for the assessee to make investment in the new
scheme asset within the due date for filing ROI (U/s S. 139 (1)), still he can avail
exemption if he deposits the amount proposed to be invested in new
asset in “Capital gains deposit account scheme”.
7 Utilization of amount deposited The amount so deposited should be utilized for investment in new asset
within the time limit (supra).
8 Consequences of non-utilization or partial If the amount deposited is not fully utilized for investment in the new
utilization asset within the aforesaid time limit, then the unutilized amount should be
treated as CG of the previous year in which the period of 2 years from
the date of transfer of original asset expires.
9 Withdrawal of unutilized amount The assessee can withdraw the unutilized amount from the deposit a/c
for any other purpose only after a period of 2 years from the date of
transfer of original asset.
10 Withdrawal of exemption upon sale of the The exemption granted will be withdrawn if the new asset is transferred
new asset within 3 years from the date of its acquisition.
13 PY in which the exemption is withdrawn The exemption will be withdrawn in the previous year in which the new
asset is transferred.
Less: Exemption U/s 54B (to extent remaining unwithdrawn) *****
6 STCG / LTCG (2-4-5) *****
(D) Exemption of capital gains arising on account of transfer of a LTCA upon investment in certain bonds (S. 54EC):
1 Person eligible for exemption under this Any assessee.
section
2 Capital asset to be transferred for Any LTCA being land or building or both.
availing exemption (referred to as original
asset)
3 Conditions to be fulfilled for availing The assessee should invest in specified assets within 6 months from the
exemption date of transfer of the asset.
4 Specified asset Bonds issued by NHAI or REC or any other bond notified by the CG in
the official gazette by the CG redeemable after 3 years. (If investment is
made before 01.04.2018).
Bonds issued by NHAI or REC or any other bond notified by the CG in
the official gazette by the CG redeemable after 5 years. (If investment is
made on or after 01.04.2018).
4A Bonds notified by the CG Bonds issued by Power finance corporation.
Bonds issued by Indian railway finance corporation.

5 Quantum of exemption LTCG or Amount invested in specified asset (whichever is less).

6 Ceiling on investment in specified asset Investment in specified asset in a financial year shall not be more than
Rs. 50L
Investment in specified asset in the financial year of transfer and in the
succeeding financial year, out of capital gains arising on account of
transfer of LTCA, shall not exceed Rs. 50L.
7 Withdrawal of exemption upon transfer of If the specified assets are transferred within 3 years from the date of their
specified assets acquisition, the LTCG arising from the transfer of original asset which
was not charged to tax, will be deemed to be the LTCG of the PY in
which specified assets are transferred.
In addition, the capital gains arising on account of transfer of the
specified assets shall also be assessed to tax.
8 Availing loan or advance on the security If loan or advance is taken on the security of specified assets within a
of specified asset within 3 years – period of 3 years of its acquisition, the exemption granted U/s 54EC shall
impact. be withdrawn. (if investment was made before 01.04.2018)
If loan or advance is taken on the security of specified assets within a

period of 5 years of its acquisition, the exemption granted U/s 54EC shall
be withdrawn. (if investment was made on or after 01.04.2018)
Some important judicial pronouncements:

1 Exemption U/s 54EC cannot be denied on account of the bonds being issued after six months of the date of transfer
even though the payment for the bonds was made by the assessee within the six month period. [Hindustan Unilever
Ltd (2010) 325 ITR 102 (Bom)].
2 An assessee cannot be deprived of claiming exemption U/s 54EC, if bonds of assessee’s choice are not available or are
available only for a broken period within the period of 6m after the DOT of capital asset and the bonds are purchased
shortly after it became available next time after the expiry of the said 6m. [Cello Plast (2012) 209 Taxman 617 (Bom)].
3 In a case where a depreciable asset held for more than 36 months is transferred, the benefit of exemption U/s 54EC be
claimed, if the capital gains on sale of such asset are reinvested in long-term specified assets within the specified time.
[V.S. Dempo Company Ltd 387 ITR 354 (SC)].
(E) Exemption of capital gains arising on account of transfer of a LTCA upon investment in notified units of
specified fund (S. 54EE):
1 Person eligible for exemption under Any assessee.
this section
2 Capital asset to be transferred for Any LTCA
availing exemption (referred to as
original asset)
3 Conditions to be fulfilled for availing The assessee should invest in notified units of specified fund within 6 months
exemption from the date of transfer of the LTCA.
4 Quantum of exemption LTCG or Amount invested in notified units (whichever is less).
5 Ceiling on investment in notified units Investment in notified units in a financial year shall not be more than Rs. 50L
Investment in notified units in the FY of transfer and in the succeeding FY, out
of capital gains arising on account of transfer of LTCA, shall not exceed Rs.
50L.
6 Withdrawal of exemption upon transfer If the notified units are transferred within 3 years from the date of their
of notified units acquisition, the LTCG arising from the transfer of original asset which was not
charged to tax, will be deemed to be the LTCG of the PY in which notified
units are transferred.
In addition, the capital gains arising on account of transfer of the notified units
shall also be assessed to tax.
8 Availing loan or advance on the If loan or advance is taken on the security of notified units within a period of 3
security of notified units within 3 years years of its acquisition, the exemption granted U/s 54EE shall be withdrawn.
– impact.

(F) Exemption of capital gains on transfer of assets in case of shifting of industrial undertakings from urban area -
S. 54G:
1 Person eligible for exemption U/s 54G Any assessee
2 Capital asset to be transferred for It may be LTCA or STCA
availing exemption (referred to as It may be Plant, machinery, land or building or any right in land or building.
original asset) It is used for the purpose of an industrial undertaking situated in an urban
area.
It is transferred in the course of shifting of the industrial undertaking to any
area other than an urban area.
3 Condition to be satisfied for availing The assessee has to utilize the capital gains for:
exemption
(i) Purchasing of new machinery or plant for the purposes of business of the
industrial undertaking in the area to which the said undertaking is shifted.
(ii) Acquisition of land or building for the purposes of his business in the
said area.
(iii) Shifting the establishment to such area
(iv) Incurring expenses for such other purpose as may be specified in a
scheme framed by the CG.
4 Time limit for making the above Within 1 year before or 3 years after the date of transfer of original asset
expenditure
5 Quantum of exemption CG arising from transfer of original asset or the amount incurred for the
purposes mentioned in 4 (whichever is less).
6 Depositing in capital gains account Where it is not possible for the assessee to incur these expenses within the
scheme due date for filing ROI (specified in S. 139 (1)), still he can avail exemption if
he deposits the capital gains in “Capital gains deposit account scheme”.
7 Utilization of amount deposited The amount so deposited should be utilized for the purposes specified in 4
within the aforesaid time limit.
8 Consequences of non-utilization or If the amount deposited is not fully utilized for the purposes specified in 4
partial utilization within the aforesaid time limit, then the unutilized amount should be treated
as CG of the previous year in which the period of 3 years from the date of
transfer of original asset expires.
9 Withdrawal of unutilized amount for The assessee can withdraw the unutilized amount from the deposit account
any other purpose for any other purpose only after a period of 3 years from the date of transfer
of original asset.
10 Withdrawal of exemption upon sale of The exemption granted will be withdrawn if the new asset is transferred
the new asset within 3 years from the date of its acquisition.
11 Previous year in which the exemption The exemption will be withdrawn in the previous year in which the new
is withdrawn asset is transferred.
Less: Capital gains arising from transfer of original asset-exempted earlier *****
6 LTCG/STCG (2-4-5) *****

1 Plant, machinery and building are depreciable assets. Hence, capital gains arising on account of transfer of these
assets are always STCG.
2 Land is not a depreciable asset. Hence, capital gains arising on account of transfer of land may be long term or short
term depending on the period of holding.
3 Exemption U/s 54 G is not available on transfer of furniture and is not available on purchase of furniture.

Fibre Boards (P) Ltd (2015) 376 ITR 596 (SC)

To avail exemption U/s 54G in respect of capital gain arising from transfer of capital assets in the case of shifting of
industrial undertaking from urban area to non-urban area, the requirement is satisfied if the capital gain is given as advance
for acquisition of capital assets such as land, building and / or plant and machinery.
(H) Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban
area to any SEZ (S. 54 GA):
1. Person eligible for Any assessee
exemption under this section
2. Capital transferred It may be LTCA or STCA
(referred to as original asset) It may be Plant, machinery, land or building or any right in land or building.
It is used for the purpose of an IU situated in an urban area.
It is transferred in the course of shifting of the industrial undertaking to any Special
economic zone.
3. Condition to be satisfied The assessee has to utilize the capital gains for
for availing exemption Purchasing of new machinery or plant for the purposes of business of the industrial
undertaking in the special economic zone area to which the said undertaking is shifted.
Acquisition of land or building for the purposes of his business in the special economic
zone area.
Shifting the establishment to SEZ area
Incurring expenses for such other purpose as may be specified in a scheme framed by the
CG.
4. Time limit for making the Within 1 year before or 3 years after the date of transfer of original asset
above expenditure
5. Quantum of exemption CG arising from transfer of original asset or the amount incurred for the purposes
mentioned in 4 (whichever is less).
6. Depositing in capital gains Where it is not possible for the assessee to incur these expenses within the due date for
account scheme filing ROI (specified in S. 139 (1)), still he can avail exemption if he deposits the capital
gains in CGDS account.
7. Utilization of amount The amount so deposited should be utilised for the purposes specified in 4 within the
deposited aforesaid TL.
8. Consequences of non- If the amount deposited is not fully utilised for the purposes specified in 4 within the
utilization or partial utilization aforesaid time limit, then the unutilized amount should be treated as CG of the previous
year in which the period of 3 years from the date of transfer of original asset expires.
9. Withdrawal of unutilized The assessee can withdraw the unutilised amount from the deposit account for any other
amount for any other purpose purpose only after a period of 3 years from the date of transfer of original asset.
10. Withdrawal of exemption The exemption granted will be withdrawn if the new asset is transferred within 3 years from
upon sale of the new asset the date of its acquisition.
11. PY in which exemption is The exemption will be withdrawn in the previous year in which the new asset is transferred.
withdrawn
12. Manner of withdrawal of See the table given below
exemption
Less: Expenses wholly and exclusively incurred in connection with transfer of new *****
asset
Less: CG arising from transfer of original asset-exempted earlier *****
6 LTCG/STCG (2-4-5) *****
(I) Exemption in respect of LTCG arising on account of transfer of residential property in certain cases – S. 54GB:
1 Person eligible for exemption U/s Individual or HUF
54GB
2 Capital asset transferred (hereinafter LTCA being a residential property (being a plot or house property).

referred to as original asset) the gain

thereof is eligible for exemption U/s
54GB
3 Conditions for availing exemption DOT of original asset ≤ 31.03.2019.
The net consideration arising from transfer of the original asset shall be
invested by subscribing to the equity shares of an eligible company on or
before the due date for filing ROI U/s 139 (1) for the AY relevant to the PY of
transfer of original asset.
The eligible company shall utilise the amount invested in its shares by the
eligble assessee to purchase new asset within 1 year from the date of
subscription to its equity shares by the eligible assessee.
4 Net consideration FVC – Expenses incurred in connection with transfer.
5 Eligible company It shall be incorporated in India.
Date of incorporation ≥ 1st day of the PY of transfer.
Date of incorporation < Due date for filing ROI for the AY relevant to the PY
of transfer.
Date of incorporation < 01.04.2019.
It is engaged in eligible business.
Total turnover of its business ≤ 25 crores in each of the PYs being PY 17-18,
PY 18-19, PY 19-20 & PY 20-21.
It holds a certificate of eligible business from the Inter-Ministerial Board of
Certification as notified by the CG in the OG.
The voting power of eligible assessee in it shall be more than 50% after the
subscription in the shares by the eligible assessee.
6 Eligible business Business which involves innovation, development, deployment or
commercialization of new products, processes or services driven by
technology or intellectual property.
7 New asset Means new plant and machinery
8 Exclusions from ‘new asset’ (i) any machinery or plant which, before its installation by the assessee, was
used either within or outside India by any other person;
(ii) any machinery/plant installed in any office premises/any residential
accommodation, including guest-house;
(iii) any office appliances including computers or computer software;
(iv) any vehicle; or
(v) any machinery or plant, the whole of the actual cost of which is allowed
as a deduction (whether by way of depreciation or otherwise) in computing
the income chargeable U/H PGBP of any PY.
9 Inclusion of computers and computer In case of eligible company being a technology driven start up so certified by
software in ‘new asset’ in certain the Inter-Ministerial Board of Certification as notified by the CG in the OG,
cases the new asset shall include computers or computer software.
10 Quantum of exemption (LTCG arising from transfer of original asset * Cost of new asset acquired by
the eligible company out of subscription money received from eligible
assessee within 1 year (supra)) ÷ Net consideration arising from transfer of
original asset.
11 Depositing net consideration in Where it is not possible for the eligible company to utilise the subscription
CGDS account money received from eligible assessee for acquiring new asset within the
due date for filing ROI for the AY relevant to the PY of transfer of original
asset, then the eligible company can open CGDS account and deposit the
amount intended to be utilised for acquiring new asset into it within the due
date (supra).
The amount so deposited shall be treated as investment in new asset and
exemption U/s 54GB shall be provided to the eligible assessee.
However, the amount so deposited shall be utilised for acquiring new asset
within 1 year (supra).
12 Consequence of non-utilisation within [(LTCG arising from transfer of original asset * Unutilised amount in CGDS
1 year (supra) account) ÷ Net consideration arising from transfer of original asset] shall be
taxed as LTCG in the PY in which 1 year (supra) expires.
13 Lock-in-period for investment in The eligible assessee shall not transfer the shares in eligible company within
shares 5 years from the date of their acquisition.

14 Lock-in-period for new asset The eligible company shall not transfer the new asset within 5 years from the
date of its acquisition.
15 Consequences of violation of lock-in- In the hands of the eligible assessee, the amount of capital gains exempted
period in respect of shares U/s 54GB (which is remaining unwithdrawn) shall be deemed to be LTCG of
the PY in which the shares are transferred.
In addition, capital gains shall arise in the hands of the eligible assessee on
account of transfer of shares.
16 Consequences of violation of lock-in- In the hands of eligible assessee, the amount of capital gains exempted U/s
period in respect of new asset 54GB (which is remaining unwithdrawn) shall be deemed to be LTCG of the
PY in which the shares are transferred.
In addition, in the hands of the eligible company, capital gains shall be
computed within the parameters of S. 50 on account of transfer of new
asset.
22. Computation of tax on certain STCG – S. 111A:

S. 111A (1) STCG covered by this STCG arising from transfer of STCA being (a) equity shares; or (b) EOU; or (c)
section units of a business trust which is subjected to STT.
Concessional tax rate STCG (supra) suffers tax @ 15% (flat).
Proviso-1 to Benefit of unexhausted If the BEL of a resident individual or HUF is not exhausted by income other
S. 111A (1) BEL than STCG (referred to in this section), then the unexhausted BEL shall be
adjusted against this STCG and the balance STCG shall alone be subjected
to tax @ 15%.
Proviso-2 to Relaxation in respect of Where the transaction resulting in aforesaid STCG is effected in a RSE
S. 111A transaction effected in a located in IFSC and the consideration is paid or payable in foreign currency,
RSE located in IFSC then the concessional rate stipulated in this section shall apply to such STCG
even if the transaction is not subjected to STT.
S. 111A (2) No chapter VI-A deduction. Where the GTI of the assessee includes STCG (covered by this section), then
that portion of GTI is not eligible for deduction under Chapter VI-A.
Note-1: Chapter VI-A deduction could be enjoyed against that portion of GTI which represents STCG (not covered by S.
111A).
Note-2: STCG (not covered by S. 111A) shall suffer tax at the rates given in the Finance Act.
23. Computation of tax on LTCG – S. 112:

S. 112 (1) Computation of tax on LTCG in On that portion of GTI which represents LTCG, tax shall be computed @ 20%
(a) case of a resident individual or (flat).
HUF.
Proviso to Benefit of adjustment of If the BEL of a resident individual or HUF is not exhausted by income other
S. 112 (1) unexhausted BEL. than LTCG, then the unexhausted BEL shall be adjusted against LTCG and
(a) the balance LTCG shall alone be subjected to tax @ 20%.
(b) case of a DC. (flat).
S. 112 (1) Computation of tax on LTCG in Tax on LTCG arising from transfer of LTCA other than unlisted securities or
(c) case of a foreign company or a shares in a company not being a company in which public are substantially
non-corporate non-resident. interested = 20% of LTCG. [S. 112 (1) (c) (ii)].
Tax on LTCG arising from transfer of LTCA being unlisted securities or shares
in a company not being a company in which public are substantially interested
= 20% on LTCG computed without giving effect to S. 48 Proviso-1 (exchange
neutralization benefit) and Proviso-2 (indexation benefit). [S. 112 (1) (c) (iii)].
(d) case of any other resident. (flat).
Proviso to Relaxation in certain cases. Where the LTCA transferred happens to be (a) listed securities (not being
S. 112 (1) units); or (b) ZCB, then the tax on LTCG computed U/s 112 (1) to the extent of
excess over 10% of LTCG computed without giving effect to S. 48 Proviso-2
(indexation benefit) shall be ignored for the purpose of computing the tax
payable by the assessee.
S. 112 (2) No chapter VI-A deduction Where the GTI of the assessee includes LTCG, then that portion of GTI is not
eligible for deduction under Chapter VI-A.

24. Tax on LTCG in certain cases – S. 112A:

S. 112A (1) Applicability If the following conditions are fulfilled, then the provisions of S. 112A shall apply:
C-1: The TI of the assessee includes income chargeable U/H CG.
C-2: The CG arises from the transfer of a LTCA.
C-3: LTCA = Equity share in a company or Equity oriented unit or unit of a business
trust.
C-4: In case of equity shares, STT has been paid on both acquisition as well as
transfer of shares.
C-5: In case of EOU or units of business trust, STT has been paid on transfer.
S. 112A (3) Relaxation from C-4 and C-5. If the transfer is undertaken on a RSE located in any IFSC and the consideration for
such transfer is received or receivable in foreign currency, then S. 112A shall apply
even if C-4 and C-5 are not fulfilled.
S. 112A (4) Relaxation from C-4 If the transfer is in respect of a type of acquisition of equity shares which is notified
by the CG in the OG, then S. 112A shall apply even if C-4 is not fulfilled.
S. 112A (2) Computation of tax on LTCG Tax on LTCG = [LTCG (supra) – Rs. 1L] * 10%
referred to in S. 112A (1)
Proviso to Benefit of unexhausted BEL. In case of resident individual or HUF, benefit of unexhausted BEL is available.
S. 112A (2)
S. 112A (5) No Chapter VI-A deduction No chapter VI-A deduction is available against that portion of GTI which represents
LTCG (supra).
S. 112A (6) No rebate U/s 87A Where the TI of the assessee includes LTCG (supra), then the rebate U/s 87A shall
be allowed from the income tax on the TI as reduced by tax payable on such CG.
Note:
Nothing contained in S. 48 proviso-1 and proviso-2 shall apply to the CG arising from transfer of LTCA being equity shares
or EOU or units of business trust referred to in S. 112A.
Notification of transactions in equity shares in respect of which the condition of chargeability to STT at the time of
acquisition for claiming concessional tax treatment U/s 112A shall not apply [Notification No.60/2018, dated 01-10-
2018]
The CG has, vide notification No. 60/2018, dated 1st October, 2018, notified that the condition of chargeability of STT shall
not apply to the acquisition of equity shares entered into
(i) before 1st October, 2004 or
(ii) on or after 1st October, 2004 which are not chargeable to STT, other than the following transactions.
In effect, only in respect of the following transactions mentioned in column (2), the requirement of paying STT at the time of
acquisition for availing the benefit of concessional rate of tax U/s 112A would apply. In may be noted that the exceptions are
listed in column (3) against the transaction. The requirement of payment of STT at the time of acquisition for availing benefit
of concessional tax rate U/s 112A will not apply to acquisition transactions mentioned in column(3).
(1) (2) (3)
Transaction Non-applicability of condition of chargeability of STT
(a) Where acquisition of existing listed Where acquisition of listed equity share in a company–
equity share in a company whose equity
shares are not frequently traded in a (i) has been approved by the SC, HC, National Company Law
RSE is made through a preferential Tribunal, SEBI or RBI in this behalf;
issue (ii) is by any non-resident in accordance with foreign direct
investment guidelines issued by the Government of India;
(iii) is by an investment fund referred to in clause (a) of Explanation 1

to section 115UB or a venture capital fund referred to in section
10(23FB) or a Qualified Institutional Buyer;
(iv) is through preferential issue to which the provisions of chapter
VII of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009 does
not apply.
(b) Where transaction for acquisition of Following acquisitions of listed equity share in a company made in
existing listed equity share in a accordance with the provisions of the SCRA 1956:
company is not entered through a RSE (i) acquisition through an issue of share by a company other than
in India through preferential the issue referred to in (a);

(ii) acquisition by scheduled banks, reconstruction

or securitisation companies or public financial institutions during
their ordinary course of business;
(iii) acquisition by the SC, HC, National Company Law Tribunal,
SEBI or RBI in this behalf;
(iv) acquisition under employee stock option scheme or employee
stock purchase scheme framed under the Securities and
Exchange Board of India (Employee Stock Option Scheme and
Employee Stock Purchase Scheme) Guidelines,1999;
(v) acquisition by any non-resident in
accordance with foreign direct investment guidelines of the
Government of India;
(vi) acquisition in accordance with SEBI (Substantial Acquisition of
Shares and Takeovers) Regulation, 2011;
(vii) acquisition from the Government;
(viii) acquisition by an investment fund referred to in clause (a) to
Explanation 1 to S. 115UB or a VCF referred to in S. 10 (23FB)
or a Qualified Institutional Buyer;
(ix) acquisition by mode of transfer referred to in section 47 (e.g.,
transfer of capital asset under a gift, an irrevocable trust,
transfer of capital asset between holding company and its
subsidiary, transfer pursuant to amalgamation, demerger, etc.)
or S. 50B (slump sale) or S. 45(3) (Introduction of capital
asset as capital contribution in firm/ AOPs/ BOIs) or section
45(4) (Distribution of capital assets on dissolution of firm/ AOPs/
BOIs) of the Income-tax Act, if the previous owner or the
transferor, as the case may be, of such shares has not acquired
them by any mode referred to in (a), (b) or (c) listed in column
(2) [other than the exceptions listed in column(3)]
(c) acquisition of equity share of a company
during the period beginning from the
date on which the company is delisted
from a RSE and ending on the date
immediately preceding the date on
which the company is again listed on a
RSE in accordance with the SCRA
1956 read with SEBI Act, 1992 and the
rules made there under;

Chapter-5A: Chapter VI-A Deductions - Summary
1. Deduction U/s 80C:

1 Persons eligible for Individual or HUF
deduction
2 Nature of deduction Deduction is allowed in respect of specified payments and investments.
3 Specified payment and Any sum paid or deposited in the PY by the assessee
investments
(i) as life insurance policy to effect or keep in force insurance on life (a) self,
spouse and any child in case of individual and (b) any member, in case of
HUF.
(ii) to effect or keep in force a deferred annuity contract on life of self, spouse and
any child in case of individual. [such contract should not contain a provision
for cash payment option in lieu of payment of annuity].
(iii) by way of deduction from salary payable by or on behalf of the government to
any individual for the purpose of securing him a deferred annuity or making
provision for his spouse or children. [The sum deducted should not exceed
1/5th of salary].
(iv) as contribution (not being repayment of loan) by an individual to SPF.
(v) as contribution to PPF in the name of self, spouse and any child in case of
individual and any member in case of HUF. (Maximum amount that could be
deposited = Rs. 150000).
(vi) as contribution by an employee to RPF.
(vii) as contribution by an employee to ASAF.
(viii) under Sukanya Samriddhi account, in the name of the individual or any girl
child of that individual or any girl child for whom such person is the legal
guardian.
(ix) subscription to NSC.
(x) as a contribution to ULIP of UTI or LIC mutual fund (Dhanraksha plan) in the
name of self, spouse and any child in case of individual and any member in
case of HUF.
(xi) to effect or to keep in force a contract for such annuity plan of LIC (i.e. Jeevan
Dhara, Jeevan Akshay and their upgradations) or any other insurer as
referred to in by the CG. [Tata AIG Easy retire annuity plan of Tata AIG Life
Insurance company Ltd].
(xii) as subscription to any units of mutual fund. [Equity linked savings scheme].
(xiii) as contribution by an individual to any pension fund set up by any mutual fund
or UTI. [UTI Retirement Benefit pension fund].
(xiv) as subscription to any such deposit scheme of National housing bank
[National Housing Bank (Tax savings) Term Deposit Scheme, 2008] or as a
contribution to any such pension fund set up by NHB as notified by the CG.
(xv) as subscription to notified deposit schemes of (a) public sector company
providing long-term finance for purchase or construction of residential houses
in India; (b) any authority constituted in India for the purposes of housing or
planning, development or improvement of cities, towns and villages. [Public
deposit scheme of HUDCO].
(xvi) as tuition fees (excluding any payment towards any development fees or
donation or payment of similar nature), to any university, college, school or
other educational institution situated within India for the purposes of full-time
education of any two children of individual.
(xvii) towards the cost of purchase or construction of a residential house property.
[The income from house property should be chargeable to tax U/H IFHP or
would have been chargeable to tax U/H IFHP had it not been used for
assessee’s own residence.]
(xviii) as subscription to equity shares or debentures forming part of any eligible
issue of capital of public company or PFI approved by the Board.
(xix) as term deposit for 5 years or more with Scheduled Bank in accordance with a
scheme framed and notified by the CG. [Maximum limit for investment = Rs.
150000].
(xx) as subscription to any notified bonds of NABARD.
(xxi) in an account under the Senior Citizen Savings Scheme Rules, 2004.

(xxii) as five-year term deposit in an account under the Post office time deposit
Rules, 1981.
2. Deduction in respect of contribution to certain pension funds (S. 80CCC):

1 Assessee eligible for Individual
deduction
2 Nature of deduction Under this section, the assessee is entitled to deduction in respect of amount paid
/deposited by him to effect a contract for annuity plan of LIC or any other insurer for
receiving pension from the fund set up by LIC or any other insurer.
3 Conditions for availing He should have deposited a sum under an annuity plan of LIC or any other insurer for
deduction receiving pension.
Amount of bonus or interest credited to his accounts by the insurer is not to be
regarded as amount deposited.
Amount paid should be out of the taxable income of the current or earlier years.
No deduction is allowed u/s 80C in respect of amount allowed as deduction under
this section
4 Quantum of deduction Amount deposited or Rs. 150000 whichever is less.
Note: Deduction U/s 80C, S. 80CCC and S. 80CCD (1) shall not exceed Rs. 150000.
[S. 80CCE].
5 Taxability of amount received Where the assessee or his nominee, upon surrender of the annuity plan, receives
upon surrender of annuity any amount (including interest or bonus) standing to the credit of the assessee in
respect of which deduction U/s 80CCC was allowed, such amount shall be included
in the total income of the assessee or his nominee in the year of receipt.
6 Taxability of pension Where the assessee or his nominee receives pension from the annuity plan, it is
taxable in the hands of recipient in the year of receipt.
3. Deduction U/s 80D:

Payments Deduction in case of Deduction in case of
individual HUF
Insured or person Insured or person
treated treated
Family Parents Any member of HUF
A Mediclaim insurance premium Eligible Eligible Eligible
B Contribution to CGHS or Government notified health schemes Eligible
C Preventive health check up payments Eligible Eligible
D Maximum deduction
General deduction (applicable in respect of A, B and C) Rs. 25000 Rs. 25000 Rs. 25000
Additional deduction (applicable only in case of A when insured is a Rs. 25000 Rs. 25000 Rs. 25000
senior citizen)
E Medical expenditure on the health of a person who is a super senior Eligible Eligible Eligible
citizen (if mediclaim insurance is not paid on the health of such person)
F Maximum deduction in respect of E Rs. 50000 Rs. 50000 Rs. 50000
G Maximum deduction in respect of A, B, C and E Rs. 50000 Rs. 50000 Rs. 50000

1 Family = Individual + Spouse + Dependent children.
2 No restriction on number of children.
3 Father-in-law and mother-in-law are not part of family.
4 Grandparents, brothers and sisters are not part of family.
5 Parents may be dependent or independent.
6 Mediclaim insurance premium means premium paid to effect insurance on the health under a scheme framed by GIC
and approved by the CG or by any other insurer and approved by IRDA.
7 Deduction in respect of the aggregate payment on account of preventive health check up of self, spouse, dependent
children, father and mother cannot exceed Rs. 5000.
8 All payments (supra) other than preventive health checkup payments should be made through a mode other than cash.
9 However, payment on account of preventive health checkup can be made by any mode (including cash).
10 Senior-citizen = Resident individual who is atleast 60 years at any time during the PY.

Proportionate deduction of insurance premium paid in lump sum:

1 S. 80D (4A) is inserted to provide that where any amount is paid in lump sum to keep in force health insurance of
specified person for more than one year, then deduction equal to appropriate fraction is allowed each year of the
relevant PY subject to maximum amount permissible under the section. It should be noted that provision of this section
is applicable for both senior citizens as well as other individuals/HUFs.
2 "Appropriate fraction" means the fraction, the numerator of which is one and the denominator of which is the total
number of relevant PYs;
3 "Relevant PY" means the PY beginning with the PY in which such amount is paid and the subsequent PY (s) during
which the insurance shall have effect or be in force.
4. Deduction U/s 80DD:
1 Assessee eligible for Individual/HUF (being resident in India).

deduction
2 Nature of deduction Deduction in respect of maintenance including medical treatment of disabled dependent.
3 Disabled person Person suffering from at least 40% of
Disability
Blindness Leprosy - Locomotor

Mental illness
cured Disability
Low vision Hearing Mental Autism,

impairment retardation cerebral palsy
4 Severely disabled Person suffering from atleast 80% of the aforesaid disabilities.
person
5 Dependent Dependent
In case of In case of
Individual HUF
Any member
Spouse Children Parents Brothers/
Sisters
Note: These persons should be dependant wholly or mainly on the assessee (individual or
HUF) for his support and maintenance.
6 Conditions for The assessee should have incurred an expenditure for medical treatment, training &
deduction rehabilitation of a disabled dependent or
He should have deposited an amount under a scheme framed by LIC or other insurer or UTI
and approved by CBDT, for the maintenance of disabled dependent.
The aforesaid scheme should provide for payment of annuity or lump sum amount to the
disabled dependent in the event of death of assessee.
The disabled dependent should not claim deduction u/s. 80U.
The assessee should furnish a copy of certificate issued by the medical authority in Form no.
10-IA along with his ROI.
7 Quantum of If the person maintained is ordinarily disabled, the deduction will be Rs. 75000. Whereas, the
deduction person maintained is severely disabled, the deduction will be Rs. 125000. The quantum of
deduction is fixed. No regard should be had to actual expenditure.
8 Death of disabled If the disabled dependent predeceases the assessee, an amount equal to the amount paid or
dependent deposited under the scheme shall be deemed to be the income of the assessee of the PY in
which such amount is received by the assessee and shall accordingly be charged to tax as
the income of that PY. No exemption U/s 10 (10D).
5. Deduction U/s 80U:

1 Assessee eligible for Disabled resident individual.
deduction
2 Meaning of disabled Person suffering from atleast 40% of
person

Disability
Blindness Leprosy - Locomotor

Mental illness
cured Disability
Low vision Hearing Mental Autism,

impairment retadation cerebral palsy
3 Meaning of severely Person suffering from atleast 80% of the aforesaid disabilities.
disabled person
4 Quantum of deduction If the assessee is ordinarily disabled, the deduction will be Rs. 75000. However, if the
assessee is severely disabled, the deduction will be Rs. 125000.
5 Certificate by medical The assessee shall have to furnish a copy of the certificate (in form no. 10-IA) issued by
authority the medical authority along with the return of income. Where the condition of disability
requires reassessment, a fresh certificate from the medical authority shall have to be
obtained after the expiry of the period mentioned on the original certificate in order to
continue to claim the deduction.
6. Deduction U/s 80DDB:

1. Assessee eligible for deduction Individual/HUF (being resident in India)
2. Nature of deduction Deduction in respect of medical treatment.

3. Conditions for availing deduction
The assessee should have actually paid (not merely incurred) towards medical treatment of disease or ailment specified in
R. 11DD.
The medical treatment should be for curing the specified ailment or disease of the assessee (if the assessee is an
individual) or the assessee’s dependants.
If the assessee is an individual, his spouse, children, parents, brothers or sisters dependant wholly or mainly on him for his
support and maintenance are regarded as dependants.
If the assessee is a HUF, any member of the family dependant wholly or mainly on the family for his support and
maintenance is regarded as dependant.
Medical
treatment
In case of In case of HUF,

Individual, shall shall relate to
relate to
Spouse Children Parents Brothers/

Any member
Sisters
The assessee should obtain the prescription for such medical treatment from a neurologist, an oncologist, a urologist, a
hematologist, an immunologist or such other specialist, as may be prescribed.
The medical practitioner need not be employed in a Govt. hospital. He may be even a visiting medical practitioner.
4. Quantum of deduction
If the person treated is a senior citizen, the deduction = (Actual amount paid or Rs. 100000) – Insurance cover –
Reimbursement from the employer.
If the person treated is a non-senior citizen, the deduction = (Actual amount paid or Rs. 40000) – Insurance cover –
Reimbursement from the employer.
7. Deduction U/s 80E:

1 Assessee eligible for deduction Individual
2 Nature of deduction Deduction is provided in respect of interest on loan paid by the assessee
during the PY out of his income chargeable to tax.
3 Conditions for availing deduction The loan must have been taken for the purpose of pursuing his higher
education or for the purpose of higher education of his relative.
The loan must have been taken from a financial institution or approve d
charitable institution.
3 Meaning of ‘relative’ Spouse + children + student for whom the individual is the legal guardian.
4 Meaning of ‘higher education’ It means any course of study (including vocational studies) pursued after
passing the Senior Secondary Examination or its equivalent from any

school, board, or university recognised by the CG or SG or local authority

or by any other authority authorised by the CG or SG or local authority to do
so. Precisely, higher education means any course after Class XII.
5 Meaning of ‘financial institution’ (a) Banks; (b) any other financial institution notified by the CG in official
gazette.
6 Meaning of ‘approved charitable Institution established for charitable purposes and approved by the
institution’ prescribed authority (U/s 10 (23C)) or an institution referred to in S. 80G (2)
(a).
7 Period of deduction AY relevant to the PY in which assessee starts paying interest on loan
(called as ‘initial AY’) + 7 AYs immediately succeeding the initial AY or until
the interest is paid in full by the assessee, whichever is earlier.
8. Deduction U/s 80G:

(i) Eligible assessee Deduction under this section is available to all assessees, whether corporate or non-
corporate, whether having income U/H PGBP or not.
(ii) Nature of deduction Under this section, the assessee is eligible for deduction in respect of monetary
donations made by him.
(iii) Eligible donations Deduction is allowed only with respect to donations made to funds or institutions
specified in this section.
(iv) Quantum of deduction
Donations U/s. 80G
Donations - to Other Donations

be restricted to
10% of GTI
Donations Donations Donations Donations

Qualifying for qualifying for Qualifying for qualifying for
50% deduction 100% deduction 50% deduction 100% deduction
See List - 1 See List - 2 See List - 3 See List - 4

List – 1
1. Donations made to any charitable trust/institution fulfilling the conditions of S. 80G (5).
2. Donations made to the Government or any local authority – where donations are to be utilized by them for any
charitable purpose other than for the purpose of promoting family planning:
3. Donations made to an authority constituted in India for the purpose of dealing with the need for housing
accommodation, planning and development of cities, towns etc.,
4. Donations made to any corporation established by the CG/SG, for promoting the interests of the minority community.
5. Donations made to any temple, mosque, gurudwara, church or other place notified by the Central Government to be of
historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or
States – Where the donations to be made for renovation or repair purposes.
List–2
1. Donations made to Government or any such local authority, institution or association as may be approved by the CG. –
where donations are to be utilized for promoting family planning:
2. Donations made by companies to the Indian Olympic Association or to any other association or institution for the
development of infrastructure for sports and games; or the sponsorship of sports and games.
List – 3
1. Donations made to the Indira Gandhi Memorial Trust
2. Donations made to the Rajiv Gandhi Foundation
3. Donations made to the Jawaharlal Nehru Memorial Fund
4. Donations made to the Prime Minister’s Drought Relief Fund

List – 4
1. Donations made to the National Defence Fund set up by the CG.
2. Donations made to the Prime Minister’s National Relief Fund
3. Donations made to the Prime Minister’s Armenia Earthquake Relief Fund
4. Donations made to the Africa (Public Contributions – India) Fund
5. Donations made to the National Foundation for Communal Harmony
6. Donations made to a University or any educational institution of national eminence approved by the Prescribed
Authority
7. Donations made to the Maharashtra Chief Minister’s Relief Fund / the Chief Minister’s Earthquake Relief Fund
8. Donations made to any fund set up by the Government of Gujarat for providing relief to earthquake victims of Gujarat
9. Donations made to any Zila Saksharta Samiti constituted for improvement of primary education in villages and towns
10. Donations made to the National Blood Transfusion Council or any State Blood Transfusion Council
11. Donations made to any fund set up by SG to provide medical relief to the poor
12. Donations made to the Army Central Welfare Fund; the Indian Naval Benevolent Fund; the Air Force Central Welfare
Fund
13. Donations made to the Andhra Pradesh Chief Minister’s Cyclone Relief Fund
14. Donations made to the National Illness Assistance Fund
15. Donations made to the Chief Minister’s Relief Fund; the Lt. Governor’s Relief Fund
16. Donations made to the National Sports Fund set up by Central Government
17. Donations made to the National Cultural Fund set up by Central Government
18. Donations made to the Fund for Technology Development and Application
19. Donations made to the National Trust for Welfare of Persons with Autism etc.
20 Donations to Swachh Bharat Kosh, set up by the CG (other than the sum spent by the assessee in pursuance of CSR
U/s 135 (5) of the Companies Act 2013).
21 Donations to National children’s Fund.
22 Donations to Chief minister’s Relief Fund or Lieutenant Governor’s Relief Fund.
23 Donations to Clean Ganga Fund, set up by the CG, where such assessee is a resident (other than the sum spent by
the assessee in pursuance of CSR U/s 135 (5) of the Companies Act 2013).
24 Donations to National Fund for Control of Drug Abuse constituted U/s 7A of the Narcotic Drugs and Psychotroic
Substances Act, 1985.
Computation of GTI for S. 80G:

Gross Total Income before allowing Chapter VI A deductions XXX
Less: Deductions u/s. 80C to 80U XXX
Less: LTCG XXX
Less: Short-term capital gains arising out of transfer of certain equity shares/units which were subjected to XXX
STT (Sec.111A)
Gross Total Income for Sec. 80G(4) XXX
Mode of payment:
No deduction shall be allowed in respect of donation of any sum exceeding Rs. 2000 unless such sum is paid by any mode
other than cash.
9. Deduction U/s 80GG:
1 Assessee eligible for deduction Individual
2 Nature of deduction Rent paid by the assessee.
3 Conditions a) The assessee should be a self employed person. But if he is employed, he
should not get house rent allowance from his employer.
b) He or his spouse or his minor child or the HUF in which he is a member,
should not own residential accommodation at the place where he resides,
performs the duties of his office or carries on his business or profession.
c) In respect of a house property owned by him at any other place, he should
not avail self-occupied property benefit.
d) He should file a declaration in Form No. 10BA regarding the expenditure
incurred by him towards payment of rent.
4 Quantum of deduction Least of the following:
(a) Rent paid in excess of 10% of total Income
(b) Rs. 5000 per month
(c) 25% of Total Income (Refer Note)

Meaning of total income for the purpose of S. 80GG:

Find out gross total income XXX
Less: LTCGs XXX
Less: STCG taxable U/s 111A XXX
Less: Amount deductible U/s 80C to 80U (except S. 80GG) XXX
Total income for the purpose of S. 80GG XXX
10. Deduction U/s 80JJAA:

1 Eligible assessee Person whose GTI includes profits and gains derived from business and to whom S.
44AB applies.
2 Nature of deduction Deduction is allowed in respect of additional employee cost incurred in the course of
business in the relevant PY.
3 Quantum of deduction 30% of additional employee cost incurred in the course of business in the relevant
PY.
4 Period of deduction 3 AYs including the AY relevant to the PY in which the employment is provided by
the assessee.
5 Additional employee cost Total emoluments paid or payable to additional employees employed during the PY.
6 Emoluments Any sum paid or payable to an employee in lieu of his employment by whatever
name called.
Note the words ‘paid or payable’. Accordingly, non-monetary perquisites shall not be
included in emoluments.
Even allowances which are wholly or partly exempted in the hands of employees
shall be taken into account for computing emoluments.
7 Exclusions from emoluments (a) Any contribution paid or payable by the employer to any pension fund or
provident fund or any other fund for the benefit of employees under any law for the
time being in force
(b) any lump-sum paid or payable to an employee at the time of termination of his
service or superannuation or voluntary retirement, such as gratuity, severance pay,
leave encashment, voluntary retirement benefits, commutation of pension etc.
8 Additional employee Employee who has been employed during the PY and whose employment has the
effect of increasing the total number of employees employed by the employer as on
the last day of the preceding year.
9 Exclusions from additional Employee whose total emoluments are more than Rs. 25000 p.m.
employee Employee employed for a period of less than 240 days during the PY.
Employee who does not participate in recognised provident fund.
10 Additional employee cost for In the first year of new business, emoluments paid or payable to employees
the first year in case of new employed during that PY shall be deemed to be the additional employee cost.
business
11 Circumstances when In case of an existing business, the additional employee cost shall be nil, if
additional employee cost in (a) there is no increase in the number of employees from the total number of
case of an existing business is employees employed as on the last day of the preceding PY.
nil. (b) emoluments are paid otherwise than by an account payee cheque or account
payee bank draft or by use of electronic clearing system through a bank account.
12 Report of CA For claiming deduction U/s 80JJAA, the assessee shall furnish, along with ROI, a
report of CA in form 10DA containing prescribed particulars.

1 The assessee may be an Individual or HUF or company or firm or any other person.
2 This section applies even to non-residents carrying on business in India.
3 If the GTI of the assessee includes profits and gains from profession and not business, S. 80JJAA shall not apply.
4 Business should not have been formed by splitting up or reconstruction of an existing business.
5 Business should not have been acquired by way of transfer from any other person or as a result of any business re-
organisation
6 In case of an employee engaged in the business of manufacturing of apparel (which is seasonal in nature) or in the
business of manufacturing footwear or leather products, any employee employed for a period of less than 240 days
but for 150 days or more in the PY shall, still, be considered as ‘additional employee’.
7 Where a new employee is employed during the PY for a period of less than 240 days or 150 days, as the case
may be, but is employed for a period of 240 days or 150 days, as the case may be, in the immediately
succeeding PY, he shall be deemed to have been employed in the succeeding PY and the provisions of S.

80JJAA shall apply accordingly.

8 Deduction U/s 80JJAA is in addition to the deduction U/s 37 (1) in respect of emoluments.
9 In the first year emoluments can be paid in cash. (i.e. other than through banking channels).
11. Deduction in respect of royalty income of the authors-S. 80QQB:

1. Assessee eligible for Resident individual being an author.
deduction
2. Nature of deduction Under this section, assessee is eligible for deduction in respect of any lump sum
consideration received for the assignment or grant of any of his interests in the copyright of
any book being a work of literary, artistic or scientific nature or royalty or copyright fees
received (in lump sum or otherwise).
3. Items not regarded as Books shall not include brochure, commentaries, diaries, guides, journals, magazines,
books newspapers, pamphlets, textbooks for schools and other publication of similar nature.
4. Quantum of deduction Whole of such income or Rs. 300000 (whichever is less)
5. Restriction on royalty or If royalty or copyright fee is not received in lump sum – amount in excess of 15% of value of
copyright fees not such books sold during the previous year shall be ignored.
received in lump sum
6. Conditions for availing deduction
a) Any income earned from any source outside India shall be remitted within six months from the end of the relevant
previous year or such extended time by RBI.
b) A certificate in the prescribed Form 10CCD given by the person making payment shall be furnished along with the
Return of Income.
c) Where income is earned outside India, a certificate from the prescribed authority in the prescribed form (Form No. 10H)
shall be furnished along with ROI.
7. Double deduction not available
Where a deduction U/s 80QQB for any previous year has been claimed and allowed, no deduction in respect of such
income shall be allowed under any other provisions of the Act in any AY.
12. Deduction in respect of interest on deposits in savings account – S. 80TTA:

1 Where the GTI of an assessee, being an individual (not being a senior citizen) or a HUF, includes any income by way
of interest on deposits (not being time deposits) in a savings account with-
(a) a banking company to which the Banking Regulation Act, 1949;
(b) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank
or a co-operative land development bank); or
(c) a Post Office;
there shall be allowed, in computing the TI of the assessee a deduction as specified hereunder, namely:—
(i) in a case where the amount of such income does not exceed in the aggregate Rs. the whole of such
10000 amount;
(ii) in any other case Rs. 10000
2 For the purposes of this section, "time deposits" means the deposits repayable on expiry of fixed periods.
Note: Post office savings bank interest is exempt up to Rs. 3,500 (in an individual account) and Rs. 7,000 (in a joint
account) U/s 10 ( 15) (i).
13. Deduction in respect of interest on deposits (with bank/post-office) in case of senior citizens – S. 80TTB:
1 In case of an individual being senior citizen, if his/her GTI includes income by way of interest on deposits (time deposits
or otherwise) with specified entities ('the interest income'), he/she is entitled to a deduction, up to Rs. 50,000.
2 Specified entity = (a) Banking company to whom the Banking Regulation Act, 1949 applies; (b) Any bank or banking
institution referred in S. 51 of the Banking Regulation Act; (c) A Co-operative society engaged in Banking business; (d)
Co-operative land mortgage bank; (e) Co-operative land development bank; (f) Post office defined in section 2(k) of the
Indian Post Office Act, 1898;
14. Deduction in respect of certain income of producer companies – S. 80PA:

1 Where the GTI of an assessee, being a producer company having a total turnover of less than Rs. 100 Crores in any PY,
includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions
of this section, be allowed, in computing the TI of the assessee, a deduction of an amount equal to 100% of the profits and
gains attributable to such business for the PY relevant to an AY commencing on or after 01.04.2019, but before
01.04.2025.

2 In a case where the assessee is entitled also to deduction under any other provisions of Chapter VI-A, the deduction under
this section shall be allowed with reference to the income, if any, as referred to in this section included in the GTI as
reduced by the deductions under such other provisions of this Chapter.
3 Eligible business means (a) the marketing of agricultural produce grown by the members; (b) the purchase of agricultural
implements, seeds, livestock or other article intended for agriculture for the purpose of supplying them to the members; (c)
the processing of the agricultural produce of the members.

Chapter-5B: Minimum alternate tax (MAT) - Summary
1. Applicability of MAT provisions:
1 Applicability of MAT provisions to SN Category of foreign company Applicability

foreign companies 1 Foreign company which is resident of a foreign S. 115JB
country or specified territory with which India has does not
DTAA and which does not have PE in India as per apply.
such DTAA.
2 Foreign company which is resident of a foreign S. 115JB
country or specified territory with which India does does not
not have DTAA and which does not have apply.
requirement to seek registration under the law
relating to companies in India.
3 Other foreign companies S.115JB is
applicable.
2 Applicability of MAT provision to S. 8 If such company is a mutual concern or is registered U/s 12AA, the MAT
companies [Non-profit companies]. provisions are not applicable.
3 Applicability of MAT provisions to SN Category of insurance company Applicability
insurance companies. [S.115JB (5A)]. 1 Insurance company in life insurance S. 115JB does not
business apply.
2 Insurance company in general insurance S. 115JB is applicable
business
4 MAT provisions not to apply in respect Profits of tonnage tax business shall not be subject to tax under the BP
of income from tonnage tax business. route.
[S. 115-VO]. Tonnage tax business means business of operating qualifying ships carried
on by a tonnage tax company.
Tonnage tax company means an Indian shipping company whose income
from the business of operating qualifying ships shall be computed on
presumptive basis based on the tonnage capacity of the ship under Chapter
XII-G (S. 115V to S. 115VZC).
2. Provisions of S. 115JB:
A. Determination of route under which company is liable to pay tax: [S. 115JB (1)]:
Step-1 Compute the TI of the company in accordance with the provisions of the Act other than Chapter-XII-B.
Step-2 Compute the tax on TI computed in step-1 by applying the tax rates given in the relevant Finance Act and
by applying special tax rates on specified income (like LTCG, STCG (S.111A) etc) included in the TI where
the Act requires so.
Step-3 Compute book profits (BP) in accordance with S. 115JB.
Step-4 Compute tax on book profits by applying 18.5%. [However, in case of companies located in IFSC which
derives its income solely in convertible foreign exchange instead of 18.5% apply 9%].
Step-5 If the tax computed in step-4 > tax computed in step-2, then the company is in book profit route.
If the tax computed in step-4 < tax computed in step-2, then the company is in normal total income route.
B. Determination of tax liability if the company is in book profit route:

1 Tax on book profits ****
2 Surcharge (if BP > Rs. 100L) ****
3 Tax + surcharge (1+2) ****
4 Marginal relief (if any) (***)
5 Tax + surcharge (after marginal relief) ****
6 HEC @ 4% ****
C. Determination of tax liability if the company is in normal total income route:

1 Tax on TI computed in accordance with the provisions of the Act other than Chapter-XII-B ****
2 Surcharge (if TI > Rs. 100L) ****
3 Tax + surcharge (1+2) ****
4 Marginal relief (if any) (***)
5 Tax + surcharge (after marginal relief) ****
6 HEC @ 4% ****

3. Manner of computation of book profits in case of companies to which Ind-AS is not applicable:
1 Net profit as per the statement of P&L *****
2 15 positive adjustments (i.e. additions) given in Clause (a) to (k) of Explanation-1 to S. 115JB. *****
3 12 negative adjustments (i.e. deductions) given in Clause (i) to (viii) of Explanation-1 to S. 115JB. (****)
4 Book profit (1+2-3) *****
4. Adjustments to be made in arriving at the book profit:
(i) Clause (a) of Explanation-1 to S. 115JB:

1 Clause (a) of Income tax paid or provision therefor shall be added to the net profit for arriving at the BP, if it
Explanation-1 to S. is debited to the statement of P&L.
115JB
2 Extended meaning of Income tax paid shall include:
‘income-tax paid’.
[Explanation-2 to S. (a) Surcharge
115JB]. (b) Education cess
(c) DDT
(d) Interest charged under this Act.
(ii) Clause (b) and Clause (i) of Explanation-1 to S. 115JB:

1 Clause (b) of Any amount carried to any reserve, by whatever name called, shall be added to the net profit
Explanation-1 to S. for arriving at the BP, if it is debited to the statement of P&L.
115JB
2 Clause (i) of Any amount withdrawn from reserves shall be reduced from the net profit for arriving at the
Explanation-1 to S. BP, if it is credited to the statement of P&L.
115JB But that reserve should have been created by debiting the statement of P&L.
(iii) Clause (c) & Clause (i) of Explanation-1 to S. 115JB:
1 Clause (c) of Any amount set aside to provisions made for meeting liabilities other than ascertained liabilities
Explanation-1 to S. shall be added to the net profit for arriving at the BP, if it is debited to the statement of P&L.
115JB
2 Clause (i) of Any amount set aside as provisions for diminution in value of asset [Examples: Provision for
Explanation-1 to S. NPA, PBDD, provision for permanent decline in the value of investments, provision for
115JB impairment losses etc] shall be added to the net profit for arriving at the BP, if it is debited to the
statement of P&L.
(iv) Clause (d) and Clause (e) of Explanation-1 to S. 115JB:

1 Clause (d) of Any amount by way of provision for losses of subsidiary companies, shall be added to the net
Explanation-1 to S. profit for arriving at the BP, if it is debited to the statement of P&L.
115JB
2 Clause (e) of Any amount of dividend paid or proposed shall be added to the net profit for arriving at the
Explanation-1 to S. BP, if it is debited to the statement of P&L.
115JB
(v) Clause (f) and Clause (ii) of Explanation-1 to S. 115JB:

1 Clause (ii) of Any of income to which provisions of S. 10, S. 11 or S. 12 apply shall be reduced from the
Explanation-1 to S. net profit for arriving at the BP, if it is credited to the statement of P&L.
115JB
2 Clause (f) of Explanation- Any expense relatable to income to which provisions of S. 10, S. 11 or S. 12 apply shall be
1 to S. 115JB added back to the net profit for arriving at the BP, if it is debited to the statement of P&L.
(vi) Clause (g), Clause (iia) and Clause (iib) of Explanation-1 to S. 115JB:
1 Clause (g) of Amount of depreciation debited to the statement of P&L shall be added back to the net profit
Explanation-1 to S. for computing BP.
115JB
2 Clause (iia) of Any increase in depreciation on account of revaluation of assets (if debited to the statement of
Explanation-1 to S. P&L) shall be reduced from the net profit for computing BP
115JB

3 Clause (iib) of Any amount withdrawn from the revaluation reserve and credited to statement of P&L shall be
Explanation-1 to S. reduced from the net profit for computing BP but such reduction shall be only to the extent of
115JB increase in depreciation on account of revaluation of assets.
(vii) Clause (j) of Explanation-1 to S. 115JB:

Clause (j) of Any amount standing in revaluation reserve relating to revalued asset, on retirement or disposal
Explanation-1 to S. of such asset, if not credited to the statement of P&L shall be added to the net profit for
115JB computing BP.
(viii) Clause (h) and Clause (viii) of Explanation-1 to S.115JB:

1 Clause (h) of Explanation-1 Any amount of deferred tax or provision therefor shall be added back to the net profit for
to S. 115JB computing the BP, if it was debited to the statement of P&L account.
2 Clause (viii) of Explanation- Amount of deferred tax shall be reduced from the net profit for computing the BP, if it was
1 to S. 115JB credited to the statement of P&L account.
(ix) Clause (vii) of Explanation-1 to S. 115JB:

Clause (vii) of Explanation- In case of sick companies, the profits pertaining to the period ending with the PY in which the
1 to S. 115JB company revives shall not be subjected to tax under the BP route.
(x) Clause (iie), Clause (iif), Clause (fc) and Clause (k) of Explanation-1 to S. 115JB:
1 Clause (fc) of Amount of notional loss on account of exchange of shares in SPV for units of business trust
Explanation-1 to S. referred to in S. 47 (xvii) shall be added to the net profit for arriving at the BP, if it was debited
115JB to the statement of P&L.
Amount of notional loss resulting from any change in carrying amount of units (supra) shall be
added to the net profit for arriving at the BP, if it was debited to the statement of P&L.
Amount of loss on account of transfer of units (supra) shall be added to the net profit for arriving
at the BP, if it was debited to the statement of P&L.
2 Clause (iie) of Amount of notional gain on account of exchange of shares in SPV for units of business trust
Explanation-1 to S. referred to in S. 47 (xvii) shall be reduced from the net profit for arriving at the BP, if it was
115JB credited to the statement of P&L.
Amount of notional gain resulting from any change in carrying amount of units (supra) shall be
reduced from the net profit for arriving at the BP, if it was credited to the statement of P&L.
Amount of gain on account of transfer of units (supra) shall be reduced from the net profit for
arriving at the BP, if it was credited to the statement of P&L.
3 Clause (k) of Amount of gain on account of transfer of units (supra) by taking into account the cost of shares
Explanation-1 to S. in SPV exchanged with units shall be added to the net profit for computing the BP.
115JB
4 Clause (iif) of Amount of loss on account of transfer of units (supra) by taking into account the cost of shares
Explanation-1 to S. in SPV exchanged with units shall be reduced from the net profit for computing the BP.
115JB
(xi) Clause (iid) and Clause (fb) of Explanation-1 to S. 115JB:

1 Clause (iid) of Following incomes credited to the statement of P&L shall be reduced from the net profit for
Explanation-1 to S. computing BP of a foreign company:
115JB (a) Capital gains arising from transaction in securities suffering tax at a rate < 18.5%
(b) Interest, royalty and FTS chargeable to tax at a rate specified in Chapter XII (S. 115A
to S. 115BBE) which is less than 18.5%
2 Clause (fb) of Expenditure incurred in relation to the income (supra) which is debited to the statement of P&L
Explanation-1 to S. shall be added back to the net profit for computing BP.
115JB
(xii) Clause (iic) and Clause (fa) of Explanation-1 to S. 115JB:

1 Clause (iic) of Share income from an AOP credited to the statement of P&L shall be reduced from the net
Explanation-1 to S. profit for computing the BP.
115JB. It is exempt U/s 86 under the normal TI route.
2 Clause (fa) of Expenditure incurred in relation to share income (supra) debited to the statement of P&L shall
Explanation-1 to S. be added back to the net profit for computing the BP.
115JB.

(xiii) Clause (iig) and Clause (fd) of Explanation-1 to S. 115JB:

1 Clause (iig) of Royalty earned in respect of patent developed and registered in India by a resident company
Explanation-1 to S. which has exercised option for coming U/s 115BBF and which is credited to the statement of
115JB. P&L shall be reduced from the net profit for computing BP.
However, this royalty shall suffer tax @ 10% on gross basis under the normal TI route.
2 Clause (fd) of Expenditure incurred in relation to share income (supra) debited to the statement of P&L shall
Explanation-1 to S. be added back to the net profit for computing the BP.
115JB.
(xiv) Clause (iii) of Explanation-1 to S. 115JB:

1 Clause (iii) of Explanation-1 to Amount of loss brought forward or unabsorbed depreciation whichever is less (as per
S. 115JB. the books of accounts) shall be deducted from the net profit for computing the BP.
2 Explanation to Clause (iii) of Loss shall not include depreciation.
Explantion-1 to S. 115JB. If the brought forward loss or unabsorbed depreciation is nil, the Clause (iii) shall not
apply.

Comparison should be on cumulative basis and not year-wise. [CBDT Circular 495 dated 22.09.1987 + Adoon
Electronics Private Ltd 232 ITR 528 (MP); Brut welded Tools Private Ltd 39 ITD 432 (Mad); Shree synthetics Ltd
233 ITR 333 (MP)].
1 For the purpose of Clause (iii), nature of loss is irrelevant.
2 Under the BP route, we are not bothered about the age of loss.
3 Restrictions contained in S. 79 have no role to play in the BP route.
4 Adjustment under Clause (iii) is not affected by the belated filing of return.
Amendment brought out by the FA 2018:

1 The aggregate amount of unabsorbed depreciation and loss brought forward shall be allowed to be reduced from the
net profit for computing book profits, if a company’s application for corporate insolvency resolution process under the
Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating authority.
2 MAT provisions shall not be applicable to a foreign company, if its TI comprises solely of profits and gains from the
business referred to in S. 44B, S. 44BB, S. 44BBA and S. 44BBB and such income has been offered to tax at the rates
specified in the said sections.
5. Some important issues in computing book profit:

1 List of adjustments – List of positive adjustments and negative adjustments is exhaustive in nature. No other
exhaustive adjustment could be made.
2 Other provisions not to S. 115JB is a self-contained code for computation of BP. No other provisions of this Act
apply for computing BP shall apply for computing BP. Vide non-obstante clause in S. 115JB (1).
3 Prior-period items not to ‘Prior period item’ means income or expense which arises in the current period as a result
be adjusted in computing of errors or omission in the preparation of the financial statements of one or more prior
the BP. [Khaitan periods.
Chemicals and For MAT purpose, the statement of P&L is to be prepared in accordance with the provisions
Fertilizers Ltd (Del)]. of the companies Act.
S. 129 (1) requires the companies to comply with the accounting standards while preparing
the financial statements.
One such AS is AS-5. As per AS-5, the prior period items are included in the determination
of net profit or loss for the period, but are required to be shown separately, so that their
impact on profit could be perceived.
Therefore, for the computation of BP, there is no need for any adjustments regarding the
prior period items.
4 Can AO question the Held that the AO cannot question the authenticity of the audited financial statements.
audited financial
statements? [Apollo
He cannot embark upon fresh enquiry relating to entries passed in the books of accounts.
Tyres Ltd 255 ITR 273
His role is limited to the extent of making such positive and negative adjustments
(SC)].
contemplated in Explanation-1 to S. 115JB.

6. Chapter VI provisions (S. 70 to S. 80) and provisions of S. 32 (2) continue to apply inspite of company being in BP
route – S. 115JB (3):
Nothing contained in S. 115JB (1) shall affect the determination of the amounts in relation to the relevant PY to be C/F to the
subsequent year(s) under the provisions of S. 32 (2) or S. 72 or S. 73 or S. 74 or S. 74A.
7. Report of accountant – S. 115JB (4):

Every company to which S. 115JB applies shall furnish a report of a CA in Form-29B, certifying that the BP has been
computed in accordance with the provisions of S. 115JB.
8. Applicability of other provisions to companies coming under the BP route – S. 115JB (5):
Save as otherwise provided in the section, all other provisions of the Act shall apply to every assessee being a company
mentioned in S. 115JB.
Applicability of advance tax provisions even in BP route:

1 S. 115JB (5) provides that all other provisions of this Act shall apply to every assessee, being a company, mentioned in
this section.
2 According to S. 207, tax shall be payable in advance during any FY, in accordance with the provisions of S. 208 to 219
(both inclusive), in respect of the TI of the assessee which would be chargeable to tax for the AY immediately following
that FY.
3 U/s 115JB (1), where the tax payable on TI is less than 18.5% of BP of a company, the BP would be deemed to be the
TI and tax would be payable @ 18.5%.
4 Since in such cases, the BP is deemed to be the TI, as per the provisions of S. 207, tax shall be payable in advance in
respect of such BP (which is deemed to be TI) also.
5 Further, the annual Finance Act prescribes rate for payment of advance tax when tax is payable U/s 115JB.
6 Therefore, if the BP tax is not paid in advance fully or partly, or not paid in installments as required U/s 211 within the
time limit specified therein, the company becomes liable to interest U/s 234B and S. 234C. [Rolta Ltd 196 Taxman 594
(SC)].
9. MAT credit – S. 115JAA:

1 Tax credit for MAT [S. 115JAA If a person pays tax U/s 115JB for a PY, he shall be entitled to credit in respect of
(1A) & (2A)]. such tax.
Amount of credit = (BP tax paid – Tax on normal TI payable).
2 No interest on MAT credit. No interest shall be payable on tax credit allowed U/s 115JAA (1A). [Proviso-1 to
S. 115JAA (2A)].
3 Carry forward of credit. [S. The amount of tax credit determined U/s 115JAA (2A) shall be C/F & set off in
115JAA (3A)]. accordance with the provisions of S. 115JAA (4) & (5) but such C/F shall not be
allowed beyond 15th AY immediately succeeding the AY for which tax credit
becomes allowable U/s 115JAA (1).
4 Year and extent of set off. [S. If, for an AY, the tax on normal TI exceeds the BP tax, the tax credit shall be
115AA (4) S. 115JAA (5)]. allowed to be set off to the extent of the excess of tax on normal TI over the BP
tax and the balance of the tax credit, if any, shall be C/F.
5 Variation to MAT credit pursuant If the amount of tax on normal TI or the BP tax is reduced or increased as a result
to orders passed under this Act. of any order passed under this Act, the amount of tax credit allowed under this
section shall also be varied accordingly. [S. 115JAA (6)].
6 Restriction on the quantum of Where the amount of tax credit in respect of any income-tax paid in any country
MAT credit. [Proviso-2 to S. or specified territory outside India U/s 90 or S. 90A or S. 91, allowed against the
115JAA (2A)]. BP tax payable, exceeds the amount of the tax credit admissible against the tax
on normal TI payable by the assessee, then, while computing the amount of credit
U/s 115JAA (2), such excess amount shall be ignored.
In other words, the amount of tax credit in respect of tax on BP shall not be
allowed to be carried forward to subsequent year to the extent such credit relates
to the difference between the amount of foreign tax credit (FTC) allowed against
tax on BP and FTC allowable against the tax on normal TI payable by the
assessee.
11. Computation of Book Profit for Ind AS compliant companies – S. 115JB (2A), S. 115JB (2B) and S. 115JB (2C):
See the main notes.

Chapter-5C: Miscellaneous amendments (FA 2017 & 2018) - Summary
Miscellaneous amendments:
1 S. 10 (23C) Income of Chief minister’s Relief fund and Lieutenant Governor’s Relief fund are exempt.
(iiiaaaa).
2 S. 10 (48) S. 10 (48) exempts any income accruing or arising to a foreign company on account of storage of
crude oil in a facility in India and sale of crude oil therefrom to any person resident in India, if, - (a)
such storage and sale by the foreign company is pursuant to an agreement or an arrangement
entered into by the CG or approved by the CG; and (b) having regard to the national interest, the
foreign company and the agreement or arrangement are notified by the CG in this behalf.
3 S. 10 (48B). It provides that any income accruing or arising to a foreign company on account of sale of left over
stock of crude oil, if any, from a facility in India after the expiry of an agreement or an arrangement
[referred to in S. 10 (48A)] shall also be exempt (subject to such conditions as may be notified by the
CG in this behalf).
4 Disallowance of Existing provisions of S. 58 specify the amounts which are not deductible in computing income U/H
TDS default IFOS which include certain disallowances made in computation of income U/H PGBP.
extended to These disallowances include disallowances such as disallowance U/s 40 (a) (i) / (iii) and U/s 40A.
income taxable Disallowance pertaining to TDS default when payment or credit is given to resident (which is covered
U/H IFOS. [S. 58 by S. 40 (a) (ia)) is not applicable while computing income U/H IFOS.
(1A)]. With a view to improving compliance of provision relating to TDS, S. 58 (1A) has been amended (w.e.f
AY 2018-19) so as to provide that provisions of S. 40 (a) (ia) shall, so far as they may be, apply in
computing income chargeable U/H IFOS as they apply in computing income chargeable U/H PGBP.
5 Restriction on Under the existing provisions of S. 80G, deduction is not allowed in respect of cash donation
cash donation exceeding Rs. 10000.
U/s 80G. FA 2017 has reduced this limit to Rs. 2000 with effect from AY 2018-19.
6 Amendments The existing provisions of S. 133 empower the ITA to call for information for the purpose of any inquiry
pertaining to or proceeding under the Act.
power to call 2nd proviso to S. 133 provides that the power in respect of an inquiry, in case where no proceeding is
information. [S. pending, shall not be exercised by any ITA below the rank of the PDIT or DIT or PCIT or CIT without
133]. the prior approval of such authorities.
Considering the requirements of the work profile of the authorities working in the Investigation
Directorate, the 1st proviso to S. 133 has been amended with effect from 01.04.2017 to provide that the
power in respect of inquiry or proceeding under the Act, may also be exercised by the JDIT or DDIT
and ADIT.
Further, the 2nd proviso is amended to provide that the JDIT, DDIT or ADIT may exercise the powers in
respect of such inquiry, without seeking prior approval of higher authorities.
7 Extension of the S. 133A empowers an ITA to enter any place, at which a business or profession is carried on, at which
power to survey any books of account or other documents or any part of cash or stock or other valuable article or thing
[S.133A]. relating to business or profession are kept, for the purposes of conducting a survey.
To widen the scope of the said section, S. 133A (1) has been amended with effect from 01.04.2017 to
include any place, at which an activity for charitable purpose is carried on.
Penalty for failure to furnish statement of financial transaction or reportable account [Section 271FA]
Section 285BA(1) (read with Rule 114E) obliges specified person to furnish the statement of financial transaction or
reportable account on or before 31st May, immediately following the financial year in which the transaction is registered or
recorded (except in respect of certain transaction of cash deposits during financial year 2016 where different date was
prescribed). Further, sub-section (5) of the said section also empowers the prescribed income-tax authorities to issue notice
requiring the person to furnish such statement, if he has not furnished the statement within due date.
Hitherto, section 271FA provided that if such specified person failed to furnish such statement within due date, he was liable
to pay penalty of Rs. 100 for every day of continuing default.
It further provided that in case where such person failed to furnish the statement within time specified in the notice issued
under section 285BA(5), he shall be liable to pay penalty of Rs. 500 for every day of continuing default. In order to ensure
compliance of the reporting obligations under section 285BA, Finance Act, 2018 has amended section 271FA with effect
from April 1, 2018 to enhance the quantum of penalty as under:
1 if such specified person fails to furnish such statement within due date, he shall be liable to pay penalty of Rs. 500 for
every day of continuing default; and
2 in case where such person fails to furnish the statement pursuant to and within time specified in the notice issued under
section 285BA(5), he shall be liable to pay penalty of Rs. 1,000 for every day of continuing default.

Chapter-6: Provisions of S.269SS, S. 269T & S. 269ST - Summary:
1. Mode of taking or accepting certain loans, deposits and specified sum – S. 269SS:
In the following circumstances, loan, deposit or specified sum shall be taken or accepted only through APC/APBD/by use of
ECS through a bank account:
Circumstance-1 Loan, deposit or specified sum ≥ Rs. 20000.
Circumstance-2 Loan, deposit or specified sum taken or accepted < Rs. 20000.
However, from the same depositor loan, deposit or specified sum was taken on the earlier occasion.
It is remaining unpaid. Amount remaining unpaid is ≥ Rs. 20000.
Circumstance-3 Loan, deposit or specified sum taken or accepted < Rs. 20000.
Loan, deposit or specified sum taken or accepted from the same depositor on the earlier occasion is
remaining unpaid. But the unpaid amount is also < Rs. 20000.
However, loan, deposit or specified sum taken or accepted on the current occasion together with the
unpaid amount of loan, deposit or specified sum taken or accepted on the earlier occasion from the
same depositor ≥ Rs. 20000.

1 Specified sum means a sum of money received by way of advance or otherwise in relation to transfer of an immovable
property, whether or not the transfer takes place. [Clause (iv) of Explanation to S. 269SS].
2 S. 269SS applies to sum received in relation to transfer of an immovable property, whether held as capital asset or
stock-in-trade.
3 S.269SS applies even if sum is received in relation to transfer of agricultural land. No exclusion in S. 269SS similar to
that in S. 194-IA, S. 194LA and S. 56 (2) (x).
2. Penalty U/s 271D:

1 Offence Taking or accepting loan, deposit or specified sum in contravention of provisions of S. 269SS.
2 Levying authority JCIT
3 Quantum of Equals to Loan, deposit or specified sum taken or accepted in contravention of provisions of S.
penalty 269SS.
4 Escape route No penalty shall be levied if the JCIT is satisfied that the borrower has reasonable cause for
violation of the provisions of S. 269SS. [S. 273B].
Proviso-1 to S. 269SS:
S. 269SS shall not apply to loan or deposit or specified sum taken by or from the following persons:
1 CG/SG
2 Banking company
3 Co-operative banks
4 Post office saving bank
5 Statutory corporation
6 Government company
7 Association or institution or body or class of association or institution or body notified by the CG.
Provios-2 to S. 269SS:
If the acceptor of loan or deposit or specified sum as well as payer have agricultural income and don’t have any income
chargeable to tax, then S. 269SS shall not apply.
Some judicial rulings on S. 269SS & S. 271D:

1 V. Sivakumar (2013) Transactions between firm and partners are outside the ambit of S. 269SS. Firm is not a
(Mad) + Muthoot separate juristic person. It is a collective name for partners. It is a compendious way of
Financiers (2015) (Del) describing partners. Fiction created in S. 2 (31) is only for the purpose of determination of
TI and tax thereon.
2 Noida Toll Bridge Co S. 269SS covers only cash loan and not loan through book entries.
Ltd (Del)
3 Whether the share View-1: Share application money is neither loan nor deposit. S. 269SS is not violated.
application money is Penalty U/s 271D cannot be levied. [I.P. India (P) Ltd (Del)].
covered by S. 269SS? View-2: Share application money is not loan. However, it comes within the purview of
deposit. If there is an obligation to return, the sum becomes deposit. If the shares are
allotted to the applicant, though the share application money is not refunded in species, it is
returned in the form of shares. If the shares are not allotted, the share application money
becomes refundable. Anyway share application is refunded in species or otherwise.

Therefore, it comes with the ambit of deposit. If it is received in cash, it is a violation of S.

269SS. [Bhalotia Engineering Works (P) Ltd (Jharkhand)].
4 Kailash Chandra Advances given in the ordinary course of business are outside the ambit of S. 269SS.
Deepak Kumar (All)
5 Diwan Enterprises 246 Same amount cannot be treated as unexplained cash credit as well as loan. If the story of
ITR 571 (Del) + loan is not believed by the Department and accordingly, addition is made U/s 68, then the
Standard Brands Ltd – JCIT cannot levy penalty U/s 271D, treating it as loan taken in violation of S. 269SS.
285 ITR 295 (Del)
3. Mode of re-payment of certain loan or deposit – S. 269T:

In the following circumstances, (a) branch of a banking company; (b) branch of a co-operative bank; (c) any other company;
(d) firm; (e) co-operative society; (f) any other person shall repay loan or advance or specified advance only through APC or
APBD or by use of ECS through a bank account:
Circumstance- Loan or deposit or specified advance together with the interest, if any, payable thereon ≥ Rs. 20000.
1
Circumstance- Loan or deposit repaid and interest thereon < Rs. 20000.
2 However, the aggregate of loan or deposit to be repaid to the same depositor together with interest
thereon ≥ Rs. 20000.
Circumstance- Specified advance repaid together with interest thereon < Rs. 20000.
3 However, the aggregate specified advance received by such person either in his own name or jointly with
any other person on the date of such repayment together with the interest, if any, payable on such
specified advances ≥ Rs. 20000.
Specified advance – Clause (iv) of Explanation to S. 269T:

Specified advance means any sum of money in the nature of advance by whatever name called in relation to transfer of an
immovable property, whether or not the transfer takes place.
4. Penalty U/s 271E:

1 Offence Repayment of loan or deposit or specified advances in contravention of the provisions of S. 269T.
2 Levying JCIT
authority
3 Quantum of Equals to amount of Loan, deposit or specified advance repaid in contravention of provisions of S.
penalty 269T.
4 Escape route No penalty shall be levied if the JCIT is satisfied that the borrower has reasonable cause for violation
of the provisions of S. 269T. [S. 273B].
Note: For quantification of penalty U/s 271E, interest is not relevant. Interest is relevant only in deciding whether the
provisions of S. 269T is violated or not.
Proviso-2 to S. 269T:
Where loan or deposit or specified advance is repaid to following persons, S. 269T shall not apply:
1 CG/SG
2 Banking company
3 Co-operative bank
4 Statutory corporation
5 Government company
6 Post-office Savings Bank
7 Any other person notified by the CG in OG
Important judicial ruling:

Triumph International Even repayment of loan by passing mere adjusting book entries by the assessee can be
Finance (India) Ltd. (2012) taken to be in contravention of provisions of S. 269T to attract penalty U/s 271E.
345 ITR 270 (Bom) However, no penalty should be levied if there is reasonable cause for violation.
Important CBDT circulars:

CBDT Circular Penalty orders U/s 271D and S. 271E shall be passed within 6 months from the end of the month in
9/2016 which the SCN was issued by JCIT and not within 6 months from the end of the month in which order
of assessment was passed by the AO containing direction for initiation of penalty proceedings U/s
271D and S. 271E. [S. 275 (1) (c)].

CBDT Circular The action inviting imposition of penalty U/s 271D and S. 271E is accepting or repaying loan
10/2016 otherwise than by way of APC or APBD or by use of ECS through bank account. It is not related to
the income that may be assessed or finally adjudicated. The penalty U/s 271D and S. 271E is
independent of assessment.
Thus, the time-limit for passing order U/s 271D and S. 271E is not affected by the pendency of
appeal against the assessment order.
Accordingly, the time-limit for passing order U/s 271D and S. 271E is not 6 months from the end of
the month in which the order of ITAT is received by the CIT. It is 6 months from the end of the month
in which the SCN was issued by the JCIT.
5. Restriction on cash transactions – S. 269ST:

No person shall receive an amount of Rs.2L or more:
(a) In aggregate from a person in a day; or
(b) In respect of a single transaction; or
(c) In respect of transactions relating to one event or occasion from a person,
Otherwise than by an APC or APBD or use of ECS through a bank account:
Proviso to S. 269ST:
The provisions of this section shall not apply to:
(i) Any receipt by (a) Government; (b) any banking company, Post office savings Bank or co-operative bank;
(ii) Transactions of the nature referred to in S. 269SS.
(iii) Such other persons or class of persons or receipts, which the CG may notify in the OG.
6. Penalty U/s 271DA:

1 Offence Receiving a sum in contravention of the provisions of S.269ST.
2 Levying JCIT
authority
3 Quantum of Equals to the amount received in contravention of S. 269ST.
penalty
4 Escape route No penalty shall be levied if the JCIT is satisfied that there are good and sufficient reasons for
contravention of provisions of S. 269ST. [S. 273B].
Notification No. 28/2017 dated 05.04.2017:

S. 269ST shall not apply to receipt by any person from any banking company, post office savings bank or co-operative bank.
Notification No 57/2017 dated 03.07.2017:

The CG hereby specifies that the provisions of S. 269ST shall not apply to the following, namely:
(a) Receipt by a business correspondent on behalf of a banking company or co-operative bank, in accordance with the
guidelines issued by the RBI;
(b) Receipt by a white label automated teller machine operator from retail outlet sources on behalf of a banking company
or co-operative bank, in accordance with the authorization issued by the RBI under the payment and settlement
systems Act, 2007;
(c) Receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the authorization issued by
the RBI under the payment and settlement systems Act, 2007;
(d) Receipt by a company or institution issuing credit cards against bills raised in respect of one or more credit cards.
(e) Receipt which is not includible in the TI U/s 10 (17A).
Clarifications in respect of S. 269ST [Circular No. 22/2017, Dated 03.07.2017]:

The CBDT has clarified that in respect of receipt, in the nature of repayment of loan, by NBFCs or HFCs, the receipt of one
instalment of loan repayment in respect of a loan shall constitute a ‘single transaction’ as specified in S. 269ST (b) and all
the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions of S.
269ST.

Chapter-7: Business Trust
Tax implications of various transactions in relation to Business Trust:
A. Transfer of listed units of BT through RSE:

1 POH criterion for units of 36 months
BT
2 STT levy on purchase or If the units of BT are purchased / transferred through RSE, the transaction is subjected to
sale through RSE STT @ 0.1% in the hands of purchaser or seller, as the case may be.
3 No deduction in respect STT paid shall not be allowed as deduction while computing income U/H CG. [S. 48
of STT Proviso-7].
4 Tax treatment of LTCG If STT is paid at the time of transfer of units of BT, the resultant LTCG is covered by S.
arising on account of 112A. However, if the transfer takes place in a RSE located in IFSC and the consideration
transfer of units of BT. for such transfer is received in foreign currency, then the resultant LTCG is still covered by
S. 112A, though there is no STT obligation.
In computing such LTCG, effect shall not be given to 2nd Proviso to S. 48. In other words,
there will be no benefit of indexation. [S. 48 Proviso-3].
LTCG (Supra) in excess of Rs. 1L is only taxable. Such excess shall suffer tax @ flat rate
10%.
In case of a resident individual or HUF, if the BEL is not exhausted by other income, then
such unexhausted BEL could be adjusted against the LTCG (Supra).
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which
represents this LTCG.
5 Tax treatment of STCG If STT is paid at the time of transfer of units of BT, the resultant STCG is covered by S.
transfer of units of BT. for such transfer is received in foreign currency, then the resultant STCG is still covered by
represents this STCG. It shall suffer tax @ 15%.
B. Exchange of shares in SPV for units of BT:

Where the assessee exchanges his shares in SPV for the units of BT, this shall not be regarded as transfer. [S. 47 (xvii)].
Hence, the question of computing CG does not arise.
C. Transfer of units of BT which were acquired in consideration for exchange of shares in SPV:
1 POH of units (supra) Starts on the DOA of shares in SPV. [S. 2 (42A) Explanation-1 Clause (hc)].
2 COA of units (supra) COA of shares in SPV. [S. 49 (2AC)].
3 STT obligation STT shall be levied @ 0.1%.
However, the STT shall be levied @ 0.20% in the hands of seller upon sale of such units of
BT (which are acquired in lieu of shares of SPV), under an offer for sale to the public
included in the initial offer and where such units are subsequently listed on a RSE. Such
STT shall be collected and remitted to the credited of Government by the Lead Merchant
Banker appointed by the BT
4 Tax treatment of LTCG If STT is paid at the time of transfer of units of BT, the resultant LTCG is covered by S.
transfer of units (supra). for such transfer is received in foreign currency, then the resultant LTCG is still covered by
In computing such LTCG, effect shall not be given to 2nd Proviso to S. 48. In other words,
there will be no benefit of indexation. [S. 48 Proviso-3].
LTCG (Supra) in excess of Rs. 1L is only taxable. Such excess shall suffer tax @ flat rate
10%.
In case of a resident individual or HUF, if the BEL is not exhausted by other income, then
such unexhausted BEL could be adjusted against the LTCG (Supra).
represents this LTCG.
5 Tax treatment of STCG If STT is paid at the time of transfer of units of BT, the resultant STCG is covered by S.
transfer of aforesaid for such transfer is received in foreign currency, then the resultant STCG is still covered by
units of BT. S. 111A, though there is no STT obligation.
represents this STCG. It shall suffer tax @ a flat rate of 15%.

D. Interest income from SPV:

1 Narration of transaction. BT has given loan to SPV. Interest on such loan arises to BT.
2 Tax treatment of interest It is exempt in the hands of BT U/s 10 (23FC). In respect of this income, the BT is
(supra) in the hands of BT. given a pass-through status.
3 No TDS obligation for SPV. In respect of this interest, SPV has no TDS obligation. [S. 194A (3) (xi)], since it is
exempt in the hands of BT.
4 Tax treatment of such portion If the UH = FC/NCNR, it shall suffer tax in the hands of investors at a flat rate of 5%.
of distribution made by the BT [S. 115A (1) (a) (iiac)].
to its investors (i.e. unit No deduction is available in respect of such portion of distribution. [S. 115A (3)].
holders) which represents Not even Chapter VI-A deduction is available against that portion of GTI which
interest (supra) represents the distribution (supra). [S. 115A (4)].
If the UH = Resident, no special provisions are prescribed. Normal rates of tax are
applicable.
PY (chargeability) = PY (Distribution).
5 TDS on such portion of If the UH = FC/NCNR, tax shall be deducted at source by the BT @ 5% U/s 194LBA
distribution made by the BT to at the time of payment or credit to the account of the UH whichever is earlier.
its investors (i.e. unit holders) If the UH = Resident, tax shall be deducted at source by the BT @ 10% U/s 194LBA
which represents interest at the time of payment or credit to the account of the UH whichever is earlier. (Subject
(supra) to S. 206AA).
E. Dividend from non-SPV sources:

1 Tax treatment of dividend income from non- Dividend from non-SPV sources are exempt U/s 10 (34).
SPV sources (being domestic companies) in
the hands of REIT.
2 Tax treatment of such dividend element It is exempt in the hands of UHs U/s 10 (23FD).
present in the distribution made by BT to its
UHs.
F. Dividend distributed by SPV to BT:

SN Situation SPV BT UH
1 BT holds less than 100% of equity share Dividend is Dividend from This dividend element in the
capital of SPV liable to DDT SPV is exempt distribution made by the BT to
U/s 115-O. U/s 10 (34). the UH is exempt U/s 10
[Subject to S. (23FD). On this, the BT has
115BBDA]. no obligation to deduct tax at
source U/s 194LBA.
2 BT holds Case- Dividend is declared Dividend is Dividend from This dividend element in the
100% of 1 or paid out of profit liable to DDT SPV is exempt distribution made by the BT to
equity earned before BT U/s 115-O. U/s 10 (34). the UH is exempt U/s 10
share acquired 100% [Subject to S. (23FD). On this, the BT has
capital of holding. 115BBDA]. no obligation to deduct tax at
SPV source U/s 194LBA.
Case- Dividend is declared Dividend paid Dividend from This dividend element in the
2 or paid out of profits to BT is not SPV is exempt in distribution made by the BT to
earned on or after liable to DDT the hands of BT the UH is exempt U/s 10
the date on which U/s 115-O. [S. U/s 10 (23FC) (b). (23FD). On this, the BT has
BT acquired 100% 115-O (7)]. no obligation to deduct tax at
holding. source U/s 194LBA.
Note: If dividend from non-SPV sources with dividend in Situation-1 or dividend in Case-1 of Situation-2 in aggregate
exceeds Rs. 10L, the excess over 10L becomes taxable in the hands of BT on gross basis @ 10% U/s 115BBDA.
G. Rental income arising to REIT from real-estate assets directly held by it:
1 Rental income earned by REIT from Exempt in the hands of REIT U/s 10 (23FCA).
real estate assets directly held by it.
2 No TDS on rent (supra). On the rent payable to REIT, the person responsible for making payment
has no obligation to deduct tax at source U/s 194-I. [3rd Proviso to S. 194-I].
3 Tax treatment of this rent element It shall be taxed in the hands of UH. In respect of this income, the BT is

present in the distribution made by the given a pass-through status.

REIT to UH.
4 TDS obligation on the rent element If the UH = Resident, the BT shall deduct tax at source U/s 194LBA (1) @
present in the distribution. 10%. [Subject to S. 206AA].
If the UH = FC, the BT shall deduct tax at source U/s 194LBA (3) at rates in
force (i.e. 40% + surcharge if applicable + Health & Education cess).
If the UH = NCNR, the BT shall deduct tax at source U/s 194LBA (3) at rates
in force (i.e. 30% + surcharge if applicable + Health & Education cess).
Tax shall be deducted at source at the time of payment or at the time of
credit (whichever is earlier).
H. CG on disposal of assets by BT:
1 Tax treatment of LTCG arising to It shall suffer tax at rates specified in S. 112/S. 112A.
REIT on account of transfer of
CA
2 Tax treatment of STCG arising If it is covered by S. 111A, it shall suffer tax in the hands of REIT @ 15%.
to REIT on account of transfer of If it is not covered by S. 111A, it shall suffer tax in the hands of REIT @ MMR. [S.
CAs 115UA (2)].
3 Tax treatment of CG element It is exempt in the hands of UHs U/s 10 (23FD).
present in the distribution made
by REIT to UHs
I. Income of BT other than (a) interest from SPV; (b) dividend from SPV; (c) dividend from non-SPV sources (being
domestic companies); (d) CG covered by S. 111A and S. 112; (e) rental income from direct investment in real estate
assets:
1 Tax treatment of such other income in the hands of BT. It is taxable in the hands of BT @ MMR.
[S.115UA (2)].
2 Tax treatment of such other income element present in the distribution It is exempt in the hands of UHs U/s 10
made by BT to its UHs. (23FD).
J. Interest payment to NR Lenders on ECB by the BT:

1 Narration of Transaction On or after 01.07.2012 but before 01.07.2020, BT has borrowed money in foreign currency
from a source outside under a loan agreement approved by the CG or by way of issue of LT
bonds as approved by the CG in this behalf or the BT has borrowed money from a source
outside India by way of issue of RDB before 01.07.2020.
Interest is payable to the FC or NCNR at a rate which does not exceed the rate approved by
the CG.
2 Tax treatment of the Interest is taxable in the hands of FC/NCNR @ a flat rate of 5%. [S. 115A (1) (a) (iiaa)].
interest (supra) in the Nothing is allowed as deduction U/s 28 to S. 44C or S. 57. [S. 115A (3)].
hands of FC/NCNR. No deduction is allowed under Chapter VI-A. [S. 115A (4)].
3 TDS obligation U/s BT has obligation to deduction tax at source on the interest (supra) @ 5% U/s 194LC at the
194LC time of payment or credit to the account of the payee whichever is earlier.
K. Special provisions relating to BT – S. 115UA:

S. 115UA (1) Any income distributed by a business trust to its unit holders shall be deemed to be of the same nature
and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the
business trust.
Necessity of S. The surplus distributed by the BT to the UHs comes from a basket of mixed receipts like (a) interest
115UA (1) received from SPV; (b) interest received from non-SPV sources; (c) dividend received from SPV; (d)
dividend received from non- SPV sources and (e) sales consideration of capital assets sold by the BT.
In the hands of UH, the tax treatment of different elements of income present in the amount distributed
is not same.
Hence, there is a necessity to segregate the different components of income present in the amount
distributed.

Chapter-8: Provisions relating to Mutual Fund – Summary:
1. Additional income tax on income distributed by MF – S. 115R:

When income is distributed to the unit-holders, the fund house has to pay additional income tax U/s 115R (2) as provided
below:
Distributor Unit-holder Additional income-tax rate
Administrator - -
Equity oriented fund - 12.94% (w.e.f 01.04.2018)
Infrastructure debt fund (being a MF) FC/NCNR 6.13%
Debt funds Individual / HUF 38.82%
Any other person 49.92%

1 Distribution tax shall be paid to the credit of CG within 14 days of the date of distribution. [S. 115-R (3)].
2 Interest shall be paid @1% p.m. or part thereof from 15th day to the date of payment on the outstanding distribution tax.
[S. 115-S].
3 If the distribution tax is not paid as required U/s 115-R (2), the MF and its principal officer are regarded as assessee in
default. Collection & recovery proceedings could be initiated. [S. 115-T].
4 Income distributed by way of dividend by the MF/Administrator/Specified company to the unit holders is exempt U/s 10
(35). This is because the fund house has suffered distribution tax U/R 115-R (2).
5 Distribution by the fund house upon redemption of units will not suffer distribution tax in the hands of fund house.
Capital gains will be computed in the hands of unit holders upon redemption of units. [CBDT Circular 6/2014].
6 Distribution by the fund house by way of allotment of bonus units will attract distribution tax in the hands of fund house.
When these bonus units are transferred by the unit holder, for computation of capital gains, the cost of acquisition of
bonus units shall be regarded as nil (subject to S. 94 (8)). [CBDT Circular 6/2014].
7 LTCG arising from transfer of EOU of MF is covered by S. 112A, if the investor has suffered STT @ 0.001% at the time
of transfer. However, if the transfer takes place in a RSE located in IFSC and the consideration for such transfer is
received in foreign currency, then the resultant LTCG is still covered by S. 112A, though there is no STT obligation.
In computing such LTCG, effect shall not be given to 2nd Proviso to S. 48. In other words, there will be no benefit of
indexation. [S. 48 Proviso-3].
LTCG (Supra) in excess of Rs. 1L is only taxable. Such excess shall suffer tax @ flat rate 10%.
In case of a resident individual or HUF, if the BEL is not exhausted by other income, then such unexhausted BEL could
be adjusted against the LTCG (Supra).
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which represents this LTCG.
8 STCG arising from transfer of EOU of MF is covered by S. 111A, if the investor has suffered STT @ 0.001% at the
time of transfer. However, if the transfer takes place in a RSE located in IFSC and the consideration for such transfer is
received in foreign currency, then the resultant STCG is still covered by S. 111A, though there is no STT obligation.
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which represents this STCG. It shall
suffer tax @ a flat rate of 15%.
9 Any income of MF is exempt U/s 10 (23D).
10 MF shall file return for every year, irrespective of income or loss being reported by it. [S. 139 (4C)].
Note: If the infrastructure debt fund is having the form of NBFC, the tax implications are as under:
1 Exemption U/s 10 (47) Income of infra-structure debt fund is exempt U/s 10 (47). It is having just pass-through
status.
2 Interest paid by It is income deemed to accrue or arise in India for the non-resident investor. [S. 9 (1) (v)
infrastructure debt fund to (b)]. It is taxable in India.
non-resident investors – It is taxed on gross basis in the hands of non-resident. No deduction is allowed in respect
Tax implications. of any expense or allowance against this interest income. [S. 115A (3)].
No Chapter-VIA deduction is allowed against that portion of GTI of non-resident investor
which represent this interest income. [S. 115A (4)].
It shall suffer tax at flat rate of 5% (+ Surcharge if applicable + HEC). [S. 115A (1) (iia)].
If the NR investor does not have any income other than this interest income and the
interest income was subjected to TDS U/s 194LB, there is no need for NR investor to file
ROI for the relevant PY. [S.115A (5)].
3 TDS U/s 194LB The infrastructure debt fund shall deduct tax at source @ 5% on the interest payable to
investors at the time of payment or credit to the account of the investor whichever is
earlier.

Chapter-8: Provisions relating to Mutual Fund – Summary:
2. Consolidation of mutual fund schemes – Tax implications:

1 Where there is consolidation of mutual fund scheme, the unit holders of consolidating scheme are allotted units of
consolidated scheme for extinguishment of their rights in the units of consolidating scheme. This comes within the ambit
of the term ‘transfer’ as defined in S. 2 (47).
2 In order to make consolidation tax neutral, S. 47 (xviii) is inserted to exclude this from the ambit of transfer. Hence,
question of computing capital gains in the hands of the unit holders of consolidating scheme does not arise.
3 However, the exclusion u/s 47 (xviii) is only in respect of homogenous consolidation.
4 COA of units of consolidated scheme allotted to the unit holders of consolidating scheme = COA of units of
consolidating scheme. [S. 49 (2AD)].
5 POH of units of consolidated scheme allotted to the unit holders of consolidating scheme shall start on the DOA of units
of consolidating scheme. [S. 2 (42A) Explanation-1 Clause (hd)].
3. Consolidation of plans within a scheme of mutual fund – Tax implications:

(i) Where there is consolidation of plans of a mutual fund scheme, the unit holders of consolidating plan are allotted units
of consolidated plans for extinguishment of their rights in the units of consolidating plan. This comes within the ambit
of the term ‘transfer’ as defined in S. 2 (47).
(ii) In order to make consolidation tax neutral, S. 47 (xix) is inserted to exclude this from the ambit of transfer. Hence,
question of computing CG in the hands of the unit holders of consolidating plan does not arise.
(iii) COA of units of consolidated plan allotted to the unit holders of consolidating plan = COA of units of consolidating
plan. [S. 49 (2AF)].
(iv) POH of units of consolidated plan allotted to the unit holders of consolidating plan shall start on the DOA of units of
consolidating plan. [S. 2 (42A) Explanation-1 Clause (hg)].

Chapter-9: Provisions relating to New Pension Scheme
1. Provisions relating to New Pension Scheme:

1 Tax implications in the hands of subscriber (being an employee) in respect of his contribution and the
contribution of employer:
(a) Employer’s contribution It is salary in the hands of employee (as per S. 17 (1)).
It is allowed as deduction U/s 80CCD (2) in the hands of employee to the extent of
10% of (Salary + DA (if the terms of employment so provides)).
(b) Employee’s contribution In respect of this, deduction is allowed U/s 80CCD (1B) to the employee to the extent
of Rs. 50000.
Also U/s 80CCD (1), deduction is allowed to the employee to the extent of lower of the
following: (a) Employer’s contribution in excess of Rs. 50000; (b) 10% of (Salary + DA
(if the terms of employment so provides)).
2 Tax implications in the hands of subscriber (being self-employed person) in respect of his contribution
Deduction in respect of own Contribution to pension account is allowed as deduction U/s 80CCD (1B) to the extent
contribution of Rs. 50000.
Also U/s 80CCD (1), deduction is allowed to the subscriber to the extent of lower of the
following: (a) Contribution in excess of Rs. 50000; (b) 20% of GTI.
3 Ceiling in S. 80CCE Ʃ Deductions U/s 80C + S. 80CCD (1) + S. 80CCC ≤ Rs. 150000.
4 Tax implications of payments out of pension wealth in the hands of the subscriber:
(a) Payment of pension wealth Exempt in the hands of the nominee. [Proviso to S. 80CCD (3)].
to the nominee upon death
of the subscriber (being an
employee or otherwise).
(b) Partial withdrawal from NPS Any payment from the NPST to a subscriber being an employee under the pension
account by subscriber being scheme referred to in S. 80CCD, on partial withdrawal made out of his account in
an employee. [S. 10 (12B)]. accordance with the terms & conditions, specified under the Pension Fund Regulatory
and Development Authority Act, 2013 and the regulations made thereunder, to the
extent it does not exceed 25% of the amount of contributions made by him, shall be
exempt from tax.
(c) Subscriber (being an 40% of the pension wealth is exempt U/s 10 (12A).
employee or otherwise) Balance, if used for purchasing annuity, is exempt u/s 80CCD (5). Otherwise, it is
closes his account under taxable U/s 80CCD (3) (a).
NPS or opts out of NPS
(d) Pension paid by annuity Taxable in the hands of the assessee. [S. 80CCD (3) (b)].
service provider
5 Tax implications in the hands of the employer:
Deduction in respect of his In respect of employer’s contribution to the pension account of the employee, the
contribution to the pension employer gets deduction U/s 36 (1) (iva) while computing income U/H PGBP.
account of the employee Deduction is restricted to 10% of (Salary + DA (if the terms of employment so
provides)).
6 Tax implications in the hands of NPST:
(a) Exemption U/s 10 (44) Any income received by NPST is exempt U/s 10 (44).
(b) Exemption from TDS Any payments made to NPST shall not be subjected to TDS. [S. 197A (1E)].
(c) Exemption from STT Finance Act 2004 Chapter VII exempts NPST from STT payable in respect of purchase
and sale of equity and derivatives.
7 Exemption from DDT - S. On dividend payable to NPST, the investee-company need not pay DDT.
115-O (1A)
2. ‘Atal Pension Yojana’ notified U/s 80CCD (1) [Notification 7/2016 dated 19-02-16]
S. 80CCD (1) empowers the CG to notify a pension scheme, contribution to which would qualify for deduction in the hands
of an individual assessee. Accordingly, in exercise of the powers conferred by S. 80CCD (1), the CG has notified the ‘Atal
Pension Yojana.

Chapter-10: Provisions relating to Electoral Trust – Summary:
1. Exemption in respect of voluntary contribution received by ET – S. 13B:

Any voluntary contributions received by an ET shall not be included in its TI of the PY, if such ET distributes to any
registered political party during the said PY, 95% of the aggregate donations received by it during the said PY along with the
surplus, if any, B/F from any earlier PY; and such ET functions in accordance with the rules made by the CG.
2. Rules governing functioning of an ET for claim of exemption U/s 13B:
R. 17 CA (1): Persons from whom contributions may be received by an electoral trust: ET may receive voluntary
contributions from:
(a) an individual who is a citizen of India;
(b) a company which is registered in India; and
(c) a firm or HUF or an AOP or a BOI, resident in India.
R. 17CA (3): Persons from whom contribution shall not be received by an electoral trust: The ET shall not accept
contributions-
(a) from an individual who is not a citizen of India or from any foreign entity whether incorporated or not; and
(b) from any other ET;
(c) from a Government company and
(d) from a foreign source as defined in S. 2 (j) of the Foreign Contribution (Regulation) Act, 2010
R. 17CA (4): Mode of acceptance of contribution: The ET shall accept contributions only by way of an APC drawn on a
bank or APBD or by electronic transfer to its bank account and shall not accept any contribution in cash.
R. 17CA (5): PAN/Passport – Prerequisite: The ET shall not accept any contribution without the PAN of the contributor,
who is a resident and the passport number in the case of a citizen of India, who is not a resident.
R. 17CA (6): Distribution only to eligible political party: An ET shall distribute funds only to the registered political
parties.
R. 17CA (7) (i): Ceiling on Administration expenses: The ET may, for the purposes of managing its affairs, spend upto
5% of the total contributions received in a year subject to an aggregate limit of Rs. 5L in the 1st year of incorporation and Rs.
3L in subsequent years;
R. 17CA (7) (ii): Quantum of distributable contribution: Total contributions received in any FY along with the surplus from
any earlier FY, if any, as reduced by the amount spent on managing its affairs, shall be the distributable contributions for the
FY;
R. 17CA (7) (iii): Minimum amount to be distributed & time-limit for distribution: An ET shall be required to distribute
the distributable contributions received in a FY, to the eligible political parties before the 31st March of the said FY, subject
to the condition that at least 95% of the total contributions received during the FY along with the surplus B/F from earlier FY,
if any, are distributed.
4. Deduction in respect of donations to ET – S. 80GGB and S. 80GGC:

If any person makes a donation to an ET, such donations shall be allowed as deduction in computing the TI of such person.

Chapter-11: Taxation of NRI – Summary:
1. Applicability of Chapter XII-A (S. 115-C – S.115-I): [S. 115C]:

1 Applicability of Chapter This chapter applies to a NRI in respect of investment income and LTCG.
XII-A No other income of NRI is covered by this chapter.
2 NRI A non-resident being an Indian citizen or person Indian origin.
3 Person of Indian origin A person shall be deemed to be of Indian origin if he, or either of his parents or any of his
grand-parents, was born in undivided India.
4 Investment income Any income derived (other than dividends referred to in S. 115-O) from a foreign exchange
asset.
5 LTCG LTCG arising from transfer of foreign exchange asset.
6 Foreign exchange asset Any specified asset which the assessee has acquired or purchased with, or subscribed to
in, convertible foreign exchange.
7 Specified asset (a) Shares in an Indian company; (b) debentures issued by an Indian company which is not
a private company; (c) deposits with an Indian company which is not a private company; (d)
Government securities; (e) any other asset as may be notified by the CG in the OG.
Shares may be equity shares or preference shares, listed shares or unlisted shares, quoted
shares or non-quoted shares, shares in public company or in private company.
8 Convertible foreign Foreign exchange notified as such by the RBI.
exchange
2. No deduction against investment income – S. 115D:

S.115D In computing the investment income, no deduction shall be allowed in respect of any expenditure or allowance. It
(1) is taxed on gross basis.
S.115D No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which represents investment
(2) income.
In computing LTCG arising on account of transfer of foreign exchange asset, effect should not be given to 2 nd
proviso to S. 48 (i.e. no indexation benefit).
However, the application of 1st proviso to S. 48 is not negated.
3. Special tax rates – S. 115E:

1 Tax rate applicable for investment income earned by NRI 20% flat.
2 Tax rate applicable for LTCG arising on account of transfer of foreign exchange asset by NRI 10% flat
4. Exemption in respect of LTCG arising on account of transfer of foreign exchange asset – S. 115F:
S. 115F LTCG that is eligible for Exemption is available in respect of LTCG arising from transfer of foreign
(1) exemption exchange asset.
Condition to be fulfilled for NRI shall invest the net consideration in acquisition of new asset (being
enjoying exemption specified assets or NSC issued by the CG).
Time limit for making 6 months from the date of transfer of foreign exchange asset.
investment
Quantum of exemption (LTCG * Amount invested in new asset) ÷ Net consideration.
Net consideration FVC – Expenses incurred in relation to transfer.
S. 115F Lock-in-period in respect of new The new asset shall not be transferred within 3 years from the date of its
(2) asset acquisition.
Also, it shall not be converted into money otherwise than by way of transfer
within 3 years from the date of its acquisition.
Consequences of violation of If the new asset is transferred within the lock-in-period, the following two
lock-in-period consequences will follow in the PY of transfer: (a) withdrawal of exemption
granted earlier U/s 115F (1); (b) computation of CG on account of transfer
of new asset.
If the new asset is converted into money otherwise than by way of transfer
within 3 years (supra), the exemption granted earlier U/s 115F (1) shall be
withdrawn in the PY of conversion.
5. Relaxation from filing of return – S. 115G:

1 Where the NRI has no income taxable in India other than the investment income (or) and the LTCG arising from transfer
of foreign exchange asset, he need not file ROI for the relevant PY.
2 However, this relaxation is available only if the investment income and LTCG (supra) are subjected to TDS.

Chapter-11: Taxation of NRI – Summary:
6. Opting for Chapter XII-A even after becoming resident – S. 115H:

1 Where the assessee, who was a NRI in the earlier years, becomes resident for the relevant PY, still, he can, in respect
of his investment income, opt for chapter XII-A through a declaration in writing along with his ROI for the relevant PY.
2 If he does so, then the provisions of Chapter XIIA shall continue to apply to him in relation to such income for that PY
and for every subsequent PY until the transfer/conversion (otherwise than by transfer) into money of foreign exchange
assets.
7. Opting out of Chapter XII-A: S. 115-I

1 A NRI may elect not to be governed by the provisions of Chapter XII-A for any AY by furnishing his ROI for that AY U/s
139 declaring therein that the provisions of Chapter XIIA shall not apply to him for that AY.
2 If he does so, then the provisions of Chapter XIIA shall not apply to him for that AY and his TI for that AY shall be
computed and tax on such TI shall be charged in accordance with the other provisions of this Act.

Chapter-12: Taxation of Non-resident sportsmen, athlete, entertainer etc.
Special provisions applicable to NR sportsmen, athlete, entertainer and sports association:
1 Special provision S. 115BBA

2 Who is covered by S. 115BBA? It applies to non-resident sportsmen, athlete, entertainer (who are foreign
nationals) and non-resident sports association.
3 Which income of non-resident Income by way of participation in India in any game (other than a game the
foreign national sportsmen winnings wherefrom are taxable U/s 115BB) or sport;
(including athlete) are covered by Income by way of advertisement;
S. 115BBA? Income by way of contribution of articles relating to any game or sport in India in
newspapers, magazines or journals;
4 Which income of non-resident Income from performance in India.
foreign national entertainer are
covered by S. 115BBA?
5 Which income of non-resident Any amount guaranteed to be paid or payable to such association or institution in
sports association are covered by relation to any game (other than a game the winnings wherefrom are taxable U/s
s. 115BBA? 115BB) or sport played in India;
6 Taxability of income (supra) Aforesaid income shall suffer tax @ flat rate of 20%.
No deduction in respect of any expenditure/allowance shall be allowed under any
provision of this Act in computing the income (supra).
7 TDS in respect of income (supra) The person responsible for paying aforesaid income shall deduct tax at source @
20% U/s 194E.
Tax shall be deducted at source at the time of payment or credit to the account of
the payee, whichever is earlier.
8 Relaxation to the persons (supra) If the persons (supra) have no income taxable in India other than the income
from filing of return. [S. 115BBA (supra) and the income (supra) has been subjected to TDS U/s 194E, then there
(2)]. is no obligation to file ROI in respect of the relevant PY.
9 Indcom (Cal). Umpires and match referees ≠ Sportsmen or athlete.
Payments to them does not come U/s 115BBA and it shall not be subjected to
TDS U/s 194E.
Tax shall be deducted U/s 195.

Chapter-13: Taxation of FII
Special provisions applicable to Foreign Institutional Investors (FII):
1 Meaning of FII. FII means persons notified as such by the CG in OG. [Explanation to S. 115AD].
Foreign portfolio investors registered under the SEBI (Foreign Portfolio Investors)
Regulations, 2014 are notified as FII. [Notification 9/2014].
2 Securities held by FII Securities held by a FII which has invested in such securities in accordance with SEBI
characterized as regulation are to be regarded as capital asset. These securities do not stand excluded from
capital asset. the scope of the term CA even if these are held as SIT. [S. 2 (14)].
3 Interest on RDB If the FII has subscribed to RDBs of an Indian company and interest income is receivable on
receivable by FII - or after 01.06.2013 but before 01.07.2020, then it shall suffer tax @ a flat rate of 5% U/s
Tax implications. 115A (1) (a) (iiab).
Interest rate shall not exceed the rate notified by the CG.
4 Interest rate notified In case bonds were issued before 01.07.2010, then the rate of interest shall not exceed
by the CG (Base rate of SBI as on 01.07.2010 + 5%).
In case bonds were issued on or after 01.07.2010, then the rate of interest shall not exceed
(Base rate of SBI as on the date of issue of bonds + 5%).
5 Interest on If the FII has subscribed to Government securities and interest income is receivable on or
Government after 01.06.2013 but before 01.07.2020, then it shall suffer tax @ a flat rate of 5% U/s 115A
securities receivable (1) (a) (iiab).
by FII–Tax
implications.
6 No deduction in No deduction (including deduction under Chapter VI-A) shall be allowed in respect of
respect of interest aforesaid interest in the hands of FII. [S. 115A (3) & (4)].
(supra).
7 TDS obligation U/s The person responsible for paying interest (supra) shall deduct tax at source U/s 194LD @
194LD 5% on such interest at the time of payment or credit to the account of payee, whichever is
earlier.
8 Relaxation from filing If the interest (supra) is the only taxable income of FII for the relevant PY and it was
of return. subjected to TDS U/s 194LD, then the FII has no obligation to file ROI for the relevant PY.
[S. 115A (5)].
9 Income (dividend It is taxable in the hands of FII @ flat rate of 20%.
exempt U/s 10 (34)) No deduction (including deduction under Chapter VI-A) shall be allowed in respect of this
arising from income in the hands of FII. [S. 115AD (2)].
securities (units) to
FII – Tax
implications.
10 TDS obligation U/s The person responsible for paying the income referred to in (9) shall deduct tax at source U/s
196D 196D @ 20% at the time credit to the account of the payee or at the time of payment,
whichever is earlier.
11 LTCG arising from S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
securities (not shall not apply for computing LTCG arising from securities in the hands of FII. [S. 115AD (2)].
covered by S. 112A) It shall suffer tax @ a flat rate of 10%. [S. 115AD (1)].
– Tax implications.
12 LTCG arising from S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
securities (not shall not apply for computing LTCG arising from securities in the hands of FII. [S. 115AD (2)].
covered by S. 112A) Tax shall be calculated @ 10% on this LTCG exceeding Rs. 1L.
– Tax implications.
13 STCG referred to in S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
S. 111A – Tax shall not apply for computing STCG (referred to in S. 111A) arising from securities in the
implications. hands of FII. [S. 115AD (2)].
It shall suffer tax @ a flat rate of 15%. [S. 115AD (1)].
14 Other STCG arising S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
from transfer of shall not apply for computing STCG arising from securities in the hands of FII. [S. 115AD
securities – Tax (2)].
implications. It shall suffer tax @ a flat rate of 30%. [S. 115AD (1)].

Chapter-14: Taxation of Overseas Financial Organisation - Summary
Special provisions relating to Offshore funds or Overseas Financial Organisation - S. 115AB:

1 Meaning of Overseas It means any fund, institution, association or body, whether incorporated or not,
Financial Organisation. established under the laws of a country outside India, which has entered into an
arrangement for investment in India with any public sector bank or public financial
institution or a mutual fund and such arrangement is approved by the SEBI.
2 LTCG arising on account Income by way of LTCG arising from the transfer of units of mutual funds purchased in
of transfer of units – Tax foreign currency shall suffer tax in the hands of overseas financial organisation @ a flat
implications. rate of 10%. [S. 115AB (1)].
While computing this LTCG, provisions of 2nd proviso to S. 48 (i.e. benefit of indexation),
shall not apply. [S. 115AB (2)].
3 TDS obligation U/s 196B. The person responsible for making payment of income by way of LTCG arising from
transfer of units purchased in foreign currency to overseas financial organisation shall
deduct tax at source @ 10% U/s 196B at the time of credit to the account of the payee or
at the time of payment, whichever is earlier.

1 STCG arising from transfer of units are not covered by S. 115AB.
2 Proviso-1 to S. 48 (i.e. computation of capital gains in foreign currency) applies only when the capital asset transferred
is shares or debentures in Indian company. It has no application in respect of units.
3 Income from units is exempt U/s 10 (35).
4 Expenses in connection with earning income from units are not to be allowed as deduction. (S. 14A).

Chapter-15: Assessment of co-operative society - Summary
Deduction in respect of specified income of co-operative societies – S. 80P:

1 Deduction U/s 80P S. 80P provides deduction to a co-operative society against its GTI. [S. 80P (1)].
Deduction is allowed in respect of income specified in S. 80P (2) included in the GTI of Co-
operative society to the extent permitted in S. 80P (2).
2 Income specified in 100% of the following income included in the GTI of the Co-operative society shall be allowed
S. 80P (2). as deduction while computing its taxable income:
S. 80P (2) (a) (i) Profits attributable to carrying on the business of banking or providing credit facilities to its
members;
S. 80P (2) (a) (ii) Profits attributable to a cottage industry;
S. 80P (2) (a) (iii) Profits attributable to marketing of agricultural produce grown by its members;
S. 80P (2) (a) (iv) Profits attributable to purchase of agricultural implements, seeds, livestock or other articles
intended for agriculture for the purpose of supplying them to its members;
S. 80P (2) (a) (v) Profits attributable to processing, without the aid of power, of the agricultural produce of its
members;
S. 80P (2) (a) (vi) Profits attributable to collective disposal of the labour of its members;
S. 80P (2) (a) (vii) Profits attributable to fishing or allied activities, that is, the catching, curing, processing,
preserving, storing or marketing of fish or the purchase of materials and equipment in
connection therewith for the purpose of supplying them to its members;
S. 80P (2) (b) Profits of a Co-operative society, being a primary society engaged in supplying milk, oilseeds,
fruits or vegetables raised or grown by its members to-
A a federal co-operative society engaged in the business of supplying milk, oilseeds, fruits
or vegetables.
B the Government or a local authority
C a Government company or a statutory corporation engaged in supplying milk, oilseeds,
fruits or vegetables, as the case may be, to the public.
S. 80P (2) (d) Income by way of interest or dividends derived by the co-operative society from its investments
with any other co-operative society.
S. 80P (2) (e) Income derived by the co-operative society from the letting of godowns or warehouses for
storage, processing or facilitating the marketing of commodities.
S. 80P (2) (f) Interest income from securities and house property income in the case of a co-operative society
(other than housing society or an urban consumers’ society or a society carrying on transport
business or a society engaged in manufacturing operations with the aid of power) whose GTI
does not exceed Rs. 20000.
3 Adhoc deduction U/s In case of a co-operative society engaged in activities other than those specified in (2), so
80P (2) (c) much of its profits and gains attributable to such activities as does not exceed the following
shall be allowed as a deduction in computing its total income:
Where the co-operative society is a consumer co-operative society Rs. 100000
In any other case Rs. 50000
1 Deduction in respect of income Deduction in respect of income from carrying on the business of banking is
from banking available only to Primary agricultural credit society and Primary co-operative
agricultural and rural development bank. [S. 80P (4)].
2 Deduction in respect of Income Cold storage can be said to be a warehouse or godown where goods are
from cold storage. stored, and hence income from cold storage would be allowed as a deduction
U/s 80P. [District Co-operative Federation 271 ITR 22 (All)].
Important judicial rulings:

1 Karnataka State Co- Placement of reserve funds with SBI or RBI is in compliance with the statutory provisions
operative Apex Bank and is imperative for the purpose of carrying on banking business. Accordingly, the income
251 ITR 194. derived therefrom would be income from banking business and hence, eligible for
deduction U/s 80P (2) (a) (i).
2 Mehsana District Interest on Investment in Government securities out of statutory reserves by a co-operative
Central Co-operative society engaged in banking business is eligible for deduction U/s 80P (2) (a) (i). The
Bank Ltd 251 ITR 522 position will be the same even if the investments were made out of voluntary reserves
which are utilized in the course of its ordinary banking business.
Provision of safe deposit lockers is part of ordinary banking business. Locker rent derived
from the hiring out of safe deposit vaults is income from the business of banking and

Chapter-15: Assessment of co-operative society - Summary
therefore, deductible U/s 80P (2) (a) (i).

3 Madras Auto Rickshaw Selling goods on credit to the members does amount to provision of credit facility.
Drivers' Co-operative Accordingly, the profits therefrom is not eligible for deduction U/s 80P (2) (a) (i).
Society 249 ITR 330
(SC)
4 Kotagiri Industrial Co- The deduction is allowed U/s 80P only after the GTI of the assessee is computed in
operative Tea Factory accordance with the provisions of the Act. Further, the eligible income will be computed as
Ltd 224 ITR 604 (SC) + per S. 80AB, which provides for computation of profits in accordance with the provisions of
Shirke Construction the Act i.e. after setting of current year losses as well as past year’s unabsorbed losses or
Equipment Ltd 291 ITR allowances.
380 (SC).

Chapter-16: Taxation of dividend - Summary
1. Basics in taxation of dividend:

1 Basis of charge [S. 8] Though S. 145 (1) provides that the income chargeable U/H IFOS shall be computed in accordance with
the method of accounting regularly employed by the assessee, the chargeability of dividend is
independent of the method of accounting followed by the assessee. It is governed by the provisions of
S. 8.
Final dividend, if taxable, shall be taxed in the PY in which it is declared in the AGM.
Interim dividend, if taxable, shall be taxed in the PY in which it is unconditionally made available to the
shareholders.
Deemed dividend, if taxable, shall be taxed in the PY in which it is distributed or paid to the
shareholders.
2 Dividend fits only U/H Dividend, if taxable, shall be taxed only U/H IFOS irrespective of whether it is received by an investor or
IFOS. dealer. [S. 56 (2) (i)].
3 Deduction U/s 57 If dividend is taxable, the following may be allowed as deduction U/s 57:
(i) Realisation charges (commission or remuneration paid to banker or agent for realisation of dividend).
[S. 57 (i)].
(ii) Any other expenditure wholly and exclusively incurred for the purpose of making or earning dividend
income chargeable U/H IFOS. [S. 57 (iii)].
4 Significance of ‘for the Even if the dividend is not actually earned in the relevant PY, any expenditure wholly and exclusively
purpose of making or incurred for the purpose of making or earning dividend income shall be allowed as a deduction. What is
earning …’ in S. 57 (iii) relevant is incurring expenditure for the purpose of earning. Whether such purpose is achieved or not is
not relevant (i.e. whether income is earned or not is not relevant). [Rajendra Prasad Moody (SC)].
5 Disallowance U/s 14A. Expenditure incurred in earning exempted dividend shall not be eligible for deduction while computing
taxable income.
2. Taxability of dividend:
SN Nature of dividend Implications in the hands of shareholders Tax implications in the hands
of distributing company
1 Any dividend from Taxable U/H IFOS No obligation to pay DDT U/s
foreign company If the shareholder is an Indian company and has not less than 26% 115-O.
equity in the distributing foreign company and the dividend received
is not one covered by S. 2 (22) (e), then it shall suffer tax @ 15% on
a gross basis (i.e. No deductions U/s 57). [S. 115BBD].
In other cases, it shall suffer tax @ the FA rates and deductions
contemplated U/s 57 are available.
2 S. 2 (22) (e) dividend It is exempt in the hands of shareholders U/s 10 (34). S. 115BBDA There is DDT U/s 115-O @
from domestic company does not apply to this dividend. 34.944%.
3 Any other dividend from If the shareholder = PCT or PRT registered U/s 12AA, exemption is There is DDT obligation U/s
domestic company not available U/s 10 (34). However, exemption may be enjoyed U/s 115-O @ 20.555%.
11 (subject to fulfilment of conditions stipulated therein). [S. 11 (7)].
S. 115BBDA does not apply.
If the shareholder = Fund or institution or educational institution or There is DDT obligation U/s
university or medical institution or hospital referred to in S. 10 (23C) 115-O @ 20.555%.
(iv)/(v)/(vi)/(via), exemption is not available U/s 10 (34). However,
exemption may be enjoyed U/s 10 (23C) (subject to fulfilment of
conditions stipulated therein). [19th Proviso to S. 10 (23C)]. S.
115BBDA does not apply.
If the shareholder = domestic company, exemption is available U/s There is DDT obligation U/s
10 (34). S. 115BBDA does not apply. 115-O @ 20.555%.
If the shareholder = Business Trust and the distributing company is No DDT obligation for the
SPV in which business trust holds 100% equity and the dividend is SPV. [S. 115-O (7)].
declared out of profits of SPV reported after business trust acquired
100% equity holding, then the dividend is exempt in the hands of
business trust U/s 10 (23FC) (b). S. 115BBDA does not apply.
If the shareholder = NPST, the dividend declared is exempt U/s 10 No DDT obligation for the
(44). S. 115BBDA does not apply. distributing company. [S.
115-O (1A)].
If the distributing company is a unit of IFSC, deriving income solely in No DDT obligation of the unit
convertible foreign exchange and the dividend (interim or final) is of IFSC. [S.115-O].
declared by it out of its current income on or after 01.04.2017, it is

exempt in the hands of shareholder U/s 115-O (8). S. 115BBDA does

not apply.
If the shareholder = Sikkimese, the dividend is exempt U/s 10 There is DDT obligation for
(26AAA). S.115BBDA does not apply. the distributing company U/s
115-O @ 20.555%.
If the shareholder = a member of scheduled tribe residing in the There is DDT obligation for
states of Manipur, Tripura, Arunachal Pradesh, Mizoram and the distributing company U/s
Nagaland ladakh region of the State of Jammu and Kashmir, the 115-O @ 20.555%.
dividend is exempt U/s 10 (26). S. 115BBDA does not apply.
If the shareholder = MF or any other person whose dividend income There is DDT obligation for
is exempt under any clause (other than clause (34)) of S. 10, S. the distributing company U/s
115BBDA shall not apply. 115-O @ 20.555%.
If the shareholder = non-resident, the dividend income is exempt U/s There is DDT obligation for
10 (34). S. 115BBDA does not apply. the company U/s 115-O @
20.555%.
3. Provisions of S. 115BBDA:
1 Where the TI of a specified assessee being a resident in India includes any income in aggregated exceeding Rs. 10L,
by way of dividend (not being one covered by S. 2 (22) (e)) from domestic companies, such dividend in excess of Rs.
10L shall be charged to tax in the hands of the specified assessee @ 10% (flat).
2 No deduction in respect of any expenditure or allowance or set off shall be allowed.
3 Specified assessee means any person other than (a) a domestic company; (b) entities referred to in S. 10 (23C)
(iv)/(v)/(vi)/(via); (c) a trust or institution registered U/s 12AA.
4. Deemed dividend – S. 2 (22):

1 S. 2 (22) (a) Dividend includes any distribution by a company of its accumulated profits, if such distribution entails
release by the company to its shareholders of all or any part of the assets of the company.
Issue of equity shares as bonus shares to the equity shareholders ≠ dividend u/s 2 (22) (a). [Reason:
Issue of bonus shares does not entail release of assets.]
2 S. 2 (22) (b) Dividend includes any distribution to its shareholders by a company of debentures, debenture-stock, or
deposit certificates in any form, whether with or without interest and any distribution to its preference
shareholders of shares, by way of bonus, to the extent to which the company possesses accumulated
profits.
3 S. 2 (22) (c) Dividend includes any distribution made to shareholders of a company on its liquidation, to the extent to
which the distribution is attributable to the accumulated profits of the company immediately before its
liquidation. [Discussed in detail in Capital gains chapter].
4 S. 2 (22) (d) Dividend includes any distribution to its shareholders by a company on the reduction of its capital to the
extent to which the company possessed accumulated profits. [Discussed in detail in Capital gains
chapter].
5 S. 2 (22) (e) Dividend includes payment by way of loan or advance made by a closely held company to its major
Limb-1 shareholder, to the extent to which the company possesses accumulated profits.
Major shareholder means shareholder being a person who beneficially owns equity shares carrying not
less than 10% voting power.
6 S. 2 (22) (e) Dividend includes payments made by a closely held company on behalf of major shareholder, to the
Limb-2 extent to which the company possessed accumulated profits.
7 S. 2 (22) (e) Dividend includes payments made by a closely held company (a company other than a company in
Limb-3 which public are substantially interested) for the individual benefit of major shareholder, to the extent to
which the company possessed accumulated profits.
8 S. 2 (22) (e) Dividend includes payments by way of loan or advance made by a closely held company to a concern in
Limb-4 which the major shareholder is a member or partner and has substantial interest, to the extent to which
the company possessed accumulated profits.
Substantial interest means (a) beneficial ownership in equity shares carrying not less than 20% voting
power (if the concern = company) [S. 2 (32)]; (b) beneficial entitlement to not less than 20% of the profits
at any time during the relevant PY (if the concern ≠ company) [Explantion-3 to S. 2 (22)].

Points relating to dividend U/s 2 (22) (a)
1 Issue of preference shares as bonus shares to equity shareholder amounts to dividend U/s 2 (22) (a) in the PY of redemption
of preference bonus shares. DDT obligation U/s 115-O arises in the PY of redemption. [Shashi Bala Navinithlal (Guj)].

2 On redemption of these preference bonus shares, capital gains shall not be computed in the hands of the shareholders.
[Decision of SC in G. Narasimhan case applied].
3 Redemption of these preference shares amounts to buy back.
Therefore, the company becomes liable to pay BBDT U/s 115QA (if the shares are unlisted) in the PY of redemption. This is
not desirable since the company suffers DDT in the PY of redemption. It can’t be burden also with BBDT. However, there is no
specific provision to exclude the applicability of S. 115QA.
4 For the purpose of S. 2 (22) (a), accumulated profits shall include even capitalised profits (i.e. which is shown as part of share
capital upon issued of bonus shares).
Points relating to S. 2 (22) (e)
1 The ‘shareholder’ has to be only a person who is the beneficial owner of shares. The moment there is a shareholder, who
need not necessarily be a member of the company on its register, who is the beneficial owner of shares carrying not less than
10% voting power, S. 2 (22) (e) gets attracted. [National Travel services (2018) (SC) + Gopal & Sons (HUF) (2017) 391 ITR
1 (SC)].
2 For quantification of dividend U/s 2 (22) (e), the loan amount shall not be compared with the share of the lendee shareholder
in the accumulated profits of the company but with the accumulated profits possessed by the company. [Mayur Madhukant
Mehta (Guj)].
3 Repayment of loan within the relevant PY does not give immunity from the provisions of S. 2 (22) (e). [Tarulatha Shyam
(SC)].
4 To invoke S. 2 (22) (e), the AO need not see whether the loan is genuine or sham, secured or unsecured, short-term or long-
term, interest-bearing or interest-free etc.
5 Provisions of S. 2 (22) (e) apply only in respect of gratuitous loan given to the shareholder and not to loan given by the
company to the shareholder as a consideration for some benefit or advantage enjoyed from him. [Pradeep Kumar Malhothra
(Cal)].
6 S. 2 (22) (e) does not apply to advances given in the ordinary course of business. [Ankitech (P) Ltd (Del) + Ambassador
Travels (P) Ltd (Del)].
7 Any legal fiction shall be led to a logical conclusion. The aggregate amount of dividend taxable in the hands of the
shareholders cannot exceed the accumulated profits of the company.
Therefore, every time when loan or advance is given by the company to its major shareholder, and if it is taxed U/s 2 (22) (e)
in the hands of major shareholder, the amount so taxed shall be notionally reduced from the accumulated profits.
For quantification of dividend U/s 2 (22) (e) on the subsequent occasions, the loan or advance shall be compared with such
reduced accumulated profits. [G. Narasimhan (SC)].
8 Repayment of loan doesn’t augment the accumulated profits.
9 S. 2 (22) (e) Limb-4 dividend (if taxable) is taxable in the hands of major shareholder and not in the hands of concern. [Hotel
Hill Top (Raj) + Universal Medicare (P) Ltd (Bom)]. Dividend U/s 2 (22) (e) from a domestic company is exempt in the
hands of shareholder U/s 10 (34). However, the company shall be liable to pay DDT @ 34.944%.
10 To invoke S. 2 (22) (e) Limb-4, the voting power of the shareholder in the lending company who has substantial interest in the
lendee concern shall be atleast 10% on the date of loan.
Such shareholder shall be member or partner in the concern on the date of loan.
The profit entitlement of the shareholder (supra) in the lendee concern need not be 20% or more on the date of loan. It is
enough if it so at any time during the relevant PY. Note the words ‘at any time during the relevant PY’ in Explanation-3 to S. 2
(22).
11 If the loan is granted in the ordinary course of business of the lending company and the lending of money is substantial part of
the company’s business, the loan or advance to the major shareholder or the concern in which he is substantially interested
shall not be regarded as dividend u/s 2 (22) (e). [S. 2 (22) (ii)].
12 The word ‘substantial part’ in S. 2 (22) (ii) means ‘not small, trivial, insignificant or inconsequential. [Parle Plastic Ltd (Bom)].
13 Yardstick for measuring whether a particular business activity is substantial part or not could be (a) Turnover; (b) profit
reported; (c) capital employed or asset employed; (d) man power employed etc. There is no single yardstick which is
applicable in all cases. [Parle Plastic Ltd (Bom)].
14 Where a loan has been treated as dividend and subsequently the company declares and distributes dividend to all its
shareholders including the borrowing shareholder, and the dividend so paid is set off by the company against the previous
borrowing, the adjusted amount shall not again treated as a dividend. [S. 2 (22) (iii)].
Though this exclusion does not result in benefit to the shareholder, it helps the company to save DDT.
15 For the purpose of S. 2 (22) (a) to (d), accumulated profits shall include even capitalised profit. However, it is not so for the
purpose of S. 2 (22) (e).
Thus, for quantification of dividend U/s 2 (22) (e), the loan or advance shall be compared with the accumulated profits which
shall not include bonus shares shown as part of share capital. [P. K. Badani (Bom)].
16 Mr. V, holding 75% equity shares in X (P) Ltd, leased out a building to X (P) Ltd (to be used as factory building) for a nominal
rent on the understanding that X (P) Ltd shall bear repairs and renovation expenses. The building was, earlier, used for the
business carried on by Mr. V which was discontinued subsequently.

During the relevant PY, X (P) Ltd spent Rs. 1 Crore on repairs and renovation of the building. The AO invokes S. 2 (22) (e)
and treats Rs. 1 Crore as dividend in the hands of Mr. V.
Held, no money had been paid by way of advance or loan to Mr. V. Further, the amount spent was towards repairs and
renovations of premises owned by the assessee but occupied by the company as lessee. The expenses incurred by virtue of
repairs and renovation on the premises can’t be brought within ‘advance or loan’ given to Mr. V. It can’t be treated as a
payment by the company on behalf of the shareholder or for the individual benefit of such shareholder. Therefore, the question
of invoking S. 2 (22) (e) doesn’t arise. [Vir Vikram Vaid (2014) (Bom)].
5. Disallowance U/s 14A:

S. 14A (1) For the purpose of computing the total income under Chapter IV-D, no deduction shall be allowed in
respect of expenditure incurred by the assessee in relation to income which does not form part of total
income under this Act.
S. 14A (2) The AO shall determine the amount of expenditure incurred in relation to such income which does not part
of the total income under this Act in accordance with such method as may be prescribed, if the AO, having
regard to the account of the assessee, is not satisfied with the correctness of the claim of the assessee in
respect of such expenditure in relation to income which doesn’t form part of TI under this Act.
S. 14A (3) The provisions of S. 14A (2) shall also apply in relation to a case where an assessee claims that no
expenditure has been incurred by him in relation to income which does not form part of total income under
this Act.
R. 8D (New):
R. 8D (1) Where the AO, having regard to accounts of the assessee of a PY, is not satisfied with—
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the TI under the Act for such PY, he shall determine the
amount of expenditure in relation to such income in accordance with the provisions of R. 8D (2).
R, 8D (2) The expenditure in relation to income which does not form part of the TI shall be the aggregate of following
amounts, namely:—
(i) the amount of expenditure directly relating to income which does not form part of TI; and
(ii) an amount equal to one per cent of the annual average of the monthly average of the opening and
closing balances of the value of investment, income from which does not or shall not form part of TI:
Proviso to Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed
R. 8D (2) by the assessee
Issues in R. 8D:
1 The AO, for invoking R. 8D, has to record satisfaction as to why the disallowance offered by the assessee is not correct.
There should be a definite finding in this regard. Otherwise, R. 8D can’t be invoked. [Taikisha Engineering India Ltd (Del)].
2 When the assessee had not retained shares with the intention of earning dividend and dividend income was incidental to his
business of sale of shares, which remained unsold by the assessee, it could not be said that the expense incurred in
acquiring shares should be disallowed U/s 14A. [CCI Ltd (Kar) + Smt. Leena Ramachandran (Ker)].
3 S. 14A deals only with disallowance of expenditure incurred in relation to exempt income. Depreciation, being a statutory
allowance U/s 32, is outside the ambit of S. 14A. [Vishnu Anant Mahajan (Ahd (SB)).].
4 Expenses which are relatable to earning of exempt income shall be disallowed irrespective of the fact whether such income
has been earned during the FY or not. [CBDT Circular 5/2014].
5 S. 14A is not applicable for deductions, which are permissible and allowed under Chapter VI-A. It is applicable only if an
income is not included in the TI as per Chapter-III of the IT Act.
Deductions under Chapter VI-A are different from exemptions provided in Chapter-III.
The words ‘do not form part of TI under this Act’ used in S. 14A are significant and important.
Income which qualifies for deduction U/s 80C to S. 80U has to be first included in the total income of the assessee and then
allowed as deduction.
However, income referred to in Chapter III do not form part of TI and therefore, as per S. 14A, no deduction shall be allowed
in respect of expenses incurred by the assessee in relation to such income. [Banaskantha District Co-operative Milk
Producers Union Ltd (Guj) + Khribco (Del)].
6. Dividend Distribution Tax – S. 115-O:

1 What is DDT? [S. 115-O (1)] It means additional income tax payable by a company upon declaration or distribution
or payment of dividend to its shareholders.
Dividend may be final dividend or interim dividend or deemed dividend (not being one
covered by S. 2 (22) (e)).

It may be out of current profits or accumulated profits.

2 Who is liable to pay DDT? Domestic company. [S. 115-O (1)].
However, if the distributing company is a unit of IFSC, deriving income solely in
convertible foreign exchange and the dividend (interim or final) is declared by it out of
its current income on or after 01.04.2017, then it has no DDT obligation. [S. 115-O
(8)].
Also, if the distributing company is a SPV in which the business trust has 100%
equity and the dividend is declared out of profits reported after business trust has
acquired 100% equity holding, then the SPV has no DDT obligation. [S. 115-O (7)].
3 Quantification of DDT in case of Dividend referred to in S. 2 (22) (e) * 34.944%
dividend referred to in S. 2 (22) (e).
4 Quantification of DDT in case of [Dividend distributed to the shareholders – Permissible adjustments U/s 115-O (1A)]
dividend (not being one referred to in S. * [100/(100-15)] * 15% * 112% * 104%.
2 (22) (e). [S. 115-O (1) + S. 115-O
(1B)]
5 Adjustments permissible U/s 115-O (1A) I. Dividend (interim or final dividend) received from the subsidiary during the FY.
II. Dividend payable to NPST
6 Points related to adjustment-I Subsidiary should be a domestic company and it should have paid DDT on the
dividend declared by it; (or)
Subsidiary should be a foreign company, the dividend received from which is taxable
U/s 115BBD.
Same amount of dividend shall not be taken into account for reduction more than
once. [Proviso to S. 115-O (1A)].
7 Meaning of subsidiary for the purpose of A company shall be subsidiary of another company, if such other company holds
S. 115-O (1A). more than half in nominal value of the equity share capital of the company.
[Explanation to S. 115-O (1A)].
In other words, sub-subsidiary is not subsidiary.
8 DDT – an independent obligation. [S. Notwithstanding that no income tax is payable by a domestic company on its TI
115-O (2)]. computed in accordance with the provisions of the Act, the tax on distributed profits
(i.e. DDT) shall be payable by the distributing company.
9 Time limit for paying DDT. [S. 115-O The Principal officer of the company and the company shall be liable to pay DDT to
(3)]. the credit of CG within 14 days from the date of declaration or distribution or payment
(whichever is earliest).
10 DDT payment is final. [S. 115-O (4)]. DDT paid by the company shall be treated as the final payment of additional income
tax and no credit is available to the distributing company in respect of the amount of
tax so paid.
11 No deduction. [S. 115-O (5)]. Neither the distributing company nor the shareholder is eligible for any deduction in
respect of the dividend or DDT thereon.
12 Interest on delayed payment. [S. 115- If there is a delay in remittance of DDT, interest is levied @ 1% p.m or part thereof on
P]. the outstanding DDT for the period beginning with the expiry of 14 days (supra) and
ending with the date of payment of DDT.
13 Declaration as assessee-in-default. If the DDT is not paid as required U/s 115-O, the Principal officer and the domestic
[S.115-Q]. company shall be regarded as assessee-in-default.
This will enable the Department to initiate collection and recovery proceedings U/s
222 and S. 226 for recovery of DDT.
14 Penalty for default. [S. 271C]. If there is a failure to pay DDT as required U/s 115-O, then JCIT can levy penalty of a
sum equal to DDT.
However, no penalty will be levied if there is reasonable cause for the violation. [S.
273B].
15 Prosecution U/s 276B The Principal officer could be punished with rigorous imprisonment (minimum: 3
months; Maximum: 7 years) and fine for not paying DDT as required U/s 115-O.

Can DDT U/s 115-O be levied in respect DDT is a surrogate tax. Since dividend is non-agricultural income in the hands
of the dividend declared out of of the shareholder (even though it was declared out of agricultural income of
agricultural income? [Tata Tea and the company), it (in its entirety) shall suffer DDT.
Others [2017] 398 ITR 260 (SC)]

Chapter-17: Assessment of Trust – Summary
Provisions relating to Public trust:

1. Charitable purpose:
1 Meaning of (i) Relief of poor; (ii) Education; (iii) Medical relief; (iv) Yoga; (v) preservation of environment
charitable purpose (including forest, wildlife and watersheds); (vi) Preservation of monuments, places or objects of
[S. 2 (15)]. artistic or historic interest; (vii) Advancement of any other object of general public utility.
2 Restriction on Advancement of any other object of general public utility ≠ charitable purpose, if it involves
commercial activities carrying on of any activity in the nature of trade or commerce or business for a consideration
irrespective of the nature of use or application or retention, of income from such activity.
[Proviso to S. 2 (15)].
3 Relaxation from However, advancement of any other object of general public utility which involves carrying on
restriction (supra) commercial activities shall be regarded as charitable purpose if:
(i) such activities are undertaken in the course of actual carrying out of such advancement of
any other object of general public utility. [i.e. the commercial activities should be linked or
related to the objects].
(ii) the Ʃ receipts from such activity during the PY do not exceed 20% of the total receipts of the
trust for the PY. [Proviso to S. 2 (15)].
4 Limitation on the If the trust is created for the objects covered in Limb-1 to Limb-6 of S. 2 (15) or for religious
scope of proviso to purpose, then there is no restriction in carrying on commercial activities (whether linked to its
S. 2 (15) objects or otherwise) which are incidental to its objects.
Proviso to S. 2 (15) has no role to play.
The only requirement is to maintain separate books of accounts in respect of its commercial
activities. [S. 11 (4A)].
2. Conditions for availing exemption – S. 12A:

S. 12A (1) Registration PCT/PRT shall make an application to the CIT seeking registration in Form-10A. It
(aa) shall be accompanied by (a) Trust deed; (b) Earlier year’s account (Maximum 3
preceding PYs).
S. 12A (1) (b) Audit requirement PCT/PRT shall get its books of accounts audited by a CA if its TI for the relevant PY
without giving effect to the provisions of S. 11 and S. 12 exceeds the BEL.
Audit report shall be in Form-10B. It shall be duly verified and signed by the CA. It
shall set fort prescribed particulars.
It shall be electronically filed within the due date for filing ROI. [Proviso to R. 12 (2)].
S. 12A (1) Filing of timely PCT/PRT shall furnish the ROI for the relevant PY U/s 139 (4A) within the due date
(ba) return specified in S. 139 (1).
Application seeking registration where there is adoption or modification of objects:

1 If a PCT/PRT which has been granted registration adopts new objects or modifies its existing objects which do not
conform to the conditions of registration, then it shall make application in the prescribed form and manner to the
PCIT/CIT seeking registration.
2 The application shall be made within a period of 30 days from the date of the adoption or modification (supra). [S. 12A
(1) (ab)].
3. Procedure for registration:

S. 12AA (1) Calling for documents The CIT, upon receipt of application seeking registration, shall verify the objects
(a) and conducting of the trust and genuineness of its activities.
inquiry For this purpose, the CIT may call for such documents or information from the
trust as he thinks necessary.
He may also conduct such inquiry as he deems fit.
S. 12AA (1) Passing of order If the CIT is satisfied about the objects of the trust and the genuineness of the
(b) (i) granting registration activities of the trust, he may pass an order in writing granting registration.
S. 12AA (1) Passing of order If he is not satisfied, he may pass an order denying registration through an order
(b) (ii) denying registration in writing
Proviso to S. OBH Before passing an order denying registration, the CIT shall grant opportunity of
12AA (1) (b) being heard to the trust.
(ii)
S. 12AA (2) Time limit for passing The order granting or denying registration shall be passed within 6 months from
order U/s 12AA (1) (b) the end of the month in which application was received.


1 Extension of the objects of the trust beyond the territory of India can’t be a ground for denial of registration. [M. K.
Nambyar Saarc Law Charitable Trust (Del)].
2 Where the CIT has neither passed an order granting registration nor passed an order denying registration within 6
months (supra), the registration is deemed to have been granted. [Society for promotion of education, Allahabad
(SC)].
3 If the trust is newly created and is yet to commence its activities, it is enough if the CIT verifies its objects. Registration
cannot be denied on the ground that the trust is yet to commence its activities. [Meenakshi Amma Endowment Trust
(Kar)].
4 Where the settler has given power to the trustees to alter the objects specified in the trust deed, there is no need for the
approval of Civil Court for amending the trust deed. [Kamala Town Trust (SC)].
4. From when the exemption U/s 11 and S. 12 is available?

S. 12A (2) From when exemption is Exemption U/s 11 and S. 12 is available to the trust from the PY in which the
available? application was made seeking registration.
Proviso-1 to Benefit of roll back If, on the date of grant of registration, the proceedings in relation to
S. 12A (2) assessment for any earlier PY (s) is pending, then the AO shall grant
exemption U/s 11 and S. 12 for such PY (s) provided the objects and
activities of the trust remains the same for such PY as that of those upon
verification of which registration was granted.
Proviso-2 to No reopening U/s 147 The AO shall not take any action U/s 147 for any earlier PY solely on the
S. 12A (2) ground of non-registration of such trust for such PY.
Proviso-3 to When the benefit of Nothing contained in Proviso-1 and Proviso-2 are applicable in case of any
S. 12A (2) Proviso-1 and Proviso-2 trust which was refused registration or the registration granted was cancelled
are not applicable? at any time before.
5. Cancellation of registration:
S. 12AA (3) Grounds for cancellation (i) Activities of the trust are not genuine or the activities are not carried out in
of registration accordance with its objects.
S. 12AA (4) (ii) Income or property of the trust is applied or used for the benefit of S. 13
(3) persons (like author, trustee, relatives etc). (Unless there is a reasonable
cause).
(iii) Funds of the trust are invested or deposited in a manner not permitted
U/s 11 (5). (unless there is a reasonable cause)
S. 12AA (3) & Procedure to be followed OBH should be given to the trust before passing an order cancelling the
(4) in cancellation registration.
Cancellation should be through an order in writing.

1 If a trust becomes non-charitable No. Registration can be cancelled only under the circumstances
because of Proviso to S. 2 (15), is it contemplated U/s 12AA (3) and S. 12AA (4). [Karnataka Industrial Area
justified for the CIT to cancel the Development Board (Kar) + T. N. Cricket Association (Mad) + CBDT
registration? Circular 21/2016].
2 S. 12AA (3) or S. 12AA (4) order – Order passed U/s 12AA (3) or S. 12AA (4) cancelling registration is
appealable? appealable before ITAT. [S. 253 (1)].
6. Tax on accreted income – S. 115-TD:

1 What is tax on accreted It is an additional income-tax payable U/s 115-TD by a trust or institution registered U/s
income? 12AA.
2 When tax on accreted Circumstance-I: Trust or institution gets converted into a form which is not eligible for
income is payable? registration U/s 12AA.
Circumstance-II: Trust or institution gets merged with a non-compatible entity.
Circumstance-III: Trust or institution gets dissolved and its assets are not transferred
to specified entities within specified time.
3 Quantum of tax on accreted Accreted income of the trust or institution on the specified date * MMR (i.e. 35.88%).
income.
4 Payment of tax on accreted The tax on accreted income is in addition to the income-tax chargeable in respect of
income = Independent the total income of the trust or institution.
obligation. In the aforesaid circumstances, the trust or institution shall pay tax on accreted income,

even if no income-tax is payable by it on its TI.

5 Circumstance-1: Conversion of trust or institution into a form which is not eligible for grant of registration U/s
12AA:
(a) When can be say that the Circumstance-1A: Registration granted to the trust or institution U/s 12AA got
trust or institution has got cancelled.
converted into a form which Circumstance-1B: Trust or institution has adopted or undertaken modification of its
is not eligible for grant of objects which do not confirm to the conditions of registration and trust or institution has
registration? not applied for fresh registration U/s 12AA in the relevant PY.
Circumstance-1C: Trust or institution has adopted or undertaken modification of its
objects which do not confirm to the conditions of registration and trust or institution has
applied for fresh registration U/s 12AA and the aforesaid application has been rejected.
(b) Manner of computation of 1 ƩFMV of total assets (not being fictitious assets) of the *****
accreted income on trust or institution on the specified date
specified date 2 Total liability (not being contingent liabilities) of the (*****)
trust on the specified date
3 Accreted income (1-2) *****
(c) Specified date Date of conversion
(d) Exclusions from assets for Exclusion-1: Assets acquired out of agricultural income referred in S. 10 (1).
computing accreted income Exclusion-2: Assets acquired during the period beginning from the date of creation of
trust or institution and ending on the date on which registration becomes effective.
[Provided the trust or institution has not been allowed any benefit U/s 11 and S. 12
during this period].
(e) Exclusion of related Liabilities related to the assets excluded shall be excluded from liabilities which are
liabilities considered for computing accreted income.
(f) Date of conversion in Date of order cancelling the registration.
circumstance-1A
(g) Date of conversion in Date of adoption or modification of objects.
circumstance-1B & 1C
(h) Time limit for payment of Situation Narration of the situation Time-limit for payment
tax on accreted income in 1 Time-limit for filing appeal U/s 253 Within 14 days from the
circumstance-1A against the order cancelling the date on which the period for
registration expired and no appeal has filing appeal U/s 253
been filed by the trust or institution. expires.
2 Appeal was made against the Within 14 days from the
cancellation order and the appellate date on which order in
authority confirms cancellation appeal is received by the
trust or institution.
(i) Time limit for payment of Within 14 days from the end of the relevant PY.
tax on accreted income in
circumstance-1B
(j) Time limit for payment of Situation Narration of the situation Time-limit for payment
tax on accreted income in 1 Time-limit for filing appeal U/s 253 Within 14 days from the
circumstance-1C against the order rejecting the date on which the period for
application has expired and no appeal filing appeal U/s 253
has been filed by the trust or institution. expires.
2 Appeal was made against the rejection Within 14 days from the
order and the appellate authority upholds date on which order in
rejection of application. appeal is received by the
trust or institution.
6 Circumstance-2: Merger of trust or institution with non-compatible entity
(a) What do we mean by It means merger of trust or institution with an entity (other than an entity which is a trust
merger of trust or institution or institution having similar objects and registered U/s 12AA).
with non-compatible entity?
(b) Manner of computation of 1 ƩFMV of total assets (not being fictitious assets) of the *****
accreted income on the trust or institution on the specified date
specified date. 2 Total liability (not being contingent or unascertained (*****)
liabilities) of the trust or institution on the specified
date


(c) Specified date Date of merger.
(d) Exclusions from assets for Same as in point 5 (d).
computing accreted
income.
(e) Exclusion of related Liabilities related to the assets excluded shall be excluded from liabilities which are
liabilities considered for computing accreted income.
(f) Time limit for payment of Within 14 days from the date of merger.
tax on accreted income.
7 Circumstance-3: Dissolution of trust or institution – not followed by transfer of assets to specified entities
within specified time.
(a) Specified entities Any trust or institution registered U/s 12AA.
Any fund or institution or trust or University or other educational institution or hospital or
medical institution referred to in S. 10 (23C).
(b) Specified time 12 months from the end of the month in which the dissolution takes place.
(c) Manner of computation of 1 ƩFMV of total assets (not being fictitious assets) of the *****
accreted income on the trust or institution on the specified date
specified date. 2 Total liability (not being contingent or unascertained (*****)
liabilities) of the trust or institution on the specified
date
(d) Specified date Date of dissolution
(e) Exclusions from assets for Exclusion-1: Assets acquired out of agricultural income referred in S. 10 (1).
computing accreted income Exclusion-2: Assets acquired during the period beginning from the date of creation of
trust or institution and ending on the date on which registration becomes effective.
[Provided the trust or institution has not been allowed any benefit U/s 11 and S. 12
during this period].
Exclusion-3: Assets transferred to trust or institution registered U/s 12AA or entities
referred to in S. 10 (23C) within the aforesaid period of 12 months.
(f) Time limit for payment of Within 14 days from the date on which the period of aforesaid 12 months expires.
tax on accreted income.
8 Interest payable for non- If tax on accreted income is not paid within the time allowed U/s 115-TD (i.e. 14 days),
payment of tax on accreted simple interest shall be paid @ 1% p.m or part thereof on such tax for the period
income. [S. 115-TE]. beginning on the date immediately after the last date on which such tax was payable
and ending with the date on which the tax is actually paid.
9 Trust or institution = If tax on accreted income is not paid in accordance with the provisions of S. 115-TD,
deemed to be AID for not the Principal officer or trustee and trust or institution shall be regarded as assessee-in-
honouring S. 115-TD. [S. default.
115-TF (1)]. Collection and recovery proceedings could be initiated.
10 Provisions of S. 115-TF (2) If the trust or institution gets dissolved and assets are transferred to (a) trust or
institution registered U/s 12AA or entities referred to in S. 10 (23C) beyond the period
of 12 months (supra); or (b) entities other than trust or institution registered U/s 12AA or
entities referred to in S. 10 (23C), then the transferee shall be regarded as AID in
respect of tax on accreted income and interest thereon.
Collection and recovery proceedings could be initiated against the transferee.
However, the liability of the transferee shall be limited to the extent of assets received
by him.
11 Cost of acquisition of the FMV of the capital asset which has been taken into account for computation of
capital asset in the hands of accreted income as on the date of dissolution.
the transferee for
computation of capital
gains. [S. 49 (8)].
Determination of FMV of assets for computing accreted income – R. 17CB:

SN Asset Situation Manner of determination of FMV
1 Quoted shares and I. Traded on the FMV = (Lowest price quoted on RSE on the specified date + Highest
securities specified date price quoted on RSE on the specified date]/2
II. Not traded on the FMV = (Lowest price quoted on RSE on a date immediately preceding

specified date the specified date when such shares and securities were traded on a
RSE + Highest price quoted on RSE on such immediately preceding
date)/2.
2 Non-quoted equity FMV = (A+B-L)*PV/PE
shares A = Book value of all assets (other than bullion, jewellery, precious
stone, artistic work, shares, securities and immovable properties).
B = FMV of bullion, jewellery, precious stone, artistic work, shares,
securities and immovable properties determined in accordance with R.
17CB.
L = Book value of liabilities not being contingent or unascertained
liabilities.
3 Non quoted shares FMV = Price it would fetch if sold in the open market on the specified
and securities other date on the basis of valuation report from a merchant banker or FCA.
than equity shares
4 Immovable FMV = Higher of (a) price that the property shall ordinarily fetch if sold in
properties the open market on the specified date on the basis of the valuation
report from a registered valuer; (b) SDV on the specified date.
6 Business undertaking FMV = A+B-L
5 Any other asset FMV = price that the asset shall ordinarily fetch if sold in the open
market on the specified date on the basis of the valuation report from a
registered valuer;
7. Exemption U/s 11 and S. 12:
I. Exemption U/s 11 (1) (a) & S. 11 (1) (d):

1 Income of Income derived from PHUT
PCT/PRT Voluntary contributions
Profits from business which is incidental to its objects
2 Tax Applied for charitable or religious purpose in Exempt U/s 11 (1) (a)
treatment of India
income Applied for charitable or religious purpose Not exempt
derived from outside India
PHUT Applied for any purpose other than Not exempt
charitable/religious purpose
Accumulated for charitable or religious purpose Unconditionally exempt up to 15% of income derived from
in India PHUT. [S. 11 (1) (a)]
Excess accumulation is not exempt U/s 11 (1) (a). However
may be eligible for conditional exemption U/s 11 (2).
3 Tax Anonymous contributions (i.e. the contributions No exemption U/s 11. [S. 13 (7)].
treatment of in respect of which the identity of the donor can’t
voluntary be established from the records of the donee
contributions trust) received by a PCT (registered U/s 12AA)
Anonymous contributions received by a PRT Same treatment as that is given to the non-anonymous
(registered U/s 12AA) donations.
Non-anonymous donations Where it is given with a specific direction that it shall form
part of the corpus of the trust, it is called corpus
contribution. It is exempt unconditionally U/s 11 (1) (d).
Where no such direction is given by the donor, it is called
non-corpus contribution. It shall be regarded as income
derived from PHUT. [S. 12 (1)]. Exemption is available in
accordance with the provisions of S. 11 (1) (a).
4 Direction Money deposited into the donation box which bears the inscription that the money so deposited shall form part
need not be of the corpus of the trust shall be treated as corpus donation.
explicit Though the donor doesn’t give any explicit direction to treat it as part of corpus, it is implied. [Maha Devi Tirath
Shardama Seva Sangh (Chd)].
5 Profits from If the commercial activity is incidental to its objects and separate books of accounts are maintained in respect
incidental thereof, then the business profits or surplus from commercial activities shall be regarded as income derived

business from PHUT.

Exemption may be claimed in accordance with the provisions of S. 11 (1) (a). [S. 11 (4A)].
Some important issues:
1 Application of income can be even on capital front. [S. R.MM.CTM. Tiruppani Trust (SC)].
2 Repayment of loan (originally taken for fulfillment of objects of the trust) out of income of relevant PY amounts to
application of that year’s income and accordingly, to that extent, it is exempt U/s 11 (1) (a). [Janmabhoomi Press
Trust (Mad)].
3 Where non-corpus donations are made out of income of relevant PY to trusts with similar objects, it shall be regarded
as application of income and to that extent, it is exempt U/s 11 (1) (a). The exemption to the donor trust does not
depend on as to whether the sum donated has been applied by the donee trust or not. [Sarala Devi Sarabhai Trust
(Guj)].
4 Corpus donations to trust registered U/s 12AA or to institutions referred to in S. 10 (23C) shall not be regarded as
application of income by the donor trust. [Expalanation-2 to S. 11 (1)]. Therefore, it is not eligible for exemption in the
hands of the donor trust.
5 Giving loan for carrying out the objects of the trust amounts to application of income. [Cutchi Menon Union (Kar)].
6 Amount set-apart or ear-marked for a specific purpose and is not available for the purposes of the trust anymore, it is
to be regarded as applied, though it is yet to be spent. [Nizam’s Charitable Trust (AP)].
7 Where amounts were withdrawn from the corpus in the earlier years for carrying out the objects of the trust and the
corpus is recouped out of the income of the relevant PY, such recoupment of corpus amounts to application of income.
Hence, it is eligible for exemption U/s 11 (1) (a). [Matriseva Trust (Mad)].
8 ‘Income’ in S. 11 (1) shall be understood in commercial sense. It shall be computed in accordance with the rules of
accountancy and not in accordance with the provisions of the Act. [Giridharilal Shewnarain Tantia Trust (Cal)].
9 Where a trust has been granted registration U/s 12AA (1) (b) and the said registration is in force for any PY, then,
nothing contained in S. 10 shall operate to exclude any income derived from PHUT from the total income for that PY.
[S. 11 (7)]. However, exemption U/s 10 (1) and S. 10 (23C) could be enjoyed still.
10 Entities referred to in S. 10 (23C) (iv)/(v)/(vi)/(via) can’t enjoy exemption U/s 10 except U/s 10 (1) and S. 10 (23C).
11 1 Expenses incurred for the purpose of earning income from It is deducted in arriving at income derived
PHUT from PHUT.
2 Expenses incurred for maintaining the administrative It is treated as application of income of the
machinery of the trust. trust.
12 Payment of tax dues by the trust amounts to application. [Janaki Ammal Ayya Nadar Trust (Mad)].
13 Income, for the purpose of application shall be determined without any deduction or allowance by way of depreciation
in respect of any asset, the acquisition of which has been claimed as an application of income in the same or any other
PY. [S. 11 (6) + Explanation to S. 10 (23C)].
II. Deemed application – Explanation-1 to S. 11 (1):

1 If there is a shortfall in application of income due to non-receipt of income accrued, the trust can exercise the option
under Explanation-1 to S. 11 to treat the shortfall as being applied. However, the trust has to apply the sum deemed to
have been applied in the PY of receipt or in the PY succeeding the PY of receipt. The shortfall which has not been made
good shall be brought to tax in the PY succeeding the PY of receipt. [S. 11 (1B)].
2 If there is a shortfall in application of income due to any reason other than non-receipt of income accrued, the trust can
exercise the option under Explanation-1 to S. 11 to treat the shortfall as being applied. However, the trust has to apply
the sum deemed to have been applied in the succeeding PY. The shortfall which has not been made good shall be
brought to tax in the succeeding PY. [S. 11 (1B)].
Explanation to S. 11 (2):
1 Where the PCT/PRT enjoyed the benefit of deemed application in view of Explanation-1 to S. 11 (1) in the earlier year
and in the subsequent PY the short fall of the earlier year was made good by donating to another trust registered U/s
12AA or to institutions referred to in S. 10 (23C) (iv)/(v)/(vi)/(via), that shall not amount to application of income for
charitable or religious purpose.
Accordingly, the sum donated to make good the short fall (supra) shall be taxed in the hands of the trust U/s 11 (1B).
[Explanation to S. 11 (2)].
2 However, the Explanation to S. 11 (2) has no role to play where donations are made to another trust registered U/s
12AA or to institutions referred to in S. 10 (23C) (iv)/(v)/(vi)/(via) out of free accumulations of earlier years.
Exemption U/s 11 (1) (a) in respect of free accumulation is unconditional. It can’t be withdrawn invoking Explanation to
S. 11 (2). [Bagri Foundation (Delhi)].
Note:
The rejection by the CIT, of the application made by a trust for approval U/s 80G, on the ground that it had not spent 85% of
its income for charitable purposes, is not valid. [Shree Govindbhai Jethalal Nathavani Charitable Trust (2015) 373 ITR
619].

Amendments brought out by Finance Act 2018:

A new Explanation 3 has been inserted after S. 11 (1) w.e.f AY 2019-20 to provide that for the purposes of determining the
amount of application of income U/s 11 (1) (a), the provisions of S. 40 (a) (ia), and of S. 40A (3) / (3A), shall, mutatis
mutandis, apply as they apply in computing the income chargeable U/H PGBP.
III. Deemed application of capital gains – S. 11 (1A):

1 Deemed The capital gains arising to a PCT or PRT (Registered U/s 12AA) from transfer of a capital asset
application of held under trust for charitable or religious purpose shall be deemed to have been applied for
capital gains charitable or religious purpose and accordingly, are exempt U/s 11 (1) (a), if the net consideration
arising on account of transfer of the capital asset is utilised for acquisition of another capital asset
to be so held.
Where only a part of the net consideration is utilised for acquiring new asset, then the capital gains
to the extent of the difference between the amount utilised and the cost of transferred asset shall
be regarded as applied for charitable or religious purpose. Only to that extent it exempt U/s 11 (1)
(a)
2 Net consideration Full value of consideration – Expenses incurred in connection with transfer.
3 Cost of Ʃ Cost of acquisition + Cost of improvement.
transferred asset
4 Computation of It is not done in accordance with the provisions of S. 48. Head-wise computation does not apply to
capital gains PCT/PRT. Therefore, the question of doing indexation does not arise.
Note:
1 In English mortgage, there is absolute transfer of mortgaged property from mortgagor to the mortgagee on a condition
that the mortgagee shall re-transfer the property on repayment of loan. [Bafna Charitable trust Vs CIT 230 ITR 864
(Bom)].
2 If the trust invests the net consideration arising from a capital asset held as property held under trust in an English
mortgage, the requirements of S. 11 (1A) are satisfied.
IV. Conditional exemption in respect of accumulation in excess of 15% - S. 11 (2):
1 Tax treatment of accumulation of 15% free accumulation is unconditionally exempt U/s 11 (1) (a).
income by PCT/PRT Accumulation in excess of 15% of income derived from PHUT is eligible for
exemption U/s 11 (2) (subject to conditions stipulated therein).
2 Conditions to be fulfilled for 1. Trust shall file a statement (in Form-10) to the AO within the due date for filing
enjoying exemption U/s 11 (2). [S. of ROI.
11 (2) + S. 13 (9)] 2. Accumulation in excess of 15% shall be invested or deposited in a manner laid
down in S. 11 (5).
3. ROI for the relevant PY shall be filed within the due date referred to in S. 139
(1).
3 Contents for Form-10 Specific purpose for which accumulation is made in excess of 15%.
Period for excessive accumulation. [Period specified can’t exceed 5 years].
4 Mere listing of objects in Form-10 – Generality of objects can’t take the place of specificity of purpose.
not suffice. Merely listing the objects is not sufficient to enjoy the exemption U/s 11 (2).
The purpose mentioned shall be precise and specific to enable the AO to
appreciate the necessity for excessive accumulation. There is no bar on plurality
of purpose. [Trustees of Singhania Charitable Trust (Cal)].
However, a contrary liberal view is expressed by the Delhi HC in Hotel and
Restaurant Association.
V. Circumstances under which the exemption granted U/s 11 (2) could be withdrawn – S. 11 (3):
SN Circumstance Tax implications
1 Excessive accumulation for which exemption was enjoyed U/s 11 (2) It shall be deemed to be the income of the
is applied for purposes other than charitable or religious purposes PY in which it is so applied.
mentioned in Form-10.
ceases to be accumulated for the purposes mentioned in Form-10. PY in which it ceases to be so accumulated.
ceases to remain invested or deposited in any of the forms or modes PY in which it ceases to remain so invested

specified in S. 11 (5). or deposited.

is not utilised for the purpose for which it is so accumulated or set PY immediately following the expiry of the
apart during the period specified in Form-10 or in the year period specified in Form-10.
immediately following the expiry thereof,
is donated to any trust or institution registered U/s 12AA or to PY in which it is donated.
institutions referred to in S. 10 (23C) (iv) or (v) or (vi) or (via).
VI. Change in purpose of accumulation – Procedure – S. 11 (3A):
1 Where due to circumstances beyond the control of trust, excessive accumulation in respect of exemption was enjoyed
U/s 11 (2) cannot be applied for the purpose for which it was accumulated or set apart, the AO may, on an application
made to him in this behalf, allow the trust to apply such income for such other charitable or religious purpose in India as
is specified in the application by the trust and as is in conformity with the objects of the trust.
2 Thereupon, the provisions of S. 11 (3) shall apply as if the purpose specified by the trust in the application U/s 11 (3A)
were a purpose specified in Form-10.
3 If the trust specifies donating to another trust registered U/s 12AA or to institutions referred to in S. 10 (23C) as an
alternate purpose, that shall not be accepted by the AO U/s 11 (3A) unless the trust is getting dissolved. [Proviso-1 and
Proviso-2 to S. 11 (3A)].
VII. Business undertaking held under trust – AO empowered to compute income therefrom – S. 11 (4):
1 Where the trust claims a business undertaking as PHUT and the income therefrom as exempt, the AO shall have power
to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment.
2 Where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess
shall be deemed to be applied to purposes other than charitable or religious purposes. [S. 11 (4)].
VIII. Modes of investment of trust funds – S. 11 (5):

A PCT or PRT (Registered U/s 12AA) can invest or deposit money in any of the following forms and modes, namely:
1 Investment in government securities (like Indira Vikas Patra, Kishan Vikas Patra etc).
2 Deposit with the office savings bank.
3 Deposit with scheduled banks or co-operative banks (including co-operative land mortgage bank, co-operative land
development bank etc).
4 Investment in units of UTI.
5 Investment in CG or SG securities.
6 Investment in debentures issued by or on behalf of any company or corporation. [However, both the principal and
interest thereon must have been guaranteed by the CG or SG].
7 Investment or deposits in any PSC. [Where an investment is made in the shares of any PSC and such PSC ceases to
be a PSC, the investment so made shall be deemed to be an investment made for a period of 3 years from the date of
such cessation and in the case of any other investment or deposit, till the date of its maturity].
8 Investment in bonds of approved financial corporation providing long term finance for industrial development in India
and eligible for deduction U/s 36 (1) (viii).
9 Investment in bonds of approved public companies whose principal object is to provide long-term finance for
construction or purchase of houses in India for residential purposes and eligible for deduction U/s 36 (1) (viii).
10 Deposits with or investment in any bonds issued by a public company formed and registered in India with the main
object of carrying on the business of providing long-term finance for urban infrastructure in India.
‘Long term finance’ means any loan or advance where the terms under which moneys are loaned or advance provide
for repayment along with interest thereof during a period of not less than 5 years.
‘Urban infrastructure’ means a project for providing potable water supply, sanitation and sewerage, drainage, solid
waste management, road, bridges and flyovers or urban transport.
11 Investment in immovable property excluding plant and machinery, not being plant and machinery installed in a building
for the convenient occupation thereof.
12 Deposit with IDBI.
13 Any other mode of investment or deposit as may be prescribed.
R. 17C prescribes the following other modes:
(a) Investment in units issued under any scheme of MF referred to in S. 10 (23D).
(b) Any transfer of deposits to Public Account of India.
(c) Deposits made with an authority constituted in India or under any law enacted either for the purpose of dealing with
and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of

cities, towns and villages or for both;

(d) Investment by way of acquiring equity shares of a depository.
(e)Investment by way of acquiring shares of NSDC.
(f) Investment in debt instruments issued by any infrastructure finance company registered with RBI.
(g) Investment in stock certificates as defined in Sovereign Gold Bonds Schemes, 2015.
Note:
In case where the properties bequeathed to a trust could not be transferred to it due to ongoing court litigation and pendency
of probate proceedings, the provisions of S. 11 (5) are not attracted and consequently, the provisions of S. 13 (1) (d) do not
get invoked. [Khetri Trust (2014) (Delhi)]:
IX. Circumstances in which exemption U/s 11 and S. 12 is not available – S. 13:

Provisions of S. 13 Income from the property held under a trust for private religious purposes which does not enure for
(1) (a) the benefit of the public is not eligible for exemption U/s 11 and S. 12.
Provisions of S. 13 Income of a charitable trust created for the benefit of any particular religious community or caste is
(1) (b) not eligible for exemption U/s 11 and S. 12.
Explanation-2 to S. A trust or institution created or established for the benefit of SC, BC, ST or women and children
13 shall not be deemed to be a trust or institution created or established for the benefit of a religious
community or caste within the meaning of S. 13 (1) (b).
Provisions of S. 13 If income or property of the PCT or PRT is used or applied, directly or indirectly, for the benefit of
(1) (c) persons referred to in S. 13 (3), the trust will lose exemption U/s 11 and S. 12.
S. 13 (3) persons (1) the author of the trust or the founder of the institution;
(2) any person who has made a substantial contribution to the trust or institution, that is to say, any
person whose total contribution up to the end of the relevant PY exceeds Rs. 50000;
(3) where such author, founder or person is a HUF, a member of the family;
(4) any trustee of the trust or manager (by whatever name called) of the institution;
(5) any relative of any such author, founder, person, member, trustee or manager as aforesaid;
(6) any concern in which person (supra) has a substantial interest.
Explanation-1 to S. (1) Spouse of the individual;
13 (Meaning of (2) Brother or sister of the individual;
relative) (3) Brother or sister of the spouse of the individual;
(4) Any lineal ascendant or descendant of the individual;
(5) Any lineal ascendant or descendant of the spouse;
(6) spouse of a person referred to in (2), (3), (4) or (5);
(7) Any lineal descendant of a brother or sister of either the individual or of the spouse.
Explanation-3 to S. A person referred to in S. 13 (3) shall be deemed to have substantial interest in a concern, being
13 (substantial company, if its equity shares carrying not less than 20% of the voting power are, at any time during
interest in concern) the PY owned beneficially by such person or partly by such person and partly by one or more of the
other persons referred to in S. 13 (3).
A person referred to in S. 13 (3) shall be deemed to have substantial interest in any other concern,
if such person is entitled, or such person and one or more of the other person referred to in S. 13
(3) are entitled in the aggregate, at any time during the PY, to not less than 20% of the profits of
such concern.
Circumstances in which income or property of PCT or PRT is deemed to have been used or applied for the benefit
of S. 13 (3) persons [S. 13 (2)].
1. Loan without adequate Any part of the income or property of the trust or institution is, or continues to be lent to any
interest or adequate person referred to in S. 13 (3) for any period during the PY without either adequate security
security. [S. 13 (2) (a)]. or adequate interest or both.
2. Allowing use of property Any land or building of the trust or institution is, or continues to be, made available for use
without adequate rent. [S. of any person referred to in S. 13 (3), for any period during the PY without charging
13 (2) (b)]. adequate rent or other compensation.
3. Excess payment for Any amount is paid by way of salary, allowance or otherwise during the PY to any person
services. [S. 13 (2) (c)]. referred to in S. 13 (3) out of the resources of the trust or institution for services rendered
by that person to such trust or institution and the amount so paid is in excess of what may
be reasonably paid for such services.
4. Inadequate remuneration Services of the trust or institution are made available to any person referred to in S. 13 (3)
for services rendered. [S. during the previous year without adequate remuneration or other compensation.
13 (2) (d)].
5. Excess payment for Any share/security/other property is purchased by trust or institution from any person

purchase of property. [S. referred to in S. 13 (3) during the PY for consideration which is more than adequate.
13 (2) (e)].
6. Inadequate Any share or security or other property is sold by the trust or institution to any person
consideration for property referred to in S. 13 (3) during the PY for consideration which is less than adequate.
sold. [S. 13 (2) (f)].
7. Diversion of income or Any income or property of the trust or institution is diverted during the PY in favour of any
property exceeding Rs. person referred to in S. 13 (3).
1000. [S. 13 (2) (g)].
8. Investment in a concern Any funds of the trust or institution are, or continue to remain invested for any period during
in which S. 13 (3) person is the PY in any concern in which any of the person referred to in S. 13 (3) has a substantial
substantially interested. [S. interest.
13 (2) (h)].
Exemption not to be denied The value of any services, being medical or educational services, made available by any
to charitable trusts charitable or religious trust running a hospital or medical institution or an educational
providing educational or institution, to any person referred to in S. 13 (3), shall be deemed to be income of such trust
medical facilities to or institution derived from property held under trust wholly for charitable or religious
specified persons. [S. 13 purposes during the PY in which such services are so provided and shall be chargeable to
(6)]. income-tax notwithstanding the provisions of S. 11 (1).
Notwithstanding anything contained in S. 13 (1) (c) and S. 13 (2), but without prejudice to
the provisions contained in S. 12 (2), in the case of a charitable or religious trust running an
educational institution or a medical institution or a hospital, the exemption U/s 11 or 12 shall
not be denied in relation to any income, other than the income referred to in S. 12 (2), by
reason only that such trust has provided educational or medical facilities to persons
referred to in S. 13 (3).
Provisions of S. 13 (1) (d) if for any period during the PY, any funds of the trust or institution are invested or deposited
otherwise than in any one or more of the modes specified in S. 11 (5), the trust or institution
will lose exemption U/s 11 and S. 12.
Proviso to S. 13 (1) (d) Any funds representing the profits and gains of business incidental to its objects (in respect
of which separate books of accounts are maintained) may be invested or deposited even in
a manner other than a manner specified in S. 11 (5).
Acquisition of asset, though not covered by S. 11 (5), will not result in forfeiture of
exemption U/s 11 and S. 12 for a period of 1 year from the end of the PY in which such
asset is acquired.
Note:
1 For claiming exemption U/s 11 (1) (d) in respect of corpus donations and exemption U/s 11 (1) (a) in respect of 15% free
accumulation, the trust is not required to invest in the forms and modes specified U/s 11 (5). However, for claiming
exemption U/s 11 (2) in respect of accumulation in excess of 15% free accumulation, the trust is first required to invest
the sum in S. 11 (5) modes.
2 While S. 11 (2) mandates investments in S. 11 (5) for claiming exemption, S. 13 (1) (d) nowhere mandates investments
of funds; it only states that if any funds are invested, the same should be in the forms and modes specified U/s 11 (5),
otherwise whole of the exemption is lost. The words ‘any funds’ in S. 13 (1) (d) would cover corpus donations and 15%
free accumulation. Thus, if corpus donation or 15% free accumulation is invested otherwise than in S. 11 (5) modes,
then, the trust will lose whole of exemption and all incomes of the trust including the corpus donations will become
taxable accordingly.
X. Charge of tax on PCT/PRT – S. 164 (2):

1 Unexempted Income of PCT or PRT which is not exempted U/s 11 and S. 12 shall be taxed @ slab rates. [S.
income to suffer 164 (2)].
tax @ Slab rates
2 Exemption lost View-1: Entire income of the trust loses exemption U/s 11 and S. 12. Entire income shall suffer tax
due to provisions @ MMR.
of S. 13 (1) (c) View-2: Entire income of the trust loses exemption U/s 11 and S. 12. Only such part of income
and S. 13 (1) (d) which has forfeited exemption U/s 13 (1) (c) and s. 13 (1) (d) shall suffer tax @ MMR. Other part of
income shall suffer tax at slab rates. [Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR
533 (Bom)].
View-3: Entire income of the trust does not lose exemption U/s 11 and S. 12. Only such part of
income which has forfeited exemption U/s 13 (1) (c) and S. 13 (1) (d) shall suffer tax and tax shall
be @ MMR. [Fr. Mullers Charitable institutions [2014] 363 ITR 230 (Kar) + Agrim Charan
Foundation [2002] 253 ITR 593].

XI. Anonymous donation – Tax treatment: S. 115BBC:

1 Meaning of anonymous donation It means any voluntary contribution where a person receiving such contribution
does not maintain a record to establish the identity of the donor (indicating the
name, address and such other particulars as may be prescribed.
2 Classification of anonymous Anonymous donation is classified into (a) anonymous donation covered by S.
donation 115BBC; (b) anonymous donation not covered by S. 115BBC.
3 Anonymous donation not covered by It is eligible for exemption U/s 11 and S. 12. If it is a corpus donation, it is
S.115BBC unconditionally exempt U/s 11 (1) (d). If it is a non-corpus donation, it is eligible
for exemption U/s 11 (1) (a), if 85% is applied for the objects of the trust.
4 Anonymous donation covered by S. It is not eligible for exemption U/s 11 and S. 12. [S. 13 (7)].
115BBC. Anonymous donation to the extent of higher of (a) 5% of total donation; or (b)
Rs. 1L, shall suffer tax @ slab rates.
Excessive anonymous donation shall suffer tax @ 30% (flat).
5 Anonymous donation received by It is covered by S. 115BBC.
PCT registered U/s 12AA
6 Anonymous donation received by It is covered by S. 115BBC.
entities referred to in S. 10 (23C)
(iiiad)/(vi)/(iiiae)/(via)/(iv).
7 Anonymous donation received by It is not covered by S. 115BBC.
PRT registered U/s 12AA
8 Anonymous donation received by It is not covered by S. 115BBC.
religious institution approved by CIT
U/s 10 (23C) (v)
9 Anonymous donation received by If the anonymous donation is received with a specific direction that it should be
trust existing wholly for charitable used only for educational institution or hospitals run by the trust, then it is
and religious purpose approved by covered by S. 115BBC.
CIT U/s 10 (23C) (v) If there is no such specific direction, then the anonymous donation is not
covered by S. 115BBC.
2. Entities eligible exemption U/s 10 (23C):

1 Entities entitled to Any university or other educational institution existing solely for educational purposes and not
unconditional exemption for purposes of profit, and which is wholly or substantially financed by the Government; [S. 10
(23C) (iiiab)].
Any university or other educational institution existing solely for educational purposes and not
for purposes of profit if the aggregate annual receipts of such university or educational
institution do not exceed the amount of annual receipts as may be prescribed (Rs. 100L). [S. 10
(23C) (iiiad)].
Any hospital or medical institution existing solely for philanthropic purposes and not for
purposes of profit, and which is wholly or substantially financed by the Government. [S. 10
(23C) (iiiac)].
purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed
the amount of annual receipts as may be prescribed (Rs. 100L). [S. 10 (23C) (iiiae)].
2 When can we say that the If the Government grant to a university or other educational institution or hospital or medical
institution is substantially institution during the relevant PY exceeds 50% of the total receipts (including voluntary
financed by the contribution) of such university or other educational institution or hospital or medical institution
Government? [Explanation as the case may be, then such university or other educational institution or hospital or medical
to S. 10 (23C) (iiiab) and S. institution shall be considered as being substantially financed by the Government for the PY.
10 (23C) (iiiac)].
3 Entities entitled to Any fund or institution established for charitable purposes which may be approved by the CIT,
conditional exemption having regard to its the objects and its importance throughout India or throughout any state (s).
[S. 10 (23C) (iv)].
Any trust or institution wholly for public religious purposes or wholly for public religious and
charitable purposes, which may be approved by the CIT, having regard to the manner in which
the affairs of the trust or institution are administered and supervised for ensuring that the
income accruing thereto is properly applied for the objects thereof. [S. 10 (23C) (v)].
Any university or other educational institution existing solely for educational purposes & not for
purposes of profit, other than those mentioned in S. 10 (23C) (iiiab) or S. 10 (23C) (iiiad) &
which may be approved by the CIT. [S. 10 (23C) (vi].

purposes of profit, other than those mentioned in S. 10 (23C) (iiiac) or S. 10 (23C) (iiiae) and
which may be approved by the CIT.
Conditions to be fulfilled for enjoying exemption U/s 10 (23C) (iv)/(v)/(vi)/(via):

1 Application to be made Application shall be made in the prescribed form and manner to the CIT for the purpose
of grant of the exemption.
2 Time limit for making application for Applications shall be filed on or before 30th September of the succeeding FY. For
grant of exemption example, if an educational institution seeks exemption U/s 10 (23C) (vi) for PY 2018-19,
it has to make an application for grant of exemption by 30.09.2019.
3 Furnishing of documents CIT may call for such documents (including audited accounts) or information which he
consider necessary for satisfying himself about the genuineness of the activities of the
entities (supra). He may also make such inquiries as he deems necessary for this
purpose.
4 Time limit for disposal of application Order granting approval or order rejecting the application shall be passed within the
period of 12 months from the end of the month in which such application was received.
5 Order of rejection – appealable. Order rejecting the application is appealable before ITAT U/s 253 (1).
6 Application of income It shall apply its income, or accumulates it for application, wholly and exclusively to the
objects for which it is established and in a case where more than 15% of its income is
accumulated, the period of the accumulation of such amount shall not exceed 5 years.
7 Mode of investments It should not invest or deposit its funds otherwise than in S. 11 (5) modes. Exception:
Voluntary contributions received and maintained in the form of jewellery, furniture or
notified article.
Note: If voluntary contributions, other than cash or those referred above, are received in
modes other than S. 11 (5) modes, then, exemption will be available if those
contributions are transferred into S. 11 (5) modes within 1 year from the end of the PY
when such asset was acquired.
8 Condition as to exemption of business The exemption does not apply to profits and gains of business, unless the business is
income. incidental to the attainment of its objectives and separate books of account are
maintained by it in respect of such business.
9 Audit of accounts Where its TI for any PY (without giving effect to the provisions of this section) exceeds
the BEL, it shall get its accounts audited in respect of that year by a CA. The report of
such audit shall be in the prescribed form duly signed and verified by such accountant
and set forth such particulars as may be prescribed.
10 Payment to similar institution out of Where it does not apply its income during the year of receipt and accumulates it, any
accumulation – not regarded as payment or credit out of such accumulation to any trust or institution registered U/s 12AA
application of income. or to any fund or trust or institution or any university or other educational institution or
any hospital or other medical institution referred to in S. 10 (23C) (iv)/(v)/(vi)/(via) shall
not be treated as application of income to its objects.
11 Withdrawal of approval Where the fund or institution etc has not applied its income or invested or deposited its
funds in accordance with the aforesaid provisions; or its activities are not genuine or are
not being carried out in accordance with all or any of the conditions subject to which it
was notified or approved, then the CIT may, at any time after giving a reasonable
opportunity of being heard, withdraw its approval and forward a copy of the order
withdrawing the approval to AO concerned.
12 Anonymous donations to be included Any anonymous donation referred to in S. 115BBC on which tax is payable in
in total income accordance with the provisions of the said section shall be included in the total income.
13 Amount donated by way of corpus Any amount donated out of its income to any trust or institution registered U/s 12AA by
donation to trust registered U/s 12AA way of corpus donation shall not be treated as application of income to the objects for
not considered as application. which the entity is established.
14 Entities referred to in S. 10 (23C) (iv) If the purpose of trust referred to in S. 10 (23C) (iv)/(v) does not remain charitable in a
or S. 10 (23C) (v) not entitled to PY on account of the commercial receipts > 20% of total receipts of the trust, then, such
exemption if its commercial receipts trust would not be entitled to get benefit of exemption in respect of its income for that PY
exceed 20% of total receipts. in which the commercial receipts exceed the specified threshold.
The denial of exemption would be compulsory by operation of law and would not be
dependent on any approval being withdrawn or registration being cancelled.
15 No benefit of exemption U/s 10 to These entities can’t enjoy exemption U/s 10 except U/s 10 (1) and S. 10 (23C).
entities eligible for exemption U/s 10
(23C)

16 Depreciation not allowable if cost of Income for the purposes of application U/s 10 (23C) shall be determined without allowing
the asset claimed as application. any deduction or allowance for depreciation, where the cost of acquisition of the asset
has been claimed as application of income U/s 10 (23C) in the same PY or any other
PY.
17 13th Proviso below S. 10 (23C) For the purpose of determining the amount of application U/s 10 (23C), provisions of S.
40 (a) (ia) and S. 40A (3)/(3A) shall, mutatis mutandis apply as they apply in computing
the income chargeable U/H PGBP.
18 Obligation to file return These entities have obligation to file ROI for the relevant PY if their TI (without giving
effect to S. 10 (23C)) exceeds BEL. [S. 139 (4C)].
Even entities covered by S. 10 (23C) (iiiab) and S. 10 (23C) (iiiac) have obligation to file
ROI U/s 139 (4C).
Note:
1 Where an institution engaged in imparting education incidentally makes profit, it would not lead to an inference that it
ceases to exist solely for educational purposes. [Queen’s educational society (SC)].
2 Imparting education or training in specialized filed like communication, advertising etc and awarding diplomas or
certificates would constitute ‘educational purpose’ for grant of exemption U/s 10 (23C) (vi). [Peter’s Educational
society (2016) (SC)].
3. Private Specific Trust:

1 Options to the Department. Option-1: Income of the trust could be assessed to tax directly in the hands of
[S. 166] beneficiaries.
Income of the trust is treated as income as the personal income of beneficiaries and
taxed accordingly. Trustee does not come into picture.
Option-2: Income of the trust could be assessed to tax in the hands of the trustee as
representative assessee.
Tax shall be levied upon and recovered from the trustee (representative assessee) in
a like manner and to the same extent to which it would have been levied upon and
recovered from the persons so represented. [S. 161 (1)].
2 Business carried on by the If the trust carries on business, then the entire income of the trust shall suffer tax @
trust – Implications. [S. 161 MMR (notwithstanding anything contained in S. 161 (1)).
(1A)].
3 S. 161 (1A) – not to apply. If the trust was declared through a will and was created for the benefit of dependent
[Proviso to S. 161 (1A)]. relatives and this is the only trust so created, then S. 161 (1A) shall not apply.
4. Private Discretionary Trust:

1 Taxed at MMR Entire income of the trust shall suffer tax @ MMR in the hands of the trustee in representative
capacity. [S. 164 (1)]. This is subject of S. 111A, S; 112 etc.
Nothing is taxed in the hands of the beneficiaries.
2 Relaxation In the following circumstances, the trust shall suffer tax at slab rates and not at MMR:
Circumstance-1 None of the beneficiaries is a beneficiary in any other trust.
The personal income of the beneficiary does not exceed BEL.
The trust does not carry on business.
Circumstance-2 The trust was declared through a will for the benefit of dependent relative and it was the only
trust so created.
Circumstance-3 The trust was created through non-testamentary instrument for the benefit of dependent
relative before 01.03.1970 and the trust does not carry on business.
5. Oral Trust:
1 Meaning It means a trust not evidence by duly executed instrument in writing.
2 Tax treatment Its entire income shall suffer tax @ MMR. No exemptions are available under the Act. [S.
164A].
3 Conversion of oral trust An oral trust will be regarded as a trust declared by a duly executed instrument in writing if a
into non-oral trust statement in writing signed by the trustees, setting out the purposes of the trust, particulars
as to the trustees, the beneficiaries and the trust property, is forwarded to the AO within 3
months from the date of declaration of trust.
Then, exemptions may be allowed (if entitled).

Chapter-18: Taxation of political parties - Summary
1. Special provisions relating to political parties:

1 Exemption U/s 13A A political party registered U/s 29A of the Representation of the People Act, 1951 is eligible
for exemption U/s 13A.
2 Income eligible for (a) IFHP; (b) Capital gains; (c) IFOS; (d) voluntary contribution.
exemption
3 Conditions to be (i) It shall maintain such books of account and other documents to enable the AO to properly
satisfied for enjoying deduce its income therefrom.
exemption (ii) It shall maintain a record of each such voluntary contribution (other than electoral bonds)
in excess of Rs. 20000 and the name and address of the contributor.
(iii) Accounts of the political party shall be audited by a CA.
(iv) Donation exceeding Rs. 2000 shall not be received otherwise than by an APC/APBD/by
use of ECS through a bank account/by way of electoral bond.
(v) A report of donations received referred to in S. 29C of the Representation of the People
Act, 1951 shall be submitted for each financial year.
(vi) Return of income shall be furnished U/s 139 (4B) within the time limit specified in S. 139
(1).
2. Deduction U/s 80GGB:

1 Assessee eligible for Indian company.
deduction
2 Nature of deduction Assessee is eligible for deduction in respect of contributions made to registered political
parties or electoral trust during the PY (otherwise than by way of cash).
3 Extended meaning of Political contribution includes even the expenditure incurred on advertisement in any
political contribution publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet or the
like) by or on behalf of a political party or for its advantage.
4 Ceiling on deduction Nothing is specified in the section.
Note:
1 Any expenditure on advertisement in a political magazine incurred by an Indian company is disallowed U/s 37 (2B) while
computing income U/H PGBP.
2 However, it is allowed as deduction U/s 80GGB against the GTI.
3. Deduction U/s 80GGB:

1 Assessee eligible for Any person other than (a) Indian company; (b) local authority; (c) AJP wholly or partly funded
deduction by the Government.
2 Nature of deduction Assessee is eligible for deduction in respect of contributions made to registered political
parties or electoral trust during the PY (otherwise than by way of cash).
3 Ceiling on deduction Nothing is specified in the section.

Chapter-19: Clubbing provisions - Summary
1. Transfer of income without transfer of asset – S. 60:

(i) If any person transfers the income from any asset without transferring the asset itself, such income is to be included in
the total income of the transferor.
(ii) It is immaterial whether the transfer is revocable or irrevocable.
2. Income arising from revocable transfer – S.61:

(i) Transfer of assets can be of two types: (a) Revocable; (b) Irrevocable.
(ii) S. 63 defines the term ‘revocable transfer’.
(iii) A transfer is deemed to be revocable if the instrument through which transfer is effected (a) contains any provisions
for retransfer, directly or indirectly, of the whole or any part of the income or assets to the transferor, or (b) gives, in
any way to the transferor, a right to reassume power, directly or indirectly, over the whole or any part of the income or
the assets.
(iv) S. 61 Provides for clubbing the income arising from assets transferred under revocable transfer in the hands of the
transferor.
(v) This clubbing provision will operate even if only part of income of the transferred asset had been applied for the
benefit of transferor. Once the transfer is revocable, the entire income from the transferred asset is includible in the TI
of the transferor.
3. Exceptions where clubbing provisions are not attracted even in case of revocable transfer – S. 62:
(i) If there is a transfer of asset which is not revocable during the life time of the transferee, the income from the
transferred asset is not includible in the total income of the transferor provided the transferor derives no direct or
indirect benefit from such income.
(ii) If the transferor receives direct or indirect benefit from such income, such income is to be clubbed in his total income
even though the transfer may not be revocable during the life time of the transferee.
(iii) As and when the power to revoke the transfer arises, the income arising by virtue of such transfer will be included in
the total income of the transferor.
4. Clubbing of income arising to spouse:
A. Income by way of remuneration from a concern in which the individual has substantial interest – S. 64 (1) (ii):
(i) In computing the total income of any individual, all such income which arises directly or indirectly, to the spouse of
such individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind, from
a concern in which such individual has a substantial interest shall be included.
(ii) However, this provision does not apply where the spouse of the said individual possesses technical or professional
qualifications and the income to the spouse is solely attributable to the application of his or her technical or
professional knowledge or experience. In such an event, the income arising to the spouse is to be assessed in his or
her hands.

(i) An individual is said to have substantial interest in a concern, being company, if he singly or along with his relatives
beneficially owns equity shares carrying not less than 20% voting power at any time during the PY.
(ii) An individual is said to have substantial interest in a concern, not being company, if he singly or along with his
relatives is beneficially entitled to not less than 20% of the profits of the concern at any time during the PY.
(iii) Relative = Spouse + Brother + Sister + Lineal ascendant +Lineal descendant.
Clubbing when both husband and wife are having substantial interest and both are employed in the concern:
Situations Does husband possess Does wife possess technical or Manner of clubbing
technical or professional professional knowledge and
knowledge and experience? experience?
1 Yes No Club the salary of the wife from the concern
with the income of the husband.
2 No Yes Club the salary of the husband from the
concern with the income of the wife.
3 Yes Yes No need for clubbing. Assess the respective
salary income in the hands of the respective
spouse.
4 No No Include the salary of the other spouse in the
total income of the spouse whose total income
excluding such remuneration is greater.

(B) Income from assets transferred to spouse - S. 64 (1) (iv):

Applicability of S. 64 (1) (iv):
If the following conditions are satisfied, S. 64 (1) (iv) shall apply:
1 The tax payer is an individual.
2 He/she transfers an asset other than a house property.
3 The asset is transferred to his/her spouse.
4 The transfer may be direct or indirect.
5 The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an agreement to live
apart.
Impact of S. 64 (1) (iv):

The income arising from the transferred asset shall be included in the income sheet of transferor individual and not in the
hands of transferee spouse.
Note: Where the subject matter of transfer is house property, then the provisions of S. 27 (i) shall apply and the transferor
individual is deemed to be the owner and the annual value shall be assessed to tax in his hands. Provisions of S. 64 (1) (iv)
has no relevance.

1 Spouse means legally wedded wife or husband. The term will not cover concubine. Executors of the will of T.V.
Krishna Iyer 38 ITR 144 (Ker).
2 Husband and wife relationship should subsist both on the date of transfer of the asset and on the date of accrual of
income. Then only the provisions of S. 64 (1) (iv) can be invoked. Philip John Plasket Thomas 49 ITR 97 (SC).
3 Note the words “indirectly”. The effect of this is, even cross transfers are hit by S. 64 (1) (iv). C.M. Kothari 49 ITR 107
(SC).
4 To avoid clubbing of the income of the transferee-spouse with that of the transferor-spouse, what S. 64 (1) (iv) requires
is “adequate consideration” and not “good consideration”.
Only such consideration which is capable of being measured in monetary terms can fall within the ambit of the
expression “adequate consideration”. Therefore, natural love and affection of the transferee-spouse, though a good
consideration, is not an adequate consideration. Tulsidas Kilachand 42 ITR 1 (SC).
5 Similarly, consent by the transferee-spouse to allow the transferor-spouse to adopt a child cannot be regarded as
adequate consideration. Potti Veerayya Sresty 85 ITR 194 (AP).
6 Even if the form of the asset transferred by the transferor-spouse is changed by the transferee-spouse, still, the income
arising from such changed asset shall be clubbed in the hands of the transferor-spouse. Mohini Thapar 83 ITR 208
(SC).
7 Bonafide loan by the husband to wife or vice versa will not invite the application of S. 64 (1) (iv). Hasina Begum 158
ITR 215 (Cal).
8 The Mumbai High Court in Patwardhan 76 ITR 279 held that the purpose of S. 64 (1) (iv) is to include the income of
the transferred assets in computation of the total income of the transferor-spouse only to the extent the consideration
was found inadequate. However, a contrary view has been expressed by the Kerala High Court in Junus Haji
Ummer Sait 173 ITR 3 (Ker).
9 Even the capital gains derived by the transferee-spouse upon sale of assets transferred to her/him by the transferor-
spouse had to be included in the total income of the transferor-spouse-U/s 64 (1) (iv). Seventilal Maneklal Sheth 68
ITR 503 (SC).
10 Even the capital gains arising on account of transfer of an asset the form of which is changed by the transferee-spouse
shall be clubbed in the hands of the transferor-spouse. Smt Pelleti Sridevamma 216 ITR 826 (SC).
11 Subsequent to the receipt of shares as gift from the transferor-spouse, if bonus shares are allotted to the transferee-
spouse and on which the transferee-spouse receives any dividend, that is not bit by S. 64 (1) (iv). M.P. Birla 142 ITR
377 (Bom). Income arising from accretions to the transferred asset shall not be clubbed invoking S. 64 (1) (iv).
12 Second generation income cannot be clubbed invoking the provisions of S. 64 (1) (iv). For example, subsequent to the
receipt of a house property as gift from the transferor-spouse, if the transferee-spouse earns any income from fixed
deposits placed with a bank, made out of the rental income, such second generation income is not hit by S. 64 (1) (iv).
M.S.S. Rajan 252 ITR 126 (Mad).
13 In Karamchand Premchand Ltd 40 ITR 106 (SC), the apex court held that income includes loss. Therefore, U/s 64
(1) (iv) even loss could be clubbed.

Amount to be clubbed when transferred asset is invested in business:

Clubbing procedure [Explanation-3 to S. 64 (1)]:
Step 1 Find out the total investment of transferee-spouse in the business on the 1st day of the PY.
Step 2 Find out the amount invested by the transferee spouse out of the assets transferred to her without adequate
consideration by her husband on the 1st day of the PY in the said business.
Step 3 Find out the taxable income of the transferee spouse from the business.
If the transferees spouse becomes the partner of a firm by investing the aforesaid asset, then only interest
income from the firm is considered under step-3.
Share of profit from the firm is not considered under step-3 as it is exempt U/s 10 (2A).
Remuneration received from the firm cannot be considered for clubbing since it is paid for the services rendered
by the partner.
Step 4 The amount which shall be included in the hands of the transferor is determined as follows: Step 3 * (Step 2/
Step 1)
5. Income from assets transferred to son’s wife S. 64 (1) (vi):

Applicability of S. 64 (1) (vii):
If the following conditions are satisfied, S. 64 (1) (vii) shall apply:
2 He or She has transferred an asset.
3 The asset is transferred to his/her son’s wife.
5 The asset is transferred otherwise than for adequate consideration.
Impact of S. 64 (1) (vii):

The income arising from the transferred asset shall be included in the income sheet of transferor individual and not in the
hands of transferee daughter-in-law.

(i) The relationship of father-in-law or Mother-in-Law and Daughter-in-Law should subsist both at the time of transfer and
at the time of accrual of income.
(ii) Even S. 64 (1) (vi) covers cross transfers - Om Dutt 277 ITR 63 (P&H).
(iii) The asset may be held by the transferee in the same form or in a different form.
(iv) Explanation-3 to S. 64 (1) is applicable here also.
6. Income from assets transferred to a person for the benefit of spouse (S. 64 (1) (vii)):
Applicability of S. 64 (1) (vii):
S. 64 (1) (vii) is applicable if the following conditions are satisfied:
1 The taxpayer is an individual.
2 He/she has transferred an asset.
4 The asset is transferred to a person or association of person.
5 It is transferred for the immediate or deferred benefit of his/her spouse.
6 The transfer is for an inadequate consideration.

Income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.
7. Income from assets transferred to a person for the benefit of son’s wife (S. 64 (1) (viii):
Applicability of S. 64 (1) (viii):

S. 64 (1) (viii) is applicable if the following conditions are satisfied:
2 He/she has transferred an asset.
3 The asset is transferred to any person or an association of person.
4 Transfer may be direct or indirect.
5 The asset is transferred for the immediate or deferred benefit of his or her son’s wife.
6 The asset is transferred otherwise than for adequate consideration.


Income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.
8. Clubbing of income of minor (S. 64 (1A)):

Income accruing or arising to a minor child shall be clubbed in the hands of the parent of the child. Provisions relating to
clubbing of income of the minor child in the hands of parents are given in S. 64 (1A). However, in respect of the income
clubbed U/s 64 (1A), the parent is eligible for exemption U/s 10 (32).
Which income of the minor could be clubbed?

?
Child Income not clubbed
No
= with the parent
Minor
Yes
Minor Child
Suffering from disability

Other Minor Child
Specified u/s 80 U
Income of such Minor Income

child (from all sources) -
Not subject to Clubbing
provisions
On account of any On account of any
activity involving Other income
manual work
application of his
skill, talent or
specialized
knowledge and
experience
Parent in whose hands the income of the minor is to be clubbed: subject to
Not subject to Clubbing Provision
Clubbing Provision
Marriage of Marriage of Parents

Parents subsists doesn’t subsist
Situation 1 Situation 2
Total income of Father (excluding Total income of Mother (excluding

the income includible u/s 64(1A) the income includible u/s 64(1A)
> >
Total income of Mother(excluding Total income of Father (excluding
the income includible u/s 64(1A) the income includible u/s 64(1A)
Clubbed with the Clubbed with the Income of Minor is clubbed

income of Father income of Mother with the income of that
Exemption U/s 10 (32): parent who maintains the
Minor child in the relevant
Previous Year
Parent with whose income the income of minor is clubbed is entitled to an exemption to the extent of Rs. 1500 per child or
the income clubbed (whichever is less).

1 Meaning of “Child” (S. 2 Child in relation to a child includes a step child and an adopted child of that individual.
(15B)) But it does not include an illegitimate child.
2 Minor married daughter Unlike S. 27, S. 64 (1A) does not exclude minor married daughter.
Hence, U/s 64 (1A) even the income arising to a minor married daughter would be
clubbed with that of the parent.
3 Attaining majority during the Where the minor child becomes major during the PY, then the income up to the date he
previous year remained minor in that PY shall be clubbed in the hands of the parent.

4 Income from investments To be clubbed with that of the parent U/s 64 (1A).
made out of income earned
from manual work or
activities involving
application of skill, talent or
specialized knowledge and
experience
9. Conversion of self-acquired property into family property & subsequent partition (S. 64 (2)):
Situations covered by S. 64 (2):

Situation An Individual converts his self-acquired property into property belonging to the family. It is done by impressing
1 such property with the character of joint family property or throwing such property into common stock of the
family.
Situation An individual transfers his self-acquired property, directly or indirectly, to the family otherwise than for adequate
2 consideration.
Clubbing of income before partition:

In the aforesaid situations, the income from such property is clubbed with the income of the transferor.
Clubbing of income after partition:

If the property converted or transferred by an individual is subsequently transferred amongst the members of the family, the
income derived from such converted property, as is received by the spouse of the transferor will be included in the
income of the transferor.
10. Liability of person in respect of income included in the income sheet of another person: S. 65:
1 S. 61 to S. 64 provided for clubbing of income of one person in the hands of the other in circumstances specified
therein. However, service of notice of demand (in respect of tax on such income) may be made upon the person to
whom such asset is transferred (i.e. the transferee). In such a case, the transferee is liable to pay that portion of tax
levied on the transferor which is attributable to the income so clubbed.
2 Similar provision will be applicable in case of deemed ownership of house property U/s 27 (i.e. transfer of house
property otherwise than for adequate consideration to spouse, not being in connection with agreement to live apart or to
minor child not being a minor married daughter).

Chapter-20: Assessment Procedure Summary
A. Filing of returns – S. 139:

1. Voluntary return – S. 139 (1):
1 Filing of ROI by firms and For each PY, every firm and company shall furnish ROI. It shall be furnished within
companies –Mandatory. [S. 139 the due date specified in Explanation-2 to S. 139 (1).
(1) (a)]
2 Mandatory filing of loss return by Every firm and company shall furnish on or before the due date (supra) the return in
firms and companies. [Proviso-3 respect of loss in every PY.
to S. 139 (1)].
3 Filing of ROI by other persons. Every other person has obligation to file ROI only if the TI of the PY > BEL. It shall
[S. 139 (1) (b)]. be furnished within the due date specified in Explanation-2 to S. 139 (1).
4 TI for the purpose of S. 139 (1) TI before giving effect to the provisions of Chapter VI-A.
(b). [Proviso-6 to S. 139 (1)].
5 Due date for filing return. Assessees who have entered into international 30th November of
[Explanation-2 to S. 139 (1)]. transactions or specified domestic transactions. the AY
Other assessees being (a) companies; (b) auditees; (c) 30th September of
working partner of an auditee-firm the AY
Other assessees 31st July of the AY
6 Filing of return in respect of If the TI of the PY of any other person in respect of which a person is assessable
income of any other person by under this Act > BEL, he shall furnish return of income of such other person in
person who is assessable in this prescribed form, verified in prescribed manner and setting forth prescribed
regard. [S. 139 (1) (b)]. particulars within the due date specified in Expalantion-2 to S. 139 (1).

1 Relaxations to non- NRI, who does not have any income other than (a) investment income; and (b) LTCG
residents from filing of arising from transfer of foreign exchange assets and on these incomes has suffered TDS,
returns. need not file ROI for the relevant PY. [S. 115G].
Persons referred to in S. 115BBA (1) (i.e. Non-resident foreign national sportsmen etc) who
do not have any income other than the income referred to therein and have suffered TDS
U/s 194E, need not file ROI for the relevant PY. [S. 115BBA (2)].
FC/NCNR, who does not have any income other than interest referred to in S. 115A (1) (a)
(ii)/(iia)/(iiaa)/(iiab) and has suffered TDS U/s 195 or S. 194LB, S. 194LC or S. 194LD, as
the case may be, need not file ROI for the relevant PY. [S. 115A (5)].
FC/NCNR, who does not have any income other than interest on GDR or FCCB and has
suffered TDS U/s 196C, need not file ROI for the relevant PY. [S. 115AC (4)].
2 Power of CG to exempt The CG has power to notify persons who need not file ROI subject to fulfillment of
filing of return. [S. 139 conditions specified therein.
(1C)].
Consequences of not filing return within the due date:
1. Interest U/s 234A (1)

1 Circumstances in which interest is Situation-1: Return was filed belatedly and the return was processed U/s 143 (1)
levied U/s 234A (1). but no assessment was made.
Situation-2: Return was filed belatedly and assessment was made thereafter.
Situation-3: Return was not filed and best judgment assessment was made U/s
144.
2 Computation of interest in Base for Tax on total income determined U/s 143 (1) – TDS – TCS
situation-1. computation of – Advance tax – Self assessment tax paid before the due
interest date for filing return – double tax avoidance relief – MAT
credit or AMT credit. [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of
interest is furnishing of return.
computed
3 Computation of interest in Base for Tax on total income assessed – TDS – TCS – Advance
situation-2 computation of tax – Self assessment tax paid before the due date for
interest filing return – double tax avoidance relief – MAT credit or

AMT credit. [Part of Rs. 100 ignored].

interest is furnishing of return.
computed
4 Computation of interest in Base for Tax on total income assessed U/s 144 – TDS – TCS –
situation-3 computation of Advance tax – Self assessment tax paid before the due
interest date for filing return – double tax avoidance relief – MAT
credit or AMT credit. [Part of Rs. 100 ignored].
interest is completion of assessment U/s 144.
computed
2. Loss of tax holidays – S. 80AC
Provisions of S. 80AC For the AY 2018-19 onwards, no deduction is available under Chapter VI-A
Part-C (S. 80-IA to S. 80RRB), if the return is not filed within the due date
specified in Explanation-2 to S. 139 (1).
3. Fees U/s 234F
1 When it is levied? Where a person required to furnish ROI U/s 139, fails to do so within the due date
specified in Explanation-2 to S. 139 (1), he shall pay fees U/s 234F.
2 Quantum of fees payable. Situation-1 Return is filed beyond the due date but within 31st Rs.
December of the AY. 5000
Situation-2 Return is filed beyond 31st December of the AY. Rs.
10000
If the TI of the assessee does not exceed Rs. 5L, the fee payable U/s 234F shall
not exceed Rs. 1000.
4. Prosecution U/s 276CC
1 When the provisions of S. 276CC Case-1: Assessee having obligation to file return U/s 139 hasn’t filed return within
shall apply? the due date wilfully.
Case-2: Assessee, upon receipt of notice U/s 142 (1) (i) requiring filing of return,
defaults wilfully.
2 Consequence of willful default. Assessee may be punished with rigorous imprisonment and fine.
3 Term of imprisonment Situation-1 Tax that would have been evaded if Minimum term = 6
the failure had not been discovered months.
> Rs. 25L Maximum term = 7
years.
Situation-2 Tax that would have been evaded if Minimum term = 3
the failure had not been discovered months.
does not Rs. 25L Maximum term = 2
years.
4 Rebuttable presumption [S. Mensrea (i.e. culpable state of mind) is presumed. It needs to be rebutted.
278E].
5 Escape route for a person other ROI was filed before the end of the relevant AY.
than company in case-1 [Sai (Tax on assessed income – TDS – Advance tax) ≤ Rs. 3000.
Enterprises (SC)] (i.e. No
prosecution U/s 276CC)
5. Shrinking of period of interest payable on account delay in granting of refund out of TDS/TCS/Advance tax – S.
244A
1 Return was filed within the due Period of interest = 1st day of the AY to the date of grant of refund.
date
2 Return was filed beyond the due Period of interest = Date of furnishing of return to the date of grant of refund.
date
6. Best judgment assessment U/s 144
Provisions of S. 144 If the assessee does not file the return within the due date, he becomes a non-
cooperating assessee and in his case, assessment could be made U/s 144 on
best judgement basis.

2. Filing of returns by beneficial owners of, or beneficiaries in, foreign assets: Proviso-4 and Proviso-5 to S. 139 (1):
1 Persons who have obligation to file R&OR who has no obligation to file return U/s 139 (1) and who:
return by virtue of Proviso-4 to S. (i) holds as a beneficial owner or otherwise, any asset (including any financial
139 (1) interest in any entity) located outside India; or
(ii) has a signing authority in any account located outside India; or
(iii) is a beneficiary of any asset (including any financial interest in any entity)
located outside India.
shall file return in prescribed form, verified in prescribed manner and setting forth
prescribed particulars within the due date specified in Expalantion-2 to S. 139 (1)
(irrespective of whether he has reported income or loss in the relevant PY).
2 Relaxation from filing of return in An individual being a beneficiary of an asset o/s India need not file return by
respect of beneficiary. [Proviso-5 virtue of Proviso-4 to S. 139 (1), if the income arising from such asset is includible
to S. 139 (1)]. in the income of the owner of the asset.
3 Beneficial owner. [Expalantion-4 to Beneficial owner means an individual who has provided, directly or indirectly,
S. 139 (1)]. consideration for the assets for the immediate or future benefit, direct or indirect,
of himself or any other person.
4 Beneficiary. [Explanation-5 to s. Beneficiary (in respect of an asset) means an individual who derives benefit from
139 (1)]. the asset during the PY and the consideration for such asset has been provided
by any person other than such beneficiary.
3. Filing of return by specified entities – S. 139 (4A)/(4B)/(4C)/(4D)/(4E)/(4F):

1. Filing of return by PCT/PRT (Registered U/s 12AA) – S. 139 (4A)
(i) When there is obligation for If the TI of the PY of the PCT/PRT (Registered U/s 12AA) without giving effect to the
PCT/PRT (Registered U/s provisions of S. 11 and S. 12 > the BEL, then there is obligation to file ROI for the
12AA) to file return U/s 139 relevant PY within the due date specified in S. 139 (1).
(4A)?
(ii) Due date for filing ROI 30th September of the AY. [Since trust has obligation to get its books of accounts
audited U/s 12A (1) (b)].
(iii) Consequences of not filing Loss of exemption U/s 11 and S. 12. [S. 12A (1) (ba)].
return within S. 139 (1) time No exemption could be claimed U/s 11 (2) in respect of accumulation in excess of 15%
limit. of income derived from PHUT. [S. 13 (9)].
Penalty U/s 272A.
S. 234F fees.
(iv) Penalty U/s 272A Default inviting action Non-filing of return U/s 139 (4A) within the time-limit
U/s 272A specified in S. 139 (1).
Levying authority JCIT/JDIT
Quantum of penalty Rs. 100 for each day of continuing default.
Escape route No penalty U/s 272A, if there is reasonable cause for
the default.
2. Filing of return by political parties – S. 139 (4B)
(i) When there is obligation for If the TI of the PY of the political party (Registered U/s 29A of the ROPA) without
a registered political party to giving effect to the provisions of S. 13A > the BEL, then there is obligation to file ROI
file return U/s 139 (4B)? for the relevant PY within the due date specified in S. 139 (1).
(ii) Due date for filing ROI 30th September of the AY. [Since the political party has obligation to get its books of
accounts audited U/s 13A].
(iii) Consequences of not filing Loss of exemption U/s 13A.
return within S. 139 (1) time S. 234F fees.
limit.
3. Filing of return by entities entitled to exemption under specified clauses of S. 10 – S. 139 (4C)
1 Which entities are required Entity required to file return U/s 139 (4C). Clause of S. 10
to filed return U/s 139 (4C)? under which
exemption is
available
Research association approved by CG S. 10 (21)
News agency established in India – existing solely for the S. 10 (22B)
purpose of collection and distribution of news (approved by
the CG)
Association or institution established in India for controlling or S. 10 (23A)
regulating or supervising or encouraging profession of law,

medicine, engineering, architecture, accountancy etc.

(approved by the CG)
Public trust or society registered under the Society S. 10 (23B)
Registration Act (to develop khadi and village industries)
Registered trade union S. 10 (24) (a)
Association of registered trade union S. 10 (24) (b)
University or educational institution referred to in S. 10 (23C) S. 10 (23C)
(iiiab) or S. 10 (23C) (iiiad) or S. 10 (23C) (vi).
Hospital or medical institution referred to in S. 10 (23C) (iiiac) S. 10 (23C)
or S. 10 (23C) (iiiae) or S. 10 (23C) (via).
Fund or institution existing wholly for charitable purpose S. 10 (23C) (iv)
(approved by the CCIT having regard to its object & its
importance throughout the state or country)
Public trust existing wholly for religious purpose or wholly for S. 10 (23C) (v)
charitable or religious purpose (approved by the CCIT)
Infrastructure debt fund S. 10 (47)
Authority or board or commission or corporation or fund or S. 10 (46)
trust constituted or established under the Central or State Act
or constituted by the CG or SG to regulate and administer any
activity for the benefit of general public and which is not
engaged in any commercial activity.
Mutual fund S. 10 (23D)
Securitisation trust S. 10 (23DA)
VCC/VCF S. 10 (23FB)
Investors protection fund S. 10 (23EC) / S.
10 (23ED)
Core settlement fund S. 10 (23EE)
Coffee Board S. 10 (29A)
Rubber Board S. 10 (29A)
Tea Board S. 10 (29A)
Tobacco Board S. 10 (29A)
Marine Products Export Development Authority S. 10 (29A)
Agricultural and Processed Food Products Development S. 10 (29A)
Authority
Spices Board S. 10 (29A)
Coir Board S. 10 (29A)
Fund for the welfare of employees or their dependents S. 10 (23AAA)
2 When there is obligation for If the TI of the PY of these entities without giving effect to the provisions of these
these entities to file return clauses of S. 10 > the BEL, then there is obligation to file ROI for the relevant PY
U/s 139 (4C)? within the due date specified in S. 139 (1).
3 Due date for filing ROI It depends on whether the books of accounts are to be audited or not.
4 Consequences of not filing Penalty U/s 272A (subject to S. 273B).

return within S. 139 (1) time S. 234F fees.
limit.
4. File of return U/s 139 (4D)/(4E)/(4F)
1 Who is required to file return Irrespective of income or loss, for every year, the universities/colleges/institutions
U/s 139 (4D)? referred to in S. 35 (1) (ii) and S. 35 (1) (iii) have obligation to file return within the due
date specified in S. 139 (1).
2 Who is required to file return Irrespective of income or loss, for every year, the business trust has obligation to file
U/s 139 (4E)? return within the due date specified in S. 139 (1).
3 Who is required to file return Irrespective of income or loss, for every year, the investment fund has obligation to file
U/s 139 (4F)? return within the due date specified in S. 139 (1).
4. Loss returns – S. 139 (3):

1 Filing of Where assessee has sustained loss U/H PGBP or U/H CG and wants such loss to be C/F to the next
return U/s AY U/s 72, S. 73, S. 73A, S. 74 or S. 74A, he shall file a return of loss U/s 139 (3) within the due date
139 (3) specified in Explanation-2 to S. 139 (1).

2 Consequence of non- Where a loss return referred to in S. 139 (3) is not filed within the due date (supra),
compliance with S. 139 (3). [S. then the assessee shall not be entitled to carry forward losses U/s 72, S. 73, S.
80]. 73A, S. 74 or S. 74A.
S. 80 supersedes provisions of Chapter-VI (i.e. S. 70 – S. 80).
3 Carry forward and set off If a loss return is filed belatedly, carry forward and set off is only prohibited U/s 80
prohibited U/s 80 and not set and not set off.
off.
4 Certain carry forwards not Belated filing of loss return shall not affect the following:
prohibited U/s 80 1 Carry forward of unabsorbed loss U/H IFHP U/s 71B.
2 Carry forward of unabsorbed depreciation U/s 32 (2). [Govind Nagar Sagar
Ltd (Del) + East Asiatic Company India (P) Ltd (Mad)].
3 Carry forward of unabsorbed capital expenditure on scientific research U/s
35 (4) and S. 32 (2).
4 Carry forward of unabsorbed expenditure on promotion of family planning
amongst employees U/s 36 (1) (ix) Proviso-2 and S. 32 (2).
5 Filing loss return beyond the S. 119 (2) (a) empowers the CBDT to relax a list of provisions which inter-alia
due date but within the time includes S. 139.
extended by CBDT – will it In order to avoid stringency of law, the CBDT, in exercise of this power, extends the
affect carry forward of loss? due date for filing ROI.
If the loss return is furnished beyond the due date referred to in Explanation-2 to S.
139 (1), however, furnished within the time extended by the CBDT, it shall be
regarded as one filed within S. 139 (1) time limit.
The benefit of carry forward is unaffected.
6 Will S. 80 prohibit carry forward S. 80 prohibits only carry forward of losses pertaining to the PY for which loss return
of earlier year’s loss? was filed belatedly.
However, the carry forward of unabsorbed losses pertaining to earlier PYs shall not
be affected.
7 Condonation of delay in filing of loss return to enable carry forward of losses: [CBDT Circular 9/2015].
(a) Provisions of S. 119 (2) (b) It empowers CBDT to authorise subordinate IT authorities to admit and dispose off,
on merits, any application or claim made by the assessee seeking (a) deduction; (b)
exemption; (c) refund; or (d) any other relief (like, carry forward of losses), beyond
the time-limit specified under this Act for making such claim or application.
This power is exercised through general or special order to avoid genuine hardship.
(b) Circular issued to condone the Condoning If the return having a claim of carry forward is filed late,
delay in filing loss return to authority then the delay, in case of genuine hardship, could be
enable carry forward of losses. condoned by the CIT if the returned loss is up to Rs.
10L.
If the returned loss exceeds Rs. 10L but is up to Rs.
50L, the delay could be condoned by the CCIT.
If the returned loss exceeds Rs. 50L, the delay could be
condoned by the CBDT.
Time limit for Condonation application for claim of loss can be made
making application only within 6 years from the end of the AY for which
application is made.
Time limit for Application received for condonation of delay shall be
disposing of disposed off within 6 months from the end of the month
condonation in which application is received by the condoning
application authority.
5. Belated return – S. 139 (4):

Any person who has not furnished a return within the time allowed to him U/s 139 (1) may furnish the return for any PY at
any time before the end of the relevant AY or before the completion of assessment, whichever is earlier.
6. Revised return – S. 139 (5):

If a person having furnished a return U/s 139 (1) or S. 139 (4) discovers any omission or wrong statement therein, then he
may furnish a revised return at any time before the end of the relevant AY or before the completion of assessment,

Issues in revised return:

1 Letters can’t substitute revised Any deduction or exemption not claimed in the original return could be claimed
return. only through a revised return and not through letters. [Geotze India Ltd (SC)].
2 Revised return steps into the shoes Revised return steps into the shoes of original return.
of original return. It substitutes the original return since inception.
If the original return was filed within S. 139 (1) time limit, then the revised return
is also deemed to have been filed within S. 139 (1) time limit.
Thus, if the assessee offers loss through the revised return, such revised return
becomes a return U/s 139 (3) and such loss could be carried forward.
[Dhampur sugar mills Ltd (All)].
3 Whether a loss return filed U/s 139 If a loss return is filed U/s 139 (3), all the provisions of the Act shall apply to
(3) could be revised? [Periyar such return as if it were a return required to be furnished U/s 139 (1).
district co-operative milk Therefore, if the original return was a loss return filed U/s 139 (3), even such
producer union Ltd (Mad)]. return could be revised U/s 139 (5).
4 Whether a loss return filed beyond Loss return filed beyond S. 139 (1) time limit would be still treated as a return
S. 139 (1) time limit but filed within filed U/s 139 (3), if it was filed within the time extended by the CBDT.
the time extended by the CBDT Therefore, such return could also be revised U/s 139 (5). [Hargovind Damji
could be revised U/s 139 (5)? (Guj)].
5 Does filing of a valid revised return Assessee filed a loss return pursuant to notice issued by the AO U/s 142 (1) (i).
automatically enable the assessee Since, such return was filed before the end of the relevant AY, the assessee
to carry forward losses? revised the return U/s 139 (5) and offered additional loss.
In the instant case, though the validity of the revised return could not be
questioned, still the assessee will not be allowed to carry forward both the
losses offered through original return and revised return, since both are not
returns U/s 139 (3).
Filing of a valid revised return does not automatically enable the assessee to
carry forward losses.
6 Whether a revised return could be Yes. [Dr. N. Srivatava (MP)].
revised U/s 139 (5)?
7 Is there any restriction on the No. Revision U/s 139 (5) is possible any number of times subject to the time
number of time a return could be limit specified therein. There is no need for nod of the AO for revising the
revise? return. [Waman Padmanabh Dande 22 ITR 339 (Nag)].
8 Whether a return processed U/s 143 A return could be revised even after processing U/s 143 (1), provided the
(1) could be revised U/s 139 (5)? relevant AY has not expired.
Processing of return U/s 143 (1) does not amount to assessment. [Rajesh
Jhaveri Stock Brokers (P) Ltd (SC)].
9 Significance of ‘discovers any If the assessee has furnished return U/s 139 (1) or U/s 139 (4) and he was not
omission or wrong statement’ in S. aware of omission or falsity of the statements made in the original return at the
139 (5). time of filing of original return and the omission or wrong statement was due to
inadvertence or bonafide mistake, the assessee can file a revised return, within
the time limit specified in S. 139 (5).
However, S. 139 (5) can’t provide remedy to the cases involving deliberate
concealment or furnishing of inaccurate particulars.
Filing a revised return U/s 139 (5) can’t save the assessee from the rigours of
penalty for under-reporting unless the assessee explains to the satisfaction of
the AO that the omission or falsity in the original return was attributable to
bonafide mistake or inadvertence. [Sunanda Ram Dekha (Gau)].
B. PAN – S. 139A:
1 Persons who should apply (a) Every person whose TI during any PY exceeded BEL.
for PAN (b) Every person carrying on any business or profession whose total sales, TO or GR
exceeds or is likely to exceed Rs. 5L in any PY.
(c) Every person who is required to furnish a ROI U/s 139 (4A).
(d) Every person being a resident, other than an individual, which enters into a
financial transaction of an amount aggregating Rs. 250000 or more in a FY
(e) Every person who is the MD, director, partner, trustee, author, founder, karta,
CEO, principal officer or office bearer of the person referred to in (d) or any
person competent to act on behalf of the person referred to in (d),
(f) Persons notified by the CG.

2 Others can also apply Any person, other than the persons (supra), may apply to the AO for the allotment of a
PAN and the AO shall allot a PAN to such person immediately.
3 Quoting of PAN in PAN shall be mandatorily quoted in all returns, challans and documents pertaining to
documents pertaining to prescribed transactions.
prescribed transactions.
Transactions notified by the CBDT requiring mandatory quoting of PAN:

SN Nature of transaction Value of transaction
1. Sale or purchase of a motor vehicle or vehicle which requires registration by All such transactions.
a registering authority, other than two wheeled vehicles.
2. Opening an account [other than a time-deposit referred to at SN 12 and a All such transactions.
Basic Savings Bank Deposit Account] with a banking company or a co-
operative bank
3. Making an application to any banking company or a co-operative bank or to All such transactions.
any other company or institution, for issue of a credit or debit card.
4. Opening of a demat account with a depository, participant, custodian of All such transactions.
securities
5. Payment to a hotel or restaurant against a bill or bills at any one time. Payment in cash of an amount > Rs. 50,000.
6. Payment in connection with travel to any foreign country or payment for Payment in cash of an amount exceeding Rs.
purchase of any foreign currency at any one time. 50,000.
7. Payment to a Mutual Fund for purchase of its units Amount exceeding
Rs. 50,000.
8. Payment to a company or an institution for acquiring debentures or bonds Amount exceeding
issued by it. Rs.50,000.
9. Payment to the Reserve Bank of India for acquiring bonds issued by it. Amount exceeding
Rs. 50,000.
10. Deposit with a banking company or a co-operative bank or post office Cash deposits - (i) exceeding Rs. 50,000
during any one day;
11. Purchase of bank drafts or pay orders or banker’s cheques from a banking Payment in cash of an amount exceeding
company or a co-operative bank Rs. 50,000 during any one day.
12. A time deposit with (i) a banking company or a co-operative bank; (ii) a Post Amount exceeding Rs. 50,000 or aggregating
Office; (iii) a Nidhi or (iv) a NBFC. to more than Rs. 5L during a FY.
13. Payment for one or more pre-paid payment instruments, as defined in the Payment in cash or by way of a bank draft or
policy guidelines for issuance and operation of prepaid payment instruments pay order or banker’s cheque of an amount
issued by RBI India under the Payment and Settlement Systems Act, 2007, aggregating to more than Rs. 50,000 in a FY.
to a banking company or a co-operative bank or to any other company or
institution.
14. Payment as life insurance premium to an insurer as defined in the Amount aggregating to more than Rs. 50K in
Insurance Act, 1938. a FY.
15. A contract for sale or purchase of securities (other than shares) Amount exceeding Rs. 1L per transaction.
16. Sale or purchase, by any person, of shares of a company not listed in a Amount exceeding Rs. 1L per transaction.
RSE.
17. Sale or purchase of any immovable property. Amount exceeding Rs. 10L or SDV
exceeding Rs. 10L.
18. Sale or purchase, by any person, of goods or services of any nature other Amount exceeding Rs. 2L per transaction:
than those specified at SN 1 to 17, if any.
C. Quoting of Aadhar number [S. 139AA]:

1 Mandatory quoting of Aadhar Number. Every person who is eligible to obtain Aadhar Number is required to
[S. 139AA (1)]. mandatorily quote Aadhar Number, on or after 1st July, 2017: (a) in the
application form for allotment of PAN; (b) in the ROI.
2 Mandatory quoting of Enrolment Id, If a person does not have Aadhar Number, he is required to quote Enrolment
where person does not have Aadhar ID of Aadhar application form issued to him at the time of enrolment in the
Number. [Proviso to S. 139AA (1)]. application form for allotment of PAN or in the ROI furnished by him.
Enrolment ID means a 28 digit Enrolment Identification Number issued to a
resident at the time of enrolment.
3 Intimation of Aadhar Number to Every person who has been allotted PAN as on 1st July, 2017, and who is
prescribed Authority. [S. 139AA (2)]. eligible to obtain Aadhar Number, shall intimate his Aadhar Number to
prescribed authority on or before a date as may be notified by the CG.

4 Consequences of failure to intimate If a person fails to intimate the Aadhar Number, the PAN allotted to such
Aadhar Number. [Proviso to S. 139AA person shall be deemed to be invalid and the other provisions of the Act shall
(2)]. apply, as if the person had not applied for allotment of PAN.
5 Provision not to apply to certain The provisions of S. 139AA relating to quoting of Aadhar Number would,
person or class of persons. [S. 139AA however, not apply to such person or class or classes of persons or any State
(3)]. or part of any State as may be notified by the CG.
Notification dated 11.05.2017:

The provisions of S. 139AA shall not apply to an individual who does not possess the Aadhar number or the Enrollment ID
and is:
(i) Residing in the states of Assam, J&K and Meghalaya;
(ii) A non-resident as the IT Act;
(iii) Of the age of 80 years or more at any time during the PY;
(iv) Not a citizen of India.
Supreme Court Judgement on Aadhar-PAN linkage: [Press release dated 10.06.2017]

(i) Those persons who have already enrolled themselves under Aadhaar scheme would comply with the requirements of
S. 139AA (2).
(ii) However, those assessees who are not Aadhaar card holders and do not comply with the provisions of S. 139AA (2),
their PAN cards cannot be treated as invalid.
CC. Verification of return – S. 140 (Amendments):

1 S. 140 provides for verification of ROI by specified persons in case of different assessees.
2 To facilitate implementation of the Insolvency and Bankruptcy Code, 2016 (IBC), it is provided that the insolvency
professional appointed by the adjudicating authority would be the authorised signatory for verification of ROI of the
specified company, with effect from AY 2018-19.
3 Specified company means company in whose case an application for corporate insolvency resolution process is
admitted by Adjudicating Authority; and such application may be admitted U/s 7 or S. 9 or S. 10 of IBC.
4 "insolvency professional" means a person enrolled U/s 206 with an insolvency professional agency as its member and
registered with the Board as an insolvency professional U/s 207;"
5 National Company Law Tribunal is Adjudicating Authority under IBC.
6 In case of such companies, in terms of the provisions of IBC, the Board and the directors are not functional and the
responsibilities are conferred on insolvency professional. Accordingly, the provision is amended to facilitate verification
and signature of such Company's ROI by insolvency professional.
D. Self-assessment – S. 140A:
1 Payment of self-assessment Where any tax is payable on the basis of any return required to be furnished under, inter
tax etc. [S. 140A (1)]. alia, S. 139, after taking into account –
(i) the amount of tax, already paid
(ii) any tax deducted or collected at source;
(iii) DTAR
(iv) MAT credit
(v) AMT Credit
the assessee shall be liable to pay such tax together with interest and fee payable under
any provision of this Act for any delay in furnishing the return or any default or delay in
payment of advance tax before furnishing the return.
2 Order of adjustment of amount Where the amount paid by the assessee U/s 140A (1) falls short of the aggregate of the
paid by the assessee. tax, interest and fee as aforesaid, the amount so paid shall first be adjusted towards the
[Explanation to S. 140A (1)]. fee payable and thereafter towards interest and the balance, if any, shall be adjusted
towards the tax payable.
3 Assessee-in-default for non- If any assessee fails to pay the whole or any part of such of tax or interest or fees, he
payment of sum referred to in shall be deemed to be an assessee in default in respect of such tax or interest or fees
S. 140A (1). [S. 140A (3)]. remaining unpaid and all the provisions of this Act shall apply accordingly.
Penalty could be levied to the extent of tax outstanding, if the assessee is assessee-in-
default in respect of tax. [S. 221].
Collection and recovery proceedings could be initiated and the sum due could be
recovered in accordance with modes of recovery specified in S. 222 and S. 226.

E. Inquiry and audit before assessment - S. 142:
1. Notice U/s 142 (1):
S.142 (1) (i) Notice requiring filing of Where return has not been furnished within the time-limit specified in S.
return. 139 (1), the AO may issue a notice U/s 142 (1) (i) requiring filing of return
within the time specified in such notice.
S. 142 (1) (ii) Notice requiring production For the purpose of making assessment under this Act, the AO may
of accounts and issue a notice U/s 142 (1) (ii) seeking production of accounts and
documents. documents which he considers necessary.
Clause (b) of Restriction on powers given The AO shall not require the production of any accounts relating to a
Proviso to S. U/s 142 (1) (ii). period more than 3 years prior to the PY.
142 (1)
S. 142 (1) (iii) Notice requiring specified For the purpose of making assessment under this Act, the AO may
information. issue a notice U/s 142 (1) (iii) seeking information on specified points in
writing (duly verified).
Clause (a) of Sanction of JCIT required However, the previous approval of the JCIT shall be obtained before
Proviso to S. for seeking certain requiring the assessee to furnish a statement of all assets and liabilities
142 (1) information. not included in the accounts.
1 Significance of ‘For the purpose of Powers U/s 142 (1) (ii) and (iii) could be exercised only for the purpose of
making assessment under this Act’ in S. making assessment. That means, assessment proceedings U/s 143 (3) or
142 (1) S. 144 should have been initiated before issue of notice U/s 142 (1) (ii) and
(iii).
2 Could powers U/s 142 (1) (ii) and (iii) be S. 2 (8) defines assessment to include reassessment. Therefore, even for
exercised for the purpose of re- the purpose of dong reassessment U/s 147, the powers U/s 142 (1) (ii) and
assessment? (iii) could be exercised.
3 Consequences of violation of S. 142 (1) Best judgement assessment U/s 144
(i)/(ii)/(iii) Penalty U/s 272A (1) (d) [AO is empowered to levy a penalty of Rs. 10000].
4 Additional consequences in case of Rigorous imprisonment up to 1 year. [S. 276D].
violation of S. 142 (1) (ii). Initiation of search operations U/s 132.
2. Inquiry U/s 142 (2):
For the purpose of obtaining full information in respect of the income or loss of any person, the AO may make such inquiry
as he considers necessary.
3. Audit – S. 142 (2A) to S. 142 (2D):
1 Power to give audit direction. [S. 142 During the pendency of assessment proceedings, the AO can give
(2A)]. direction to the assessee to get his books of accounts audited by a CA and
to furnish audit report in Form-6B duly signed and verified by such CA and
setting forth such particulars as may be prescribed and such other
particulars as the AO may require.
2 Factors that may influence the AO to Nature and complexity of accounts
give audit direction. [S. 142 (2A)]. Volume of accounts
Doubts regarding the correctness of accounts
Multiplicity of transactions in accounts
Specialized nature of business activities of the assessee
Interest of revenue.
3 OBH to the assessee. [Proviso to S. The AO shall give opportunity of being heard to the assessee before he
142 (2A)]. gives audit direction U/s 142 (2A).

4 Prior sanction of CIT/CCIT. [S. 142 (2A)]. The AO shall obtain prior sanction of the CIT/CCIT before he gives audit
direction U/s 142 (2A).
Even the CA who is going to do audit shall be nominated by the CIT/CCIT.
5 Direction binding even if accounts were The audit direction shall have effect notwithstanding that the accounts of
already audited. the assessee have been audited under any other law. [S. 142 (2B)].
The audit direction shall have effect notwithstanding that the accounts of
the assessee have been audited U/s 44AB of IT Act. The scope of every
audit is different. [Super Cassettes Industries Ltd (Del)].
6 Can audit direction be given in the course Yes. Assessment includes reassessment. [S. 2 (8)].
of reassessment proceedings U/s 147?
7 Time-limit for submission of audit report. Audit report shall be furnished within the time specifies by the AO.
[S. 142 (2C)]
8 Extension of time-limit. [Proviso to S. 142 AO can extend the time limit for submission of audit report for good and
(2C)]. sufficient reasons.
However, the Ʃ period originally fixed for submission of audit report and the
period extended shall not, in any case, exceed 180 days from the date on
which the direction U/s 142 (2A) is received by the assessee.
10 Audit expenses – who shall bear? The expenses of, and incidental to, any audit U/s 142 (2A) shall be paid by
[Proviso to S. 142 (2D)]. the CG.
11 Consequences of non-compliance with Best judgement assessment U/s 144.
audit direction. Penalty U/s 272A (1) (d) [AO is empowered to levy a penalty of Rs. 10000].
Rigorous imprisonment up to 1 year. [S. 276D].
12 Delay in submission of audit report due to If the audit report is not submitted in time inspite of assessee extending co-
default of CA – Can AO do assessment operation, and the default is attributable to the auditor, then best judgement
U/s 144? assessment can’t be made.
Assessee can’t be punished for the mistake of the auditor who was
nominated by the CIT/CCIT. [Swadeshi Polytex Ltd 144 ITR 1 (SC)].
13 Audit direction – not appealable. If the assessee is aggrieved by the audit direction, he can’t prefer an
appeal against it, since it is not appealable.
However, a writ petition could be made before the HC challenging the audit
direction.
14 OBH to the assessee before using the The assessee shall, except where the assessment is made U/s 144, be
material gathered. [S. 142 (3)]. given an opportunity of being heard in respect of any material gathered on
the basis of any inquiry U/s 142 (2) or any audit U/s 142 (2A) and proposed
to be utilised for the purposes of the assessment.
F. Reference to DVO – S. 142A:
1 Reference to DVO The AO may, for the purposes of assessment or reassessment, make a
reference to a VO to estimate the value, including FMV, of any asset, property
or investment and submit a copy of report to him.
2 Satisfaction about incompleteness or The AO may make a reference to the VO U/s 142A (1) whether or not he is
incorrectness of books – not a pre- satisfied about the correctness or completeness of the accounts of the
requisite for making reference U/s 142A. assessee.
[S. 142A (2)].
3 Powers of DVO. [S. 142A (3)]. The DVO, on a reference made U/s 142A (1), shall, for the purpose of
estimating the value of the asset, property or investment, have all the powers
that he has U/s 38A of the Wealth-tax Act, 1957.
4 Estimation based on evidences produced The VO shall, estimate the value of the asset, property or investment after
after giving OBH. [S. 142A (4)]. taking into account such evidence as the assessee may produce and any other
evidence in his possession gathered, after giving an opportunity of being heard
to the assessee.
5 Best judgement estimation in case of non- The VO may estimate the value of the asset, property or investment to the best
cooperation. [S. 142A (5)]. of his judgment, if the assessee does not co-operate or comply with his
directions.
6 Time-limit for furnishing of valuation report. The VO shall send a copy of the report of the estimate made U/s 142A (4) or S.
[S. 142A (6)]. 142A (5), as the case may be, to the AO and the assessee, within a period of 6
months from the end of the month in which a reference is made U/s 142A (1).

7 Using valuation report for framing The AO may, on receipt of the report from the VO, and after giving the
assessment. [S. 142A (7)]. assessee an opportunity of being heard, take into account such report in
making the assessment or reassessment.
8 Significance of ‘for the purposes of Vide ‘for the purposes of assessment or reassessment’ in S. 142A (1). This
assessment or reassessment’ in S. 142A indicates that reference U/s 142A (1) can be made only during the pendency of
(1). assessment or reassessment proceedings. [Umiya co-opearative housing
society Ltd (Guj)].
G. Processing of returns – S. 143 (1):
1 Processing of returns U/s 143 (1) Return furnished U/s 139 or in pursuance to notice issued U/s 142 (1) (i) shall
be processed U/s 143 (1).
2 Manner of processing U/s 143 (1). The following adjustments are to be made to returned income or loss namely
(list exhaustive):
Adjustment-1 [S. 143 (1) (a)]. Rectification of arithmetical errors in the return.
Adjustment-2 [S. 143 (1) (a)]. Denial of incorrect claim, if it is apparent from the information contained in the
return.
Adjustment-3 [S. 143 (1) (a)]. Disallowance of loss claimed, if the return of the PY in which loss was
incurred was furnished beyond the due date specified in S. 139 (1).
Adjustment-4 [S. 143 (1) (a)]. Disallowance of expenditure indicated in the audit report but not taken into
account in computing the TI in the return.
Adjustment-5 [S. 143 (1) (a)]. Disallowance of deduction claimed U/s 80-IA, S. 80-IB, S. 80-IC, S. 80-ID, S.
80-IE or S. 10AA, if the return is furnished beyond the due date specified in
S. 139 (1).
3 Intimation to the assessee about the Before making any adjustments (supra), an intimation has to be given to the
adjustments. [Proviso-1 to S. 143 (1) assessee requiring him to respond to such adjustments. Such intimation may
(a)]. be in writing or through electronic mode.
4 Considering the responses before The response received, if any, has to be duly considered before effecting any
making adjustments. [Proviso-2 to S. adjustment.
143 (1) (a)]. However, if no response is received within 30 days of issue of such
intimation, the processing shall be carried out incorporating the adjustments.
5 Computation of tax and interest The tax and interest and fee U/s 234F, if any, shall be computed on the basis
based on adjusted TI. [S. 143 (1) (b)] of the total income computed U/s 143 (1) (a).
6 Determination of demand or refund. The sum payable by, or the amount of refund due to, the assessee shall be
[S. 143 (1) (c)]. determined after adjustment of the tax, interest and fee U/s 234F, if any,
computed U/s 143 (1) (b) by any TDS, TCS, any advance tax paid, DTAR,
any tax paid on self-assessment and any amount paid otherwise by way of
tax or interest.
7 Sending intimation to the assessee An intimation shall be prepared or generated and sent to the assessee
communicating demand or refund. specifying the sum determined to be payable by, or the amount of refund due
[S. 143 (1) (d)]. to, the assessee U/s 143 (1) (c).
8 Granting of refund. [S. 143 (1) (e)]. The amount of refund due to the assessee in pursuance of the determination
U/s 143 (1) (c), if any, shall be granted to the assessee.
9 Processing results in variation to the Intimation shall also be sent to the assessee in a case where the loss
returned loss – Intimation required. declared in the return by the assessee is adjusted but no tax or interest and
[Proviso-1 to S. 143 (1)]. fee U/s 234F is payable by, or no refund is due to, him.
10 Acknowledgement - deemed to be Where processing has not resulted in demand or refund not it has resulted in
intimation in other cases. variation to the returned losses, then acknowledgement is deemed to be an
[Explanation (b) to S. 143 (1)]. intimation issued U/s 143 (1).
11 Time limit for sending intimation. Intimation U/s 143 (1) shall be sent within 1 year from the end of the FY in
[Proviso-2 to S. 143 (1)]. which return is made.
1 Time-limit of 1 year is for issue and not for service. Vide the word ‘sent’ in Proviso-2 to S. 143 (1).
2 S. 143 (1) intimation could be challenged in appeal before the CIT (A) U/s 246A.
An application seeking rectification can be made to the AO U/s 154.

Revision petition can be made to the CIT U/s 264. [Sanchit Software and Solutions (P) Ltd (Bom) + Vijay Gupta
(2016) (Del)].
3 Where any sum is determined to be payable by the assessee U/s 143 (1), the intimation U/s 143 (1) shall be deemed to
be a notice of demand for the purpose of S. 156.
Accordingly, if the sum specified in S. 143 (1) intimation is not paid within 30 days of its service, then the assessee shall
be regarded as assessee-in-default. [S. 220 (4)].
AO can levy penalty U/s 221. AO can initiate collection and recovery proceedings U/s 226.
Interest is levied U/s 220 (2) @ 1% p.m or part thereof on the sum specified in the intimation from 31 st day to the date of
payment.
Precisely, the consequences that will flow if the notice of demand is not honoured will flow for not honoring the
intimation issued U/s 143 (1).
Processing of return in case of scrutiny: [S. 143 (1D)]:
1 If a return is filed having a claim of refund and case is selected for scrutiny U/s 143 (2), then the refund shall be granted
to the assessee U/s 143 (1). The IT Department cannot stop the refund till the completion of assessment U/s 143 (3).
2 However, to protect the interest of revenue, S. 241A has been introduced by the FA 2017.
3 For the returns furnished for AY 2017-18 or thereafter, where refund of any amount becomes due to the assessee U/s
143 (1) and the AO is of the opinion that grant of refund may adversely affect the recovery of revenue, he may, for the
reasons recorded in writing and with the previous approval of the PCIT or CIT, withhold the refund upto the date on
which the assessment is made. [S. 241A].
H. Scrutiny notice – S. 143 (2):
1 Scrutiny notice. [S. 143 If the AO or the prescribed ITA considers it necessary or expedient to ensure that the
(2)] assessee has not understated his income or has not computed excessive loss or has
not underpaid his tax in any manner he can issue a notice for making the assessment.
2 Prescribed income-tax An ITA not below the rank of an ITO who has been authorised by the CBDT to act as
authority ITA for the purpose of S. 143 (2).
3 What the assessee is On the date to be specified therein, the assessee is required either to attend office of
required to do through this AO or to produce any evidence on which the assessee may rely in support of the
notice? return.
4 Form of notice. The scrutiny notice may be in paper/electronic form. [S. 282A (1)]
5 Time limit for serving Notice U/s 143 (2) cannot be served after the expiry of 6 months from the end of the FY
scrutiny notice. in which the ROI is furnished. [Proviso to S. 143 (2)].
6 Significance of scrutiny Issue scrutiny notice is the 1st step in initiation of proceedings U/s 143 (3). Proceedings
notice. are not initiated unless the notice (supra) is issued.
7 Provisions of S. 292BB
(a) Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment or
reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon
him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be
precluded from taking any objection in any proceeding or inquiry under this Act that the notice
(a) was not served upon him; or
(b) was not served upon him in time; or
(c) was served upon him in an improper manner:
(b) However, S. 292BB shall not apply where the assessee has raised such objection before the completion of such
assessment or reassessment.
8 Consequences of non- Best judgement assessment U/s 144.
compliance with scrutiny Penalty U/s 272A (1) (d) [AO is empowered to levy a penalty of Rs. 10000].
notice.

I. Scrutiny assessment – S. 143 (3):
1 Order of assessment U/s After hearing such evidence as the assessee may produce and such other evidence as
143 (3) the AO may require on specified points, and after taking into account all relevant
material which he has gathered, the AO shall, by an order in writing, make an
assessment of the TI or loss of the assessee, and determine the sum payable by him or
refund of any amount due to him on the basis of such assessment.
2 Hearing [S. 2 (23C)] ‘Hearing’ shall include communication of data and document through electronic mode.
3 Assessment an integrated Assessment is an integrated process. It involves two steps: (a) determination of total
process. income or loss of the assessee; (b) determination of demand or refund.
Within the time limit specified in S. 153 (1) for completion of assessment U/s 143 (3), it
is not enough if the total income or loss alone is determined.
It is imperative to get the demand or refund determined based on the total income or
loss assessed.
4 Procedure for denial of In case of
exemption U/s 10 in case of (a) research association referred to in S. 10 (21);
certain entities which is
required to file return U/s (b) news agency referred to in S. 10 (22B);
139 (4C). [Proviso-1 to S.
143 (3)]. (c) association or institution referred to in S. 10 (23A);
(d) institution referred to in S. 10 (23B);
(e) fund or institution referred to in S. 10 (23C) (iv) or trust or institution referred to

S. 10 (23C) (v) or any university or other educational institution referred to in S.
10 (23C) (vi) or any hospital or other medical institution referred to in S. 10
(23C) (via),
which is required to furnish the ROI U/s 139 (4C), no order making an assessment of
the TI or loss of such research association etc shall be made by the AO, without giving
effect to the provisions of S. 10, unless—
(i) the AO has intimated the CG or the prescribed authority the contravention of
the provisions of S. 10 (21) or (22B) or (23A) or (23B) or S. 10 (23C) (iv) or (v)
or (vi) or (via), as the case may be, by such research association etc, where in
his view such contravention has taken place; and
(ii) the approval granted to such research association etc has been withdrawn or
notification issued in respect of such news agency or fund or trust or institution
has been rescinded:
4 When the procedure laid If the object of the charity approved by the CIT U/s 10 (23C) (iv) is ‘advancement of any
down in proviso-1 to S. 143 other object of general public utility’ and its receipts from commercial activities during
(3) shall not apply? the relevant PY > 20% of its total receipts, it becomes non-charitable for that PY. In
[Proviso-3 to S. 143 (3)]. such case, the AO can complete the assessment by denying exemption U/s 10 (23C)
without following the procedure laid down in Proviso-1 to S. 143 (3).
5 Procedure to be followed in where the AO is satisfied that the activities of the university, college or other institution
withdrawal of recognition of referred to in S. 35 (1) (ii) and (iii) are not being carried out in accordance with all or any
entities referred to in S. 35 of the conditions subject to which such university, college or other institution was
(1) (ii)/(iii). [Proviso-2 to s. approved, he may, after giving a reasonable opportunity of showing cause against the
143 (3)] proposed withdrawal to the concerned university, college or other institution,
recommend to the CG to withdraw the approval and that Government may by order,
withdraw the approval and forward a copy of the order to the concerned university,
college or other institution and the AO.

1 AO frames assessment U/s 143 (3) based on return filed beyond the end of the relevant AY. What is the fate of
such assessment?
As per S. 139 (4), a valid return shall be filed within the end of the relevant AY. Return filed beyond the end of the relevant
AY is an invalid return.
Assessment based on invalid return is invalid. [Maya Devi Bansal (Cal)].
S. 292B will not give immunity to assessment based on invalid return, since it could be invoked only in case of defective
return.
S. 292BB will not come to the rescue of the revenue, since the validity of the assessment is not questioned on the ground of
notice being served beyond the time specified.
In the instant case, the AO should have proceeded U/s 147 and not U/s 143 (3).
If the order of assessment is challenged in appeal, appellate authorities will annul it.
2 Scope of fresh assessment [K.P. Mohideen Kutty (Ker) + Manasa Ram Sons (Raj)].
(a) Where the assessment is set aside and fresh assessment is ordered to re-examine specified issues, then the AO should
restrict himself to only such issues. He cannot consider any fresh issue which he can do so only by initiating proceedings
U/s 147 after the completion of fresh assessment proceedings.
(b) However, where the assessment is set aside in toto and there is a complete remand of case to the table of AO, then the AO
can do whatever he could have done in the course of original assessment. He can even consider the incomes which have
escaped his eyes in the first round.
(c) In nut shell, the scope of fresh assessment is based on the terms of order setting aside the original assessment and
directing fresh assessment.
3 Protective assessment
(a) Meaning of protective assessment: Income is generally charged to tax in the hands of person who earned it. However, S.
60 to S. 64 deals with circumstances in which it is clubbed in the hands of other person.
Even in such a case, the same income is not included in the hands of two persons.
However, in certain cases (i.e. where there exists doubt regarding the person who has title over the income), the
Department includes the same income in the hands of more than one person.
In the hands of one person on substantive basis and in the hands of other on protective basis.
Protective assessment is purely based on convention and not on the basis of any specific provisions of the Act. However,
the validity of this convention is upheld by the SC in Lalji Haridas and in Hirjee case.
(b) Income included only once finally: If, in appeal, the substantive addition is deleted, the protective inclusion becomes
final. However, if the substantive addition is sustained, the protective addition gets cancelled.
(c) No protective recovery and no under-reporting penalty: Protective assessment is possible. Protective recovery is not
possible. Protective inclusion kept as paper inclusion and is not acted upon. Further, on the strength of protective
assessment, under-reporting penalty can’t be levied. [Cochin Co (P) Ltd (ker) + Behari Lal Payarelal (Pun)].
(d) Necessity behind protective assessment: Had the income not been included on protective basis and if in appeal, the
substantive addition is deleted and at that point of time if the time to reopen the assessment has expired, then the
department will be at a loss. This is limitation is made good by the convention of protective inclusion.
4 Principle of Res Judicata – Does it apply to IT Act proceedings:
(a) The issue decided and adjudicated by the Court can’t be raised by the same parties to dispute before the same Court
again.
(b) The principle of res judicata does not apply to IT proceedings.
(c) Every AY is a separate compartment. Findings reached in respect of one AY can’t be automatically imported for another
AY. It is not binding for another AY.
5 Liability to pay tax arises from the charging section and not from the order of assessment. Assessment is, in fact only a
process through which the charge is quantified.
For want of assessment, the charged does not get obliterated. Hence, the assessee cannot claim refund on the ground that
no assessment was made in his case. [Saurashtra Cement and Chemicals industries Ltd 194 ITR 659 (Guj)].
6 Where the assessee has paid the tax due on RI and the demand which arose on account of additions made in the course of
assessment and the assessment was set aside and fresh assessment was ordered and the Department had failed to do the
fresh assessment in time and it had become barred by limitation, then the assessee is entitled to get the sum paid pursuant
to NOD as refund. However, the tax due on the returned income, being an admitted liability cannot be refunded back to the
assessee. [Shelly products (SC)].
E-assessment – S. 143 (3A) to (3C):
To authorise formulation and implementation of scheme for e-assessment, sub-sections (3A) to (3C) are inserted
in S. 143, w.e.f 01.04.2018. Broadly stated, the authorisation is as follows:

1 The CG is empowered to make a scheme by notification in the Official Gazette.

2 The scheme must be for making e-assessment of total income or loss under section 143(3) of the Act, to impart
greater efficiency, transparency and accountability.
3 It should be achieved by: (a) eliminating interface between Assessing Officer and assessee, in course of
proceedings, to the extent technological feasible; (b) optimizing utilization of resources through economies of
scale and functional specialization; and (c) introducing team-based assessment with dynamic jurisdiction. [S.
143 (3A)].
4 For giving effect to the scheme, Central Government may direct that certain provisions of the Act (relating to
assessment) would not apply or would apply with exceptions or modifications or adaptations, as may be
specified in Notification to be issued for the purpose. Such a direction cannot be issued after March 31, 2020.
[S. 143 (3B)].
5 Every Notification to be issued, as aforesaid, should, as soon as may be after its issue, be laid before each
House of Parliament. [S. 143 (3C)].
J. Best judgment assessment – S. 144:
1 Circumstances in which the Assessee fails to make the return required U/s 139 (1), or
AO can do best judgement Assessee fails to comply with all the terms of a notice issued U/s 142 (1) or fails to
assessment U/s 144 comply with a direction issued U/s 142 (2A), or
Assessee, having made a return, fails to comply with all the terms of a notice issued
U/s 143 (2).
2 Manner of doing assessment The AO, after taking into account all relevant material which he has gathered, shall,
U/s 144. after giving the assessee an opportunity of being heard, make the assessment of the
total income or loss to the best of his judgment and determine the sum payable by the
assessee on the basis of such assessment.
3 OBH through SCN. [Proviso-1 Such opportunity shall be given by the AO by serving a notice calling upon the
to S. 144] assessee to show cause, on a date and time to be specified in the notice, why the
assessment should not be completed to the best of his judgment.
4 When SCN is not required? It shall not be necessary to give such opportunity in a case where a notice U/s 142 (1)
has been issued prior to the making of an assessment U/s 144.
1 Partial compliance with notice issued U/s 142 (1) cannot give immunity from best judgement assessment.
[Shankaralinga Nadar and Bros (Mad)].
2 These three circumstances are alternative and not cumulative for the purpose of making an ex parte assessment.
3 BJA should be on a logical, rational and scientific basis. It shall not be on a random or arbitrary basis.
4 It shall not be based on suspicion, rumours, gossips, surmise or prejudice.
5 It shall be based on objective consideration of all materials gathered by him such as past years’ returns, current year’s
return, industry knowledge, enquiry with connected persons, books, documents etc.
6 The order of assessment shall be a speaking order clearly bringing out the basis of assessment and the assumptions
involved.
7 Though some guess work is inevitable, it should be a fair and reasonable.
8 BJA should not result in refund. If it is likely to result in refund, it shall be dropped.
9 Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the
method of accounting provided in S. 145 (1) has not been regularly followed by the assessee, or income has not been
computed in accordance with the standards notified U/s 145A (2), the AO may make an assessment in the manner
provided in S. 144.
K. Directions by JCIT – S. 144A:
1 Direction to AO to enable him to JCIT may issue such directions as he thinks fit for the guidance of the AO to enable
frame assessment. [S. 144A]. him to complete the assessment and such directions shall be binding on the AO.
He may issue these directions on his own motion or on a reference being made to
him by the AO or on the application of an assessee.
Before he gives directions, he may call for and examine the records relating to the
pending assessment proceedings.
He may choose to interfere considering the nature of the case or the amount involved

or any other reason, as he considers necessary.

2 OBH to be given to the assessee No directions which are prejudicial to the assessee shall be issued before an
if directions are prejudicial. opportunity is given to the assessee to be heard.
[Proviso to S. 144A].
3 Direction regarding the manner No direction as to the lines on which an investigation connected with the assessment
of investigation – not should be made, shall be deemed to be a direction prejudicial to the assessee.
prejudicial. [Explanation to
S.144A].
L. Income escaping assessment – S. 147 – S. 152:
Discussion segment-1:
1 If the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY, he may,
subject to S. 148 to S. 153, assess or reassess such income.
2 Circumstances in which income is deemed to have escaped assessment. [Explanation-2 to S. 147].
(a) No ROI has been furnished by the assessee although his TI during the PY exceeded the BEL;
(b) ROI has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the
assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) (i) Assessment has been made, but income chargeable to tax has been under-assessed or
(ii) Assessment has been made, but such income has been assessed at too low a rate
(iii) Assessment has been made, but such income has been made the subject of excessive relief under this Act
(iv) Assessment has been made, but excessive loss or depreciation allowance or any other allowance under this Act
has been computed.
(ba) Assessee has failed to furnish a report in respect of any international transaction which he was so required U/s 92E.
(ca) ROI has not been furnished by the assessee and on the basis of information or document received from the
prescribed ITA U/s 133C (2), it is noticed by the AO that the income of the assessee exceeds the BEL.
ROI has been furnished by the assessee and on the basis of information or document received from the prescribed
ITA U/s 133C (2), it is noticed by the AO that the assessee has understated the income or has claimed excessive
loss, deduction, allowance or relief in the return.
(d) A person is found to have any asset (including financial interest in an entity) located outside India.
1 Significance of ‘reason to Action U/s 147 can’t be based on suspicion, rumours, gossips, surmise or prejudice.
believe’ in S. 147 AO should have concrete material or information in his hands which should result in
formation of belief about escapement.
There should be a live link between the material gathered and the belief formed.
2 Illustrative list of material SC Judgment
which may trigger action HC judgment
U/s 147. CBDT circular
Invalid return submitted by the assessee.
Survey wing information
Findings arrived at in the course of scrutiny assessment for subsequent years.
Retrospective amendments.
Government notifications issued U/s 90 (3).
3 Scope of S. 147 Vs scope of S. 143 (3).
For selecting the case for scrutiny, there is no need for reasons to believe (based on concrete material or information)
that the income is under-stated in the return or the loss is over-stated or tax is under-paid in any manner.
However, for initiating action U/s 147, there should be reason to believe that the income chargeable to tax for the
relevant AY has escaped assessment.
There is no need for recording reasons for selecting the return for scrutiny U/s 143 (3). No need for sanction of higher
authorities to select the case for scrutiny.
However, for initiating proceedings U/s 147, the AO shall record reasons for re-opening and get the sanction for the
same from higher authorities.

U/s 143 (3), there is no restriction on the scope of inquiry. AO can conduct such inquiry as he deems fit for obtaining full
information about income or loss.
However, in the course of proceedings U/s 147, the AO can’t make roving or fishing general inquiry. He can inquire only
in respect of income which has escaped assessment.
Law views S. 147 more seriously and there are enough safeguards against it being misused to harass the assessee.
Important judicial pronouncements:
1 The AO can’t traverse the path of S. 147 for not selecting the case for scrutiny. Assessment U/s 147 can never be a
substitute for assessment U/s 143 (3). What ought to have been done U/s 143 (3) can’t be done U/s 147. Scope of S. 147 is
different from that of S. 143 (3). [KLM Royal Dutch Airlines (Delhi)]. However, if the AO has fresh material on record
which makes him believe that there is escapement (i.e. the income in the return is understated) he may proceed to initiate
action U/s 147.
2 Where assessment could be made U/s 143 (3), there is no justification for the AO traverse the path of S. 147. [Qatalys
software technologies Ltd (Mad)].
3 There is no restriction on the number of times the case could be could be re-opened U/s 147 (Subject to S. 148 to S. 153).
[SSRG Arthanarain swamy 136 ITR 147 (Mad)].
4 During the pendency of validly initiated proceedings U/s 147, another proceeding U/s 147 can’t be initiated in respect of the
same AY. [Trustees of H.E.H. The Nizam’s Supplemental Family Trust 242 ITR 381 (SC)]. However, if these notices
pertain to different AYs, then the proceedings initiated are valid.
5 If the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY, he may, subject to
S. 148 to S. 153, assess or reassess such income and also any other income chargeable to tax which has escaped
assessment and which subsequently comes to his notice in the course of proceedings under this section’.
6 Explanation-3 to S. 147 provides that for the purpose of assessment or reassessment U/s 147, the AO may assess or
reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice
subsequently in the course of the proceedings U/s 147, notwithstanding that the reasons for such issue have not been
included in the reasons recorded U/s 148 (2).
7 The phrase ‘and also any other income chargeable to tax which has escaped assessment and which subsequently
comes to his notice in the course of proceedings under this section…’ in S. 147 and Explanation-3 to S. 147 shall not
encourage the department to do roving or fishing inquiry in respect of matters unconnected with reopening U/s 147. General
inquiry is possible only when the proceedings are initiated U/s 143 (3).
8 Can the AO reassess issues other than the issues in respect of which proceedings were initiated U/s 147 when the
original “reason to believe” on the basis of which the notice was issued ceased to exist?
No possible. [Ranbaxy Laboratories Ltd [2012] (Del) + Jet Airways (India) Ltd (Bom)].
Possible. [Mehak Finvest P Ltd (2014) 367 ITR 769 (P&H) and N. Govindaraju (2015) (Kar)].
9 If there are mistakes apparent from record in the order of AO, he can rectify them U/s 154. However, he has no power to
review his own order through proceedings U/s 147. S. 147 proceedings can’t be used according to his whims and fancies.
[Kelvinator of India Ltd 320 ITR 561 (SC) [2010] + ICICI Securities Primary Dealership Ltd. (2012) 348 ITR 299 (SC) +
Aventis pharma Ltd (2010) (Bom)]. In short, mere change of opinion can’t trigger action U/s 147.
10 Revenue audit objection per se can’t trigger action U/s 147.
However, it is an eye-opener to the AO in most of the cases. It throws light on facts which would have escaped the eyes of
the AO. It enlightens the AO on the legal position based on decided case laws. The AO has to apply his mind on the
objections raised by the audit party, conduct inquiry and if he is satisfied about escapement, thereafter, he can step in U/s
147. [Mettur Chemical and Industrial corporation (Mad)].
11 Valuation report per se can’t be the basis for taking action U/s 147 unless there is some other corroborative evidence to
support it. [Dhariya constructions (SC)].
1 Where, for the relevant AY, assessment was already over U/s 143 or S. 147 and 4 years have elapsed from the end of the
relevant AY and thereafter, the AO wants to take action U/s 147, it is possible only when the escapement is attributable to the
failure of the assessee in truly and fully disclosing all facts material for framing assessment.
2 Initiation of reassessment beyond a period of 4 years on the basis of subsequent Tribunal and HC ruling is not valid, if there
is no failure on the part of the assessee to disclose fully and truly all materials facts. [Allanasons Ltd (2014) 369 ITR 648
(Bom)].
3 Can under-assessment due to subsequent change of law No. It can’t unless there was a failure on the part of the
be taken as income escaping assessment for triggering assessee to disclose fully and truly all material facts necessary
reassessment beyond 4 years from the end of the AY? for assessment. [Allanasons Ltd (2014) 369 ITR 648 (Bom)].

4 If all material facts were disclosed by the assessee, Nedungadi Bank Ltd - 264 ITR 545 (Ker) + Indra Co Ltd 80
reopening of assessment U/s 147 beyond 4 years is not ITR 559 (Cal). + J. P. Baipai (HUF) 140 Taxman 34 (All) –
possible, if escapement is due to AO’s ignorance of law, Century Enka Ltd 143 ITR 629 (Cal) + Dr. H. Habicht Vs
CBDT Circular or decisions of court or due to omission by Makhija 154 ITR 552 (Bom) + Lokendra singh 128 ITR 450
AO of facts by oversight. (MP)].
Principles emerging from the decision of SC in Sun engineering case:
Principles emerging from the decision of SC in Sun engineering case are summarized as under:
1 Matters lost in the original assessment proceedings which have reached finality (because of non-filing of appeal or revision or
rectification application) cannot be raised in the reassessment proceedings. Hence, expenses disallowed or incomes taxed in the
original assessment against which no appeal/revision/rectification application was filed cannot be claimed as allowable or non-taxable
in the re-assessment proceedings U/s 147.
However, concluded matters, if it pertains to income which has escaped assessment, can be raised in the reassessment proceedings.
2 Expenses not claimed in the original assessment cannot be claimed in the reassessment proceedings U/s 147. However, the expenses
pertaining to the income which has escaped assessment can be claimed.
3 U/s 147, the income cannot be reduced below the income originally assessed. Similarly, U/s 147, losses cannot be assessed above the
losses originally assessed.
4 S. 147 is for the benefit of revenue and not for the benefit of the assessee. Therefore, if no return was filed earlier and no assessment
was made earlier, then U/s 147, the AO cannot compute the loss of the assessee.
Circumstances under which proceedings U/s 147 shall be dropped by the AO (at the instance of the assessee): [S.
152 (2)].
1 For the relevant AY, assessment got already over.

2 The order of assessment was not challenged by the assessee in appeal or revision. It has become final.
3 Subsequently, the AO initiates proceedings U/s 147 for the same AY.
4 In such case, the assessee can approach AO and require him to drop the proceedings U/s 147 if he could show that he
had already been assessed on an amount not lower than what he would be rightly liable for even if the income alleged
to have escaped assessment had been taken into account, or the assessment had been properly made.
Appellate proceedings are pending – whether action U/s 147 is possible? [Proviso-3 to S. 147]:
The AO may assess or reassess such income, other than the income involving matters which are the subject matters of any
appeal or revision, which is chargeable to tax and has escaped assessment.
Issue of notice U/s 148:
S. 148 (1) Before making the assessment/reassessment U/s 147, the AO shall serve on the assessee a notice requiring him
to furnish a return of his income for the PY corresponding to the relevant AY.
Such return shall be furnished within such time as may be specified in the notice.
It shall be in the prescribed form and verified in the prescribed manner and setting forth such other particulars as
may be prescribed
All the provisions of this Act shall apply to such return as if it return were a return required to be furnished U/s 139.
S. 148 (2) The AO shall, before issuing any notice U/s 148 (1), record his reasons for doing so.
1 S. 147 = Machinery Provisions of S. 147 are machinery in nature.

provision. [R. Dalmia (Del)]. When the proceedings are initiated U/s 147, assessment is to be made either U/s
143 (3) or S. 144.
No independent procedure is prescribed in respect of proceedings initiated U/s 147.
For co-operating assessees, assessment is done U/s 147 read with S. 143 (3).
For non-cooperating assessees, assessment is done U/s 147 read with S. 143 (3).

2 Assessment or The AO issues notice U/s 148 requiring the assessee to file a return for the relevant
reassessment U/s 147 read AY.
with S. 143 (3) The assessee shall furnish a return as required in the notice.
If he had already filed a return for the relevant AY either U/s 139 or in pursuance of a
notice issued U/s 142 (1) (i) and he has nothing to offer additionally, he can write a
letter to the AO to regard the return already filed U/s 139 or in pursuance of notice
issued U/s 142 (1) (i) as a return filed in pursuance of notice issued U/s 148.
Then, the AO shall serve on the assessee a notice U/s 143 (2) within 6 months from
the end of the FY in which return was furnished in pursuance of notice issued U/s
148.
The AO can issue notice U/s 142 (1) (ii) seeking accounts and documents relating to
the relevant AY for the purpose of making assessment or reassessment.
He can issue notice U/s 142 (1) (iii) seeking information on specified points in writing
(duly verified) for the purpose of making assessment or reassessment.
He can give audit direction U/s 142 (2A).
He can conduct inquiry U/s 142 (2) in respect of matters for which he has initiated
proceedings U/s 147.
Where assessment or reassessment U/s 147 involves estimation of value of any
asset or property or investment, he may make reference to the DVO U/s 142A.
He shall also consider the directions given by the JCIT for the purpose of framing
assessment or reassessment U/s 147.
He shall, then, pass an order of assessment or reassessment U/s 147 read with S.
143 (3), after giving OBH to the assessee.
3 Assessment or If the assessee does not file ROI in pursuance of notice issued U/s 148 or the
reassessment U/s 147 read assessee does not comply with the terms of notice issued U/s 143 (2) or does not
with S. 144 comply with the terms of notice issued U/s 142 (1) (ii)/(iii) or does not comply with the
audit directions issued U/s 142 (2A), the AO may do assessment/reassessment U/s
147 read with S. 144.
4 Significance of notice U/s If the AO, after initiating proceedings U/s 147, fails to serve on the assessee a notice
143 (2). [C. Palaniappan U/s 143 (2) within 6 months from the end of FY in which ROI was furnished in
(Mad)] pursuance of notice issued U/s 148, then the AO can’t proceed U/s 147 and such
proceedings are to be dropped. (Subject to S. 292BB).
5 No immunity from S. 292BB The failure of the AO, in reassessment proceedings, to issue notice U/s 143 (2), prior
for non-issuance of S. 143 to finalizing the re-assessment order, cannot be condoned by referring to S. 292BB.
(2) notice. S. 292BB applies insofar as failure of ‘service of notice’ is concerned and not with
regard to failure to ‘issue’ notice.
The non-issuance of said notice is fatal to the order of reassessment U/s 147. [Shri.
Jai shiv Shanker Traders (P) Ltd (2015) (Del) + Salarpur cold storage (P) Ltd
(2014) (All) + Silverline (2016) (Del)].
6 Reasons need not be S. 148 (2) only requires recording of reasons for initiating proceedings U/s 147 and
communicated through S. does not require its communication to the assessee through notice U/s 148.
148 notice. The validity of proceedings initiated U/s 147 can’t be questioned for non-
communication of reasons through notice issued U/s 148. [S. Narayanappa (SC) +
Ajantha Industries Vs CBDT 102 ITR 281 (SC)].
7 Reasons for re-opening to be The AO is duty bound to supply to the assessee the reasons recorded by him for
supplied. issue of notice U/s 148, after the assessee has filed the ROI. [Jawaharlal Gupta
(Del)].
8 Challenging S. 147 If the reasons recorded by the AO for issue of notice U/s 148 are invalid, then the
proceedings through a writ. assessee can file a writ petition before the HC challenging the proceedings initiated
U/s 147. [Trivandrum club (Ker)].
9 Objections for reopening, Upon perusal of reasons for re-opening, if the assessee raises objections to such re-
raised by the assessee are to opening, the AO shall deal with them through a speaking order before he continues
be dealt with through an the proceedings initiated U/s 147. [Keshav stock and shares Ltd (Del) + IOT
order. Infrastructure and energy services Ltd (Bom)].
10 Summary of events in S. 147 proceedings – [G. K. N. Drive shafts India Ltd (SC)]
(1) The AO possesses material which warrants the belief that income has escaped assessment.

(2) He satisfies himself regarding the reasons for such belief.
(3) He checks time limits and monetary limits in S. 149 and S. 147 Proviso-1.
(4) He records reasons as required by S. 148 (2).
(5) He gets sanction from the higher authorities U/s 151.
(6) Issues notice U/s 148 requiring the assessee to file ROI.
(7) Assessee files ROI as required by the notice. Where the assessee has nothing to offer additionally, he can
write a letter to the AO to consider the return filed U/s 139 or in pursuance of notice issued U/s 142 (1) (i) as
return filed pursuant to notice issued U/s 148.
(8) Assessee demands reasons for issue of notice U/s 148.
(9) The AO furnishes the reasons.
(10) The raises objections if he has any.
(11) The AO counters the objections raised by the assessee, if he is not convinced by explanations given by the
assessee.
(12) The assessee seeks the intervention of JCIT U/s 144A.
(13) If JCIT does not provide remedy, the assessee files a writ.
(14) The HC decides the fate of the proceedings.
(15) If the assessee is aggrieved with the order of the HC, he files an appeal to SC.
(16) The SC decides the fate of the proceedings.
(17) If the proceedings are sustained, the AO completes the assessment U/s 147.
11 No need for fresh notice U/s 148 for If the ITAT sets aside the order of reassessment passed U/s 147 and
fresh reassessment. directs fresh re-assessment U/s 147, for that AO need not issue notice U/s
148. [T.SPL.P. Chidambaram Chettiar (SC)].
Time limit for issue of notice U/s 148 – S. 149:
S. 149 (1) (a) No notice U/s 148 shall be issued for the relevant AY, if 4 years have elapsed from the end of the
relevant AY, unless the case comes U/s 149 (1) (b)/(c)
S. 149 (1) (b) No notice U/s 148 shall be issued for the relevant AY, if 4 years, but not more than 6 years, have
elapsed from the end of the relevant AY unless the income chargeable to tax which has escaped
assessment amounts to or is likely to amount to Rs. 1L or more for that year.
1 Time limit for issue and S. 149 (1) prescribes time-limit for issue of notice U/s 148 and not for service. [R. K.
not for service. Upadhyaya (SC)]. [See illustration-1].
2 When notice is said to be Notice is regarded as issued only on the date of delivery to the post office or courier
issued? company for service to the assessee. It is not issued merely upon signing it. [Kanubhai.
M. Patel (HUF) (Guj)]. [See illustration-2].
3 Provisions cumulative. The requirements of 1st proviso to S. 147 and S. 149 are cumulative. [Vikram Kothari
(HUF) (Guj)].

4 Noticee deceased Where the noticee is deceased, the notice is not valid.
Assessment or reassessment on deceased is invalid.
The proper course of action is to issue notice the legal representative.
But even such notice shall be within the time limit specified in s. 149 (1) and 1 st Proviso to
S. 147. [Vipin Walia (2016) (Del) + Kesar Devi (Raj)]. [See illustration-6].
Escapement of income from foreign assets:
1 Where a person is found to possess any asset (including financial interest in any entity) located outside India, income is
deemed to have escaped assessment. [Explanation-2 (d) to S. 147].
2 Where any income relating to an asset (including financial interest in any entity) located outside India has escaped
assessment, then notice U/s 148 can be issued at any time within 16 years from the end of the relevant AY. [S. 149 (1)
(c)].
3 Where any income relating to an asset located outside India has escaped assessment for any AY, then the provisions of
1st Proviso to S. 147 shall not apply. [2nd Proviso to S. 147].
4 That means, even though the escapement is not attributable to the failure of the assessee in truly and fully disclosing all
facts material for framing assessment, proceedings U/s 147 could be initiated.
Summary of time-limits specified in S. 149 (1) and 1st proviso to S. 147:
Situation Narration of situation Whether notice U/s 148 could be

issued?
1 Escapement relating to income from foreign assets
A 16 years from the end of the relevant AY have not expired [and Yes
escapement is attributable to the failure of the assessee in
making true and full disclosure of all material facts].
B 16 years from the end of the relevant AY have not expired [and Yes
escapement is not attributable to the failure of the assessee in
making true and full disclosure of all material facts].
C 16 years from the end of the relevant AY have expired. No
2 Other escapement.
A 6 years have elapsed from the end of the relevant AY. No
B 6 years have not elapsed but 4 years have elapsed + No
escapement < Rs. 1L.
C 6 years have not elapsed but 4 years have elapsed + Yes
escapement ≥ Rs. 1L + escapement is attributable to failure of
assessee in making true & full disclosure of all material facts.
D 6 years have not elapsed but 4 years have elapsed + No
escapement ≥ Rs. 1L + escapement is not attributable to the
failure of the assessee in making true and full disclosure of all
material facts + For the relevant AY, already assessment was
over U/s 143 (3) or S. 147.
E 6 years have not elapsed but 4 years have elapsed + Yes
escapement ≥ Rs. 1L + escapement is not attributable to the
failure of the assessee in making true and full disclosure of all
material facts + For the relevant AY, already assessment was
not over U/s 143 (3) or S. 147.
F Not even 4 years have elapsed from the end of the relevant Yes.
AY.
Time-limit for issue of notice U/s 148 to the agent of non-resident – S. 149 (3):
1 Options to the Department in case of Option-1: Department can assess or re-assess the income of the non-resident
non-residents [S. 166] directly in his hands.
Option-2: Some person connected to NR can be treated as agent of NR through an
order passed U/s 163 upon which such person becomes a representative assessee

(as per S. 160 (1) (i)) and the income of the NR could be assessed to tax in the
hands of such person treated as agent of NR in representative capacity.
In such case, tax shall be levied and recovered from the agent of the non-resident in
the like manner and to the same extent to which it would have been levied upon and
recovered from the NR. [S. 161].
2 What do we mean by treating a It means adjudicating liability in representative capacity. The person so treated as
person as agent of non-resident? agent of non-resident shall have same responsibilities, duties and liabilities as that of
the non-resident (like, filing of ROI, production of books and documents, co-operation
in inquiry, payment of tax etc).
3 Who could be treated as agent of Person (in India) employed by or on behalf of the NR; or
non-resident? [S. 163 (1)]. Person (in India) who has any business connection with the NR; or
Person (in India) from or through whom the NR is in receipt of any income, whether
directly or indirectly;
Person (in India) who is the trustee of the NR;
Any other person who, whether a resident or NR, has acquired by means of a
transfer, a capital asset in India.
4 Certain persons can’t be treated as A broker in India who, in respect of any transactions, does not deal directly with or on
agent of non-resident. [Proviso to S. behalf of a NR principal but deals with or through a NR broker shall not be deemed to
163]. be an agent U/s 163 in respect of such transactions (being transfer of CA in India), if
the following conditions are fulfilled, namely:—
(i) the transactions are carried on in the ordinary course of business through
the first-mentioned broker; and
(ii) the NR broker is carrying on such transactions in the ordinary course of his
business and not as a principal.
5 OBH to be provided [S. 163 (2)] No person shall be treated as the agent of a non-resident unless he has had an
opportunity of being heard by the AO as to his liability to be treated as such.
6 S. 163 order appealable. [S. 246A]. Order passed U/s 163 treating a person as agent of non-resident is appealable
before the CIT.
7 Can more than one person be treated Yes. In such case, a consolidated assessment of income of NR will be made based
as agent of non-resident? on the returns furnished by these persons treated as agent of NR applying the
provisions applicable to NR and the tax will be recovered from them accordingly.
8 Separate order U/s 163 for each year. In respect of every AY, a separate order is to be passed U/s 163.
Order passed U/s 163 in respect of one AY does not hold good for the other AYs.
9 Time limit for issue of notice U/s 148 Given in S. 149 (1) and 1st Proviso to S. 147.
where proceedings U/s 147 are
initiated directly against non-resident.
10 Time limit for issue of notice U/s 148 6 years from the end of the relevant AY. [S. 149 (3)]. [Subject to 1 st proviso to S. 147]
where proceedings U/s 147 are
initiated against the person treated as
agent of non-resident.
Sanction of higher authorities for issuing notice U/s 148: [S. 151]:
Notice U/s 148 shall be issued only with the sanction of the higher authority. [S. 149 (2)]. The higher authorities who shall
sanction in different situations are summarized as under:
Provision Situation Higher authority whose sanction is to be obtained by the AO

based on the reasons recorded U/s 148 (2).
S. 151 (1) Proceedings U/s 147 are initiated beyond 4 PCCIT/CCIT/PCIT/CIT
years from the end of the relevant AY
S. 151 (2) Proceedings U/s 147 are initiated within 4 JCIT
years from the end of the relevant AY + AO
< Rank of JCIT

Note:
1 Sanctioning authority, being satisfied on the reasons recorded by the AO about the fitness of a case for issue of notice
U/s 148, need not issue such notice himself. [S. 151 (3)].
2 If the Act requires sanction of JCIT but the proceedings were initiated even with the sanction of different authority, even
though higher in rank (in the instant case, CIT), the proceedings are not validly initiated. [Ghan Shyam. K. Khabrani
(Bom) + SPL’s Siddharta Ltd (Del)].
Circumstance in which notice U/s 148 can be issued any time – S. 150 (1):
1 Time limit specified In order to give effect to a finding or direction contained in the order passed by the appellate
in S. 149 shall not authority or revisionary authority, proceedings are to be initiated U/s 147. For that purpose,
apply notice is to be issued U/s 148.
Such notice can be issued at any time. The time limit specified in S. 149 and the restriction
contemplated in 1st Proviso to S. 147 shall not apply. Vide ‘Notwithstanding anything contained
in S. 149’. Vide ‘subject to S. 148 to S. 153’ in S. 147.
2 No need for sanction For issuance of notice U/s 148 in the circumstances (supra), there is no need for sanction from
from higher authority. higher authority U/s 151.
Restriction on operation of S. 150 (1): S. 150 (2):
The provisions of S. 150 (1) shall not apply in any case where any such assessment/reassessment as is referred to in S.
150 (1) relates to an AY in respect of which an assessment/reassessment could not have been made at the time the order
which was the subject-matter of the appeal or revision, as the case may be, was made by reason of any other provision
limiting the time within which any action for assessment/reassessment may be taken.
M. Time-limit for completion of assessment or reassessment – S. 153:
I. Time-limit for completion of assessment U/s 143 (3) or S. 144:
1 Time-limit for completion of assessment U/s 143 (3) 21 months from the end of the relevant AY.
or S. 144 for the AY 2017-18 or earlier years.
or S. 144 for the AY 2018-19.
or S. 144 for the AY 2019-20 or subsequent AYs.
II. Time limit for passing order U/s 147: [S. 153 (2)].
1 Time limit for completion of proceedings U/s 147, where 9 months from the end of the FY in which notice U/s 148 was served on
the notice U/s 148 was served before 01.04.2019. the assessee.
2 Time limit for completion of proceedings U/s 147, where 12 months from the end of the FY in which notice U/s 148 was served
the notice U/s 148 was served on or after 01.04.2019. on the assessee.
III. Time-limit for completion of fresh assessment: [S. 153 (3)].
1 Time limit for completion of fresh 9 months from the end of the FY in which the order of the ITAT is received
assessment directed by the ITAT through by the CIT or PCIT. [If the order of the ITAT is received by the CIT or
its order U/s 254. PCIT before 01.04.2019].
12 months from the end of the FY in which the order of the ITAT is
received by the CIT or PCIT. [If the order of the ITAT is received by the
CIT or PCIT on or after 01.04.2019].
2 Time limit for completion of fresh 9 months from the end of the FY in which the order U/s 263 or S. 264 was
assessment directed by the CIT U/s passed. [If the order U/s 263 or S.264 was passed before 01.04.2019].
263/264. 12 months from the end of the FY in which the order U/s 263 or S. 264

was passed. [If the order U/s 263 or S.264 was passed on or after
01.04.2019].
IV. Time-limit for giving effect to appeal or revision – S. 153 (5):
1 Time limit for giving effect to the orders of appellate 9 months from the end of the FY in which these orders are received by the
authorities passed U/s 250 or S. 254 or S. 260A or S. CIT or PCIT. [If these orders are received by the CIT or PCIT before
262. (Where these orders requires verification of any 01.04.2019].
issue by way of submission of any document by the 12 months from the end of the FY in which these orders are received by the
assessee or any other person or where OBH is to be CIT or PCIT. [If these orders are received by the CIT or PCIT on or after
provided to the assessee). [2nd proviso to S. 153 (5)]. 01.04.2019].
2 Time limit for giving effect to the orders of appellate 3 months from the end of the month in which these orders are received by
authorities passed U/s 250 or S. 254 or S. 260A or S. the CIT.
262 (in other cases). 9 months from the end of the month in which these orders are received by
the CIT (where it is not possible for the AO to give effect to these
orders within 3 months (supra), for reasons beyond control and the
CIT on receipt of request in writing from the AO allows an additional
period of 6 months). [1st proviso to S.153 (5)].
3 Time limit for giving effect to the orders of revisionary 9 months from the end of the FY in which the order U/s 263 or S. 264 was
authority passed U/s 263 or S. 264 (Where these passed. [If the order U/s 263 or S.264 was passed before 01.04.2019].
orders requires verification of any issue by way of 12 months from the end of the FY in which the order U/s 263 or S. 264 was
submission of any document by the assessee or any passed. [If the order U/s 263 or S.264 was passed on or after
other person or where OBH is to be provided to the 01.04.2019].
assessee). [2nd proviso to S. 153 (5)].
4 Time limit for giving effect to the orders of revisionary 3 months from the end of the month in which the these orders are passed
authority passed U/s 263 or S. 264 (in other cases) by the revisionary authority CIT.
9 months from the end of the month in which the these orders are passed
by the revisionary authority CIT (where it is not possible for the AO to
give effect to these orders within 3 months (supra), for reasons
beyond control and the CIT on receipt of request in writing from the
AO allows an additional period of 6 months). [1st proviso to S. 153 (5)].
V. Time limit for completion of assessment or reassessment in certain cases pursuant to directions of appellate
authorities and Courts: [S. 153 (6) (ii)].
1 Where assessment or reassessment is made on the assessee in consequence of or to give effect to any finding or
direction contained in an order passed U/s 250 or S. 254 or S. 260A or S. 262 or in an order of any court in a
proceeding otherwise than by way of appeal, it shall be made within 12 months from the end of the month in which the
order is received by the CIT/PCIT.
2 Where assessment or reassessment is made on the assessee in consequence of or to give effect to any finding or
direction contained in an order passed U/s 263 or S. 264, it shall be made within 12 months from the end of the month in
which the order U/s 263 or S. 264 is passed by the CIT/PCIT.
VI. Time-limit for completion of consequential reassessment in the hands of partners – S. 153 (6) (ii):
Where in case of a firm, an assessment is made on the partner of the firm in consequence of an assessment or
reassessment made on the firm U/s 147, then such assessment or reassessment shall be made before the expiry of 12
months from the end of the month in which assessment order is passed in case of the firm.

Extension of time-limit in certain cases: Explanation-1 to S. 153:
In computing the period of limitation for the purposes of S. 153 the following time periods shall be excluded:
Case Exclusion of Period
Commencing from Ending with
(i) Contravention of the The date on which the AO intimates the CG The date on which the copy of the order
provisions of S. 10 (21) / or the prescribed authority, the said withdrawing the approval or rescinding the
(22B) / (23A) / (23B) / (23C) contravention as required under 1st proviso notification, as the case may be, is received
(iv) / (v) / (vi) / (via). to S. 143 (3) by the AO.
(ii) Direction to get accounts The date on which the AO directs the The last date on which the assessee is
audited U/s 142 (2A). assessee to get his accounts audited U/s required to furnish a report of such audit (or)
142 (2A). the date on which the order setting aside
such direction is received by the PCIT/CIT, if
such direction is challenged before a Court.
(iii) Reference to the VO U/s The date on which the AO makes a The date on which the report of the VO is
142A (1). reference to the VO. received by the AO.
(iv) Where reference(s) for The date on which a reference or first of the The date on which the information requested
exchange of information is references for exchange of information is is last received by the PCIT/CIT (or) a period
made by a competent made by an authority competent under an of one year, whichever is less.
authority. [See illustration-5]. agreement referred to in S. 90 or S. 90A.
(v) the time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the assessee to be re-heard
under the proviso to S. 129; or [See illustration-6].
(vi) the period during which the assessment proceeding is stayed by an order or injunction of any court. [See illustration -7 & 8].
Note:
In all the above cases, where immediately after the exclusion of the aforesaid period, the period of limitation available to the
AO for making an order of assessment, reassessment is less than 60 days, then such remaining period shall be extended to
60 days and the aforesaid period of limitation shall be deemed to be extended accordingly. [Proviso to Explanation-1 to
S.153].
N. Rectification of mistakes apparent from record: [S. 154]:
1 Power to rectify mistakes S. 154 (1) empowers the IT authorities to amend any order passed by them with a view
apparent from record. [S. 154 to rectify mistakes apparent from record.
(1)]
2 Significance of ‘IT authority’ in This power is not only available to AO but also to other IT authorities (like JCIT, CIT,
S. 154 (1)’. CIT (A), TPO, DVO, DRP etc).
However, ITAT can’t invoke this section to rectify mistakes apparent from record in its
order passed U/s 254 (1), since it is not an IT authority. But it has similar powers U/s
254 (2).
3 Significance of ‘any order’ in S. Assessment order, reassessment order, fresh assessment order, penalty order,
154 (1). amendment order, revisionary order, appellate order passed U/s 250, TPO’s order
passed U/s 92CA (3), DRP’s order passed U/s 144C (5), order passed by the AO U/s
195 (2), order passed U/s 197, etc could be amended U/s 154.
4 Whether intimations issued U/s Yes. It is explicitly provided so.
143 (1), S.200A or S. 206CB

could be amended U/s 154?

5 Amendment by respective Respective orders could be amended by only respective authorities. For example, the
authorities. order of AO can’t be amended by the CIT/CIT (A).
6 What do we mean by mistakes It should be patent, obvious and apparent.
apparent from record? It should not be one which is established through a process of long drawn argument.
Its establishment should not be through a complicated process of investigation.
Its establishment shall not involve construction on a point of law. [T. S. Balaram ITO
Vs Volkart Bros 82 ITR 40 + Orient Paper Industries Ltd 208 ITR 158 (Cal) + Harita
Seating Systems Ltd [2011] 202 Taxman 402 (Mad)].
7 Examples of mistakes Clerical or arithmetical mistakes.
apparent from record. Mistakes in indexation.
Non-consideration of mandatory provisions.
Non-consideration of decisions of SC/JHC.
Non-consideration of CBDT circulars.
8 Can mere change of opinion No. A mere change of opinion, however, cannot be the basis on which the same or the
trigger action U/s 154? successor AO can treat a case as one of rectification of mistake. [M. Corp Ltd (SC)].
9 Amendment sumoto & at the The authority concerned
instance of the assessee. [S. (a) may make an amendment U/s 154 (1) of its own motion, and
154 (2)].
(b) shall make such amendment for rectifying any such mistake which has been
brought to its notice by the assessee or the deductor or collector, and where
the authority concerned is CIT (A), by the AO also.
10 OBH to the assessee before An amendment, which has the effect of enhancing an assessment or reducing the
making amendment. [S. 154 refund or otherwise increasing the liability of the assessee or deductor or collector,
(3)]. shall not be made U/s 154 unless the authority concerned has given notice to the
assessee or deductor or collector of its intention so to do and has allowed the
assessee or deductor or collector a reasonable OBH.
11 Amendment to be through a Where an amendment is made U/s 154, an order shall be passed in writing by the ITA
written order. concerned. [S. 154 (4)].
12 Refund upon effecting Where amendment made under this section has the effect of reducing the assessment
amendments reducing or otherwise reducing the liability of the assessee or deductor or collector, the AO shall
assessment. [S. 154 (5)]. make any refund which may be due to such assessee or the deductor or collector.
13 Raising demand upon effecting Where any amendment made under this section has the effect of enhancing the
amendments enhancing assessment or reducing a refund already made, the AO shall serve on the assessee a
assessment or reducing NOD in the prescribed form specifying the sum payable, and such NOD shall be
refund. [S. 154 (6)]. deemed to be issued U/s 156 and the provisions of this Act shall apply accordingly.
14 Time limit for making No amendment under this section shall be made after the expiry of 4 years from the
amendment. [S. 154 (7)]. end of the FY in which the order sought to be amended was passed.
15 Time limit for making Without prejudice to the provisions of S. 154 (7), where an application for amendment
amendments at the instance of under this section is made by the assessee to an IT authority, such authority shall pass
the assessee. [S. 154 (8)]. an order, within a period of 6 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.
Issues in S. 154:
1 Non-consideration of the decision of courts can trigger action U/s 154. [Bihar State Road transport corporation (Pat)].
2 Where divergent were expressed by the HCs, and there is no unanimity, siding one view, action can’t be taken U/s 154,
until the controversy is set at rest by the SC. This is not a case involving mistake apparent from record. The AO can’t
proceed U/s 154. [Indian Steel & Wire Products Ltd 192 ITR 252 (Cal)].
3 However, though contrary views were expressed by other courts, the AO, relying on the decision of JHC, amend his
order U/s 154. [Ramlal Babulal 148 CTR 643 (P&H)].
4 Action U/s 154 is possible even based on later decisions. The Courts, by rendering judgments, do not enact law but only
interpret it (as existing at the material point of time when the order was passed). In other words, these decisions clarify

the legal position which was prevalent when the order was passed. Therefore, even based on later decisions of HC/SC,
action can be taken U/s 154. [Saurashtra Kutch Stock Exchange Ltd [2008] (SC)].
5 Retrospective amendments are clarificatory in nature. Without understanding the legislative intent, the provisions were
mis-interpreted and such views were upheld by the Courts. Thus, to clarify the legislative intent, retrospective
amendments are made. These amendments are deemed to have been included in the statue book at the material point
of time when the AO passed the order of assessment.
If the order of assessment is not in conformity with these amendments, then there is mistake apparent from record. The
AO shall amend his order U/s 154. [E. Sefton & Co (P) Ltd (Cal)].
6 Non-consideration of mandatory provisions of the Act amounts to mistake apparent from record. Therefore, the AO can
step in U/s 154. [Plasser India (P) Ltd 84 TTJ 1024 (Del) + Steel strips Ltd [2011] 200 Taxman 368 (P&H) + Thomy
P. Chakola [2011] 200 Taxman 74 (Ker)].
7 Where curing is possible through S. 154, the AO cannot resort to S. 147. [Hindustan Unilever Ltd 325 ITR 102 (Bom)].
8 S. 143 (1) intimation cannot be amended U/s 154 after the issue of notice U/s 143 (2). [Tamil Nadu Magnesite Ltd
[2011] 196 Taxman 271 (Mad)].
9 In order to avoid stringency of law, S. 119 (2) (a) empowers the CBDT to relax a list of provisions which interalia
includes S. 154. In exercise of such powers, the CBDT issued circular 73 which provides that if the rectification
application is made by the assessee within 4 years from the end of the FY in which the order sought to be amended was
passed, then the rectification order can be passed even beyond 4 years.
Doctrine of merger:
1 If the order passed by an authority is modified in appeal or in revision, then the original order gets merged with the
modified order.
2 Thereafter, the operative order is only the modified order. The original order gets effaced. This is called doctrine of
complete merger.
3 In doctrine of partial merger, the original order does not get merged with the modified order completely. It mergers only
in respect of matters considered and decided in appeal or revision. In respect of other matters, original order continues
to exist.
4 In other words, in respect of matters considered and decides in appeal or revision, the operative order is the modified
order, whereas in respect of other matters, the operative order is the original order.
5 In S. 154, through S. 154 (1A), the doctrine of partial merger is incorporated.
6 S. 154 (1A) provides that where any matter has been considered and decided in any proceeding by way of appeal or
revision relating to an order, the authority passing such order may, notwithstanding anything contained in any law for the
time being in force, amend the order U/s 154 (1) in relation to any matter other than the matter which has been so
considered and decided.
Order already rectified U/s 154 – What is the time limit for subsequent rectification?
1 S. 154 provides that rectification can be made before the expiry of 4 years from the end of the FY in which the order
sought to be amended was passed.
2 The order sought to be amended will not necessarily mean the original order but also the rectified order.
3 Therefore, the 4 years’ time limit in respect of second application shall start from the end of the FY in which 1 st
rectification order was passed.
5 Accordingly, the 2nd rectification application was filed in time and was not time-barred.
6 Therefore, the AO is not justified in rejecting the 2nd rectification application. [Hind Wire Industries Ltd (SC].
O. Post search assessment – S. 153A to S. 153B:
1. Provisions relating to search and seizure – S. 132:
1 When search operations Any person to whom a summons U/s 131 was issued to produce books of accounts or
could be authorised? [S. other documents has failed to produce such books of account or other documents as
132 (1)]. required by such summons; or
Any person to whom a notice U/s 142 (1) was issued to produce books of accounts or
other documents has failed to produce such books of account or other documents as
required by such notice; or

Department has, on the basis of information in its possession, reason to believe

that any person is in possession of any money, bullion, jewellery or other valuable article
or thing and such money, bullion, jewellery or other valuable article or thing represents
income which has not been disclosed for the purposes of this Act.
2 Who can authorise search DGIT – DIT – CCIT – CIT. (Hereinafter referred to as authorizing officers-I)
operations? [S. 132 (1)]. ACIT – ADIT – JCIT – JDIT (if empowered by the CBDT). [S. 132 (1) Proviso-4].
(Hereinafter referred to as authorizing officers-II)
3 Who can be authorised to ACIT – ADIT – JCIT – JDIT – DCIT – DDIT – Assistant CIT – Assistant DIT – ITO (could
carry out search be authorised by the authorizing officers-I).
operations? [S. 132 (1)]. DCIT – DDIT – Assistant CIT – Assistant DIT – ITO (could be authorised by the
authorizing officers-II).
4 What operations are (i) Authorised officer can enter and search any building, place, vessel, vehicle or aircraft
carried in the course of where he has reason to suspect that such books of account, other documents, money,
search? [S. 132 (1)]. bullion, jewellery or other valuable article or thing are kept;
(ii) He can break open the lock of any door, box, locker, safe, almirah or other receptacle
for exercising the powers conferred by (i) where the keys thereof are not available;
(iia) He can search any person who has got out of, or is about to get into, or is in, the
building, place, vessel, vehicle or aircraft, if he has reason to suspect that such person
has secreted about his person any such books of account, other documents, money,
bullion, jewellery or other valuable article or thing;
(iib) He can require any person who is found to be in possession or control of any books
of account or other documents maintained in the form of electronic record, to afford him
the necessary facility to inspect such books of account or other documents;
(iii) He can seize any such books of account, other documents, money, bullion, jewellery
or other valuable article or thing found as a result of such search:
However, the bullion, jewellery or other valuable article or thing, being SIT of the
business, found as a result of such search shall not be seized but the authorised officer
shall make a note or inventory of such stock-in-trade of the business. [Proviso to (iii)].
(iv) He can place marks of identification on any books of account or other documents or
make or cause to be made extracts or copies therefrom;
(v) He can make a note or an inventory of any such money, bullion, jewellery or other
valuable article or thing.
5 Requisitioning services of The authorised officer may requisition the services of any police officer or of any officer of
police. [S. 132 (2)] the CG, or of both, to assist him in search operations and it shall be the duty of every
such officer to comply with such requisition.
6 Examination on oath. [S. The authorised officer may, during the course of the search or seizure, examine on oath
132 (4)]. any person who is found to be in possession or control of any books of account,
documents, money, bullion, jewellery or other valuable article or thing and any statement
made by such person during such examination may thereafter be used in evidence in any
proceeding under this Act.
The aforesaid examination may not be merely in respect of any BOA, other documents or
assets found as a result of the search, but also in respect of all matters relevant for the
purposes of any investigation connected with any proceeding under this Act.
7 Presumptions as to the Where any books of account, other documents, money, bullion, jewellery or other
assets, books etc found in valuable article or thing are found in the possession or control of any person in the
the course of search. [S. course of a search, it may be presumed:
132 (4A) + S. 292C]. (i) that such books of account, other documents, money, bullion, jewellery or other
valuable article or thing belong to such person;
(ii) that the contents of such books of account and other documents are true ; and
(iii) that the signature and every other part of such books of account and other
documents which purport to be in the handwriting of any particular person or
which may reasonably be assumed to have been signed by, or to be in the
handwriting of, any particular person, are in that person's handwriting, and in the
case of a document stamped, executed or attested, that it was duly stamped
and executed or attested by the person by whom it purports to have been so
executed or attested.

8 Period of retention of BOA or other documents seized shall not be retained by the authorised officer for a period
BOA and other exceeding 30 days from the date of the order of assessment or reassessment U/s 153A
documents. [S. 132 unless the reasons for retaining the same are recorded by him in writing and the approval of
(8)]. the CCIT/CIT/DGIT/DIT for such retention is obtained.
However, CCIT or CIT or DGIT or DIT shall not authorise the retention of the BOA and other
documents for a period > 30 days after all the proceedings under this Act in respect of the
years for which the BOA or other documents are relevant are completed.
9 Allowing making of The person from whose custody any books or other documents are seized may make copies
copies or taking of thereof, or take extracts therefrom, in the presence of the authorised officer at such place
extracts. [S. 132 (9)]. and time as he may appoint in this behalf.
10 Handing over of books Where the authorised officer has no jurisdiction over the person searched by him, the BOA
assets etc to the or other documents, or assets seized shall be handed over by the authorised officer to the
jurisdictional AO. [S. AO having jurisdiction over such person within a period of 60 days from the date on which
132 (9A)]. the last of authorisations for search was executed.
Thereupon, the powers exercisable by the authorised officer U/s 132 (8) or S. 132 (9) shall
be exercisable by such AO.
11 Power to make Where, during the course of the search or within a period of 60 days from the date on which
provisional the last of the authorisations for search was executed, the authorised officer, for the reasons
attachment. [S. 132 to be recorded in writing, is satisfied that for the purpose of protecting the interest of revenue,
(9B)]. it is necessary so to do, he may with the previous approval of the PDGIT or DGIT or the
PDIT or PDIT, by order in writing, attach provisionally any property belonging to the
assessee.
This power is given to protect the interest of the revenue by safeguarding recovery in search
cases.
12 Life of provisional Every provisional attachment aforesaid shall cease to have effect after the expiry of a period
attachment. [S. 132 of 6 months from the date of the order passed to that effect.
(9C)].
13 Power to make The authorised officer may, during the course of the search or within a period of 60 days
reference to valuation from the date on which the last of the authorisations for search was executed, make a
officer. [S. 132 (9D)]. reference to DVO, who shall estimate the FMV of the property in the manner provided U/s
142A and submit a report of the estimate to the said officer within a period of 60 days from
the date of receipt of such reference.
This power is given to enable correct estimation and quantification of undisclosed income
held by the assessee in the form of investment or property.
1 Significance of ‘in consequence Search can’t be triggered by suspicion, gossips, rumours, anonymous letters,
of information in his possession, prejudice, surmise or past track record.
has reason to believe, in S. 132 There should be concrete material or information to warrant search operation.
(1). There should be a live link between the material gathered and the belief formed.
2 Communication from CBI ≠ DGIT received a communication from the CBI that the assessee has unexplained
Information. assets. DGIT issues authorisation for initiation of search operations. The legality
of search operations was questioned before the SC.
Held, that the communication from CBI, though a Government agency, per se
does not constitute information. DGIT should have conducted inquiry and have
gathered material in this regard to satisfy himself. The search operation is illegal,
since it was initiated purely based on the communication of CBI, without
application of mind. [Ajit Jain (SC)].
3 Recording of reasons. The authorizing officer shall record the reasons for initiation of search operations.
[Southern Herbals Ltd (Kar)].
4 Reasons need not be in search Search warrant need not bear the reasons for initiation of search operations.
warrant. [Southern Herbals Ltd (kar) + Space wood furnishers (P) Ltd (2015) (SC)].
5 Blank search warrant – not Search based on blank search warrant is illegal. Search warrant should specify
acceptable. the person to be searched and the location to be searched.
6 Fresh authorisation for extension Based on the information gathered in the course of a validly initiated search, if the
of search operations into new authorised officer wants to extend the search operations into new locations of the
locations. person searched, fresh authorisation is to be obtained.

7 Authorisation from officers who Where any building, place, vessel, vehicle or aircraft in which the books of
don’t have jurisdiction over accounts or assets are suspected to be kept is within the area of jurisdiction of a
person searched. [Proviso-1 to CCIT or CIT who has no jurisdiction over the person searched, and such CCIT or
S. 132 (1)]. CIT has reasons to believe that delay in getting the authorisation from the CCIT
or CIT having jurisdiction over such person may be prejudicial to the interest of
the revenue, then he is competent to authorise the authorised officer to conduct
the search.
8 Books, documents and assets Where any CCIT or CIT has reason to suspect that any books of account, other
authorised to be searched kept documents, money, bullion, jewellery or other valuable article or thing in respect
in a place not mentioned in the of which an officer has been authorised by other CCIT or CIT to carry out search
authorisation – authorisation to operations are kept in any building, place, vessel, vehicle or aircraft not
search such place can come mentioned in the authorisation, such CCIT or CIT may, authorise the said officer
from non-jurisdictional officer. [S. to search such other building, place, vessel, vehicle or aircraft.
132 (1A)].
9 Prosecution U/s 275B for not The person who is found to be in possession or control of any books of account
affording facility to inspect books or other documents maintained in the form of electronic record and is required by
of account or documents the authorised office to afford him the necessary facility to inspect such books of
maintained in electronic form. account or other documents, fails to afford such facility to the authorised officer,
then he shall be punishable with rigorous imprisonment for a term which may
extend to 2 years and shall also be liable to fine.
10 Deemed or constructive search. Where it is not possible or practicable to take physical possession of any valuable
[2nd proviso to S. 132 (1)]. article or thing and remove it to a safe place due to its volume, weight or other
physical characteristics or due to its being of a dangerous nature, the authorised
officer may serve an order on the owner or the person who is in immediate
possession or control thereof that he shall not remove, part with or otherwise deal
with it, except with the previous permission of such authorised officer and such
action of the authorised officer shall be deemed to be seizure of such valuable
article or thing.
However, this power can’t be exercise in respect of valuable article or thing, being
stock-in-trade. [Proviso-3 to S. 132 (1)].
11 Order of restraint. [S. 132 (3)]. The authorised officer may, where it is not practicable to seize any such books of
account, other documents, money, bullion, jewellery or other valuable article or
thing, for reasons other than those mentioned in the 2nd proviso to S. 132 (1),
serve an order on the owner or the person who is in immediate possession or
control thereof that he shall not remove, part with or otherwise deal with it except
with the previous permission of such officer.
Serving a restraint order shall not be regarded as seizure of such books of
accounts, other documents or assets. [Explanation to S. 132 (3)].
12 Life of restraint order. [S. 132 Restraint order shall not be in force for a period exceeding 60 days from the date
(8A)]. of the order.
13 Reason to believe – not to be The reason to believe or suspect, as recorded by the income-tax authority U/s
disclosed. [Explanation to S. 132 132 (1) or S. 132 (1A), shall not be disclosed to any person or any authority or the
(1) & Explanation to S. 132 (1A)]. Appellate Tribunal.
Accordingly, When appeal is made by the assessee challenging the order of
assessment or reassessment U/s 153A, now it is not possible for the CIT (A) or
ITAT to demand the reasons which resulted in formation of belief that the person
raided is possessing assets representing undisclosed income. They can’t not see
as to whether the search operations were initiated based on concrete material or
information.
In other words, it is no more possible for the assessees to challenge the orders
passed U/s 153A before CIT(A) or ITAT on the ground that search is invalid since
is not backed sufficient material.

2. Requisition of books of accounts, other documents and assets – S. 132A:
1 Circumstances in which books of accounts, Any person to whom a summons U/s 131 or a notice U/s 142 (1) (ii) was
other documents and assets could be issued to produce any books of account or other documents has failed to
requisitioned. [S. 132A (1)]. produce such books of account or other documents and the said books
of account or other documents have been taken into custody by any
officer under any other law.
Any assets represent income which has not been disclosed for the
purposes of the this Act by any person from whose possession or control
such assets have been taken into custody by any officer or authority
under any other law for the time being in force.
2 What do we mean by requisitioning books It means seeking them from the officer under any other law in force,
of account, other documents and assets? when these are no longer required for the purpose of such law.
[S. 132A (1)].
3 Who can authorise such requisition? [S. DGIT – DIT – CCIT – CIT. (Referred to as authorizing officers).
132A (1)].
4 Who could be authorised to make ACIT – ADIT – JCIT – JDIT – DCIT – DDIT – Assistant CIT – Assistant
requisition? [S. 132A (1)]. DIT – ITO. (Referred to as requisitioning officers).
5 Delivery of books etc pursuant to On a requisition being made as aforesaid, the officer under other law
requisition. [S. 132A (2)]. shall deliver the books of account, other documents or assets to the
requisitioning officer either forthwith or when such officer is of the opinion
that it is no longer necessary to retain the same in his custody.
6 Application of provisions of S. 132 to Where any books of account, other documents or assets have been
books, documents and assets requisitioned delivered to the requisitioning officer, the provisions of S. 132 shall apply
as if these are seized U/s 132 (1). [S. 132A as if such books of account, other documents or assets had been seized
(3)]. U/s 132 (1) by the requisitioning officer from the custody of the person
referred above.
3. Post search assessment provisions – S. 153A to S. 153D:
(i) Assessment in case of search or requisition – S. 153A:
1 Issuance of notice U/s 153A. [S. 153A The AO shall issue a notice to the person in respect of whom search was initiated
(1) (a)]. U/s 132 or to the person whose books of accounts, other documents and assets
were requisitioned U/s 132A seeking returns in respect of 6 AYs immediately
preceding the AY relevant to the PY in which search was initiated or requisitioned
was made and of relevant AY (s).
The returns shall be furnished within the time-limit specified in the notice.
The returns shall be in the prescribed form, verified in the prescribed manner and
shall set forth prescribed particulars.
All the provisions of the Act shall apply to such returns as if these were returns
required to be furnished U/s 139.
2 Relevant AY (s). [Explanation-1 to S. The expression "relevant AY" shall mean an AY preceding the AY relevant to the PY
153A (1)]. in which search is conducted or requisition is made which falls beyond 6 AYs but not
later than 10 AYs from the end of the AY relevant to the PY in which search is
conducted or requisition is made.
3 Conditions to be fulfilled for issuing (a) The AO has in his possession books of account or other documents or evidence
notice U/s 153A in respect of specified which reveal that the income, represented in the form of asset, which has escaped
AY (s). [Proviso-4 to S. 153A (1)] assessment amounts to or is likely to amount to Rs. 50L or more in the relevant AY
or in aggregate in the relevant AYs.
(b) The income referred to in (a) or part thereof has escaped assessment for such
year or years; and
(c) The search U/s 132 is initiated or requisition U/s 132A is made on or after
01.04.2017.
4 Meaning of ‘asset’ in Proviso-4 to S. Asset shall include (a) immovable property being land or building or both, (b) shares
153A (1). [Exp-2 to S. 153A (1)]. and securities, (c) loans and advances, (d) deposits in bank account.
5 Time-limit for issuing notice U/s 153A. No time-limit is prescribed for issuing or serving notice U/s 153A.
6 Single notice or separate notice? For each of the AYs for which proceedings are initiated U/s 153A, a separate notice

is to be issued.
7 Assessment or reassessment U/s The AO shall assess or reassess the TI of 6 AYs immediately preceding the AY
153A. [S. 153A (1) (b)]. relevant to the PY in which such search is conducted or requisition is made and for
the relevant AY (s).
8 No block assessment – Assessment or The AO shall assess or reassess the TI in respect of each AY falling within such 6
reassessment for each AY separately. AYs and for the relevant AY (s).
[Proviso-1 to S. 153A (1)]
9 Relevant tax rates. [Explanation to S. In an assessment or reassessment made in respect of an AY U/s 153A, the tax shall
153A]. be chargeable at the rate (s) as applicable to such AY.
10 Time-limit for doing assessment or Situation Narration of the situation Time-limit
reassessment U/s 153A for 6 AYs and 1 Date on which last of 21 months from the end of the FY
for relevant AY (s). [S. 153B]. authorisation for search or in which last of the authorisation
requisition got executed < for search or requisition got
01.04.2018. executed.
2 Date on which last of 18 months from the end of the FY
authorisation for search or in which last of the authorisation
requisition got executed falls for search or requisition got
during the FY 18-19 executed.
requisition got executed ≥ for search or requisition got
01.04.2019 executed.
11 Under which section assessment is S. 143 (3) or S. 144. But not U/s 153A.
done for the AY relevant to the PY in
which search was initiated or
requisitioned was made?
12 What is the time limit for completion of Situation Narration of the situation Time-limit
assessment for the AY relevant to the 1 Date on which last of 21 months from the end of the FY
PY in which search was initiated or authorisation for search or in which last of the authorisation
requisitioned was made? requisition got executed < for search or requisition got
0104.2018. executed.
requisition got executed falls for search or requisition got
during the FY 18-19 executed.
requisition got executed ≥ for search or requisition got
01.04.2019 executed.
13 S. 153A is a machinery provision. Provisions of S. 153A are machinery in nature.
When the proceedings are initiated U/s 153A, assessment is to be made either U/s
143 (3) or S. 144.
No independent procedure is prescribed in respect of proceedings initiated U/s 153A.
For co-operating assessees, assessment is done U/s 153A read with S. 143 (3).
For non-cooperating assessees, assessment is done U/s 153A read with S. 143 (3).
14 Assessment or reassessment U/s 153A The AO issues notice U/s 153A requiring the assessee to file a return for the 6 AYs
read with S. 143 (3) and the relevant AY (s).
The assessee shall furnish a return as required in the notice.
If he had already filed a return for the aforesaid AYs either U/s 139 or in pursuance of
a notice issued U/s 142 (1) (i) and he has nothing to offer additionally, he can write a
letter to the AO to regard the returns already filed U/s 139 or in pursuance of notice
issued U/s 142 (1) (i) as a return filed in pursuance of notice issued U/s 153A.
Then, the AO shall serve on the assessee a notice U/s 143 (2) within 6 months from
the end of the FY in which return was furnished in pursuance of notice issued U/s
153A.
He can issue notice U/s 142 (1) (iii) seeking information on specified points in writing
(duly verified) for the purpose of making assessment or reassessment.
He can give audit direction U/s 142 (2A).
He can conduct inquiry U/s 142 (2) for the purpose of framing assessment or

reassessment U/s 153A.

He shall, then, pass an order of assessment or reassessment U/s 153A read with S.
143 (3), after giving OBH to the assessee.
15 Assessment or reassessment U/s 153A If the assessee does not file return in pursuance of notice issued U/s 153A or the
read with S. 144 assessee does not comply with the terms of notice issued U/s 143 (2) or does not
comply with the terms of notice issued U/s 142 (1) (iii) or does not comply with the
audit directions issued U/s 142 (2A), the AO may do assessment/reassessment U/s
153A read with S. 144.
16 Sanction of JCIT required. [S. 153D]. If the AO < JCIT, the AO shall pass the order of assessment or reassessment U/s
153A only with the sanction of JCIT.
Similarly, for the AY relevant to the PY in which search was initiated or requisition
was made, the order of assessment shall be passed only with the sanction of JCIT.
17 Joint authorisation should not lead to a It shall not be necessary to issue an authorisation U/s 132 or make a requisition U/s
conclusion that the persons searched 132A separately in the name of each person. [S. 292CC (1) (i)].
should be assessed as an AOP or BOI Where an authorisation U/s 132 has been issued or requisition U/s 132A has been
jointly. [S. 292CC] made mentioning therein the name of more than one person, the mention of such
names of more than one person on such authorisation or requisition shall not be
deemed to construe that it was issued in the name of an AOP or BOI consisting of
such persons. [S. 292CC (1) (ii)].
Notwithstanding that an authorisation U/s 132 has been issued or requisition U/s
132A has been made mentioning therein the name of more than one person, the
assessment or reassessment shall be made separately in the name of each of the
persons mentioned in such authorisation or requisition. [S. 292CC (2)].
The action of AO is justified in view of provisions of S. 292CC.
18 What is the fate of proceedings U/s Anonymous letters does not constitute information about the undisclosed income of
153A initiated pursuant to search the person complained of. Search based on such letters are illegal.
triggered by anonymous letters? The person raided can file a writ petition in the HC challenging the validity of the
[Suresh Chand Agarwal (All)]. proceedings initiated U/s 153A on the ground that the search is illegal.
Such proceedings will be quashed by the HC.
It can’t be a defence to the Department to contend that thought search was not in
consequence of information or material about the undisclosed income of the person
raided, in the course of such search, he was found to possess assets representing
undisclosed income.
Search operations have serious ramifications. It results in intrusion into the privacy of
the person raided.
Validity of search operations can’t be judged by its outcome.
Search operations could be initiated only in consequence of information in the
possession of the Department about undisclosed income.
Though, in the course of search assets representing undisclosed income and
incriminating evidences indicating concealment were seized, that can’t validate an
illegal search.
If search is illegal, the resultant proceedings U/s 153A also becomes illegal and
invalid.
19 Whether the material gathered in the Illegality of search will not vitiate the legality of the evidence.
course of illegal search can be used The evidentiary value of documents or records seized in the course of illegal search
against the assessee for initiating is not lost.
proceedings U/s 147? [Dr. Pratap There is not in the Indian Evidence Act to suggest this.
Singh (SC) + Pooran Mal (SC)]. Therefore, the Department is free to initiate proceedings U/s 147, if it is otherwise
possible.
(iii) Abatement of pending proceedings – 2nd proviso to S. 153A (1):
1 Pending proceedings shall get abated. The assessment or reassessment, if any, relating to any AY falling within the
[2nd proviso to S. 153A (1)]. period of 6 AYs and for the relevant AY (s) pending on the date of initiation of
the search or making of requisition, as the case may be, shall abate.
However, the Department is not at a loss. The assessment or reassessment
could be done U/s 153A in respect of those AYs for which the pending
proceedings got abated.

2 Concluded proceedings –intact. Nothing will happen to the concluded proceedings pertaining to these AYs.
These are intact. However, the AO shall do reassessment for these years.
3 Pending appellate proceedings / What gets abated under 2nd proviso to S. 153A (1) is only the proceedings
revisionary proceedings / rectification relating to assessment or reassessment which are pending on the date of
proceedings –intact. [CBDT circular initiation of search.
7/2003] Appellate proceedings, revisionary proceedings and rectification proceedings
which are pending on the date of initiation of search will not get abated.
(iv) No need to issue notice U/s 153A in certain cases – 3rd Proviso to S. 153A (1) + R. 112F:
1 Power of CG to notify The CG may by rules made by it and published in the OG (except in cases where any
cases where notice U/s assessment or reassessment has abated under 2nd proviso to S. 153A (1)), specify the
153A need not be issued. classes of cases in which the AO shall not be required to issue notice for assessing or
[3rd Proviso to S. 153A reassessing the TI for 6 AYs immediately preceding the AY relevant to the PY in which
(1)]. search is conducted or requisition is made and for the relevant AY (s).
2 R. 112F notified in Where as a result of a search U/s 132, a person is found to be in possession of any assets,
exercise of this power. whether or not he is the actual owner of such assets; and
Where such search is conducted in the territorial area of an assembly or parliamentary
constituency in respect of which a notification has been issued by the Election
Commissioner appointing the date and time of poll, before the completion of poll hours or
where the assets so seized or requisitioned are connected in any manner to the ongoing
election in an assembly or Parliamentary constituency:
Assessment or reassessment need not be made in respect of 6 AYs and in respect of
relevant AYs.
It would be sufficient if the assessment is made for the AY relevant to the PY in which
search was initiated or requisition was made and for those AYs for which the proceedings
for assessment or reassessment were abated by virtue of 2nd proviso to S. 153A (1).
(v) Revival of abated proceedings – S. 153A (2) + S. 153 (8):
1 Abated proceedings If any proceeding initiated or any order of assessment or reassessment made U/s 153A (1)
to get revived. [S. has been annulled in appeal or any other legal proceeding, then the assessment or
153A (2)]. reassessment relating to any AY which has abated 2 nd Proviso to S. 153A (1), shall stand
revived with effect from the date of receipt of the order of such annulment by the CIT.
2 Time-limit for (a) 1 year from the end of the month of such revival; or
completion of revived
proceedings. [S.153 (b) within the period specified in S. 153; or Whichever is later.
(8)].
(c) S. 153B (1).
(vi) Abatement of revived proceedings:
1 Revived proceedings to get abated. Such revival of abated proceedings shall cease to have effect, if the order of
[Proviso to S. 153A (2)]. annulling the proceedings U/s 153A is set aside.
The proceedings U/s 153A which got abated because of the order of annulment shall
stand revived.
2 Extended time-limit for completion of Normal time-limit U/s 153B + Time lost.
revived S. 153A proceedings. [Clause
(viii) of Explanation to S. 153B].
3 Time lost The period commencing from the date of annulment of proceeding U/s 153A (2) to
the date of receipt of the order setting aside the order of such annulment, by the CIT.
4 Minimum 60 days should be available The AO should have atleast 60 days for completion of assessment from the time he
to the AO after extension. [Proviso-1 could resume his work.
to Explanation to S. 153B].

a(vii) Assessment or reassessment in case of other person: S. 153C:
1 Issuing notice U/s 153A in case of The AO, having jurisdiction over the person searched or the person whose books of
a person other than the person accounts, other documents and assets were requisitioned (hereinafter referred to as S. 153A
searched. [S. 153C (1)]. person), is satisfied that (a) any assets seized or requisitioned belong to any person other
than S. 153A person; or (b) any books of accounts or documents seized or requisitioned,
pertain to, or any information contained therein relates to, any person other than S. 153A
person.
Then, he shall hand over such books of accounts, documents and assets to the AO having
jurisdiction over the person other than S. 153A person.
The AO, having jurisdiction over the person other than S. 153A person, is satisfied that the
books, documents or assets seized or requisitioned have a bearing on the determination of
the total income of the person other than S. 153A person.
Then, he shall issue notice U/s 153A to the person other than S. 153A person for 6 AYs
immediately preceding the AY relevant to the PY in which search was initiated or requisition
was made and for the relevant AY (s).
2 Assessment or reassessment for The AO, having jurisdiction over the person other than S. 153A person, shall assess or
the aforesaid AYs U/s 153A. [S. reassess the total income of the 6 AYs and relevant AY (s) U/s 153A.
153A (1)].
3 Time limit for completion of Situation Narration of the situation Time-limit
assessment or reassessment U/s 1 Date on which last of 21 months from the end of the FY in which last
153C read with S.153A for 6 AYs authorisation for search or of the authorisation for search or requisition
and relevant AY (s) [S. 153B]. requisition got executed < got executed; or
01.04.2018. 9 months from the end of the FY in which
books, documents and assets were handed
over U/s 153C (1) to the AO having jurisdiction
over the person other than S. 153A person.
(Whichever is later).
2 Date on which last of 18 months from the end of the FY in which last
authorisation for search or of the authorisation for search or requisition
requisition got executed got executed.
falls during the FY 18-19 12 months from the end of the FY in which
3 Date on which last of 12 months from the end of the FY in which last
authorisation for search or of the authorisation for search or requisition
requisition got executed ≥ got executed.
01.04.2019 12 months from the end of the FY in which
4 Pending proceedings shall get The assessment or reassessment, if any, relating to any AY falling within the period of 6 AYs
abated. [1st proviso to S. 153A (1)]. and for the relevant AY (s) pending on the date of handing over of books, documents and
assets U/s 153C to the AO concerned, shall abate.
However, the Department is not at a loss. The assessment or reassessment could be done
U/s 153C read with S. 153A in respect of those AYs for which the pending proceedings got
abated.
5 Power of CG to notify cases where 3rd Proviso to S. 153A (1) + S. 112F apply.
notice U/s 153A need not be
issued. [2nd proviso to S. 153C (1)].
6 Assessment for the AY relevant to Assessment for the AY relevant to the PY in which search was initiated or requisition was
the PY in which search was made shall be made U/s 143 (3) or S. 144.
initiated or requisition was made. However, if the books, documents or assets were handed over to the AO having jurisdiction
[S. 153C (2)]. over the person other than S. 153A person beyond the due date for filing return for the AY
relevant to the PY in which search was initiated or requisition was made, then for such AY
notice shall be issued U/s 153A and assessment shall be made U/s 153A.

7 Time-limit for completion of Same as that is given in 3.

assessment referred to in 6.
1 Recording of satisfaction in the Where books, documents or assets are found from a person who is being searched, then the
satisfaction note by the AO normal presumption is that the said books, documents or assets belong to that person. [Vide S.
having jurisdiction over S. 153A 292CC].
person. [Pepsi Foods (P) Ltd It is for the AO to rebut that presumption and come to the conclusion or satisfaction that the
(2014) (Del) + Meghmani books, documents or assets, in fact, belongs to somebody else.
Organics Ltd (2013) (Guj) + There must be some cogent material available with the AO before he arrives at satisfaction that
CBDT Circular 24/2015]. the seized books, documents or assets do not belong to person searched but to somebody else.
Such satisfaction should be recorded in the file of the assessee (i.e. S. 153A person) which is
sine qua non to trigger jurisdiction for the AO (having jurisdiction over the other person) to
proceed against the other person.
The satisfaction note should clearly indicate that he has applied his mind and it was not done in
a mechanical manner.
In other words, the satisfaction note should display the reasons or basis for the conclusion that
the AO of the searched person is satisfied that the seized documents or assets belong to a
person other than the searched person.
2 Forwarding of satisfaction note A copy of the aforesaid satisfaction note shall be forwarded to the AO having jurisdiction over
to the AO having jurisdiction the other person and it shall be kept in the file of the other person.
over the other person.
4. Application of seized or requisitioned assets – S. 132B:
S. 132B (1): Manner of dealing with the assets seized: The assets seized U/s 132 or requisitioned U/s 132A may be dealt
with in the following manner, namely:—
(i) Liabilities that could be The amount of any existing liability under this Act, the Wealth-tax Act, 1957 and the amount of
recovered of the assets the liability determined on completion of the assessment U/s 153A and the assessment of the
seized year relevant to the PY in which search is initiated or requisition is made (including any penalty
levied or interest payable in connection with such assessment) and in respect of which such
person is in default or is deemed to be in default, may be recovered out of such assets:
Proviso- Application for release Where the person concerned makes an application to the AO within 30 days from the end of
1 to (i) of assets + Conditions the month in which the asset was seized, for release of asset and the nature and source of
to be fulfilled for acquisition of any such asset is explained to the satisfaction of the AO, the amount of any
release of assets. existing liability referred above may be recovered out of such asset and the remaining portion
of the asset may be released, with the prior approval of the CCIT or CIT, to the person from
whose custody the assets were seized:
Proviso- Time limit within which Such asset or any portion thereof as is referred to in proviso-1 shall be released within a period
2 to (i) the seized assets are of 120 days from the date on which the last of the authorisations for search U/s 132 or for
to be released requisition U/s 132A was executed;
(ii) Appropriation of money If the assets consist solely of money, or partly of money and partly of other assets, the AO may
seized apply such money in the discharge of the liabilities referred to above and the assessee shall be
discharged of such liability to the extent of the money so applied;
(iii) Sale of assets for The assets other than money may also be applied for the discharge of any such liability
discharge of liability referred to above as remains undischarged and the AO may recover the amount of such
liabilities by the sale of such assets and such sale shall be effected in the manner laid down in
the 3rd schedule.

S. 132B (2): Other recovery mode are applicable: Nothing contained in S. 132B (1) shall preclude the recovery of the
amount of liabilities aforesaid by any other mode laid down in this Act.
S. 132B (3): Returning back the surplus assets: Any assets or proceeds thereof which remain after the liabilities referred
to above are discharged shall be forthwith made over or paid to the persons from whose custody the assets were seized.
S. 132B (4) (a): Payment of interest by the CG: The CG shall pay simple interest @ 0.5% p.m or part thereof on the
amount by which the aggregate amount of money seized U/s 132 or requisitioned U/s 132A, as reduced by the amount of
money, if any, released under the first proviso to S. 132B (1) (i), and of the proceeds, if any, of the assets sold towards the
discharge of the liability referred to above, exceeds the aggregate of the amount required to meet the liabilities referred to
above.
S. 132B (4) (b): Period for which interest is to be paid: Such interest shall run from the date immediately following the
expiry of the period of 120 days from the date on which the last of the authorisations for search U/s 132 or requisition U/s
132A was executed to the date of completion of the assessment U/s 153A.
Explanation to S. 132B:
1 The Explanation provides that “existing liability” does not include advance tax payable in accordance with the provisions
of Part C of Chapter XVII of the Income-tax Act.
2 The impact of the above amendment as inserted by the said Explanation shall be harsh on the assessees who have
been searched U/s 132, since they have to pay advance tax from their own funds and not from seized funds.
5. Penalty in search cases – S. 271AAB:
1 When penalty can be Where the assessee has undisclosed income pertaining to specified PYs which is
levied U/s 271AAB? unearthed in the course of search operations U/s 132, penalty is levied U/s 271AAB.
2 Meaning of specified PY. PY which has ended before the date of search, but the date of furnishing the ROI U/s 139
(1) for such year has not expired before the date of search and the assessee has not
furnished the ROI for the PY before the date of search;
PY in which search was conducted.
3 Levying authority. AO.
4 Quantum of penalty. 30% of the undisclosed income (if the following conditions are satisfied).
60% of the undisclosed income. (if the following conditions are not satisfied).
5 Conditions to be fulfilled In a statement U/s 132 (4), the assessee admits the undisclosed income pertaining to
for suffering penalty @ specified PYs and specifies the manner in which income has been derived.
30%. The assessee substantiates the manner in which the undisclosed income was derived.
On or before the specified date, the assessee pays tax, together with interest, if any, in
respect of undisclosed income.
On or before the specified date, the assessee furnishes the ROI for the specified PYs
declaring such undisclosed income therein.
6 Meaning of specified It means the due date of furnishing of ROI U/s 139 (1) or the date on which the period
date. specified in the notice issued U/s 153A for furnishing of ROI expires, as the case may be.
7 No penalty U/s 270A. No penalty under the provisions of S. 270A shall be imposed upon the assessee in respect
of the aforesaid undisclosed income.

Chapter-21: Advance tax & interest U/s 234A - S. 234B – S. 234C Summary
A. Advance tax provisions:

1 Requirement to pay tax in advance. Though income of the PY is assessed to tax in the AY, the recovery of tax on such
[S. 207 (1)]. income is not postponed to the AY. It is recovered in the same PY in which the
income is earned. One of the mechanisms through which the tax is recovered in the
same PY is the advance tax mechanism.
2 Steps in computation of advance tax Estimation of total income of the assessee for the relevant PY.
liability. Estimation of the tax liability using the tax rates specified in Part-III of Schedule I of
the Finance Act and special rates applicable for specified income.
Advance tax liability = Tax liability estimated (inclusive of surcharge (if applicable) &
education cess) – TDS – TCS – DTAR – AMT credit – MAT credit
3 No advance tax obligation in certain Case-1: If the advance tax liability < Rs. 10000, there is no advance tax obligation.
cases. [S. 208].
Case-2: If the assessee = senior citizen (i.e. resident + Age ≥ 60 years) and he does
not have income U/H PGBP, then there is no advance tax obligation. [S. 207 (2)].
4 Advance tax installments and due Due date of Instalment amount payable
date. [S. 211]. instalment
On or before 15th Not less than 15% of advance tax liability.
June
On or before 15th Not less than 45% of advance tax liability, as reduced by
September the amount, if any, paid in earlier instalment.
On or before 15th Not less than 75% of advance tax liability, as reduced by
December the amount, if any, paid in earlier instalments.
On or before 15th The whole of advance tax liability, as reduced by the
March amount, if any, paid in earlier instalments.
5 Advance tax payment and due date The assessees who have opted for presumptive taxation U/s 44AD or S. 44ADA
applicable for assessees who have shall pay the whole of the advance tax liability on or before 15th March.
opted for presumptive taxation U/s
44AD or S. 44ADA.
6 Payment made before the end of the Any amount paid by way of advance tax on or before 31st March shall also be
PY to be treated as advance tax. treated as advance tax paid during the FY for all purposes of the Act.
7 Income on which tax is deductible Employee receives salary without TDS U/s 192. Then, the employee shall pay the
but not deducted – Tax on such tax on his salary in advance. Otherwise, the employee exposes himself to interest
income shall be paid by way of U/s 234B. This so even if the employer is punished by way of levying interest U/s
advance tax. 201 (1A) for non-deduction of tax at source.
B. Computation of interest U/s 234A:

1 Circumstances in which Situation-1: For the relevant AY, the return was filed belatedly and the return was processed
interest is levied U/s U/s 143 (1) but no assessment was made.
234A (1). Situation-2: For the relevant AY, the return was filed belatedly and assessment was made
thereafter.
Situation-3: For the relevant AY, the return was not filed and best judgment assessment was
made U/s 144.
Situation-4: For the relevant AY, the return was not filed and assessment was made U/s 147.
Situation-5: For the relevant AY, the return was not filed and assessment was made U/s 153A.
2 Computation of interest Base for computation of Tax on total income determined U/s 143 (1) – TDS – TCS –
in situation-1. interest Advance tax – Self assessment tax paid before the due date for
filing return – double tax avoidance relief – MAT credit or AMT
credit. [Part of Rs. 100 ignored].
Period for which Date immediately following the due date to the date of furnishing
interest is computed. of return.
Interest to be included Interest computed as aforesaid – Interest U/s 234A (1) paid U/s
in the intimation issued 140A.
U/s 143 (1).
3 Computation of interest Base for computation of Tax on total income assessed – TDS – TCS – Advance tax –
in situation-2 interest Self assessment tax paid before the due date for filing return –
double tax avoidance relief – MAT credit or AMT credit. [Part of
Rs. 100 ignored].


Period for which interest Date immediately following the due date to the date of
is computed furnishing of return.
Interest to be included in Interest computed as aforesaid – interest U/s 234A (1) paid
the notice of demand pursuant to intimation issued U/s 143 (1) –interest U/s 234A (1)
issued U/s 156. paid U/s 140A.
4 Computation of interest Base for Tax on total income assessed U/s 144 – TDS – TCS – Advance tax –
in situation-3 computation of Self assessment tax paid before the due date for filing return – double
interest tax avoidance relief – MAT credit or AMT credit. [Part of Rs. 100
ignored].
Period for which Date immediately following the due date to the date of completion of
interest is assessment U/s 144.
computed
5 Computation of interest Base for Tax on total income assessed U/s 147 – TDS – TCS – Advance tax –
in situation-4 computation of Self assessment tax paid before the due date for filing return – double
interest tax avoidance relief – MAT credit or AMT credit. [Part of Rs. 100
ignored].
Period for which Date immediately following the due date to the date of assessment
interest is U/s 147.
computed
6 Computation of interest Base for Tax on TI assessed U/s 153A – TDS – TCS – Advance tax – SAT
in situation-5 computation of paid before the DD for filing return – double tax avoidance relief –
interest MAT credit or AMT credit. [Part of Rs. 100 ignored].
Period for which Date immediately following the due date to the date of assessment
interest is computed U/s 153A.

1 Circumstances in which interest is Situation-1: For the relevant AY, the return was processed U/s 143 (1).
levied U/s 234A (3) Subsequently assessment is made U/s 147/ S. 153A. Pursuant to notice U/s
148 or S. 153A, return was not furnished within the time specified therein but
filed belatedly.
Situation-2: For the relevant AY, the return was processed U/s 143 (1).
Subsequently assessment is made U/s 147/ S. 153A (read with S. 144).
Pursuant to notice U/s 148 or S. 153A, no return was not furnished.
Situation-3: For the relevant AY, assessment was made U/s 143 (3), S. 144 or
S. 147. Subsequently, reassessment is made U/s 147 or U/s 153A. Pursuant to
notice U/s 148 or S. 153A, return was not furnished within the time specified
therein but filed belatedly.
Situation-4: For the relevant AY, assessment was made U/s 143 (3), S. 144 or
S. 147. Subsequently, reassessment is made U/s 147 or U/s 153A (read with
S. 144). Pursuant to notice U/s 148 or S. 153A, no return was not furnished.
2 Computation of interest in situation- Base for Tax on TI assessed U/s 147 or S. 153A - Tax on
1. computation of total income determined U/s 143 (1). [Part of Rs.
interest 100 ignored].
Period for which Date immediately following the due date specified in
interest is computed the notice issued U/s 148 or S. 153A to the date of
furnishing of return.
3 Computation of interest in situation-2 Base for Tax on TI assessed U/s 147 or S. 153A (read with S.
computation of 144) - Tax on total income determined U/s 143 (1).
interest [Part of Rs. 100 ignored].
interest is the notice issued U/s 148 or S. 153A to the date of
computed completion of assessment U/s 147 or S. 153A (read
with S. 144).

4 Computation of interest in situation-3 Base for Tax on TI reassessed U/s 147 or S. 153A - Tax on TI
computation of assessed U/s 143 (3) or S. 144 or S. 147. [Part of Rs.
interest 100 ignored].
computed furnishing of return pursuant to notice issued U/s 148
or S. 153A.
5 Computation of interest in situation-4 Base for Tax on TI reassessed U/s 147 or S. 153A (read with
computation of S. 144) - Tax on TI assessed U/s 143 (3) or S. 144 or
interest S. 147. [Part of Rs. 100 ignored].
computed completion of reassessment U/s 147 or S. 153A (read
with S. 144).
C. Computation of interest U/s 234B:

1. Interest U/s 234B (1)
1 When interest is levied U/s 234B (1)? Assessee has obligation to pay tax in advance. But has not paid any
advance tax.
Advance paid by the assessee < 90% of the assessed tax.
2 Different situations in which interest is Situation-1: For the relevant AY, the return was processed U/s 143 (1)
computed U/s 234B (1). but no assessment was made.
Situation-2: For the relevant AY, the return was processed U/s 143 (1).
Subsequently, assessment was made U/s 143 (3) or S. 144.
Situation-3: For the relevant AY, return was not filed. Best judgment
assessment is made U/s 144.
Situation-4: For the relevant AY, no return was filed. Assessment was
made U/s 147.
Situation-5: For the relevant AY, no return was filed. Assessment was
made U/s 153A.
3 Computation of interest in situation-1
Stage-1: Computation of interest at the Assessed tax Tax on returned income – TDS – TCS –
time of filing of return. DTAR – AMT credit – MAT credit.
Advance tax paid < 90% of the assessed tax.
Base for computation of Assessed tax – Advance tax paid. [Part of
interest Rs. 100 ignored].
Period for which interest 1st of the AY to date of payment of self-
is computed assessment tax U/s 140A.
Stage-2: Computation of interest at the Assessed tax Tax on TI as adjusted U/s 143 (1) –
time of preparing intimation U/s 143 (1) TDS – TCS – DTAR – AMT credit –
after the processing of return. MAT credit.
Quantum of interest U/s [(Assessed tax – Advance tax) * 1% *
234B (1) (1st day of the AY to date of payment of
SAT U/s 140A)] +
[(Assessed tax – Advance tax – self-
assessment tax paid U/s 140A) * 1% *
(1st day of month succeeding the
month of payment of self-assessment
tax to date of processing of return U/s
143 (1))]
Interest to be included in Interest computed (supra) – Interest
intimation issued U/s 143 U/s 234B (1) paid U/s 140A (1).
(1)


Computation of interest U/s 234B (1) upon Assessed tax Tax on TI assessed U/s 143 (3) or S.
assessment U/s 143 (3) or S. 144. 144 – TDS – TCS – DTAR – AMT
credit – MAT credit.
Quantum of interest U/s [(Assessed tax – Advance tax) * 1% *
234B (1) (1st day of the AY to date of payment of
self-assessment tax U/s 140A)] +
assessment tax paid U/s 140A) * 1% *
(1st day of month succeeding the
month of payment of self-assessment
tax to date of payment of tax pursuant
to intimation issued U/s 143 (1))] +
assessment tax paid U/s 140A – tax
paid pursuant to intimation issued U/s
143 (1)) * 1% * (1st day of month
succeeding the month of payment of
tax pursuant to intimation issued U/s
143 (1) to date of assessment U/s 143
(3) or S. 144)].
Interest to be included in Interest computed (supra) – Interest
the notice of demand U/s 234B (1) paid U/s 140A (1) –
issued U/s 156. Interest U/s 234B (1) paid pursuant to
intimation issued U/s 143 (1).
Assessed tax Tax on TI assessed U/s 144 – TDS – TCS – DTAR – AMT credit – MAT
credit.
Quantum of interest U/s 234B (1). [(Assessed tax – Advance tax) * 1% * (1st day of the AY to date of best
judgment assessment U/s 144].
Assessed tax Tax on TI assessed U/s 147 – TDS – TCS – DTAR – AMT credit – MAT
credit.
Quantum of interest U/s 234B (1). [(Assessed tax – Advance tax) * 1% * (1st day of the AY to date of
assessment U/s 147].
Assessed tax Tax on TI assessed U/s 153A – TDS – TCS – DTAR – AMT credit – MAT
credit.
Quantum of interest U/s 234B (1). [(Assessed tax – Advance tax) * 1% * (1st day of the AY to date of
assessment U/s 153A].
2. Interest U/s 234B (3)

1 Circumstances in which interest is levied Situation-1: For the relevant AY, the return was processed U/s 143 (1).
U/s 234B (3). Subsequently, assessment was made U/s 147 or S. 153A.
Situation-2: For the relevant AY, assessment was made U/s 143 (3) or
S. 144 or S. 147. Subsequently, reassessment was made U/s 147 or S.
153A.
2 Computation of interest in situation-1. Base for Tax on TI assessed U/s 147 or S. 153A - Tax
computation of on total income determined U/s 143 (1). [Part
interest of Rs. 100 ignored].
Period for which 1st of the AY to the date of assessment U/s
interest is computed 147 or S. 153A.

3 Computation of interest in situation-2 Base for Tax on TI reassessed U/s 147 or S. 153A -
computation of Tax on TI assessed U/s 143 (3) or S. 144 or S.
interest 147. [Part of Rs. 100 ignored].
Period for which 1st of the AY to the date of reassessment U/s
interest is 147 or S. 153A.
computed
D. Interest U/s 234C:

SN Default Interest U/s 234C
1 Advance tax paid on or before 15th June of the PY < 12% [Tax due on returned income – Advance tax paid on or
of tax due on the returned income. before 15th June] * 1% * 3 months.
2 Advance tax paid on or before 15th September of the PY < [Tax due on returned income – Advance tax paid on or
36% of tax due on the returned income. before 15th September] * 1% * 3 months.
3 Advance tax paid on or before 15th December of the PY < [Tax due on returned income – Advance tax paid on or
75% of tax due on the returned income. before 15th December] * 1% * 3 months.
4 Advance tax paid on or before 15 December of the PY <
th [Tax due on returned income – Advance tax paid on or
75% of tax due on the returned income. before 15th March] * 1% * 1 month.

1 Tax due on returned income = Tax on returned income – TDS – TCS – DTAR – AMT credit – MAT credit.
2 Computation of interest in case of [Tax due on returned income – Advance tax paid on or before 15th March] *
assessees who have opted for 1% * 1 month.
presumptive taxation scheme referred to
in S. 44AD or S. 44ADA.
3 Provisions of S. 234C not to apply in The provisions of S. 234C shall not apply to any shortfall in the payment of
certain cases. the tax due on returned income where such shortfall is on account of under
estimation or failure to estimate:
(a) The amount of capital gains.
(b) Income by way of winnings from lotteries, cross word puzzles,
races, card games, gambling etc.; or
(c) Income U/H PGBP in cases where the income accrues or arises
under the said head for the first time; or
(d) Income of the nature referred to in s. 115BBDA. i.e. dividend from
domestic companies exceeding Rs. 10L.
However, the assessee has to pay the whole of the amount of tax payable
in respect of sums referred to in (a) to (d) above as part of the remaining
instalments of advance tax which are due or where no such instalment is
due, by 31st March of the FY.
Issues in S. 234A - S. 234B - S. 234C interest:

1 SAT paid before the due date for filling ROI to be reduced in finding the base for computation of interest U/s 234A. [Dr. Pranoy
Roy (SC) + CBDT Circular 2/2015].
2 Because of subsequent amendments to the IT Act if there is any shortfall in payment of advance tax, that shall not fasten
liability U/s 234B and S. 234C. [Emami Ltd (Cal) + Revathi Equipments Ltd (Mad)].
3 NOD specifying interest can be issued only when there is a specific direction in the assessment order, levying interest. When
the assessment order is silent on whether any interest is leviable, the NOD cannot go beyond the assessment order and the
assessee cannot be served with any such notice demanding interest. [Uday Mistanna Bhandar & Complex 222 ITR 44 (Pat) –
Affirmed in Ranchi Club Ltd 247 ITR 209 (SC)]. Also vide the wordings in S. 156 “Where any tax, interest, penalty, fine or any
other sum which is payable in consequence of any order passed under this Act”. It follows that the demand notice has to
conform to the demand raised in the assessment order not only for tax but also for interest or any other sum. CIT Vs Kishan
Lal (HUF) 258 ITR 359 (Delhi).
4 However, where the tax payable along with interest was computed in the computation sheet prepared in the prescribed form
(ITNS 150) which was appended to the assessment order itself, the assessee cannot place reliance on the decision of the
Patna HC in Uday Mistanna Bhandar & Complex case. The computation sheet in the form prescribed (Form No. ITNS 150)
signed or initialed by the AO is an order in writing determining the tax payable within the meaning of S. 143(3) and, therefore,
has to be treated as a part of the assessment order. Hence, the assessee cannot challenge the levy of mandatory interest U/s
234B and S. 234C on the aforesaid grounds. [Assam Mineral Development Corporation Ltd 320 ITR 149 (Gau) + Bhagat

construction Co (P) Ltd (2016) (SC)].

5 In terms of S. 234B (1), interest liability would end on the date of determination of TI U/s 143 (1) or, in case of regular
assessment, date of such assessment and there is no scope for extending such liability to a later date and relate it to a
revisional, appellate or rectification order. [Applitech solutions Ltd (2016) (Guj)].
6 Where fresh assessment is made upon the original assessment getting set aside, the interest U/s 234B shall end with the date
of original assessment and not with that of fresh assessment. [Modi Industries Ltd (SC)].
Power of CBDT to relax the requirements of S. 234A/B/C:

1 Power of CBDT to relax the As per S. 119 (2) (a), the CBDT has, interalia, power to relax the provisions of S.
provisions of S. 234A, S. 234B 234A, S, 234B and S. 234C.
and S. 234C. [S. 119 (2) (a)]. The CBDT, in exercise of this power, authorised the CCIT or DGIT to waive or reduce
interest U/s 234A, S. 234B and S. 234C under the specified circumstances and
subject to the conditions stipulated by it.
However, the waiver or reduction is not possible unless the assessee has filed the ROI
for the relevant AY and paid the entire tax component specified in the demand notice.
2 Circumstances in which the CCIT Where in the course of search and seizure operation, books of accounts were taken
or DGIT is authorised to waive or over by the Department and were not available to the assessee to prepare his ROI,
reduce interest U/s 234A, S. the CCIT or DGIT (Investigations) is authorised by the CBDT to reduce or waive the
234B and S. 234C. interest U/s 234A.
Where ROI could not be filed by the assessee due to unavoidable circumstances and
such ROI is filed voluntarily by the assessee or his legal heirs without detection by the
AO, it can be a ground for waiver of interest.
In consequence of any retrospective amendment of law or the decision of the SC or a
decision of a larger bench of JHC (which was not challenged before the SC and has
become final), some expense is disallowed or certain receipts which were not taxable
become taxable. In this case, interest U/s 234B shall be waived.
Any income chargeable to tax under any head of income, other than CG is received or
accrued after due date of payment of the first or subsequent instalments of advance
tax which was neither anticipated nor was in the contemplation of the assessee, and
the advance tax on such income is paid in the remaining instalment or instalments. In
this case, interest U/s 234C shall be waived.

Chapter-22: Refund & Interest thereon (Summary)
A. Interest on refund – S. 244A:

S. 244A (1) Entitlement to Where refund of any amount becomes due to the assessee under this Act, he
interest on refund. shall be entitled to receive simple interest.
It shall be computed in the following manner.
S. 244A (1) (a) Computation of interest where refund is out of TDS/TCS/Advance tax.
ROI for the Base for computation of interest Refund. [Part of Rs. 100 is ignored].
relevant AY is filed Interest rate 0.50% p.m. or part thereof
within S. 139 (1) Period 1st of the relevant AY to the date of
time limit. grant of refund.
ROI for the Base for computation of interest Refund. [Part of Rs. 100 is ignored].
relevant AY is not Interest rate 0.50% p.m. or part thereof
filed within S. 139 Period Date of filling of return to the date of
(1) time limit. grant of refund.
S. 244A (1) (aa) Computation of interest where refund is out of self-assessment tax.
Where self Base for computation of interest Refund. [Part of Rs. 100 is ignored].
assessment tax Interest rate 0.50% p.m. or part thereof
was paid before Period Date of filing of return to the date of
the due date for grant of refund.
filing return.
Where self Base for computation of interest Refund. [Part of Rs. 100 is ignored].
assessment tax Interest rate 0.50% p.m. or part thereof
was paid after the Period Date of payment of self-
due date for filing assessment tax to the date of grant
return. of refund.
Proviso to S. 244A No interest in Where the refund < 10% of tax determined U/s 143 (1) or pursuant to regular
(1) (a) & (aa) certain cases. assessment, no interest shall be granted U/s 244A (1) (a) or S. 244A (1) (aa).
S. 244A (1) (b) Computation of Base for computation of interest Refund. [Part of Rs. 100 is ignored].
interest on refund Interest rate 0.50% p.m. or part thereof
in other cases. Period Date of payment to the date of
grant of refund.
S. 244A (1A) Computation of additional interest on refund arising from order (not being a fresh assessment
order) passed to give effect to appeal or revision.
Refund arises from Parameters for Order giving effect to Order giving effect to
the order passed computing interest on appellate order was appellate order was
to give effect to the refund. passed within 3 passed within 9
appellate order months from the end months from the end
passed U/s 250, of the month in which of the month in which
254, 260A or S. the order of appellate the order of appellate
262. authority was received authority was received
by the CIT. by the CIT. (CIT has
extended the time for
passing the order to
give effect to appeal
by 6 months)
Base for computing Refund Refund
interest
Interest rate 3% p.a 3% p.a
Period From the expiry of 3 From the expiry of 9
months (supra) to the months (supra) to the
date of grant of refund. date of grant of refund.
Refund arises from Parameters for Order giving effect to Order giving effect to
the order passed computing interest on revisionary order was revisionary order was
to give effect to the refund. passed within 3 passed within 9
revisionary order months from the end months from the end
passed U/s 263 or of the month in which of the month in which
S. 264. the revisionary order the revisionary order
was passed. was passed. (CIT has
extended the time for
passing the order to

give effect to revision

by 6 months)
Base for computing Refund Refund
interest
Interest rate 3% p.a 3% p.a
Period From the expiry of 3 From the expiry of 9
months (supra) to the months (supra) to the
date of grant of refund. date of grant of refund.
S. 244A (1B) Computation of Parameters for Refund arises on Refund arises
interest on refund computing interest on account of giving pursuant to claim
to the deductor out refund. effect to an appellate made in Form 26B.
of amount paid to order U/s 250, 254,
the credit of CG 260A or S. 262.
under Chapter Base Refund Refund
XVII-B. Interest rate 0.5% p.m. or part 0.5% p.m. or part
thereof thereof
Period Date of deposit of TDS Date of making claim
to the date of grant of to the date of grant of
refund. refund.
S. 244A (2) Exclusion from the If the proceedings resulting in the refund are delayed for reasons attributable
period of interest. to the assessee or the deductor, as the case may be, the period of delay so
attributable to him shall be excluded from the period for which interest is
payable U/s 244A (1)/(1A)/(1B).
The decision regarding the period to be excluded vests with the
CIT/PCIT/CCIT/PCCIT. His decision is final.
S. 244A (3) Variation to the Because of assessment order, amendment order, appellate order or
interest on refund. revisionary order, if the refund varies, the interest thereon shall also be varied
accordingly.
If the interest (supra) decreases, then the AO shall serve on the assessee a
notice of demand. It shall be deemed to be one served U/s 156.
Whether the assessee is entitled to interest on delayed payment of interest U/s 244A?
Gujarat flouro chemicals Ltd (SC):
1 In Sandvik Asia Ltd 150 Taxman 591, the SC held that an assessee is entitled to compensation by way of interest on
the delay in the payment of amounts of interest (S. 244A) lawfully due to the assessee which were withheld wrongly and
contrary to law by the Income-tax Department for an inordinately long period.
2 However, the larger bench of SC in Gujarat Flouro chemicals Ltd 222 Taxman 233 did not approve the liability of
the Department to pay interest on interest.
3 Thus, in case of delay in granting refund, assessee would be entitled to compensation and interest can be
awarded by way of compensation, but assessee would not be entitled to further compensation by way of
interest on such interest, which is awarded as compensation.
Note:
Interest on refund gets accrued only in the PY of grant of such refund. Therefore, it is taxable only in such PY. [Smt.
Devayani Amma (Ker) + Govindabhai Mamaiya (SC)].
B. Interest U/s 234D:

S. 234D (1) When interest is levied U/s Refund was granted to the assessee upon processing of return U/s 143 (1).
234D? Subsequently, the refund got wiped off or got reduced upon regular assessment.
Then, the assessee is liable to pay interest U/s 234D (1).
Base for computing interest U/s Amount refunded excessively (including interest U/s 244A).
234D (1)
Interest rate 0.50% p.m. or part thereof.
Period for which interest is Date of grant to the date of regular assessment.
computed.
Explanation-1 to Meaning of regular Generally regular assessment means assessment U/s 143 (3) or S. 144.
S. 234D. assessment. For this purpose, it shall also include assessment made for the first time U/s 147
or S. 153A.

S. 234D (2) Variations to interest U/s 234D. Pursuant to amendment order, appellate order or revisionary order, the additions
made in the course of regular assessment get deleted either wholly or partly.
Accordingly, the refund gets restored wholly or in part.
Then, interest paid by the assessee U/s 234D shall be refunded to him.
Note: Provisions of S. 234D levying interest on excess refund will not get attracted in a case where the refund is granted to
the assessee in pursuance of the order of CIT (A) was reversed on account of setting aside of such order by the Tribunal.
[Delta airlines Inc (2013) (Bom):].
S. 240: Refund on appeal, etc:

No need to make claim in certain cases: Where, as a result of any order passed in appeal or other proceeding
(revisionary proceedings, rectification proceedings etc) under this Act, refund of any amount becomes due to the assessee,
the AO shall refund the amount to the assessee without his having to make any claim in that behalf:
Note:
Where the assessee has filed ROI and if on account of processing or assessment the assessee is entitled to refund, no
claim for refund is to be made. It is the duty of the AO to grant refund on his own.
Proviso to S. 240: Refund in case of fresh assessment or annulment: Provided that where, by the order aforesaid,—
(a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any,
shall become due only on the making of such fresh assessment;
(b) the assessment is annulled, the refund shall become due only of the amount, if any, of the tax paid in excess of the tax
chargeable on the total income returned by the assessee.
S. 245: Set off of refunds against tax remaining payable:

Where under any of the provisions of this Act, a refund is found to be due to any person, the AO, CIT (A) or CCIT or CIT,
may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any,
remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such
person of the action proposed to be taken under this section.

Chapter-23: Revisionary powers of CIT (Summary)
A. Revisionary powers of CIT U/s 263:

S. 263 (1) Circumstance in which CIT can Upon examination of records relating to any proceedings
assume jurisdiction in S. 263. under this Act, if the CIT considers the order passed therein
by the AO as erroneous and prejudicial to the interest of
the Revenue, he may step in U/s 263 to exercise his
revisionary jurisdiction.
What are the powers of the CIT U/s U/s 263, the CIT may pass such order as the circumstances of
263? the case justify, after conducting such inquiry as he considers
necessary.
He may, interalia, pass an order enhancing the assessment or
modifying assessment or cancelling the assessment and
directing fresh assessment.
OBH to the assessee before Before exercising the revisionary powers U/s 263, the CIT shall
exercising revisionary powers. give OBH to the assessee. Usually OBH is given through a
SCN.
Explanation-2 to S. Circumstances in which the order The order is passed without making inquires or verifications
263 (1) of the AO shall be regarded as which should have been made.
erroneous and prejudicial to the The order is passed allowing any relief without inquiring into
interest of the revenue. the claim.
The order has not been made in accordance with any order,
direction or instruction issued by the CBDT U/s 119.
The order has not been passed in accordance with any
decision which is prejudicial to the assessee by the JHC or the
SC in the case of the assessee or any other person.
Clause (a) of Order of assessment passed Order of assessment passed by the ITO/ACIT/DCIT on the
Explanation-1 to S. pursuant to directions of JCIT – basis of directions issued by the JCIT U/s 144A could also be
263 (1). Could it be subjected to revision revised U/s 263 if it is erroneous and prejudicial to the interest
U/s 263? of the revenue.
Order passed by JCIT, in exercise In high profile cases, the JCIT may be directed by the
of the powers of the AO, or in CBDT/CCIT/DGIT/CIT to play the role of AO. Further, the JCIT,
performance of the functions of AO if authorised by the CBDT, plays the role of TPO and performs
– Could it be subjected to revision the functions of the AO which are referred to in S. 92C and S.
U/s 263? 92D. Even these orders of JCIT could be revised U/s 263 if it is
found to be erroneous and prejudicial to the interest of the
revenue.
Clause (b) of Meaning of ‘record’ It shall include all records relating to any proceeding under this
Explanation-1 to Act available at the time of examination by the CIT.
S.263 (1).
Clause (c) of Order of the AO was subjected to The order of AO which had been the subject matter of appeal
Explanation-1 to S. appeal – Could it be subjected to filed, can be revised U/s 263 in respect of matters which had
263. revision U/s 263? not been considered and decided in appeal.
Doctrine of partial merger is enshrined in S. 263.
S. 263 (2) Time-limit for passing revisionary 2 years from the end of the FY in which the order sought to
order U/s 263 (1). be revised was passed.
Explanation to S. Exclusions in reckoning the period In computing the period of limitation for the purposes of S. 263
263 (2). of limitation. (2), the time taken in giving an opportunity to the assessee to
be reheard under the proviso to S. 129 and any period during
which any proceeding under this section is stayed by an order
or injunction of any court shall be excluded.
1 Significance of ‘any proceedings U/s 263, the CIT has powers to call for and examine records relating to (a)
under this Act’ in S. 263 (1). assessment/reassessment/fresh assessment proceedings; (b) Rectification
proceedings; (c) penalty proceedings.
2 Significance of ‘any order passed U/s 263, the CIT can revise only the orders passed by the AO.
therein by the AO’ in S. 263 (1). It could be (a) assessment/reassessment/fresh assessment order; (b) rectification
order; (c) penalty order.
S. 143 (1) intimation ≠ order. Therefore, it could not be revised by the CIT U/s 263.

[Christian Mica Industries Ltd 120 ITR 627 (Cal)].

3 Conditions cumulative. To step in U/s 263, it is not enough if the order of the AO is prejudicial to the
interest of the Revenue, it should also be erroneous. The conditions are
cumulative.
4 What can’t be the basis for (a) Rumours; (b) Gossips; (c) Suspicion; (d) Prejudice or surmise; (e) Mere
initiation of action U/s 263? different opinion.
5 Whether audit objection can Mere audit objection can’t trigger action U/s 263. However, it could be an eye-
trigger action U/s 263? opener. [Sohana woolen mills (P&H)].
6 Whether retrospective Yes. It can instigate action U/s 263. [Dharmapuri District Co-operative Sugar
amendments can trigger action Mills Ltd (2002) 124 Taxman 849 (Mad)].
U/s 263?
7 Significance of ‘record’ definition. This enables the CIT to revise the order of assessment even based on records
which were not available at the time of assessment but available to the CIT at the
time of examination U/s 263.
Issues in S. 263:
1 U/s 263, the CIT has powers to call for and examine even records relating to penalty proceedings. Vide the words ‘any
proceedings under this Act’. Recording of dropping of penalty proceedings in the office note amounts to passing of
order by the AO. If it is erroneous and prejudicial to the interest of the Revenue, the CIT is justified in exercising his
revisionary jurisdiction U/s 263. [R. A. Himmatsingka and Co Vs CIT [2012] 20 taxmann.com 849 (Patna)].
2 Where two views are possible as to the interpretation of the provisions of the Act and the AO while passing the
assessment order adopts the view favourable to the assessee with which the CIT does not agree, even if it results in
loss of revenue, it cannot be said that the order of the AO is erroneous. Action U/s 263 is not valid. [Max India Ltd 295
ITR 282 (SC) + Honda Siel Power Products Ltd [2010] 194 Taxman 175 (Del)].
3 Where on a particular issue, the HCs are expressing divergent views, the CIT cannot regard the order of AO to be
erroneous siding with one of the views so expressed. If CIT exercises his jurisdiction U/s 263 based on one such view,
his action is not sustainable in law. However, if the action of CIT is based on the view expressed by the Jurisdictional
HC, it will withhold the test of law. [Mehsana District co-operative milk producers union Ltd 130 Taxman 235
(Guj)].
4 Mere non-mention or non-discussion of enquiry made by the AO in the assessment order cannot justify invoking
revisionary jurisdiction U/s 263. [Krishna Capbox (P) Ltd (2015) 372 ITR 310 (All) + Cellular Ltd 301 ITR 407
(Bom)].
5 The CIT, disregarding the decision of the jurisdictional HC, cannot step in U/s 263 treating the order of AO to be
erroneous. [G.M. Mittal Stainless Steel (P) Ltd 263 ITR 255 (Cal) + Meghalaya Plywood Ltd 160 Taxman 89 (Gau)
+ Hindustan Lever 335 ITR 108 (Cal)].
6 The action of CIT U/s 263 cannot be challenged on the reasoning that the CIT had gone beyond the scope of the SCN
and had dealt with issues not covered or mentioned in the notice issued for initiation of proceedings U/s 263. S. 263
does not require any specific SCN to be served on the assessee detailing specific grounds on which revision of
assessment order is tentatively being proposed affecting initiation of exercise in the absence thereof or to require CIT
to confine himself to terms of notice and foreclosing consideration of any other issue. What is required is granting of
opportunity to the assessee of being heard before making the revision order. [Amitabh Bachchan (2016) 384 ITR 200
(SC)].
7 The original assessment order U/s 143 (3), which was subsequently modified to give effect to the revision order U/s
264, cannot be later on subjected to revision U/s 263. [New Mangalore Port Trust (2016) 382 ITR 434 (Kar)].
8 The time limit U/s 263 is to be reckoned with reference to the date of assessment order, where the revision is in
relation to an item which was not the subject matter of reassessment. [Alagendran Finance Ltd. (2007) 293 ITR 1 +
Lark Chemicals Ltd (2014) 368 ITR 655 (Bom) + ICICI Bank Ltd. (2012) 343 ITR 74 (Bom)].
9 The fresh assessment made by the AO pursuant to the order of CIT U/s 263, could not be challenged without
challenging the order directing such fresh assessment. [Hardilia Chemicals Ltd 221 ITR 194 (Bom) + Muralidhar
Bhagvan Das Vs CIT 234 ITR 548 (Bom)].
10 Where the CIT sets aside the assessment in toto U/s 263 and directs fresh assessment, the assessee could challenge
the fresh assessment order in appeal. [Azhimala Beach Resorts (P) Ltd 325 ITR 419 (Ker)].
11 There is no bar on CIT initiating action U/s 263 even if the rectification proceedings had been initiated U/s 154 for the
same AY for a different issue. [Ralson Industries Ltd 288 ITR 322 (SC)].
12 There could be proceedings U/s 147 and S. 263 parallelly on different issues for the same AY. [Inductotherm (India)
Private Ltd Vs James Kurian ACIT 294 ITR 341 (Guj) + Gulam Rasool 225 ITR 904 (MP)]. However, parallel
proceedings U/s 147 and S. 263 is not possible on the same matter. [Vide proviso-3 to S. 147]
13 Non-initiation of penalty proceeding U/s 270A (for under-reporting or mis-reporting of income) cannot be a ground for
setting aside the order of assessment U/s 263. [C.R.K. Swamy – 254 ITR 158 (Mad) + Linotype & Machinery Ltd

192 ITR 337 (Cal) + Precision Metal Works 19 Taxman 584 (Del) + Keshrimal Parasmal 48 CTR 61 (Raj) +
Sudershan Talkies [1993] 200 ITR 153 (Del).].
B. Revisionary powers of CIT U/s 264:

S. 264 (1) What are the powers of If the assessee is aggrieved by any order passed by any authority
CIT U/s 264? subordinate to CIT, he can make an application to the CIT seeking relief.
Also, the CIT can interfere suomoto to provide relief.
Before interfering, the CIT shall call for records relating to proceedings in
which the order sought to be revised was passed. Then, should examine
those records and do the requisite inquiry.
Then, he shall, subject to the provisions of this Act, pass such order thereon
as he deems fit.
But the order of the CIT shall not be prejudicial to the interest of the
assessee.
Explanation-1 to Refusal to interfere – An order by the CIT declining to interfere shall be deemed not to be an order
S. 264 not prejudicial. prejudicial to the assessee.
S. 264 (4) When the CIT shall not The order (which is sought to be revised U/s 264) is appealable but has not
interfere U/s 264? been appealed against and the time within which such appeal may be made
has not expired and the assessee has not waived his right of appeal.
The order (which is sought to be revised U/s 264) has been made the subject
of an appeal to the CIT (A) or to the ITAT.
S. 264 (3) Time-limit for making 1 year from the date on which the order sought to be revised was served on
revision application. the assessee.
S. 268 Exclusion of date of While computing the aforesaid 1 year, the date of service of order sought to
service of order sought be revised shall be ignored.
to be revised,
Proviso-3 to S. Power to condone the The CIT may, if he is satisfied that the assessee was prevented by sufficient
264 (3) delay. cause from making the application within the period aforesaid, admit an
application made after the expiry of that period.
S. 264 (5) Fee to accompany Every application by the assessee for revision shall be accompanied by a fee
application of Rs. 500.
S. 264 (6) Time-limit of passing 1 year from the end of the FY in which the application for revision was made
order U/s 264 upon by the assessee.
receipt of revision
application.
Explanation to Exclusion in reckoning In computing the period of limitation for the purposes of S. 264 (6), the time
S. 264 (6) the period of limitation. taken in giving an opportunity to the assessee to be reheard under the
proviso to S. 129 shall be excluded.
S. 264 (2) Time-limit for suomoto 1 year from the date of passing of order sought to be revised.
revision

1 Order of AO was revised U/s No. Vide the opening words ‘In the case of any order other than an order to which S.
263 – Could it be revised U/s 263 applies’.
264 on a different issue?
2 Significance of ‘any order’ in S. The order sought to be revised need not be an assessment order. It can even be an
264 (1). order passed by the AO U/s 197 refusing to issue non-deduction certificate or a
certificate authorizing deduction of tax at a lower rate. [Larsen & Toubro Ltd [2010]
190 Taxman 373 (Bom)].
3 Significance of ‘order……. The BOA for the AY 18 -19 showed cash credit of Rs. 3L and the AO made an
passed by an authority addition in respect of this U/s 68. Subsequently, the JCIT, in exercise of his power
subordinate to CIT’ in S. 264 U/s 271D levied penalty for violation of S. 269SS. The assessee approaches the CIT
(1). U/s 264 and seeks the deletion of penalty levied on the ground that the Revenue
cannot regard Rs. 3L as undisclosed income as well as loan. The CIT can exercise
jurisdiction U/s 264 and provide relief to the assessee.
4 Whether a revision application Yes. For the purpose of S. 264, the intimation issued U/s 143 (1) shall be regarded as
can be filed challenging the order. [Sanchit Software and Solutions (P) Ltd (2012) 349 ITR 404 (Bom)].
intimation U/s 143 (1)?
5 Appeal withdrawn or Where the assessee has withdrawn the appeal or appeal is dismissed on the ground

summarily dismissed – of limitation, the assessee can seek remedy U/s 264. [CBDT Circular 367].
Whether the assessee can
seek remedy U/s 264?
Issues in S. 264:
1 If there are two errors in an order sought to be revised, one in favour of the assessee and the other against him, and the
assessee raises in revision the error against him, the CIT acting U/s 264 would be seized of the whole case and would
be entitled to correct all the errors therein including the one against the assessee and pass an order subject to the
limitation that his order should not prejudicial to the assessee. [Luckose (K.C) Vs ITO – 92 ITR 450 (Ker)].
2 The scope of powers exercisable by the CIT U/s 264 is wider than that exercisable U/s 263. For exercising the powers
U/s 263, the order should be erroneous and should also be prejudicial to the interests of the Revenue, but such
requirement is not necessary for the exercise of powers U/s 264. There is no indication in the Act to show that the CIT
can revise only an erroneous order in exercise of the powers U/s 264. There is nothing in S. 264 which places any
restriction on the CIT's revisional power to give relief to the assessee in a case where, after the assessment was
completed, the assessee detects mistakes on account of which he was over-assessed. It is open to the CIT to entertain
a new ground/claim not urged before the lower authorities. [Snehalata Jain 140 Taxman 156 (J & K) + Parek Brothers
150 ITR 105 (Ker) + Phool lata somani (2005) 197 CTR 339 (Cal)].
3 Where the time limit for filing appeals to the CIT (A) has not expired and the assessee has not waived his right to
appeal, the revision application cannot be made. In other words, the revision application will not be entertained unless
the time limit for preferring appeal has expired or the assessee has waived his right to appeal. Thus, in view of explicit
provisions of S. 264 (4) (a), it is not possible for the assessee to seek remedies parallelly U/s 246A and S. 264.
4 If the CIT refuses to interfere U/s 264, the following remedies are available to the assessee:
Remedy-1 If the assessee feels that the CIT has unjustly denied the exercise of discretion to provide relief, he
may challenge the order of CIT through a Writ petition. [Dwaraka Nath 57 ITR 349 (SC) + Mysore
Agro Chemical Co (P) Ltd (Cal) [2010] 8 Taxmann.com 187].
Remedy-2 Where an assessee is unsuccessful U/s 264, he can traverse the path of appeal U/s 246A. There
is no prohibition under the Act. The delay in filing of appeal can be condoned by the CIT (A) U/s
249 (3). Pursuing remedy U/s 264 could be regarded as sufficient case for the delay. [D. Lakshmi
Narayanapathi 250 ITR 187 (Mad)].
5 It has been held in Hindustan Aeronautics Ltd Vs CIT 243 ITR 808 (SC) that, after preferring an appeal in respect of
an assessment order, the assessee cannot go for revision petition U/s 264 in respect of any matter falling in such
assessment order even if such matter has not been considered or raised in such appeal.
6 It was held in Manmala Exhibitors 257 ITR 563 (Bom) that the assessee has choice of seeking remedy U/s 246A and
revision remedy U/s 264. Once remedy of appeal is chosen, S. 264 becomes inapplicable, even if all the issues were
not raised in the appeal or the appeal is dismissed.

Chapter-24: Assessment of AOP/BOI Summary
1. Fundamentals:
1 Meaning of AOP. S. 2 (31) defines “person” as including AOP or a BOI.

However, the expression AOP is not defined in the Act.
It is to be understood in its ordinary sense meaning there by a group or
congregation of persons.
When there is a group of persons formed for the promotion of an enterprise or
when co-adventures join together in a common action they are assessable as an
AOP provided they did not in law constitute a partnership. [Indira Balakrishnan 39
ITR 546].
In simple terms, when two or more persons come together voluntarily to carry out
some income generating activity and to share the income arising therefrom
(without constituting partnership), such association is called AOP.
2 Main features of AOP. Two or more persons should associate voluntarily.
There should be meeting of minds on a common purpose.
There should be a common design for earning income (i.e. joint enterprise).
There should be joint act of management.
There should be joint and several liability.
There should be sharing of profits.
3 Mere co-ownership not Common title in a property coupled with production of income is not sufficient to
sufficient. constitute AOP. There should be joint enterprise and joint act of management.
In other words, mere receipt of income by a group of members in common will not
make it an association unless income is earned by its own effort in common.
This principle is enshrined even in the Act. Vide S. 26.
Where a house property is owned by two or more persons and their respective
shares are definite and ascertainable, such persons shall not in respect of such
property be assessed as an AOP but the share of each such person in the IFHP
shall be included in his total income.
4 Joint inheritance – not suffice. Forced association of persons on account of inheriting joint property under a will
or such other circumstances not being voluntary would not constitute such joint
legatees as AOP for the purpose of S. 2 (31). [Laxmi Pd. And Sons (2009) 316
ITR 330 (All) + Sudhir Nagpal (2012) 349 ITR 0636 (P&H) + Govindbhai
Mamaiya (2014) (SC)].
5 Is it necessary that there No. AOP need not be evidenced by an instrument in writing. [T. George and M.
should be a written agreement Syed Alavi (2009) 316ITR 333 (Ker)].
between persons to prove the
status of AOP?
6 Constitution may be legal or It is not necessary that the association should be legally constituted.
illegal. In other words, it is not necessary that there must be mutual rights and obligations
amongst the members enforceable in law.
The illegality, invalidity or incorrectness in the constitution of an association does
not in any way affect its liability to tax or its chargeability as a unit of assessment.
A partnership which is illegal or otherwise void will have to be assessed as an
AOP.
7 Logic behind treating AOP as a In reality, AOP is not distinct and separate from the members constituting it.
distinct tax entity. However, it is treated as a distinct tax entity, since one of the cardinal principle of
taxation is to tax the profits arising from a single profit-yielding venture carried on
jointly by persons, jointly and not severally.
8 AOP can have non-individuals An AOP may have as its members not only individuals but also companies, firms,
as its constituents. joint families and other associations.
9 Is there any restriction on No.
number of members?
10 Should the individual shares of Need not be so.
the members be definite and
ascertainable?
11 Does a consortium of A consortium arrangement for executing EPC/turnkey contracts which has the
contractors formed to following attributes may not be treated as an AOP:
implement large infrastructure (a) Each member is independently responsible for executing its part of work
projects necessarily constitute through its own resources and also bears the risk of its scope of work.

AOP? [CBDT Circular 7/2016]. That is, there is a clear demarcation in the work and costs between the
consortium members and each member incurs expenditure only in its
specified area of work;
(b) Each member earns profit or incurs losses based on performance of the
contracts falling strictly within its scope of work. However, consortium
members may share contract price at gross levels only to facilitate
convenience in billing.
(c) The men and materials used for any area of work are under the risk and
control of respective consortium members.
(d) The control and management of consortium is not unified and common
management is only for the inter-se coordination between the consortium
members for administrative convenience.
2. Disallowance of interest and remuneration paid to members – S. 40 (ba):

1 Disallowance of interest and Notwithstanding anything to the contrary in S. 30 to 38, any payment of interest,
remuneration salary, bonus, commission or remuneration, by whatever name called, made by an
AOP/BOI to its member shall not be deducted in computing the income of AOP/BOI
chargeable U/H PGBP.
2 Net interest payable by AOP/BOI Where interest is paid by an AOP or BOI to any member thereof who has also paid
– to be disallowed. [Explanation interest to the AOP or BOI, the amount of interest to be disallowed U/s 40 (ba) shall
1 to S. 40 (ba)]. be limited to the amount by which the payment of interest by the AOP or BOI to the
member exceeds the payment of interest by the member to the AOP or BOI.
3 Member in representative Where an individual is a member of an AOP or BOI on behalf of any other person,—
capacity – receiving interest in
personal capacity – No (i) interest paid by the AOP or BOI to such individual or by such individual to
Disallowance U/s 40 (ba). the AOP or BOI otherwise than as member in a representative capacity,
shall not be taken into account for the purposes of S. 40 (ba);
(ii) interest paid by the AOP or BOI to such individual or by such individual to
the AOP or BOI as member in a representative capacity and interest paid
by the AOP or BOI to the person so represented or by the person so
represented to the AOP or BOI, shall be taken into account for the
purposes of S. 40 (ba).
4 Member in individual capacity – Where an individual is a member of an AOP or BOI otherwise than as member in a
receiving interest in representative capacity, interest paid by the AOP or BOI to such individual shall not
representative capacity – No be taken into account for the purposes of S. 40 (ba), if such interest is received by
Disallowance U/s 40 (ba). him on behalf, or for the benefit, of any other person.
Whether rebate given by the AOP is hit by S. 40 (ba)?

1 What could be disallowed U/s 40 (ba) is only the interest, salary, bonus, commission or remuneration paid by AOP to its
members.
2 The expression ‘by whatever name called’ in S. 40 (ba) signifies that the remuneration shall be disallowed irrespective
of the nomenclature used in denoting it.
3 However, it cannot bring within its fold any payment which is not in the nature of remuneration.
4 The rebate given to these members cannot be equated with commission.
5 Commission is basically a payment made for the services rendered by one person to another. In other words, it is a
compensation for the services rendered.
6 "Rebate", on the other hand, is a remission or a payment back to the purchaser of a commodity of a portion of price
paid by him. This is given to the customers who give repeat orders and who have continuous dealings.
7 Thus, rebate paid by the AOP to its member-societies is not hit by S. 40 (ba).
8 The stand taken by the AO is not correct. This is so held in Harihar Cotton pressing factory 39 ITR 594 (Bom).
Note: Rent paid by AOP/BOI to its members is not covered by S. 40 (ba). This can’t be disallowed.
4. Special rates of tax applicable to AOP/BOI – S. 167B:

S. 167B deals with the manner of charging tax on the TI of AOP or BOI under different cases which are summarized as
under:
Case Narration of the cases Relevant tax rates
1 Individual shares of members of AOP or BOI in the whole or part of the
income of the AOP or BOI are unknown or indeterminate. [Refer note-3].

(a) None of the members is assessable at a rate higher than MMR (Refer MMR. [S. 167B (1)].
note-1)
(b) One or more of the members are assessable at a rate higher than MMR Such higher rate. [S. 167B (1) Proviso].
2 Individual shares of members of AOP or BOI in the whole of the income of the
AOP are known or determinate.
(a) One or more members have TI (excluding the share income from AOP or MMR. [S. 167B (2) (i)].
BOI) exceeding the BEL.
(b) One or more members are assessable at a rate higher than MMR. See note-2 given below. [S. 167B (2) (ii)].
(c) None of the members has TI exceeding the BEL and none of the members S. 167B does not apply. Finance Act
is assessable at a rate higher than MMR rates shall apply. [Refer note-4 & 5].
Note-1: MMR means the rate of income tax (including Surcharge & HEC) applicable in relation to the highest slab of income
in case of an individual. [S. 2 (29C)].
Note-2: Tax on TI of the AOP or BOI shall be computed by applying the following rates on the following elements of the TI of
AOP or BOI:
SN Elements of the income of AOP or BOI Tax rate

1 Share in the income of AOP attributable to the members who are assessable at a rate Such rate higher than the
higher than the MMR. MMR
2 Balance income MMR
Note-3: Shares of the members of an AOP or BOI shall be deemed to be indeterminate or unknown if such shares are
indeterminate or unknown on the date of formation or at any time thereafter. [Explanation to S. 167B].
Note-4: Rates applicable to AOP or BOI (not covered by S. 167B) as per the Finance Act 2018 – I Schedule – Part III are as
under:
Income slab Tax rate
Up to Rs. 250000 Nil
Above 250000 to Rs. 500000 5%
Above 500000 to Rs. 1000000 20%
Above Rs. 1000000 30%
Note-5: In addition, there will be surcharge @ 10% if the TI > Rs. 50L. If the TI > Rs. 100L, surcharge will be @ 15%.
Further there is liability to pay HEC @ 4% on income tax and surcharge.
Note-6: LTCG of AOP or BOI shall be taxable at the special rates specified in S. 112A and S. 112. STCG referred to in S.
111A shall be taxed @ 15%.
5. Tax treatment of share income from AOP or BOI in the hands of members – S. 86:
SN Situation Tax treatment Provision

1 AOP or BOI suffers tax at MMR Share income shall not be included in TI of the Clause (a) of Proviso 1 to
or higher rate. member. S. 86.
2 AOP or BOI is chargeable to tax Share income shall be included in the TI of the Clause (b) of Proviso 1 to
at the rates given in the annual member for rate purposes. From the tax computed S. 86.
Finance Act. TI of AOP is more on the TI including the share income, a relief is
than the BEL. allowed U/s 110.
3 AOP or BOI is chargeable to tax Share income of the member shall be charged to Proviso 2 to S. 86.
at the rates given in the annual tax as a part of his TI.
Finance Act. The TI of AOP is
less than the BEL.
6. Computation of relief – S. 110:
1 Relief U/s 110 Share income * Average rate of income tax.

2 Average rate of income tax (S. 2 (10)) [Tax on TI (including the share income) / TI (including the share income)] * 100.

8. Computation of share income of members – S. 67A:
Table-1: Ascertainment of the TI of AOP or BOI to be apportioned to members in income sharing ratio: (S. 67A (1):
1 Total income of AOP or BOI *****
2 Interest, salary, bonus, commission or remuneration paid to members (*****)
3 Balance to be apportioned to members in the income sharing ratio (1-2) *****
Table-2: Ascertainment of the share income: (S. 67A (1)):

1 Interest, salary, bonus, commission or remuneration paid to member concerned *****
2 Amount ascertained in Row 3 of table-1 apportioned to the member concerned based on the income sharing *****
ratio.
3 Share income (1+2) *****
Table-3: Apportionment of share income under various heads: (S. 67A (2)):
1 Member’s share in the income of AOP or BOI, as computed above, cannot simply be added to his TI.
2 It has to be apportioned under the various heads of income in the same manner in which the income of AOP or BOP
has been determined under each head of income.
Table-4: Deduction w.r.t interest on capital borrowed for investment in AOP or BOI: (S. 67A (3):
1 As per S. 67A (2), the member’s share in the income of AOP or BOI is to be apportioned under various heads.
2 S. 67A (3) provides for a deduction against such portion of member’s interest in the income of AOP or BOI apportioned
U/H PGBP.
3 The aforesaid deduction is w.r.t the amount of interest paid or payable by the member on capital borrowed by him for
the purposes of investment in AOP or BOI.
Losses to be carried forward only by AOP/BOI:

1 It is well established principle of law that loss incurred by a person cannot be set off by any other person, except as
expressly provided by any provision of the Act.
2 Since AOP is a separate assessable entity and there are no provisions in the Act for the set off or carry forward of the
share loss of a member in an AOP in his own assessment, member’s share in loss determined as per S. 67A cannot be
set off or carry forward by the members.
3 This is conclusion that could be arrived at in view of Birla Tyres 267 ITR 1 (Kol) & CBDT Circular 551 & Smt. Lalita
M. Bhat 234 ITR 319 (Bom).
4 Accordingly, the loss suffered by the AOP can be set off or carry forward in its hands only.
5 The members cannot claim set off of any share in the loss of AOP.

Chapter-25: Assessment of Firm (Part-1) Summary
1. Assessment in the status of firm – S. 184:

1 Conditions to be fulfilled A firm shall be assessed as a firm for the purposes of this Act, if
for assessing the firm as (i) the partnership is evidenced by an instrument; and
firm. [S. 184 (1)]. (ii) the individual shares of the partners are specified in that instrument.
2 Consequences of non- If the conditions stipulated above are not complied with, still, the firm shall be as a firm
compliance with the only.
conditions aforesaid. [S. However, no deduction shall be allowed to it in respect of interest and remuneration paid
185]. by it to its partners.
The interest and remuneration so disallowed shall not be assessed to tax in the hands of
partners.
3 Deed in violation of law – Where a minor admitted to the benefits of partnership was made liable for share in losses
not assessable as firm. of the firm by virtue of specific clause in partnership deed, the partnership deed lacks
legal force to that extent. In such case, the firm cannot be assessed to tax as firm but
only as an AOP. [Badri Nath Ganga Ram 273 ITR 485 (All)].
4 No of partners in excess of Where a firm has more than 50 partners, it becomes an illegal association. It cannot be
50. assessed as partnership firm but only as an AOP.
5 Denial of deduction in Where, in respect of any AY, there is on the part of a firm any such failure as is
respect of interest and mentioned in S. 144, the firm is not entitled to deduction in respect of interest and
remuneration if the firm is remuneration paid by it to its partners.
guilty of violations referred The interest and remuneration so disallowed shall not be assessed to tax in the hands of
to in S. 144. [S. 184 (5]. partners.
2. Change in constitution – S. 187:

1 Assessment on reconstituted firm. Where at the time of making an assessment U/s 143 or S. 144 it is found that a
[S. 187 (1)] change has occurred in the constitution of a firm, the assessment shall be made
on the firm as constituted at the time of making the assessment.
2 Meaning of change in constitution For the purposes of this section, there is a change in the constitution of the firm—
of the firm. [S. 187 (2)]. (a) if one or more of the partners cease to be partners or one or more new
partners are admitted, in such circumstances that one or more of the
persons who were partners of the firm before the change continue as
partner(s) after the change ; or
(b) where all the partners continue with a change in their respective shares
or in the shares of some of them:
3 Dissolution on death of a partner – If the partnership deed is silent as to whether the firm could continue or not after
not to constitute change in the death of a partner, it gets dissolved by operation of law, in view of S. 42 (c) of
constitution. [Proviso to S. 187 Indian Partnership Act.
(2)]. In such a case, we should not construe it as change in constitution merely
because of continuance of the rest of the partners.
However, where the partnership deed provides for continuance of the firm even in
the event of death of a partner, then the firm is not dissolved. This is to be
understood as a case of change in constitution.
3. Succession of one firm by another firm – S. 188:

(a) Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by S.
187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the
provisions of S. 170.
(b) Income up to the date of succession shall be assessed to tax in the hands of the predecessor firm and income
thereafter, shall be assessed to tax in the hands of successor firm.
4. Dissolution of firm – S. 189:

1 Dissolved firm deemed Where a firm is dissolved, the AO shall make an assessment of the TI of the firm as if no such
to exist for the purpose dissolution had taken place.
of assessment. [S. 189 All the provisions of this Act, including the provisions relating to the levy of a penalty or any other
(1)]. sum chargeable under any provision of this Act, shall apply, so far as may be, to such
assessment.
2 Partners are jointly and Every person who was at the time of such dissolution a partner of the firm, and the legal
severally liable for the representative of any such person who is deceased, shall be jointly and severally liable for the
due of the dissolved amount of tax, penalty or other sum payable.
firm. [S. 189 (3)]. However, the liability of the legal representatives is restricted to the estate inherited. [S. 189 (5)].

5. S. 188A: Joint and several liability of partners for tax etc payable by firm during its subsistence:
Every person who was, during the PY, a partner of a firm, and the legal representative of any such person who is deceased,
shall be jointly & severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the
AY to which such PY is relevant.
Taxability of amount received after dissolution:

1 S. 189 (1) deems the continuance of the dissolved firm for the purpose of framing assessment. The fiction becomes
necessary to confront the argument that assessment cannot be made on a non-existing person.
2 This fiction cannot be stretched beyond the purpose for which it is created.
3 In other words, the aforesaid fiction cannot be used to tax the dissolved firm in respect of income arising after the
dissolution. The fiction operates only for assessing income earned up to the date of dissolution.
4 Such income should be brought to tax in the hands of partners in the PY of receipt in view of S. 176 (3A).
5 The aforesaid conclusions derived support from the rulings in Banyan & Berry 222 ITR 831 (Guj)) + Bhagat & Co 47
Taxman 201 (Del); George Talkies Circuit 171 ITR 386 (Raj).
6. Deductibility of interest paid to partners in the hands of the firm – S. 40 (b):

1 Tax treatment of interest paid by S. 36 (1) (iii) provides deduction in respect of amount of interest paid in respect
the firm to its partners. of capital borrowed for the purpose of business or profession carried on by the
assessee.
Hence, the interest paid by the firm to its partners shall be eligible for deduction
U/s 36 (1) (iii).
2 Disallowance of interest (supra). However, such interest could be disallowed if the requirements of S. 40 (b) and
S. 184 are not complied with.
3 No TDS on such interest. Firm has no obligation to deduct tax at source on the interest paid by it to its
partners. [S. 194A (3) (iv)].
4 Requirements of S. 40 (b) (i) There should be authorisation in the partnership deed for payment of interest
to partners.
(ii) Payment of interest shall be in accordance with the terms of partnership
deed.
(iii) Period for which interest is paid shall not precede the date of authorisation.
(iv) The interest shall be simple interest.
(v) Interest rate ≤ 12%.
5 No bar in payment of interest to Interest is a reward for the funds committed by the partners. It could be paid to
non-working partners. both working partner as well as non-working partner.
6 Requirements of S. 184. There shall be instrument evidencing partnership.
The instrument evidencing partnership shall contain the individual share of the
partners.
The firm shall not be guilty of any failure U/s 144.
7 Partner in representative capacity Where an individual is a partner in a firm on behalf of any other person (that is,
– Interest received in individual partner in a representative capacity),—
capacity – not covered. (i) interest paid by the firm to such individual otherwise than as partner in
[Explanation-1 to S. 40 (b)]. a representative capacity, shall not be taken into account for the
purposes of S. 40 (b);
(ii) interest paid by the firm to such individual as partner in a
representative capacity and interest paid by the firm to the person so
represented shall be taken into account for the purposes of S. 40 (b).
8 Partner in Individual capacity – Where an individual is a partner in a firm otherwise than as partner in a
interest received in representative representative capacity, interest paid by the firm to such individual shall not be
capacity – not covered. taken into account for the purposes of S. 40 (b), if such interest is received by
[Explanation-2 to S. 40 (b)]. him on behalf of any other person.
Some issues in S. 40 (b) in the context of interest paid by firm to partners:

1 Just because the requirements of S. 40 (b) are satisfied, interest paid to partners cannot be allowed as deduction where
the funds taken from partners are not used by the firm for the purpose of its business or profession. S. 40 (b) is not the
section for allowing deduction in respect of interest but one for disallowing interest which is otherwise allowable as
deduction U/s 36 (1) (iii). [Munjal Sales Corporation 298 ITR 298 (SC)].
2 Though the requirements of S. 40 (b) are satisfied, still interest could be disallowed in terms of S. 14A. [Shankar
Chemicals Works Vs CIT [2011] 47 SOT 121 (Ahd)].
3 Where partnership deed authorises only payment of interest on capital contributed by the partners, the AO is justified in

disallowing the interest which is computed on the current account balance of the partners. [Novel Distribution
enterprise 251 ITR 704 (Ker)].
4 Where the partners have infused capital into the firm out of their borrowings and the interest thereon is paid by the firm,
then it is constructive payment of interest to the partners which will be disallowed in the absence of authorisation in the
partnership deed. [Agra Tannery 179 ITR 44 (P&H)]. However, this would not happen, if the borrowing is made directly
by the firm and the partners stand as guarantors. [Damodar Das Jai Chand Aggarwal (Amritsar)].
5 Interest paid to the partner for a period preceding the date of his admission as partner is not hit by the provisions of S.
40 (b). [Raj Kumar Singh & Co 295 ITR 9 (All)].
6 Interest paid by the firm to partners could not be disallowed U/s 40A (2). It is covered by specific provisions of S. 40 (b).
S. 40 (b) provides the yard stick for measuring reasonableness. (i.e. 12%). There is no need to resort to an external
yardstick, like interest charged by the banks or financial institutions, by super-imposing the general provisions of S. 40A
(2). [L. M. Textiles (Bom)].
7. Deductibility of remuneration paid to partners in the hands of the firm – S. 40 (b):

1 Tax treatment of remuneration S. 37 (1) provides deduction in respect of expenses which are wholly and
paid by the firm to its partners. exclusively incurred for the purpose of business or profession carried on by the
assessee.
Remuneration paid to the partners is a consideration for availing services from
them.
Hence, it is deductible in views of the provisions of S. 37 (1).
2 Disallowance of remuneration However, such remuneration could be disallowed if the requirements of S. 40
(supra). (b) and S. 184 are not complied with.
3 Requirements of S. 40 (b) (i) There should be authorisation in the partnership deed for payment of
remuneration to partners.
(ii) Payment of remuneration shall be in accordance with the terms of
partnership deed.
(iii) Period for which remuneration is paid shall not precede the date of
authorisation.
(iv) Remuneration shall be paid only to a working partner. (Since it is reward for
the services rendered by the partners).
(v) Ʃ Remuneration paid to all partners ≤ Ceiling.
4 Requirements of S. 184. There shall be instrument evidencing partnership.
The instrument evidencing partnership shall contain the individual share of the
partners.
The firm shall not be guilty of any failure U/s 144.
5 Meaning of working partner. “Working partner” means an individual who is actively engaged in conducting
[Explanation-4 to S. 40 (b)]. the affairs of the business or profession of the firm of which he is a partner.
6 Ceiling on remuneration. The amount of remuneration paid to all the partners during the PY shall not
exceed the aggregate amount computed as hereunder:
On the first Rs. 3,00,000 of the Rs. 1,50,000 or at the rate of 90% of
book profit or in case of a loss. the book-profit, whichever is more;
On the balance of the book-profit. at the rate of 60%
7 Meaning of book profit. “Book-profit” means the net profit, as shown in the P&L account for the relevant
[Explanation-3 to S. 40 (b)]. PY, computed in the manner laid down in Chapter IV-D (PGBP Chapter) as
increased by the aggregate amount of the remuneration paid or payable to all
the partners of the firm if such amount has been deducted while computing the
net profit.
In simple terms, it means income U/H PGBP after allowing interest paid to
partners (subject to S. 40 (b)) but before allowing remuneration paid to partners.
While computing book profit, unabsorbed depreciation pertaining to earlier years
shall be adjusted. However, unabsorbed losses pertaining to earlier years can’t
be adjusted.
To determine the amount of unabsorbed depreciation to be adjusted in
computing the book profits, notionally the brought forward business losses shall
be adjusted against the income computed under Chapter-IVD before allowing
remuneration to the partners. Thereafter, the unabsorbed depreciation could be
adjusted only to the extent of the balance income.

Issues in s. 40 (b) relating to remuneration:

1 Where the partnership deed is silent regarding the quantum of remuneration payable to the partners and the manner of
its quantification, it has to be disallowed in terms of S. 40 (b). [CBDT Circular 739]. The legality of this circular was
upheld by the Delhi HC in Sood Brij & Associates [2011] 203 Taxman 188 + by the P&H HC in Sood Bhandari &
Co [2012] 204 Taxman 340.
2 Remuneration to partner comes within the ambit of S. 40 (b) whether or not he is a partner in individual capacity or
representative capacity. [Rasiklal & Co 229 ITR 458 (SC)].
3 A partner is supposed to make available all his knowledge, skills, experience and expertise for furtherance of the objects
of the firm. A partner cannot create artificial capacity differences while rendering services to the firm in which he is a
partner (Such as rendered in the capacity as expert or professional), so that the firm could exploit it to circumvent the
provisions of S. 40 (b). Whatever services a partner provides to the firm, he provides them only in his capacity as
partner. For that, if he is paid any consideration, that falls within the ambit of term ‘remuneration’ and it is hit by S. 40
(b). Therefore, the firm cannot seek to avoid the provisions of S. 40 (b) by describing his services as those rendered in
the capacity as an expert. [Pack well (Karnataka) industries – 267 ITR 452 (Mad)].
4 If a firm engaged in chit fund business pays chit dividend to some of its partners who subscribed to its chit scheme, that
is not remuneration paid to partners to come U/s 40 (b). [Devi Finance Corporation 215 ITR 570 (Mad)].
5 Remuneration paid to partners cannot be disallowed invoking S. 40A (2) since it is covered by the specific provisions of
S. 40 (b). [Great city manufacturing company [2009] 33 SOT 31 (Del)].
6 If the assessee has opted for presumptive taxation U/s 44AD or S. 44ADA, interest and remuneration paid by the firm to
partners are not deductible against the presumptive income. However, if the assessee is under presumptive taxation
regime covered by S. 44AE, interest and remuneration paid by the firm to partners are deductible (subject to S. 40 (b))
against the presumptive income.
8. Tax treatment of interest and remuneration in the hands of partners:
S. 2 (24) (ve) Interest and remuneration paid by the firm to its partners is income in the hands of partners.
S. 28 (v) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to,
or received by, a partner of a firm from such firm shall be charged to tax U/H PGBP.
Proviso to S. 28 (v) Where any interest, salary, bonus, commission or remuneration, by whatever name called, or
any part thereof has not been allowed to be deducted U/s 40 (b) in the hands of the firm,
then such income to that extent shall not be taxed in the hands of the partner.
S. 10 (2A) In computing the TI of a person being a partner of a firm which is separately assessed as
such, his share in the total income of the firm shall be excluded.
CBDT circular 8/2014 Income of a firm is to be taxed in the hands of the firm only and the same can under no
circumstances be taxed in the hands of its partners. Therefore, the entire profit credited to
the partner’s accounts in the firm would be exempted from tax in the hands of such partners,
even if the income chargeable to tax becomes Nil in the hands of the firm on account or
deduction available under the provisions of the Act.
Some important issues:

1 Interest paid to a partner in representative capacity shall be assessed to tax in the hands of person whom he
represents. [R. M. Appavu Chettiar & Sons 256 ITR 289 (Mad)]. However, since the remuneration is paid as a
compensation for his service, skill or labour, it has to be assessed to tax in his hands (to the extent allowed as deduction
in the hands of the firm). This shall be assessed to tax U/H PGBP and not U/H Salaries. [Raj Kumar Singh Hukam
Chandji 78 ITR 33 + K.S. Subbaiah Pillai Vs CIT 237 ITR 11 (SC)].
2 A sub-partnership which is in receipt of the share of profit of a partner in the main partnership has to be deemed to be a
partner in the main partnership for the limited purpose of S. 10 (2A), hence eligible for exemption under that section.
[Radha Krishna Jalan 294 ITR 28 (Gau)].

Chapter-26: Taxation of Investment fund Summary
1. Meaning of Investment Fund:

Investment Venture capital fund + SME Fund + Social venture Fund + Infrastructure Fund + Private equity and debt
fund Fund.
2. Taxability of income of/from investment fund:

1 Taxability of income of Nature of income Taxability
investment funds. Profits and gains of business or Taxable in the hands of investment fund @
profession specified rates.
Other income Exempt U/s 10 (23FBA).
2 Specified rate. [S. 115UB Company or firm 30% + Surcharge (if applicable) + EC
(4)]. Other than company or firm MMR (35.535%)
3 Exemption to unit holder of Income accruing or arising to, or received by, a unit holder of an investment fund, being
income U/H PGBP of that proportion of income which is of the same nature as income chargeable U/H PGBP
investment fund. [S. 10 at investment fund level, shall be exempt U/s 10 (23FBB).
(23FB B)].
4 Taxability of element of Any income accruing or arising to, or received by, a person, being a unit holder of an
income other than PGBP investment fund, out of investments made in the investment fund shall be chargeable to
present in the distribution income-tax in the same manner as if it were the income accruing or arising to, or
made by the investment received by, such person had the investments, made by the investment fund, been
fund to its unit-holders. [S. made directly by him.
115UB (1)].
5 Manner of determination The distribution made by an investment fund to its unit holders comes from a basket of
of different components mixed receipts.
present in the distribution Different components of income present in the amount distributed by the investment
made by the investment fund to the unit holders are subject to differential tax treatment in the hands of unit
fund to unit holders. holders.
Therefore, it becomes necessary to segregate the various components of income
present in the amount distributed.
For this purpose, S. 115BU (3) provides that the income paid or credited by the
investment fund shall be deemed to be of the same nature and in the same proportion
in the hands of the unit holders as if it had been received by, or had accrued to, the
investment fund.
6 TDS in respect of income (i) Deductor Investment fund
of units of investment fund (ii) Deductee Unit holder
to unit holders [S. (iii) Payment any income (other than the proportion of income which is of the
194LBB]. covered same nature as income chargeable U/H PGBP which is taxable
at investment fund level)
(iv) TDS rate Payee TDS rate
Resident unit 10% (subject to S. 206AA)
holder
Unit holder (being -
foreign company or (if the payment is exempt under
non-corporate non- DTAA)
resident) Rates in force (if not exempt under
DTAA)
(v) Rates in Foreign company 40% (+ Surcharge (if any) +
force HEC)
Non-corporate non- 30% (+ Surcharge (if any) +
resident HEC)
(vi) Time of At the time of credit of income (supra) to the account of the
deduction payee or at the time of payment, whichever is earlier.
of tax
7 Application seeking non- Application to AO can be made U/s 197 seeking non-deduction certificate or certificate
deduction certificate authorising deduction of tax at lower rate.
8 No TDS on income TDS provisions would not be attracted in respect of the income received by the
received by investment investment fund. This would be provided by issue of appropriate notification U/s 197A
fund. (1F) subsequently. [S. 197A (1F)].
9 No DDT obligation. [S. Income paid by an investment fund to its unit holders would not be subject to
115UB (5)]. DDT under Chapter XII -D or tax on distributed income under Chapter XII –E.

Chapter-26: Taxation of Investment fund Summary
10 No pass-through for If in any year there is a loss at the fund level, either current loss or the loss which
losses. [S. 115UB (2)]. remained to be set off, such loss shall not be allowed to be passed through to the
investors but has to be carried over at fund level to be set off against income of the next
year in accordance with the provisions of Chapter VI.
11 Deemed credit on the last If the income accruing or arising to, or received by, an investment fund, during a PY is
day of the PY. [S. 115UB not paid or credited to the unit-holders, it shall be deemed to have been credited to the
(6)] account of the unit-holder on the last day of the PY in the same proportion in which such
person would have been entitled to receive the income had it been paid in the PY.
This is intended to prevent the deferral of taxation by deferring credit to the account of
unit-holder. Now it is not possible to exploit the pass through status.
12 Already tax on accrual Any income which has been included in the total income of the unit-holder of an
basis – shall not be taxed investment fund in a PY, on account of it having accrued or arisen in the said PY, would
again on receipt basis. not be included in his TI in the PY in which such income is actually paid to him by the
[Explanation-2 to S. investment fund. [Explanation-2 to S. 115UB].
115UB].
13 Furnishing of statement of The person responsible for crediting or making payment of the income on behalf
income distributed. [S. of an investment fund and the investment fund are required to furnish, within the
115UB (7) + R. 12CB]. prescribed time, to the person who is liable to tax in respect of such income and to the
prescribed income -tax authority a statement in the prescribed form and verified in the
prescribed manner. Such statement should give details of the nature of the income paid
or credited during the previous year and such other relevant details as may be
prescribed.
R. 12CB provides that the statement of income paid or credited by an investment trust
to its unit holder has to be furnished to the PCIT or CIT within whose jurisdiction the
principal office of the investment trust is situated, by 30th November of the FY following
the PY during which such income is paid or credited.
Further, the statement of income paid or credited also has to be furnished to the unit
holder by 30th June of the FY following the PY during which the income is paid or
credited.
14 Filing of return by Every investment fund has to compulsorily file its ROI or ROL U/s 139 (4F), if it is not
investment fund. required to do so under any other provision of S. 139.
Summary:
Particulars Investment Fund Unit holder
(i) Income U/H PGBP of the Taxable Exempt
investment fund
(ii) Income, other than PGBP Exempt. Taxable, as if he had

Tax to be deducted on such income distributed to unit- directly made the
holders (a) at the rate of 10% in case of resident investment.
payee; (b) at rates in force in case of non-resident
payee.
(iii) Any loss incurred by the To be carried forward for set-off as per Chapter VI at Not passed on to
investment fund the Fund level investors
(iv) DDT and tax on distributed No obligation -
income

Chapter-27: Taxation of Securitisation Trust Summary
New taxation regime for securitisation trust and its investors:

1 Meaning of Securitisation “Securitisation trust” means a trust being a –
Trust [Clause (d) of SN Form Regulation
Explanation below S. (i) A special purpose distinct SEBI (Public Offer and Listing of Securitised
115TCA]. entity Debt Instrument) Regulations, 2008.
(ii) A special purpose vehicle The guidelines on securitisation of standard
assets issued by RBI.
(iii) A trust set up by a Securitisation and Reconstruction of
securitisation company or a Financial Assets and Enforcement of
reconstruction company Security Interest Act, 2002.
2 Exemption of income of The income of securitisation trust from the activity of securitisation shall continue to be
securitisation trust from exempt U/s 10 (23DA).
the activity of
securitisation.
3 Taxability of income from S. 115TCA (1) provides that the income accruing or arising to, or received by, a person,
securitisation trust in the being an investor from the securitisation trust, out of investments made in the
hands of the investor [S. securitisation trust, shall be taxable in the hands of investor in the same manner and to
115TCA (1)]. the same extent as if the investor had made investment directly in the underlying assets
and not through the trust.
4 Nature of income paid or The income paid or credited by the securitisation trust shall be deemed to be of the same
credited by securitisation nature and in the same proportion in the hands of the investor of the securitisation trust,
trust in the hands of the as if it had been received by, or had accrued and arisen to, the securitisation trust during
investor. the PY. [S. 115TCA (2)].
5 Deemed credit to If the income accruing or arising to, or received by, the securitisation trust, during a PY
investor [S. 115TCA (3)]. has not been paid or credited to the investor, the same shall be deemed to have been
credited to the account of the said person on the last day of the PY in the same
proportion in which such person would have been entitled to receive the income had it
been paid in the PY.
6 Statement specifying the The securitisation trust shall provide breakup regarding nature and proportion of its
details of nature of income and such other relevant details to the investors and also to the prescribed
income to be furnished to income-tax authority in the prescribed form and verified in the prescribed manner, within
investor and prescribed the prescribed period.
income-tax authority [S. The CBDT has, vide notification no. 107/2016 dated 28 -11-2016, inserted new Rule
115TCA (4) + R. 12CC]. 12CC to provide that the statement of income distributed by a securitisation trust to its
investor has to be furnished to the PCIT or the CIT within whose jurisdiction the principal
office of the securitisation trust is situated, by 30th November of the FY following the PY
during which such income is distributed.
Further, the statement of income distributed also has to be furnished to the investor by
30thJune of the FY following the PY during which the income is distributed.
7 Income taxed in the year Where income has been included in the TI of the investor in a PY, on account of it having
of accrual not taxable accrued or arisen in the said PY, the same shall not be included in the total income of
again in the year of such person in the PY in which such income is actually paid to him by the securitisation
payment. trust. [S. 115TCA (5)].
8 Deduction of tax at Payee TDS rate
source in respect of Resident individuals and HUFs 25%
income payable to Resident payees, other than individuals and HUFs 30%
investor. [S. 194LBC] Foreign companies Rates in force
NCNR Rates in force
Tax shall be deducted at source at the time of payment or at the credit, whichever is
earlier.
9 Application for low or nil The facility for the investors to obtain low or nil deduction of tax certificate would be
deduction of tax at available; the investor can make an application to the AO, and he can, on an application
source. [S.197] made by the assessee in this behalf, issue a certificate U/s 197 in this behalf for no
deduction of income-tax or deduction of income-tax at a lower rate.
10 No TDS on payments No deduction of tax under Chapter XVII-B shall be made on the payments of nature
made to securitisation specified in S. 10 (23DA) received by any securitisation trust, since such income is
trust. exempt in the hands of securitisation trust U/s 10 (23DA). [S. 197A (1F) + Notification
46/2016].

Chapter-28: Collection & Recovery Summary
A. Issuance of NOD, time-limit for honouring NOD and getting declared as AID for not honouring NOD: [S. 220]:
1 Issuance of notice of Where any tax, interest, fees, penalty, fine or any other sum is payable in consequence
demand. [S. 156] of any order passed under this Act, the AO shall serve on the assessee a notice of
demand in Form-7 specifying the sum payable by the assessee.
2 Intimation = NOD. [Proviso Where any sum is found due on processing of return U/s 143 (1), or on processing of
to S. 156]. quarterly statement of TDS U/s 200A or on processing of quarterly statement of TCS
U/s 206CB, the intimations issued under these sections are regarded as NOD.
3 NOD – first step in initiation Issue of NOD is the first step in initiation of collection and recovery proceedings.
of collection and recovery Without which the AO or TRO cannot assume jurisdiction.
proceedings.
4 Time-limit for paying the sum The sum specified in the NOD shall be paid within 30 days of its service. However, the
specified in the NOD. [S. 220 AO has powers to reduce the time-limit for paying the sum specified in the NOD.
(1)].
5 When the AO can specify a If the AO has reason to believe that giving full 30 days aforesaid will be detrimental to
time lesser than 30 days in revenue, he can specify a time lesser than 30 days in the NOD. However, this power
the NOD? [Proviso to S. 220 could be exercised only with the prior approval of JCIT.
(1)].
6 Powers of AO to provide On an application made by the assessee before the expiry of time specified in S. 220
extension or to allow (1), the AO may extend the time for payment of the sum specified in the NOD, subject
payment in instalments. [S. to such conditions as he may think fit to impose.
220 (3)]. He may also allow payment by instalments, subject to such conditions as he may think
fit to impose.
7 Defaulting assessee to be If the amount specified in the NOD is not paid within the time specified in S. 220 (1) or
branded as AID. [S. 220 (4)]. extended U/s 220 (3), the assessee shall be deemed to be in default.
8 Entire outstanding amount If, in a case where payment by instalments is allowed U/s 220 (3), the assessee
becomes due upon default in commits defaults in paying any one of the instalments within the time fixed U/s 220 (3),
respect of one installment. the assessee shall be deemed to be in default as to the whole of the amount then
[S. 220 (5)]. outstanding, and the other instalment or instalments shall be deemed to have been due
on the same date as the instalment actually in default.
Note: If under the Act a remedy has been provided to an assessee to challenge the assessment or the demand and also to
seek interim relief and if by virtue of any order passed by any higher authority or competent court of law, the demand is not
paid, then that cannot by itself be taken as a ground detrimental to the Revenue for reducing the period of 30 days. Further,
sound financial position of the assessee also irrelevant for reducing the period of 30 days. [Farrukhabad Gramin Bank 277
ITR 320 (All)].
B. Stay of demand: [S. 220 (6)]:

1 Power of AO to Where an assessee has presented an appeal U/s 246A, the AO may, in his discretion, treat the
grant stay of assessee as not being in default in respect of the amount in dispute in the appeal, even though
demand. [S. 220 the time for payment has expired, as long as such appeal remains undisposed of. The AO may
(6)]. impose such conditions as he deems fit.
2 Is it obligatory on Power to grant stay of demand is discretionary. Note the words ‘in his discretion’.
the part of the AO If the discretion is not exercised, the reasons for not exercising the discretion shall be clearly
to grant stay? brought out in his order. In other words, the order should be a speaking order. Powers given in
S. 220 (6) are quasi-judicial in nature.
He shall not act as mere tax gatherer. He is not the final arbiter of disputes. [Rajan Nair (N.)
165 ITR 650 (Ker)].
4 What are the 1 Assessment history of the assessee.
factors to be 2 His conduct and co-operation in relation to the Department.
considered by him 3 Points raised in the appeal.
in exercise of his 4 Chances of recovery in case appeal is dismissed.
discretion U/s 220 5 The hardship to the assessee by insistence on immediate payment and the like. [Rajan
(6)? Nair (N.) 165 ITR 650 (Ker)].
This list is illustrative and not exhaustive.
5 How long the stay Stay can be granted until the appeal remains undisposed of.
could be granted Note the words ‘as long as such appeal remains undisposed of’ in S. 220 (6).
by the AO?

6 Whether the order The order passed by the AO in S. 220 (6) is not appealable.
passed U/s 220 (6) If the assessee is aggrieved on account of the denial by the AO to exercise discretion to grant
is appealable? stay of demand, he may file a writ to HC.
7 Whether this S. 220 (6) specifically gives discretion to the AO to grant stay of demand.
discretion U/s 220 This discretion cannot be exercised by the CIT though he is a superior authority. He cannot
(6) could be also pressurize the AO to exercise the discretion. [Savithri Sam 72 ITR 730 (Mad) + Pradeep
exercised by the Ratanshi 221 ITR 502].
CIT?
8 Circumstances in Circumstance-1: Demand in dispute arose because the AO had adopted an interpretation of
which the AO shall law in respect of which there exists conflicting decisions of one or more HCs.
exercise his Circumstance-2: Demand in dispute arose because of the Department not accepting the
discretion U/s 220 ruling of JHC which favours the stand point of the assessee.
(6) and grant stay Circumstance-3: Demand in dispute relates to issues that have been decided in favour of the
of demand. [CBDT assessee in an earlier order by an appellate authority or court in the assessee's own case.
Circular 530].
9 Circumstances in Cirucmstance-1: Originally stay was granted since the demand in dispute arose because of
which the stay of the Department not accepting the ruling of JHC which favoured the stand point of the
demand gets assessee. Subsequently, the decision of the JHC is over-ruled by the SC.
vacated. [CBDT Cirucmstance-2: Stay was granted U/s 220 (6). However, the assessee does not co-operate
Circular 530]. in early disposal of appeal.
10 Whether the CIT The power to grant stay of demand is not explicitly conferred by the Act on the CIT (A).
(A) has powers to However, the CIT (A) has power to grant stay of demand as it is an inherent and incidental
grant stay of power of the appellate authority.
demand? Thus, the CIT (A) can stay the demand during the pendency of proceedings before him on an
application made by the assessee in this regard. [Paul sons Litho Works 208 ITR 676 (Mad)
+ Pradeep Ratanshi 221 ITR 502.].
11 Power of CIT (A) is The power of CIT (A) to stay the recovery of the demand of dues in dispute is independent of
independent of the provisions of S. 220 (6).
provisions of S. It is not necessary that before approaching the CIT (A), an assessee should have approached
220 (6). the AO U/s 220 (6) or the AO must have rejected the assessee's prayer for stay of the demand.
[Keshav cashew co (Ker)].
12 ITAT to grant stay If the assessee loses the appeal before the CIT (A), then further stay cannot be granted by the
once unfavourable AO or the CIT (A).
order passed U/s In such a case the stay shall have to be obtained from the ITAT after filing the appeal to ITAT.
250.
C. Interest U/s 220 (2):

1 When interest is If the assessee defaults in paying the sum specified in the NOD within the time-specified in the
levied U/s 220 (2)? NOD, then interest is levied U/s 220 (2).
2 Base Sum specified in NOD as payable by the assessee.
3 Rate 1% p.m or part thereof. (Simple interest).
4 Period From the expiry of time specified in the NOD to the date of payment of sum specified in the
NOD.
5 Reduction in interest Where as a result of an order U/s 154 or 155 (amendment orders) or 250 or 254 or 260A or
upon reduction in 262 (appellate orders) or 264 (revisionary order), the amount on which interest was payable
demand. U/s 220 (2) had been reduced, the interest shall be reduced accordingly and the excess
interest paid, if any, shall be refunded. [1st Proviso to S. 220 (2)].
6 Interest unavoidable Even if the assessee was given extended time for paying the demand, still interest will start
after the expiry of 30 days from the date of service of NOD.
Same is the case where the assessee was allowed to pay in instalments U/s 220 (3).
Provisions of S.220 (1A) & 2nd proviso to S. 220 (2):

1 Where any NOD has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed
or initiated in respect of the amount specified in the said NOD, then such demand shall be deemed to be valid till the
disposal of appeal by the last appellate authority or disposal of proceedings, as the case may be and such NOD shall
have effect as provided in S. 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.
[S. 220 (1A)].
2 Where as a result of an order U/s 154, 155, 250, 254, 260A, 262 and 264, (i.e. amendment orders or appellate orders or
revisionary order) the amount on which interest was payable U/s 220 (2) had been reduced and subsequently as a

result of an order under said sections or S. 263 (i.e. amendment orders or appellate orders or revisionary order), the
amount on which interest was payable U/s 220 is increased, the assessee shall be liable to pay interest U/s 220 (2) on
the amount payable as a result of such order, from the day immediately following the end of the period mentioned in the
first NOD referred to in S. 220 (1) and ending with the day on which the amount is paid. [2nd Proviso to S. 220 (2)].
S. 3 of the Taxation Laws (Continuation & Validation of Recovery Proceedings) Act, 1964:
1 Where any NOD in respect of any Government dues is served upon an assessee by a Taxing Authority under any
scheduled Act, and any appeal or other proceeding is filed or taken in respect of such Government dues, then,-
(a) where such Government dues are enhanced in such appeal or proceeding, the Taxing Authority shall serve upon the
assessee another NOD only in respect of the amount by which such Government dues are enhanced and any
proceeding in relation to such Government dues as are covered by the NOD served upon him before the disposal of
such appeal or proceeding may, without the service of any fresh NOD, be continued from the stage at which such
proceedings stood immediately before such disposal;
(b) where such Government dues are reduced in such appeal or proceeding,-
(i) it shall not be necessary for the Taxing Authority to serve upon the assessee a fresh NOD;
(ii) the Taxing Authority shall give intimation of the fact of such reduction to the assessee. Further, where a
certificate has been issued to the TRO for the recovery of such amount, intimation of the fact of reduction
shall also be given to him;
(iii) any proceedings initiated on the basis of the NOD served upon the assessee before the disposal of such
appeal or proceeding may be continued in relation to the amount so reduced from the stage at which such
proceedings stood immediately before such disposal;
(c) no proceedings in relation to such Government dues (including the imposition of penalty or charging of interest) shall
be invalid by reason only that no fresh NOD was served upon the assessee after the disposal of such appeal or
proceeding or that such Government dues have been enhanced or reduced in such appeal or proceeding:
2 No fresh NOD shall be necessary in any case where the amount of Government dues is not varied as a result of any
order passed in any appeal or other proceeding under any scheduled Act.
3 The provisions of this section shall have effect notwithstanding any judgment, decree or order of any court, tribunal or
other authority.
D. Power to waive or reduce interest U/s 220 (2): [S. 220 (2A)]:
1 Power of CIT to waive or The CCIT or CIT may reduce or waive the amount of interest paid or payable by an
reduce interest U/s 220 assessee U/s 220 (2) if he is satisfied that—
(2). [S. 220 (2A)]. (i) payment of such amount has caused or would cause genuine hardship to the
assessee;
(ii) default in the payment of the amount on which interest has been paid or was
payable was due to circumstances beyond the control of the assessee; and
(iii) the assessee has co-operated in any inquiry relating to the assessment or any
proceeding for the recovery of any amount due from him.
2 Conditions (supra) – The aforesaid conditions are cumulative. [Metallurgical & Engineering Consultants
cumulative. (India) Ltd 103 Taxman 542 (Pat)].
3 Order U/s 220 (2A) – to Power U/s 220 (2A) is to be exercised judiciously and not randomly or arbitrarily. The order
be a speaking order – should be a speaking order. He shall clearly bring out the reasons as to why he exercised
not appealable. or refuses to exercise his discretion. This order is not appealable. However, writ petition
can be filed to challenge the order. - Auro Food Ltd Vs CIT 276 ITR 658 (Mad).
4 Time-limit for passing The order accepting or rejecting the application of the assessee U/s 220 (2A) shall be
order U/s 220 (2A). passed within a period of 12 months from the end of the month in which the application was
received. [1st Proviso to S. 220 (2A)].
5 OBH to the assessee No order rejecting the application shall be passed without giving OBH to the assessee. [2nd
before rejection of Proviso to S. 220 (2A)].
application.
E. Penalty U/s 221:

S. 221 (1) Where an assessee is in default in payment of tax, the AO shall impose a penalty which in cases of
continuing default, may be increased from time to time. However, the total penalty should not exceed
the tax in arrears.
Proviso-1 to S. The AO should give the assessee a reasonable OBH before levying such a penalty.
221 (1)
Proviso-2 to S. No penalty shall be levied on the assessee for default in payment of tax in cases where he proves to
221 (1) the satisfaction of the AO that default was for good and sufficient reasons.

Explanation to S. An assessee would not cease to be liable to pay any penalty for his default or delay in payment of the
221 (1) tax merely by reason of the fact that before the date of levy of such penalty the tax which was in arrears
had actually been paid by him.
Thus wherever there is delay on the part of the assessee, he would be liable to penalty even though by
the time the AO initiates action for the levy of penalty the amount of tax in arrears is actually paid.
S. 221 (2) If, as a consequence of any final order, the amount of tax, with respect to the default in the payment of
which the penalty was levied, has been wholly reduced, the penalty levied shall be cancelled and the
amount of penalty paid shall be refunded.
F. Certificate to the TRO – S. 222:

S. 222 (1) When an assessee is in default in making a payment of tax the TRO may draw up under his signature a
statement in Form-57 and specifying the amount of arrears due from the assessee and shall proceed to
recover from such assessee the amount specified in the certificate by one of more of the modes
mentioned below in accordance with the 2nd Schedule:
(a) Attachment and sale of the assessee`s movable property.
(b) Attachment and sale of assessee`s immovable properties.
(c) Arrest of the assessee and his detention in prison.
(d) Appointing a receiver for the management of assessee`s movable and immovable properties.
Explanation to For the purpose of this section, the assessee`s movable or immovable property shall include any
S. 222 (1) property which has been transferred directly or indirectly by the assessee to his spouse or minor child or
son`s wife or son`s minor child otherwise than for adequate consideration and which is held by any of
the persons aforesaid.
So far as the movable or immovable property so transferred to his minor child or his son`s minor child is
concerned, they shall even after the date of attainment of majority by such minor child or son`s minor
child continue to be included in the assessee`s movable or immovable property for recovering any
arrears.
S. 222 (2) The TRO may take action U/s 222 (1) notwithstanding that proceedings or recovery of the arrears by any
other mode have been taken.
G. Stay of proceedings in pursuance of certificate and amendment or cancellation thereof [S. 225]:
S. 225 (1) It shall be lawful for the TRO to grant time for the payment of any tax and when he does so he shall stay
proceedings for the recovery of such tax until the expiry of the time so granted.
S. 225 (2) Where as a result of appeal, the demand is reduced but the order is the subject matter of further
proceedings, the TRO shall stay the recovery of such part of the amount specified in the certificate as
pertains to such deduction for the period in which an appeal or other proceedings remains pending.
S. 225 (3) Where a certificate has been drawn up and subsequently, as a result of appellate order the amount is
reduced, the TRO shall modify the certificate or cancel it if it is necessary, when the order which was the
subject matter of appeal or other proceeding becomes final and conclusive.
H. Other modes of recovery – S. 226:

S. 226 (1) & Whether Certificate has been drawn ITA empowered to recover taxes by one or more of the modes
S. 226 (1A). up U/s 222? specified in S. 226
Yes AO
No TRO (without prejudice to the mode of recovery specified in S.
222)
S. 226 (2). If any assessee is in receipt of any income chargeable U/H Salaries, the AO or TRO may require any person
paying the same to deduct from any payment subsequent to the date of such requisition any arrears of tax
due from such assessee, and such person shall comply with any such requisition and shall pay the sum so
deducted to the credit of the CG or as the Board directs.
S. 226 (3) The AO or TRO may, at any time, by notice in writing require any person from whom money is due or may
(i) become due to the assessee or any person who holds or may subsequently hold money for or on account of
the assessee to pay to the AO or TRO either forthwith upon the money becoming due or being held or at or
within the time specified in the notice (not being before the money becomes due or is held) so much of the
money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the
money when it is equal to or less than that amount.
S.226 (3) A notice U/s 226 (3) may be issued to any person who holds or may subsequently hold any money for or on
(ii) account of the assessee jointly with any other person and the shares of the joint holders in such account
shall be presumed, until the contrary is proved, to be equal.

S. 226 (3) A copy of the notice shall be forwarded to the assessee at his last address known to the AO or TRO, and in
(iii) the case of a joint account to all the joint holders at their last addresses known to the AO or TRO.
S. 226 (3) Every person to whom a notice is issued U/s 226 (3) shall be bound to comply with such notice, and, in
(iv) particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be
necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose
of any entry, endorsement or the like being made before payment is made, notwithstanding any rule,
practice or requirement to the contrary.
S. 226 (3) Any claim respecting any property in relation to which a notice U/s 226 (3) has been issued arising after the
(v) date of the notice shall be void as against any demand contained in the notice.
S. 226 (3) Where a person to whom a notice U/s 226 (3) is sent objects to it by a statement on oath that the sum
(vi) demanded or any part thereof is not due to the assessee or that he does not hold any money for or on
account of the assessee, then nothing contained in S. 226 (3) shall be deemed to require such person to
pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false
in any material particular, such person shall be personally liable to the AO or TRO to the extent of his own
liability to the assessee on the date of the notice, or to the extent of the assessee’s liability for any sum due
under this Act, whichever is less.
S. 226 (3) The AO or TRO may, at any time, amend or revoke any notice issued U/s 226 (3) or extend the time for
(vii) making any payment in pursuance of such notice.
S. 226 (3) The AO or TRO shall grant a receipt for any amount paid in compliance with a notice issued under this sub-
(viii) section, and the person so paying shall be fully discharged from his liability to the assessee to the extent of
the amount so paid.
S. 226 (3) Any person discharging any liability to the assessee after receipt of a notice under this sub-section shall be
(ix) personally liable to the AO or TRO to the extent of his own liability to the assessee so discharged or to the
extent of the assessee’s liability for any sum due under this Act, whichever is less.
S. 226 (3) If the person to whom a notice U/s 226 (3) is sent fails to make payment in pursuance thereof to the AO or
(x) TRO, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and
further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax
due from him, in the manner provided in S. 222 to S. 225 and the notice shall have the same effect as an
attachment of a debt by the TRO in exercise of his powers U/s 222.
S. 226 (4) Moneys belonging to the assessee-in-default which are in the custody of a Court or Receiver are also liable
for attachment.
S. 226 (5) On being authorised by the PCCIT /CCIT /PCIT / CIT, the AO or the TRO is also empowered, by general or
special order to recover any arrears of tax due by distraint and sale of movable property as laid down in the
Third Schedule.
I. Recovery of tax in pursuance of agreements with foreign countries [S. 228A]:

1 S. 228A provides for the procedure of recovery of tax in pursuance of an agreement entered into by the CG with the
Government of any country outside India or any authority under that Government.
2 Where the Government of the foreign country or any authority under that Government sends a certificate to the CBDT
for the recovery of any tax due under that law from a person having any property in India, the CBDT may forward such
certificate to any TRO within whose jurisdiction such property is situated.
3 The TRO shall proceed to recover the amount specified in the certificate in the manner in which he would proceed to
recover the amount specified in a certificate drawn up by him U/s 222.
4 Thereafter, the TRO has to remit any sum so recovered to the CBDT after deducting the expenses in connection with
the recovery proceedings.
5 Where an assessee is in default or is deemed to be in default in making a payment of tax, the TRO may, if the assessee
has property in a country outside India, forward to the CBDT a certificate drawn up by him U/s 222 and the CBDT may
take such action thereon as it may deem appropriate having regard to the terms of the agreement with such country.
J. Tax Clearance Certificate [S. 230]:

(1) Undertaking to be furnished by a person not domiciled in India visiting India in connection with business,
profession or employment [S. 230 (1)]:
(i) No person, who is not domiciled in India and who has come to India in connection with business, profession or
employment; and who has income derived from any source in India, shall leave the territory of India by land, sea or air
unless he furnishes to the prescribed authority an undertaking in the prescribed form.
(ii) The said undertaking should be furnished from the employer of the said person or through whom such person is in
receipt of the income.
(iii) The undertaking should be to the effect that tax payable by such person who is not domiciled in India shall be paid by
the employer or the person through whom any income is receivable by the first-mentioned person.

(iv) The prescribed authority shall, on receipt of the undertaking, immediately give to such person a no-objection
certificate, for leaving India.
(v) However, the provisions contained in S. 230 (1) shall not apply to a person who is not domiciled in India but visits
India as a foreign tourist or for any other purpose not connected with business, profession or employment.
(2) Furnishing of PAN by person domiciled in India at the time of departure [S. 230 (1A)]:
(i) Every person, who is domiciled in India at the time of his departure, shall furnish, to the ITA or such other authority as
may be prescribed, the PAN allotted to him U/s 139A, the purpose of his visit and the estimated period of his stay
outside India.
(ii) In case no such PAN has been allotted to him, or his TI is not chargeable to income-tax or he is not required to obtain
a PAN under the Act, a certificate in the prescribed form shall be furnished to the ITA or such other authority, as may
be prescribed.
(iii) However, where an ITA opines that there exist circumstances which render an Indian domiciled to obtain a certificate
U/s 230, such person shall not leave the territory of India by land, sea or air unless-
(a) he obtains a certificate from the ITA stating that he has no liabilities under the Act or
(b) that satisfactory arrangements have been made for the payment of all or any of such taxes which are or may
become payable by that person [1st proviso to S. 230 (1A)].
(iv) No ITA shall make it necessary for any person who is domiciled in India to obtain a certificate U/s 230 unless he
records the reasons therefor and obtains prior approval of the PCCIT or CCIT.
(3) Personal liability of owner or charterer of ship or aircraft carrying such persons:
If the owner or charterer of any ship or aircraft carrying persons from any place in India to any place outside India allows any
of the above mentioned persons to travel by such ship or aircraft without first satisfying that such person is in possession of
a certificate as required, he shall be personally liable to pay the whole or any part of the tax payable by such person. In such
a case, the owner or charterer shall be deemed to be an assessee in default for such sum and recovery shall be as if it were
an arrear of tax. [S. 230 (2) & S. 230 (3)].
K. Liabilities of directors of private company in liquidation – S. 179:

1 Where any tax due from a private company in respect of any income of any PY cannot be recovered, then, every person
who was a director of the private company at any time during the relevant PY shall be jointly and severally liable for the
payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or
breach of duty on his part in relation to the affairs of the company. [S. 179 (1)].
2 For the purposes of this section, the expression "tax due" includes penalty, interest or any other sum payable under the
Act. [Explanation to S. 179].
L. Liability of partners of limited liability partnership in liquidation: [S. 167C]:

Where any tax due from a LLP in respect of any income of any PY cannot be recovered, in such case, every person who
was a partner of the LLP at any time during the relevant PY, shall be jointly and severally liable for the payment of such tax
unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part
in relation to the affairs of the LLP. [S. 167C]. For the purposes of this section, the expression "tax due" includes penalty,
interest or any other sum payable under the Act. [Explanation to S. 167C].
M. Provisions relating to provisional attachment – S. 281B:

S. 281B (1) Attaching properties Where, during the pendency of any proceeding for the assessment or
provisionally. reassessment, the AO is of the opinion that for the purpose of protecting the
interests of the revenue it is necessary so to do, he may, with the previous
approval of the PCCIT or CCIT, PCIT or CIT, PDGIT or DGIT or PDIT or
DIT, by order in writing, attach provisionally any property belonging to the
assessee in the manner provided in the 2nd Schedule.
S. 281B (2) Life of order made U/s Every such provisional attachment shall cease to have effect after the
281B. expiry of a period of 6 months from the date of the order made U/s 281B
(1).
Proviso to S. Extension of provisional The PCCIT or CCIT, PCIT or CIT, PDGIT or DGIT or PDIT or DIT may, for
281B (2) attachment. reasons to be recorded in writing, extend the aforesaid period by such
further period (s) as he thinks fit, so.
Maximum extension that However, that the total period of extension shall not in any case exceed 2
could be made. years or 60 days after the date of order of assessment or reassessment,
whichever is later.

S. 281B (3) Revoking of provisional Where the assessee furnishes a guarantee from a scheduled bank for an
attachment upon furnishing amount not less than the FMV of the property provisionally attached U/s
of bank guarantee. 281B (1), the AO shall, by an order in writing, revoke such attachment.
Proviso to S. Power to accept guarantee Where the AO is satisfied that a guarantee from a scheduled bank for an
281B (3) for an amount lower than amount lower than the FMV of the property is sufficient to protect the
the FMV of property interests of the revenue, he may accept such guarantee and revoke the
attached. attachment.
S. 281B (4) Reference to DVO for The AO may, for the purposes of determining the value of the property
determination of FMV of provisionally attached U/s 281B (1), make a reference to the DVO.
the property.
Time-limit for submission of The DVO shall estimate the FMV of the property in the manner provided in
valuation report. S. 142A and submit a report of the estimate to the AO within a period of 30
days from the date of receipt of such reference.
S. 281B (5) Time-limit for revoking An order revoking the provisional attachment U/s 281B (3) shall be made:
provisional attachment. (i) within 45 days from the date of receipt of the guarantee, where a
reference to the DVO has been made U/s 281B (4); or
(ii) within 15 days from the date of receipt of guarantee in any other
case.
S. 281B (6) Invoking guarantee if the Where a NOD specifying a sum payable is served upon the assessee and
assessee does not honour the assessee fails to pay that sum within the time specified in the NOD, the
NOD. AO may invoke the guarantee furnished U/s 281B (3), wholly or in part, to
recover the amount.
S. 281B (7) Invoking of guarantee The AO shall, in the interests of the revenue, invoke the bank guarantee, if
where the assessee fails to the assessee fails to renew the guarantee referred to in S. 281B (3), or fails
renew it or to furnish a new to furnish a new guarantee from a scheduled bank for an equal amount, 15
one. days before the expiry of the guarantee referred to in S. 281B (3).
S. 281B (8) Realisation from invoking The amount realised by invoking the guarantee referred to in S. 281B (3)
guarantee to be adjusted shall be adjusted against the existing demand which is payable by the
against demand. assessee.
Balance to be deposited in The balance amount shall be deposited in the Personal Deposit A/c of the
bank. PCIT or CIT in the branch of RBI or SBI or of its subsidiaries or any bank as
may be appointed by RBI at the place where the office of the PCIT or CIT is
situate.
S. 281B (9) Releasing guarantee, if no Where the AO is satisfied that the guarantee referred to in S. 281B (3) is
longer required. not required anymore to protect the interests of the revenue, he shall
release that guarantee forthwith.

Chapter-29: Liabilities in special cases Summary
A. Legal representatives – S. 159:

S. 159 (1) Where a person dies, his legal representative shall be liable to pay any sum (tax, fee, penalty, fine or
interest) which the deceased would have been liable to pay if he had not died, in the like manner and to the
same extent as the deceased.
S. 159 (3) The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an assessee.
S. 159 (6) The liability of a legal representative U/s 159 shall be limited to the extent to which the estate is capable of
meeting the liability.
S. 159 (4) Every legal representative shall be personally liable for any tax payable by him in his capacity as legal
representative if, while his liability for tax remains undischarged, he creates a charge on or disposes of or
parts with any assets of the estate of the deceased, which are in, or may come into, his possession.
But such liability shall be limited to the value of the asset so charged, disposed of or parted with.
This personal liability is imposed by S. 159 (4) only in respect of tax and not in respect of penalty, fine or
interest.
S. 159 (2) Any proceeding taken against the deceased before his death shall be deemed to have been taken against
the legal representative and may be continued against the legal representative from the stage at which it
stood on the date of the death of the deceased.
Any proceeding which could have been taken against the deceased if he had survived may be taken
against the legal representative.
However, the prosecution proceedings cannot be continued or initiated against the legal representatives for
the offences committed by the deceased.

1 Income upto the S. 159 applies in respect of the income of the deceased only upto the date of death and not upto
date of death and the end of the accounting year in which the death occurs.
the end of the The income of the estate for the period from the date of death upto the end of the accounting
accounting year. year in which the death occurs should be assessed under section 168 in the hands of the
executor.
Thus in respect of the year of death two separate and distinct assessments would have to be
made, the prior one on the legal representative U/s 159 and the latter one on the ‘executors’ U/s
168. This may even lower the incidence of tax for the year. The position will be the same even if
the representative and the ‘executor’ are one and the same.
2 Apportionment of As a consequence of two separate assessments as mentioned above, apportionment of income
income. between the two periods becomes necessary.
However, it should be noted that certain incomes like dividends or interest if they become
payable after the death cannot be apportioned to the period upto the date of death because they
do not accrue from day to day.

1 Assessment in the name of the deceased is null and void. The AO should issue notice U/s 143 (2) to all the legal
representatives and bring them on record and should give OBH to all of them and should frame assessment in the name
of all. [Dalumal Shyamumal 276 ITR 62 (MP)].
2 Where the AO had issued notices to the legal representatives and brought them on record and given them OBH before
framing assessment, framing of assessment in the name of the deceased is only a case of irregularity or technical flaw.
For this reason, assessment can’t be annulled.
At the best, it could be set aside and fresh assessment could be ordered with a direction to frame it on the legal
representatives. [Roshan Lal 134 ITR 145 (Del)].
3 Notice should to be sent to all legal representatives. Any legal representative who has not received a notice cannot be
made responsible in respect of his share of the assets of the deceased. [Maram Reddy Sulochanamma 79 ITR 1
(SC)]. The SC in Jai Prakash Singh 219 ITR 737 (SC) held that the assessment done without giving notice to all the
legal representatives will only be irregular and not void, so that it is a remediable defect, since liability to tax arises under
the law, while the procedural provisions are only machinery sections. In such case, the assessment could be set aside
and a fresh assessment may be directed but it could not be annulled. [Smt. Pushpa Devi 132 Taxman 506 (Raj)].
4 Where the notice is sent only to one of the legal representatives and the other legal representatives have not raised any
preliminary objection as to non-service of notice on them and have in fact co-operated in the assessment proceedings, it
could be inferred that they have waived their right to receive notice. In such case, the validity of assessment cannot be
questioned on the ground of non-service of notice on them. [Chandra Mohan Verma [2000] 244 ITR 430 (All)].

B. Executors and administrators – S. 168 & S. 169:

1 Who is an Executor is a person appointed to carry out to carry out the instructions and wishes of the
executor or deceased and to administrate the estate of a deceased person.
administrator? The executor is appointed by the testator of the will (the individual who makes the will).
An administrator is a person appointed by competent authority to administer the estate of a
deceased person when there is no executor.
Executor includes an administrator or other person administering the estate of a deceased
person. [Explanation to S. 168].
2 Chargeability of Where executors and administrators or other persons have been appointed to administer the
income in the estate of a deceased, the income arising from such an estate shall be chargeable to tax in the
hands of hands of the executor (s).
executor. If there is one executor the assessment shall be made on him in the status of an individual. If on
the other hand, there are more executors than one, then the assessment will be made on them in
the status of an AOP.
The residential status of the executor shall be determined on the basis of the residential status of
the deceased person during the previous year in which his death took place.
3 Separate The assessment of an executor shall be made separately from any assessment that may be
assessments on made on him in respect of his own income.
executor. Separate assessment shall be made on the executor(s) on the TI of each completed PY or part
thereof as is included in the period from the date of death of the deceased to the complete
distribution to the beneficiaries of the estate according to their several interests.
The income chargeable in the hands of the executor or administrator is the income of the period
commencing from the date of the death of the deceased. Any income in respect of any period
prior to the date of death i.e., from the first day of the accounting year and ending with the date of
death should be assessed in the hands of the legal representative U/s 159.
4 Income applied In computing TI of any PY, any income of the estate of that PY which is distributed or applied to
for the benefit of the benefit of any specific legatee of the estate during that PY shall be excluded from the
specific legatee computation of the TI of that PY assessed in the hands of the executors.
to be excluded The income so excluded shall, however, be included in the total income of the previous year of
from total income the ‘specific legatee’ himself.
of executor
5 Right of executor According to S. 169, the executor will be able to recover the tax (paid by him in his capacity as
to recover tax executor) from the estate or from the persons on whose behalf it is paid.
paid. [S. 169].

1 Some points on Under the general law when an executor gives his assent to a specific legatee, the title of the
exclusion of income legatee relates back to the date of death and consequently the income arising after the death
due to specific and before the asset belong to the legatee is taxable in his hands but not as the income of the
legatee. executor.
However, it is only the income distributed to or applied for the benefit of any specific legatee
during the PY which should be excluded from the executors’ TI. In other words, if the income is
not so distributed or applied in the PY, it would be taxable as part of the income of the executor.
2 Distribution to If the legatee is a residuary legatee, the income from the residue is the income of the executor
residuary legatee not taxable in his hands so long as the estate has not been completely administered; it is
to be excluded only after the estate is fully administered and the net residue is ascertained that the residuary
pending the legatee gets a title and the income, therefore, can be said to accrue to him and can be taxed in
administration of the his hands.
estate. This is so even if a part of the income of the estate had been actually paid on account to the
residuary legatee pending the administration of the estate.
3 Application of Where the executors apply a portion of the income received by them from the estate in a
income pursuant to particular way pursuant to the directions of the testator or other legal obligations, it is
directions of testator merely an application of income and would not entitle the executors to claim any deduction in
or other legal respect of the income so applied.
obligations – not Thus, payment of the cost of the probate, death duties and other debts due to the State or
deductible. periodic payments to the beneficiaries (other than the specific legatees) of property of the
testator or to a Court cannot be excluded in computing the executor’s chargeable income from
the estate.

C. Liability of successor to business in respect of tax chargeable from the predecessor – S. 170:
1 Assessment of Where a person carrying on any business, profession, or vocation is succeeded by another
successor and person who continues to carry on that business or profession, both the successor and the
predecessor. [S. person who is succeeded to (hereinafter called the predecessor) shall be assessed in respect
170 (1)]. of the actual share to which he is separately entitled in his income, profits & gains of PY.
Thus, the predecessor in business would be assessable in respect of the income of the year of
succession upto the date of succession while the successor would be assessable in respect
of the income of that year after the date of succession.
Accordingly, the income of the year in which the succession takes place is to be apportioned
between the predecessor and the successor with the share of each. The income must be
computed separately and each must be granted the deductions and allowance applicable to
him. The assessment on each of these persons must be separate and distinct.
2 Assessment when Where the predecessor cannot be found, the assessment of (a) the income of the year in
predecessor which the succession took place up to the date of succession and (b) of the one year
cannot be found. preceding the year of succession should be made on the successor in like manner and to the
[S. 170 (2)]. same extent as it would have been made on the predecessor, and all the provisions of the Act
shall apply accordingly.
3 Recovery of sum If the assessment has already been made on the predecessor for either or both of the years
payable by aforesaid, but the sum payable in pursuance of each assessment cannot be
predecessor from recovered from the predecessor, the sum payable by the predecessor shall be payable and
the successor. [S. recoverable by the successor. Successor shall be entitled to recover the full amount of sum
170 (3)]. paid by him from the predecessor.
The AO is required to record a finding that the sum in respect of the income of the year of
succession or the preceding year cannot be recovered from the predecessor, before
seeking to recover such sum from the successor.
4 Predecessor The successor’s liability to tax arises also in respect of any gain (e.g., capital gains) accruing to
income includes the predecessor from the transfer of the business or profession as a result of the succession.
CG [Explanation to S. 170].
5 Orders (supra) are The orders passed by the AO U/s 170 (2) and S. 170 (3) are appealable before the CIT (A) U/s
appealable. 246A.
D. Income earned in a FY assessed in the same FY – S. 174 to S. 176:

Generally, the AY is always ahead of the PY. In other words, income which is earned during one FY is not charged to tax in
that very same year but in the next following FY. To this general rule, there are certain exceptions which are as under:
1. Persons leaving India [S. 174]:

1 Where it appears to the AO that any individual may leave India during the current AY or shortly after its expiry and that
there is no present intention of his returning to India, the AO may proceed to assess the TI of such individual for the
period from the expiry of the PY for that AY up to the probable date of his departure from India in that AY.
2 The TI of each completed PY or part thereof included in such period shall be chargeable to tax at the rates in force in
that AY and separate assessment must be made in respect of each such completed PY or part thereof.
3 The AO is entitled to estimate the income of the individual leaving India for such period or part thereof in cases
where his income cannot be readily determined in the manner provided in the Act for the computation of income
under each head.
4 For the purposes of making this assessment, the AO may serve a notice upon the assessee requiring him to furnish
within such time (not being less than seven days), as may be specified in the notice, a return U/s 142 (1) (i) setting forth
his TI for each completed PY comprised in the period of assessment, and his estimated TI for any part of the period.
5 If an assessee does not furnish the return as required by the notice of the AO, a best judgment assessment
must be made on him U/s 144; non-compliance with the requirements of the notice may also attract liability to penalty
U/s 272A.
2. AOP or BOI or Artificial Juridical Person formed for a particular event or purpose [S. 174A]:
1 S. 174A provides for accelerated assessments in cases of certain AOP, BOI etc. If such AOP, BOI etc. is formed or
established for a particular event or purpose and the AO apprehends that the AOP/BOI is likely to be dissolved in the
same year or in the next year, the AO can make assessment of the income upto the date of dissolution as income of the
relevant AY.
2 The proceedings in this case shall be on the same basis as contained in S. 174 which deals with accelerated
assessment of persons leaving India.

3. Persons trying to alienate their assets [S. 175]:

1 If it appears to the AO during any current AY that any person is likely to charge, sell, transfer, dispose of or otherwise
part with any of his assets with a view to avoiding payment of the whole or any part of his liability under the Act, the TI of
such person, for the period from the expiry of the PY for that AY to the date when the AO commences proceedings
under this section shall be chargeable to tax in that AY itself.
2 The proceedings in this case also shall be on the same basis as contained in S. 174 which deals with accelerated
assessment of persons leaving India.
4. Discontinuance of business or profession [S. 176]:

1 Option to do Where any business or profession is discontinued in any AY, an assessment may be made
accelerated in that very year of the income from business for the period between the expiry of the PY relevant
assessment. to that AY and the date of discontinuance, in addition to the assessment, if any, made on the
income, profits or gains of the earlier PY (s).
Thus, the AO has an option to make a premature assessment of the profits earned up to the
date of discontinuance in the year of discontinuance.
2 Separate The total income of each completed PY or part thereof included in the period for which
assessment of assessment is to be made shall be computed separately and shall be chargeable to tax at the
each year. rates in force in respect of each of the relevant AYs.
3 Notice to AO. Any person discontinuing his business or profession must necessarily give notice to the AO of
the fact of discontinuance within 15 days from the date thereof. Failure to give this notice would
entail the levy of penalty U/s 272.
4 Income received In the case of discontinuance of any business or of discontinuance of any profession on account
after of the cessation of the profession by, or on the retirement or death of the person carrying on
discontinuance. profession, any sum received in any year after the date of discontinuance is deemed to be the
income of the recipient and charged to tax accordingly in the year of receipt in his hands if such
sum would have been included in the TI of the person who carried on business or profession had
it been received before such discontinuance.
5 Same procedural The other procedural provisions in regard to service of notice, mode of assessment, collection of
aspects. tax etc. are the same as those applicable to a person leaving India, as discussed earlier.
E. Liabilities arising when an association carrying on business is dissolved or business is discontinued – S. 177:
1 Where any business or profession carried on by an AOP had been discontinued or where an AOP is dissolved, the AO
is bound to make an assessment of the TI of the AOP as if no such discontinuance has taken place.
2 Consequently, all the provisions of the Act, including those relating to the levy of penalty or any other sum chargeable
under the Act, apply to such an assessment.
3 Every person who was at the time of discontinuance or dissolution a member of the association of persons, and the
legal representative of any such member who is deceased, shall be jointly and severally liable for the amount of tax
penalty or other sum payable.
4 Where the dissolution or discontinuance had taken place after the commencement of any proceedings, the proceedings
may be continued against the member of the association immediately prior to discontinuance or dissolution and the
legal representative of any deceased member from the stage at which they stood at the time of discontinuance or
dissolution.
5 The liability of the legal representative of any deceased member shall, however, be limited to the extent to which the
estate is capable of meeting the liability.
6 But if the legal representative, while his tax liability remains undischarged, creates a charge on or disposes off or parts
with any of the assets of the estate of the deceased which are, or may, come into his possession, this personal
liability shall, however, be limited to the value of the assets so charged, disposed of or parted with.
F. Companies under liquidation – S. 178:

1 Notice to AO Every person who is the liquidator of any company which is being wound up, whether under the
orders of a Court or otherwise, or who has been appointed as the receiver of any assets of a
company is bound under a statutory obligation to give notice of his appointment as liquidator or
receiver, as the case may be.
This notice may be given within 30 days of his appointment to the AO having jurisdiction to
assess the income of the company.
2 Information of tax The AO, in his turn, is bound, after making such enquiries or calling for such information as he
due by the AO may deem fit, to notify to the liquidator, within 3 months from the date of receipt of the notice of
appointment, of the amount which in his opinion would be sufficient to provide for any tax which
is then or likely thereafter to become payable by the company.

3 Restriction on The liquidator is debarred from parting with the assets of company and its properties in his
liquidator to part hands until he is notified by the AO of the amount which will be sufficient to provide for any tax
with assets. which is then, or is likely thereafter, to become payable by the company except with the prior
approval of the PCCIT or CCIT or PCIT or CIT and on being so notified, shall set aside an
amount equal to the amount notified.
However, the above restriction of debarring the liquidator from parting with assets or properties
shall not be applicable on (a) payment of the tax payable by the company, (b) payment to
secured creditors whose debts are entitled under law to priority of payments over the debts due
to the Government on the date of liquidation and (c) meeting such costs and expenses of the
winding up of the company as are, in the opinion of the PCCIT or CCIT or PCIT or the CIT,
reasonable.
4 Consequences of If the liquidator fails to notify the AO of his appointment within the time specified or fails to set
failure to give aside the amount intimated by the AO as being sufficient to provide for the tax liability of the
notice or set company or parts with any of the assets or property of the company in his hands in
aside the tax due contravention of the above provisions, he shall be personally liable for payment of the tax which
by the liquidator. the company would be liable to pay.
However, if the amount of any tax payable by the company is notified by the AO, the
personal liability of the liquidator under this sub-section shall be to the extent of such amount.
Failure to comply with the above requirement would be an offence punishable U/s 276A.
Where there are more liquidators than one, their obligations and liabilities under this section are
joint and several.

Chapter-30: TDS (Chapter XVII-B) Summary
1. Applicability of surcharge and HEC on rates of TDS:

Payee Payment Surcharge Health & Education
cess
Resident Salary ≤ Rs. 50L - 4%
Rs. 100L ≥ Salary > Rs. 50L 10% 4%
Salary > Rs. 100 15% 4%
Other than salary - -
Non-resident being foreign companies Any payment ≤ Rs. 100L - 4%
Rs. 1000L ≥ Any payment > Rs. 2% 4%
100L
Any payment > Rs. 1000L 5% 4%
Non-resident being Individual/ Any payment ≤ Rs. 50L - 4%
HUF/AJP/AOP/BOI Rs. 100L ≥ Any payment > Rs. 10% 4%
50L
Other non-residents Any payment ≤ Rs. 100L - 4%
2. Impact of absence of PAN – S. 206AA:

1 If the payee does not have PAN, the minimum TDS rate is 20%. [S. 206AA (1)].
2 However, S. 206AA shall not apply in of deduction of tax on certain payments to non-residents which are given as
under:
(i) Payment of interest on long-term bonds referred to in S. 194C to a FC or NCNR.
(ii) Payment to foreign company or non-resident of interest, royalty, FTS and payments on transfer of any capital
asset. (Subject to the conditions given below).
3 The deductee shall furnish the following details to the deductor:
(i) Name, email id, contact number;
(ii) Address in the country of which the deductee is a resident;
(iii) A certificate of his being resident in any country from the Government of that country if the law of that country
provides for issuance of such certificate.
(iv) Tax identification number of the deductee in the country of his residence and in case no such number is
available, then a unique number on the basis of which the deductee is identified by the government of that
country of which he claims to be a resident.
4 When 20% is used for deducting tax at source as per S. 206AA, it shall not be incremented by health and education
cess. [CBDT circular].
3. TDS on payments to persons in NJA – S. 94A (5):

U/s 94A (1), the CG has powers to notify the countries with which it has no effective exchange of information as NJA. If any
sum is payable to a person in NJA and it is liable to TDS under Chapter XVII-B, it shall be subjected to TDS at a minimum
rate of 30%.
4. TDS on Salary – S. 192:

1 Payer and payment Every person responsible for paying any income chargeable to tax U/H `Salaries` to deduct
covered by the tax on the amount payable. [S. 192 (1)]. He may be individual, HUF or any other person.
section Liability to tax audit in the immediately preceding FY is not relevant.
2 Payee. Resident or non-resident. [S. 192 (1)].
3 Manner of deduction Tax to be deducted has to be calculated at the average rate of income-tax computed on the
of tax. [S. 192 (1)]. basis of the rates in force for the relevant FY in which the payment is made, on the estimated
total income of the assessee.
4 Timing of TDS. Tax shall be deducted at source at the time of payment. [S. 192 (1)].
5 Employer The employer may, at his option, pay tax on the non-monetary perquisites enjoyed by the
undertaking the employee, in lieu of deduction of tax at source from salary payable to the employee.
obligation to pay tax Such tax will have to be worked out at the average rate applicable to aggregate salary
on non-monetary income of the employee and payment of tax will have to be made by the employer every
perquisites enjoyed month out of his funds, along with tax deducted at source on monetary payment of salary,
by the employee. [S. allowances etc.
192 (1A) & (1B)]. The employee is going to get credit even in respect of tax on non-monetary perquisites borne
by the employer.

6 Tax treatment of tax It is income in the hands of the employee, since it is a payment made by the employer to
paid by the employer discharge the obligation of the employee. However, it is exempt in the hands of the
on the non-monetary employee U/s 10 (10CC).
perquisites. Though it is a business expense for the employer, it shall be disallowed in view of S. 40 (a)
(v).
7 Multiple employment In cases where an assessee is simultaneously employed under more than one employer or
/successive the assessee takes up a job with another employer during the FY after his resignation or
employment – retirement from the services of the former employer, he may furnish the details of the income
manner of tax U/H "Salaries” due or received by him from the other employer, the tax deducted therefrom
deduction. [S. 192 and such other particulars to his current employer.
(2)]. Thereupon, the subsequent employer should take such information into consideration and
then deduct the tax remaining payable in respect of the employee`s remuneration from both
the employers put together for the relevant FY.
8 Considering relief In respect of salary payments to employees of Government or to employees of companies,
while estimating co-operative societies, local authorities, universities, institutions, associations or bodies,
TDS. [192 (2A)]. deduction of tax at source should be made after allowing relief U/s 89 (1), where eligible.
In this regard, the employee has to submit form-10E to the employer.
9 Considering income A tax payer having salary income in addition to other income chargeable to tax for that FY,
under other heads may send to the employer, the following:
and loss under head (a) particulars of such other income;
IFHP. [S. 192 (2B)]. (b) particulars of any tax deducted under any other provision;
(c) loss, if any, U/H IFHP.
The employer shall take the above particulars into account while calculating tax deductible at
source.
10 Consideration of However, the tax deductible from salary should not get reduced as a result of considering
other income and income under other heads and tax deducted thereon. But there is no issue on account of
TDS thereon not to reduction of TDS due to considering LFHP. [Proviso to S. 192 (2B)].
result in reducing
TDS U/s 192.
11 Requirement to Responsibility is cast on the person responsible for paying any income chargeable U/H
obtain evidence / "Salaries” to obtain from the assessee, the evidence or proof or particulars of prescribed
proof / particulars of claims (including claim for set-off of loss) under the provisions of the Act in the prescribed
claims from the form and manner, for the purposes of –
employee by the
employer. [S. 192 (i) estimating income of the assessee; or
(2D)]. (ii) computing tax deductible U/s 192 (1).
12 Provisions of R. 26C R. 26C requires furnishing of evidence of the following claims by an employee to the person
responsible for making payment U/s 192 (1) in Form No.12BB for the purpose of estimating
his income or computing the tax deduction of tax at source:
S.No. Nature of Claim Evidence or particulars
1. House Rent Allowance Name, address and PAN of the
landlord(s) where the aggregate rent
paid during the PY > Rs. 1L.
Leave Travel Concession or
2. Evidence of expenditure
Assistance
3. Deduction of interest U/H IFHP Name, address and PAN of the lender
4. Deduction under Chapter VI-A Evidence of investment or expenditure.
13 Salary in foreign For purposes of deduction of tax out of salaries payable in a foreign currency, the value of
currency – manner of salaries in terms of rupees should be calculated at the prescribed rate of exchange as
tax deduction. [S. specified in R. 26. [TTBR on the date of payment].
192 (6)].
14 Adjustments to the It is possible for the employer to increase or decrease the tax to be deducted to cover the
TDS instalments. previous deficiency or surplus in deduction. [S. 192 (3)].

1 Home salary paid abroad to the secondee-employees for services rendered in India shall be liable to TDS U/s 192. [Eli
Lilly (SC)].
2 Tips collected from customers and distributed to the waiters or servers by the Hotel-employer shall not be subjected to
TDS U/s 192, since tips are chargeable to tax U/H IFOS. [ITC Ltd (SC)].

5. TDS on premature withdrawal from EPF – S. 192A:

1 Applicability and S. 192A provides for deduction of tax @ 10% on premature taxable withdrawal from
TDS rate employees provident fund scheme.
Accordingly, in a case where the accumulated balance due to an employee participating in a
RPF is includible in his TI owing to the provisions of Rule 8 of Part A of the Fourth Schedule not
being applicable, the trustees of the EPF Scheme, 1952 or any person authorised under the
scheme to make payment of accumulated balance due to employees are required to deduct tax
@10%.
2 Timing of tax Tax should be deducted at the time of payment of accumulated balance due to the employee
deduction.
3 Non-applicability of No tax deduction is to be made this section if the amount of such payment or aggregate
TDS U/s 192A amount of such payment to the payee is less than Rs. 50,000.
4 TDS at MMR for Any person entitled to receive any amount on which tax is deductible under this section has to
non-submission of furnish his PAN to the person responsible for deducting such tax. In case he fails to do so, tax
PAN. would be deductible at the MMR.
6. TDS on Interest on Securities [S. 193]:

1 Person This section casts responsibility on every person responsible for paying any income by way of
responsible for interest on securities.
deduction of tax at
source
2 Payee Resident.
3 Meaning of interest It means: (a) interest on any security of the CG or SG; (b) interest on debentures or other securities
on securities. [S. 2 for money issued or on behalf of a local authority or a company or a corporation established by a
(28B)]. Central or State Act.
4 Rate of TDS 10%
5 Time of tax Tax should be deducted at the time of credit of such income to the account of the payee or at the
deduction. time of payment thereof, whichever is earlier.
6 Non-applicability of No tax shall be deducted at source on any interest payable to any insurance company in respect of
TDS U/s 193. any securities owned by it or in which it has full beneficial interest.
No tax shall be deducted on interest payable on any security of the CG or SG. However, tax shall
be deducted on interest on 7.75% Savings (Taxable) Bonds 2018 exceeding Rs. 10000.
No TDS on interest payable on any security issued by a company, where such security is in demat
form and is listed on a RSE in India.
No tax shall be deducted from any interest payable to an Individual or HUF, who is resident in India,
on debentures issued by a company in which the public are substantially interested, if: (a) the
interest is paid by the company by an APC; and (b) the amount of such interest or, as the case may
be, the aggregate of the amounts of such interest paid or likely to be paid during the FY by the
company to such individual or HUF does not exceed Rs. 5000.
7. TDS on interest other than interest on securities – S. 194A:

1 Payment covered. [S. Interest other than interest on securities.
194A (1)].
2 Payee. Resident. [S. 194A (1)].
3 Person responsible for Any person. [S. 194A (1)].
making payment. However, an individual or HUF has TDS obligation only when they were liable to tax audit in
the immediately preceding FY. [Proviso to S. 194A (1)].
4 TDS rate. 10% [S. 194A (1)].
5 Time of tax deduction. At the time of credit to the account of the payee in the books of accounts of the payer or at
the time of payment (whichever is earlier). [S. 194A (1)].
6 Threshold limit. Rs. 5000. [S. 194A (1)].
7 Cases where there is S. 194A (3) (iii): Payee =
no TDS obligation. [S. (a) Banking company
194A (3)]. (b) Co-operative land mortgage bank
(c) Co-operative society engaged in banking business
(d) Statutory corporation
(e) LIC
(f) UTI

(g) Company or co-operative society engaged in business of insurance.

(h) Any other person notified by the CG in the OG. [Example: National skill development
fund].
S. 194A (3) (iv): No TDS on interest paid by the firm to its partners.
S. 194A (3) (vi): No TDS obligation in respect of interest payable on sum deposited under:
(a) Kissan vikas patra
(b) Indira Vikas Patra
(c) NSC
(d) Post office monthly income account
(e) Post office time deposit account
(f) Post office recurring deposit account
S. 194A (3) (viii): No TDS on Interest on refund granted under IT Act.
S. 194A (3) (x): No TDS on discount of ZCB.
S. 194A (3) (xi): No TDS on interest payable by the SPV to the Business Trust, since it is
exempt U/s 10 (23FC).
S. 194A (3) (vii): No TDS on interest on deposits (other than time deposits) with bank.
S. 194A (3) (ix) + S. 194A (3) (ixa): Motor accident claims tribunal awards compensation and
interest thereon for the delay in awarding it to the motor accident victim or his legal heir. The
person causing accident pays compensation and interest thereon to the motor accident victim
or his legal heir. It is taxable in the PY of receipt U/H IFOS. [S. 145A (b) & S. 56 (2) (viii)].
50% is deductible U/s 57 (iv). The TDS obligation arises in respect of interest only upon
payment. That too, only when the threshold limit of Rs. 50000 is crossed by the interest paid
during a FY.
S. 194A (3) (i) (c): No TDS on interest paid by the Post office on deposits made under senior
citizen scheme if the threshold of Rs. 10000 is not crossed. (Rs. 50000 in case of senior
citizen).
S. 194A (3) (i) (d): No TDS on interest on deposits (time deposit or otherwise) paid by a
housing finance company to a resident, if the threshold of Rs. 5000 is not crossed.
If the HFC has adopted core banking solutions (CBS), then the threshold of Rs. 5000 is in
respect of interest paid by the HFC as a whole.
If CBS was not adopted, then the threshold limit is in respect of interest paid by each branch.
S. 194A (3) (i) (a): No TDS on interest paid to resident by a banking company on time
deposits, if the threshold of Rs. 10000 is not crossed. (Rs. 50000 in case of senior citizen).
Time deposits shall include recurring deposits.
If the banking company has adopted core banking solutions (CBS), then the threshold of Rs.
10000/Rs. 50000 is in respect of interest paid by the banking company as a whole.
S. 194A (3) (viia) (a): No TDS on any interest on any deposit paid to any one by:
(a) Primary agricultural credit society
(b) Primary credit society
(c) Co-operative land mortgage bank
(d) Co-operative land development bank
S. 194A (3) (v): No TDS on interest on time deposits paid by a co-operative bank (not being
one covered by S. 194A (3) (viia) (a)) to another co-operative society.
S. 194A (3) (i) (b): No TDS on interest on time deposits paid by a co-operative bank (not
being one covered by S. 194A (3) (viia) (a)) to a member or non-member if the threshold of
Rs. 10000 is not crossed. (Rs. 50000 in case of senior citizen).
If the co-operative bank has adopted core banking solutions (CBS), then the threshold of Rs.
10000 / Rs. 50000 is in respect of interest paid by the co-operative bank as a whole.
S. 194A (3) (viia) (b): No TDS on interest on savings account paid by a co-operative bank to
its resident depositors.
S. 194A (3) (v): No TDS on any interest paid by a co-operative society to its members or
another co-operative society.
No TDS on any interest paid by a co-operative society to non-members if the threshold of Rs.
5000 is not crossed.
S. 197A (1D): No TDS on interest paid by off-shore banking units on borrowings made from
or deposits accepted from non-residents or resident but not ordinarily residents.

Off-shore banking units are branches of Indian banks established in SEZ which deals only
with SEZ units in Forex. It makes available international funds at international rates.
8 Avoidance of TDS If the payee of interest has PAN, his TI is not likely to exceed BEL and the interest is not
through form-15G and going to exceed the BEL, Form-15G could be issued to avoid TDS U/s 193 and S. 194A. [S.
form-15H. 197A (1A), S. 197A (1B)].
If the payee = senior citizen, has PAN and his estimated TI is not likely to cross the BEL,
Form-15H could be issued to avoid TDS U/s 193 and S. 194A. [S. 197A (1C)].
Form-15G or form-15H is invalid if PAN is not quoted in it. [S. 206AA (2)].
9 Is a person having As per the provisions of S. 139A, interalia, a person whose TI does not exceed the BEL is not
income below BEL, required to apply to the AO for the allotment of PAN.
required to furnish his However, as per the provisions of S. 206AA, notwithstanding anything contained in any other
PAN to the deductor provision of this Act, any person who is entitled to receive any sum or income or amount on
as per S. 206AA, even which tax is deductible under Chapter XVII-B, i.e., the deductee, shall furnish his PAN to the
though he is not deductor, otherwise tax shall be deducted as per the provisions S. 206AA, which is normally
required to hold a PAN higher. It is mandatory for an assessee to furnish his PAN, despite filing Form 15G as
as per the provisions required U/s 197A, to seek exemption from TDS.
of S. 139A? [Smt. A. The provisions of S. 139A are contradictory to S. 197A, due to the fact that assessees whose
Kowsalya Bai (2012) income was less than the BEL, were not required to hold PAN, whereas their declaration
346 ITR 156 (Kar)]. furnished U/s 197A was not accepted by the bank or financial institution unless PAN was
communicated as per the provisions of S. 206AA. S. 206AA creates inconvenience to small
investors, who invest their savings from earnings as security for their future, since, in the
absence of PAN, tax was deducted at source at a higher rate.
In order to avoid undue hardship caused to such persons, the Karnataka HC, in the present
case, held that it may not be necessary for such persons whose income is below the BEL to
obtain PAN and in view of the specific provision of S. 139A, S. 206AA is not applicable to
such persons. Therefore, the banking and financial institutions shall not insist upon such
persons to furnish PAN while filing declaration U/s 197A. However, S. 206AA would continue
to be applicable to persons whose income is above the BEL.
Issues in S. 194A:
1 Interest on delayed payment of compensation shall be subjected to TDS U/s 194A. [Baldeep Singh Vs UOI 199 ITR
628 (P&H)].
2 Damages described as interest shall not invite the application of S. 194A. [Ghaziabad Development Authority v. Dr.
N.K. Gupta 258 ITR 337 (NCDRC)].
3 Interest described as return on investment shall not escape from the provisions of S. 194A. Nomenclature is immaterial.
Substance is important. [Viswapriya Financial Services and Securities Ltd 258 ITR 496 Mad].
4 Chit fund organisations have no obligation to deduct tax at source U/s 194A in respect of chit dividend paid to
subscribers. [Sahib Chits (Delhi) (P) Ltd 328 ITR 342 (Del) + Avenue Super Chits (P) Ltd (2015) (Kar)].
5 Interest on FDRs made in the name of Registrar General of the Court or the depositor of the fund on the directions of
the Court, will not be subject to TDS till the matter is decided by the Court. However, once the Court decides the
ownership of the money lying in the fixed deposit, the provisions of S. 194A will apply to the recipient of the income.
[Circular No.23/2015, dated 28-12-2015].
TDS on payment of interest on time deposits U/s 194A by banks following CBS software – CBDT Circular 3/2010
dated 02.03.2010:
1 In case of banks using CBS software, interest payable on time deposits is calculated generally on daily basis or monthly
basis and is swept and parked accordingly in the provisioning account for the purposes of macro monitoring only.
2 However, constructive credit given to the depositors’ or payees’ account either at the end of the FY or at periodic
intervals as per practice of the bank or as per the depositors’ or payees’ requirement or on maturity or on encashment of
time deposit whichever is earlier.
3 The Explanation to S. 194A which provides that credit to suspense account or any other account would be liable to TDS,
is not meant to apply in cases of banks where credit is made to provisioning account on daily or monthly basis for the
purposes of macro-monitoring only by use of CBS software.
4 Accordingly, it is clarified that since no constructive credit to the depositors’ or payees’ account takes place while
calculating interest on time deposits on daily or monthly basis in the CBS software used by banks, tax need not be
deducted at source on such provisioning of interest by bank for the purposes of macro-monitoring only.
5 In such cases, tax shall be deducted at source on accrual of interest at the end of the FY or at periodical intervals as per
practice of the bank or as per the depositors’ or payees’ requirement or on maturity or on encashment of time deposit

8. TDS on winnings from lotteries etc – S. 194B:

1 Payment covered Any income by way of winnings from any lottery or crossword puzzle or card game and
other game of any sort (including any game show, an entertainment programme on TV or
electronic mode in which people compete to win prizes).
2 Payee Resident or non-resident.
3 Threshold limit Rs. 10000
4 TDS rate 30%
5 Duty of the payer where the Where the winnings are wholly in kind or partly in cash and partly in kind but the part in
winnings are in kind. cash is not sufficient to meet the liability of deduction of tax in respect of whole of the
[Proviso to S. 194B]. winnings, the payer shall, before releasing the winnings, ensure that tax has been paid in
respect of the winnings.
6 Consequences of not Penalty is levied for the non-compliance with the requirements of Proviso below S. 194B.
discharging the duty Levying authority is JCIT. Quantum of penalty = Tax not paid as per the Proviso to S. 194B.
referred to in Proviso to S. [S. 271C (1) (b) (ii)]. If there is a reasonable cause for the default, no penalty shall be
194B. levied. [S. 273B].
Rigorous imprisonment for non-compliance with the Proviso to S. 194B: Minimum = 3

months; Maximum = 7 years. Also fine could be levied. [S. 276B (b) (ii)].
Issues in S. 194B:
1 Prize money on unsold or unclaimed lottery tickets paid to organising agent pursuant to the agreement with him shall
not be subjected to TDS U/s 194B. It does not represent lottery winnings of the organising agent. [Director of State
Lotteries Vs ACIT [1999] 238 ITR 1 (Gau)].
2 However, the prize money received by a wholesale distributor of lotteries (who purchased the tickets at a discount) on
the unsold lottery tickets shall be subjected to TDS U/s 194B. It shall suffer tax in his hands U/H IFOS @ rates specified
in S. 115BB. [Manjoo and Co [2011] 335 ITR 527 (Kerala)].
3 For violation of the proviso to S. 194B, order U/s 201 (1) declaring the releaser of winnings in kind as assessee-in-
default is not possible. [Hindustan Lever Ltd (2014) 361 ITR 0001 (Kar)].
9. TDS on winnings from horse races – S. 194BB:

1 Payment covered Income way of horse race winnings.
2 Payer Bookmaker or person licensed by the Government for racing in a race course or for
arranging for wagering or betting in a race course.
3 Payee Resident or non-resident.
4 Threshold limit Rs. 10000
5 TDS rate 30%
6 Timing of TDS At the time of payment.
10. Payments to contractors and sub-contractors – S. 194C:

1 Payments covered. [S. Any sum for carrying out any work (including supply of labour for carrying out any work)
194C (1)]. payable in pursuance of a contract.
2 Payee. [S. 194C (1)]. Resident contractor.
3 Person responsible for The CG or any SG; or
making payment. any local authority; or
[Clause (i) of Explanation any corporation established by or under a Central or State Act; or
S. 194C]. any company; or
any co-operative society; or
Any authority dealing with housing accommodation; or
any society registered under the Societies Registration Act,
any trust; or
any university; or
any Government of a foreign State or a foreign enterprise or any association or body
established outside India; or
any firm; or
an individual or a HUF or an AOP or a BOI, if such person is liable to audit of accounts
U/s 44AB during the FY immediately preceding the FY in which such sum is credited or
paid to the account of the contractor.

4 TDS rate. [S. 194C (1)]. Payee TDS rate

Individual or HUF 1%
Others 2%
5 Timing of tax deduction. At the time of credit to the account of the contractor in the books of accounts of the payer
[S. 194C (1)]. or at the time of payment (whichever is earlier).
6 Meaning of work. Work includes:
[Clause (iv) of (a) advertising;
Explanation to S. 194C]. (b) broadcasting and telecasting including production of programmes for such
broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by
railways;
(d) catering;
(e) manufacturing or supplying a product according to the requirement or
specification of a customer by using material purchased from such customer,
but does not include manufacturing or supplying a product according to the
requirement or specification of a customer by using material purchased from
a person, other than such customer.
7 Meaning of contract. It includes sub-contract. [Clause (iii) of Explanation to S. 194C].
8 Threshold limit. [S. 194C No deduction shall be made from the amount of any sum credited or paid to the
(5)]. contractor, if such sum does not exceed Rs. 30000:
However, where the aggregate of the amounts of such sums credited or paid or likely to
be credited or paid during the FY exceeds Rs. 100000, the person responsible for paying
such sums shall be liable to deduct tax at source. [Proviso to S. 194C (5)].
9 Sum on which tax is to Where any sum is paid or credited for manufacturing or supplying a product according to
be deducted at source the requirement or specification of a customer by using material purchased from such
where payments are customer, tax shall be deducted at source—
made to the contractor (i) on the invoice value excluding the value of material, if such value is
for manufacturing of mentioned separately in the invoice; or
goods according to the (ii) on the whole of the invoice value, if the value of material is not mentioned
specifications of the separately in the invoice.
payer using the materials
purchased from the
payer. [S. 194C (3)].
10 No TDS on payments No individual or HUF shall be liable to deduct tax on the sum credited or paid to the
made for personal account of the contractor where such sum is credited or paid exclusively for personal
purpose. [S. 194C (4)]. purposes of such individual or any member of HUF.
11 No TDS on payments No deduction is required to be made from the sum credited or paid or likely to be credited
made to contractors in or paid during the previous year to the account of a contractor, during the course of the
transport business. [S. business of plying, hiring or leasing goods carriages, if he furnishes his PAN to the
194C (6)]. deductor.
This relaxation from the requirement to deduct tax at source shall only be applicable to
the payment in the nature of transport charges made to a contractor, who fulfills the
following three conditions cumulatively – (a) owns ten or less good carriages at any time
during the PY; (b) is engaged in the business of plying, hiring or leasing goods carriages;
(c) has furnished a declaration to this effect along with his PAN.

1 Payments to NR contractors shall be subjected to TDS U/s 195.
2 The words ‘any sum…….for carrying out work’ are not qualified by the phrase ‘chargeable to tax under this Act’, unlike
in S. 195. Therefore, even if the sum paid is not chargeable to tax in the hands of the contractor, it shall be subject to
TDS U/s 194C. [ACC Ltd 201 ITR 435 (SC)].
3 Supply of printed labels by printer is sale and not works contract. S. 194C is not applicable. [BDA Ltd 281 ITR 999
(Bom)].
4 Payment made for supply of corrugated boxes with labels printed on them bearing the logo of the manufacturer of
match sticks is not governed by S. 194C, since it is pursuant to contract for sale of goods. [Dabur India Ltd 283 ITR
197 (Del)].
5 Payments made under service contracts are outside the ambit of S. 194C. Accordingly, the payment made to hotels for
various services or facilities provided shall not come within the ambit of S. 194C. [East India Hotels Ltd Vs CBDT 320
ITR 526 (Bom)].

6 Illustrative list of payments covered by S. 194C: [CBDT Circular 681].

Payment made under a contract for construction/repair/renovation/alteration of building.
Payment made under a contract for laying roads.
Payment made under a contract for laying airfields.
Payment made under a contract for laying railway lines.
Payment made under a contract for erection and installation of plant and machinery.
Payment made under a contract granted for processing of goods supplied by the payer, where the ownership of such
goods remains at all times with the payer.
Payment made a contract for fabrication of any article or thing where materials are supplied by the payer and the
fabrication work is done by a contractor.
Payments made to couriers for carrying documents, letters etc.
7 Freight or transportation charges included in the sales invoice shall not be subjected to TDS U/s 194C, since delivery
of goods is incidental to the contract of sale and is not done pursuant to a separate contract. [P&H HC in Bhagwati
Steels 326 ITR 108 + Food Corporation of India 326 ITR 106 + United Rice Land Ltd 322 ITR 594 + CBDT
Circular 9/2012].
8 Where the contract is for transportation services, the payments made thereunder come U/s 194C. However, if the
payments are made for hiring the carriers or lorries, it shall come U/s 194-I. [Swayam Shipping Services P. Ltd.
(2011) 339 ITR 647 (Guj)].
9 Where the assessee is in the business of arranging transportation of goods through lorries owned by other
transporters, in respect of the payments made by him to the other transporters out of payments received from the client
companies after withholding of his commission, he has not TDS obligation U/s 194C if he is merely a facilitator or
intermediary and there is no privity of contract between him and client companies. [Hardarshan Singh (2013) 350 ITR
427 (Delhi)].
10 Where the content to be telecasted is produced by the production house as per the specifications provided by the
broadcaster/telecaster and the copyright of the content/programme also gets transferred to the telecaster/ broadcaster,
such contract is covered by the definition of the term `work` in S. 194C and, therefore, subject to TDS U/s 194C.
However, where the telecaster/broadcaster acquires only the telecasting/ broadcasting rights of the content already
produced by the production house, there is no contract for ``carrying out any work”, as required in S. 194C (1).
Therefore, such payments are not liable for TDS U/s 194C. However, payments of this nature may be liable for TDS
under other sections of Chapter XVII-B (i.e. S. 194J). [Circular No. 04/2016, dated 29-2-2016].
11 Where in terms of agreement between the payer and the payee, the component of GST comprised in the amount
payable to a resident is indicated separately, tax shall be deducted at source on the amount paid or payable without
including the GST component. [CBDT Circular 23/2017].
12 Tax shall be deducted U/s 194C at the time when the client makes payment to the advertisement agency and not when
the advertising agency makes payment to the media for advertising. If the advertising agency gives a consolidated bill
including charges for art work and other related jobs as well as payments made by them to the media, then the tax
shall be deducted at source on the gross amount of bill. [CBDT Circular 715].
13 Payments made directly to the print media or electronic media for release of advertisements shall also be subject to
TDS U/s 194C. However, payments made directly to Doordarshan shall not be subjected to TDS, since it is a
Government agency. [CBDT Circular 715].
14 Payment made in connection with sponsoring of debates, seminars and other functions held in colleges, schools and
associations with a view to earn publicity through display of banners etc put up by organizers shall be subject to TDS
U/s 194C. [CBDT Circular 715].
15 Payments for cost of advertisement issued in souvenirs brought out by various organizations. [CBDT Circular 715].
16 Payments made by advertisement agencies to models, artists, photographers in connection with production of
advertisement programmes shall be subjected to TDS U/s 194I and not U/s 194C. [CBDT Circular 715].
17 Payments made for serving food in a restaurant in the normal course of running of the restaurant shall not be
subjected to TDS U/s 194C. [CBDT Circular 715].
18 Payments made to travel agents for purchase of tickets for travel shall not be subjected to TDS U/s 194C. [CBDT
Circular 715].
19 Payments made by travel agent to the airline companies shall not be subjected to TDS U/s 194C. [CBDT Circular
715].
11. TDS on insurance commission – S. 194D:

1 Payment covered Any income by way of remuneration or reward, whether by way of commission or otherwise, for
soliciting or procuring insurance business (including the business relating to the continuance,
renewal or revival of policies of insurance).
2 Payee Resident insurance agent.
3 Payer Insurance companies.

4 TDS rate 5%
5 Threshold limit Rs. 15000.
6 Time of tax At the time credit to the account of the payee in the books of accounts of the payer or at the time
deduction of payment (whichever is earlier).
7 Non-deduction S. 197A is amended by the Finance Act 2017 to provide that the recipient of commission can
through Form- furnish declaration U/s 197A in Form-15G/H for non-deduction of tax at source.
15G/H.
Note: Profit commission paid by re-insurance company to the insurer company is outside the ambit of S. 194D.
12. TDS on payment in respect of life insurance policy – S. 194DA:

1 Payment covered Any sum received under a life insurance policy, including the sum allocated by way of
bonus on such policy (if not exempt U/s 10 (10D)).
2 Payee Resident
3 Payer Insurance companies
4 TDS rate 1%
5 Time of tax deduction At the time of payment.
6 Threshold limit The obligation to deduct tax arises only when the aggregated payment made is Rs. 1L or
more.
7 Non-deduction through The recipient of commission can furnish declaration U/s 197A in Form-15G/H for non-
Form-15G/H. deduction of tax at source.
Provisions of S. 10 (10D):
(i) Any sum received under life insurance policy including sum allocated by way of bonus on such policy is exempt U/s 10
(10D).
(ii) However, the following are not exempt:
(a) Key man insurance policy proceeds.
(b) Life insurance policy proceeds, if the premium payable for any of the years during the term of the policy
exceeds
If the policy was issued before 01.04.2012 20% of the actual
capital sum assured.
If the policy was issued on or after 01.04.2012 10% of the actual
capital sum assured.
If the policy was issued on or after 01.04.2013 [In case of persons with disability or 15% of the actual
person with severe disability as per S. 80U or suffering from disease or ailment as capital sum assured.
specified in S. 80DDB]
[However, if the sum is payable upon death of the insured, S. 10 (10D) exemption is available].
(c) Sum received U/s 80DD (3)
Sum received U/s 80DD (3):

1 A resident individual may deposit an amount under a scheme framed by LIC or other insurer or UTI and approved by
CBDT, for the maintenance of disabled dependent, which may provide for payment of annuity or lumpsum amount for
the benefit of disabled dependent, in the event of the death of the depositor.
2 For the sum so deposited, deduction is allowed to the depositor U/s 80DD.
3 However, if the disabled dependent predeceases the depositor, any sum received by the depositor under the scheme
(supra) shall be charged to tax in his hands in the PY of receipt.
13. TDS on Commission etc. on the sale of lottery tickets – S. 194G:

1 Payment covered Any income by way of commission, remuneration or prize (by whatever name called) on
lottery tickets
2 Payee Lottery agent (Resident or non-resident)
3 TDS rate 5%
4 Threshold limit Rs. 15000.
5 Time of deduction of At the time of credit to the account of the payee or at the time of payment, whichever is
tax earlier.

14. TDS on commission or brokerage – S. 194H:

1 Payment covered Commission (not being one covered U/s 194D) or brokerage.
2 Payee Resident
3 Person responsible for Any person.
making payment. However, if the payer is an individual or HUF, the obligation to deduct tax at source under
this section arises, only if such individual or HUF was liable to tax audit in the immediately
preceding FY. [Proviso-2 to S. 194H].
4 TDS rate 5%
5 Threshold limit. Rs. 15000. [Proviso-1 to S. 194H]
6 Time of deduction of At the time of credit to the account of the payee or at the time of payment, whichever is
tax at source. earlier.
7 Meaning of "Commission or brokerage" includes any payment received or receivable, directly or
commission or indirectly, by a person acting on behalf of another person for services rendered, or for
brokerage. any services in the course of buying or selling of goods, or in relation to any transaction
relating to any asset, valuable article or thing, other than securities.
8 Professional services This section is not applicable to professional services. For that S. 194J shall apply.
O/s 194H
9 No TDS on payments There would be no requirement to deduct tax at source on commission or brokerage
made to PCO payments made by BSNL or MTNL to their public call office (PCO) franchisees. [Proviso-3
franchises. to S. 194H].
10 Significance of ‘other Brokerage or commission paid to stock brokers or underwriters is outside the ambit of S.
than securities’ in 194H.
Commission definition.
Issues in S. 194-H:
1 Discount given on supply of SIM cards and recharge coupons by a telecom company to its distributors under a prepaid
scheme shall be treated as commission and shall be subjected to TDS U/s 194H. [Idea Cellular Ltd 325 ITR 148 (Del)
+ Vodafone Essar Cellular Ltd (2011) 332 ITR 255 (Kerala) + Bharti Cellular Ltd (2013) 354 ITR 507 (Cal)].
2 The difference between the sale price of ticket and minimum fixed commercial price being additional special commission
in the hands of the agents of an airline company shall not be subjected to TDS U/s 194H since it cannot be quantified by
the airline company. [Qatar Airways (2011) 332 ITR 253 (Bom)].
3 Discount given to stamp vendors on purchase of stamp papers is not 'commission or brokerage' to attract the provisions
for tax deduction U/s 194H. [Ahmedabad Stamp Vendors Association v. UOI (2012) 348 ITR 378 (SC)].
4 Where an assessee, a dairy, makes an outright sale of milk to its concessionaires at a certain price (which is lower than
the MRP fixed by the assessee-dairy) and the concessionaires make full payment for the purchases on delivery and
bear all the risks of loss, damage, pilferage and wastage, provisions of S. 194H are not attracted. [Mother Dairy India
Ltd. (2013) 358 ITR 218 (Delhi)].
5 Retention of commission by the consignee or agent amounts to constructive payment of commission by the consignor or
principal. It is covered by S. 194H. Consignor or principal has to deposit tax. [CBDT Circular 619 dated 04.12.1991].
6 The work of receipt of tax payments and issue of refunds is conducted by the banks authorized for such purposes by the
RBI. As a compensation for the work so conducted, the CG pays to the banks, through RBI, commission termed as
“Turnover Commission”. It does not come within the purview of S. 194H. [CBDT Circular 6/2003 dated 03.09.2003].
7 Payment for procurement of orders for company’s product is within the ambit of S. 194H. [CBDT Circular-715].
8 Payment of commission by the Doordarshan to the advertisement agencies for canvassing of advertisements from
business houses shall be subjected to TDS U/s 194H. [Prasar Bharathi (SC)].
15. TDS on rent – S. 194-I:

1 Payment covered. Any income by way of rent.
2 Payee Resident
3 Person responsible for Any person.
making payment However, if the payer is an individual or HUF, the obligation to deduct tax at source arises
only if such individual or HUF was liable to tax audit in the immediately preceding FY.
[Proviso-2 to S. 194-I].
4 Meaning of rent. “Rent” means any payment, by whatever name called, under any lease, sub-lease,
[Explanation to S. 194- tenancy or any other agreement or arrangement for the use of (either separately or
I]. together) any,—
(a) land; or
(b) building; or

(c) machinery; or
(d) plant; or
(e) equipment; or
(f) furniture; or
(g) fittings,
whether or not any or all of the above are owned by the payee;
5 Threshold limit. Rs. 180000. [Proviso-1 to S. 194-I].
6 TDS rate. 2% on rent for the use of any machinery or plant or equipment; and
10% on rent for the use of any land or building or furniture or fittings.
7 Time of deduction of At the time of credit to the account of the payee or at the time of payment (whichever is
tax earlier).
8 No TDS on rent No deduction shall be made U/s 194-I from the rent credited or paid to a business trust,
payable to REIT. being a REIT, in respect of any real estate asset owned directly by it. [Proviso-3 to S. 194-
I].
Issues in S. 194-I:
1 The main function of the cold storage is to preserve perishable goods by means of a mechanical process, and storage
of such goods is only incidental in nature. The customer is also not given any right to use any demarcated space/place
or the machinery of the cold store and thus does not become a tenant. Therefore, the provisions of 194-I are not
applicable to the cooling charges paid by the customers of the cold storage. [CBDT Circular No. 1/2008].
2 TDS will be made on rental income without including GST. [CBDT Circular 23/2017].
3 Lump sum lease premium or one-time upfront lease charges, which are not adjustable against periodic rent, paid or
payable for acquisition of long-term leasehold rights over land or any other property are not payments in the nature of
rent within the meaning of S. 194-I. Therefore, such payments are not liable for TDS U/s 194-I. [Circular No 35/2016].
4 Landing and parking charges paid by airline companies to AAI is not for use for airport land but for various services
provided by AAI pursuant to international protocol for safe landing and takeoff of aircraft. This is not within the ambit of
S. 194-I. [Japan Airlines Co. Ltd & Singapore Airlines Ltd (SC)].
5 Passenger service fee paid by airline companies to AAI shall not come U/s 194-I. [Circular No. 21/2017].
6 In respect of a co-owned property, the threshold limit mentioned in S. 194-I for non-deduction of tax at source shall
apply for each co-owner separately. [Senior Manager, SBI (2012) 206 Taxman 607 (All)].
7 Payment of warehousing charges shall be subjected to TDS U/s 194-I. [CBDT Circular 718].
8 Rent paid to Government, RBI, MF, statutory corporation whose income is exempt under the Act shall not be subjected
to TDS U/s 194-I. [S. 196 + CBDT Circular 699].
9 Arrears of rent arising in the relevant FY on account of retrospective increase in rent is within the ambit of S. 194-I.
[Leena Resorts (P) Ltd Vs. C. G. Suryakant (Mad)].
10 Rent paid to the landlord by the advertisement agencies for using land as hoarding sites shall be subjected to TDS U/s
194-I. [CBDT Circular 715].
11 Consideration paid by the client companies to the advertisement agencies for exploiting the display rights in the
hoardings installed by the advertisement agencies in hoarding sites shall be subjected to TDS U/s 194C. [Roshan
Publicity Private Ltd 4 SOT 105 (Mum)].
12 Payment made for hotel accommodation taken on a regular basis shall be subjected to TDS U/s 194-I. However,
payments made under rate contracts are not covered by S. 194-I. [CBDT Circular 5/2002].
13 Reimbursements of hotel accommodation expenses by companies to the auditor or consultant shall not be subjected
to TDS U/s 194-I. [CBDT Circular 5/2002].
14 Where an assessee receives rent in advance, the payer has to deduct tax U/s 194-I in the year of payment. If the
advance rent pertains to more than one FY, the credit of TDS shall be allowed to the assessee in the same proportion
in which such income from rent is offered for taxation for different AYs based on the single TDS certificate furnished for
the entire advance rent. However, if the rent agreement gets terminated in a subsequent year or rented property is
transferred and the balance advance is refunded to the transferee or tenant, as the case may be, the credit for the
entire balance of TDS which has not been given credit so far shall be allowed in the year of termination or transfer -
CBDT Circular 5/2002].
16. Payment of rent by certain individuals or Hindu undivided family: [S. 194-IB]:
1 Payment covered Any income by way of rent.
2 Payee Resident
3 Payer An individual or a HUF, other than those individual or HUF who was liable to tax audit in
the immediately preceding FY.
He can be resident or non-resident.
4 TDS rate 5%

5 Threshold limit Tax has to be deducted at source only if the amount of such rent exceeds Rs. 50,000
for a month or part of a month during the PY.
6 Timing of deduction of tax This deduction is to be made at the time of credit of such rent, for the last month of the
PY or the last month of tenancy, if the property is vacated during the year, as the case
may be, to the account of the payee or at the time of payment, whichever is earlier.
In other words, deduction of tax U/s 194-IB is only one time in a year. (i.e. Tax
deduction is annually in the last month of the PY.
In case the tenant is vacating the premises during the PY, then tax should be deducted
in the month when the tenant vacates the premises.
7 No requirement to obtain The provisions of S. 203A containing the requirement of obtaining TAN shall not apply
TAN. to the person required to deduct tax U/s 194-IB.
8 Meaning of “Rent”. “Rent” means any payment, by whatever name called, under any lease, sub-lease,
tenancy or any other agreement or arrangement for the use of any land or building or
both.
9 Deduction not to exceed S. 206AA requires providing of PAN of the deductee to the deductor, failing which tax
rent for last month. shall be deducted at a higher rate (i.e., higher of the rate provided in the relevant
section, rates in force and 20%).
Where the tax is required to be deducted as per the provisions of S. 206AA, such
deduction shall not exceed the amount of rent payable for the last month of the PY or
the last month of the tenancy, as the case may be.
1 Location of property is It is irrelevant as to where the land and building is situated. It may be in India or abroad.
immaterial.
2 TDS only on component Tax shall be deducted only on the component of rent paid for the use of land or
attributable to land and building. Rent attributable to any other thing taken on rent (example: furniture) shall not
building. be subjected to TDS U/s 194-IB.
3 Purpose of usage – The land or building taken by tenant can be used for any purpose. (i.e. it can be
immaterial. commercial or residential).
4 Time limit for remittance of Tax deducted under this section shall be remitted within 30 days from the end of the
TDS. month in which deduction is made.
17. TDS on FPS, FTS, royalty, non-compete fee, fee for exclusivity of rights and director’s remuneration – S. 194J:
SN Payments covered Person responsible for making payment Payee Threshold limit. TDS
[Proviso-1 to S. rate
194J].
1 Fee for professional Any person (including individual and Resident Rs. 30000 10%
services HUF liable to tax audit in the
immediately preceding FY). [Proviso-2
to S. 194J].
2 Fee for technical Any person (including individual and Resident (engaged only Rs. 30000 2%
services HUF liable to tax audit in the in the business of
immediately preceding FY). [Proviso-2 operation of call centre)
to S. 194J]. Other residents Rs. 30000 10%
3 Royalty Any person (not being individual and Resident Rs. 30000 10%
HUF)
4 Non-compete fees Any person (not being individual and Resident Rs. 30000 10%
HUF)
5 Fee for exclusivity of Any person (not being individual and Resident Rs. 30000 10%
rights HUF)
6 Director’s Company Resident - 10%
remuneration
1 Director = employee Remuneration shall be subjected to TDS U/s 192 and not U/s 194J.
2 Timing of deduction of tax. At the time of credit to the account of the payee in the books of accounts of the payer
or at the time of payment, whichever is earlier.
3 Meaning of professional “Professional services” means services rendered by a person in the course of carrying
services. [Explanation to S. on legal, medical, engineering or architectural profession or the profession of
194J]. accountancy or technical consultancy or interior decoration or advertising or such other
profession as is notified by the Board for the purposes of S. 44AA or of S. 194J;

4 Professions notified for the 1 Film artist – (a) an actor; (b) a cameraman; (c) a director, including an assistant
purpose of S. 44AA. director; (d) a music director, including an assistant music director; (e) an art
director, including an assistant art director; (f) a dance director, including an
assistant dance director; (g) an editor; (h) a singer; (i) a lyricist; (j) a story writer;
(k) a screen-play writer; (l) a dialogue writer; (m) a dress designer;
2 Company secretary
3 Information technology professional
4 Authorised representative
5 Professions notified for the Sports person,
purpose of S. 194J. Umpires
Referees
Coaches
Trainers
Team Physicians
Physiotherapists
Event managers
Commentators
Anchors
Sports Columnists
6 No TDS if professional fee is No individual or a HUF shall be liable to deduct tax on the sum by way of fees for
paid exclusively for personal professional services in case such sum is credited or paid exclusively for personal
purpose. [Proviso-3 to S. 194J]. purposes of such individual or any member of HUF.
7 No TDS on professional fee paid Where a non-resident has no branch, agent or establishment in India, then the
by non-residents to CA, provisions of S. 194J will not be applicable in respect of payments made for
advocate or solicitor in India – professional or technical services rendered to it by an Indian law or accountancy firm.
[CBDT Circular 726]. However, payments are to be made through regular banking channel.
But there is a necessity to send a quarterly statement indicating the name and address
of persons to whom payments are made to CBDT.
Issues in S. 194J:
1 Where a company makes payments to hospitals for rendering medical services to its employees, it shall be subjected
to TDS U/s 194J. [CBDT Circular 715].
2 Payment made to the recruiting agency is FTS and shall be subjected to TDS U/s 194J. [CBDT Circular 715].
3 TPAs have obligation to deduct tax at source U/s 194J on payments to hospitals on behalf of insurance companies.
[CBDT Circular 8/ 2009].
4 Wherever in terms of the agreement or contract between the payer and the payee, the component of 'GST on services'
comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source on the amount
paid or payable without including such 'GST on services' component. [CBDT Circular 23/2017].
5 Where the fee is claimed along with reimbursement in one bill, tax is to be deducted on the gross amount of bill
(inclusive of reimbursement). However, if the claim of fees and reimbursement of expenses is by way of separate bills,
no tax needs to be deducted on the reimbursement amount. [CBDT Circular 715].
6 Software payments are to be understood as royalty in view of Explanation-4 to S. 9 (1) (vi) and hence, these shall be
subjected to TDS U/s 194J if the payee happens to resident.
7 However, where payment is made by the transferee for acquisition of software from a resident-transferor, the
provisions of S. 194J would not be attracted if –
(i) the software is acquired in a subsequent transfer without any modification by the transferor;
(ii) tax has been deducted either U/s 194J or U/s 195 on payment for any previous transfer of such software; and
(iii) the transferee obtains a declaration from the transferor that tax has been so deducted along with the PAN of
the transferor.
8 Where standard facilities are made available to the public at large for a cost using sophisticated technology and
equipments, it does not amount to rendering of technical services and hence, S. 194J shall not get attracted. [Skycell
communications Ltd 251 ITR 153 (Mad)]. Thus, payments made for mobile phone services and internet services are
not to be regarded as FTS.
9 Port access charges paid by telecom operators to BSNL/MTNL pursuant to agreement regulated by TRAI is not FTS,
since rendering of port access services does not involve a human interface. Only those technical services, the
rendition of which involves human element, could be treated as technical services for the purpose of S. 194J. [Bharti
Cellular Ltd 330 ITR 239 (SC)].
10 Transaction charges paid by the members of the RSE for availing fully automated online trading facility, being a facility
provided by the RSE to all its members, do not constitute FTS to attract the provisions of TDS U/s 194J. Technical

services like managerial and consultancy service are in the nature of specialised services made available by
the service provider to cater to the special needs of the customer-user as may be felt necessary. It is the above
feature that would distinguish or identify a service provider from a facility offered. However, there is no exclusivity in
the services rendered by the stock exchange and each and every member has to avail such service in the
normal course of trading in securities in the stock exchange. [Kotak Securities Ltd (2016) 383 ITR 1 (SC)].
11 Transmission and wheeling charges paid by a company engaged in distribution and supply of electricity, under a
service contract, to the transmission company is FTS and shall be subjected to TDS U/s 194J. However, SLDC
charges (being charges for supervisory services) do not come within FTS and accordingly, S. 194J does not get
attracted. [Ajmer Vidyut Vitran Nigam Ltd., In re (2013) 353ITR 640 (AAR)].
18. TDS on payments to FC/NCNR:

1 Payment covered Any sum (not being a sum covered by any other section of Chapter XVII-B) chargeable to
tax under this Act. [S. 195 (1)].
Chargeability to be decided not only keeping in mind the provisions of the Act but also the
provisions of the DTAA.
2 Payee [S. 195 (1)]. FC/NCNR
3 Payer [S. 195 (1)]. Any person (resident or non-resident)
If the payer is non-resident, whether he has place of residence or business in India is not
relevant. Similarly whether he has business connection in India or has any other presence
in India is not relevant. [Explanation-2 to S. 195 (1)].
4 Threshold Not specified
5 TDS rate Rates in force (Finance Act 1st Schedule – Part II). [S. 195 (1)].
6 Timing of TDS. [S. 195 (1)]. At the time of payment or at the time of credit to the account of the payee in the books of
the payer, whichever is earlier.
However, interest payable by the Government or a Public sector bank or a PFI shall be
subjected to TDS at the time of payment only. [Proviso-1 to S. 195 (1)].
7 Certificate of non-deduction Payee FC/NCNR may make an application in the prescribed form to the AO for grant of
of tax at source. [S. 195 (3) certificate authorizing him to receive the sum (supra) without deduction of tax thereunder.
& S. 195 (4)]. Where such certificate is granted, the payer shall make payment of sum (supra) without
deduction of tax at source U/s 195 (1), so long as the certificate in force.
Such certificate shall remain in force till the expiry of the period specified therein. However,
if it is cancelled by the AO before the expiry of such period, the certificate shall remain in
force till such cancellation.
8 Composite payments in If the payer cannot independently determined the income element hidden or embedded,
which income element is then the payer can make an application to the AO requiring him to quantify the income
hidden element hidden or embedded for the purpose of quantification of TDS. [S. 195 (2)].
9 Furnishing of payment The person responsible for paying to a FC/NCNR, any sum, whether or not chargeable
particulars. [S. 195 (6)]. under this Act, shall furnish the information relating to the payment of any sum in such form
and manner as may be prescribed by the Board. [Form-15CA, Form-15CB & S. 15CC].
10 Penalty for failure to furnish If a person, who is required U/s 195 (6) fails to furnish such information or furnishes
information or furnish inaccurate information, the AO may direct that such person shall pay, by way of penalty, a
inaccurate information U/s sum of Rs. 1L.
195. [S. 271-I] However, no penalty shall be levied if there is reasonable cause for the failure. [S. 273B].
11 Power of the CBDT to S. 195 (7) empowers the CBDT to notify a class of persons or case, where the person
specify cases where responsible for paying a FC/NCNR, any sum, whether or not chargeable under this Act,
application shall be made to shall make an application to the AO to determined the appropriate proportion of sum
the AO seeking chargeable. [S. 195 (7)].
determination of sum Upon such determination, tax shall be deducted on that proportion of the sum which is so
chargeable to tax present in chargeable.
the payment made.
19. Credit for tax deducted at source [S. 199]:
1 Tax deducted at source and paid to the credit of the CG shall be treated as payment of tax on behalf of the person from whose
income the deduction was made;
2 Any sum referred to in S. 192 (1A) and paid to the CG, shall be treated as the tax paid on behalf of the person in respect of
whose income, such payment of tax has been made.
3 The CBDT is empowered to frame rules for the purpose of giving credit in respect of tax deducted or tax paid under Chapter XVII.
4 The CBDT also has the power to make rules for giving credit to a person other than the persons mentioned in (1) and (2) above.
Further, the CBDT can specify the AY for which such credit may be given.

Rule 37BA - Credit for tax deducted at source for the purposes of S. 199:
1 R. 37BA (1) provides that credit for tax deducted at source and paid to the CG shall be given to the person to whom the
payment has been made or credit has been given (i.e., the deductee) on the basis of information relating to deduction of
tax furnished by the deductor to the income-tax authority or the person authorized by such authority.
2 Rule 37BA (2) (i) provides that where under any provisions of the Act, the whole or any part of the income on which tax
has been deducted at source is assessable in the hands of a person other than the deductee, credit for the whole or any
part of the tax deducted at source, as the case may be, shall be given to the other person and not to the deductee.
3 For example, if tax is deducted at source on the interest income of minor, the credit of TDS shall be allowed to the
parent in whose name such interest shall be clubbed.
4 However, the deductee should file a declaration with the deductor and the deductor should report the tax deduction in
the name of the other person in the information relating to deduction of tax referred to in R. 37BA (1).
5 Credit for tax deducted at source and paid to the CG shall be given for the AY for which such income is assessable.
6 For example, if builder deducts tax at source on cash paid to the assessee in joint development agreement on
01.01.2018 and capital gains are assessable in the year in which completion certificate is received and completion
certificate is received on 01.01.2021, the TDS will be allowed in the PY 20-21.
7 Where tax has been deducted at source and paid to the CG and the income is assessable over a number of years,
credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is
assessable to tax.
[Notification no. 5/2017]:

In case of minors where both the parents have deceased, the TDS on the interest income accrued to the minor is required to
be deducted and reported against PAN of the minor child.
[Notification No. 08/2017]:

In case of deposits under the Capital Gains Accounts Scheme, 1988 where the depositor has deceased:
(i) TDS on the interest income accrued for and upto the period of death of the depositor is required to be deducted and
reported against PAN of the depositor, and
(ii) TDS on the interest income accrued for the period after death of the depositor is required to be deducted and reported
against PAN of the legal heir,
unless a declaration is filed U/R 37BA (2) that credit for tax deducted has to be given to another person.
20. Duty of person deducting tax [S. 200]:

1 The persons responsible for deducting the tax at source should deposit the sum so deducted to the credit of the CG
within the prescribed time [S. 200 (1) + R. 30].
2 Further, an employer paying tax on non-monetary perquisites provided to employees in accordance with S. 192 (1A),
should deposit within the prescribed time, the tax to the credit of the CG or as the Board directs [S. 200 (2) + R. 30].
3 For the purpose of improving the reporting of payment of TDS made through book entry and to make existing
mechanism enforceable, S. 200 (2A) has been inserted. Accordingly, where the tax deducted or tax referred to in S. 192
(1A) has been paid without the production of a challan, the PAO/TO/CDDO or any other person, by whatever name
called, who is responsible for crediting such sum to the credit of the CG, shall deliver or cause to be delivered within the
prescribed time a statement in the prescribed form, verified in the prescribed manner and setting forth prescribed
particulars to the prescribed income-tax authority or the person authorised by such authority.
4 The deductor or employer, as the case may be shall file a quarterly statement of TDS to DGIT (systems) in the
prescribed form, setting forth prescribed particulars within the prescribed time. [S. 200 (3) + R. 31A].
5 Statement of TDS U/s 192 in Form No.24Q. Statement of TDS U/s 193 to 196D in Form No. 26Q in respect of all
deductees other than a deductee being a NCNR or a FC or RNOR in which case the relevant form would be Form
No.27Q.
6 The proviso to S. 200 (3) permits the deductor or employer to deliver to the prescribed authority a correction statement
for rectification of any mistake or to add, delete or update the information furnished in the statement delivered U/s 200
(3) in such form and verified in such manner as may be specified by the authority.
Rule 30 – Prescribed time and mode of payment to Government account of TDS or tax paid U/s 192 (1A):
SN Deductor Time-limit for remittance
1 Office of the Government (payment of tax is without production Same day on which tax was deducted.
of income-tax challan)
2 Office of the Government (payment of tax is accompanied by On or before 7 days from the end of the month in which
an income-tax challan) the deduction is made or income-tax is due U/s 192 (1A).
3 Deductors other than a Government office [Where the income On or before 30th April.
or amount is credited or paid in the month of March].

4 Deductors other than a Government office [In any case other On or before seven days from the end of the month in
than one covered in 3]. which the deduction is made or income-tax is due U/s
192 (1A).
Note:
1 In special cases, the AO may, with the prior approval of the JCIT, permit quarterly payment of the tax deducted U/s 192/
194A/194D/194H on or before 7th of the month following the quarter, in respect of first three quarters in the financial
year and 30th April in respect of the quarter ending on 31st March.
2 The dates for quarterly payment would, therefore, be 7th July, 7th October, 7th January and 30th April, for the quarters
ended 30th June, 30th September, 31st December and 31st March, respectively.
3 Tax deducted U/s 194-IA and 194-IB have to be remitted within 30 days from the end of the month of deduction. A
challan-cum-statement in Form 26QB/26QC has to be furnished within 30 days from the end of the month of deduction.
Time limit for submission of quarterly statements – R. 31A:

SN Date of ending of the quarter of the FY Due date
1 30th June 31st July of the FY
2 30th September 31st October of the FY
3 31 December
st 31st January of the FY
4 31 March
st 31 May of the FY immediately following the FY in which the
st
deduction is made.
21. Stringent penal provisions for delay in furnishing of TDS/TCS statements and/or for furnishing incorrect
information in TDS/TCS statements [S. 234E & S. 271H]:
A. Fees for defaults in furnishing quarterly returns [S. 234E]:
1 Under this section, if a person fails to deliver a quarterly TDS/TCS return within the time prescribed in S. 200(3) or the
proviso to S. 206C(3), he shall be liable to pay, by way of fee, a sum of Rs. 200 for every day during which the failure
continues.
2 This fee will be in addition to other consequences under the Act.
3 However, the fees shall not exceed the amount of tax deductible/collectible.
B. Penalty for failure to furnish quarterly TDS/TCS return [S. 271H]:

1 Applicability Penalty U/s 271H will be applicable in the following two cases—
Case 1: A person fails to submit quarterly TDS/TCS return on or before the due date.
Case 2: A person furnishes incorrect information in these quarterly returns.
2 Levying authority AO
3 Quantum of penalty Under this section, a person has to pay a penalty of not less than Rs. 10000. It may extend to Rs. 1L.
This is in addition to the fee referred to in S. 234E.
4 Is it possible to In the following cases, it is possible to reduce or avoid penalty U/s 271H:
reduce or avoid CIT has power to reduce or waive any penalty (including penalty imposable U/s 271H) U/s 273A (4).
penalty U/s 271H? Application can be made in this regard.
Provisions of S. 273B will be applicable in the case of penalty imposable U/s 271H. Consequently, no
penalty shall be imposed on the assessee for any failure referred to in S. 271H if he proves that there
was a reasonable cause for the said failure.
S. 271H (3) provides that, no penalty shall be levied for delay in furnishing of TDS/TCS quarterly return
if (a) the tax deducted/collected is deposited to the credit of CG; (b) interest U/s 201 (1A) is paid; (c) fee
referred to in S. 234E is paid, and (d) such return is submitted within 1 year from the time prescribed for
the delivery of quarterly returns. This concession is given only in Case 1 and not in Case 2.
22. Correction of arithmetic mistakes and adjustment of incorrect claim during computerized processing of TDS
statements [S. 200A]:
1 At present, all statements of tax deducted at source are filed in an electronic mode, thereby facilitating computerised processing
of these statements. Therefore, in order to process TDS statements on computer, electronic processing on the same lines as
processing of income- tax returns has been provided in S. 200A.
2 The following adjustments can be made during the computerized processing of statement of tax deducted at source or a
correction statement -
(i) any arithmetical error in the statement; or
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the statement.
3 The term "an incorrect claim apparent from any information in the statement" shall mean such claim on the basis of an entry, in
the statement, -

(i) of an item, which is inconsistent with another entry of the same or some other item in such statement;
(ii) in respect of rate of deduction of tax at source, where such rate is not in accordance with the provisions of the Act.
4 The interest, if any, has to be computed on the basis of the sums deductible as computed in the statement;
5 The fee, if any, has to be computed in accordance with the provision of section 234E.
6 The sum payable by, or the amount of refund due to, the deductor has to be determined after adjustment of interest and fee
against the amount paid U/s 200 or S. 201 or S. 234E and any amount paid otherwise by way of tax or interest or fee.
7 Intimation will be prepared and generated and sent to the deductor, specifying his tax liability or the refund due, within 1 year from
the end of the FY in which the statement is filed. The refund due shall be granted to the deductor.
8 For this purpose, the CBDT is empowered to make a scheme for centralized processing of statements of TDS to determine the
tax payable by, or refund due to, the deductor.
23. TDS violation consequences:

1 Declaring the deductor or employer Where there is non-deduction or short deduction or non-remittance or non-discharge
as AID. (Consequence-1). [S. 201 of obligation assumed U/s 192 (1A), then the deductor or employer, as the case may
(1)]. be, may be declared as AID through an order passed U/s 201 (1).
2 When deductor will not be regarded (i) Payee = resident
as AID even if he has made non- (ii) Payee has filed ROI U/s 139 for the relevant AY.
deduction or short-deduction? (iii) Payee has included the sum received without TDS while computing the RI.
[Proviso-1 to S. 201 (1)]. (iv) Tax due on RI has been paid either by way of advance tax or SAT.
(v) The deductor has obtained a certificate in Form-26A from a CA to the effect
that the payee has complied with the aforesaid conditions.
3 Recovery not possible when payee Even if the payee is a non-resident to whom payment was made without TDS, the
has paid tax directly. [Explanation to deductor cannot be regarded as AID, if the tax had been paid directly by the payee.
S. 191 and S. 201 (1)]. Accordingly, nothing could be recovered from the deductor in such cases.
4 Tim-limit for passing order U/s 201 No order U/s 201 (1), deeming a person to be an AID for failure to deduct the whole
(1). [S. 201 (3)]. or any part of the tax from a person resident in India, shall be passed at any time
after the expiry of 7 years from the end of the FY in which the payment is made or
credit is given.
No time-limit is specified in case of non-remittance and in case of non-discharge of
obligation assumed U/s 192 (1A).
No time-limit is specified in case of short deduction or non-deduction in relation to
payment made to non-resident.
5 Disallowance (Consequence-2) Vide S. 40 (a) (i), S. 40 (a) (ia) and S. 40 (a) (iii) in the PGBP Chapter.
6 Penalty (Consequence-3) For short deduction and non-deduction, penalty is levied U/s 271C by the JCIT to the
extent of short-deduction or non-deduction, as the case may be.
For non-remittance, penalty is levied U/s 221.
7 Interest (Consequence-4) Without prejudice to the provisions of S. 201 (1), if any such person does not
deduct the whole or any part of the tax or after deducting fails to pay the tax as
required by this Act, he shall be liable to pay simple interest,—
(i) @ 1% p.m or part thereof on the amount of such tax from the date on which
such tax was deductible to the date on which such tax is deducted; and
(ii) @ 1.5% p.m or part thereof on the amount of such tax from the date on
which such tax was deducted to the date on which such tax is actually paid,
and such interest shall be paid before furnishing the statement in accordance with S.
200 (3).
8 Terminal date for computation of Where the payer fails to deduct the whole or any part of the tax on the amount
interest where the deductor is not credited or payment made to a resident and is not deemed to be an AID U/s 201(1)
regarded as AID by virtue of Proviso- on account of payment of taxes by such resident payee, interest U/s 201 (1A) (i) i.e.,
1 to S. 201 (1). [Proviso to S. 201 @1% p.m. or part of month, shall be payable by the payer from the date on which
(1A)]. such tax was deductible to the date of furnishing of return of income by such
resident payee.
The date of deduction and payment of taxes by the payer shall be deemed to be the
date on which return of income has been furnished by the resident payee.
If the payee is a non-resident, then Proviso to S. 201 (1A) shall not apply. In such
case, the terminal date for computation of interest is the date of payment of tax by
the payee.
9 Charge upon all assets. [S. 201 (2)]. Where the tax has not been paid after it is deducted, the amount of the tax together
(Consequence-5). with the amount of simple interest thereon shall be a charge upon all the assets of
the person or the company, as the case may be.

10 Bar against direct demand on the Where tax is deductible at source under Chapter XVII-B, the assessee shall not be
assessee called upon to pay the tax himself to the extent to which tax has been deducted from
that income.
11 Prosecution for failure to pay tax to If a person fails to pay to the credit of the CG, the tax deducted at source by him as
the credit of CG under Chapter-XVII- required by the provisions of Chapter XVII-B, he shall be punishable with rigorous
B. (Consequence-6) [S. 276B]. imprisonment for a term which shall not be less than 3 months but which may extend
to 7 years and with fine.
Issues in interest U/s 201 (1A):

1 Where there is short deduction of TDS U/s 192 due to non-consideration of performance incentives payable to the
employees which could only be quantified at the year-end and it has been made good in the last month, interest could
not be levied U/s 201 (1A). [Marubeni India (P) Ltd 165 Taxman 467 (Del)].
2 Where there is short deduction of TDS U/s 192 in the earlier months and it is compensated in subsequent months, S.
201 (1A) interest could not be levied. S. 192 (3) provides that the employer may, at the time of making any deduction,
increase or reduce the amount to be deducted U/s 192 for the purpose of adjusting any excess or deficiency arising out
of any previous deduction or failure to deduct during the FY. [Enron Expat Services Inc [2010] 45 DTR 154
(Uttarakhand)].
24. Guidelines for waiver of interest charged U/s 201 (1A) – [Circular No. 11/2017]:
1 In exercise of the powers conferred U/s 119 (2) (a), the CBDT has directed that the CCIT and DGIT may reduce or
waive interest charged U/s 201 (1A) (i) in the classes of cases specified below for the period and to the extent the
CCIT/DGIT may deem fit.
2 However, no reduction or waiver of such interest shall be ordered unless the principal demand U/s 200A, 201(1) or
234E, as the case may be, stands fully paid or satisfactory arrangements for payment of the principal demand under
these sections have been made.
3 The CCIT or DGIT may also impose any other condition as deemed fit for the said reduction or waiver of interest.
4 The class of cases in which the reduction or waiver of interest U/s 201 (1A) (i) can be considered, are as follows:
(i) Where during the course of proceedings for search and seizure U/s 132, or otherwise, the books of account
and other documents necessary for making deduction under Chapter XVIIB of the Act were seized and the
assessee was not able to, within the time specified, deduct tax at source from any sum credited to any account
(whether called "suspense account" or by any other name) in his books of account.
(ii) Where any sum paid or payable was not liable for deduction of tax at source in the case of a deductor on the
basis of any order passed by the JHC, and as a result, he did not deduct tax at source in relation to such sum,
and subsequently, in consequence of any retrospective amendment of law or a decision of the SC of India or a
decision of a Larger Bench of the JHC (which was not challenged before the SC and has become final) in any
proceedings, as the case may be, tax was held to be deductible or the tax deducted by the deductor during
such FY was found to be less than the tax deductible on such sums paid or payable.
(iii) Where the default U/s 201 relates to non-deduction or a lower deduction of tax U/s 195 in respect of a payment
made to a non-resident (including a foreign company) being a resident of a country or specified territory
outside India with whom India has entered into an agreement referred to in S. 90 or S. 90A, and where —
(a) a dispute regarding the tax payable in India in respect of the said payment had been referred to the
Competent Authority in India mentioned in R. 44H of the Income-tax Rules, 1962 under the said
agreement U/s 90 or S. 90A;
(b) such reference had been received by the Competent Authority in India within a period of 2 years of the
date on which the NOD determining the tax payable was received by the person in default U/s 201;
(c) the dispute has been settled by way of a resolution arrived at under the MAP provided in the said
agreement; and
(d) the person in default U/s 201 has given his acceptance to the resolution and has withdrawn his
appeal(s) pending on the issue, within the meaning of R. 44H (4) of the Income-tax Rules, within a
period of 1 month of the date on which the resolution is communicated to him.
5 The CCIT or DGIT examining an application for waiver of interest under this order shall pass a speaking order after
providing adequate OBH to the applicant.
6 The CBDT reserves the power to examine any grievance arising out of an order passed or not passed by CCIT or DGIT,
as the case may be, and issue suitable directions to these authorities for proper implementation of this order. However,
no review of or appeal against the orders passed on merits by such authorities would be entertained by the CBDT.

Chapter-31: TCS Summary
Applicability and Rate [S. 206C (1)/(1C)/(1F)]:

S. 206C (1):
U/s 206C (1), sellers of certain goods are required to collect tax from the buyers at the specified rates. The specified % for
collection of tax at source is as follows:
Nature of Goods TCS %
(i) Alcoholic liquor for human consumption 1%
(ii) Tendu leaves 5%
(iii) Timber obtained under a forest lease 2.5%
(iv) Timber obtained by any mode other than (iii) 2.5%
(v) Any other forest produce not being timber or tendu leaves 2.5%
(vi) Scrap 1%
(vii) Minerals, being coal or lignite or iron ore 1%
S. 206C (1C):
S. 206C (1C) provides for collection of tax by every person who grants a lease or a licence or enters into a contract or
otherwise transfers any right or interest in any –
(a) Parking lot or
(b) toll plaza or
(c) a mine or a quarry
to another person (other than a PSC) for the use of such parking lot or toll plaza or mine or quarry for the purposes of
business. The tax shall be collected as provided, from the licensee or lessee of any such licence, contract or lease of the
specified nature, at the rate of 2%.
Note:
1 Mining and quarrying excludes mining and quarrying of mineral oil.
2 Mineral oil includes petroleum and natural gas.
3 Thus, mining and quarrying excludes mining and quarrying of petroleum and natural gas.
4 Consequently, the oil exploration and incidental services are relieved from the applicability of TCS provisions, since
these services are in the organized sector.
S. 206C (1F):
S. 206C (IF) provides that every person, being a seller, who receives any amount as consideration for sale of a motor
vehicle of the value exceeding Rs. 10L, shall collect tax from the buyer @ 1% of the sale consideration.
Term Meaning
Buyer (For the A person who obtains in any sale, by way of auction, tender, or any other mode, goods of the
purpose of S. 206C nature specified in the Table in S. 206C (1) or the right to receive any such goods but does not
(1) and (1C)) include –
(A) a PSC, the CG, a SG, and an embassy, a high commission, legation, commission,
consulate and the trade representation, of a foreign State and a club, or
(B) a buyer in the retail sale of such goods purchased by him for personal consumption.
Buyer (For the A person who obtains in any sale, goods of the nature specified therein, but does not include –
purpose of S. 206C (A) the CG, a SG and an embassy, a High Commission, legation, commission, consulate and
(1F). the trade representation of a foreign State; or
(B) a local authority as defined in Explanation to S. 10 (20); or
(C) a PSC which is engaged in the business of carrying passengers.
Seller (i) The CG,
(ii) a SG or
(iii) any local authority or
(iv) corporation or
(v) authority established by or under a Central or State Act
(vi) any company or
(vii) firm or
(viii) co-operative society
Seller also includes an individual or a HUF liable to tax audit in the immediately preceding FY.
Scrap Waste and scrap from the manufacture or mechanical working of materials which is definitely not
usable as such because of breakage, cutting up, wear and other reasons;

CBDT Clarification relating to certain issues with respect to S. 206C(1F) – (CBDT Circular 22/2016):
1 TCS provisions shall apply only in respect of transactions of retails sales of motor car. It will not apply on sale of motor
vehicles by manufacturers to dealers/distributors.
2 Government, institutions notified under United Nations (Privileges and Immunities) Act 1947, and Embassies,
Consulates, High Commission, Legation, Commission and trade representation of a foreign State shall not be liable to
levy of TCS @ 1% U/s 206C (1F).
3 Tax is to be collected at source @ 1% on sale consideration of a motor vehicle exceeding Rs. 10L. It is applicable to
each sale and not to aggregate value of sale made during the year.
4 The provisions of TCS on sale of motor vehicle exceeding Rs. 10L is not dependent on mode of payment. Any sale of
motor vehicle exceeding Rs. 10L would attract TCS @ 1%.
Time of Collection of tax [Section 206C(1)/(1C)/(1F)]:

The tax should be collected at the time of debiting of the amount payable by the buyer or licensee or lessee, as the case
may be, to his account or at the time of receipt of such amount from the buyer or licensee or lessee, as the case may be, in
cash or by the issue of a cheque or draft or any other made, whichever is earlier. In case of sale of a motor vehicle of the
value exceeding Rs. 10L, tax shall be collected at the time of receipt of such amount.
Non-applicability of TCS [S. 206C (1A)]:

No collection of tax shall be made in the case of a resident buyer, if such buyer furnishes to the person responsible for
collecting tax, a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect
that goods referred to in column (2) of the Table in (1) above are to be utilised for the purpose of manufacturing, processing
or producing articles or things or for the purposes of generation of power and not for trading purposes.
Furnishing of copy of declaration within specified time [S. 206C (1B)]:

The person responsible for collecting tax under this section shall deliver or cause to be delivered to the CCIT or CIT one
copy of the declaration referred to S. 206C (1A) on or before 7th of the month next following month in which the declaration is
furnished to him.
Time limit for paying tax collected to the credit of the CG [S. 206C (3) + R. 37CA]:
Circumstance Period within which TCS to be paid
Collector to the credit of the CG
(1) An office of the Government (i) where the tax is paid without on the same day
production of an income-tax challan
(ii) where tax is paid on or before 7 days from the end of the
accompanied by an income-tax challan month in which the collection is made
(2) Collectors other than an within one week from the last day of the
office of the Government month in which the collection is made
Statement of TCS to be prepared and delivered within prescribed time:

(i) A person collecting tax in accordance with the provisions of the section is vested with the responsibility of preparing
such statements for such periods as may be prescribed after paying the tax collected to the credit of the CG within the
prescribed time.
(ii) The statement should be delivered or caused to be delivered to the prescribed income- tax authority, i.e., DGIT
(Systems) or the person authorised by such authority.
(iii) The statement should be in Form No.27EQ and verified in the prescribed manner.
(iv) The statement should set forth the prescribed particulars and should be filed within such time as may be prescribed.
Due dates for furnishing statement of TCS [Rule 31AA]:

Quarter ending Due Date
I 30th June 15th July
II 30th September 15th October
III 31st December 15th January
IV 31st March 15th May
Enabling provision for improving the reporting of payment of TCS made through book entry and making the
existing mechanism enforceable [S. 206C (3A)]
Where the tax collected has been paid without the production of a challan, the PAO/TO/CDDO or any other person, by
whatever name called, who is responsible for crediting such sum to the credit of the CG, shall furnish a statement in the
prescribed form [Form No.24G] for the prescribed period to the agency authorised by the PDIT (Systems) in respect of tax

collected by the collectors and reported to him. Such statement has to be furnished within the prescribed time by verifying
the same in the prescribed manner and setting forth prescribed particulars.
Relevant Rule Period to which statement relates Prescribed Time
37CA(3A)(a) Where the statement relates to the month of On or before 30th April
March
37CA(3A)(b) In any other case On or before 15 days from the end of
the relevant month
Such statement has to be furnished in the following manner:
(a) electronically under digital signature; or
(b) electronically along with verification of the statement in Form No.27A or verified through an electronic process
in accordance with the procedures, formats and standards for the purpose of furnishing and verification of the statements
specified by the PDGIT (Systems).
Enabling provision for filing correction statement of TCS [S. 206C (3B)]:
The person collecting tax at source who is required to prepare statements to be delivered to DGIT (Systems) / NSDL after
paying the tax collected to the credit of the CG, may also deliver to the said authority, a correction statement for rectification
of any mistake or to add, delete or update the information furnished in the statement so delivered in the specified form and
verified in the specified manner.
Credit for TCS [S. 206C (4)]:

Any amount collected in accordance with the provisions of this section and paid to the credit of the CG shall be deemed to
be payment of tax on behalf of the person from whom the amount has been collected. The CBDT may prescribe the rules
based on which credit shall be given to such person for the amount so collected in a particular AY.
Rule Case Manner of allowing credit
37-I(2)(i) Where tax has been collected at source and paid to Credit for TCS shall be given for the A.Y. for
the Central Government which the income is assessable to tax.
37-I(2)(ii) Where tax has been collected at source and paid to Credit for TCS shall be allowed across those
the Central Government and the lease or license is years to which the lease or license relates in the
relatable to more than one year same proportion
Consequences of failure to collect tax at source:

Personal liability to pay tax collectible at source [S. 206C (6)] - A person who is responsible for collecting the tax in
accordance with the provisions of this section shall be liable to pay the tax to the credit of the CG, even if he has failed to
collect the tax
Deemed assessee-in-default for failure to collect tax [S. 206C (6A)]: Any person responsible for collecting tax shall be
deemed to be an assessee in default in respect of the tax if such person does not collect the whole or any part of the tax or
fails to pay such tax after having collected the tax.
Deeming provision not applicable if tax is paid by buyer/licensee/lessee [First Proviso to S. 206C (6A)] - Any person
responsible for collecting tax at source would not be deemed to be an assessee-in-default for failure to collect tax on the
amount received from a buyer or licensee or lessee or on the amount debited to the account of the buyer or licensee or
lessee, if such buyer or licensee or lessee has furnished his return of income under section 139, taking into account such
amount for computing income and paid the tax due on the income declared by him in such return of income. Further, the
person should also furnish a certificate to this effect from an accountant in the prescribed form.
Levy of penalty for failure to collect and pay tax [Second proviso to S. 206C (6A)] - No penalty shall be charged under
section 221 from such person unless the AO is satisfied that the person has without good and sufficient reasons failed to
collect and pay the tax.
Interest payable for failure to collect and pay tax within the prescribed time [S. 206C (7)] - If the person responsible for
collecting tax does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable
to pay simple interest at the rate of 1% p.m. or part thereof on the amount of such tax from the date on which such tax was
collectible to the date on which the tax was actually paid and such interest shall be paid before furnishing the quarterly
statement for each quarter in accordance with the provisions of sub-section (3). In such cases where a person is not
deemed to be an assessee-in-default on account of the tax being paid by the buyer/licensee/lessee, interest shall be
payable by the collector from the date on which tax was collectible to the date of furnishing return of income by such buyer
or licensee or lessee.

Tax not collected to be a charge upon all assets of the collector [S. 206C (8)]: Where the tax has not been paid as
aforesaid, after it is collected, the amount of tax together with the amount of simple interest thereon referred to in S. 206C
(7) shall be a charge upon all the assets of the person responsible for collecting tax.
Other Provisions [S. 206C (9) / (10) / (11)]:
Certificate for collection of tax at lower rate [S. 206C (9)] - The AO can issue certificate for collection of tax at a lower
rate than those specified in S. 206C (1)/(1C). Such certificate shall be issued on an application made by the buyer or
licensee or lessee in this behalf.
Tax to be collected at the rate specified in the Certificate [S. 206C (10)] -The person responsible for collecting tax shall
collect the same at the rate specified in such certificate until such certificate in cancelled by the AO.
CBDT empowered to make rules relating to grant of Certificates [S. 206C (11)]: The CBDT is empowered to make rules
specifying the cases in which and the circumstances under which an application maybe made for the grant of such
certificate and the conditions subject to which certificate may be granted.
Processing of TCS statements [S. 206CB]:

(1) S. 206CB facilitates processing of statements of tax collected at source in the like manner as processing of TDS
statements U/s 200A.
(2) The manner of processing a statement of tax collection at source or a correction statement made by a person
collecting any sum U/s 206C, as provided in S. 206CB (1), is as follows -
(a) Permissible adjustments The sums collectible under Chapter XVII-BB shall be computed after making
the following adjustments, namely:—
(i) any arithmetical error in the statement;
(ii) an incorrect claim, apparent from any information in the statement
(i.e., a claim, on the basis of an entry, in the statement—
(a) of an item, which is inconsistent with another entry of the

same or some other item in such statement;
(b) in respect of rate of collection of tax at source, where such
rate is not in accordance with the provisions of the Act).
(b) Interest The interest, if any, shall be computed on the basis of the sums collectible as
computed in the statement;
(c) Fee The fee, if any, shall be computed in accordance with the provisions of S.
234E;
(d) Determination of sum Such sum shall be determined after adjustment of such interest and fee
payable by, or the amount against any amount paid U/s 206C or U/s 234E and any amount paid
of refund due to, the otherwise by way of tax or interest or fee;
collector
(e) Intimation An intimation shall be prepared or generated and sent to the collector
specifying the sum determined to be payable by, or the amount of refund due
to, him; and
(f) Grant of refund The amount of refund due to the collector in pursuance of such determination
shall be granted to the collector. However, no intimation U/s 206CB (1) shall
be sent after the expiry of the period of one year from the end of the FY in
which the statement is filed.
3 The CBDT is empowered to make a scheme for centralised processing of statements of tax collected at source to
expeditiously determine the tax payable by, or the refund due to, the collector, as required U/s 206CB (1).
PAN quoting mechanism in the TCS regime [New section 206CC]:

In order to strengthen the PAN mechanism new S. 206CC has been inserted to provide the following:
1 Tax collectible at Any person paying any sum or amount, on which tax is collectible at source (collectee) shall
higher rate if PAN not furnish his PAN to the person responsible for collecting such tax (collector), failing which tax
furnished. [S. shall be collected at the higher of the following rates (i) at the twice the rate mentioned in the
206CC(1)] relevant section under Chapter XVII-BB; or (ii) at the rate of 5%.
2 Declaration invalid if The declaration filed U/s 206C (1A) shall not be valid unless the person filing the declaration
PAN not furnished. [S. furnishes his PAN in such declaration. In case any declaration becomes invalid, the collector
206CC (2) & (3) & (6)]. shall collect the tax at source in accordance with the provisions of S. 206CC (1). Where the

PAN provided by the collectee is invalid or it does not belong to the collectee, then it shall be
deemed that PAN has not been furnished to the collector.
3 PAN pre-requisite for No certificate U/s 206C (9) shall be granted unless it contains the PAN of the applicant. [S.
Certificate. 206CC (4)].
4 Documents to contain The collectee shall furnish his PAN to the collector and both shall indicate the same in all
PAN of the collectee. their correspondence, bills, vouchers and other documents which are sent to each other. [S.
206CC (5)].
5 Provisions not to apply The requirement to furnish PAN to the collector does not apply to a NR who does not have
if the collectee is a PE in India from the provisions of S. 206CC. [S. 206CC (7)].
non-resident.
Note: Items of finished products from ship breaking activity which are usable as such cannot be treated as “Scrap” to attract
provisions for TCS U/s 206C. [Priya Blue Industries (P) Ltd (2016) 381ITR 210 (Guj)].

Chapter-32: Set off and carry forward of losses - Summary
1. Inter-source adjustment – S. 70:

1 Rule of inter-source The losses incurred by the assessee in respect of one source shall be set-off against income
adjustment. [S. 70]. from any other source under the same head of income, since the income under each head is
to be computed by grouping together the net result of the activities of all the sources covered
by that head.
In simpler terms, loss from one source of income can be adjusted against income from
another source, both the sources being under the same head.
2 Exceptions
(a) Loss arising from speculation business could be adjusted only against income from speculation business and not
against any other income. Thus, loss from speculation business shall not be adjusted against income from non-
speculation business. [S. 73 (1)].
(b) LTCL could be adjusted only against LTCG. It cannot be set off against STCG. [S. 70 (3)].
(c) The loss from the activity of owning and maintaining race horses can be set off only against income from such
activity. [S. 74A (3)].
(d) No loss can be set off against income from lotteries, horse race, card games, cross word puzzles, betting, gambling
etc.
(e) Loss from lottery, card games, betting, horse races etc. cannot be set off against any income.
(f) Loss from exempted source cannot be set off against income chargeable to tax.
(g) Any loss, computed in respect of any specified business referred to in S. 35AD shall not be set off except against
profits, if any, of any other specified business. [S. 73A (1)].
(h) Loss arising on account of dividend stripping. [S. 94 (7)].
(i) Loss arising on account of bonus stripping. [S. 94 (8)].
Point to be noted:
1 Against gain arising on account of transfer of a depreciable asset (held for more than 24/26 months), LTCL could be
adjusted.
2 The fiction created in S. 50 (deeming the gain to be short term in nature) is only for the purpose of S. 48. It cannot be
extended for other purposes.
3 Order of adjustment: (a) inter-source adjustment; (b) inter-head adjustment; (c) brought forward loss adjustment. [CBDT
Circular 587].
2. Inter-head adjustment – S. 71:

1 Rule of Inter-head Where the net result of computation under any head of income is a loss, the assessee
adjustment can set off such loss against his income assessable for that AY under any other head.
2 Exceptions
(a) Speculative business loss cannot be set off against any other income.
(b) Capital loss cannot be set off against income under any other head of income.
(c) Loss from the activity of owning and maintaining race horses cannot be set off against any other income.
(d) No loss can be set off against income from lotteries, horse race, card games, cross word puzzles, betting, gambling
etc.
(e) Loss from lottery, card games, betting, horse races etc. cannot be set off against any income.
(f) Loss from exempted source cannot be set off against income chargeable to tax.
(g) Business loss cannot be adjusted against income U/H “Salaries”. [S. 71 (2A)].
(h) Loss computed in respect of any specified business referred to in S. 35AD, cannot be set off against any other
income.
(i) Where the net result of computation U/H IFHP is a loss and the assessee has income assessable under any other
head of income, the amount of such loss exceeding Rs. 2L would not be allowable to be set off against income under
the other head. [S. 71 (3A)].
1 Set off is compulsory and not optional. [Mahalakshmi Sugar mills Co Ltd (SC) + Milling trading Co (P) Ltd (Guj)].
2 Partial set off of losses is not possible. Losses need to be completely set off. [Atherton and Co (Cal)].
3. Carry forward and set off of losses from house property - S. 71B:
(i) LFHP, to the extent not set off U/s 71, can be carried forward to the next AY and set off only against IFHP of that AY.
(ii) The assessee can carry forward this loss for a period of 8 AYs succeeding the AY in which the loss was first
computed.

4. Carry forward and set off of capital losses – S. 74:

Where for any AY, the net result U/H ‘capital gains’ is STCL or LTCL, the loss shall be carried forward to the following AY to
be set off in the following manner:
(i) Where the loss so carried forward is a STCL, it shall be set off against any capital gains, short term or long term,
arising in that year.
(ii) Where the loss so C/F is a LTCL, it shall be set off only against LTCG arising in that year.
(iii) Net loss U/H capital gains cannot be set off against income under any other head.
(iv) Any unabsorbed loss shall be carried forward to the following AY up to a maximum of 8 AYs immediately succeeding
the AY for which the loss was first computed.
(v) As per S. 80, the assessee must have filed a return of loss U/s 139 (3) in order to carry forward and set off a capital
loss. In other words, the non-filing of a return of loss disentitles the assessee from carrying forward the loss sustained
by him. Such a return should be filed within the time allowed U/s 139 (1).
5. C/F and set off of loss from the activity of owning and maintaining race horses: S. 74A:
1 Losses incurred by an assessee from the activity of owning and maintaining race horses cannot be set off against the
income from any other source other than the activity of owning and maintaining race horses. [S. 74A (3)].
2 Such loss can be carried forward for a maximum period of 4 AYs for being set off against the income from the activity of
owning and maintaining race horses in the subsequent years.
3 As per S. 80, the assessee must have filed a return of loss U/s 139 (3) in order to carry forward and set off this loss. In
other words, the non-filing of a return of loss disentitles the assessee from carrying forward the loss sustained by him.
Such a return should be filed within the time allowed U/s 139 (1).
How to compute loss from the activity of owning and maintaining race horses?
1 Amount of stake money ****
2 Revenue expenditure incurred by the assessee wholly and exclusively for the purposes of maintaining such ****
horses
3 Loss from the activity of owning and maintaining race horses (1-2) (if it is negative) ****
Note: Stake money means the gross amount of prize money received on a race horse by the owner of the horse on account
of the horse wining or being placed in the second or in the lower position in the horse race.
6. Carry forward & Set off of losses by specified businesses – S. 73A:

1 Any loss computed in respect of the specified business referred to in S. 35AD shall be set off only against profits and
gains, if any, of any other specified business.
2 The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any specified business in the
following AY and so on.
3 There is no time limit specified for carry forward and set off and therefore, such loss can be carried forward indefinitely
for set off against income from specified business.
4 However, return of loss has to be filed on or before the due date of filing of return U/s 139 (1) for carry forward of loss
from specified business.
7. Carry forward & Set off of losses from speculation business – S. 73:
1 If the losses sustained by the assessee in a speculation business cannot be set off in the same year against any other
speculation profit, they can be carried forward to subsequent years and set off only against income from any speculation
business carried on by the assessee.
2 The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the
relevant AY in respect of which the loss was computed.
3 However, return of loss has to be filed on or before the due date of filing of return U/s 139 (1) for carry forward of loss
from speculation business.
Note:
1 If speculative transactions are carried out on a systematic and organized basis so as to constitute business, then such
business is called speculative business.
2 Speculative business shall be regarded as distinct and separate from any other business. [S. 28 Explanation-2]. This is
to facilitate the operation of S. 73.
3 Speculative transaction means the transaction in which the contract for purchase or sale of any commodity (including
shares and securities) is settled otherwise than by way of actual delivery. [S. 43 (5)]. Example: Intra-day trading.
4 As per Proviso to S. 43 (5), the following are not to be regarded as speculative transactions: (a) hedging transactions;
(b) trading in derivatives carried out in a RSE; (c) Trading in commodity derivatives carried out in a recognised

association (which are chargeable to commodities transaction tax).

5 Explanation to S. 73 provides that where any part of the business of a company consists in purchase and sale of
shares of other companies, such a company shall be deemed to be carrying on speculation business to the extent to
which the business consists of purchase and sale of such shares.
6 However, this deeming provision does not apply to the following companies:
(a) A company whose GTI consists of mainly income chargeable U/H IFHP, CG and IFOS.
(b) A company, the principal business of which is (i) business of trading in shares; or (ii) the business of banking; or (iii)
the granting of loans and advances.
7 The Explanation (supra) does not cover non-corporate assessees.
8 If the shares sold were held as capital asset, Explanation (supra) does not apply.
9 If the subject matter of purchase and sale is units or Government securities, the Explanation (supra) does not apply.
[ANZ Grindlays Bank (Del)].
10 Though the contract for purchase and sale of shares was settled by way of actual delivery, still, the transaction shall be
regarded as speculative, in view of Explanation (supra).
Note:
Trading in agricultural commodity derivatives - treated as non-speculative transaction:[S. 43 (5)]:
1 S. 43(5) defines speculative transaction. The proviso to the said clause, however, stipulates certain transactions to be
non-speculative in nature even though the contracts are settled otherwise than by the actual delivery or transfer of the
commodity or scrips. Clause (e) to the said proviso provides that trading in commodity derivatives carried out in a RSE,
which is chargeable to CTT, is a non-speculative transaction.
2 A proviso has been inserted in S. 43 (5) w.e.f AY 2019-20 to provide that in respect of trading in agricultural commodity
derivatives, the requirement of chargeability of CTT shall not apply. In other words a transaction in respect of trading of
agricultural commodity derivatives, which is not chargeable to CTT, in a RSE or registered association, will be treated as
non-speculative transaction.
Issues in S. 73:
1 If a share broking firm, on behalf of its clients, purchases and sells shares otherwise than by way of actual delivery, the
commission earned is not to be regarded as speculative income and is not available for adjustment against speculative
losses. [K. L. Jhunjunwala 139 ITR 371 (Cal)].
2 Where damages are paid for breach of contract, what is settled is dispute and not the contract. Hence, it could not be
argued that the contract was settled otherwise than by way of actual delivery and the damages represents speculative
loss. Hence, it shall be allowed in computing PGBP. [Shantilal (P) Ltd. 144 ITR 57 (SC)].
8. Carry forward and set off of business losses – S. 72:

S. 72 covers the carry forward and set off of losses arising from business or profession. The assessee’s right to carry
forward business losses under this section is, however, subject to the following conditions:
1 The loss should have been incurred in business, profession or vocation.

2 The loss should not be in the nature of a loss in the business of speculation.
3 The loss may be carried forward and set off against the income from business or profession though not necessarily
against the profits and gains of the same business or profession in which the loss was incurred.
4 However, a loss carried forward cannot be set off against income other than business income. Such business income
may be taxable U/H PGBP or any other head. [Western states trading co (P) Ltd 80 ITR 21 (SC))].
5 The loss can be carried forward and set off against the profits of the assessee who incurred the loss. That is, only the
person who has incurred the loss is entitled to carry forward or set off the same. Consequently, the successor of a
business cannot be carry forward or set off the losses of his predecessor except in the case of succession by
inheritance.
6 A business loss can be carried forward for a maximum period of 8 AYs immediately succeeding the AY in which the loss
was incurred. [S. 72 (3)].
7 As per S. 80, the assessee must have filed a return of loss U/s 139 (3) in order to carry forward and set off a loss. In
other words, the non-filing of a return of loss disentitles the assessee from carrying forward the loss sustained by him.
Such a return should be filed within the time allowed U/s 139 (1).
8 If there is unabsorbed depreciation and unabsorbed business loss pertaining to earlier years, first the unabsorbed
business loss should be adjusted against the current year’s business income. Then only unabsorbed depreciation
should be adjusted. [S. 72 (2)].

Benefit in respect of revived business – Proviso to S. 72 (1):

1 The Business of the assessee was discontinued.
2 Such discontinuance was due to extensive damage to building, machinery, plant or furniture.
3 Such damage was due to
(a) Flood
(b) Cyclone
(c) Typhoon
(d) Hurricane
(e) Earthquake
(f) Any other natural calamity
(g) Accidental fire or explosion
(h) Action by enemy
(i) Action taken in combating the enemy.
4 The business is re-established within 3 years from the end of the PY in which the business was discontinued.
5 In such a case, the loss of such business surviving in the PY of discontinuance shall be allowed to be carried forward to
the AY relevant to the PY in which business is re-established.
6 It shall be set off against the profits and gains of that business or any other business carried on by him in that AY.
7 If the loss still subsists, it could be carried forward to the immediately succeeding 7 AYs.
Resurrection of elapsed losses from discontinued business for set off against amount taxable U/s 41: [S. 41 (5)]:
1 Applicability of S. 41 (5) S. 41 (5) will apply if the following conditions are satisfied:
(a) The business or profession is no longer in existence.
(b) Loss from such business or profession relating to the year in which it was
discontinued could not be set off against any other income of that year.
(c) Such business was not a speculation business.
(d) After discontinuance of such business or profession, there is a receipt which is
deemed as business income U/s 41 (1)/ (3)/ (4)/ (4A).
2 Effect of application of S. If the aforesaid conditions are cumulatively satisfied, the unabsorbed loss pertaining to the
41 (5). year in which such business or profession was discontinued can be set off against the
deemed business income referred to U/s 41 (1)/ (3)/ (4)/ (4A) even after 8 years.
3 Deemed business income Recovery of loss or expenditure allowed as deduction in the earlier years, or accrual of
U/s 41 (1) benefit arising on account of cessation of trading liability incurred by the assessee and
allowed as a deduction in earlier years.
4 Deemed business income Sale proceeds of asset sold after putting it to use for scientific research purpose but
U/s 41 (3) without using it for any other purpose.
5 Deemed business income Recovery of bad debts (to the extent allowed as deduction in earlier years).
U/s 41 (4)
6 Deemed business income Withdrawal of amount from special reserve maintained U/s 36(1) (viii).
U/s 41 (4A)
9. Tax treatment of unabsorbed depreciation:

(i) Where, in any PY, the profits or gains chargeable are not sufficient to give full effect to the depreciation allowance, the
unabsorbed depreciation shall be added to the depreciation allowance for the following PY and shall be deemed to be
part of that allowance.
(ii) If no depreciation allowance is available for that PY, the unabsorbed depreciation of the earlier PY shall become the
depreciation allowance of that year.
(iii) The effect of this provision is that the unabsorbed depreciation shall be carried forward indefinitely till it is fully set off.
(iv) However, in the order of set off of losses under different heads of income, effect shall first be given to the business
losses and then to unabsorbed depreciation.
Essence:
(i) Since the unabsorbed depreciation forms part of the current year’s depreciation, it can be set off against any other
head of income except ‘salaries’.
(ii) The unabsorbed depreciation can be carried forward for indefinite number of PYs.
(iii) Set off will be allowed even if the same business to which it relates is no longer in existence in the year in which the
set off takes place.
Note:
1 Unabsorbed capital expenditure on SR and unabsorbed expenditure on promotion of family planning amongst
employees shall be treated on par with unabsorbed depreciation.

2 As per S. 72 (2), B/F BL is to be set off before setting off unabsorbed depreciation.
3 Therefore, the order in which set off will be effected is as follows: (a) Current year depreciation; (b) Current year capital
expenditure on scientific research and current year expenditure on promotion of family planning; (c) brought forward
loss from business or profession; (d) unabsorbed depreciation; (e) unabsorbed capital expenditure on scientific
research; (f) unabsorbed expenditure on promotion of family planning.
10. Provisions to tackle dividend stripping – S. 94 (7):

S. 94 (7) will apply if the following cumulative conditions are satisfied:
In respect of shares In respect of units
1 The assessee shall purchase shares within a period of 3 1 The assessee shall purchase units within a period of 3
months prior to record date. months prior to record date.
2 He shall sell such shares within a period of 3 months 2 He shall sell such units within a period of 9 months after
after the record date. the record date.
3 Dividend from such shares is exempt U/s 10 (34). 3 Income from such units is exempt U/s 10 (35).
If the conditions (supra) are satisfied, then the loss arising on account of such purchase and sale of shares/units shall be
ignored to the extent of the aforesaid of dividend or income.

Chapter-33: Restriction on carry forward of losses – S. 78 & S. 79 - Summary
1. Carry forward and set off of losses in the case of certain companies – S. 79:
A. Provisions of S. 79 (a):
1 Where a change in shareholding has taken place in a PY in the case of a company, not being a company in which the
public are substantially interested and not being an eligible start up referred to in S. 79 (b), no loss incurred in any
year prior to the PY shall be C/F and set off against the income of the PY unless on the last day of the PY the shares of
the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held
shares of the company carrying not less than 51% of the voting power on the last day of the year(s) in which the loss
was incurred.
2 S. 79 over-rides other sections in Chapter VI (S. 70 – S. 80). Vide ‘Notwithstanding anything contained in this Chapter
(S. 70 – S. 80)’ in S. 79.
B. Change in shareholding due to death of shareholder or gift by shareholder to his relative:

Nothing contained in this section shall apply to a case where a change in the said VP takes place in a PY consequent upon
the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such
gift. [Proviso-1 to S. 79].
C. Change in shareholding in Indian subsidiary due to amalgamation or demerger of a foreign parent company:
Proviso-2 to S. 79:
Nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary
of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that 51%
shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the
resulting foreign company.
Note:
1 S. 79 is applicable only in case of loss and not in case of depreciation.
2 Hence, UAD can be C/F without any restriction even if there is change in shareholding.
3 Similarly, the restrictions of S. 79 shall not apply to unabsorbed capital expenditure on scientific research and
unabsorbed expenditure on promotion of family planning.
4 The aforesaid conclusions are based on the decisions in Concord Industries Ltd 247 ITR 800 (SC) + Shri
Subhulaxmi Mills Ltd. 249 ITR 795 (SC).
D. Analysis of S. 79 (b) [Inserted by the FA 2017]:

1 Where a change in shareholding has taken place in a PY in the case of a closely held company being an eligible start
up, the loss incurred in any year prior to the PY shall be carried forward and set off against the income of the PY, if all
the shareholders of such company who held the shares carrying VP on the last day of the year or years in which the
loss was incurred:
(i) Continue to hold the shares on the last day of such PY; and
(ii) Such loss has been incurred during the period of 7 years beginning from the year in which such company is
incorporated.
2 Eligible start up means a company or a LLP engaged in eligible business which fulfills the following conditions,
namely:
(a) It is incorporated or after 01.04.2016 but before 01.04.2021
(b) The total turnover of its business does not exceed Rs. 25 Crores in the PY relevant to the AY for which
deduction U/s 80-IAC (1) is claimed; and
(c) It holds a certificated of eligible business from the Inter-Ministerial Board of Certification as notified in
the Official Gazette by the CG.
3 Eligible business means a business carried out by an eligible start-up engaged in innovation, development or
improvement of products or processes or services or a scalable business model with a high potential of
employment generation or wealth creation.'
3 S. 79 over-rides other sections in Chapter VI (S. 70 – S. 80). Vide ‘Notwithstanding anything contained in this Chapter
(S. 70 – S. 80)’ in S. 79.
E. 3rd Proviso to S. 79: (Inserted by the Finance Act 2018):

1 S. 79 provides that C/F and set off of losses in a CHC shall be allowed only if there is a continuity in the beneficial owner of
the shares carrying not less than 51% of the voting power, on the last day of the year(s) in which the loss was incurred.
2 A 3rd proviso to S. 79 has been inserted w.e.f AY 2018-19 to provide that the section shall not apply to a company if the
following conditions are satisfied:
(a) a change in shareholding has taken place in a PY;

Chapter-33: Restriction on carry forward of losses – S. 78 & S. 79 - Summary
(b) the change has taken place pursuant to a resolution plan approved by the Insolvency and Bankruptcy Code, 2016.
(c) the change has taken place after giving a reasonable opportunity of being heard to the Jurisdictional Principal CIT
or CIT.
3 The purpose behind the amendment has been explained in the Memorandum as follows: "In general, the case of a company
seeking insolvency resolution under Insolvency and Bankruptcy Code, 2016, involves change in the beneficial owners of
shares beyond the permissible limit U/s 79. This acts as a hurdle for restructuring and rehabilitation of such companies. In
order to address this problem, it is proposed to relax the rigors of S. 79 in case of such companies, whose resolution plan
has been approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being
heard to the jurisdictional PCIT/CIT."
2. Carry forward and set off of losses in case of change in constitution of firm – S. 78 (1):
1 Extent of C/F of Where a change has occurred in the constitution of a firm, nothing in this Chapter (S. 70 to S.
losses in case of 80) shall entitle the firm to have carried forward and set off so much of the loss proportionate to
change in the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in
constitution respect of the PY.
2 No restriction on S. 78 (1) puts restrictions only on C/F of losses and not depreciation. Note the words ‘nothing in
carry forward of this chapter’ in S. 78 (1). Carry forward of depreciation is governed by S. 32 (2) which comes in
depreciation. chapter IV D and not Chapter VI. [Nagpur Gas and Domestic Appliances – 147 ITR 440
(Bom)].
Note:
S. 78 (1) puts restrictions only on C/F of losses and not depreciation. Note the words ‘nothing in this chapter’ in S. 78 (1).
C/F of depreciation is governed by S. 32 (2) which comes in chapter IV D and not Chapter VI. [Nagpur Gas and Domestic
Appliances – 147 ITR 440 (Bom)].
3. Carry forward and set off of losses in case of succession – S. 78 (2):

Where any person carrying on any business or profession has been succeeded in such capacity by another person
otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to
have it carried forward and set off against his income.
Note:
1 Exceptions are contemplated in S. 72A.
2 Where the sole proprietary business carried on by father is continued by sons as firm in the same name and style, it is
succession by way of inheritance. Losses incurred by father could be C/F and set off by the firm. Restrictions placed in
S. 78 (2) shall not apply. [Madhukant M. Mehta 247 ITR 805 (SC)].

Chapter-34: Tonnage taxation - Summary
Tonnage taxation provisions in short: (Chapter XII-G [S. 115V – S. 115VZC]):

1 Applicability of tonnage Chapter XII-G applies to a company if the following conditions are satisfied:
taxation provisions (a) The company is registered in India.
(b) Its POEM is in India.
(c) It shall own atleast one qualifying ship.
(d) Its main object shall be to carry on the business of operating qualifying
ship.
If the aforesaid conditions are satisfied, then the company is called qualifying
company.
2 Meaning of qualifying ship It should be a sea-going ship or vessel.
Its capacity should be atleast 15 net tonnage.
It shall be registered under the Merchant Shipping Act.
If it is registered outside India, then licence should be obtained from the Director-
General (Shipping).
A Valid certificate specifying the net tonnage shall be in force.
However, fishing vessels and please crafts are not to be regarded as qualifying ship.
3 Impact of application of A qualifying company can opt for tonnage taxation scheme provided under Chapter
Chapter XII-G XII-G for computation of income from the business of operating qualifying ships on
presumptive basis based on the tonnage capacity of the qualifying ships operated
by it.
Then such company is called tonnage tax company.
The business of operating qualifying ships is called as tonnage tax business.
The profits from the tonnage tax business are not computed in accordance with the
provisions of Chapter-IVD following the scheme of deduction and disallowance.
4 Determination of presumptive 1 Ascertain the daily tonnage income of each qualifying ship operated ****
income under Chapter XII-G. during the relevant PY.
2 Multiply 1 with the number days for which the qualifying ships are ****
operated a qualifying ship during the relevant PY
3 Tonnage business income (1*2) ****
5 How to ascertain daily Net tonnage of qualifying ship (Rounded Daily tonnage income
tonnage income? off)
Up to 1000 tons Rs. 70 per 100 tons.
Above 1000 tons but not more than Rs. 700 + (Rs. 53 per 100 tons
10000 tons thereafter).
Above 10000 tons but not more than Rs. 5470 + (Rs. 42 per 100 tons
25000 tons thereafter).
Above 25000 tons Rs. 11770 + (Rs. 29 per 100 tons
thereafter).
6 Manner of rounding off net If the net tonnage has part of 100 tons and
tonnage. Situation Narration of the Manner of rounding off
situation
1 that part is less than 50 Then it is ignored.
tons
2 that part is 50 or more Then it is rounded off to the next multiple
tons of 100 tons.
7 Impact of presumptive No deduction will be allowed U/s 30 to S. 38.
taxation. No depreciation will be allowed. But the WDV of the block is updated as if
depreciation was allowed.
No disallowance will be made U/s 37 (2B), S. 40A, S. 40 or S. 43B.
No loss could be set off against this presumptive income.
Normal tax rate is applicable.
8 Procedure for adoption of For the adoption of tonnage taxation scheme, the qualifying company has to make
tonnage taxation scheme. [S. an application to the JCIT and get such adoption sanctioned by him.
115VP]. If he sanctions, then the tonnage taxation scheme shall apply for 10 years and
Chapter IV-D shall not be used for determination of income from tonnage taxation
business.
If sanction was denied, then the order of JCIT is appealable.

Chapter-34: Tonnage taxation - Summary
9 Exiting the qualifying company If the AO is satisfied that the tonnage taxation scheme is misused or abused for
from the tonnage taxation evasion of tax, then the AO, with the sanction of CCIT, can expel the qualifying
scheme. [S. 115VZC]. company from the tonnage taxation scheme through an order U/s 115VZC.
Then, there will be bar on re-entry for next 10 years.
Thereafter, the income from the business of operating qualifying ship shall be
computed in accordance with Chapter IV-D and not in accordance with Chapter XII-
G.
If the qualifying company is aggrieved by the order of the AO passed U/s 115VZC,
then appeal can be made to the ITAT U/s 253 (1).
10 MAT provisions not to apply in Profits of tonnage tax business shall not be subject to tax under the BP route.
respect of income from Tonnage tax business means business of operating qualifying ships carried on by a
tonnage tax business. [S. 115- tonnage tax company.
VO]. Tonnage tax company means an Indian shipping company whose income from the
business of operating qualifying ships shall be computed on presumptive basis
based on the tonnage capacity of the ship under Chapter XII-G.

Chapter-35: Settlement Commission - Summary
A. Application for settlement of cases – S. 245C:

1 Who can approach Any assessee, who had concealed the particulars of his income & is desirous of getting
ITSC? [S. 245C (1)]. his case settled without penalty & prosecution, can approach ITSC by making an
application in Form-34B.
2 What are the contents of True & full disclosure of his income which wasn’t disclosed before AO.
the application (supra)? Manner in which such income was derived.
[S. 245C (1)]. Additional income-tax payable on such income.
Such other particulars as has been prescribed.
3 When can the application At any stage of case relating to him, the application can be made to ITSC. [S. 245C (1)].
be made to ITSC?
4 Meaning of case. [S. ‘Case’ means any proceedings for assessment under this Act of any person in respect
245A (b)]. of any AY (s) which may be pending before the AO on the date on which an
application U/s 245C (1) is made.
5 Significance of ‘pending For approaching the ITSC, pendency of assessment proceedings in respect of the
before the AO’ in S. 245A relevant AY before the AO is a pre-requisite.
(b). ‘Pending’ means that the proceedings are initiated but not yet completed.
6 Significance of It may be (a) assessment U/s 143 (3); (b) assessment U/s 147; (c) assessment U/s
‘assessment under this 153A; (d) assessment U/s 153C; (d) Fresh assessment pursuant to the directions
Act’ in S. 245A (b). contained in the order passed by the ITAT or revisionary authority.
7 When S. 143 (3) Date of deemed Date on which ROI for the relevant AY was filed U/s 139 or in
proceeding is said to be initiation. pursuance of a notice issued U/s 142 (1) (i).
initiated and completed? Date of Date on which order of assessment was passed. (where the
[Clause (vi) of completion. return was taken for scrutiny)
Explanation to S. 245A Date on which the time-limit referred to in S. 153 (1) expired.
(b)]. [Where the return was not taken for scrutiny].
8 Some important The proceedings for assessment for the AY gets initiated only upon filing of return U/s
observations in relation 139 or in pursuance of notice issued U/s 142 (1) (i). Where the assessee did not file
to point-7. return for the relevant AY and, in his case, assessment is being made U/s 144, the
assessee can’t approach ITSC.
The assessee need not wait for service of notice U/s 143 (2) for making settlement
application. If he had already filed return for the relevant AY, even though his return was
not selected for scrutiny and the time-limit for service of scrutiny notice has expired, still,
he can approach ITSC till the due date for completion of assessment stipulated in S. 153
(1).
Settlement application can be made even after the completion of processing of return U/s
143 (1), since processing of return does not tantamount to assessment.
9 When S. 147 proceeding SN AY Date of initiation of Date of completion of
is said to be initiated and proceedings U/s 147 proceedings U/s 147
completed? [Clause (i) of 1 AY (in respect of which Date on which notice Date on which order was
Explanation to S. 245A notice U/s 148 was U/s 148 was issued. passed U/s 147.
(b)]. issued)
2 Other AYs (for which Date on which notice Date on which order was
return was furnished U/s 148 was issued in passed U/s 147.
U/s 139 or in pursuance respect of AY referred
of notice issued U/s 142 in 1.
(1) (i) and for which
notice U/s 148 could be
issued on the date of
issue of notice U/s 148
in respect of AY
referred in 1).
10 When proceeding U/s Date of initiation Date of issue of notice U/s 153A.
153A or S. 153C is said Date of completion Date of passing of order U/s 153A.
to be initiated and
completed for the 6 AYs
immediately preceding
the AY relevant to the PY
in which search was
initiated or requisitioned

was made and for the

relevant AY (s)? [Clause
(iiia) of Explanation to S.
245A (b)].
11 When fresh assessment Date of initiation Date on which order U/s 254 or S. 263 or S. 264 setting aside the
proceedings is said to be assessment was passed.
initiated and completed? Date of Date of passing of fresh assessment order.
completion
[Clause (iii) of Explanation to S. 245A (b)].
12 Conditions to be satisfied Condition-1: Additional income tax payable in respect of income disclosed in the
for maintainability of settlement application > Specified monetary limit.
settlement application. Condition-2: The assessee shall pay such tax and interest thereon, which would have
[Proviso to S. 245C (1)]. been paid under the provisions of this Act, had the income disclosed in the application
been declared in the ROI before the AO on the date of application.
Payment should be on or before the date of making application.
Proof of payment shall be attached with the settlement application.
13 Computation of additional Situation Narration of the situation
income tax payable in 1 Income disclosed in the settlement application pertains to only one PY.
respect of income 2 Income disclosed in the settlement application pertains to more than one
disclosed in the PY.
settlement application. [S. 245C (1A) + S. 245C (1D)].
14 Computation of additional Situation Narration of the Additional income tax payable
income tax payable in situation
situation-1. [S. 245C (1B) 1A ROI was filed for the Tax on (Ʃ RI and income disclosed in the
+ S. 245C (1C) ]. PY settlement application) – Tax on RI.
1B No return was filed Tax on income disclosed in the settlement
for the PY application.
15 Computation of additional Compute additional income tax in respect of each PY separately in accordance with S.
income tax payable in 245C (1B) and S. 245C (1C) and find its aggregate. [S. 245C (1D)].
situation-2.
16 Specified monetary limit Search cases (AY relevant to the PY in which search was initiated, Rs. 50L
6AYs & relevant AY(s))
Other cases Rs. 10L
17 Reduced monetary limit Where the assessee raided makes settlement application upon initiation of proceedings
in certain search cases. U/s 153A and the additional income tax payable by the assessee in respect of income
disclosed in the settlement application > Rs. 50L, then the person connected to the
assessee against whom proceedings were initiated U/s 153A or S. 153C can make
settlement application, even if the additional income tax payable on the income disclosed
in his settlement application is not more than Rs. 50L but more than Rs. 10L.
18 Meaning of connected Same as that in S. 40A (2).
person.
19 Computation of interest Base for computing Additional income tax payable on the income declared in the
U/s 234B to be paid at interest settlement application.
the time of making Interest rate 1% p.m. or part thereof.
settlement application. Period for computing 1st day of the AY to the date of making settlement
interest application.
[S. 234B (2A) (a)].
20 Recovery out of seized or The amount of liability arising upon filing settlement application U/s 245C (1) could be
requisitioned assets. recovered out of assets seized U/s 132 or requisitioned U/s 132A. [S. 132B (1) (i)].
21 Fee payable. Settlement application shall be accompanied by a fee of Rs. 500. [S. 245C (2)].
22 Is it possible to withdraw No. settlement application shall not be allowed to be withdrawn by the applicant. [S.
the settlement application 245C (3)].
filed?
23 Can settlement Settlement application can’t be revised.
application be revised? Allowing revision to the settlement application tantamounts to withdrawing it and filing a
fresh application which is against the spirit behind S. 245C (3). [Ajmera Housing
corporation (SC)].
24 Intimation to the AO. [S. The assessee shall, on the date on which he makes an application to the ITSC, also
245C (4)]. intimate the AO in Form-34BA of having made such application to the ITSC.

B. Procedure on receipt of settlement application – S. 245D:

S. 245D (1) Deciding as to whether the Upon receipt of an application U/s 245C, the ITSC shall issue a notice to the
application should be applicant requiring him to explain as to why the application made by him shall be
allowed to be proceeded allowed to be proceeded with.
with or not. This notice shall be issued within 7 days from the date of receipt of the
application.
Then, on hearing the applicant, the ITSC shall, by an order in writing, reject the
application or allow the application to be proceeded with.
This order (referred to as D1 order) shall be passed within a period of 14 days

from the date of the application.
Proviso to S. What will happen if D1 If D1 order is not passed within the time-limit (supra), the settlement application is
245D (1) order is not passed in time? deemed to have been allowed to be proceeded with.
S.245D (2) Forwarding of D1 order. Then, the ITSC shall forward a copy of D1 order to the CIT as well to the
applicant.
S. 245D (2B) Seeking report from CIT. The ITSC shall, in respect of an application which is allowed to be proceeded
with U/s 245D (1), within 30 days from the date on which the application was
made, call for a report from the CIT.
The CIT shall furnish the report within a period of 30 days of the receipt of
communication from the ITSC.
S. 245D (2C) Declaring the application to Where the report (supra) has been furnished by the CIT in time, then the ITSC
be invalid based on the may, on the basis of such report, by an order (hereinafter called D2 order) in
report of CIT. writing, declare the application in question as invalid.
This D2 order shall be passed within a period of 15 days of receipt of the
aforesaid report. Then, it shall send the copy of such order to the applicant and
the CIT.
1st proviso to OBH before declaring the An application shall not be declared invalid unless an opportunity has been given
S. 245D (2C) application to be invalid. to the applicant of being heard.
2nd proviso to Proceeding without report Where the CIT has not furnished the report within the aforesaid period, the ITSC
S. 245D (2C) of CIT. shall proceed further in the matter without the report of the CIT.
S. 245D (3) Examination of records – The ITSC, in respect of an application which has not been declared invalid U/s
directing enquiry – seeking 245D (2C) may call for the records from the CIT.
report from CIT. After examination of such records, if the ITSC is of the opinion that any further
enquiry or investigation in the matter is necessary, it may direct the CIT to make
such further enquiry or investigation and furnish a report on the matters covered
by the application and any other matter relating to the case.
Then, the CIT shall furnish the report within a period of 90 days of the receipt of
communication from the ITSC.
Proviso to S. Proceeding without the Where the CIT does not furnish the report within the aforesaid period, the ITSC
245D (3) report of CIT. may proceed to pass an order U/s 245D (4) (i.e. Settlement order) without such
report.
S. 245G No right to inspect reports No person shall be entitled to inspect, or obtain copies of, any reports made by
any ITA to the ITSC.
But the ITSC may, in its discretion, furnish copies thereof to any such person on
an application made to it in this behalf and on payment of the prescribed fee.
Proviso to S. Inspection to be allowed for However, for the purpose of enabling the applicant to rebut any evidence which
245G rebuttal of evidence was brought on record against him in any such report, the ITSC shall, on an
brought against. application made in this behalf, and on payment of the prescribed fee by the
applicant, furnish him with a certified copy of any such report or part thereof.
S. 245D (4) Passing of settlement After examination of the records and the report of the CIT, if any, received U/s
order. 245D (2B) or S. 245D (3) and after giving an opportunity to the applicant and to
the CIT to be heard, and
after examining such further evidence as may be placed before it or obtained by
it, the ITSC may, in accordance with the provisions of this Act, pass such
order (hereinafter referred to as D4 order) as it thinks fit on the matters covered
by the application and any other matter relating to the case not covered by the
application, but referred to in the report of the CIT.

S. 245D (4A) Time-limit for passing D4 The ITSC shall pass D4 order within 18 months from the end of the month in
order. which the application was made.
S. 245D (6) Contents of D4 order. Every D4 order shall provide for the terms of settlement including any demand by
way of tax, penalty or interest, the manner in which any sum due under the
settlement shall be paid and all other matters to make the settlement effective.
It shall also provide that the settlement shall be void if it is subsequently found by
the ITSC that it has been obtained by fraud or misrepresentation of facts.
S. 234B (2A) Interest U/s 234B pursuant Where as a result of D4 order of ITSC for any AY, the amount of TI disclosed in
(b) to additions made in the the application U/s 245C (1) is increased, the assessee shall be liable to pay
course of settlement. interest.
It shall be computed in the following manner:
Base Tax on TI determined on the basis of D4 order – Tax on TI disclosed
in the settlement application.
Rate 1% p.m or part thereof.
Period 1st of the AY to the date on which D4 order was passed.
S. 245D (6A) Interest on delayed The sum payable in pursuance of D4 order shall be paid within 35 days of receipt
payments. of it.
The ITSC has powers to extend the time for making payment.
It can also allow payment of the sum (supra) in instalments.
Where the sum (supra) is not paid by the assessee within the aforesaid 35 days,
he shall be liable to pay simple interest at 1.25% p.m or part thereof on the
amount remaining unpaid from the date of expiry of the period of 35 days
aforesaid.
This interest shall be paid even if the ITSC has extended the time for making
payment or has allowed payment in instalments.
S. 245D (7) Time limit for completing Where the settlement becomes void because of settlement being obtained by
the restored assessment way of fraud or misrepresentation of facts, the proceedings with respect to the
where the settlement matters covered by the settlement shall be deemed to have been revived from
becomes void. the stage at which the application was allowed to be proceeded with by the ITSC.
The AO may, notwithstanding anything contained in any other provision of this
Act, complete such proceedings at any time before the expiry of 2 years from the
end of the FY in which the settlement became void. [See illustration-10].
S. 245D (6B) Power to rectify D4 order. With a view to rectify mistakes apparent record, the ITSC may amend its D4
order.
This amendment may be done either suomoto or upon application from the
applicant or CIT.
Time-limit for suomoto 6 months from the end of the month in which the D4 order was passed.
rectification.
Time-limit for making 6 months from the end of the month in which application was made.
rectification upon
application from the
applicant or CIT.
1st proviso to Time-limit for making 6 months from the end of the month in which D4 order was passed.
S.245D (6B). application by the applicant
or CIT seeking rectification.
2nd proviso OBH before making Where the ITSC intends to amend its D4 order which will have the effect of
toS.245D (6B) adverse amendments. modifying the liability of the applicant, the ITSC shall issue a notice to the
applicant and to the CIT communicating the intention to make the proposed
amendment.
S.234B (2A) Variation to interest U/s If, as a consequence of amendment order passed U/s 245D (6B), the amount on
(c) 234B consequent to which interest is payable is increased or decreased, the interest shall also be
amendment order U/s increased or decreased accordingly.
245D (6B).

C. Power to make provisional attachment of properties – S. 245DD:

1 Provisional attachment During the pendency of any proceedings before it, the ITSC has powers to provisionally
by ITSC. [S. 245DD attach the property belonging to the applicant. This may be done to protect the interest of the
(1)] revenue. Such provisional attachment shall be made in a manner provided in 2nd Schedule.
2 Life of order Every provisional attachment made by the ITSC U/s 245DD (1) shall cease to have effect
provisionally attaching after the expiry of a period of 6 months from the date of the order made U/s 245DD (1). [S.
the property. 245DD (2)].
3 Extension of However, ITSC may, for reasons to be recorded in writing, extend the aforesaid period by
provisional attachment. such further period or periods as it thinks fit. [Proviso to S. 245DD (2)].
D. Powers of ITSC – S. 245F:

S. 245F (1) The ITSC shall have all the powers which are vested in an IT authority under the Act.
S. 245F (2) Situation Period of exclusive jurisdiction
& (4) Settlement application was rejected by Date on which settlement application was made to the date
the ITSC through D1 order. of D1 order rejecting the settlement application.
Settlement application was declared Date on which settlement application was made to the date
invalid by the ITSC through D2 order. of D2 order declaring the settlement application invalid.
D4 order was passed by the ITSC. Date on which settlement application was made to the date
on which D4 order was passed.
This exclusive jurisdiction is only in respect of proceedings covered by the settlement application and not in
respect of any other proceedings.
E. D4 order to be conclusive – S. 245-I:

1 D4 order shall be conclusive as to the matters stated therein.
2 Save as otherwise provided in this chapter, no matter covered by D4 order shall be reopened in any proceeding under
this Act or under any other law for the time being in force.

1 D4 order not appealable – D4 order of ITSC cannot be challenged in appeal or revision. Vide the words ‘no matter
not subject to revision. covered by D4 order shall be reopened in any proceeding under this Act…….’.
However, a SLP can be made before the SC challenging the D4 order.
2 Circumstances in which (a) There is a grave procedural defect such as violation of the mandatory procedural
D4 order can be requirements of the provisions of Chapter XIX-A;
challenged through a SLP. (b) There is violation of the rules of natural justice is made;
(c) It is found that there is no nexus between the reasons given and the decision taken by
the ITSC. [V.B. Desai and R.B. Desai Vs Administrative officer (ITSC) 125 Taxman
1097 (Kar)].
3 Significance of ‘save as Even the ITSC cannot review or recall its own order since it is final and conclusive.
otherwise provided in this However, if it was found by the ITSC that the settlement was obtained by fraud or
chapter’. misrepresentation, it can be declared void.
Similarly, if there are mistakes apparent from record, the ITSC can amend its D4 order
U/s 245D (6B).
4 D1 order, D2 order and D1 order rejecting the application or the D2 order declaring the application to be invalid or
order U/s 245D (6B) – not amendment order U/s 245D (6B) is conclusive.
appealable. No appeal is possible against such orders under the Act.
However, the aggrieved (the applicant or the Department) can file a writ before the HC
and thereafter, an appeal before the SC.
Whether the ITSC has power to waive or reduce the interest payable U/s 234A, S. 234B and S. 234C?
1 S. 234A, 234B and S. 234C use the expression ‘shall’. It signifies that these interests are mandatory.
2 ITSC U/s 245D (4) has to pass order of settlement ‘in accordance with the provisions of this Act’.
3 It has no power to waive or reduce the interests which are mandatory in nature.
4 S. 119 (2) gives power to the CBDT to relax various provisions which interalia includes S. 234A, 234B and S. 234C.
5 In exercise of such power, the CBDT has come out with a circular [Circular No. 400/234/95-IT (B), dated May 23,
1996] which empowers the DGIT or CCIT to waive or reduce the aforesaid interest under specific circumstances
subject to the conditions referred to therein.
6 The argument that as per S. 245F, the ITSC shall have all the powers of an ITA and accordingly, it shall also have the
power to relax the requirements of S. 234A, 234B and S. 234C U/s 119 (2) on par with CBDT is not acceptable for the
following reasons:

(a) The CBDT is an executive authority being part of the Ministry of Finance: its actions are amenable to scrutiny by that
Ministry and by audit bodies and also Parliament.
(b) Whereas, the ITSC is a quasi-judicial body and its orders are not amenable to either supervisory or appellate
jurisdiction of the Ministry of Finance: its orders U/s 245-I are conclusive and cannot be reopened in any proceedings
under the Act or any other law.
(c) While exercising its quasi-judicial power of arriving at a settlement U/s 245D, the ITSC cannot have the administrative
power of issuing directions to other ITA. Thus, the ITSC cannot exercise the power of relaxation found in S. 119(2)(a)
in the manner provided therein:
7 However, the powers granted to CCIT or DGIT to reduce or waive interest U/s 234A-B-C in Circular No. 400/234/95 –
IT (B), dated May 23, 1996 can be exercised by the ITSC.
8 This is the ruling of the SC in Anjum M.H. Ghaswala 252 ITR 1 + Santram Mangatram Jewellers 264 ITR 564.
F. Power of ITSC to grant immunity from prosecution and penalty: S. 245H:

S. 245H (1) The ITSC has powers U/s 245H (1) to grant immunity to the applicant from prosecution for any offence under
this Act and also from the imposition of any penalty under this Act, with respect to the case covered by the
settlement.
But this power will be exercised only when the applicant has co-operated with the ITSC in the proceedings
before it and has made a full and true disclosure of his income and the manner in which such income has
been derived.
Such immunity is subject to the conditions which may be imposed by the ITSC.
The ITSC, while granting immunity to applicant from prosecution, shall record reasons in writing in the order
passed by it.
S. 245 (1A) Immunity granted U/s 245H (1) shall stand withdrawn if the applicant fails to pay any sum specified in D4
order within the time specified therein or within the time extended by the ITSC.
Further, the immunity stands withdrawn even if the applicant fails to comply with any other condition subject
to which the immunity was granted.
Thereupon, the provisions of this Act shall apply as if such immunity had not been granted.
S. 245H (2) Immunity granted to a person U/s 245H (1) may, at any time, be withdrawn by the ITSC, if it is satisfied that
the applicant had, in the course of the settlement proceedings, concealed any particulars material to the
settlement or had given false evidence.
Thereupon, the applicant may be tried for the offence with respect to which the immunity was granted and
shall also become liable to the imposition of any penalty under this Act to which he would have been liable,
had such immunity not been granted.
G. Abatement of proceedings before ITSC – S. 245HA:

S. 245HA (1) SN Situations under which the proceedings before Date of abatement
the ITSC get abated
1 Application was rejected through D1 order. Date of D1 order date.
2 Settlement application was declared invalid Last day of the month in which the settlement
through D2 order. application was declared invalid.
3 D4 order was not passed within the time Date on which the time limit specified in S. 245D
specified in S. 245D (4A). (4A) expires.
4 D4 order was passed without providing the Date on which D4 order was passed.
terms of settlement.
Only such proceedings would abate U/s 245HA (1) which had been delayed on account of any reason
attributable on the part of the applicant.
If the delay is not attributable to the applicant, the settlement proceedings shall not abate.
S. 245HA (2) Where a proceeding before ITSC abates, the AO before whom the proceeding at the time of making the
application was pending, shall dispose of the case in accordance with the provisions of this Act as if no
application U/s 245C had been made.
S. 245HA (3) For this purpose, the AO shall be entitled to use all the material and other information produced by the
assessee before the ITSC or the results of the inquiry held or evidence recorded by the ITSC in the course of
the proceedings before it, as if such material, information, inquiry and evidence had been produced before the
AO held or recorded by him in the course of the proceedings before him.
S. 245HA (4) For making the assessment, the period commencing on and from the date of settlement application and ending
with the date of abatement shall be excluded.
Proviso-2 below Where a proceeding before the ITSC abates U/s 245HA, the period of limitation available U/s 153 to the AO for
Explanation-1 to making an order of assessment after the exclusion of the period U/s 245HA (4), be not less than 1 year; and
S. 153 where such period of limitation is less than one year, it shall be deemed to have been extended to one year.

S. 245HAA Where the proceedings before the ITSC get abated, the AO shall allow the credit for the tax and interest paid on
or before the date of making the application to the ITSC.
H. Power of CIT to grant immunity from penalty – S. 273AA:

S. 273AA (1) A person may make an application to CIT for granting immunity from penalty, if:
(a) he has made an application for settlement U/s 245C and the proceedings for settlement have
abated U/s 245HA and
(b) the penalty proceedings have been initiated under this Act.
S. 273AA (2) The application to the CIT U/s 273AA (1) shall not be made after the imposition of penalty after
abatement.
S. 273AA (3) The CIT may grant to the assessee immunity from the imposition of any penalty under this Act, if he is
satisfied that the assessee has, after the abatement, co-operated with the AO in the proceedings
before him and has made a full and true disclosure of his income and the manner in which such
income has been derived.
The CIT may impose such conditions as he thinks fit for granting immunity.
S. 273AA (3A) The order U/s 273AA (3), either accepting or rejecting the application in full or in part, shall be passed
within a period of 12 months from the end of the month in which the application is received by the CIT.
Proviso-1 to S. No order rejecting the application, either in full or in part, shall be passed unless the assessee has
273AA (3A) been given an OBH.
S. 273AA (4) The immunity granted to a person U/s 273AA (3) shall stand withdrawn, if such person fails to comply
with any condition subject to which the immunity was granted.
S. 273AA (5) The immunity granted to a person U/s 273AA (3) may, at any time, be withdrawn by the CIT, if he is
satisfied that such person had, in the course of any proceedings, after abatement, concealed any
particulars material to the assessment from the ITA or had given false evidence.
Thereupon, such person shall become liable to the imposition of any penalty under this Act to which
such person would have been liable, had not such immunity been granted.
I. Power of CIT to grant immunity from prosecution – S. 278AB:

S. 278AB (1) A person may make an application to the CIT for granting immunity from prosecution, if he has made an
application for settlement U/s 245C and the proceedings for settlement have abated U/s 245HA.
S. 278AB (2) The application to the CIT U/s 278AB (1) shall not be made after institution of the prosecution
proceedings after abatement.
S. 278AB (3) The CIT may grant to the assessee immunity from the imposition from prosecution for any offence under
this Act, if he is satisfied that the assessee has, after the abatement, co-operated with the AO in the
proceedings before him and has made a full and true disclosure of his income and the manner in which
such income has been derived.
The CIT may impose such conditions as he thinks fit for granting immunity.
S. 278AB (4) The immunity granted to a person U/s 278AB (3) shall stand withdrawn, if such person fails to comply
with any condition subject to which the immunity was granted.
S. 278AB (5) The immunity granted to a person U/s 278AB (3) may, at any time, be withdrawn by the CIT, if he is
satisfied that such person had, in the course of any proceedings, after abatement, concealed any
particulars material to the assessment from the ITA or had given false evidence.
Thereupon, such person may be tried for the offence with respect to which the immunity was granted or
for any other offence of which he appears to have been guilty in connection with the proceedings.
J. Powers of the CIT (A) to use the material gathered by the ITSC and use the results of inquiry conducted by ITSC:
In an appeal against the order of assessment in respect of which the proceeding before the ITSC abates U/s 245HA, he
may, after taking into consideration all the material and other information produced by the assessee before, or the results of
the inquiry held or evidence recorded by, the ITSC, in the course of the proceeding before it and such other material as may
be brought on his record, confirm, reduce, enhance or annul the assessment. [S. 251 (1) (aa)].
K. Bar on subsequent application for settlement – S. 245K:

1 A person is not allowed to approach ITSC, if the settlement application made by him in the past was allowed to be
proceeded with Us/ 245D (1) by the ITSC.
2 Also, any person related to the person who has already approached ITSC once, cannot approach the ITSC
subsequently.

Related person: [Explanation to S. 245K]

SN Person Related person
1 Individual Any company in which such person holds more than 50% of the shares or voting rights at any time.
Any firm or AOP or BOI in which such person is entitled to more than 50% of the profits at any time.
Any HUF in which such person is a karta.
2 HUF Karta of that HUF.
3 Company Any individual who held > 50% of the shares or voting rights in such company at any time before
the date of application before ITSC by the company.
4 Firm/AOP/BOI Any individual who was entitled to more than 50% of the profits in such firm, AOP or BOI, at any time
before the date of application before the ITSC by such person (i.e. Firm/AOP/BOI).

Assessee receiving refund consequent to waiver of interest U/s 234A to 234C by the ITSC is also entitled to interest
on such refund U/s 244A. [K. Lakshmansa and Co. [2017] 399 ITR 657(SC)].

Chapter-36: Advance Ruling: Chapter-XIX-B (S. 245N – S. 245V) - Summary
1. Authority for advance ruling – S. 245-O:

SN Particulars Provisions
1 Composition of AAR AAR to consist of a Chairman and such number of Vice Chairmen, revenue Members and
law Members as the CG may, by notification, appoint. Qualifications for appointment:
(a) Chairman – a person who has been a judge of the SC or the Chief Justice of a
HC or for at least seven years a judge of a HC;
(b) Vice Chairman – a person who has been a Judge of a HC;
(c) A Revenue Member from the IRS – a person who is, or is qualified to be, a
Member of the Board on the date of occurrence of vacancy;
(d) A Revenue Member from the Indian Customs and Central Excise Service – a
person who is, or is qualified to be a Member of the CBEC on the date of
occurrence of vacancy.
(e) A law Member from the Indian legal service – a person who is, or is qualified to
be, an Additional Secretary to the Government of India on the date of occurrence
of vacancy.
2 Terms & Conditions The terms and conditions of service and the salaries and allowances payable to the
Members shall be such as may be prescribed.
3 Officers & Employees The CG shall provide to the Authority with such officers and employees, as may be
necessary, for the efficient discharge of the functions of the Authority under the Act.
4 Location of AAR National Capital Territory of Delhi
5 Constitution of Benches The powers and functions of the AAR may be discharged by its Benches as may be
constituted by the Chairman from amongst its Members thereof.
6 Composition of A Bench shall consist of the Chairman or the Vice-Chairman and one revenue and one
Benches law Member.
7 Any vacancy in the The senior-most Vice Chairman shall act as the Chairman until the date on which a new
office of the Chairman Chairman, appointed in accordance with the provisions of the Act to fill such vacancy,
enters upon his office.
8 In case the Chairman is The senior-most Vice Chairman shall discharge the functions of the Chairman until the
unable to discharge his date on which the Chairman resumes his duties.
functions
9 Location of Benches At such places as the CG may, by notification, specify.
Amendments brought out by the Finance Act 2018:

1 In order to merge the AAR for income-tax, central excise, customs duty and service tax, S. 245-Q was amended by the
Finance Act, 2017. S. 245-O provides for the constitution of an AAR and constitution of its benches, for giving advance
rulings sought under: (a) Chapter XIX-B of the Act; or (b) Chapter V of the Customs Act, 1962; or (c) Chapter IIIA of the
Central Excise Act, 1944; or (d) Chapter VA of the Finance Act, 1994.
2 FA, 2018 has inserted new S. 28EA under Customs Act, 1962 to provide for constitution of Customs AAR.
3 Accordingly, provisions are made in the Act to the effect that the provisions of the Act relating to Constitution of AAR
would not apply to advance ruling under the Customs Act and related matters.
4 FA, 2018 has made following amendments in S. 245-O of the Act with effect from April 1, 2018.
5 Proviso is inserted in S. 245-O (1) to provide that an Authority constituted under the Section will cease to act as an AAR
for the purposes of Chapter V of the Customs Act, 1962 once separate Authority is appointed U/s 28EA of that Act.
6 Thus, till the date of appointment of the Customs AAR, the existing AAR constituted U/s 245-O shall continue to be the
Authority for giving advance rulings for the purposes of Customs Act.
7 S. 245-O (1A) is inserted to provide that once separate AAR is appointed U/s 28EA of Customs Act, 1962, the Authority
under the section will act as Appellate Authority for the purpose of Chapter V of that Act.
8 Proviso to S. 245-O (1A) provides that such Authority shall not admit any appeal against any ruling or order passed
earlier by it in its capacity as AAR in relation to any matter under Chapter V of the Customs Act, 1962.
9 S. 245-O (7) provides for constitution of bench which inter alia consists of one revenue member.
10 As per S. 245-O (3), a revenue member could be any person: (a) from IRS who is qualified to be a member of CBDT; or
(b) from Indian Customs and Central Excise Service who is qualified to be a member of CBEC.
11 As discussed above, new section is inserted in Customs Act for constituting separate Authority for Advance Ruling.
Accordingly, proviso is inserted in S. 245-O (7) to provide that the revenue member of the bench would be a person
only from IRS who is qualified to be a member of CBDT as referred to in S. 245-O (3) (c) (i).
12 S. 245-Q inter alia provides for mode and manner of making application by a person desirous of obtaining an advance
ruling. In view of the amendment made by FA 2018 (supra), consequential amendment is also made in S. 245-Q (1) to
exclude person seeking advance ruling under Chapter V of the Customs Act, 1962 once separate Authority is appointed
U/s 28EA of the Act.

2. Qualifications, terms and conditions of service of chairman, vice-chairman and members – S. 245-OA:
1 The qualifications, appointment, term of office, salaries and allowances, resignation, removal and the other terms and
conditions of service of the Chairman, Vice -Chairman and other Members of the Authority appointed after 26.05.2017,
being the date on which the provisions of Part XIV of Chapter VI of the Finance Act, 2017 came into force, shall be
governed by the provisions of S. 184 of Finance Act 2017.
2 However, the Chairman, Vice-Chairman and Member appointed before 26.05.2017 shall continue to be governed by the
provisions of the Act and the rules made thereunder as if the provisions of S. 184 of the Finance Act, 2017 had not
come into force."
S. 184 of Finance Act, 2017:

1 Power to CG to The CG may, by notification, make rules to provide for qualifications, appointment, term of
make rules. office, salaries and allowances, resignation, removal and the other terms and conditions
of service of the Chairman, Vice-Chairman or Member of the Authority.
2 Term of Chairman, The Chairman, Vice- Chairman or Member of the Authority shall hold office for such term as
Vice-Chairman or specified in the rules made by the CG but not exceeding five years from the date on which he
Member enters upon his office and shall be eligible for reappointment.
3 Age Criteria of No Chairman, Vice- Chairman or Member of the Authority shall hold office as such after he has
Chairman, Vice- attained such age as specified in the rules made by the CG which shall not exceed:
Chairman or In case of Age
Member Chairman 70 years
Vice-Chairman or any other Member 67 years
3. Vacancies etc, not to invalidate proceedings – S.245-P:

No proceeding before, or pronouncement of advance ruling by, the Authority shall be questioned or shall be invalid on
the ground merely of the existence of any vacancy or defect in the constitution of the Authority.
4. Meaning of advance ruling – S. 245N (a):

Advance ruling means:
S. 245N (a) A determination by the authority in relation to a transaction which has been undertaken or is proposed to
(i) be undertaken by the NR applicant.
S. 245N (a) A determination by the authority in relation to the tax liability of a non-resident arising out of a transaction
(ii) which has been undertaken or is proposed to be undertaken by a resident applicant with such NR.
S. 245N (a) A determination by the authority in relation to the tax liability of a resident applicant, arising out of a
(iia) transaction which has been undertaken or is proposed to be undertaken by such applicant and such
determination shall include the determination of any question of law or of fact specified in the application.
However, a resident can seek determination only in relation to his tax liability arising out of one or more
transactions valuing Rs. 100 crores or more in total which has been undertaken or proposed to be
undertaken by him. [Notification no. 73/2014].
S. 245N (a) A determination or decision by the authority in respect of an issue relating to computation of TI which is
(iii) pending before any Income-tax Authority or the Appellate Tribunal upon application from a resident notified
by the CG in the official gazette and such determination or decision shall include the determination or
decision of any question of law or fact in relation to such computation of TI specified in the application.
For this purpose, the PSC is notified by the CG in official gazette. [Notification no. 725 (E) dated
03.08.2000].
Note:
1 Residential status of the applicant plays a pivot role in deciding the maintainability of application.
2 Whether the applicant is resident or non-resident shall be decided not for the PY of application. It shall be decided for
the PY preceding the PY in which application was made. [Robert W. Smith Vs CIT 212 ITR 275 (AAR)].
Issues regarding maintainability of application:

1 A NR can make application to AAR seeking determination in relation to transaction undertaken only by him and not by
some other person.
2 The query should pertain to an issue which is a consequence of the transaction entered into by him or proposed to be
entered into by him.
3 If a resident, in respect of tax insulated payments made to NR, desires to know the tax liability, he can make an
application to AAR. Just because the agreement has tax insulation clause, it does not mean that NR does not have tax
liability in India. The tax liability is cast on NR by the charging section, which can’t be obliterated by virtue of tax

insulation clause in the agreement. The only effect of this tax insulation clause is that this obligation is to be discharged
by the resident.
5. Application for advance ruling – S. 245-Q:

S. 245-Q An applicant desirous of obtaining an advance ruling under the income tax Act may make an application in
(1) such form and in such manner as may be prescribed, stating the question on which the advance ruling is
sought.
S. 245-Q The application shall be made in quadruplicate and be accompanied by a fee of Rs. 10000 or such fee as
(2) may be prescribed in this behalf, whichever is higher.
R. 44E Application shall be accompanied by the proof of payment.
S. 245-Q An applicant may withdraw an application within 30 days from the date of the application.
(3)
Notification 74/2017:
Category of applicant Category of case Fee
Applicant referred to in Amount of one or more transactions entered into or proposed to be undertaken, in Rs. 2L
S. 245N (a) (i)/(ii)/(iia) respect of which ruling is sought does not exceed Rs. 100 crores.
Amount of one or more transactions entered into or proposed to be undertaken, in Rs.5L
respect of which ruling is sought exceeds Rs. 100 crores but does not exceed Rs.
300 crores.
Amount of one or more transactions entered into or proposed to be undertaken, in Rs. 10L
respect of which ruling is sought exceeds Rs. 300 crores.
Any other applicant In all cases Rs.
10000
6. Procedure to be followed by AAR after receipt of the application – S. 245-R:

S. 245R (1) On receipt of an application, the AAR shall cause a copy thereof to be forwarded to the CIT and, if
necessary, call upon him to furnish the relevant records.
Proviso to S. Where any records have been called for by the AAR in any case, such records shall, as soon as possible,
245R (1) be returned to the CIT.
S. 245R (2) The AAR may, after examining the application and the records called for, by order, either allow or reject
the application.
The AAR has discretion to allow or reject the application. Vide the word ‘may’ in S. 245R (2).
If the questions are hypothetical or non-factual, the application is bound be rejected.
Proviso-1 to S. The AAR shall not allow the application where the question raised in the application,—
245R (2) (i) is already pending before any ITA or ITAT (except in the case of an applicant being PSC) or any
court; [See illustration-1 & 2 below].
(ii) involves determination of FMV of any property;
(iii) relates to a transaction or issue which is designed prima facie for the avoidance of income-tax
(except in the case of an applicant being a PSC).
Proviso-2 to S. No application shall be rejected U/s 245R (2) unless an opportunity has been given to the applicant of
245R (2) being heard.
Proviso-3 to S. Where the application is rejected, reasons for such rejection shall be given in the order.
245R (2)
S. 245R (3) A copy of every order made U/s 245R (2) shall be sent to the applicant and to the CIT.
S.245R (4) Where an application is allowed U/s 245R (2), the AAR shall, after examining such further material as may
be placed before it by the applicant or obtained by the AAR, pronounce its advance ruling on the question
specified in the application.
S. 245R (5) On a request received from the applicant, the AAR shall, before pronouncing its advance ruling, provide
an opportunity to the applicant of being heard, either in person or through a duly authorised
representative.
S. 245R (6) The Authority shall pronounce its advance ruling in writing within 6 months of the receipt of application.
S. 245R (7) A copy of the advance ruling pronounced by the AAR, duly signed by the Members and certified in the
prescribed manner shall be sent to the applicant and to the CIT, as soon as may be, after such
pronouncement.

Issues in Clause (i) of Proviso-1 to S. 245R (2):

1 Where ROI was filed for the relevant AY and the case is yet to be taken for scrutiny, still a valid application can be made
to AAR. [Sin Oceanic shipping ASA Norway (2014) (SC)].
2 Mere issue of notice U/s 143 (2) in a pre-printed format for an AY will not take away the right of the assessee to
approach AAR, where the Department has not commenced the real inquiry.
3 Where the NR-payee has challenged the taxability of a sum in appellate form in respect of earlier years, it can’t prevent
the resident-payer from approaching the AAR with a query on TDS obligation in respect of such sum in the relevant PY.

(1) Modification of If there is any change in law or facts on the basis of which the ruling was pronounced and the AO
the ruling. is yet to give effect to the ruling pronounced, then AAR, either suomoto or on representation from
the applicant or the CIT, modify the ruling after giving OBH to the CIT and applicant.
(2) Rectification Ruling was pronounced by the AAR. There are some mistakes apparent from record. The AO is
of mistakes yet to give effect to the ruling pronounced. The AAR may, either suomoto or on representation
apparent from from the AO or the applicant, rectify such mistakes after giving OBH to the CIT and applicant.
record.
(3) Ruling final. The ruling of AAR is final. It can’t be challenged in appeal.
However, the AAR is a tribunal for the purpose of article 136 and article 227 of the Constitution.
Hence, the ruling of AAR could be challenged before the HC through a writ petition. [Columbia
sportswear co (SC) (2012)].
7. Binding nature of the advance ruling: [S. 245S]

S. 245-S (1) The advance ruling pronounced by the AAR U/s 245R shall be binding only—
(a) on the applicant who had sought it;
(b) in respect of the transaction in relation to which the ruling had been sought; and
(c) on the CIT, and the ITA subordinate to him, in respect of the applicant and the said transaction.
Where the AAR has given its ruling and the case is pending in assessment or appeal, then, the AO or the CIT
(A), as the case may be, shall have to apply the decision of the AAR in the assessment or appeal as it is
binding on them.
S. 245-S (2) The advance ruling referred to in S. 245-S (1) shall be binding as aforesaid unless there is a change in law or
facts on the basis of which the advance ruling has been pronounced.
Note:
1 Though the ruling of the AAR is not binding on others but there is no bar on the ITAT taking a view or forming an opinion
in consonance with the reasoning of the AAR for Advance Rulings de hors the binding nature [P. Sekar Trust (2010)
321 ITR 305 (Mad)].
2 Based on retrospective amendments or later decisions of the JHC or the SC, it is not possible for the Department to
take action U/s 154, or S. 147 or S. 263 to modify the assessment made in conformity with the ruling of AAR. The orders
passed pursuant to the ruling of AAR become final and can’t be questioned under any proceedings under this Act. The
very purpose of Chapter-XIX-B is to bring certainty in tax regime, thereby preventing disputes. [Prudential Assurance
Co. Ltd [2010] 191 Taxman 62 (Bom)]. However, such ruling will not be binding in the future.
8. Under what circumstances the advance ruling becomes void? [S. 245T]:
S. 245-T (1) Where the AAR finds, on a representation made to it by the CIT or otherwise, that an advance ruling
pronounced by it U/s 245R (6) has been obtained by the applicant by fraud or misrepresentation of facts, it
may, by order, declare such ruling to be void ab initio.
Thereupon, all the provisions of this Act shall apply (after excluding the period beginning with the date of
such advance ruling and ending with the date of order U/s 245-T (1)) to the applicant as if such advance
ruling had never been made.
S. 245-T (2) A copy of the order made U/s 245T (1) shall be sent to the applicant and the CIT.
9. Extension of time limit for completion of assessment – Explanation-1 to S. 153:

SN Situation Period of exclusion from the time limit
1 Application rejected by Date on which application is made U/s 245Q to the date on which the order rejecting the
the AAR application is received by the CIT U/s 245R – to be excluded.
2 AAR pronounced ruling Date on which application is made U/s 245Q to the date on which the ruling pronounced
upon receipt of by AAR is received by the CIT U/s 245R – to be excluded.
application

Chapter-37: Appeals (Chapter-XX) - Summary
1. Appeal to CIT (A):

1 Orders which are Assessment Orders U/s 143 (3), S. 144, S. 147, S. 153A and S. 153C (other than
appealable before orders orders passed pursuant to the directions given by the DRP).
the CIT (A) Intimation S. 143 (1) – S. 220A – S. 206CB intimations
Amendment Orders passed U/s 154 and S. 155.
orders
Penalty orders Passed by the IT authorities < CIT
Miscellaneous Orders passed U/s 170 (2), S. 170 (3), S. 171, S. 115VP (3) (ii), S.
orders 163, S. 201 and S. 206C (6A).
2 Appeal by a Where under an agreement or other arrangement, the tax deductible on any income U/s 195 is
person denying to be borne by the person by whom the income is payable, and such person having paid such
liability to deduct tax to the credit of the CG, claims that no tax was required to be deducted on such income, he
tax in certain may appeal to the CIT (A) for a declaration that no tax was deductible on such income. [S.
cases. 248].
3 Form of appeal Appeal to CIT (A) shall be in Form-35 and shall be verified in the prescribed manner. It shall be
application. accompanied by the prescribed fee. [S. 249 (1)].
4 Time-limit for filing Appeal relating to 30 days to be reckoned from
appeal. [S. 249 1 A case covered by S. 248 Date of payment of tax
(2)]. 2 Assessment/penalty Date of service of NOD
3 Any other case Date on which intimation of the order
sought to be appealed against is served.
5 Period to be While computing the aforesaid 30 days, the date of service of NOD/order appealed against
excluded in shall be excluded.
computing 30 days Time taken for getting a copy of order (if it is not accompanying the NOD) shall also be
(supra). excluded. [S. 268].
6 Power of CIT (A) to The CIT (A) can condone the delay for good and sufficient reasons. [S. 249 (3)].
condone the delay.
7 Payment of tax – is Appeal against the order of assessment could be entertained only if the assessee has paid the
pre-requisite for tax due on RI fully.
admission of However, if the appeal is made against order passed U/s 144, then the entire tax on assessed
appeal. [S. 249 income should have been paid for entertaining appeal. But in this case, for good and sufficient
(4)]. reasons, the CIT (A) can dispense with the requirement of payment of tax for admitting appeal.
8 Raising additional The CIT (A) may, at the hearing of an appeal, allow the appellant to go into any ground of
grounds during the appeal not specified in the grounds of appeal, if the CIT (A) is satisfied that the omission of that
pendency of ground from the form of appeal was not willful or unreasonable. [S. 250 (5)].
proceedings.
9 Powers to conduct Appellate order is passed U/s 250. If the CIT (A) deems that it is necessary to conduct further
further inquiry inquiry before he passes his appellate order, he can do it or cause to do it. [S. 250 (4)].
10 Powers of CIT (A). In disposing of an appeal, the CIT (A) shall have the following powers—
[S. 251 (1)]. (a) in an appeal against an order he may confirm, reduce, enhance or annul the
of assessment assessment.
(b) in an appeal against an order he may confirm or cancel such order or vary it so as
imposing a penalty either to enhance or to reduce the penalty;
(c) in any other case he may pass such orders in the appeal as he thinks
fit.
However, the CIT (A) has no power to set aside assessment and direct fresh assessment.
11 OBH before The CIT (A) shall not enhance an assessment or a penalty or reduce the amount of refund
unfavourable unless the appellant has had a reasonable opportunity of showing cause against such
order. enhancement or reduction. [S. 251 (2)].
12 Power to consider In disposing of an appeal, the CIT (A) may consider and decide any matter arising out of the
and decide matters proceedings in which the order appealed against was passed, notwithstanding that such matter
not raised in was not raised before the CIT (A) by the appellant. [Explanation to S. 251].
appeal.
13 Scope of power of Powers of CIT (A) are co-terminus with that of the AO. He can do what AO can do. He can do
CIT (A). what the AO has failed to do. [Kanpur coal syndicate (SC)].
The CIT (A) can entertain even fresh claims which were not made in the return and which were
not raised in the course of assessment proceedings. [Jute corporation of India (SC) +
Pruthvi brokers and shareholders (Bom)].
14 Procedure for admitting additional evidence. [R. 46A].

(a) Circumstances in The appellant shall not be entitled to produce before the CIT (A), any evidence, whether oral or
which additional documentary, other than the evidence produced by him during the course of proceedings
evidence admitted before the AO, except in the following circumstances, namely :—
[R. 46A (1)]. (a) where the AO has refused to admit evidence which ought to have been admitted ; or
where the appellant was prevented by sufficient cause from producing the evidence
(b)
which he was called upon to produce by the AO or
where the appellant was prevented by sufficient cause from producing before the AO
(c)
any evidence which is relevant to any ground of appeal ; or
where the AO has made the order appealed against without giving sufficient
(d)
opportunity to the appellant to adduce evidence relevant to any ground of appeal.
(b) Reasons to be No evidence shall be admitted U/R 46A (1) unless the CIT (A) records in writing the reasons for
recorded in writing its admission. [R. 46A (2)].
before admission.
(c) Opportunity to the The CIT (A) shall not take into account any evidence produced U/R 46A (1) unless the AO has
AO to examine and been allowed a reasonable opportunity—
rebut. [R. 46A (3)]. (a) to examine the evidence or document or to cross-examine the witness produced by
the appellant, or
(b) to produce any evidence or document or any witness in rebuttal of the additional
evidence produced by the appellant.
(d) When the Nothing contained in this rule shall affect the power of the CIT (A) to direct the production of
restrictions (supra) any document, or the examination of any witness, to enable him to dispose of the appeal, or for
shall not apply? [R. any other substantial cause including the enhancement of the assessment or penalty (whether
46A (4)]. on his own motion or on the request of the AO) U/s 251 (1) (a) or the imposition of penalty U/s
270A.

The CIT (A) has the power to change the status of the assessee. His powers are co-terminus with that of the AO. [Mega
Trends Inc (2016) 388 ITR 16 (Mad)].
2. Appeals to ITAT:
A. Orders which are appealable before the ITAT by the aggrieved assessee – S. 253 (1):
Order passed Section Particulars
by
AO 115VZC(1) Power of AO to exclude a tonnage tax company from the tonnage tax scheme
if such company is a party to any transaction or arrangement which amounts
to an abuse of such scheme.
143(3)/147/153A/15 An order of assessment passed by an AO in pursuance of the directions of
3C DRP or an order passed U/s 154 in respect of such order.
143(3)/147/153A/15 An order of assessment passed by an AO with the approval of PCIT or CIT as
3C referred to in S. 144BA (12), where tax consequences have been determined
under the provisions of Chapter X-A relating to GAAR, or an order passed U/s
154 or S. 155 in respect of such order.
CIT (A) 250 Order of the CIT (A) disposing of the appeal
270A Order levying penalty for under-reporting and mis-reporting of income.
271A Order imposing penalty for failure to keep, maintain or retain books of
account, documents etc.
PCIT/CIT 12AA Order refusing/canceling registration of trust or institution
80G(5)(vi) Refusal to grant approval to the Institutions or Fund
263 Revision of erroneous order passed by AO
270A Order imposing penalty for under-reporting of income and mis-reporting of
income.
272A Order imposing penalty for failure to answer questions, sign statements,
furnish information returns or statements, allow inspections etc.

154 Amending the order passed under section 263

PCCIT or CCIT 272A Order imposing penalty for failure to answer questions, sign statements,
or PDGIT or furnish information returns or statements, allow inspections etc.
DGIT or PDIT
or DIT
CIT 10(23C)(iv)/(v)/(vi)/( Order passed by the prescribed authority refusing approval of a fund/
(Exemption) via) institution for charitable purposes or trust or institution for public
religious purposes or wholly for public religious and charitable
purposes, university or other educational institution solely for
educational purposes and not for purposes of profit or hospital or other
institution solely for philanthropic purposes and not for purposes of
profit U/s 10(23C)(iv)/(v)/(vi)/(via).
Amendment brought out by the Finance Act 2018:
1 S. 271J empowers the AO or the CIT (A) to impose penalty on an accountant, a merchant banker or a registered
valuer, if it finds that such person has furnished incorrect information in a report or certificate. The quantum of penalty
is Rs. 10,000 for each such report or certificate.
2 An appeal can be preferred to CIT (A) against penalty order passed by AO U/s 271J as per S. 246A (1) (q) providing
for an appeal against "an order imposing a penalty under Chapter XXI" and S. 271J forms part of the said Chapter.
3 S. 253 (1) (a) of the Act provides for an appeal against the order passed by CIT (A) under certain specified provisions.
That does not include penalty order passed by him under S. 271J.
4 Finance Act, 2018 has amended clause (a) of the S. 253 (1), w.e.f April 1, 2018 to provide that the person aggrieved by
an order passed by the CIT (A) U/s 271J, may file appeal to the ITAT against such order. In view of the amendment,
now it is possible to file an appeal to the ITAT against the order passed by the CIT (A) U/s 271J.
5 It appears that if any order is passed by the CIT (A) on or after April 1, 2018, an appeal against such order can be
preferred.
B. Orders which are appealable to ITAT at the instance of the Department – S. 253 (2):
The PCIT or CIT may, if he objects to any order passed by the CIT (A) U/s 154 or S. 250, direct the AO to appeal to the
ITAT against such order.
C. Time limit for filing appeal or memorandum of cross objection (MOCO) U/s 253 (1) & (2): [S. 253(3) & (4)]:
(i) Every appeal to the ITAT has to be filed within 60 days from the date on which the order sought to be appealed
against is communicated to the assessee or the CIT, as the case may be. [S. 253 (3)].
(ii) Further, on receipt of notice that appeal against order of CIT (A) has been preferred by the AO or the assessee, as the
case may be, the other party can file MOCO within 30 days of receipt of notice against any part of the order of CIT (A).
ITAT has to dispose of the MOCO as if it were an appeal filed within the given time limit. [S. 253 (4)].
(iii) However, the ITAT may admit an appeal or permit the filing of a MOCO even after expiry of the prescribed time limit, if
he is satisfied that there was sufficient cause for not presenting it within that period. [S. 253 (5)].
Note:
1 No fee is payable by the Department for filing appeal.
2 No fees is payable on filing of MOCO. [S. 235 (6)].
D. Orders of ITAT – S. 254:

S. 254 (1) The ITAT may, after giving both the parties to the appeal an opportunity of being heard, pass such orders
thereon as it thinks fit.
S. 254 (2) ITAT can amend its order, with a view to rectifying mistakes apparent from record, within 6 months from the
end of the month in which the order was passed.
The amendment could be made suomoto or at the instance of the AO or the assessee.
If the amendment has the effect of increasing the assessment or reducing the refund or otherwise increasing
the liability of the assessee, the ITAT shall give OBH.
Application made by the assessee for rectification shall be accompanied a fee of Rs. 50.
Issues relating to the powers of ITAT:

1 If, as a result of a judicial decision given while the appeal is pending before the ITAT, it is found that a non-taxable item
is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising
that question before the ITAT for the first time, so long as the relevant facts are on record in respect of the item.

There is no reason to restrict the power of the ITAT U/s 254 only to decide the grounds which arise from the order of the
CIT (A). The view that the ITAT is confined only to issues arising out of the appeal before the CIT (A) is too narrow a
view to take of the powers of the ITAT. The ITAT should not be prevented from considering questions of law arising in
assessment proceedings, although not raised earlier. Undoubtedly, the ITAT has the discretion to allow or not to allow a
new ground to be raised. [National Thermal Power Co. Ltd 229 ITR 383 (SC)].
2 However, the ITAT has no power to enhance assessment. [Hukum Chand Mills Ltd 63 ITR 232 (SC) + Mcorp Global
(P) Ltd 309 ITR 434 (SC)].
3 ITAT has no power to review its own order. [Earnest Exports Ltd. (2010) 323 ITR 577 (Bom)].
4 However, the ITAT can exercise its power of rectification U/s 254 (2) to recall its order in entirety, where there is a
mistake apparent from record. [Lachman Dass Bhatia Hingwala (P) Ltd (2011) 330 ITR 243 (Delhi) (FB)].
E. Stay of demand by the ITAT:

1 An application for stay of demand could be made to ITAT and it shall be accompanied by a fee of Rs. 500. [S. 253 (7)].
2 The ITAT may, after considering the merits of the application made by the assessee, pass an order of stay in any
proceedings relating to an appeal filed U/s 253 (1), for a period not exceeding 180 days from the date of such order and the
ITAT shall dispose of the appeal within the said period of stay specified in that order. [Proviso-1 to S. 254 (2A)].
3 Where such appeal is not so disposed of within the said period of stay as specified in the order of stay, the ITAT may, on
an application made in this behalf by the assessee and on being satisfied that the delay in disposing of the appeal is not
attributable to the assessee, extend the period of stay, or pass an order of stay for a further period or periods as it thinks fit;
so, however, that the aggregate of the period originally allowed and the period (s) so extended or allowed shall not, in any
case, exceed 365 days and the ITAT shall dispose of the appeal within the period (s) of stay so extended or allowed.
[Proviso-2 to S. 254 (2A)].
4 If such appeal is not so disposed of within the period allowed under proviso-1 or the period(s) extended or allowed under
proviso-2, which shall not, in any case, exceed 365 days, the order of stay shall stand vacated after the expiry of such
period(s), even if the delay in disposing of the appeal is not attributable to the assessee. [Proviso-3 to S. 254 (2A)].
However, the Court may direct the ITAT to extend stay of demand and speedy disposal of appeal. [Jethmal Faujimal Soni
333 ITR 96 (Bom)].
3. Appeals to HC – S. 260A & S. 260B:

1 Appeal to HC against An appeal shall lie to the HC from every order passed in appeal by the ITAT, if the HC is
the order of ITAT. satisfied that the case involves a substantial QOL. [S. 260A (1)].
2 Meaning of substantial “Substantial QOL” has not been defined anywhere in the Act. However, it has acquired a
QOL. definite meaning through various judicial pronouncements. The tests are:
(i) whether directly or indirectly it affects substantial rights of the parties; or
(ii) the question is of general public importance; or
(iii) whether it is an open question in the sense that issue is not settled by the
pronouncement of the SC; or
(iv) the issue is not free from difficulty; or
(v) it calls for a discussion for alternative view.
3 Time limit for filing The CCIT/CIT or an assessee aggrieved by any order passed by the ITAT may file an
appeal to HC. [S. 260A appeal to the HC and such appeal shall be filed within 120 days from the date on which the
(2)]. order appealed against is received by the assessee or the CCIT or CIT in the form of a
memorandum of appeal precisely stating therein the substantial QOL involved.
4 Power to condone The HC may admit an appeal after the expiry of the period of aforesaid 120 days, if it is
delay. [S. 260A (2A)]. satisfied that there was sufficient cause for not filing the same within that period.
5 Formulation of QOL by Where the HC is satisfied that a substantial QOL is involved in any case, it shall formulate
HC. that question. [S. 260A (3)].
6 Hearing on such QOL. The appeal shall be heard only on the question so formulated, and the respondents shall,
[S. 260A (4)]. at the hearing of the appeal, be allowed to argue that the case does not involve such
question.
7 Power to hear any Nothing in S. 260A (4) shall be deemed to take away or abridge the power of the court to
other QOL. [Proviso to hear, for reasons to be recorded, the appeal on any other substantial QOL not formulated
S. 260A (4)]. by it, if it is satisfied that the case involves such question.
8 Order by HC. [S. 260A The HC shall decide the QOL so formulated and deliver such judgment thereon containing
(5)]. the grounds on which such decision is founded and may award such cost as it deems fit.
9 Scope of determination The HC may determine any issue which has not been determined by the ITAT; or has been
by HC. [S. 260A (6)]. wrongly determined by the ITAT, by reason of a decision on such QOL as is referred to in
S. 260A (1).

10 Applicability of Code of Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure,
Civil Procedure. relating to appeals to the HC shall, as far as may be, apply in the case of appeals under
this section. [S. 260A (7)].

Delay in filing appeal U/s 260A cannot be condoned where the stated reason for delay is the pursuance of an alternate
remedy by way of filing an application before the ITAT U/s 254 (2) for rectification of mistake apparent on record.
[Spinacom India (P.) Ltd [2018] 258 Taxman 128 (SC)].
Issues in appeal to HC:

1 S. 260A (7) provides for the application of CPC in relation to the appeals to the HC. In view of this provision, the HC is
conferred the power to stay a proceeding for recovery of demand arising out of the assessment order pending disposal
of the appeal U/s 260A. [SBI Home Finance Ltd (Cal)].
2 The HC, being a superior court, has an inherent power under the Income-tax Act, 1961 to review an earlier order
passed on merits. [Meghalaya Steels Ltd (2015) 377 ITR 112 (SC)].
3 The HC cannot exercise its inherent power to recall its order by exercising jurisdiction U/s 260A (7) read with the
relevant Rule of the Code of Civil Procedure, 1908 if that order is not an ex-parte order. [Subrata Roy (2016) 385 ITR
570 (SC)].
4. Appeal to SC – S. 261:
1 According to S. 261, an appeal shall lie to the SC from any judgment of the HC, in a case which the HC certifies to be a
fit one for appeal to the SC.
2 The provisions of the Code of Civil Procedure, 1908 in regard to appeal shall apply in the case of all appeals to the SC
in the same manner as in the case of all appeals from decrees of a HC.
3 The cost of appeal shall be decided at the discretion of the SC.
4 Where the judgment of a HC is varied in the appeal, effect should be given to the order of the SC in the same manner
as provided in the case of a judgment of the HC.
5. Revision of monetary limits for filing of appeals by the Department before ITAT and HCs and SLP before SC:
[Circular no. 21/2015, DATED 10-12-2015 (as modified by CBDT Circular 3/2018)]:
The CBDT has, through this circular, revised the monetary limits for filing of appeals by the Department with the
objective of reducing litigation as a part of its initiatives to reduce grievances of the tax payers. Accordingly, henceforth,
appeals/ SLPs shall not be filed in cases where the tax effect does not exceed the monetary limits given hereunder –
SN Appeals in income-tax matters Monetary limit (Rs.)
1 Before ITAT 20L
2 Before HC 50L
3 Before SC 100L
It is also clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits
prescribed above. Filing of appeal in such cases is to be decided on merits of the case.
Meaning of Tax Effect:
Case Tax effect
(i) In cases not covered in The tax on the total income assessed ( - ) The tax that would have been chargeable
(ii), (iii) and (iv) below had such total income been reduced by the amount of income in respect of the
issues against which appeal is intended to be filed ("disputed issues").
Note - However, the tax will not include any interest thereon, except where
chargeability of interest itself is in dispute.
(ii) In case the chargeability of interest is The amount of interest
the issue under dispute
(iii) In cases where returned loss is The tax effect would include notional tax on disputed additions
reduced or assessed as income
iv) In case of penalty orders Quantum of penalty deleted or reduced in the order to be appealed against

Manner of calculation of tax effect of different assessment years:

(i) The AO has to calculate the tax effect separately for every AY in respect of the disputed issues in the case of every
assessee.
(ii) If, in the case of an assessee, the disputed issues arise in more than one AY, appeal can be filed in respect of such
AY (s) in which the tax effect in respect of the disputed issues exceeds the specified monetary limit. No appeal shall
be filed in respect of an AY (s) in which the tax effect is less than the monetary limit specified. In other words,
henceforth, appeals can be filed only with reference to tax effect in the relevant AY.
(iii) However, in case of a composite order of any HC or appellate authority, which involves more than one AY and
common issues in more than one AY, appeal shall be filed in respect of all such AYs even if the 'tax effect' is less than
the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax
effect’ exceeds the monetary limit· prescribed. In case where a composite order/judgement involves more than one
assessee, each assessee shall be dealt with separately.
Department not precluded from filing an appeal against disputed issues for subsequent AYs if the tax effect
exceeds the specified monetary limits in those years
1 In a case where appeal before a ITAT or a Court is not filed only on account of the tax effect being less than the
monetary limit specified above, the CIT shall specifically record that "even though the decision is not acceptable, appeal
is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction".
2 Further, in such cases, there will be no presumption that the Department has acquiesced in the decision on the disputed
issues.
The Department shall not be precluded from filing an appeal against the disputed issues in the case of the same
assessee for any other AY, or in the case of any other assessee for the same or any other AY, if the tax effect > the
specified monetary limits.
Circumstances when appeal can be filed even if tax effect is less than the specified monetary limit
Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect
entailed is less than the specified monetary limits or there is no tax effect:
(i) Where the Constitutional validity of the provisions of an Act or Rule are under challenge, or
(ii) Where Board's order, Notification, Instruction or Circular has been held to be illegal
(iii) Where Revenue Audit objection in the case has been accepted by the Department, or
(iv) Where the addition relates to undisclosed foreign assets/bank accounts.
(v) Where addition is based on information received from external sources in the nature of law enforcement
agencies such as CBI/ED/DRI/SFIO/Directorate General of GST Intelligence (DGGI).
(vi) Cases where prosecution has been filed by the Department and is pending in the Court.
Specified monetary limit not to apply to writ matters and direct tax matters other than income-tax
Filing of appeals in other direct tax matters shall continue to be governed by the relevant provisions of statute and rules.
Further, filing of appeal in cases of income-tax, where the tax effect is not quantifiable or not involved, such as the case of
registration of trusts or institutions U/s 12A, shall not be governed by the specified monetary limits and decision to file appeal
in such cases may be taken on merits of a particular case.
Clarification on applicability of Circular No 21/2015, dated 10-12-2105 [Letter F. No. 279/Misc./M-142/2007 - ITJ (Part),
dated 08-03-2016] to memorandum of cross objections before ITAT.
The monetary limits for filing appeals before the ITATs and HCs were raised to Rs. 20L and Rs. 50L, respectively, by
Circular 3/2018. The CBDT has clarified that the monetary limit of Rs. 20L for filing appeals before the ITAT would apply
equally to cross objections U/s 253 (4).
Monetary limits for filing appeal – Monetary limits at the time of filing of appeal relevant – subsequent revision in
limits not to be considered:
1 The circular laying down monetary limit controls the filing of the appeals and not their hearing.
2 Appeals filed as per applicable limit at the time of filing cannot be governed by the circular applicable at the time of
hearing.
3 The object of circular U/s 268A is only to govern the monetary limit for filing of appeals. There is no scope for reading
circular as being applicable to pending appeals. Even the Bombay HC in Madhukar K. Inamdar (HUF) 318 ITR 149
held that circular was not retrospective. [Varinder constructions co 331 ITR 449 (P&H) [FB]].
6. Avoidance of repetitive appeals – S. 158A:

S. 158A (1) Where an assessee claims that any QOL arising in his case for an AY which is pending before the AO or CIT(A)
or ITAT (relevant case) is identical with a QOL arising in his case for another AY which is pending in appeal U/s
before the SC (the other case), he may furnish to the AO or the CIT (A) or ITAT, a declaration in Form-8 and

verified in the prescribed manner, that if the AO or the CIT (A) or ITAT, agrees to apply in the relevant case the
final decision on the QOL in the other case, he shall not raise such QOL in the relevant case in appeal before
any CIT (A) or ITAT or in appeal before the HC U/s 260A or in appeal before the SC U/s 261.
S. 158A(2) Where a declaration U/s 158A (1) is furnished to CIT (A) or ITAT, the CIT (A) or ITAT shall call for a report from
the AO on the correctness of the claim made by the assessee and, where the AO makes a request to the CIT
(A) or ITAT to give him an OBH in the matter, the CIT (A) or ITAT shall allow him such opportunity.
S. 158A (3) The AO or the CIT (A) or ITAT may, by order in writing,—
(i) admit the claim of the assessee if he or it is satisfied that the question of law arising in the relevant
case is identical with the question of law in the other case;
(ii) reject the claim if he or it is not so satisfied.
S. 158A (4) Where a claim is admitted U/s 158A (3),—
(a) the AO or the CIT (A) or ITAT may make an order disposing of the relevant case without awaiting the
final decision on the question of law in the other case; and
(b) the assessee shall not be entitled to raise, in relation to the relevant case, such question of law in
appeal before CIT (A) or ITAT or in appeal before the HC U/s 260A or the SC U/s 261.
S. 158A (5) When the decision on the question of law in the other case becomes final, it shall be applied to the relevant
case and the AO or the CIT (A) or ITAT shall, if necessary, amend the order referred to in S. 158A (4) (a)
conformably to such decision.
S. 158A (6) An order U/s 158A (3) shall be final and shall not be called in question in any proceeding by way of appeal or
revision under this Act.
7. Procedure for appeal by the Revenue when an identical QOL is pending before SC: [S. 158AA]:
1 S. 158AA provides that notwithstanding anything contained in the Act, where any QOL arising in the case of an
assessee for any AY is identical with a question of law arising in his case for another AY which is pending before the
SC, in an appeal or in a special leave petition under Article 136 of the Constitution filed by the revenue, against the
order of the HC in favour of the assessee, the CIT or PCIT may, instead of directing the AO to appeal to the ITAT U/s
253 (2) or S. 253 (2A), direct the AO to make an application to the ITAT in the prescribed form within 60 days from the
date of receipt of order of the CIT (A) stating that an appeal on the QOL arising in the relevant case may be filed when
the decision on the QOL becomes final in the earlier case.
2 The CIT or PCIT shall direct the AO to make an application U/s 158AA (1), only if an acceptance is received from the
assessee to the effect that the question of law in the other case is identical to that arising in the relevant case. However,
in case no such acceptance is received, the CIT or PCIT shall proceed in accordance with the provisions contained in S.
253 (2) or S. 253 (2A). Accordingly, the CIT or PCIT may, if he objects to the order passed by the CIT (A), direct
the AO to appeal to the ITAT.
3 Where the order of the CIT (A) is not in conformity with the final decision on the question of law in the other case (if the
SC decides the earlier case in favour of the Department), the CIT or PCIT may direct the AO to appeal to the ITAT
against such order within 60 days from the date on which the order of the SC is communicated to the CIT or PCIT.
4 Unless otherwise provided in S. 158AA, all other provisions of Part B of Chapter XX “Appeals to ITAT” shall apply
accordingly.

Chapter-38: Profit linked deductions & Investment linked deductions - Summary
1. Introduction:
1 Classification of These deductions are classified into (a) profit linked deductions; and (b) investment linked
deductions deductions.
2 Sections providing S. 80-IA, S. 80-IAB, S. 80-IAC, S. 80-IB, S. 80-IBA, S. 80-IC, S. 80-IE, S. 80JJA, S. 80LA, S.
profit-linked deductions 80P, S. 80PA, S. 80QQB, S.80RRB (Chapter VI-A part-C) and S. 10AA (Chapter-III).
Deductions under Chapter VI-A part-C are allowed against GTI.
For the purpose of calculation of deductions under Chapter VI-A Part-C, the net income
computed in accordance with the provisions of the Act (before making any deduction under
Chapter VI-A) shall alone be regarded as income received by the assessee and which is
included in his GTI. [S. 80AB]
Accordingly, the deductions specified in the aforesaid sections will be calculated with
reference to the net income as computed in accordance with the provisions of the Act (before
making deduction under Chapter VI-A) and not with reference to the gross amount of such
income.
Deduction U/s 10AA shall be allowed against total income (before deduction U/s 10AA) and
shall be restricted to the total income.
3 Investment linked S. 35AD (Chapter-IVD).
deduction Deduction U/s 35AD shall be allowed in computing income U/H PGBP.
4 No deduction under Where in computing the TI of an assessee of the PY relevant to any AY, any deduction is
certain sections unless admissible U/s 80-IA, S. 80-IAB, S. 80-IAC, S. 80-IB, S. 80-IBA, S. 80-IC, S. 80-IE, S. 80JJA,
return is furnished in S. 80JJAA, S. 80LA, S. 80P, S. 80PA, S. 80QQB and S.80RRB, no such deduction shall be
time. [S. 80AC] allowed to him unless he furnishes a ROI for such AY on or before the DD specified in S. 139
(1).
5 No profit-linked Where the assessee fails to make a claim in his ROI for any deduction U/s 10AA or under
deductions if no claim Chapter VI-A Part-C, no deduction shall be allowed to him.
is made in the return. Assessee cannot claim these deductions before the AO or CIT (A) or ITAT or Courts. Such
[S. 80A (5)]. deduction cannot be claimed in appeal/revision/rectification. It could be claimed only through
a valid revised return.
However, deductions U/s 80C to S. 80GGC, S. 80TTA and S. 80U, if not claimed in the
return, could be claimed in appeal/revision/rectification. This is so because these sections do
not come within Part-C of Chapter-VIA.
6 No over-lapping profit- Where, in the case of an assessee, any amount of profits and gains of an undertaking or unit
linked deduction. [S. or enterprise or eligible business is claimed and allowed as a deduction U/s 10AA or under
80A (4)]. Chapter VI-A Part-C for any AY, deduction in respect of, and to the extent of, such profits and
gains shall not be allowed under any other provisions of this Act for such AY and shall in no
case exceed the profits and gains of such undertaking or unit or enterprise or eligible
business, as the case may be.
7 Deduction under Where a deduction under Chapter VI-A Part-C is claimed and allowed in respect of profits of
Chapter VI-A Part-C any specified business referred to in S. 35AD for any AY, no deduction shall be allowed U/s
and S. 35AD mutually 35AD in relation to such specified business for the same or any other AY.
exclusive. [S. 80A (7)]. Where a deduction U/s 35AD is claimed and allowed in respect of the specified business for
any AY, no deduction shall be allowed U/s 10AA or under Chapter VI-A Part-C in relation to
such specified business for the same or any other AY. [S. 35AD (3)].
Where a deduction U/s 10AA is claimed and allowed in respect of profits of any specified
business referred to in S. 35AD, for any AY, no deduction shall be allowed U/s 35AD in
relation to such specified business for the same or any other AY. [S. 10AA (10)].
2. Chapter-VIA Part C – at a glance:

Eligible Business Year of Period of Quantum of Deduction
Commencement of Deduction
eligible business
S. 80-IA (1) (i) Developing or (ii) On or after 1st April 1995 Infrastructure Telecommunication
Operating and maintaining but not later than 1st Facility of road, or services:
or April 2017 a bridge or a rail 100% for first 5 AYs and
(iii) Developing, operating and system or a 30% for further 5 AYs.
maintaining any Infrastructure highway project or
facility a water supply Other eligible businesses:
(2) Telecom undertakings On or after 1st April 1995 project: 10 100 % of the profits and
but on or before 31st consecutive AYs gains derived from such

March 2005 out of 20 years business.

beginning from the
(3) Industrial parks / SEZ Industrial parks: year in which the
Notified by the CG for the enterprise develops
period on or after 1st April or begins to operate
1997 and ending on 31st the eligible
March 2011. business.
SEZs: Notified by the CG
for the period on or after 1st Other eligible
April 1997 and ending on businesses: 10
31st March 2005 consecutive AYs
(4) Power undertakings Generation or Generation out of 15 years
and distribution: Set up beginning from the
between 1st April 1993 year in which the
and 31st March 2017. enterprise develops
Transmission or or begins to operate
distribution: Start the eligible
transmission during the business.
period from 01.04.99 and
31.03.2017.
Renovation and
modernisation of existing
network: Undertakes
substantial renovation
and modernisation during
the period on or after
01.04.2004 and ending
on 31.03.2017.
(5) Undertaking owned by an Company formed on or

Indian Company set up for before 30.11.2005 and
Reconstruction or revival of begins to generate or
a power generating plant transmit or distribute
power before
31.03.2011.
S. 80- Development of SEZs Develops SEZ, notified 10 consecutive AYs 100 % of the profits and
IAB on or after 1st April 2005 out of 15 years gains derived from such
but before 1st April 2017. beginning from the business.
year in SEZ has
been notified.
S. 80- A business carried out by an The company or LLP is 3 consecutive AYs 100 % of the profits and
IAC eligible start-up engaged in incorporated during the out of 7 years gains derived from such
innovation, development or period 1.4.2016 - beginning from the business.
improvement of products, 31.3.2021 year in which
processes or services or a scalable company/LLP
business model with a high incorporated.
potential of employment
generation or wealth creation;
S.80-IB (1) An industrial undertaking Begins to manufacture of Not exceeding 10 100% of the profits & gains
including a small scale any article or thing or consecutive AYs derived from such IU for the
industrial undertaking (SSI) operate cold storage (12 AYs in case of initial 5 years and thereafter
in Jammu and Kashmir plant during the period 1- co-operative 25% (30% in case of
4-1993 and 31-3-2012. society) company) of such profits &
gains
(2) Commercial production or Commercial production of 7 consecutive AYs 100% of the profits and
refining of mineral oil or mineral oil: On or after including the initial gains from such business
commercial production of 01.04.1997 but not later AY
natural gas in licensed than 31.3.2017
blocks Refining of mineral oil: On
or after 1-10-1998 but not

later than 31.3.2012.

Commercial production of
natural gas: On or after
01.04.2009 but not later
than 31.3.2017
(3) Processing, preservation Processing, preservation 10 consecutive AYs 100% of the profits and
and packaging of fruits or and packaging of meat or beginning with the gains derived from such
vegetables or meat and meat products or poultry initial AY business for 5 AYs
meat products or poultry or or marine or dairy beginning with the initial AY
marine or dairy products or products: On or after 25% (30% in case of
from the integrated 1.4.2009 company) for remaining 5
business of handling, Other eligible years
storage and transportation businesses: On or after
of food grains 1.4.2001
(4) Operating and maintaining Start functioning during 5 consecutive AYs 100% of the profits and
a hospital anywhere in the period 1.4.08 to beginning with the gains derived from business
India, other than the 31.3.2013 initial AY of operating and
excluded area maintaining a hospital
S. 80- Developing and building Project is approved after 100% of the profits and
IBA housing projects 1st July 2016 but on or gains derived from such
before 31st March 2019 housing project.
S. 80- New undertakings or Manufacture or produce 10 AYs 100% for the first 5 AYs and
IC existing undertakings on article or thing from commencing with 25% (30% in the case of a
their substantial expansion 7.1.03 and ending before the initial AY. company) for the next 5
in HP and Uttaranchal. 1.4.2012 AYs.
80-IE Undertaking begun or Between 1st April, 2007 10 consecutive AYs 100% of the profits and
begins, in any of the North- and ending before 1st commencing with gains derived from such
Eastern States (i.e., the April, 2017 the initial AY business
States of Arunachal
Pradesh, Assam, Manipur,
Meghalaya, Mizoram,
Nagaland, Sikkim and
Tripura) -
(1) to manufacture or
produce any eligible article
or thing;
(2) to undertake substantial
expansion to manufacture
or produce any eligible
article or thing;
(3) to carry on any eligible
business.
3. Important issues in Chapter VI-A Part-C:

1 Persons employed on casual or contractual basis shall be treated as workers to verify the satisfaction of the condition of
employment of (10/20) or more workers for availing benefit of deduction u/s 80-IB. [Jyoti Plastic Works Private Limited
(2011) 339 ITR 491 (Bom) + Nanda Mint and Pine Chemicals Ltd (2012) 345 ITR 60 (Del)].
2 Transport subsidy, interest subsidy and power subsidy received from the Government shall be treated as profits
“derived from” business or undertaking to qualify for deduction U/s 80-IB. [Meghalaya Steels Ltd (2016) 383 ITR 217
(SC) + CBDT Circular 39/2016].
3 Duty drawback receipts and DEPB benefits do not form part of the profits derived from the eligible business for the
purpose of the deduction U/s 80-IB. [Orchev Pharma P. Ltd. (2013) 354 ITR 227 (SC) + Liberty India (2009) 317 ITR
218 (SC)].
4 The period of deduction U/s 80-IB commence from the year of commercial production and not from the year of trial run
production. [Nestor Pharmaceuticals Ltd. / Sidwal Refrigerations Ind Ltd. (2010) 322 ITR 631 (Delhi)].
5 Assessee, who has not claimed deduction U/s 80-IB in the initial years, can start claiming deduction thereunder for the
remaining years during the period of eligibility, if the conditions are satisfied. [Praveen Soni (2011) 333 ITR 324 (Delhi)].
6 The process of bottling of gas into gas cylinders, which requires a very specialized process and independent plant and
machinery, amounts to production of "gas cylinders" containing gas for the purpose of claiming deduction U/s 80-IB.
[Puttur Petro Products P. Ltd. [2014] 361 ITR 290 (Kar)].

7 Procuring parts and assembling them into windmill amount to ‘Manufacture’ or ‘Production’ to be entitled to deduction U/s
80-IB. [Chiranjevi Wind Energy Ltd (2011) (Mad)].
8 One of the conditions to be fulfilled by an industrial undertaking for availing deduction is that it should not be formed by
transfer of machinery or plant previously used for any purpose. If, however, the value of the transferred assets does not
exceed 20% of the total value of the machinery or plant used in the business, this condition is deemed to have been
satisfied. If assessee is not entitled to deduction u/s 80-IB in the year in which the industrial undertaking is started,
because value of old machinery exceeds 20% he will be eligible for the deduction in the subsequent years, if the value of
old machinery in the subsequent years does not exceed 20% of the total value of the machinery. Each year has to be
examined independently for fulfillment of this condition and the deduction can be claimed in respect of the years for which
the condition is satisfied. [Seeyan Ply woods (1991) 190 ITR 564 (Ker), Suzessin Textile Bearings Ltd (1980) 135 ITR
443 (Guj) + Satellite Engineering Ltd (1997) 133 ITR 208 (Guj)].
9 Profit from sale of scarp generated during ‘manufacture’ would be eligible for deduction. [Fenner (India) Ltd 241 ITR 803
(Mad)].
10 Interest income derived by an undertaking on delayed collection of sale proceeds shall be treated as income derived from
the industrial undertaking. Hence eligible for deduction U/s 80-IB. (Indian Additives Ltd 25 Taxmann.com 412 (SC) +
Phatela Cotgin Industries Private Limited (2008) 303 ITR 411 (P & H)).
11 Interest derived from deposit with Electricity Board is not business income, and not entitled to deduction U/s 80-IB.
Although electricity may be required for the purposes of industrial undertaking, the deposit required for its supply is a step
removed from the business of the industrial undertaking. The derivation of profits on the deposit made with electricity
board could not be said to flow directly from the industrial undertaking itself. [Pandian Chemicals Ltd 262 ITR 278 (SC)].
12 Chapter VI-A provides for deductions in respect of certain incomes. In computing the profits and gains of a business
activity, the AO may make certain disallowances, such as disallowances pertaining to S. 32, 40 (a) (ia), 40A (3), 43B etc.,
of the Act. At times disallowance out of specific expenditure claimed may also, be made. The effect of such disallowances
is an increase in the profits. Such higher profits would also result in claim for a higher profit-linked deduction under
Chapter VI-A. [Circular No. 37/2016].
13 Widening of an existing road by constructing additional lanes as a part of a highway project by an undertaking would be
regarded as a new infrastructure facility for the purpose of S. 80-IA (4) (i). [CBDT Circular 4/2010].
14 However, simply relaying of an existing road would not be classifiable as a new infrastructure facility for this purpose.
[CBDT Circular 4/2010].
15 Expenditure incurred on an infrastructure project for development of roads/highways under BOT agreement may be
treated as having been made/ incurred for the purposes of business or profession of the assessee and same shall be
allowed to be spread during the tenure of concessionaire agreement. [Circular No. 09/2014].
16 Inland Container Depots shall be treated as infrastructure facility and the profits derived therefrom shall be eligible for
deduction U/s 80-IA. [Container Corporation of India Limited [2018] 404 ITR 397 (SC)].
17 Lease rent from letting out buildings/developed space along with other amenities in an Industrial Park /SEZ is to be
treated as business income and accordingly, eligible for deduction U/s 80-IA. [Circular No. 16/2017].
18 Where amalgamation or demerger takes place, deduction U/s 80-IA shall not continue in the hands of amalgamated
company or the resulting company, as the case may be. However, it shall continue under other sections.
19 The tax holiday U/s 80-IA would not be available in relation to eligible businesses referred to therein which is in the nature
of a works contract awarded by any person (including the CG or SG) and executed by the undertaking or enterprise.
20 Profits and gains of an eligible business for the AY immediately succeeding the initial AY or any subsequent AY, shall be
computed as if such eligible business were the only source of income of the assessee during the PY relevant to the initial
AY and to every subsequent AY up to and including the AY for which the determination is to be made. The aforesaid
fiction is only for the purpose of computing deduction U/s 80-IA to S. 80-IE.
21 In computing the profits qualifying for deduction in respect of an eligible undertaking, the loss incurred by other non-
eligible undertakings should not be set off. The income computed before set off should be the basis for determining the
amount of deduction. The deduction so quantified shall be allowed subject to GTI.
22 Loss from eligible business which was adjusted in the earlier years against income from non-eligible business, shall be
adjusted in computing the base for quantifying deduction under Chapter VI-A Part C. (Swarnagiri wire insulations (P)
Ltd (2012) 349 ITR 245 (Kar)).
4. Special provisions in respect of newly established units in SEZ – S. 10AA:

1 Applicability of Condition-1: Assessee should have established an unit in SEZ. [S. 10AA (1)].
S. 10AA. Condition-2: Such undertaking must be engaged in manufacturing or production of articles/things
(including computer software) or in provision of any services. [S. 10AA (1)].
Condition-3: Such undertaking shall commence production or manufacturing of articles or things
or rendering of services on or after 01.04.2005 but before 31.03.2020. [S. 10AA (4) (i)].
Condition-4: The undertaking is not formed by splitting up, or the reconstruction of, an existing
business. [S. 10AA (4) (ii)].

Condition-5: It is not formed by the transfer to a new business of any plant or machinery
previously used for any other purpose. [S. 10AA (4) (iii)].
2 Exception to Condition-1 shall not apply in the case of an undertaking which is formed as a result of
Condition-4. reconstruction, re-establishment or revival of the business of any undertaking which has been
discontinued in any PY due to extensive damage or destruction of any building, machinery, plant or
furniture owned by the assessee and used for the purposes of such business. [Proviso to S. 10AA
(4) (ii)].
Further, the reason for damage or destruction is due to any natural calamity or other unforeseen
circumstances such as the following:
(i) Flood, typhoon, hurricane, cyclone, earthquake or other natural calamity, or
(ii) riot or civil disturbance, or
(iii) accidental fire or explosion, or
(iv) enemy action or action taken in combat,
and such business is re-established or revived within 3 years from the end of such PY.
3 Exception-1 to Any machinery or plant which was used outside India by any person other than the assessee shall
Condition-5. not be regarded as machinery or plant previously used for any purpose, if all the following
[Explanation to conditions are fulfilled, namely:—
S. 10AA (4)]. (a) such machinery or plant was not, at any time previous to the date of the installation by
the assessee, used in India;
(b) such machinery or plant is imported into India;
(c) no deduction in respect of depreciation of such plant or machinery has been allowed or
is allowable under the provisions of the Income-tax Act, 1961 to any person at any time
prior to the date of installation by the assessee.
4 Excedption-2 to Further, where any machinery or plant or any part thereof previously used for any purpose is
Condition-5. transferred to a new business and the total value of the machinery or plant or part so transferred
[Explanation to does not exceed 20% of the total value of the machinery or plant used in the business, then, the
S. 10AA (4)]. condition specified that it should not be formed by transfer to a new business of plant and
machinery used for any purpose shall be deemed to have been complied with.
5 Quantum and Period Quantum of deduction
period of First 5 AYs beginning with the AY Lower of:
deduction. [S. relevant to the PY in which the (a) 100% of profits and gains derived from
10AA (1) + undertaking begins to manufacture or export of articles of things (including
Explanation produce article or thing or begins to computer software) or services.
thereto]. render services (b) TI (before availing deduction U/s 10AA).
Next 5 consecutive AYs Lower of:
(a) 50% of profits and gains derived from
export of articles of things (including
computer software) or services.
(b) TI (before availing deduction U/s 10AA).
Next 5 consecutive AYs Lower of:
(a) Amount transferred to SEZ re-investment
reserve account (restricted to 50% of
profits and gains derived from export of
articles of things (including computer
software) or services).
(b) TI (before availing deduction U/s 10AA).
Deduction U/s 10AA is allowed against total income of the assessee computed in accordance with
the provisions of the Act before giving effect to the provisions of S. 10AA.
6 Profits and 1 Profits and gains of undertaking established in SEZ (computed in accordance ***
gains derived with Chapter IV-D)
from export of 2 Export turnover of articles or things or services ****
articles or 3 Total turnover of articles or things or services ****
things or 4 Profits and gains derived from export of articles or things or services. [(1*2)/3] ***
services. [S.
10AA (7)].
7 Profits and Profits and gains derived from on site development of computer software (including services for
gains deemed development of software) outside India shall be deemed to be the profits and gains derived from
to be derived the export of computer software outside India. [Explanation-2 to S. 10AA].
from export of

computer
software.
8 Exclusions (a) Compensatory support
from Profits (b) Duty drawback
and gains of (c) Profit on sale of import entitlement.
undertaking (d) Duty exemption pass book benefit
established in
SEZ. [Decision
of the SC in
Liberty India
relied].
9 Inclusions in (a) Transport subsidy
profits of (b) Interest subsidy
undertaking (c) Power subsidy.
established in (d) Insurance subsidy. [Decision of the SC in Meghalaya Steels Ltd (2016) applied].
SEZ.
10 Meaning of It means consideration in respect of export by the undertaking of articles or thing or computer
export turnover. software or services received in or brought to India by the assessee in convertible foreign
exchange, within a period of 6 months from the end of the PY or within such further period as may
be permitted by RBI. [Explanation-1 to S. 10AA].
11 Exclusions But it shall not include:
from export (a) freight, telecommunication charges or insurance attributable to the delivery of the
turnover. articles or things or computer software outside India;
[Explanation-1 (b) expenses, if any, incurred in foreign exchange in rendering of technical services
to S. 10AA]. outside India;
(c) CCS, duty drawback and profits on sale of import entitlement licences.
12 Deemed Sale proceeds referred to above shall be deemed to be received in India where such proceeds are
receipt of credited to a separate account maintained for the purpose by the assessee with any bank outside
export turnover India with the approval of the RBI. [Explanation-1 to S. 10AA].
in India.
13 Exclusions It shall not include:
from total (a) freight, telecommunication charges or insurance attributable to the delivery of the
turnover. articles or things or computer software outside India;
(b) expenses, if any, incurred in foreign exchange in rendering of technical services
outside India;
(c) CCS, duty drawback and profits on sale of import entitlement licences.
14 Utilisation of The amount credited to the SEZ Re-investment Reserve Account is to be utilised:
amount in SEZ (i) for the purposes of acquiring machinery or plant which is first put to use before the
re-investment expiry of a period of 3 years following the PY in which the reserve was created;
reserve. [S. (ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the
10AA (2) (a)]. business of the undertaking other than for distribution by way of dividends or profits or
for remittance outside India as profits or for the creation of any asset outside India;
15 Particulars of The particulars have been furnished by the assessee in respect of machinery or plant in Form-
machinery put 56FF along with the ROI for the AY relevant to the PY in which such plant or machinery was first
to use. put to use. [S. 10AA (2) (b)].
16 Consequences Where any amount credited to the SEZ re-investment reserve account:
of non- (a) has been utilised for any purpose other shall be deemed to be the profits of the year
utilisation or than those permitted above, the in which the amount was so utilised;
mis-utilisation amount so utilised;
of amount in (b) has not been utilised before the expiry shall be deemed to be the profits of the year
SEZ re- of 3 years supra, the amount not so immediately following the period of three
investment utilised, years supra.
reserve.
17 Amalgamation If on account of amalgamation or demerger, the eligible business of an Indian company is
or demerger – transferred to another Indian company, deduction under this section will be available as follows:
impact on (a) No deduction will be available to the amalgamating company or the demerged
deduction U/s company, as the case may be, in the year of amalgamation/demerger.
10AA. [S. 10AA (b) The provisions of this section will apply to the amalgamated/resulting company as they

(5)]. would have applied to the amalgamating/demerged company, if the amalgamation/

demerger had not taken place.
18 Carry forward Loss referred to S. 72 or S. 74, in so far as such loss relates to the business of the undertaking,
of loss of the shall be allowed to be carried forward or set off. [S. 10AA (6)].
undertaking.
19 Applicability of The provisions of S. 80-IA (8) and S. 80-IA (10) shall, so far as may be, apply in relation to the
provisions of S. undertaking referred to in this section as they apply for the purposes of the undertaking referred to
80-IA (8) and in S. 80-IA.
S. 80-IA (10).
20 Amendment in Where in the assessment for any year the deduction U/s 10AA has not been allowed on the ground
S. 155 (11A). that such income has not been received in convertible foreign exchange in India and subsequently
such income or part thereof has been or is received in India with the approval of RBI, the AO shall
amend the order of assessment so as to allow deduction U/s 10AA, as the case may be in respect
of such income or part thereof as is so received in India and the provisions of S. 154 shall, so far
as may be, apply thereto and the period of 4 years shall be reckoned from the end of the PY in
which such income is so received in India.
CBDT Circular no. 1/2013, Dated 17-01-2013:

SN Issue Clarification
1 Whether on-site It is clarified that the software developed abroad at a client’s place would be eligible for
development of computer benefits under the respective provisions, because these would amount to ‘deemed
Software qualifies as an export’ and tax benefits would not be denied merely on this ground. However, since the
export activity for tax benefits under these provisions can be availed of only by the unit in SEZ, it is
benefits U/s 10AA? necessary that there must exist a direct and intimate nexus or connection of
development of software done abroad with the eligible units set up in SEZ and such
development of software should be pursuant to a contract between the client and the
eligible unit in SEZ.
2 Whether receipts from It is clarified that profits earned as a result of deployment of technical manpower at the
deputation of technical client’s place abroad specific ally for software development work pursuant to a contract
manpower for such “On- between the client and the eligible unit should not be denied benefits u/s 10AA provided
Site” Software such deputation of manpower is for the development of such software and all the
development abroad at the prescribed conditions are fulfilled.
Client’s place are eligible
for deduction U/s 10AA?
3 Whether tax benefits u/s It is clarified that on the sole ground of change in ownership of an under taking, the
10AA, would continue to claim of exemption cannot be denied to an otherwise eligible undertaking and the tax
remain available in case of holiday can be availed of for the unexpired period at the rates as applicable for the
a slump sale of a Unit/ remaining years, subject to fulfillment of prescribed conditions.
Undertaking?
4 Whether tax benefits U/s The matter has been examined and it is clarified that the tax holiday should not be
10AA can be enjoyed by denied merely on the ground of physical relocation of an eligible SEZ unit from one SEZ
an eligible SEZ unit to another if all the prescribed conditions are satisfied under the IT Act. It is further
consequent to its transfer clarified that the unit so relocated will be eligible to avail of the tax benefit for the
to another SEZ? unexpired period at the rates applicable to such years.
Clarification on allowability of deduction U/s 10AA on transfer of technical manpower in case of software industry
[CBDT Circular no. 14/2014, dated 8-10-2014]:
If any of the following two conditions are satisfied, deduction U/s 10AA shall not be denied:
1 Number of technical manpower transferred from existing unit to new unit as at the end of the first FY Number of
technical manpower transferred from existing unit to new unit as at the end of the first FY ≤ 50% of the total technical
manpower actually engaged in software development in new unit.
2 Net addition of the new technical manpower in all units of the assessee ≥ 50% of the total technical manpower of the
new SEZ unit during the first FY.

Expenditure incurred in foreign exchange for provision of technical services outside India, which is deductible for computing
export turnover, shall be excluded from total turnover also for the purpose of computing deduction U/s 10AA. [HCL
Technologies Limited [2018] 404 ITR 719 (SC)].

Circular No. 4/2018:

Freight, telecommunication charges and insurance expenses are to be excluded both from "export turnover" and "total
turnover', while working out deduction admissible U/s 10AA to the extent they are attributable to the delivery of articles or
things outside India.
Investment linked deduction U/s 35AD:

1 What is allowed as S. 35AD allows deduction in respect of capital expenditure incurred wholly and
deduction U/s 35AD? exclusively for the purpose of businesses specified therein. Deduction is allowed in the
PY in which expenditure was incurred. [S. 35AD (1)].
2 Non-eligible capital The following capital expenditures are not eligible for deduction:
expenditure. [S. 35AD (8) (a) Expenditure incurred on acquisition of land.
(f)]. (b) Expenditure incurred on acquisition of goodwill.
(c) Expenditure incurred on acquisition of financial instrument.
(d) Expenditure in respect of which the payment or aggregate payments made to a
person in a day, otherwise than by an APC or APBD or use of ECS through a bank
account, exceeds Rs. 10000.
3 Deductibility of pre- Any expenditure incurred wholly and exclusively for the purpose of business specified
commencement capital in S. 35AD before its commencement shall be allowed as deduction in the PY in which
expenditure. the business commences provided such expenditure is capitalised in the books of
accounts as on the date of commencement of business. [Proviso to S. 35AD (1)].
4 Businesses specified in S. 1. Setting up and operating cold-chain facility.
35AD. [S. 35AD (8) (c)] 2. Setting up and operating ware-house facility for storage of agricultural produce.
3. Laying and operating cross-country pipe-line network for storage & transportation of
natural gas.
4. Laying and operating cross-country pipe-line network for storage and transportation
of petroleum and crude oil.
5. Building and operating a hotel anywhere in India (which is 2 star category or above).
6. Building and operating a hospital anywhere in India (which has atleast 100 beds for
patients).
7. Developing and building a housing project under a scheme (framed by the CG or SG
and notified by the CBDT) for re-development or rehabilitation of slums.
8. Developing and building a housing project under a scheme (framed by the CG or SG
and notified by the CBDT) for affordable housing.
9. Production of fertilizer in India in a new plant or in an existing plant with newly
installed capacity.
10. Setting up and operating inland container depot or container freight station
(approved and notified under the customs Act).
11. Bee-keeping and production of honey and beeswax.
12. Setting up and operating a warehousing facility for storage of sugar.
13. Laying & operating a slurry pipeline for transportation of iron ore.
14. Setting up and operating a semiconductor wafer fabrication manufacturing unit, if
such unit is notified by the Board in accordance with the prescribed guidelines.
15. Developing or maintaining and operating or developing, maintaining and operating
a new infrastructure facility.
5 Meaning of cold-chain A chain of facilities for storage or transportation of agricultural and forest produce, meat
facility and meat products, poultry, marine and dairy products, products of horticulture,
floriculture and apiculture and processed food items under scientifically controlled
conditions including refrigeration and other facilities necessary for the preservation of
such produce.
6 Meaning of inland Business units in hinterland (i.e. an area far away from ports) have difficulty in
container depot or transporting goods to the ports and waiting in queue to get customs formalities
container freight station. complied with.
In order to avoid this traffic and congestion ICD or CFS are set up across the country in
the hinterland with public authority status.
If these ICD or CFS are approved and notified under the customs Act, they become
customs stations where formalities could be complied with and the goods could be
cleared thereafter.

7 Meaning of slurry pipeline. It is used in mining to transport mineral concentrates from a mineral processing plant near
a mine.
The concentrate of the ore is mixed with water and then pumped over a long distance to a
port where it can be shipped for further processing.
At the end of the pipeline, the mineral is separated from the slurry in a filter press to
remove the water.
8 Semi-conductor wafer fabrication. It is the process used to create integrated circuits that are present in every day electrical
and electronic devices.
9 Meaning of new infra-structure (i) A road including toll road, a bridge or a rail system.
facility (ii) A highway project including housing or other activities being an integral part of the
highway project.
(iii) A water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system.
(iv) A port, airport, inland waterway, inland port or navigational channel in the sea.
10 Date on or after which the specified The capital expenditure incurred in relation to specified business becomes eligible for
business should commence deduction U/s 35AD only if the business commences on or after specified dates which are
given as under:
(a) Specified business 1, 2 and 4 01.04.2009
(b) Specified business 3 01.04.2007
(c) Specified business 5, 6 and 7 01.04.2010
(d) Specified business 8 and 9 01.04.2011
(e) Specified business 10, 11 and 12 01.04.2012
(f) Specified business 13 and 14 01.04.2014
(g) Specified business 15 01.04.2017
11 Relaxation in respect of hotel Building and operating hotel anywhere in India is only of the business specified in S. 35AD.
business. [S. 35AD (6A)]. It indicates that the owner of the hotel himself shall operate hotel; otherwise, it will not be
regarded as specified business and deduction is not available U/s 35AD.
However, in service industry like hotel, a franchisee business exists where the hotel owner
may get the hotel operated through an outsourcing arrangement.
In order to enable such hotel owners to get deduction U/s 35AD, S. 35AD (6A) was
inserted.
While continuing to own hotel, if the assessee transfers the operations thereof to another
person, still the assessee shall be deemed to be carrying on the specified business of
building and operating hotel and is eligible for deduction U/s 35AD.
12 Conditions to be fulfilled for Conditions are divided into two categories: (a) conditions applicable to all specified
enjoying deduction U/s 35AD. businesses; (b) conditions applicable only in respect of certain specified businesses.
13 Conditions applicable to all Condition-1: The specified business shall not be set up by splitting up or reconstruction of
specified businesses. existing business.
Condition-2: Second-hand machinery shall not be used in setting up specified business.
Condition-3: Accounts of the assessee for the relevant PY have been audited by a CA
and the assessee furnishes the audit report in the prescribed form, duly signed and verified
by such CA along with his ROI.
14 Relaxing the requirements of A second-hand machinery (SHM), if it was imported from abroad and was never used by
condition-2 any other person in India before its installation by the assessee in India and no deduction
was allowed in respect thereof by way of depreciation or otherwise under this Act, shall be
treated as brand new machinery and not as second hand machinery.
If Ʃ Value of all SHM used for setting up specified business ≤ 20% of Ʃ value of all
machineries used for setting up specified business, then condition-2 is deemed to have
been complied with.
15 Illustration for understanding the Ʃ Value of all P&M used for setting up specified business = Rs. 400L.
relaxation. Ʃ Value of all SHM used for setting up specified business (included above) = Rs. 90L
(which includes Rs. 30L being the cost of imported machine-A).
Ʃ Value of SHM used for setting up specified business does not cross 20% of Ʃ value of all
machineries used for setting up specified business.
16 Conditions which are specific to Condition-1: Specified business 3 & 4 shall be carried on by an Indian company or
specified business-3 and specified consortium of Indian companies or by an authority or board or corporation established
business-4. under the Central or State Act.
Condition-2: The person carrying on these businesses shall be approved by PNGRB.

Condition-3: Such person shall be notified by the CG in OG.

Condition-4: A specified proportion of total pipe-line capacity (1/3rd for natural gas pipeline
network; 1/4th for petroleum pipeline network) shall be made available to others (not being
associated persons) on common carrier basis.
Conditon-5: Such other conditions as may be prescribed shall be fulfilled.
17 Meaning of associated persons In relation to the assessee means a person—
(i) who participates directly or indirectly or through one or more intermediaries in the
management or control or capital of the assessee;
(ii) who holds, directly or indirectly, shares carrying not less than 26% of the voting power
in the capital of the assessee;
(iii) who appoints more than half of the Board of directors or members of the governing
board, or one or more executive directors or executive members of the governing board of
the assessee;
(iv) who guarantees not less than 10% of the total borrowings of the assessee.
18 Conditions specific to specified The business should be owned by a company registered in India or by a consortium of
business-15. such companies or by an authority or a board or corporation or any other body established
or constituted under any Central or State Act.
The entity should have entered into an agreement with the CG or a SG or a local authority
or any other statutory body for developing or operating and maintaining or developing,
operating and maintaining, a new infrastructure facility.
19 Transfer of goods and services Where any goods or services held for the purposes of the specified business are
transferred to any other business carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the market value of the goods or
services then the profits and gains of the specified business shall be computed as if the
transfer was made at market value.
Market value means the price such goods or services would ordinarily fetch in the open
market, subject to statutory or regulatory restrictions, if any.
20 Close connection between Where due to the close connection between the assessee and the other person or for any
assessee and any other person other reason, it appears to the AO that the profits of specified business is increased to
more than the ordinary profits, the AO shall compute the amount of profits of such eligible
business on a reasonable basis for allowing the deduction.
21 Consequences of availing No deduction (like depreciation, additional investment allowance etc) shall be allowed in
deduction U/s 35AD. respect of the same expenditure under any other provisions for the same AY or
subsequent AYs.
Where deduction U/s 35AD is claimed and allowed in respect of specified business for any
AY, no deduction shall be allowed under Chapter VI-A Part-C or U/s 10AA in relation to
specified business for the same or any other AY. [S. 35AD (3)].
22 Restriction of set-off and carry Loss from specified business can be set off only against income from business specified in
forward of losses from specified S. 35AD.
business. [S. 73A]. If it is remaining unabsorbed, it could be carried forward to the next AY for set off against
income from business specified in S. 35AD and so on, for an indefinite period.
However, the benefit of carry forward is available only if a loss-return U/s 139 (3) for the PY
in which loss was incurred is filed within the time limit specified U/s 139 (1).
Losses specified businesses could be set off even against the income from specified
business which is not eligible for deduction U/s 35AD.
23 Asset in respect of which deduction Any sum received or receivable (in cash or in kind) on account of any capital asset (in
U/s 35AD was enjoyed is sold, respect of which deduction was allowed U/s 35AD) being demolished, destroyed or
destroyed or demolished – Tax transferred shall be charged to tax U/H PGBP. [S. 28 (vii)].
implications. However, no capital gains will be computed.
24 Actual cost of asset in respect of The actual cost of any capital asset on which deduction is allowable to the assessee U/s
which deduction was enjoyed u/s 35AD shall be treated as nil. [S. 43 (1) Explanation-13]
35AD. In case of such assessee; and
In any other case if the capital asset is acquired or received:
(a) by way of gift or will or an irrevocable trust; (b) on any distribution on liquidation of the
company; (c) by such mode of transfer as is referred to in S. 47
(i)/(iv)/(v)/(vi)/(vib)/(xiii)/(xiv)/(xiiib).
25 Asset to be used for specified S. 35AD (7A) provides that any asset in respect of which a deduction is claimed and
business for 8 years. [S. 35AD allowed U/s 35AD shall be used only for the specified business for a period of 8 years
(7A)]. beginning with the PY in which such asset is acquired or constructed.

26 Asset used for any other business If asset is used for any purpose other than the specified business, the total amount of
other than specified business [S. deduction so claimed and allowed in any PY in respect of such asset, as reduced by the
35AD (7B)]. amount of depreciation allowable in accordance with the provisions of S. 32 as if no
deduction had been allowed U/s 35AD, shall be deemed to be income of the assessee
chargeable U/H PGBP of the PY in which the asset is so used.
27 Relaxation to sick companies. [S. The provisions of S. 35AD (7B) shall not apply to sick companies.
35AD (7C)]. There is no bar on sick companies using the assets acquired for specified business for any
other purpose even during the aforesaid 8 years.
28 Determination of actual cost of the However, where an asset, in respect of which deduction is claimed and allowed U/s 35AD
asset consequent to withdrawal of is deemed to be the income of the assessee in accordance with the provisions of S. 35AD
deduction U/s 35AD. [Proviso to (7B) (on account of being used for a purpose other than specified business U/s 35AD), the
Explanation-13 to S. 43 (1)] actual cost of the asset to the assessee shall be actual cost to assessee as reduced by the
amount of depreciation allowable had the asset been used for the purpose of business,
calculated at the rate in force, since the date of its acquisition.

Chapter-39: Alternate Minimum Tax - Summary
Provisions of alternate minimum tax – Chapter XII-BA [S. 115JC – S. 115JF]:

1 Applicability of Assessee Applicability
Chapter XII-BA. Company No
[S. 115JEE]. Non-corporate assessee (not claiming deductions U/s 10AA, Chapter VI-A part-C No
and S. 35AD)
Non-corporate assessee (claiming deduction U/s 10AA, Chapter VI-A part-C and Yes
S. 35AD) being firm/LLP/Local authority.
Non-corporate assessee (claiming deduction U/s 10AA, Chapter VI-A part-C and No
S. 35AD) being Individual/HUF/AOP/BOI/AJP whose Adjusted TI ≤ Rs. 20L
Non-corporate assessee (claiming deduction U/s 10AA, Chapter VI-A part-C and Yes
S. 35AD) being Individual/HUF/AOP/BOI/AJP whose Adjusted TI > Rs. 20L
Non-corporate assessee being a co-operative society (claiming deduction only No
U/s 80P and not under other sections of Chapter VI-A Part-C / S. 10AA / S.
35AD).
Non-corporate assessee being a co-operative society (claiming deduction U/s Yes
80P as well as under other sections of Chapter VI-A Part-C / S. 10AA / S. 35AD).
2 Computation of 1 TI computed in accordance with the provisions of this Act without giving effect to ****
adjusted TI. [S. Chapter-XII-BA
115JC (2)]. 2 Deduction U/s 10AA ****
3 Deduction under Chapter VI-A Part-C (not being S. 80P) ****
4 Deduction claimed if any U/s 35AD as reduced by the amount of depreciation allowable ****
in accordance with the provisions of S. 32, as if no deduction U/s 35AD was allowed in
respects of the assets on which deduction U/s 35AD is claimed.
5 Adjusted TI (1+2+3+4) ****
3 Determination of Where the regular income tax (RIT) payable for a PY by the assessee is less than the AMT payable
route of taxation. for such PY, then the ATI shall be deemed to be the TI of that PY and the assessee shall be liable to
pay income tax on such TI @ 18.50%.
4 Meaning of RIT It means the income-tax payable for a PY by a person on his TI in accordance with the provisions of
this Act other than the provisions of this Chapter.
5 AMT It means the amount of tax computed on ATI at a rate of 18.5%.
6 Computational SN RIT > AMT AMT > RIT
procedure 1 RIT **** AMT ****
2 Surcharge (if applicable) **** Surcharge (if applicable) ****
3 RIT (including surcharge) [1+2]. **** AMT (including surcharge) [1+2]. ****
4 Marginal relief (if available) (****) Marginal relief (if available) (****)
5 RIT (after marginal relief) [3-4] **** AMT (after marginal relief) [3-4] ****
6 HEC *** HEC ***
7 Final RIT [5+6] **** Final AMT [5+6]
7 Report of CA. [S. Every person to whom S. 115JC applies shall obtain a report, in Form 29C, from an accountant,
115JC (3)]. certifying that the ATI and the AMT have been computed in accordance with the provisions of this
Chapter and furnish such report on or before the DD for furnishing of ROI U/s 139 (1).
8 Tax credit for If a person pays tax U/s 115JC for a PY, he shall be entitled to credit in respect of such tax.
AMT [S. 115JD Amount of credit = (Final AMT paid – Final RIT payable).
(1) & (2)].
9 No interest on No interest shall be payable on tax credit allowed U/s 115JD (1). [S. 115JD (3)].
AMT credit.
10 Carry forward of The amount of tax credit determined U/s 115JD (2) shall be C/F & set off in accordance with the
credit. [S. 115JD provisions of S. 115JD (5) & (6) but such C/F shall not be allowed beyond 15th AY immediately
(4)]. succeeding the AY for which tax credit becomes allowable U/s 115JD (1).
11 Year and extent If, an AY, the RIT exceeds the AMT, the tax credit shall be allowed to be set off to the extent of the
of set off. excess of RIT over the AMT and the balance of the tax credit, if any, shall be C/F. [S. 115JD (5)].
12 Variation to AMT If the amount of RIT or the AMT is reduced or increased as a result of any order passed under this
credit Act, the amount of tax credit allowed under this section shall also be varied accordingly. [S. 115JD
(6)].
13 Provisions of S. The credit for tax paid U/s 115JC shall be allowed in accordance with the provisions of S. 115JD,
115JEE (3) even if the assessee has not claimed any deduction U/s 10AA or S. 35AD or Chapter VI-A Part-C in
any PY and the Adjusted TI of that year does not exceed Rs. 20L. [S. 115JEE (3)].
16 Restriction on the Where the amount of tax credit in respect of any income-tax paid in any country or specified territory
quantum of AMT outside India U/s 90 or S. 90A or S. 91, allowed against the AMT payable, exceeds the amount of the

Chapter-39: Alternate Minimum Tax - Summary
credit. [Proviso to tax credit admissible against the RIT payable by the assessee, then, while computing the amount of
S. 115JD (2)]. credit U/s 115JD (2), such excess amount shall be ignored.
In other words, the amount of tax credit in respect of AMT shall not be allowed to be C/F to
subsequent year to the extent such credit relates to the difference between the amount of foreign tax
credit (FTC) allowed against AMT and FTC allowable against the regular tax payable by the
assessee.

Chapter-40: Double Taxation Avoidance Relief - Summary
A. Agreement with foreign countries or specified territories - Bilateral relief [S. 90]:
1 Power to enter to agreements S. 90 (1) empowers the CG to enter into agreement with Governments of Countries
outside India as well with Specified territories outside India.
2 Meaning of specified territories. It means any area outside India which may be notified as such by the CG.
[Explanation-2 to S. 90].
3 (Non-sovereign) Territories notified (i) Bermuda a British Overseas Territory
through notification no. 22/2010 (ii) British Virgin a British Overseas Territory
Islands
(iii) Cayman Islands a British Overseas Territory
(iv) Gibraltar a British Overseas Territory
(v) Guernsey a British Crown Dependency
(vi) Isle of Man a British Crown Dependency
(vii) Jersey a British Crown Dependency
(viii) Netherlands an Autonomous Part of the Kingdom of Netherlands
Antilles
(ix) Macau a Special Administrative Region of The People’s
Republic of China
(x) Sint Maarten a part of Kingdom of Netherlands
4 (Non-sovereign) Territory notified Hong Kong Special Administrative Region of the People’s Republic of China
through notification no. 25/2010
5 Purposes for which agreements (i) Elimination of double taxation, through distributive rules in the agreement, by
could be entered into. [S. 90 (1)]. assigning exclusive jurisdiction to tax a particular stream of income to one of
the contracting states.
(ii) Providing relief (where double taxation could not be eliminated through
distributive rules).
(iii) Facilitating exchange of information for the prevention of evasion of tax, or for
investigation of cases of such evasion (if it had already taken place).
(iv) Assistance in collection and recovery of taxes.
6 Tax information exchange Though India is yet to enter into a comprehensive treaty with some countries, it has
agreements. managed to enter into TIEA with them to ensure effective exchange of information.
7 Provisions of DTAA supercede the Provisions of the IT Act supercede the provisions of the Act.
Act. Vide ‘subject to the other provisions of the Act’ in S. 4 and S. 5.
The charging section and the section providing for the scope of the total income are
subject to the provisions of DTAA. [P.V.A.L. Kulandagan Chettiar – 267 ITR 654 (SC)
+ Azadi Bacho Andolan 132 Taxman 373 (SC) + Turquoise Finance and
Investments Ltd (SC)].
8 Beneficial provisions of the Act to Where the CG has entered into such an agreement with the Government of any
apply. [S. 90 (3)]. country outside India or specified territory outside India for granting relief of tax, or for
avoidance of double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the extent they are more
beneficial to that assessee.
9 GAAR shall apply – though not However, the provisions of Chapter X-A, General Anti-avoidance rule, shall apply to the
beneficial. [S. 90 (2A)]. assessee even if such provisions are not beneficial to him.
10 Meaning of terms used in DTAA. SN Situation Meaning of the term
1 Term used in any DTAA with a The term shall have the same meaning
foreign country or specified assigned to it in the DTAA.
territory, which is defined in the
DTAA itself.
2 Term used in any DTAA with a The term shall have the meaning assigned
foreign country or specified to it in the Income-tax Act, 1961 and
territory, which is not defined in explanation, if any, given to it by the CG.
the said DTAA, but defined in
the Act.
3 Term used in any DTAA with a S. 90 (3) empowers the CG to clarify the
foreign country or specified meaning of such term by issuing a
territory, and not defined in the notification in the official gazette.
agreement or the Act.
The term shall have the meaning assigned
in the said notification and the meaning

shall be deemed to have effect from the

date on which the DTAA came into force.
11 Meaning of the phrase ‘may be Accordingly, the CG has notified that where the DTAA provides that any income of a
taxed in the other country’ used in resident of India may be taxed in the other country then, such income shall be included
the DTAA – clarified by the CG. in his total income chargeable to tax in India in accordance with the provisions of the
[Notification No. 91/2008, dated Act, and relief shall be granted in accordance with the method for elimination or
28.8.2008]. avoidance of double taxation provided in such agreement.
This means only non-exclusive right to tax the income is given to the state of source.
India’s right to tax the same is unaffected. However, the assessee can get credit in
respect of tax paid in the state of source.
12 Clarification of non-discrimination Charge of tax in respect of a foreign company at a rate higher than the rate at which a
clause in DTAA. domestic company is chargeable, shall not be regarded as less favourable charge or
levy of tax in respect of such foreign company. [Explanation-1 to S. 90].
13 Tax residency certificate (TRC). [S. A non-resident to whom the agreement referred to in S. 90 (1) applies, shall be allowed
90 (4)]. to claim the relief under such agreement if a TRC obtained by him from the
Government of that country or specified territory, is furnished declaring his residence of
the country outside India or the specified territory outside India, as the case may be.
This is to prevent residents of third country from claiming the treaty benefits. (i.e. to
prevent treaty shopping).
14 Furnishing of such other documents In addition to such certificate issued by the foreign Government, the assessee would
and information as may be be required to provide such other documents and information, as may be prescribed,
prescribed. for claiming the treaty benefits. [S. 90 (5)].
15 Prescribed information and (i) Status (individual, company, firm etc.) of the assessee;
documents in Form-10F [R. 21AB]. (ii) PAN allotted (if any)
(iii) Nationality (in case of an individual) or country or specified territory of
[Notification 57/2013]. incorporation or registration (in case of others);
(iv) Assessee's tax identification number in the country or specified territory of
residence and in case there is no such number, then, a unique number on the
basis of which the person is identified by the Government of the country or the
specified territory of which the assessee claims to be a resident;
(v) Period for which the residential status, as mentioned in the certificate referred
to in S. 90 (4) is applicable; and
(vi) Address of the assessee in the country or specified territory outside India,
during the period for which the certificate, as mentioned in (iv) above, is
applicable.
However, the assessee may not be required to provide the information or any part
thereof, if the information or the part thereof, as the case may be, is already contained
in the TRC.
The assessee shall keep and maintain such documents as are necessary to
substantiate the information provided. An ITA may require the assessee to provide the
said documents in relation to a claim by the said assessee of any relief under an
agreement referred to in S. 90 (1).
B. Unilateral relief – S. 91:

1 Applicability of In the case of income arising to an assessee in countries with which India does not have any double
S. 91 (1) taxation agreement, relief would be granted U/s 91 provided all the following conditions are fulfilled:
(a) The assessee is a resident in India during the PY in respect of which the income is taxable.
(b) The income accrues or arises to him outside India.
(c) The income is not deemed to accrue or arise in India during the PY.
(d) The income in question has been subjected to income-tax in the foreign country in the hands of
the assessee.
(e) The assessee has paid tax on the income in the foreign country.
(f) There is no agreement for relief from double taxation between India and the other country
where the income has accrued or arisen.
2 Quantum of In such a case, the assessee shall be entitled to a deduction from the Indian income-tax payable by him.
relief U/s 91 (1) The deduction would be a sum calculated on such doubly taxed income at the Indian rate of tax or the
rate of tax in the said country, whichever is lower.
3 “Indian rate of It means the rate determined by dividing the amount of Indian income-tax after deduction of any relief

tax” due under the provisions of the Act but before deduction of any double taxation relief due to the
assessee.
4 “Rate of tax of It means income-tax and super-tax actually paid in that country in accordance with the corresponding
the said country” laws in force in the said country after deduction of all relief due, but before deduction on account of
double taxation relief due in the said country, divided by the whole amount of income assessed in the
said country.
5 Relief U/s 91 (2) Where a person who is resident in India in any PY has any agricultural income in Pakistan in respect of
which he has paid the income tax payable in that country as per laws of taxation of agricultural income in
Pakistan, he shall be entitled to a deduction from the Indian income-tax payable by him to the following
extent:
(a) of the amount of tax paid in Pakistan on such income which is liable to tax under this Act, also;
or
(b) of a sum calculated on that income at the Indian rate of tax, whichever is less.
C. Foreign tax credit rules – R. 128:

R. 128 (1) PY in which foreign tax An assessee, being a resident shall be allowed a credit for the amount of any
credit is available. foreign tax paid by him in a country or specified territory outside India, by way of
deduction or otherwise, in the year in which the income corresponding to such tax
has been offered to tax or assessed to tax in India, in the manner and to the extent
as specified in this rule.
Proviso to R. Credit cross the years over Where income on which foreign tax has been paid or deducted, is offered to tax in
128 (1) which income is offered. more than one year, credit of foreign tax shall be allowed across those years in the
same proportion in which the income is offered to tax or assessed to tax in India.
R. 128 (2) Meaning of foreign tax In respect of a country or specified territory outside India with which India has
entered into DTAA, it means the tax covered under the DTAA.
In respect of any other country or specified territory outside India, it means the tax
payable under the law in force in that country or specified territory in the nature of
income-tax.
R. 128 (3) Credit only against tax, The credit (supra) shall be available against the amount of tax, surcharge and cess
surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee
or penalty.
R. 128 (4) No credit in respect of No credit shall be available in respect of any amount of foreign tax or part thereof
disputed foreign tax. which is disputed in any manner by the assessee:
Proviso to R. When the assessee is The credit of such disputed tax shall be allowed for the year in which such income is
128 (4) entitled to credit in respect offered to tax or assessed to tax in India if the assessee within six months from the
of disputed foreign tax? end of the month in which the dispute is finally settled, furnishes evidence of
settlement of dispute and an evidence to the effect that the liability for payment of
such foreign tax has been discharged by him and furnishes an undertaking that no
refund in respect of such amount has directly or indirectly been claimed or shall be
claimed.
S. 155 (14A) Rectification on settlement In the assessment for any PY or in any intimation or deemed intimation U/s 143 (1)
of dispute in respect of for any PY, credit for income-tax paid in any country outside India or a specified
foreign tax. territory outside India referred to in S. 90/S. 90A/S. 91 has not been given on the
ground that the payment of such tax was under dispute.
Subsequently such dispute is settled.
The assessee, within six months from the end of the month in which the dispute is
settled, furnishes to the AO evidence of settlement of dispute and evidence of
payment of such tax along with an undertaking that no credit in respect of such
amount has directly or indirectly been claimed or shall be claimed for any other AY.
The AO shall amend the order of assessment or any intimation or deemed

intimation U/s 143 (1), as the case may be, and the provisions of S. 154 shall, so far
as may be, apply thereto:
Proviso to S. PY of credit in respect of The credit of tax which was under dispute shall be allowed for the year in which
155 (14A). foreign tax which was such income is offered to tax or assessed to tax in India.
under dispute.

R. 128 (5) Manner of quantification of The credit of foreign tax shall be the aggregate of the amounts of credit computed
foreign tax credit separately for each source of income arising from a particular country or specified
territory outside India and shall be given effect to in the following manner:
(i) the credit shall be the lower of the tax payable under the Act on such
income and the foreign tax paid on such income.
(ii) However, where the foreign tax paid exceeds the amount of tax payable in
accordance with the provisions of the DTAA, such excess shall be ignored.
(iii) The credit shall be determined by conversion of the currency of payment
of foreign tax at the TTBR on the last day of the month immediately
preceding the month in which such tax has been paid or deducted.
R. 128 (6) Credit in respect of foreign In a case where any tax is payable U/s 115JB or S. 115JC, the credit of foreign tax
tax is available even shall be allowed against such tax in the same manner as is allowable against any
against MAT or AMT tax payable under the provisions of the Act other than the provisions of the said
sections (hereafter referred to as the "normal provisions")
R. 128 (7) Quantification of MAT Where the amount of foreign tax credit available against the tax payable U/s 115JB
credit or AMT credit where or S. 115JC exceeds the amount of tax credit available against the normal
credit is taken in respect of provisions, then while computing the amount of credit U/s 115JAA or S. 115JD in
foreign tax. respect of the taxes paid under S. 115JB or S. 115JC, as the case may be, such
excess shall be ignored.
R. 128 (8) Documents to be furnished A statement of income from the country or specified territory outside India offered
by the assessee for for tax for the PY and of foreign tax deducted or paid on such income in Form No.
enjoying credit in respect 67 and verified in the manner specified therein.
of foreign tax.
Certificate or statement specifying the nature of income and the amount of tax
deducted therefrom or paid by the assessee,
(a) from the tax authority of the country or the specified territory outside India;
or
(b) from the person responsible for deduction of such tax; or
(c) signed by the assessee:
The statement furnished by the assessee in clause (c) shall be valid if it is
accompanied by:
(i) an acknowledgement of online payment or bank counter foil or challan for
payment of tax where the payment has been made by the assessee;
(ii) proof of deduction where the tax has been deducted.
R. 128 (9) Statement etc. (supra) The statement in Form No. 67 and the certificate or the statement referred to above
shall be furnished before shall be furnished on or before the due date specified for furnishing the ROI U/s 139
the due date for furnishing (1), in the manner specified for furnishing such ROI.
ROI.
R. 128 (10) Furnishing Form-67 where Form No. 67 shall also be furnished in a case where the carry backward of loss of
carry backward of current the current year results in refund of foreign tax for which credit has been claimed in
loss results in refund of any earlier PY (s).
foreign tax of earlier years.
D. Concept of Permanent Establishment (PE):

1 In order to determine the taxability of business income of foreign enterprises, the tax treaty requires existence of a PE in the
source country. PE occurs when the non-resident has some degree of permanent presence, in the source country.
2 Article 5 (1) of Model convention provides that for the purpose of this convention the term PE means a fixed place of
business through which the business of an enterprise is wholly or partly carried on.
3 According to Article 5 (2), the term PE includes:
(a) A place of management
(b) A branch
(c) An office
(d) A factory
(e) A workshop
(f) A sales outlet
(g) A warehouse
(h) A mine, an oil or gas well, a quarry, or other place of extraction of natural resources
4 Business Income of a non-resident will not be taxed in India unless such non-resident has a PE.

E. Treaty shopping:
1 Meaning of treaty It means availing of unintended advantage out of tax treaty between two countries by a resident
shopping of a third country.
2 Validity of treaty The SC, in Azadi Bachao Andolan, held treaty shopping cannot be held to be invalid, unless
shopping. there is a specific limiting provision in the DTAA itself. However, now we have GARR provisions
to tackle treaty shopping.
3 Amendments to Where the tax resident of Mauritius, transfers shares in Indian companies, the tax implications as
DTAA between per the Indo-Mauritius treaty as summarised as under:
India and Mauritius Date of acquisition Date of transfer Taxability as per treaty
(to restrict treaty Prior to 01.04.2017 Any time Capital gains are taxable in Mauritius
shopping) During 01.04.2017 During 01.04.2017 Capital gains are taxable @ 50% of the
– 31.03.2019 – 31.03.2019 domestic rate (Subject to limitation of benefits
conditions).
During 01.04.2017 On or after Taxable in India @ normal rates.
– 31.03.2019 01.04.2019
On or after Any time Taxable in India @ normal rates.
01.04.2019
4 Limitation of The affairs should not be arranged with the primary intention of availing the benefit provision
benefits – condition granting reduced rate of tax.
The company should not be a shell or conduit company.
5 When company is A company is not deemed to be ‘shell’ or ‘conduit’ if it incurred an expense of atleast Rs. 2.70
not deemed to be million (Mauritius rupees 1.50 million) in the immediately preceding 12 months in home country
shell or conduit? or is listed in a RSE in the home country.

Chapter-41: Transfer Pricing Summary
1. Determination of income or expense arising from international transaction on AL basis – S. 92:

1 Manner of determination of Income arising from international transaction (IT) shall be determined having regard to
income or deduction in the ALP. [S. 92 (1)].
respect expense arising Similarly, the deduction in respect of expense or interest arising from international
from IT. transaction shall be determined having regard to the ALP. [Explanation to S. 92 (1)].
2 Meaning of IT. [S. 92B (1)] The following conditions are to be fulfilled for regarding a transaction as IT:
(i) The transaction involves (a) purchase, sale or lease of tangible or intangible
property; or (b) provision of services; (c) lending or borrowing of money; or
(ii) The transaction could be of any nature having bearing on the income, profits,
losses or assets of transaction enterprises.
(iii) The transaction is between associated enterprises.
(iv) Atleast one of the transacting parties shall be non-resident. If both the parties
are non-residents, atleast one of the transaction party shall have presence in
India. [CBDT Circular 14/2001].
3 Meaning of ALP. [S. 92F]. It means the price charged or paid in a transaction between unrelated parties under
uncontrolled conditions.
2. Meaning of associated enterprise (AE) – S. 92A:

S. It means an enterprise-
92A (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or
(1) capital of the other enterprise; or
(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more
intermediaries, in its management or control or capital are the same persons who participate, directly or indirectly,
or through one or more intermediaries, in the management or control or capital of the other enterprise.
S. Two enterprises shall be deemed to be AEs for the purposes of S. 92A (1) if, at any time during the PY –
92A Circumstances Conditions
(2) (a) one enterprise holds, directly or not less than 26% of the voting power in the other enterprise
indirectly, shares carrying
(b) any enterprise holds, directly or not less than 26% of the voting power in each of such enterprises
indirectly, shares carrying
(c) a loan advanced by one enterprise not less than 51% of the book value of the total assets of the other
to the other enterprise constitutes enterprise
(d) one enterprise guarantees not less than 10% of the total borrowing of the other enterprise
(e) more than half of the BOD or are appointed by the other enterprise
members of the governing board,
or one or more executive directors
or executive members of the
governing board of one enterprise
(f) more than half of the directors or are appointed by the same person(s)
members of the governing board,
or one or more of the executive
directors or members of the
governing board, of each of the two
enterprises
(g) the manufacture or processing of on the use of know-how, patent, copyrights, trademarks, licences,
goods or articles or business franchises or any other business or commercial rights of similar nature,
carried out by one enterprise is or any data, documentation, drawing or specification relating to any
wholly dependent patent, invention, model, design, secret formula or process, of which the
other enterprise is the owner or in respect of which the other enterprise
has exclusive rights
(h) 90%, or more of the raw materials are supplied by the other enterprise, or by persons specified by the
and consumables required for the other enterprise, and the prices and other conditions relating to the
manufacture or processing of supply are influenced by such other enterprise.
goods or articles carried out by one
enterprise
(i) the goods or articles manufactured are sold to the other enterprise or to persons specified by the other
or processed by one enterprise enterprise, and the prices and other conditions relating thereto are
influenced by such other enterprise.
(j) where one enterprise is controlled the other enterprise is also controlled by such individual or his relative or

by an individual jointly by such individual and relative of such individual

(k) where one enterprise is controlled the other enterprise is controlled by a member of such HUF, or by a
by a HUF relative of a member of such HUF, or jointly by such member and his
relative
(l) where one enterprise is a firm, the other enterprise holds not less than 10% interest in such firm, AOP
AOP or BOI or BOI
(m) there exists between the two enterprises any relationship of mutual interest, as may be prescribed. [It may be
noted that the R. 10A to 10E do not refer to any relationship of mutual interest].
3. Cost-sharing arrangement:
S. 92B (1) International transaction shall include a mutual agreement or arrangement between two or more AEs
for the allocation or apportionment of any cost or expenses incurred or to be incurred in connection
with a benefit, service or facility provided or to be provided to any one or more of such enterprises.
S. 92 (2) In an international transaction between two or more AEs, when there is a mutual agreement or
arrangement for the allocation or apportionment of any cost or expenses in connection with a benefit,
service or facility provided to any one or more of such enterprises, then the allocation of cost,
expenses etc. shall be determined having regard to ALP of such benefit, service or facility.
4. Deemed international transaction – S. 92B (2):

Where, in respect of a transaction entered into by an enterprise with a person other than an AE (hereinafter referred to as
“other person”),
(i) there exists a prior agreement in relation to the relevant transaction between the other person and the AE or,
(ii) where the terms of the relevant transaction are determined in substance between such other person and the AE;
and
(iii) either the enterprise or the AE or both of them are NR,
then such transaction entered into between the enterprise and the other person shall be deemed to be an IT entered into
between two AEs, whether or not such other person is a NR.
5. Expansion of the scope of international transaction – Explanation to S. 92B:

International transaction shall include:
Transaction Amplification of scope of the terms used
(a) Purchase, sale, transfer, lease or use of Tangible property includes building, transportation vehicle, machinery,
tangible property equipment, tools, plant, furniture, commodity or any other article, product
or thing;
(b) Purchase, sale, transfer, lease or use of ‘Use of rights’ refers to
intangible property, including the transfer (i) land use,
of ownership or the provision of use of (ii) copyrights,
rights (iii) patents,
(iv) trademarks,
(v) licences,
(vi) franchises,
(vii) customer list,
(viii) marketing channel,
(ix) brand,
(x) commercial secret,
(xi) know-how,
(xii) industrial property right,
(xiii) exterior design or
(xiv) practical and new design or
(xv) any other business or commercial rights of similar nature;
(c) Capital financing Capital financing includes:
(i) any type of long-term or short-term borrowing,
(ii) lending or guarantee,
(iii) purchase or sale of marketable securities or
(iv) any type of advance, payments or deferred payment or
receivable or any other debt arising during the course of
business;
(d) Provision of services Provision of services includes

(i) provision of market research,

(ii) market development,
(iii) marketing management, administration,
(iv) technical service,
(v) repairs,
(vi) design,
(vii) consultation,
(viii) agency,
(ix) scientific research,
(x) legal or accounting service;
(e) Business restructuring or reorganisation, All such transactions are included in the definition of international
entered into by an enterprise with an AE transaction whether or not it has a bearing on the profit, income, losses
or assets of such enterprises at the time of the transaction or at any
future date;
6. Meaning of intangible property – Explanation to S. 92B:

Intangible property shall include:
(a) marketing related such as, trademarks, trade names, brand names, logos;
intangible assets
(b) technology related such as, process patents, patent applications, technical documentation such as
intangible assets laboratory notebooks, technical know-how;
(c) artistic related intangible such as, literary works and copyrights, musical compositions, copyrights, maps,
assets engravings;
(d) data processing related such as, proprietary computer software, software copyrights, automated databases, and
intangible assets integrated circuit masks and masters;
(e) engineering related such as, industrial design, product patents, trade secrets, engineering drawing and
intangible assets schema-tics, blueprints, proprietary documentation;
(f) customer related intangible such as, customer lists, customer contracts, customer relationship, open purchase
assets orders;
(g) contract related intangible such as, favourable supplier, contracts, licence agreements, franchise agreements, non-
assets compete agreements;
(h) human capital related such as, trained and organised work force, employment agreements, union contracts;
intangible assets
(i) location related intangible such as, leasehold interest, mineral exploitation rights, easements, air rights, water
assets rights;
(j) goodwill related intangible such as, institutional goodwill, professional practice goodwill, personal goodwill of
assets professional, celebrity goodwill, general business going concern value;
(k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or
technical data;
(l) any other similar item that derives its value from its intellectual content rather than its physical attributes.
7. S. 92 not to apply where adoption of ALP results in reduction of income or increase in loss:
The provisions of S. 92 shall not apply in a case where the computation of income U/s 92 (1) or the determination of the
allowance for any expense or interest U/s 92 (1), or the determination of any cost or expense allocated or apportioned, or,
as the case may be, contributed U/s 92 (2), has the effect of reducing the income chargeable to tax or increasing the loss,
as the case may be, computed on the basis of entries made in the BOA in respect of the PY in which the IT was entered
into.
8. Methods for determination of ALP – S. 92C:

1 Methods for computation of ALP price in relation to an international transaction shall be determined in accordance
ALP in relation to international with any of the following methods which is found to be most appropriate having regard
transaction. [S. 92C (1) + R. to the facts and circumstance of the case:
10B]. 1 comparable uncontrolled price method;
2 resale price method;
3 cost plus method;
4 profit split method;
5 transactional net margin method;
6 such other method as may be prescribed by the Board.
Accordingly, the Board has prescribed a method which takes into account the price

which has been charged or paid, or would have been charged or paid, for the same or
similar uncontrolled transaction, with or between non-AEs, under similar
circumstances, considering all the relevant facts. [R. 10AB].
2 Factors to be considered in The following factors are to be considered in selecting the most appropriate method:
selecting most appropriate (a) Nature of transaction
method. [S. 92C (1) + R. 10C]. (b) Class of transaction
(c) Class of AE
(d) Functions performed by such enterprises
(e) Assets employed by such enterprises
(f) Risk assumed by such enterprises.
(g) The availability, coverage and reliability of data necessary for application of
the method.
(h) The degree of comparability existing between the international transaction
and the uncontrolled transaction and between the enterprises entering into
such transactions;
(i) The extent to which reliable and accurate adjustments can be made to
account for difference, if any, between the IT and the comparable
uncontrolled transaction or between the enterprises entering into such
transactions;
(j) The nature, extent and reliability of assumptions required to be made in
application of a method.
3 Application of most The most appropriate method shall be applied for determination of ALP in relation to
appropriate method in the IT, in a manner as may be prescribed. [S. 92C (2)].
prescribed manner.
9. Manner of judging the comparability of IT with uncontrolled transaction:

For applying the above methods, the comparability of the IT with an uncontrolled transaction is to be judged with reference
to the following factors:
(i) The specific characteristics of the property transferred or services provided in either transaction;
(ii) The functions performed, taking into account assets employed or to be employed and the risks assumed, by the
respective parties to the transactions;
(iii) The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down
explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to
the transactions;
(iv) Conditions prevailing in the markets in which the respective parties to the transactions operate, including the
geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital
in the markets, overall economic development and level of competition and whether the markets are wholesale or
retail.
(v) R. 10B also provides that an uncontrolled transaction shall be comparable to an IT if none of the differences between
the transactions being comparable or between the enterprises entering into such transactions is likely to materially
affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market or
reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(vi) Further, the data to be used for the above comparison should relate to the FY (current year) in which the IT has been
entered into.
(vii) In case the most appropriate method for determination of ALP of a transaction entered into on or after 1.4.2014 is the
resale price method or cost-plus method or the transactional net margin method, then, the data to be used for
analysing the comparability of an uncontrolled transaction with an IT shall be –
(a) the data relating to the current year; or
(b) the data relating to the FY immediately preceding the current year, if the data relating to the current year is
not available at the time of furnishing the ROI by the assessee, for the AY relevant to the current year.
(viii) However, where the data relating to the current year is subsequently available at the time of determination of ALP of
an IT during the course of any assessment proceeding for the AY relevant to the current year, then, such data shall
be used for such determination irrespective of the fact that the data was not available at the time of furnishing the
ROI of the relevant AY.

10. Manner of determination of ALP where the application of the most appropriate method results in more than one
ALP: [3rd Proviso to S. 92C (2) + R. 10CA]:
1 Construction of data set. Where in respect of an IT, the application of the most appropriate method results in
[R. 10CA (2)]. determination of more than one price, then, a dataset shall be constructed by placing
such prices in an ascending order.
2 Determination of ALP Determine the arithmetical mean of all the values placed in the data set.
where the number of Situation Narration of the situation ALP
entries in the data set < 6. 1 Variation between the arithmetical mean and the Price at which IT was
[R. 10CA (7) Proviso international price ≤ tolerance limit effected.
below it]. 2 Variation between the arithmetical mean and the Arithmetical mean.
international price > tolerance limit
3 Tolerance limit applicable Case Narration of the case Tolerance limit
for the AY 2017-18 and AY 1 In case of wholesale trading 1% of price at which the IT was
2018-19. [Notification effected.
50/2017]. 2 In case of other international 3% of price at which the IT was
transactions effected.
4 Meaning of wholesale It means an IT of trading in goods, which fulfils the following conditions, namely: -
trading. (i) purchase cost of finished goods is 80% or more of the total cost pertaining to
such trading activities; and
(ii) average monthly closing inventory of such goods is 10% or less of sales
pertaining to such trading activities.
5 Determination of ALP 1 Ascertain the 35th percentile. [R. 10CA (4)].
where (a) the number of 2 Ascertain the 65th percentile. [R. 10CA (4)].
entries in the data set ≥ 6; 3 SN Situation ALP
and (b) the most 1 The price at which IT was effected is within the AL Price at which
appropriate method range beginning with 35% percentile and ending IT was effected.
selected is not the profit- with 65% percentile. [R. 10CA (5)].
split method or any other 2 The price at which IT was effected is outside the AL Median of the
method notified by the range aforesaid. [R. 10CA (6)]. dataset
CBDT.
6 Determination of 35th 1 Find 35% of total number of entries in the data set.
percentile. [R. 10CA (8) 2 SN Situation 35th percentile
(a)]. 1 Number arrived at in Value in the data set placed at the whole
step-1 = fractional number which is the next higher number to
number the fractional number.
2 Number arrived at in Arithmetical average of the value in the
step-1 = whole dataset at this number and the value in the
number dataset at next higher number.
7 Determination of 65th 1 Find 65% of total number of entries in the data set.
percentile. [R. 10CA (8) 2 SN Situation 65th percentile
(b)]. 1 Number arrived at in Value in the data set placed at the whole
step-1 = fractional number which is the next higher number to the
number fractional number.
2 Number arrived at in Arithmetical average of the value in the dataset
step-1 = whole at this number and the value in the dataset at
number next higher number.
8 Determination of median in 1 Find 50% of total number of entries in the data set.
the data set. [R. 10CA (8) 2 SN Situation Median
(c)]. 1 Number arrived at in Value in the data set placed at the whole
step-1 = fractional number which is the next higher number to the
number fractional number.
2 Number arrived at in Arithmetical average of the value in the dataset
step-1 = whole at this number and the value in the dataset at
number next higher number.

11. Points to be considered in construction of data set – R. 10CA (2) & S. 10CA (3):
1 Data to be used for construction of dataset – S. 10CA (2)
SN Narration of the situation Data to be used in construction of data set
1 The most appropriate method (MAM) is the The most appropriate method used to determine the price
RPM or CPM or TNMM. of the comparable uncontrolled transaction undertaken in
The comparable uncontrolled transaction has the current year shall be applied in similar manner to the
been identified on the basis of data relating to comparable uncontrolled transaction or transactions
the current year. undertaken in the aforesaid period and the price in respect
The enterprise undertaking the said uncontrolled of such uncontrolled transactions shall be determined.
transaction is not the enterprise undertaking the
IT for which the ALP is being determined. Then, the weighted average of the prices of the
Such enterprise has in either or both of the 2 comparable uncontrolled transactions undertaken in the
FYs immediately preceding the current year current year and in the aforesaid period preceding it shall
undertaken the same or similar comparable be included in the dataset.
uncontrolled transaction.
2 The most appropriate method is the RPM or The price in respect of such uncontrolled transaction shall
CPM or TNMM. be determined by applying the most appropriate method in
The comparable uncontrolled transaction has a similar manner as it was applied to determine the price
been identified on the basis of the data relating of the comparable uncontrolled transaction undertaken in
to FY immediately preceding current year. the FY immediately preceding the current year; and
The enterprise undertaking the said uncontrolled
transaction is not the enterprise undertaking the The weighted average of the prices of the comparable
IT for which the ALP is being determined. uncontrolled transactions undertaken in the aforesaid
Such enterprise has in the FY immediately period of two years shall be included in the dataset.
preceding the said FY undertaken the same or
similar comparable uncontrolled transaction.
2 Omission of data from the dataset at the time of making assessment – S. 10CA (2):
In situation-2, where the use of data relating to the current year for determination of ALP subsequently at the time of
assessment establishes that, -
(i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or
(ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled
transaction, then,
irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the FY
immediately preceding the current year or the FY immediately preceding such FY, the price of comparable uncontrolled
transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by
such enterprise shall not be included in the dataset.
3 Manner of computation of weighted average price – S. 10CA (3):
Where an enterprise has undertaken comparable uncontrolled transactions in more than one FY, then for the above
purposes the weighted average of the prices of such transactions shall be computed in the following manner, namely: -
Method used to Manner of computation of weighted average of the prices
determine the prices
(i) RPM By assigning weights to the quantum of sales which has been considered
for arriving at the respective prices
(ii) CPM By assigning weights to the quantum of costs which has been considered
for arriving at the respective prices
(iii) TNMM By assigning weights to the quantum of costs incurred or sales effected or
assets employed or to be employed, or as the case may be, any other base
which has been considered for arriving at the respective prices.
12. Records to be maintained – S. 92D:

S. 92D (1) Maintaining prescribed Every person who enters into an IT shall keep and maintain such
information and documents. information and documents in respect thereof as may be prescribed by
CBDT.
S. 92D (2) Keeping and maintaining the The Board is empowered to prescribe the period for which the information
aforesaid information and and documents shall be kept and maintained.
documents for the prescribed R. 10D (5) requires the aforesaid information and documents to be
period. maintained for a period of 8 years from the end of the relevant AY.
S. 92D (3) Power of AO / CIT (A) to seek The AO or the CIT (A) may, in the course of any proceedings under the
the aforesaid information and Act, require any person who has entered into an IT to furnish the aforesaid

documents. information or documents within a period of thirty days from the date of
receipt of a notice issued in this regard.
Proviso to S. Extension of time to furnish The AO or CIT (A) may, on an application made by such person, extend
92D (3) the aforesaid information and the period of 30 days by a further period not exceeding 30 days.
documents.
Documents and information to be maintained – R. 10D (1):

R. 10D (1) requires every person who has entered into IT to keep and maintain the following information and documents:
(i) A description of the ownership structure of the assessee enterprise with details of shares or other ownership interest
held therein by other enterprises;
(ii) A profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status
and country of tax residence of each of the enterprises comprised in the group with whom ITs have been entered into by
the assessee, and ownership linkages among them;
(iii) A broad description of the business of the assessee and the industry in which the assessee operates, and the business
of the AEs with whom the assessee has transacted;
(iv) The nature and terms (including prices) of ITs entered into with each AE, details of property transferred or services
provided and the quantum and the value of each such transaction or class of such transaction;
(v) A description of the functions performed, risks assumed and assets employed or to be employed by the assessee and
by the AEs involved in the ITs;
(vi) A record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the
assessee for the business as a whole and for each division or product separately, which may have a bearing on the ITs
entered into by the assessee;
(vii) A record of uncontrolled transactions taken into account for analysing their comparability with the ITs entered into,
including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which
may be of relevance to the pricing of the ITs;
(viii) A record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant IT;
(ix) A description of the methods considered for determining the ALP in relation to each IT or class of IT, the method
selected as the MAM along with explanation as to why such method was so selected, and how such method was
applied in each case;
(x) A record of the actual working carried out for determining the ALP, including details of the comparable data and financial
information used to apply the MAM, and adjustments, if any, which were made to account for differences between the IT
and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;
(xi) The assumptions, policies and price negotiations, if any, which have critically affected the determination of the ALP;
(xii) Details of the adjustments, if any, made to transfer prices to align them with ALP determined under the Income-tax
Rules and consequent adjustment made to the TI for tax purposes;
(xiii) Any other information, data or documents, including information or data relating to the AE, which may be relevant for
determination of the ALP.
Relaxation from maintenance of aforesaid information and documents – R. 10D (2):
(a) R. 10D (2) provides that in a case where the aggregate value of ITs does not exceed Rs. 1 crore, it will not be
obligatory for the assessee to maintain the above information and documents.
(b) Considering the wording of this Rule it appears that this limit will apply with reference to the aggregate value of the ITs
with each AE and not with reference to the aggregate value of the ITs with all AEs during the FY put together.
(c) However, it is provided that in the above cases also the assessee will have to substantiate that the income arising from
the ITs with AEs, as disclosed by the accounts, is in accordance with S. 92.
(d) This will mean that, even if the aggregate value of the ITs is less than Rs. 1 crore, the assessee will have to maintain
adequate records and evidence to show that the ITs with AEs are on the basis of AL principle.
Penalty U/s 271AA for violation of requirements of S. 92D (1) and S. 92D (2):
1 In order to provide a check on such a practice and ensure compliance with the transfer pricing regulations, S. 271AA
provides that, the AO or CIT (A) may direct the person entering into an IT to pay a penalty @ 2% of the value of the IT
entered into by him, if the person:
(i) fails to keep and maintain any such document and information as required by S. 92D (1) and S. 92D (2);
(ii) fails to report such international transaction which is required to be reported; or
(iii) maintains or furnishes any incorrect information or document.
2 In all the above cases, if the assessee can show that there was reasonable cause for the failure, no penalty will be
leviable. [S. 273B].

Penalty for not complying with the terms of notice issued U/s 92D (3): [S. 271G]:
1 If any person who has entered into an IT fails to furnish any such information or document as required by S. 92D (3), the
AO or TPO or the CIT (A) may direct that such person shall pay, by way of penalty, a sum equal to 2% of the value of
the international transaction for each such failure. [S. 271G].
2 No penalty shall be levied if there is a reasonable cause. [S. 273B].
13. CbC reporting requirement: [S. 286]:

S. 286 Obligation of resident Every constituent entity resident in India, of an international group having parent entity
(1) constituent entity to that is not resident in India, shall notify the prescribed income-tax authority on or before
furnish details the prescribed date –
regarding parent (i) whether it is the alternate reporting entity of the international group; or
entity or alternating (ii) the details of the parent entity or the alternate reporting entity, if any of the
reporting entity. international group, and the country or territory of which the said entities are
resident.
S. 286 Obligation of the Every parent entity of an international group or the alternate reporting entity, if it is
(2) parent entity or resident in India shall be required to furnish the report in respect of the group to the
alternate reporting prescribed authority for every reporting accounting year, on or before the due date of
entity to furnish report furnishing of ROI U/s 139 (1) for the relevant accounting year for which the report is
in respect of its group. being furnished, in the prescribed form and manner;
S. 286 Contents of report It should contain aggregate information in respect of:
(3) referred to in S. 286 (i) the amount of revenue,
(2). (ii) profit and loss before income-tax,
(iii) amount of income-tax paid and accrued,
(iv) details of stated capital, accumulated earnings, number of employees, tangible
assets other than cash or cash equivalent in respect of each country or
territory in which the group operates.
(v) the details of each constituent entity of the group including the country or
territory in which such constituent entity is incorporated or organised or
established and the country or territory where it is resident.
(v) the nature and detail of main business activity of each constituent entity.
(vi) any other information as may be prescribed.
S. 286 Circumstances in A constituent entity of an international group resident in India, shall be required to
(4) which the resident furnish CbC report to the prescribed authority if the parent entity of the group is
constituent entity has resident; -
obligation to furnish (i) in a country with which India does not have an arrangement for exchange of
report referred to in S. the CbC report; or
286 (2). (ii) there has been a systemic failure of the country or territory [i.e., such country is
not exchanging information with India even though there is an agreement]; and
this fact has been intimated to the entity by the prescribed authority.
If there are more than one such constituent entity of same group in India, then the
group can nominate (under intimation in writing on behalf of group to the prescribed
authority), one constituent entity that shall furnish the report on behalf of the group. This
entity would then furnish the report [Proviso to S. 286 (4)];
S. Penalty for If the reporting entity has provided any inaccurate information in the report, the penalty
271GB submission of would be Rs. 5L if, -
(4) inaccurate information (a) the entity has knowledge of the inaccuracy at the time of furnishing the report
in the CbC report. but does not inform the prescribed authority; or
(b) the entity discovers the inaccuracy after the report is furnished and fails to
inform the prescribed authority and furnish correct report within a period of
fifteen days of such discovery; or
(c) the entity furnishes inaccurate information or document in response to notice of
the prescribed authority U/s 286 (6).
No penalty shall be levied if there is reasonable cause for such failure. [S. 273B].
S. 286 When constituent If an international group, having parent entity which is not resident in India, had
(5) resident entity has no designated an alternate entity for filing its report with the tax jurisdiction in which the
obligation to file report alternate entity is resident, then the entities of such group operating in India would not
U/s 286 (4)? be obliged to furnish report if the report can be obtained under the agreement of
exchange of such reports by ITA;

S. 286 Power of prescribed The prescribed authority may call for such document and information from the entity
(6) authority to call for furnishing the report as it may specify in notice for the purpose of verifying the
document and accuracy.
information for The entity shall be required to make submission within 30 days of receipt of notice or
verifying the accuracy further period if extended by the prescribed authority, but extension shall not be beyond
of the report a further period of 30 days.
furnished.
S. Penalty for failure to Default Penalty
271GB produce information (a) Failure to produce information Rs. 5,000 per day of continuing failure, from
(2) & and documents within before prescribed authority the day immediately following the day on
(3) prescribed time within the period allowed u/s which the period for furnishing the
286(6) information and document expires.
(b) Continuing default even after Rs. 50,000 per day for the period of default
service of penalty order beyond the date of service of penalty order.
No penalty shall be levied U/s 271GB, if there is reasonable cause. [S. 273B].
S. 286 Exemption from the The requirements of this section shall not apply in respect of an international group for
(7) requirements of S. an accounting year, if the total consolidated group revenue as reflected in the
286. consolidated financial statement (CFS) for the accounting year preceding such
accounting year does not exceed the threshold to be prescribed.
14. Maintenance and furnishing of Master file:

(1) A person being constituent of an international group shall, in addition to the information related to the IT required U/s
92D (1), also keep and maintain such information and document in respect of the international group to be prescribed
by way of rules. The rules shall, thereafter, prescribe the information and document as mandated for master file under
OECD BEPS Action 13 report; [Proviso to S. 92D (1)].
(2) The information and document shall also be furnished to the prescribed authority U/s 286 (1) within such period as
may be prescribed and the manner of furnishing may also be provided for in the rules. [S. 92D (4)].
(3) For non-furnishing of the information and document to the prescribed authority, a penalty of Rs. 5L shall be leviable.
[S. 271AA (2)].
(4) Reasonable cause defence against levy of penalty shall be available to the entity. [S. 273B].
14A. Audit Report [S. 92E]:

1 Every person who enters into an IT during a PY is required to obtain a report from a CA and furnish such report on or
before the specified date in the prescribed form.
2 R. 10E provides that the auditor’s report shall be in Form No.3CEB.
3 This report is in two parts. The first part requires the auditor to state that he has examined the accounts and records of
the assessee relating to the ITs entered into by the assessee during the relevant year.
4 He has also to give his opinion whether the prescribed information and documents relating to the above transactions
have been kept by the assessee.
5 Further, he has to state that the particulars stated in the Annexure to his report are true and correct.
6 In the second part of the report i.e. Annexure, the particulars about the ITs are required to be stated. Broadly stated
these particulars include list of AEs, particulars and description of transactions relating to purchase, sales, provisions of
service, loans, advances, etc.
7 “Specified date” is 30th November of the AY.
Penalty for non-compliance with S. 92E – S. 271BA:

1 If any person fails to furnish a report from an accountant as required by S. 92E, the AO may direct that such person
shall pay, by way of penalty, a sum of Rs. 1L.
2 No penalty shall be levied if there is reasonable cause for the failure. [S. 273B].
15. Powers of AO in relation to determination of ALP:

S. 92C (3) Circumstances in which the AO The price charged or paid in an IT has not been determined in accordance with S.
can proceed to determine the 92C (1) and S. 92 (2); or
ALP in relation to IT based on Any information and documents relating to an IT has not been kept and maintained
the material, document or by the assessee in accordance with the provisions contained in S. 92D (1) and the
information available with him. rules made in this behalf (R. 10D); or
The information or data used in computation of the ALP is not reliable or correct; or
The assessee has failed to furnish within the specified time, any information or
documents which he was required to furnish by a notice issued U/s 92D (3).

Proviso to S. OBH to the assessee Before the AO proceeds to determine the ALP in relation to ITs based on the
92C (3) material or document or information available with him, he shall give OBH to the
assessee.
S. 92C (4) Determination of TI having Where an ALP is determined by the AO U/s 92C (3), the AO may compute the TI of
regard to the ALP determined the assessee having regard to the ALP so determined.
U/s 92C (3).
Proviso-1 to No deduction U/s 10AA and No deduction U/s 10AA or under Chapter VI-A shall be allowed in respect of the
S. 92C (4) Chapter VI-A against the addition amount of income by which the TI of the assessee is enhanced after computation of
on account of substitution of IT income U/s 92C (4).
price by the ALP.
Proviso-2 to Deduction in respect of expense Where the TI of an AE is computed U/s 92C (4) on determination of the ALP paid to
S. 92C (4) determined on ALP basis in the another associated enterprise from which tax has been deducted or was deductible
hands of payer - Bar on re- under the provisions of Chapter XVIIB, the income of the other AE shall not be
computing the total income of the recomputed by reason of such determination of ALP in the case of the first
payee based on ALP. mentioned enterprise.
Penalty U/s 270A:

1 U/s 270A, penalty@50% of tax payable on under-reported income is leviable. However, the amount of under-reported
income represented by any addition made in conformity with the ALP determined by the TPO would not be included
within the scope of under-reported income U/s 270A, where the assessee had maintained information and documents,
as prescribed U/s 92D, declared the ITs under Chapter X and disclosed all material facts relating to the transaction.
2 Failure to report any IT to which the provisions of Chapter X applies would constitute ‘misreporting of income’ U/s 270A
(9), in respect of which penalty @ 200% would be attracted.
16. Reference to Transfer Pricing Officer [S. 92CA]:

1 Reference to TPO for In the course of assessment or reassessment proceedings, the AO may, at his option, make
determination of ALP. reference to the TPO seeking determination of ALP in respect of ITs entered into by the
assessee.
Before making reference to the TPO, the AO has to obtain the approval of PCIT/CIT. [S. 92CA
(1)].
2 Who is TPO? [Explanation to TPO means a JCIT or DCIT or ACIT authorised by the CBDT to perform all or any of the
S. 92CA] functions of an AO specified in S. 92C and S. 92D in respect of any person or class of
persons.
3 Notice seeking evidence in When such reference is made, the TPO, through a notice issued to the assessee, can call
support of computation of ALP. upon the assessee to produce evidence in support of the computation of ALP made by him.
[S. 92CA (2)].
4 TPO empowered to consider The TPO can also determine the ALP of other ITs identified subsequently in the course of
any other IT not referred to him proceedings before him (in respect of which no reference was made by the AO to the TPO).
and can proceed to determine [S. 92CA (2A)].
ALP even in respect of such Where in respect of an IT, the assessee has not furnished the report U/s 92E and such IT
ITs. comes to the notice of the TPO during the course of the proceeding before him, then the TPO
can proceed to determine the ALP even in respect of such IT as if that was also referred to by
the AO U/s 92CA (1). [S. 92CA (2B)].
5 Order of TPO determining the The TPO has to pass an order determining the ALP after considering the evidence,
ALP. [S. 92CA (3)]. documents, etc. produced by the assessee and after considering the material gathered by him.
He has to send a copy of his order to AO as well as the assessee.
6 Time-limit for the TPO to pass In order to provide sufficient time to the AO to complete the assessment in a case where
his order. [S. 92CA (3A)] reference is made to the TPO, S. 92CA (3A) to provide for determination of ALP of ITs by the
TPO at least 60 days before the expiry of the time limit U/s 153 or S. 153B for making an order
of assessment by the AO.
7 Time-time for making AY Time limit for completion of assessment
assessment U/s 143 (3) or S. 17-18 or earlier AYs
144 where reference is made 33 months from the end of the relevant AY.
to the TPO U/s 92CA (1). [S. 18-19
30 months from the end of the relevant AY.
153 (4)].
19-20 onwards 24 months from the end of the relevant AY.
8 Time-time for making SN Situation Time limit for completion of assessment or
assessment or reassessment reassessment.
U/s 147 where reference is

made to the TPO U/s 92CA 1 Where notice U/s 148 is 21 months from the end of the FY in which notice u/s
(1). [S. 153 (4)]. served before 1.4.2019 148 is served.
2 Where notice U/s 148 is 24 months from the end of the FY in which the notice
served on or after u/s 148 is served.
1.4.2019
9 Time limit for completion of Situation Narration of the situation Time-limit
post-search assessment or 1 Date on which last of authorisation 33 months from the end of the FY in
reassessment (for 6AYs, for search or requisition got which last of the authorisation for
relevant AYs and AY relevant executed < 01.04.2018. search or requisition got executed.
to the PY of search) where 2 Date on which last of authorisation 30 months from the end of the FY in
reference is made to the TPO for search or requisition got which last of the authorisation for
U/s 92CA (1). [S. 153B]. executed falls during the FY 18-19 search or requisition got executed.
3 Date on which last of authorisation 24 months from the end of the FY in
for search or requisition got which last of the authorisation for
executed ≥ 01.04.2019 search or requisition got executed.
10 Time-limit for making reference It is not explicitly provided for in the Act. However, it could be inferred. Reference to the TPO
to TPO. shall be made before the time limit for completion of assessment or reassessment U/s 153 or
S. 153A (which is applicable when no reference is made to the TPO).
11 Extended time-limit for TPO in In many cases, it becomes necessary to seek information from foreign jurisdictions for the
certain cases and consequent purpose of determining the ALP by the TPO. At times, proceedings before the TPO may also
extension of time limit for be stayed by a court order.
completion of assessment. Taking into consideration such cases, it has been provided that where assessment
[Proviso to S. 92CA (3A) + 2nd proceedings are stayed by any court or where a reference for exchange of information has
Proviso to S. 153]. been made by competent authority under an agreement referred to in S. 90/90A, the time
available to TPO for making an order after excluding the time for which assessment
proceedings were stayed or the time taken for receipt of information, as the case may be, is
less than 60 days, then, such remaining period shall be extended to 60 days.
Where the period available to the TPO referred to in s. 92CA (3A) is extended to 60 days in
accordance with the proviso thereunder, and the period of limitation available to the AO for
making an order of assessment or reassessment, is less than 60 days, such remaining period
shall be extended to 60 days and the aforesaid period of limitation shall be deemed to be
extended accordingly.
12 Determination of TI having The order of the TPO determining the ALP of an IT is binding on the AO and the AO shall
regard to ALP. [S. 92CA (4)] proceed to compute the TI in conformity with the ALP determined by the TPO.
No deduction U/s 10AA or under Chapter VI-A shall be allowed in respect of increase in the TI
on account of substitution of IT price by the ALP determined by the TPO.
Such increase in TI shall be regarded as under-reported income and penalty could be levied
U/s 270A. However, penalty could be avoided if:
(a) The assessee has maintained information and documents prescribed U/s 92D.
(b) The assessee has declared the IT under Chapter-X.
(c) The assessee disclosed all material facts relating to IT.
13 TPO can rectify mistake With a view to rectifying any mistake apparent from the record, the TPO may amend any order
apparent from record. passed by him U/s 92CA (3), and the provisions of S. 154 shall, so far as may be, apply
accordingly. [S. 92CA (5)].
14 Consequential rectification Where any amendment is made by the TPO U/s 92CA (5), he shall send a copy of his order to
order by AO. [S. 92CA (6)]. the AO who shall thereafter proceed to amend the order of assessment in conformity with such
order of the TPO.
17. Provisions relating to dispute resolution panel (DRP) – S. 144C:

1 Assessees eligible to Foreign companies.
claim the benefits of Any assessee whose returned income or loss is to be varied in consequence of an order
dispute resolution passed by the TPO U/s 92CA (3). [S. 144C (15) (b)].
mechanism.
2 Forwarding draft order to The AO shall, in the first instance, forward a draft of the proposed order of assessment to
the eligible assessee. [S. the eligible assessee if he proposes to make any variation in the income or loss returned
144C (1)]. which is prejudicial to the interest of such assessee.
3 Time limit for the On receipt of the draft order, the eligible assessee shall, within 30 days of the receipt by
assessee to him of the draft order,—

communicate acceptance a) file his acceptance of the variations to the AO; or

or for raising objections. (b) file his objections, if any, to such variation with,— (i) the DRP; and (ii) the AO.
[S. 144C (2)].
4 Meaning of DRP. [S. DRP means a collegium comprising of three CITs constituted by the CBDT for this
144C (15) (a)]. purpose.
5 Circumstances under The AO shall complete the assessment on the basis of the draft order, if—
which assessment is to (a) the assessee intimates to the AO the acceptance of the variation; or
be based on draft order. (b) no objections are received within the period specified in S. 144C (2).
[S. 144C (3)].
6 Time limit for framing The AO shall, notwithstanding anything contained in S. 153, pass the assessment order
assessment based on U/s 144C (3) within 1 month from the end of the month in which,—
draft order. [S. 144C (4)]. (a) the acceptance is received; or
(b) the period of filing of objections U/s 144C (2) expires.
7 Directions to AO to The DRP shall, in a case where any objection is received U/s 144C (2), issue such
enable completion of directions, as it thinks fit, for the guidance of the AO to enable him to complete the
assessment. [S. 144C assessment.
(5)].
8 Documents to be The DRP shall issue the directions U/s 144C (5), after considering the following,
considered before giving namely:—
directions. [S. 144C (6)]. (a) draft order;
(b) objections filed by the assessee;
(c) evidence furnished by the assessee;
(d) report, if any, of the AO, VO or TPO or any other authority;
(e) records relating to the draft order;
(f) evidence collected by, or caused to be collected by, it;
(g) result of any enquiry made by, or caused to be made by, it.
9 Power to conduct or The DRP may, before issuing any directions referred to in S. 144C (5),—
direct further inquiry. [S. (a) make such further enquiry, as it thinks fit; or
144C (7)]. (b) cause any further enquiry to be made by any income-tax authority and report the
result of the same to it.
10 Order of DRP to be The DRP may confirm, reduce or enhance the variations proposed in the draft order so,
decisive. [S. 144C (8)]. however, that it shall not set aside any proposed variation or issue any direction U/s
144C (5) for further enquiry and passing of the assessment order.
11 Enhancing the power to The power of DRP to enhance the variation shall include the power to consider any
enhance the variation. matter arising out of the assessment proceedings relating to the draft order,
notwithstanding that such matter was raised or not by the eligible assessee. [Explanation
to S. 144C (8)].
12 Decision by majority. If the members of the DRP differ in opinion on any point, the point shall be decided
according to the opinion of the majority of the members.
13 Direction binding on AO. Every direction issued by the DRP shall be binding on the AO.
[S. 144C (10)].
14 OBH to be given where No direction U/s 144C (5) shall be issued unless an OBH is given to the assessee and
directions are prejudicial. the AO on such directions which are prejudicial to the interest of the assessee or the
[S. 144C (11)]. interest of the revenue, respectively.
15 Time limit for giving No direction U/s 144C (5) shall be issued after 9 months from the end of the month in
directions. [S. 144C (12)]. which the draft order is forwarded to the eligible assessee.
16 Time limit for framing Upon receipt of the directions issued U/s 144C (5), the AO shall, in conformity with the
assessment based on directions, complete, notwithstanding anything to the contrary contained in S. 153, the
the directions of DRP. [S. assessment without providing any further opportunity of being heard to the assessee,
144C (13)]. within 1 month from the end of the month in which such direction is received.

17. Safe harbour rules – S. 92CB:

Where an eligible assessee has entered into an eligible international transaction (EIT) and the option exercised by the said
assessee is not held to be invalid U/R 10TE, the transfer price declared by the assessee in respect of such transaction shall
be accepted by the income-tax authorities, if it is in accordance with the circumstances mentioned below:
Segment-1:
1 EIT Provision of software development services
2 Meaning of software It means:
development services (i) Business application software and information system development using known
methods and existing software tools;
(ii) Support for existing systems;
(iii) Converting or translating computer languages;
(iv) adding user functionality to application programmes;
(v) debugging of systems;
(vi) adaptation of existing software; or
(vii) preparation of user documentation.
It, however, does not include any R&D services whether or not in the nature of contract R&D
services.
3 Circumstance in which The operating profit margin declared by the eligible assessee from the EIT in relation to
the transfer price operating expense incurred is –
should not be Not less than the Where the Ʃ value of IT entered into during the PY
questioned. prescribed %
17% does not exceed a sum of Rs. 100 crore;
18% exceeds a sum of Rs. 100 crore but does not exceed Rs. 200
crore.
Segment-2:
1 EIT Provision of information technology enabled services.
2 Meaning of IT enabled It means the following business process outsourcing services provided mainly with the
services assistance or use of information technology, namely: ‐
(i) back office operations
(ii) call centres or contact centre services
(iii) data processing and data mining
(iv) insurance claim processing
(v) legal databases
(vi) creation and maintenance of medical transcription excluding medical advice
(vii) translation services
(viii) Payroll
(ix) remote maintenance
(x) revenue accounting
(xi) support centres
(xii) website services
(xiii) data search integration and analysis
(xiv) remote education excluding education content development
(xv) clinical database management services excluding clinical trials
services.
the transfer price operating expense incurred is –
should not be Not less than the Where the Ʃ value of IT entered into during the PY
17% does not exceed a sum of Rs. 100 crore;
18% exceeds a sum of Rs. 100 crore but does not exceed Rs. 200
crore.

Segment-3:
1 EIT Provision of knowledge process outsourcing services
2 Meaning of knowledge It means the following business process outsourcing services provided mainly with the
process outsourcing assistance or use of information technology requiring application of knowledge and advanced
services analytical and technical skills, namely: ‐
(i) geographic information system
(ii) human resources services
(iii) engineering and design services
(iv) animation or content development and management
(v) business analytics
(vi) financial analytics
(vii) market research
services.
3 Circumstance in which The value of IT does not exceed Rs. 200 crore and the operating profit margin declared by
the transfer price the eligible assessee from the EIT in relation to operating expense is –
should not be Not less than the Employee Cost in relation to the Operating Expense
24% Atleast 60%
21% 40% or more but less than 60%;
18% does not exceed 40%.
Segment-4:
1 EIT Advancing of intra‐group loans where the amount of loan is denominated in Indian Rupees.
2 Meaning of intra‐group It means loan advanced to wholly owned subsidiary being a non-resident, where the loan
loans (i) is sourced in Indian rupees
(ii) is not advanced by an enterprise, being a financial company including a bank or a
financial institution or an enterprise engaged in lending or borrowing in the normal
course of business; and
(iii) does not include credit line or any other loan facility which has no fixed term for
repayment;
3 Circumstance in which The interest rate declared in relation to the EIT is not less than the one-year marginal cost of
the transfer price funds lending rate of SBI as on 1st April of the relevant PY plus
should not be % CRISIL rating of AEs or its equivalent
questioned. 1.75% Between AAA to A
3.25% BBB-, BBB,
BBB+
4.75% Between BB to B
6.25% C to D
4.25% Where no credit rating is available and the loan to AE including
loans to all AEs in Indian rupees does not exceed ` 100 crore
in aggregate as on 31st March of the relevant PY.
Segment-5:
1 EIT Advancing of intra‐group loans where the amount of loan is denominated in foreign currency.
2 Circumstance in which The interest rate declared in relation to the EIT is not less than the 6-month LIBOR of the
the transfer price relevant foreign currency as on 30th September of the relevant PY plus
should not be % CRISIL rating of AEs or its equivalent
questioned. 1.50% Between AAA to A
3.00% BBB-, BBB,
BBB+
4.50% Between BB to B
6.00% C to D
4.00% Where no credit rating is available and the loan to AE including loans
to all AEs does not exceed ` 100 crore in aggregate as on 31st March
of the relevant PY.

Segment-6:
1 EIT Providing corporate guarantee
2 Meaning of It means explicit corporate guarantee extended by a company to its wholly owned subsidiary
corporate guarantee being a NR in respect of any short‐term or long-term borrowing. Explicit corporate guarantee,
however, does not include–
(i) letter of comfort;
(ii) implicit corporate guarantee;
(iii) performance guarantee; or
(iv) any other guarantee of similar nature.
3 Circumstance in Where the amount guaranteed The commission or fee declared in relation to the
which the transfer EIT is at the rate not less than -
price should not be does not exceed Rs. 100 crore. 1% p.a. on the amount guaranteed
questioned. exceeds Rs. 100 crore and the credit
rating of the AE done by an agency
registered with the SEBI is of the
adequate to the highest Safety
Segment-7:
1 EIT Provision of contract R & D services wholly or partly relating to software development.
2 Meaning of contract It means the following, namely:
R & D services (i) R & D producing new theorems and algorithms in the field of theoretical computer
wholly or partly science;
relating to software (ii) development of information technology at the level of operating systems,
development programming languages, data management, communications software and software
development tools;
(iii) development of Internet technology;
(iv) research into methods of designing, developing, deploying or maintaining software;
(v) software development that produces advances in generic approaches for capturing,
transmitting, storing, retrieving, manipulating or displaying information;
(vi) experimental development aimed at filling technology knowledge gaps as necessary
to develop a software programme or system;
(vii) R & D on software tools or technologies in specialized
areas of computing (image processing, geographic data presentation, character
recognition, artificial intelligence and such other areas); or
(viii) Upgradation of existing products where source code has been made available by the
principal except where the source code has been made available to carry out
routine functions like debugging of the software.
3 Circumstance in The operating profit margins declared by the eligible assessee from the EIT in relation to
which the transfer operating expense incurred is not less than 24%, where the value of the IT does not exceed
price should not be Rs. 200 crore.
questioned.
Segement-8:
1 EIT Provision of contract R&D services wholly or partly relating to generic pharmaceutical drugs.
2 Meaning of Generic It means a drug that is comparable to a drug already approved by the regulatory authority in dosage
pharmaceutical drug form, strength, route of administration, quality and performance characteristics, and intended use.
3 Circumstance in which The operating profit margins declared by the eligible assessee from the EIT in relation to operating
the transfer price should expense incurred is not less than 24%, where the value of the IT does not exceed Rs. 200 crore.
not be questioned.
Segment-9:
1 EIT Manufacture and export of core auto components.
2 Meaning of Core auto It means:
components. (i) engine and engine parts, including piston and piston rings, engine valves and
parts cooling systems and parts and power train components;
(ii) transmission and steering parts, including gears, wheels, steering systems, axles
and clutches;
(iii) suspension and braking parts, including brake and brake assemblies, brake
linings, shock absorbers and leaf springs;

the transfer price should operating expense is not less than 12%.
not be questioned.
Segment-10:
1 EIT Manufacture and export of non-core auto components
2 Non-core auto components. It means auto components other than core auto components.
3 Circumstance in which the transfer The operating profit margin declared by the eligible assessee from the EIT in relation to
price should not be questioned. operating expense is not less than 8.5%.
Segment-11:
1 EIT Receipt of low value-adding intra Group services from one or more members of its group.
2 Meaning of low value- It means services that are performed by one or more members of a multinational enterprise
adding intra group services group on behalf of one or more other members of the same multinational enterprise group
and which,
(i) are in the nature of support services;
(ii) are not part of the core business of the multinational
enterprise group, i.e., such services neither constitute the profit-earning activities
nor contribute to the economically significant activities of the multinational
enterprise group;
(iii) are not in the nature of shareholder services or duplicate services;
(iv) neither require the use of unique and valuable intangibles nor lead to the creation
of unique and valuable intangibles;
(v) neither involve the assumption or control of significant risk by the service provider
nor give rise to the creation of significant risk for the service provider; and
(vi) do not have reliable external comparable services that can be used for
determining their ALP
3 Exclusions from low value- However, it does not include the following services, namely:
adding intra group services
(i) research and development services;
(ii) manufacturing and production services;
(iii)information technology (software development) services;
(iv) knowledge process outsourcing services;
(v) business process outsourcing services;
(vi) purchasing activities of raw materials or other materials that are used in the
manufacturing or production process;
(vii) sales, marketing and distribution activities;
(viii) financial transactions;
(ix) extraction, exploration, or processing of natural resources; and
(x) insurance and reinsurance;
4 Circumstance in which the The entire value of the international transaction, including a mark-up not exceeding 5%,
transfer price should not be does not exceed a sum of Rs. 10 crore.
questioned. However, the method of cost pooling, the exclusion of shareholder costs and duplicate
costs from the cost pool and the reasonableness of the allocation keys used for allocation
of costs to the assessee by the overseas AE, is certified by an accountant.

1 Years for which safe harbour AY 18-19 and AY 19-20
rules are applicable
2 Compliance with provisions S. 92D requiring every person who has entered into an IT to keep and maintain the prescribed
of S. 92D and S. 92E – information and documents and S. 92E requiring such person to obtain a report from an
required accountant and furnish such report on or before the specified date in prescribed form and manner,
shall apply irrespective of the fact that the assessee exercises his option for safe harbour in
respect of such transaction.
3 When safe harbour rules If the eligible assessee enters into EIT with person located in NJA or with AEs located in no tax or
shall not apply? low tax country or territory, then SH rules do not apply.
No tax or low tax country or territory means country or territory in which maximum income tax rate
is less than 15%.

Chapter-42: General Anti-Avoidance Rules (Chapter-XA) - Summary
1. Introduction:
1 Tax evasion refers to any attempt to avoid payment of taxes by using illegal and fraudulent means.
Some of the common forms of tax evasion are:
(i) Misrepresentation or suppression of facts
(ii) Failure to record investment in books of accounts
(iii) Claim of expenditure not substantiated by any evidence
(iv) Recording of any false entry in the books of accounts
(v) Failure to record any receipt in books of accounts having a bearing on total income.
(vi) Failure to report any international transaction or deemed international transaction or specified domestic transaction
under Chapter-X.
2 Tax planning means an arrangement of one’s financial affairs in such a way that without violating in any law the legal
provisions, full advantage is taken of all tax exemptions, deductions, concessions, rebates, allowances and other reliefs or
benefits permitted under the Act so that the burden of taxation on the assessee is reduced to the minimum.
3 Example for tax planning: Setting up of a business undertaking in SEZ to enjoy tax holidays in respects of profits derived from
export.
4 Tax avoidance: Between the two extremes of tax planning and tax evasion, there lies a vast domain for selecting a variety of
methods which, though technically satisfying the requirements of law, in fact, circumvent it with a view to eliminate or reduce
the tax burden. It is these methods which constitute ‘tax avoidance’.
Tax avoidance is the result of actions taken by the assessee, none of which or no combination of which is illegal or forbidden
by the law itself.
5 Example of tax avoidance: Treaty shopping – dividend stripping – bonus stripping – Bond washing transactions etc.
6 Scope of GAAR provisions: GAAR provisions do not deal with cases of tax evasion, since it is already prohibited under the
current provisions of the Act.
Also, these provisions do not deal with the cases of tax planning, since it is permitted under the Act.
Further, these provisions do not apply to cases where there are specific provisions under the Act for anti-avoidance.
The GAAR provisions do apply only in cases of tax avoidance which are not tackled by specific anti-avoidance provisions.
These GAAR provisions are contained in Chapter-X and R. 10U to R. 10UC.
These are applicable from the AY 2018-19.
GAAR provisions will apply only when the aggregate tax benefit in relevant AY arising to all the parties to the arrangement
exceed Rs. 3 Crores.
It shall not apply to:
(a) FII who is not an assessee under the Act and has not taken benefit of DTAA and has invested in listed or unlisted
securities with prior permission.
(b) NR, in relation to investment made by of offshore derivative instruments (P-notes) or otherwise, directly or indirectly,
in a FII.
2. Applicability of GAAR – S. 95:

S. 95 (1) Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared
to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may
be determined subject to the provisions of this Chapter (i.e. Chapter-XA).
S. 102 (1) Arrangement means any step in, or a part or whole of, any transaction, operation, scheme, agreement or
understanding, whether enforceable or not, and includes the alienation of any property in such transaction,
operation, scheme, agreement or understanding.
S. 95 (2) This Chapter shall apply in respect of every AY starting with AY 2018-19.
3. Impermissible avoidance arrangement (IAA) – S. 96:

If an arrangement complies with the following twin conditions, it shall be regarded as an IAA:
Primary condition Additional condition requiring presence of tainted elements.
Main purpose of the 1st tainted element: The arrangement creates rights, or obligations, which are not ordinarily created
arrangement is to obtain between persons dealing at arm’s length. (or)
‘tax benefit’. 2nd tainted element: It results, directly or indirectly, in the misuse, or abuse, or the provisions of this
Act. (or)
3rd tainted element: It lacks commercial substance or is deemed to lack commercial substance U/s
97, in whole or in part. (or)
4th tainted element: It is entered into, or carried out, by means, or in a manner, which are not
ordinarily employed for bonafide purposes.

I. First tainted element:

(a) It refers to non-arm’s length dealings where an arrangement creates rights and obligations, which are not
normally created between parties dealing at arm‘s length.
(b) As there are specific transfer pricing regulations (SAAR) applicable to ITs and certain SDTs, this tainted
element is to be examined only in those transactions which are not covered by T P regulations and where the
main purpose of the arrangement is to obtain tax benefit.
II. Second tainted element:
(a) It refers to an arrangement which results in misuse/abuse of the provisions.
(b) It implies cases where the law is followed in letter or form but not in spirit or substance, or where the
arrangement results in consequences which are not intended by the legislation, revealing an intent to misuse
or abuse the law.
III. Third tainted element:
(a) The third tainted element refers to an arrangement which lacks commercial substance or is deemed to lack
commercial substance.
(b) When an arrangement is deemed to lack commercial substance is covered by S. 97.
IV. Fourth tainted element:
1 Fourth tainted element refers to an arrangement which is entered into, or carried out, by means of, or in a manner
which is normally not employed for a bona fide purpose.
2 In other words, it means an arrangement that possesses abnormal features.
3 This is not a purpose test but a manner test.
4. Arrangement to lack commercial substance [S. 97]:

1 Another alternate condition of an impermissible avoidance arrangement is that the arrangement lacks commercial
substance or is deemed to lack commercial substance in whole or in part.
2 U/s 97 (1), certain arrangements have been deemed to lack commercial substance as under:
(a) The substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the
form of its individual steps or a part; or
(b) It involves or includes:
(i) Round trip financing
(ii) An accommodating party
(iii) elements that have effect of offsetting or cancelling each other; or
(iv) a transaction which is conducted through one or more persons and disguises the value, location,
source, ownership or control of funds which is the subject matter of such transaction; or
(c) It involves the location of an asset or of a transaction or of the place of residence of any party which is without
any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter)
for a party.
(d) It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement
apart from any effect attributable to the tax benefit that would be obtained (but for the provisions of this
Chapter).

1 Round trip financing includes any arrangement in which, through a series of transactions—
(a) funds are transferred among the parties to the arrangement; and
(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for
the provisions of this Chapter), without having any regard to—
(A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to,
or received by, any party in connection with the arrangement;
(B) the time, or sequence, in which the funds involved in the round trip financing are transferred
or received; or
(C) the means by, or manner in, or mode through, which funds involved in the round trip financing are
transferred or received.
2 A party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of
that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of
this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the
arrangement. [S. 97 (3)].
It means that where a party is included in an arrangement mainly for obtaining tax benefit to the taxpayer, then such
party may be treated as an accommodating party and consequently the arrangement shall be deemed to lack
commercial substance. Also, it is not necessary that such party should be connected to the taxpayer.

5. Consequence of impermissible avoidance arrangement [S. 98]:

1 If an arrangement is declared to be an impermissible avoidance arrangement, then the consequences may include
denial of tax benefit or a benefit under a tax treaty. The consequence may be determined in such manner as is deemed
appropriate in the circumstances of the case.
2 Certain illustrations of the manner have been provided, namely:—
(a) disregarding, combining or re-characterizing any step in, or a part or whole of, the impermissible
avoidance arrangement;
(b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out;
(c) disregarding any accommodating party or treating any accommodating party and any other party as one and
the same person;
(d) deeming persons who are connected persons in relation to each other to be one and the same person for the
purposes of determining tax treatment of any amount;
(e) reallocating amongst the parties to the arrangement: (i) any accrual, or receipt, of a capital or revenue nature;
or (ii) any expenditure, deduction, relief or rebate;
(f) treating (a) the place of residence of any party to the arrangement; or (b) the situs of an asset or of a
transaction, at a place other than the place of residence, location of the asset or location of the transaction as
provided under the arrangement; or
(g) considering or looking through any arrangement by disregarding any corporate structure.
3 Any equity may be treated as debt or vice versa;
4 Any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or
5 Any expenditure, deduction, relief or rebate may be re-characterised.
6. Reference to PCIT or CIT in certain cases [S. 144BA]:
The short forms used in the diagram are:
PC/C Principal Commissioner/Commissioner AP Approving Panel

IAA Impermissible Avoidance Agreement AO Assessing Officer

# The following period has to be excluded in computing the said period:
(i) The period commencing from the date on which the first direction is issued by the Approving Panel to the Principal
Commissioner or the Commissioner for getting inquiries conducted through the authority competent under an
agreement referred to in section 90 or section 90A and ending with the date on which the information so
requested is last received by the Approving Panel or one year, whichever is less.
(ii) The period during which the proceeding of the Approving Panel is stayed by an order or injunction of any court.
Note – If, immediately after the exclusion of the aforesaid time or period, the period available to the Approving Panel for
issue of directions is less than 60days, such remaining period shall be extended to 60days. Consequently, the aforesaid
period of six months shall be deemed to have been extended accordingly.

Chapter-43: Taxation of non-residents Summary
1. Factors affecting the scope of TI:

The scope of TI of an assessee depends upon the following three important considerations:
1 The residential status of the assessee

2 The place of accrual or receipt of income
3 The point of time at which the income had accrued to or received by the assessee
A. Rules for determination of residential status of Individual – S. 6 (1) & S. 6 (6) (a):
1 Determining whether an An Individual is said to be resident in India in any PY, if he is:
individual is resident or non-
resident. [S. 6 (1) (a) & (c)]. Condition-1 In India in that PY for atleast 182 days (or)
Condition-2 In India in that PY for atleast 60 days and in India for atleast
365 days during 4 PYs preceding that PY
2 Condition-1 alone shall apply For the following persons, condition-1 alone is relevant for determination of residential
for certain persons. status:
[Explanation-1]. (a) Indian citizen who leaves India during the PY as a member of crew of an
Indian ship.
India citizen who leaves India during the PY for the purpose of employment
outside India.
(b) Indian citizen or a person of Indian origin (POIO) who, being outside India,
comes on a visit to India in the PY.
3 Meaning of POIO. [S. 115C]. A person is said to be of Indian origin if he or either of his parents or either of his
grandparents were born in undivided India.
4 How to determine period of In the case of an individual, being a citizen of India and a member of the crew of a
stay in India for an Indian foreign bound ship leaving India, the period or periods of stay in India shall, in respect
citizen, being a crew member? of such voyage, be determined in the prescribed manner and subject to the
prescribed conditions. [Explanation-2 to S. 6 (1)].
5 Period to be excluded in In case of an individual, being a citizen of India and a member of the crew of a ship,
computing the period of stay the period or periods of stay in India shall, in respect of an eligible voyage, not include
in India. [R. 126]. the period commencing from the date entered into the Continuous Discharge
Certificate in respect of joining the ship by the said individual for the eligible voyage
and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship in respect of such voyage.
6 Meaning of eligible voyage. A voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where- (i) for the voyage having originated from any port in India,
has as its destination any port outside India; and (ii) for the voyage having originated
from any port outside India, has as its destination any port in India.
8 Determining whether a A resident individual is said to be resident and ordinarily resident if he satisfies both
resident individual is ordinarily the following conditions:
resident or not – S.6 (6) (a): 1 He is a resident in any 2 out of the last 10 PYs preceding the relevant PY; and
2 His total stay in India in the last 7 PYs preceding the relevant PY is 730 days
or more.
1 Meaning of S. 2 (25A) defines India to mean (a) the territory of India as referred to in Article-1 of the
‘India’. Constitution; (b) its territorial waters, seabeds and subsoil underlying such waters; (c) air space
above its territory and territorial waters; (d) exclusive economic zones & maritime zones.
Even the stay in a ship or boat moored in the territorial waters of India would be sufficient to make
the individual resident in India.
2 Employment For the purpose of Explanation-1, going abroad for the purpose of employment means going
includes self- abroad to take up employment or any vocation, which takes in self-employment like business or
employment. profession. [O. Abdul Razak (2011) (ker)].
3 Resident for all If a person is resident in a PY in respect of any source of income, he shall be deemed to be
sources. resident in India in the PY in respect of each of his other sources of income. [S. 6 (5)].
B. Rules for determination of residential status of HUF:

1 How to determine whether A HUF would be resident in India if the control and management of its affairs is situated
HUF is resident or not? [S. wholly or partly in India.

6 (2)] If the control and management of the affairs is situated wholly outside India it would
become a non-resident.
2 How to determining If karta complies with the following cumulative conditions, a resident HUF is regarded as
whether a resident HUF is ordinarily resident:
ordinarily resident or not? Condition-1 Karta had been resident in India for atleast any 2 PY out of 10 PYs
[S. 6 (6) (b)] immediately preceding the relevant PY.
Condition-2 Karta had stayed in India for atleast 730 days during 7 PYs
immediately preceding the relevant PY.

1 For determining whether HUF is resident or not, the POS in India of karta has no relevance.
2 There are two types of control- Dejure control & Defacto control. Dejure controller means the person who is supposed to
have control. De Facto controller means the person who actually controls. For determination of residential status the
situs of defacto control is only relevant.
C. Rules for determination of residential status of firms and AOP: [S. 6 (2)]:
1 Firms and AOPs would be resident in India if the control and management of their affairs is situated wholly or partly in
India.
2 If the control & management of the affairs is situated wholly o/s India these would become NR.
D. Rules for determination of residential status of companies – S. 6 (3):

1 When can we say a If a company is an Indian company, it is resident of India.
company is resident of If the company is not an Indian company, it would be regarded as resident if Its place of
India? effective management (POEM), in that PY, is in India. [S. 6 (3)]
2 Meaning of POEM. It means a place where key management and commercial decisions that are necessary for
the conduct of the business of an entity as a whole are, in substance made. [Explanation to
S. 6 (3)].
Guiding principles for determination of POEM of a company, other than an Indian company – [CBDT Circular No.
6/2017, dated 24.01.2017 & CBDT Circular No. 8/2017, dated 23-02-2017]:
1 Classification of companies (other Companies which are engaged in active business outside India.
than Indian companies) for the Other companies.
process of determination of
POEM
2 Meaning of ‘companies which are A company shall be said to be engaged in ‘active business outside India’ if the following
engaged in active business cumulative conditions are satisfied:
outside India’. Condition-1 Its passive income is not more than 50% of its total income
Condition-2 Less than 50% of its total assets are situated in India;
Condition-3 Less than 50% of total number of employees are situated in
India or are resident in India;
Condition-4 The payroll expenses incurred on such employees is less than
50% of its total payroll expenditure.
3 Meaning of income (a) It means income as computed for tax purpose in accordance with the laws of the
country of incorporation; or
(b) It means income as per books of account, where the laws of the country of
incorporation do not require such a computation.
4 Meaning of passive income 1 Income from the transactions where both the purchase and sale of goods is *****
from/to its associated enterprises;
2 income by way of royalty, dividend, capital gains, interest or rental income; *****
3 Passive income (1+2) *****
5 When interest income shall not In case of a company which is engaged in the business of banking or is a PFI, the
be considered as passive activities which are regulated as such under the applicable laws of the country of
income? incorporation, any income by way of interest shall not be considered to be passive
income.
6 Determination of value of assets Assets Value
(for the above purpose) Depreciable Which are The average of its value for tax
assets depreciated purposes in the country of incorporation
individually of the company at the beginning and at
end of the PY; and

Which are The average of its value for tax

depreciated as a purposes in the country of incorporation
block of the company at the beginning and at
end of the year;
Others Value as per books of account
7 Inclusion in ‘employee’. It shall include persons, who though not employed directly by the company, perform tasks
similar to those performed by the employees.
8 How to determine the number of Find the average of the number of employees as at the beginning and at the end of the
employees? year.
9 Meaning of payroll This term includes the cost of salaries, wages, bonus and all other employee
compensation including related pension and social costs borne by the employer.
10 Usage of past data For the purpose of determining whether the company is engaged in active business
outside India, the average of the data of the PY and 2 years prior to that shall be taken
into account.
In case the company has been in existence for a shorter period, then, data of such period
shall be considered.
Where the accounting year for tax purposes, in accordance with laws of country of
incorporation of the company, is different from the PY, then, data of the accounting year
that ends during the relevant PY and two accounting years preceding it shall be
considered.
11 Determination of POEM in case Situation Location of POEM
of companies which are engaged BOD are standing aside and are not exercising their powers of POEM shall be
in active business outside India. management and such powers of management are being considered to be
exercised by either the holding company or any other person (s) in India.
resident in India.
BOD exercise their powers of Majority of the BOD meetings POEM shall be
management are held outside India considered to be
outside India.
Majority of BOD meetings are POEM shall be
held in India. considered to be
in India.
12 Following group policy does Merely because the BOD follows general and objective principles of global policy of the
amount to BOD standing aside. group laid down by the parent entity which may be in the field of Pay roll functions,
Accounting, Human resource (HR) functions, IT infrastructure and network platforms,
Supply chain functions, Routine banking operational procedures, and not being specific to
any entity or group of entities per se; would not constitute a case of BOD of companies
standing aside.
13 Two-stage process for First Identifying the person(s) who actually make the key management and
determination of POEM in case of stage commercial decisions for the conduct of the company as a whole.
companies not engaged in active Second Determining the place where these decisions are, in fact, being made.
business outside India. stage The place where these management decisions are taken would be more
important than the place where such decisions are implemented. For the
purpose of determination of POEM, it is the substance which would be
conclusive rather than the form.
14 The key management and The location where a company’s Board regularly meets and makes decisions may be the
commercial decisions for the company’s POEM provided, the Board:
conduct of the company as a (i) retains and exercises its authority to govern the company; and
whole are taken by the BOD – (ii) does, in substance, make the key management and commercial decisions
What is the POEM in such case? necessary for the conduct of the company’s business as a whole.
15 Place where formally BOD It may be mentioned that mere formal holding of board meetings at a place would by itself
meeting is held need not be its not be conclusive for determination of POEM being located at that place. If the key
POEM decisions by the directors are in fact being taken in a place other than the place where the
formal meetings are held then such other place would be relevant for POEM.
16 The authority to take key If a board has de facto delegated the authority to make the key management and
management and commercial commercial decisions for the company to the senior management or any other person
decisions for the conduct of the including a shareholder, promoter, strategic or legal or financial advisor etc. and does
company as a whole are nothing more than routinely ratifying the decisions that have been made, the company’s
delegated to senior management POEM will ordinarily be the place where these senior managers or the other person make

– What is POEM in such a case? those decisions.

17 Powers delegated by the BOD to A company’s board may delegate some or all of its authority to one or more committees
executive committees – What is such as an executive committee consisting of key members of senior management. In
POEM in such case? these situations, the location where the members of the Executive Committee are based
and where that committee develops and formulates the key strategies and policies for
mere formal approval by the full board will often be considered to be the company’s
POEM.
The delegation of authority may be either de jure (by means of a formal resolution or
Shareholder Agreement) or de facto (based upon the actual conduct of the board and the
executive committee).
18 Location of head office – a The location of a company’s head office will be a very important factor in the
relevant factor in determination of determination of the company’s POEM because it often represents the place where key
POEM. company decisions are made.
19 Meaning of head office “Head Office” of a company would be the place where the company's senior
management and their direct support staff are located or, if they are located at more than
one location, the place where they are primarily or predominantly located.
A company’s HO is not necessarily the same as the place where the majority of its
employees work or where its board typically meets.
20 Factors to be considered in If the company’s senior management and their support staff are based in a single location
determination of the location of and that location is held out to the public as the company’s principal place of business or
the head office. headquarters, then, that location is the place where head office is located.
If the company is more decentralized (for example, where various members of senior
management may operate, from time to time, at offices located in the various countries)
then, the company’s head office would be the location where these senior managers,-
(i) are primarily or predominantly based; or
(ii) normally return to following travel to other locations; or
(iii) meet when formulating or deciding key strategies and policies for the company
as a whole.
Members of the senior management may operate from different locations on a more or
less permanent basis and the members may participate in various meetings via telephone
or video conferencing rather than by being physically present at meetings in a particular
location. In such situation the head office would normally be the location, if any, where the
highest level of management (for example, the Managing Director and Financial Director)
and their direct support staff are located.
21 When the location of head office In situations where the senior management is so decentralised that it is not possible to
is not a relevant factor? determine the company’s HO with a reasonable degree of certainty, the location of a
company’s head office would not be of much relevance in determining that company’s
POEM.
22 Impact of use of modern The use of modern technology impacts the POEM in many ways. It is no longer necessary
technology on POEM. for the persons taking decision to be physically present at a particular location.
Therefore, physical location of board meeting or executive committee meeting or meeting
of senior management may not be where the key decisions are in substance being made.
In such cases the place where the directors or the persons taking the decisions or majority
of them usually reside may also be a relevant factor.
23 Determination of POEM where In case of circular resolution or round robin voting the factors like, the frequency with
decision is taken via circular which it is used, the type of decisions made in that manner and where the parties involved
resolution or round robin voting. in those decisions are located etc. are to be considered.
It cannot be said that proposer of decision alone would be relevant but based on past
practices and general conduct; it would be required to determine the person who has the
authority and who exercises the authority to take decisions. The place of location of such
person would be more important.
24 When location of shareholder is The decisions made by shareholder on matters which are reserved for shareholder
not a relevant factor for decision under the company laws are not relevant for determination of a company’s place
determination of POEM? of effective management.
Such decisions may include sale of all or substantially all of the company’s assets, the
dissolution, liquidation or deregistration of the company, the modification of the rights
attached to various classes of shares or the issue of a new class of shares etc.
These decisions typically affect the existence of the company itself or the rights of the
shareholders as such, rather than the conduct of the company’s business from a

management or commercial perspective and are therefore, generally not relevant for the
determination of a company’s place of effective management.
25 When location of shareholder is However, the shareholder’s involvement can, in certain situations, turn into that of
not a relevant factor for effective management. This may happen through a formal arrangement by way of
determination of POEM? shareholder agreement etc. or may also happen by way of actual conduct.
As an example, if the shareholders limit the authority of board and senior managers of a
company and thereby remove the company’s real authority to make decision then the
shareholder guidance transforms into usurpation and such undue influence may result in
effective management being exercised by the shareholder.
Therefore, whether the shareholder involvement is crossing the line into that of effective
management is one of fact and has to be determined on case-to-case basis only.
26 Day to day routine operational It may be clarified that day to day routine operational decisions undertaken by junior and
decisions are not relevant for middle management shall not be relevant for the purpose of determination of POEM.
determination of POEM. The operational decisions relate to the oversight of the day-to-day business operations
and activities of a company whereas the key management and commercial decision are
concerned with broader strategic and policy decision.
For example, a decision to open a major new manufacturing facility or to discontinue a
major product line would be examples of key commercial decisions affecting the
company’s business as a whole.
By contrast, decisions by the plant manager appointed by senior management to run that
facility, concerning repairs and maintenance, the implementation of company-wide quality
controls and human resources policies, would be examples of routine operational
decisions.
27 Same persons responsible for In certain situations, it may happen that person responsible for operational decision is the
operation decisions as well as same person who is responsible for the key management and commercial decision.
key management and commercial In such cases it will be necessary to distinguish the two types of decisions and thereafter
decisions – Which location is assess the location where the key management and commercial decisions are taken.
relevant for determination of
POEM?
28 Secondary factors to be If the above factors do not lead to clear identification of POEM then the final guidelines
considered in determination of provide that following secondary factors may be considered:
POEM. (i) Place where main and substantial activity of the company is carried out; or
(ii) Place where the accounting records of the company are kept.
29 Isolated facts should not be the The determination of POEM is to be based on all relevant facts related to the
basis for determination of POEM. management & control of the company, and is not to be determined on the basis of
isolated facts that by itself do not establish effective management, as illustrated by the
following examples:
(i) The fact that a foreign company is completely owned by an Indian company will
not be conclusive evidence that the conditions for establishing POEM in India
have been satisfied.
(ii) The fact that there exists a PE of a foreign entity in India would itself not be
conclusive evidence that the conditions for establishing POEM in India have
been satisfied.
(iii) The fact that one or some of the Directors of a foreign company reside in India
will not be conclusive evidence that the conditions for establishing POEM in India
have been satisfied.
(iv) The fact of, local management being situated in India in respect of activities
carried out by a foreign company in India will not, by itself, be conclusive
evidence that the conditions for establishing POEM have been satisfied.
(v) The existence in India of support functions that are preparatory and auxiliary in
character will not be conclusive evidence that the conditions for establishing
POEM in India have been satisfied.
30 Caution note Above principles for determining the POEM are for guidance only.
No single principle will be decisive in itself.
The above principles are not to be seen with reference to any particular moment in time
rather activities performed over a period of time, during the PY, need to be considered. In
other words, a “snapshot” approach is not to be adopted.
31 Pre-requisites to be followed by The AO shall, before initiating any proceedings for holding a company incorporated
the AO outside India, on the basis of its POEM, as being resident in India, seek prior approval of

the PCIT or the CIT, as the case may be.

Further, in case the AO proposes to hold a company incorporated outside India, on the
basis of its POEM, as being resident in India then any such finding shall be given by the
AO after seeking prior approval of the collegium of three members consisting of the PCITs
or the CITs, as the case may be, to be constituted by the PCCIT of the region concerned,
in this regard.
The collegium so constituted shall provide an OBH to the company before issuing any
directions in the matter.
32 Scope of the guidelines. [CBDT This ‘POEM guidelines’ shall not apply to a company having turnover or gross receipts of
Circular 8/2017]. Rs. 50 crores or less in a FY.
Clarification related to guidelines for establishing POEM in India [Circular No. 25/2017, dated 23.10.2017]
So long as the Regional Headquarter operates for subsidiaries/ group companies in a region within the general and
objective principles of global policy of the group laid down by the parent entity in the field of Pay roll functions, Accounting,
HR functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and
not being specific to any entity or group of entities per se; it would, in itself, not constitute a case of BOD of companies
standing aside and such activities of Regional Headquarter in India alone will not be a basis for establishment of POEM for
such subsidiaries/ group companies.
Transition Mechanism for a company incorporated outside India and has not been assessed to tax earlier [Chapter
XII-BC – S. 115JH]:
1 Transition mechanism to A transition mechanism for a company which is incorporated outside India, which has not
companies becoming resident for been assessed to tax in India earlier and has become resident in India for the first time in
the first time based on POEM AY 2017-18 due to application of POEM, has been provided in Chapter XII-BC
comprising of S. 115JH.
2 Notification of exception, Accordingly, the CG is empowered to notify exception, modification and adaptation
modification and adaptations to subject to which, the provisions of the Act relating to computation of income, treatment of
specified provisions of the Act in unabsorbed depreciation, set-off or carry forward and set off of losses, special provision
case first time resident relating to avoidance of tax and the collection and recovery of taxes shall apply in a case
companies. where a foreign company is said to be resident in India due to its POEM being in India for
the first time and the said company has never been resident in India before.
3 Applications of transition In a case where the determination regarding foreign company to be resident in India has
provisions even to subsequent been made in the assessment proceedings relevant to any PY, then, these transition
PYs ending before completion of provisions would also cover any subsequent PY, if the foreign company is resident in
assessment proceedings in India in that PY and the PY ends on or before the date on which such assessment
which the company is proceeding is completed. In effect, the transition provisions would also cover any
determined to be resident for the subsequent PY upto the date of determination of POEM in an assessment proceeding.
first time based on POEM. However, once the transition is complete, then, normal provisions of the Act would apply.
4 Benefits of the notification – In the notification issued by the CG, certain conditions including procedural conditions
conditional. subject to which these adaptations shall apply can be provided for and in case of failure
to comply with the conditions, the benefit of such notification would not be available to the
foreign company.
5 Consequences of violation of the Accordingly, where in a PY, any benefit, exemption or relief has been claimed and
conditions stipulated in the granted to the foreign company in accordance with the notification, and subsequently,
notification. there is failure to comply with any of the conditions specified therein, then –
(i) the benefit, exemption or relief shall be deemed to have been wrongly allowed;
(ii) the AO may re-compute the TI of the assessee for the said PY and make the
necessary amendment as if the exceptions, modifications and adaptations as
per the notification does not apply; and
(iii) the provisions of S. 154 shall, so far as may be, apply thereto and the period of
4 years for rectification of mistake apparent from the record has to be reckoned
from the end of the PY in which the failure to comply with the condition
stipulated in the notification takes place.
6 Notification to be laid before both Every notification issued in exercise of this power by the CG shall be laid before each
the houses of Parliament. house of the Parliament.

Notification of exceptions, modifications and adaptations under Section 115JH for applicability of the provisions of
the Income-tax Act on a foreign company said to be resident in India on account of PoEM [Notification No. 29/2018,
dated 22-06-2018]:
Particulars Provisions
Determination of If the foreign company is assessed to tax in the foreign jurisdiction Where depreciation is
opening WDV taken into account for the purpose of computation of its taxable income, the WDV of the depreciable
asset as per the tax record in the foreign country on the 1 st day of the PY shall be adopted as the
opening WDV for the said PY. Where WDV is not available as per tax records, the WDV shall be
calculated assuming that the asset was installed, utilised and the depreciation was actually allowed
as per the provisions of the laws of that foreign jurisdiction. The WDV so arrived at as on the 1 st day
of the PY shall be adopted to be the opening WDV for the said PY.
If the foreign company is not assessed to tax in the foreign jurisdiction WDV of the
depreciable asset as appearing in the books of account as on the 1 st day of the PY maintained in
accordance with the laws of that foreign jurisdiction shall be adopted as the opening WDV for the
said PY.
Brought forward loss If the foreign company is assessed to tax in the foreign jurisdiction Brought forward loss and
and unabsorbed unabsorbed depreciation as per the tax record shall be determined year wise on the 1 st day of the
depreciation said PY.
If the foreign company is not assessed to tax in the foreign jurisdiction Brought forward loss
and unabsorbed depreciation as per the books of account prepared in accordance with the laws of
that country shall be determined year wise on the 1st day of the said PY.
Other provisions
Such brought forward loss and unabsorbed depreciation shall be deemed as loss and unabsorbed
depreciation brought forward as on the 1st day of the said PY and shall be allowed to be set off and
carried forward in accordance with the provisions of the Act for the remaining period calculated from
the year in which they occurred for the first time taking that year as the first year. However, the
losses and unabsorbed depreciation of the foreign company shall be allowed to be set off only
against such income of the foreign company which has become chargeable to tax in India on
account of its being resident in India due to application of POEM.
In cases the brought forward loss and unabsorbed depreciation originally adopted in India are
revised or modified in the foreign jurisdiction due to any action of the tax or legal authority, the
amount of the loss and unabsorbed depreciation shall be revised or modified for the purposes of
setoff and carry forward in India.
Accounting year of The foreign company is required to prepare P&L account and B/S for the period starting from the
foreign company does date on which the accounting year immediately following said accounting year begins, upto 31 st
not end on 31st March March of the year immediately preceding the period beginning with 1st April and ending on 31st
March during which the foreign company has become resident.
For the purpose of carry forward of loss and unabsorbed depreciation If the above period is
less than 6 months, the period shall be included in that accounting year. If the above period equal to
or more than 6 months, that period shall be treated as a separate accounting year. The loss and
unabsorbed depreciation as per tax record or books of account, as the case may be, of the foreign
company shall, be allocated on proportionate basis.
Applicability of Where more than one provision of Chapter XVII-B of the Act applies to the foreign company as
provisions of resident as well as foreign company, the provision applicable to the foreign company alone shall
Chapter XVII-B apply. Compliance to those provisions of Chapter XVII-B of the Act as are applicable to the foreign
(TDS provisions) company prior to its becoming Indian resident shall be considered sufficient compliance to the
provisions of said Chapter. The provisions of S. 195 (2) relating to application to AO to determine
the appropriate proportion of sum chargeable to tax shall apply in such manner so as to include
payment to the foreign company.
Availability of The foreign company shall be entitled to relief or deduction of taxes paid in accordance with the
deduction under section provisions of S. 90 or S. 91 of the Act. Where income on which foreign tax has been paid or
90 or 91 (Foreign deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those
tax credit) years in the same proportion in which the income is offered to tax or assessed to tax in India in
respect of the income to which it relates and shall be in accordance with the provisions of R. 128 of
the Income-tax Rules, 1962.
Non-applicability of the The above exceptions, modifications and adaptations shall not apply in respect of such income of
notification the foreign company which otherwise would have been chargeable to tax in India, even if the FC
had not become Indian resident.
Applicability of the In a case where the foreign company is said to be resident in India during a previous year,
notification where immediately succeeding a previous year during which it is said to be resident in India; the

foreign company exceptions, modifications and adaptations shall apply to the said previous year subject to the
becomes resident in the condition that the WDV, the brought forward loss and the unabsorbed depreciation to be adopted on
subsequent PY also the 1st day of the previous year shall be those which have been arrived at on the last day of the
preceding previous year in accordance with the provisions of this notification.
No effect on other Any transaction of the FC with any other person or entity under the Act shall not be altered only on
transactions the ground that the FC has become Indian resident.
Applicability of The foreign company shall continue to be treated as a foreign company even if it is said to be
other provisions resident in India and all the provisions of the Act shall apply accordingly. Consequently, the
relating to foreign provisions specifically applicable to,—
company (i) a foreign company, shall continue to apply to it;
(ii) non-resident persons, shall not apply to it; and
(iii) provisions specifically applicable to resident, shall apply to it.
Applicability of tax rate In case of conflict between the provision applicable to the foreign company as resident and the
on foreign company provision applicable to it as foreign company, the later shall generally prevail. Therefore, the rate of
tax in case of foreign company i.e., 40% shall remain the same, i.e., rate of income-tax applicable to
the foreign company even though residential status of the foreign company changes from non-
resident to resident on the basis of POEM.
E. Determination of residential status of other persons – S. 6 (4):

1 Other persons would be resident in India if the control and management of their affairs is situated wholly or partly in
India.
2 If the control & management of the affairs is situated wholly o/s India they would become NR.
3. Scope of total income:

A. Classification of income based on the place of accrual and receipt:
Whether income is received in Whether income accrues in
Nature of the Income
India during the PY India during the PY
Yes Yes Indian Income
Yes No Indian Income
No Yes Indian Income
No No Foreign Income
B. Incidence of tax for assessees (other than individual & HUF):

Resident in India Non-resident
India income Taxable in India Taxable in India
Foreign income Taxable in India Not taxable in India
C. Incidence of tax for individual and HUF:

Resident & Ordinarily Resident but not Non-resident in
resident in India ordinarily resident in India India
Indian Income Taxable in India Taxable in India Taxable in India
Foreign income
If it is business income and the
business is controlled wholly or Taxable in India Taxable in India Not taxable in India
partly from India
If it is income from profession
Taxable in India Taxable in India Not taxable in India
which is set up in India
Any other foreign income Taxable in India Not taxable in India Not taxable in India
4. Circumstances in which income is deemed to accrue or arise in India – S. 9:
A. Income arising through transfer of capital asset situated in India – S. 9 (1) (i):
1 S. 9 (1) (i) Limb-3 Income accruing or arising through transfer of capital asset situated in India is deemed to
accrue or arise in India.
Therefore, it is an Indian income. Hence, it is taxable irrespective of the residential status.
2 When can we say that the A capital asset being any share in a company or entity registered or incorporated outside
capital asset is deemed to India shall be deemed to be situated in India, if the share derives, directly or indirectly, its
be situated in India? value substantially from the assets located in India. [Explanation 5 to S. 9 (1) (i)].
3 Exceptions to point-4. However, the following shall not be deemed to be situated in India:

[Proviso to Explanation 5 (a) Any capital asset being investment held by non-resident, directly or indirectly, in a
to S. 9 (1) (i)]. FII for any AY commencing on or after 1st April 2012 but before 1st April 2015.
(b) Any capital asset, which is held by a non-resident by way of investment, directly or
indirectly, in Category-I or Category-II FPI under the SEBI (FPI) Regulations,
2014, made under the SEBI Act, 1992.
4 Clarification regarding Suppose the value of shares of a foreign company derives their value substantially from
applicability of Explanation- assets located in India and such shares are deemed to be situated in India because of the
5 to S. 9 (1) (i) to dividend fiction created in Explanation-5 to S. 9 (1) (i).
declared and paid by a If such company declares and pays dividend outside India, can it be deemed as income
foreign company outside accruing or arising from an asset in India and be brought to tax?
India in respect of shares The fiction created in Explanation-5 to S. 9 (1) (i) is meant for deeming any income arising
which derive its value outside India from any transaction in respect of any share in a foreign company which has
substantially from the the effect of transferring, directly or indirectly, the underlying assets located in India, as
assets located in India. income accruing or arising in India.
[CBDT Circular 4/2015]. Declaration of dividend by a foreign company outside India does not have the effect of
transfer of any underlying assets located in India.
Therefore, the dividend declared and paid by a foreign company outside India in respect of
shares which their value substantially from assets situated in India would not be deemed to
be income accruing or arising in India by virtue of provisions of Explanation-5 to S. 9 (1) (i).
5 When can we regard that The share in a company or entity registered outside India, shall be deemed to derive its
the shares in a foreign value substantially from the assets (whether tangible or intangible) located in India, if on the
company derive their value specified date, the value of Indian assets, -
substantially from assets Condition- Exceeds the amount of Rs. 10 Crores; and
located in India? 1
[Explanation-6 to S. 9 (1) Condition- Represents at least 50% of the value of all the assets owned by the
(i)]. 2 company;
6 Manner of holding of Indian It can be direct or indirect.
assets by the investee
entity.
7 Determination of value of Value of an asset = The FMV as on the specified date, of such asset without reduction
assets (for the above of liabilities, if any, in respect of the asset, determined in accordance with R. 115UB.
purpose)
8 Meaning of specified date Situation Specified date
[Book value of assets of the foreign company whose share is Date of transfer.
transferred on the date of transfer of share] > [115% of book value
of the assets of the foreign company whose share is transferred
on the Balance sheet date preceding the date of transfer of share]
[Book value of assets of the foreign company whose share is Balance sheet
transferred on the date of transfer of share] ≤ [115% of book value date preceding the
of the assets of the foreign company whose share is transferred date of transfer.
on the Balance sheet date preceding the date of transfer of share]
9 Taxation of gains on The gain arising on account of transfer of shares in a foreign company deriving their value
proportionate basis. substantially from assets located in India will be on proportionate basis. [Explanation-7 (b)
to S. 9 (1) (i)].
10 Determination of income The income from transfer outside India of share in a foreign company deriving its value
attributable to assets in substantially from assets located in India, attributable to assets located in India = [A*B]/C.
India. [R. 115UC]. A Income from the transfer of share of in the company computed in accordance with
the provisions of the Act, as if, such share is located in India;
B FMV of assets located in India as on the specified date, from which the share
referred to in A derives its value substantially;
C FMV of all the assets of the company as on the specified date:
11 Report of accountant to be The transferor of the share of in a company that derives its value substantially from assets
furnished by the transferor. located in India, shall obtain and furnish along with the ROI a report in Form No.3CT duly
[R. 115UC]. signed and verified by an accountant providing the basis of the apportionment in
accordance with the formula and certifying that the income attributable to assets located in
India has been correctly computed.
12 Threshold exemption to Situation-1 Investee foreign company directly holds assets in India.
small shareholders in Situation-2 Investee foreign company indirectly holds assets in India.
respect of gains arising

from transfer of shares in a

foreign company whose
shares derive value from
assets located in India.
13 Conditions to be fulfilled for No income shall be deemed to accrue or arise to a non-resident from transfer, outside
enjoying exemption in India, of any share in a company registered outside India if the transferor (whether
Situation-1. [Explanation-7 individually or along with its associated enterprises), at any time in the 12 months
(a) (i) to S. 9 (1) (i)]. preceding the date of transfer, does not hold:
(a) the right of management or control in relation to foreign company (supra); or
(b) the voting power or share capital exceeding 5% of the total voting power or total
share capital, as the case may be, of the foreign company;
14 Conditions to be fulfilled for No income shall be deemed to accrue or arise to a non-resident from transfer, outside
enjoying exemption in India, of any share in a company registered outside India if the transferor (whether
Situation-2. [Explanation-7 individually or along with its associated enterprises), at any time in the 12 months
(a) (ii) to S. 9 (1) (i)]. preceding the date of transfer, does not hold:
(a) the right of management or control in relation to foreign company or;
(b) any right in, or in relation to, foreign company which would entitle him to the right
of management or control in the company that directly owns the assets situated in
India; or
(b) such % of voting power or share capital in foreign company which results in
holding of (either individually or along with associated enterprises) a voting power
or share capital exceeding 5% of the total voting power or total share capital, as
the case may be, of the company that directly owns the assets situated in India;
Exemption from capital gains in certain cases – S. 47:

1 Transfer of shares in a foreign Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a
company deriving value foreign company, referred to in the Explanation 5 to S. 9 (1) (i), which derives its
substantially from assets located value substantially from the share of an Indian company, held by the
in India under a scheme of amalgamating foreign company to the amalgamated foreign company, if—
amalgamation ≠ Transfer. [S. 47 (a) at least 25% of the shareholders of the amalgamating foreign company
(viab)] 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;
shall not be regarded as transfer and accordingly, the question of computing
capital gains does not arise.
2 Cost of acquisition of shares Cost for which the shares (supra) were acquired by the amalgamating company +
(supra) in the hands of Cost of improvement of such shares incurred or borne by the amalgamating
amalgamated foreign company. company or amalgamated company, as the case may be.
[S. 49 (1) (iii) (e)].
3 Period of holding of shares (supra) Period of holding of shares (supra) in the hands of the amalgamated foreign
in the hands of the amalgamated company starts on the date of acquisition of such shares by the amalgamating
foreign company. [S. 2 (42A) foreign company.
Explanation].
4 Denominator index Manjula shah (Bom) case shall apply. Accordingly, the denominator index is the
index pertaining to the PY in which the shares (supra) were acquired by the
amalgamating FC.
5 Transfer of shares in a foreign Any transfer in a demerger, of a capital asset, being a share of a foreign
company deriving value company, referred to in the Explanation 5 to S. 9 (1) (i), which derives its value
substantially from assets located substantially from the share of an Indian company, held by the demerged FC to
in India under a scheme of the resulting FC, if—
demerger ≠ Transfer. [S. 47 (vicc)] (a) the shareholders, holding not less than 3/4th in value of the shares of the
demerged foreign company, continue to remain shareholders of the
resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country in which
the demerged foreign company is incorporated:
shall not be regarded as transfer and accordingly, the question of computing
capital gains does not arise.

6 Cost of acquisition of shares Cost for which the shares (supra) were acquired by the Demerged company +
(supra) in the hands of Demerged Cost of improvement of such shares incurred or borne by the Demerged company
foreign company. [S. 49 (1) (iii) or Resulting company, as the case may be.
(e)].
7 Period of holding of shares (supra) Period of holding of shares (supra) in the hands of the resulting foreign company
in the hands of the resulting starts on the date of acquisition of such shares by the demerged foreign
foreign company. [S. 2 (42A) company.
Explanation].
8 Denominator index Manjula shah (Bom) case shall apply. Accordingly, the denominator index is the
index pertaining to the PY in which the shares (supra) were acquired by the
demerged foreign company.
Furnishing of information or documents by an Indian concern – S. 285A:

1 Information or documents to be Where any share in a company registered outside India derives, directly or
furnished by the Indian concern indirectly, its value substantially from assets located in India and such company,
through which assets are held holds, directly or indirectly, such assets in India through or in an Indian concern,
by the investee foreign then such Indian concern shall, for the purpose of determination of any income
company. accruing or arising in India U/s 9 (1) (i), furnish within the prescribed period to the
prescribed IT authority the information or documents, in such a manner as may be
prescribed.
2 Provisions of R. 114DB Who should provide documents or information? Indian concern
To whom documents or information is to be Jurisdictional AO
provided
Form in which information or documents are to Form-49D
be provided
Manner of furnishing information or documents E-filing under digital
signature
Situation Time-limit for furnishing
information or documents
1. Transfer of shares in foreign company has the Within 90 days of the
effect of transferring the right of control or transaction
management in relation to Indian concern.
2. Transfer of shares in FC does not have the Within 90 days from the end
effect of transferring the right of control or of the FY in which transfer
management in relation to Indian concern. took place.
3 Penalty for the failure to furnish Situation Quantum of penalty
the information or documents as 1. Transfer of shares in foreign company has 2% of value of the transaction
required U/s 285A. [S. 271GA]. the effect of transferring the right of control or in respect of which such
management in relation to Indian concern. failure has taken place.
2. Transfer of shares in FC does not have the Rs. 5L
effect of transferring the right of control or
management in relation to Indian concern.
Levying authority = Jurisdictional AO.
4 Escape route. [S. 273B]. No penalty shall be levied U/s 271GA if it is proved that there is reasonable cause
for such failure.
Clarification on applicability of section 9(1)(i) relating to indirect transfer in case of redemption of share or interest
outside India [Circular No. 28/2017, dated 7-11-2017]
1 Concerns were raised by investment funds, including private equity funds and venture capital funds that on account of
the extant indirect transfer provisions in the Act, non-resident investment funds investing in India, which are set up as
multi-tier investment structures, suffer multiple taxation of the same income at the time of subsequent redemption or
buyback.
2 However, in respect of investments in Category I and II FPIs by non-residents, which are already exempted from indirect
transfer provisions through insertion of second proviso to Explanation 5 to section 9(1)(i) by the Finance Act, 2017 with
effect from 1.4.2015, such multiple taxation will not take place. In other cases, such taxability arises firstly at the level of
the fund in India on its short-term capital gain/business income and then at every upper level of investment in the fund
chain on subsequent redemption or buyback. The CBDT has received representations to exclude investors above the
level of the direct investor who is already chargeable to tax in India on such income from the ambit of indirect transfer
provisions of the Act.

3 In order to address this concern, the CBDT has, vide this Circular, clarified that the provisions of section 9(1)(i) read with
Explanation 5, shall not apply in respect of income accruing or arising to a non-resident on account of redemption or
buyback of its share or interest held indirectly (i.e. through upstream entities registered or incorporated outside India) in
the specified funds (namely, investment funds, VCC and VCF) if such income accrues or arises from or in consequence
of transfer of shares or securities held in India by the specified funds and such income is chargeable to tax in India.
4 However, the above benefit shall be applicable only in those cases where the proceeds of redemption or buyback
arising to the NR do not exceed the pro-rata share of the non-resident in the total consideration realized by the specified
funds from the said transfer of shares or securities in India. It is further clarified that a NR investing directly in the
specified funds shall continue to be taxed as per the extant provisions of the Act.
B. Income from property, asset or source of income in India – S. 9 (1) (i):

1 Income from property, asset Any income which arises from any property (movable, immovable, tangible or intangible)
or source in India or source in India would be deemed to accrue or arise in India. Therefore, it is an Indian
income. Hence, it is taxable irrespective of the residential status.
2 Ownership not a Even income from subletting of property situated in India is covered by S. 9 (1) (i) Limb-
precondition. 2. Ownership is not a precondition.
3 Even income from indirect Even income accruing or arising from indirect use of the property is captured by S. 9 (1)
use within the ambit of S. 9 (i) Limb-2.
(1) (i).
4 Payments to overseas Not taxable in India. [Wizcraft International Entertainment (P) Ltd (2014) 364 ITR 227
agent (Bom)].
C. Income from business connection in India – S. 9 (1) (i):

1 When can we say that a Non-resident carries on business outside India.
non-resident has business In relation to such business, some activities are carried out in India.
connection in India? [R. D. Such activities are carried out (either directly or through an agent) on a continuous basis.
Aggarwal and Co (SC)]. There exists a real and intimate connection between the business carried out outside India and the
activities that are carried out in India.
The activities that are carried out outside in India enable the non-resident to generate profits from the
business carried on abroad.
If these conditions are satisfied, the non-resident is said to have business connection in India.
The income arising from such business to extent attributable to the activities that are carried out in India
is regarded as income from business connection.
Such income is deemed to accrue or arise in India. It is an Indian income. Therefore, It is taxable in India.
2 Definition of business Business connection shall include any business activity carried out through a person acting on behalf of
connection. [Explanation-2 the non-resident. For business connection to be established:
to S. 9 (1) (i)]. (i) the person acting on behalf of the non-resident has and habitually exercises authority to
conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually
plays the principal role leading to conclusion of contracts by that NR and the contracts are:
a) in the name of the non-resident or
(b) for the transfer of the ownership of, or for the granting of the right to use, property
owned by that NR or that the NR has the right to use or
(c) for the provision of services by that non-resident
(ii) Where he has no such authority, he must habitually maintain in India a stock of goods or
merchandise from which he regularly delivers goods or merchandise on behalf of non-resident;
or
(iii) He must habitually secure orders in India, mainly or wholly for the non-resident or for that non-
resident and other non-residents controlling, controlled by, or subject to the same common
control as that of non-resident;
3 Business activities through Business activities carried out through broker or agent having an independent status, who is acting in the
agent of independent ordinary course of his business, do not amount to business connection. [Proviso-1 to Explanation-2 to S.
status ≠ business 9 (1) (i)].
connection.
4 When can we say that the If a broker or agent works mainly or wholly on behalf of a non-resident or on behalf of such non-resident
broker or agent is of and other non-residents controlling, controlled by, or subject to the same common control as that of non-
independent status? resident, he shall not be deemed to be broker or agent of an independent status. [Proviso-2 to
Explanation-2 to S. 9 (1) (i)].

5 Income attributable to the Where a business is carried on in India through the agents (not being agents of independent status)
operations of agent carried referred to above, only so much of income as is attributable to the operations carried out in India shall be
out in India alone is deemed to accrue or arise in India [Explanation 3 to section 9(1)(i)]
taxable.
6 Income attributable to In case of a business of which all the operations are not carried out in India, the income of the business
operations that are carried deemed to accrue or arise in India shall be only such part of income as is reasonably attributable to the
out in India alone is operations carried out in India. Therefore, it follows that such part of income which cannot be reasonably
taxable. attributed to the operations in India, is not deemed to accrue or arise in India. [Explanation-1 (a) to S. 9
(1) (i)].
7 Professional connection The term ‘business connection’ includes even professional connection.
Amendments brought out by the Finance Act 2018 in relation to ‘Business connection’:
I. Expanding the scope of "agency" business connection by recasting Clause (a) of Explanation-2:
1 S. 9 (1) (i) provides that income accruing or arising through or from any business connection in India shall be deemed to
accrue or arise in India.
2 Explanation 2(a) to S. 9(1) (i), prior to its amendment by Finance Act, 2018, provided that business connection included
any business activity carried out through a person who, acting on behalf of a non-resident has, and habitually exercises
in India, an authority to conclude contracts on behalf of the non-resident, unless its activities are limited to purchase of
goods or merchandise for the non-resident.
3 Explanation 2 (a) has been substituted w.e.f 1st April, 2019, that is, AY 2019-20, to widen the scope of business
connection. The substituted Explanation 2(a) will apply if the following conditions are fulfilled and in the following
situations:
(a) (i) A non-resident is carrying on a business activity;
(ii) The said business activity is carried out through another person ("agent");
(iii) The said person is acting on behalf of the non-resident;
(b) (i) The person has an authority to conclude contracts on behalf of the non-resident and habitually exercises in
India such authority; (Situation 1) or
(ii) The person habitually concludes contracts ; (Situation 2) or
(iii) The person habitually plays the principal role leading to conclusion of contracts by that non-resident;
(Situation 3)
(c) In all the three situations mentioned in (b) above, the contracts ought to be—
(i) in the name of the non-resident (Condition 1); or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-
resident or that the non-resident has the right to use (Condition 2); or
(iii) for the provision of services by that non-resident (Condition 3).
4 Thus, the new Explanation 2(a) will apply if the conditions mentioned at (a) above are cumulatively satisfied in one of
the situations mentioned in (b) above and the contract is of any one of the types mentioned in (c) above. It will not apply
if the activity is carried out by an agent of independent status.
II. Business connection to include "significant economic presence" ("SEP") - Explanation-2A:

Explanation 2A to S. 9 (1) (i) is inserted to provide that "significant economic presence" of a non-resident in India shall
constitute business connection in India. For this purpose, 'significant economic presence' shall mean—
(i) any transaction in respect of any goods, services or property carried out by a non-resident in India including provision
of download of data or software in India if the aggregate of payments arising from such transaction or transactions
during the previous year exceeds the amount as may be prescribed; [Condition (a)] or
(ii) systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as
may be prescribed, in India through digital means. [Condition (b)]"
Proviso to Explanation-2A provides that the transactions or activities referred to above shall constitute SEP in India
whether or not,
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India.
Proviso-2 to Explanation 2A provides that only so much of income as is attributable to the transactions or activities
referred to above shall be deemed to accrue or arise in India.

Incomes which are not taxable U/s 9 (1) (i):

1 Purchase of goods in In case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from
India for export operations which are confined to the purchase of goods in India for the purpose of export.
[Explanation-1 (b) to s. 9 (1) (i)].
2 Collection of news In case of a non-resident, being a person engaged in the business of running a news agency or of
and views in India for publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India
transmission out of to him through or from activities which are confined to the collection of news and views in India for
India transmission out of India. [Explanation-1 (c) to S. 9 (1) (i)].
3 Shooting of In case of non-resident, no income shall be deemed to accrue or arise in India through or from
cinematograph films operations which are confined to the shooting of any cinematograph film in India.
in India If such non-resident is an individual, he should not be a citizen of India.
If such NR is a firm, it should not have any partner who is citizen of India or who is resident in India.
If such non-resident is a company, it should not have any shareholder who is citizen of India or who is
resident in India. [Explanation-1 (d) to s. 9 (1) (i)].
4 Activities confined to In case of a foreign company engaged in the business of mining of diamonds, no income shall be
display of rough deemed to accrue or arise in India to it through or from the activities which are confined to display of
diamonds in special uncut and unassorted diamonds in any special zone notified by the Central Government in the official
notified zones gazette in this behalf. [Explanation-1 (e) to S. 9 (1) (i)].
Presence of fund manager in India not to constitute BC in India of off shore funds – S. 9A:
1 Fund management activity In the case of an eligible investment fund, the fund management activity carried out through an
through an eligible fund eligible fund manager acting on behalf of such fund shall not constitute business connection in
manager not to constitute India of the said fund, subject to fulfilment of certain conditions.
business connection. [S. 9A
(1)].
2 Location of Fund Manager in An eligible investment fund shall not be said to be resident in India merely because the eligible
India not to affect residential fund manager undertaking fund management activities on its behalf is located in India.
status of an eligible investment
fund. [S. 9A (2)].
3 Meaning of eligible investment The eligible investment fund means a fund:
fund. [S. 9A (3)]. (a) which is established or incorporated or registered outside India and
(b) which collects funds from its members for investing it for their benefit and
(c) which fulfils 13 prescribed conditions.
4 Conditions to be fulfilled by an (i) The fund should not be a person resident in India;
investment fund to be regarded (ii) the fund should be a resident of a country or a specified territory with which an agreement
as eligible investment fund. referred to in S. 90 (1) or S. 90A (1) has been entered into or should be established or incorporated
or registered outside India in a country or a specified territory notified by the CG in this behalf.;
(iii) the aggregate participation or investment in the fund, directly or indirectly, by persons being
resident in India should not exceed 5% of the corpus of the fund;
(iv) the fund and its activities should be subject to applicable investor protection regulations in the
country or specified territory where it is established or incorporated or is a resident;
(v) the fund should have a minimum of 25 members who are, directly or indirectly, not connected
persons;
(vi) any member of the fund along with connected persons shall not have any participation interest,
directly or indirectly, in the fund exceeding 10%;
(vii) the aggregate participation interest, directly or indirectly, of ten or less members along with
their connected persons in the fund, shall be less than 50%;
(viii) the investment by the fund in any entity shall not exceed 20% of the corpus of the fund;
[Corpus means the total amount of fund raised for the purpose of investment by the eligible
investment fund].
(ix) no investment shall be made by the fund in its associate entity;
(x) the monthly average of the corpus of the fund shall not be less than Rs. 100 crore. If the fund
has been established or incorporated in the PY, the corpus of fund shall not be less than Rs. 100
crore rupees at the end of such PY; (However, this condition shall not be applicable to a fund which
has been wound up in the PY).
(xi) the fund shall not carry on or control and manage, directly or indirectly, any business in India;
(xii) the fund should neither be engaged in any activity which constitutes a business connection in
India nor should have any person acting on its behalf whose activities constitute a business
connection in India other than the activities undertaken by the eligible fund manager on its behalf.

(xiii) the remuneration paid by the fund to an eligible fund manager in respect of fund management
activity undertaken on its behalf should not be less than the ALP of such activity.
5 Certain conditions not to apply The following conditions would, however, not be applicable in case of an investment fund set up by
to investment fund set up by the Government or the Central Bank of a foreign State or a sovereign fund or such other fund
the Government or the Central notified by the CG:
Bank of a foreign State or a (a) the fund should have a minimum of 25 members who are, directly or indirectly, not
Sovereign Fund. [Proviso to S. connected persons;
9A (3)]. (b) any member of the fund along with connected persons shall not have any participation
interest, directly or indirectly, in the fund exceeding 10%;
(c) the aggregate participation interest, directly or indirectly, of ten or less members along
with their connected persons in the fund, shall be less than 50%.
6 Notification of Eligible These conditions would not apply to an investment fund set up by a Category-I or Category-II FPI
Investment funds in respect of registered under the SEBI (FPI) Regulations, 2014, made under the SEBI Act, 1992. [Notification
which certain conditions No. 77/2017, dated 03.08.2017].
specified U/s 9A (3) would
not apply
7 Meaning of eligible fund The eligible fund manager, in respect of an eligible investment fund, means any person who is
manager. [S. 9A (4)]. engaged in the activity of fund management and fulfils the following conditions:
(i) the person should not be an employee of the eligible investment fund or a connected
person of the fund;
(ii) the person should be registered as a fund manager or investment advisor in accordance
with the specified regulations (i.e. SEBI (Portfolio Managers) Regulation, 1993; SEBI
(Investment Advisers) Regulation, 2013; Such other regulation made under the SEBI Act
which may be notified by the CG).
(iii) the person should be acting in the ordinary course of his business as a fund manager;
(iv) the person along with his connected persons shall not be entitled, directly or indirectly, to
more than 20% of the profits accruing or arising to the eligible investment fund from the
transactions carried out by the fund through such fund manager.
8 Furnishing of Statement in Every eligible investment fund shall, in respect of its activities in a FY, furnish (i.e. electronically
prescribed form [S. 9A (5)]. under digital signature) within 90 days from the end of the FY, a statement in the prescribed form
(i.e. Form-3CEK) to the prescribed income-tax authority (i.e. the AO having jurisdiction over the
fund).
The statement should contain information relating to:
(a) the fulfilment of the above conditions; and
(b) such other relevant information or document which may be prescribed.
9 Penalty for non-furnishing of Quantum Rs. 5L
statement (supra) within the Levying Jurisdictional AO
time-limit. [S. 271FAB]. authority
Escape route If there is reasonable cause for the failure, no penalty shall be levied. [S.
273B].
10 Non-applicability of special This special taxation regime would not have any impact on taxability of any income of the eligible
taxation regime U/s 9A [S. 9A investment fund which would have been chargeable to tax irrespective of whether the activity of the
(6) & S. 9A (7)]. eligible fund manager constituted business connection in India of such fund or not.
Further, the said regime shall not have any effect on the scope of TI or determination of TI in the
case of the eligible fund manager.
D. Salary earned in India – S. 9 (1) (ii):

1 Salary earned in India is taxable Income, which falls U/H Salaries, is deemed to accrue or arise in India, if it is earned in India. It is
Indian income and therefore, it is taxable.
2 When salary is said to be earned in (i) Salary payable for service rendered in India would be treated as earned in India.
India? [Explanation to S. 9 (1) (ii)]. (ii) Any income by way of salaries payable for the rest period or leave period which is preceded
and succeeded by services rendered in India, and forms part of the service contract of
employment, shall be regarded as income earned in India.
3 Place where contract of employment is Where contract of employment was entered into is not relevant; where the employment is
exercised is only relevant. exercised is relevant. That is, where the services are rendered is relevant.
4 Even pension for past services Even pension paid outside India by the former employer for the past services rendered in India
rendered in India is taxable. falls within the ambit of S. 9 (1) (ii).
5 Exception to point-4 However, S. 9 (2) provides that the pension payable outside India by the Government to its
officials and Judges who permanently reside outside India shall not be deemed to accrue or arise
in India.

Clarification regarding liability to income -tax in India of a NR seafarer receiving remuneration in NRE account
maintained with an Indian Bank [Circular No.13/2017, dated 11.04.2017 and Circular No.17/2017, dated 26.04.2017]:
1 Representations were received by the CBDT that income by way of salary, received by NR seafarers, for services
rendered outside India on-board foreign ships, are being subjected to tax in India for the reason that the salary has been
received by the seafarer into the NRE bank account maintained in India by the seafarer.
2 The CBDT has examined the matter. It noted that S. 5 (2) (a) provides that only such income of a NR shall be subjected
to tax in India that is either received or is deemed to be received in India.
3 Accordingly, the CBDT has, vide this circular, clarified that that salary accrued to a NR seafarer for services rendered
outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the TI merely because the
said salary has been credited in the NRE account maintained with an Indian bank by the seafarer.
E. Salary of Indian Government employees (being Indian nationals) post abroad – S. 9 (1) (iii):
Salary payable by Income by way of salaries which is payable by the Government to a citizen of India for
Government for services services rendered outside India would deemed to accrue or arise in India.
rendered outside India However, allowances and perquisites paid outside India by the Government is exempt
U/s 10 (7).
F. Dividend paid by a Indian company outside India [S. 9 (1) (iv)]:

1 All dividends paid by an Indian company must be deemed to accrue or arise in India. (Taxability of dividend is discussed
in Chapter ‘Dividend’ in more detail)
2 U/s 10 (34), income from dividends referred to in S. 115-O is exempt from tax in the hands of the shareholder.
3 It may be noted that DDT U/s 115-O does not apply to deemed dividend U/s 2 (22) (e), which is chargeable in the PY in
which such dividend is distributed or paid.
G. Interest income – S. 9 (1) (v):

S. 9 (1) (v) (a) Interest payable by the Government is deemed to accrue or arise in India.
S. 9 (1) (v) (b) Interest payable by a resident is deemed to accrue or arise in India.
Exceptions Where it is payable in respect of money borrowed and used for the purposes of business or profession
carried on by him outside India or for the purpose of making or earning any income from any source
outside India, it will not be deemed to accrue or arise in India.
S. 9 (1) (v) (c) Interest payable by a non-resident is deemed to accrue or arise in India provided it is payable in
respect of money borrowed and used for the purposes of business or profession carried on in India by
him.

1 Scope of S. 9 (1) (v) Interest on money borrowed by the NR for any purpose other than a business or profession,
will not be deemed to accrue or arise in India.
2 Meaning of ‘interest’. It means interest payable in any manner in respect of moneys borrowed or debt incurred
[S. 2 (28A)]. (including a deposit, claim or other similar right or obligation).
It includes any service fee or other charges in respect of moneys borrowed or debt incurred
or in respect of any credit facility which has not been utilised.
3 Can discounting Discounting of a bill of exchange or promissory note amounted to purchase of negotiable
charges be instrument and it did not involve a debtor-creditor relationship between the endorser and
characterised as endorsee.
interest? Therefore, discounting charges do not assume the character of interest.
[ABC International Inc (2011) (AAR) + Cargill Global Trading (P) Ltd (Del)].
4 Can guarantee fee be This guarantee fee partakes the character of interest within the meaning of S. 2 (28A), since
classified as interest? it fits under the expression ‘any service fee or other charges in respect of moneys borrowed
or debt incurred’.
5 Upfront appraisal fee = It is collected by the FI for examining the creditworthiness of the loan applicant and the
interest? financial efficacy of the project that needs to be financed. It is neither interest nor FTS. Its
business income.
Explanation to S. 9 (1) (v):

In the case of a NR, being a person engaged in the business of banking, any interest payable by the PE in India of
such NR to the HO or any PE or any other part of such NR outside India, shall be deemed to accrue or arise in India.
Such interest shall be chargeable to tax in addition to any income attributable to the PE in India.
Further, the PE in India shall be deemed to be a person separate and independent of the NR person of which it is a PE and

the provisions of the Act relating to computation of TI, determination of tax and collection and recovery would apply
accordingly.
Also, the PE in India has to deduct tax at source on any interest payable to either the HO or any other branch or PE, etc. of
the NR outside India. Non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also
attract levy of interest and penalty in accordance with relevant provisions of the Act.
Special provisions relating to interest income earned by non-residents – S. 115A:

1 S. 115A (1) (a) (ii) Assessee Foreign company or NCNR
Income covered Interest received from Government or an Indian concern on
monies borrowed or debt incurred by Government or the
Indian concern in foreign currency. [(not being interest in the
nature referred to in S. 115A (1) (a) (iia) (iiaa) (iiab) & (iiac)].
Tax rate 20%
TDS obligation TDS obligation is there U/s 195 @ 20%.
2 S. 115A (1) (a) (iia) Assessee Foreign company or NCNR
Income covered Interest received from infrastructure debt fund
Tax rate 5%
TDS obligation TDS obligation is there U/s 194LB @ 5%
3 S. 115A (1) (a) (iiaa) Assessee Foreign company or NCNR
Payer Indian company or Business trust.
Income covered Interest in respect of moneys borrowed in foreign currency
from a source outside India (as per external commercial
borrowing regulations):
(i) under a loan agreement approved by the CG on or
after 01.07.2012 but before 01.07.2020.
(ii) by way of issue of long-term infrastructure bonds
on or after 01.07.2012 but before 01.10.2014.
(iii) by way of issue of any long-term infrastructure
bond at any time on or after 01.10.2014 but before
01.07.2020
(iv) by way of issue of rupee denominated bond before
01.07.2020.
Tax rate 5%
TDS obligation TDS obligation is there U/s 194LC @ 5%
4 S. 115A (1) (a) (iiab) Assessee FII/QFI
Income covered Interest on Government securities or rupee denominated
bonds receivable on or after 01.06.2013 but before
01.07.2020
Tax rate 5%
TDS obligation TDS obligation is there U/s 194LD @ 5%.
5 S. 115A (1) (a) (iiac) Assessee Foreign company or NCNR (unit holder in Business Trust)
Payer Business Trust.
Income covered Element of interest from SPV present in the distribution.
Tax rate 5%
TDS obligation TDS obligation is there U/s 194LBA (2) @ 5%.
6 No deduction U/H PGBP or No deduction is to be allowed as against the interest (supra) U/s 28 to S. 44C and S.
IFOS. 57. [S. 115A (3)].
7 No Chapter VI-A deduction. Against the interest income (supra), no deduction shall be allowed under Chapter VI-A.
[S. 115A (4)].
8 Exemption from filing of If the foreign company or NCNR does not have any income taxable in India other than
return. [S. 115A (5)]. the interest income (supra), and such interest income is also subjected to TDS under
chapter XVII-B, then there is no need to file ROI for the PY.
Exemption to interest income on specified off-shore RDB [Press Release, dated 17-09-2018]
Interest payable by an IC or a BT to a NR, including a FC, in respect of RDB issued outside India during the period from
17.9.2018 to 31.3.2019 shall be exempt from tax, and consequently, no tax shall be deducted on the payment of interest in
respect of the said bond U/s 194LC.

H. Royalty – S. 9 (1) (vi):

1 Provisions of S. 9 (1) (vi) S. 9 (1) (vi) Royalty payable by the Government is deemed to accrue or arise in
(a) India.
S. 9 (1) (vi) Royalty payable by a resident is deemed to accrue or arise in India.
(b)
Exceptions Where it is payable in respect of any right or property or information
used for the purpose of business or profession carried on by such
resident outside India or for the purpose of making or earning any
income from any source o/s India, it shall not be regarded as
accruing or arising in India.
S. 9 (1) (vi) Royalty payable by a NR is deemed to accrue or arise in India if it
(c) is payable in respect of any right or property or information used for
the purpose of business or profession carried on by such NR in
India or for the purpose of making or earning any income from any
source in India.
2 Meaning of Royalty Royalty means consideration for
[Explanation-2 to S. 9 (1) (vi) (a) Use of patent, invention, model, design, secret formula, process, trademark
or similar property;
(b) Imparting of any information concerning the working of or use of patent,
invention, model, design, secret formula, process, trademark or similar
property;
(c) Use of rights in copyright in any literary, artistic or scientific work;
(d) Imparting of any information concerning technical, industrial, commercial or
scientific knowledge, experience or skills;
(e) Use of industrial, commercial or scientific equipment (not being a sum
referred to in S. 44BB).
(f) Rendering of any services in connection with the activities listed above
3 Sum for design which is ≠ Royalty. [Neyveli Lignite Corporation (Mad)].
preliminary & incidental to
manufacture
4 Software payments = Payments made for acquisition of such software are regarded as royalty in view of
royalty? Explanation-4 to S. 9 (1) (vi).
5 Consideration for supply of Held, that the payment made for the software did not amount to royalty for the
software embedded in following reasons:
hardware = ‘royalty’? [Alcatel (a) the software that was loaded on the hardware did not have any independent
Lucent Canada (2015) (Del)]. existence;
(b) the software is embedded in the system and there could not be any
independent use of such software;
(c) this software merely facilitates the functioning of the equipment and is an
integral part of the hardware.
6 Expansion of the import of Royalty includes consideration in respect of any right, property or information,
royalty. [Explanation-5 to S. 9 whether or not:
(1) (vi)]. (a) the possession or control of such right, property or information is with the
payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
7 Meaning of ‘process’ It includes transmission by satellite (including up-linking, amplification, conversion for
down-linking of any signal), cable, optic fibre or by any other similar technology,
whether or not such process is secret.
Concessional Taxation Regime for royalty income in respect of patent developed and registered in India: S.
115BBF:
1 Eligible assessee (i) A person resident in India,
(ii) who is the true and first inventor of the invention and
(iii) whose name is entered on the patent register as the patentee in accordance with
Patents Act, 1970.
Eligible assessee includes every such person, being the true and the first inventor of the
invention, where more than one person is registered as patentee under Patents Act, 1970 in
respect of that patent.

2 Meaning of patentee. “Patentee" means the person, being the “true and first inventor” of the invention, whose name
is entered on the patent register as the patentee, in accordance with the Patents Act, and
includes every such person, being the true and first inventor of the invention, where more than
one person is registered as patentee under that Act in respect of that patent.
“True and first inventor" does not include either the first importer of an invention into India, or a
person to whom an invention is first communicated from outside India.
3 Concessional tax Where the TI of the eligible assessee includes any income by way of royalty in respect of a
regime. patent developed and registered in India, then such royalty shall be taxable at the rate of 10%
(plus applicable surcharge and cess).
No deduction for any expenditure or allowance in respect of such royalty income shall be
allowed under the Act.
4 Meaning of patent Patent for any invention granted under the Patents Act, 1970.
5 When can we say If atleast 75% of the expenditure was incurred in India by the eligible assessee for any
that the patent is invention in respect of which patent is granted, the patent is said to be developed in India.
developed in India?
6 Option to be The eligible assessee has to exercise the option for taxation of income by way of royalty in
exercised for coming respect of a patent developed and registered in India in accordance with the provisions of S.
under concessional 115BBF in the prescribed manner, on or before the due date specified U/s 139 (1) for furnishing
tax regime. the ROI for the relevant PY.
7 Bar on re-entry for 5 Where an eligible assessee opts for taxation of royalty in respect of a patent developed and
years if the assessee registered in India for any PY in accordance with S. 115BBF, and the assessee offers the
opts out of S. income for taxation for any of the 5 AYs relevant to the PY succeeding the PY not in
115BBF within 5 accordance with S. 115BBF (1), then the assessee shall not be eligible to claim the benefit of
years of exercising S. 115BBF for 5 AYs subsequent to the AY relevant to the PY in which such income has not
option to come U/s been offered to tax in accordance with S. 115BBF (1).
115BBF.
I. Fee for technical services:

1 Provisions of S. 9 (1) S. 9 (1) (vii) FTS payable by the Government is deemed to accrue or arise in India.
(vii). (a)
S. 9 (1) (vii) FTS payable by a resident is deemed to accrue or arise in India.
(b)
Exceptions Where it is payable in respect of services utilised in a B/P carried on by such
resident outside India or for the purpose of making or earning any income
from any source outside India, it shall not be regarded as accruing or arising
in India.
S. 9 (1) (vii) FTS payable by a NR is deemed to accrue or arise in India if it is payable in
(c) respect of services utilised in a business or profession carried on by such
NR in India or for the purpose of making or earning any income from any
source in India.
2 Meaning of fee for (i) FTS means any consideration for rendering of any managerial, technical or consultancy
technical services. services.
[Explanation-2 to S. 9 (1) (ii) It also includes consideration for providing the services of technical or other personnel.
(vii)]. (ii) However, it excludes the following (a) any consideration which would be income of the
recipient chargeable U/H Salaries; (b) any consideration for any construction, assembly,
mining or like project undertaken by the recipient.
3 Location where services Situs of rendition of service is not relevant. The services may be rendered outside India. What is
are rendered – not relevant is whether the services are utilised in relation to business or profession carried on in
relevant. India or for the purpose of making or earning income from a source located in India.
4 Territorial nexus not Income by way of interest, royalty or FTS which is deemed to accrue or arise in India by virtue of
relevant for taxing S. 9 (1) (v)/ (vi)/ (vii), shall be included in the TI of the non-resident, whether or not:
interest, royalty & FTS – (a) the NR has a residence or place of business or BC in India; or
Explanation to S. 9: (b) the NR has rendered services in India.

Payments made by the agents in India responsible for booking cargo and acting as clearing agents, to use a centralized
communication system maintained by the assessee-company engaged in shipping business, cannot be taxed as FTS. [A.P.
Moller Maersk [2017] 392 ITR 186 (SC)].

J. Special provisions relating to royalty and FTS:

1 Classification of (a) Agreement approved by the CG or agreement relates to a matter covered by industrial
agreements pursuant to policy; (hereinafter referred to as specified agreement); (b) other agreements (hereinafter
which royalty/FTS is paid. referred to as non-specified agreement).
2 Provisions of S. 44D Applicability Where an Indian concern pays royalty or
FTS to a foreign company, pursuant a non-
specified agreement which was entered
into before 01.04.2003 but on or after
01.04.1976, S. 44D applies.
Deduction U/s 28 to S. 44C Not available.
Unabsorbed depreciation adjustment Not possible.
U/s 32 (2)
Adjustment of losses against royalty or Yes.
FTS possible?
Tax rates Normal tax rates are applicable.
3 Provisions of S. 44DA. Applicability Where an Indian concern or Indian government pays
royalty or FTS to a foreign company/NCNR pursuant to an
agreement (whether a specified agreement or non-
specified agreement) which was entered into on or after
01.04.2003 and the royalty or FTS is paid in respect of
right or property or contract or service which is effectively
connected to PE in India, S. 44DA shall apply.
Deduction U/s 28 to S. 44C Available.
Disallowances However, the following expenditures are disallowed:
(i) Any expenditure or allowance which is not wholly
and exclusively incurred for the business of PE in
India.
(ii) Any payment made by PE to its HO or to any of

its other offices (which does not represent
reimbursement of actual expenditure incurred for
the purpose of business of PE in India).
Unabsorbed depreciation Possible.
adjustment U/s 32 (2)
Adjustment of losses against Yes.
royalty or FTS possible?
Tax rates Normal tax rates are applicable.
Books of accounts and audit. The FC/NCNR (supra) shall maintain the books of
accounts as required U/s 44AA and shall get them audited
U/s 44AB.
4 Provisions of S. 115A. Applicability Where an Indian concern or Indian government pays
royalty or FTS to a foreign company/NCNR pursuant to a
specified agreement which was entered into on or after
01.04.1976 and the royalty or FTS is not one which
covered by S. 44DA, then the provisions of S. 115A shall
apply.
Deduction U/s 28 to S. 44C Not available.
Unabsorbed depreciation Not possible.
adjustment U/s 32 (2)
Adjustment of losses against Yes.
royalty or FTS possible?
Deduction under Chapter VIA Possible
Tax rates 10%
S. 10 (6A): Tax-free royalty or FTS – Treatment of tax paid:

Where in the case of a FC deriving income by way of royalty or FTS received from Government or an Indian concern in
pursuance of a specified agreement entered into after 31.03.76 but before 01.06.02, the tax on such income is payable,
under the terms of the agreement, by Government or the Indian concern to the CG, the tax so paid not be included in the TI
of the foreign company.

L. Taxation on non-resident in shipping business – S. 172 & S. 44B:

1. Accelerated assessment in case of non-residents in shipping business – S. 172:
1 Purpose of S. 172 S. 172 shall apply for the purpose of levy and recovery of tax in the case of any ship, belonging to or
chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in
India.
This section supercedes all other provisions of this Act. Vide the phrase ‘notwithstanding anything
contained in any other provisions of this Act’ in S. 172 (1).
2 Applicability of provisions (a) Assessee should be a non-resident.
of S. 172. [S. 172 (1)] (b) He owns or charters a ship.
(c) Such ship comes to India during the PY.
(d) It carries goods or passengers or livestock or mail shipped at a port in India.
(e) He earns freight in relation to such carriage.
(f) Freight may be received or receivable by the non-resident or by his agent in India or outside India.
3 Quantification of income The income embedded in the freight (supra) shall be deemed to accrue or arise in India. It is taxed in
embedded in the freight on India.
presumptive basis. [S. 172 It is quantified on presumptive basis by applying 7.5% on the freight (including demurrage and handling
(2) + S. 172 (8)]. charges).
Against the presumptive income (supra), no deduction shall be allowed U/s 30 to S. 38 and Chapter VI-
A.
Further, against it, no loss could be adjusted under Chapter VI. Adjustment of UAD of earlier years is
also not possible.
Vide the phrase ‘notwithstanding anything contained in any other provisions of this Act’ in S. 172 (1).
4 Tax rate applicable for the The aforesaid income shall suffer tax @ rates applicable to foreign companies. [S. 172 (4)].
income (supra).
5 Obligations cast on the Before the departure of ship from the Indian port, the master of the ship shall prepare and furnish to the
master of the ship. AO a return of freight received or received on account of the carriage of passengers, livestock, mail or
goods shipped at that port. [S. 172 (3)
The master of the ship should ensure the payment of tax on the presumptive income embedded in the
freight.
Otherwise, port clearance will not be given to the ship by the customs authorities. [S. 172 (6)].
6 Deemed compliance with The AO is satisfied that it is not possible for the master of the ship to furnish the return required by S.
the provisions of S. 172 172 (3) before the departure of the ship from the port.
(3). The master of the ship has made satisfactory arrangements for filing of the return and payment of the
tax by any other person on his behalf.
The return is filed within 30 days of the departure of the ship.
Then, the AO may deem the filing of the return by the person so authorized by the master as sufficient
compliance with S. 172 (3).
7 Summary assessment. [S. On receipt of the return, the AO shall assess the income referred to in S. 172 (2) and determine the
172 (4)]. sum payable as tax thereon at the rate in force applicable to a foreign company.
8 Power of AO to seek For the purpose of determining the tax payable U/s 172 (4), the AO may call for such accounts or
accounts & documents. documents as he may require. [S. 172 (5)].
9 Time-limit for doing 9 months from the end of the FY in which the return U/s 172 (3) is furnished.
summary assessment. [S.
172 (4A)].
10 Option to seek regular The non-resident, who was already subjected to summary assessment U/s 172 (4) in respect of income
assessment. [S. 172 (7)]. embedded in the freight (supra), can make a claim to the AO seeking assessment of his TI for the PY of
departure and tax payable thereon in accordance with the other provisions of this Act (i.e. S. 44BB).
This claim for the regular assessment shall be made within the end of the AY relevant to the PY of
departure.
Upon receipt of such a claim, the AO shall proceed to assess the total income of the non-resident for
the PY of departure and determine the tax payable thereon in accordance with the other provisions.
The tax paid pursuant to summary assessment U/s 172 (4) will be deemed to be payment in advance of
tax leviable for the AY relevant to the PY of departure.
This is given a credit in determining the refund or demand arising from the regular assessment.
2. Special provisions for computing profits and gains of shipping business in the case of non-residents – S. 44B:
1 Applicability of S. 44B (a) Assessee should be a non-resident.
(b) He should be engaged in the business of operation of ships.
2 Quantification of profits and gains from Profits and gains from this business are not quantified using the scheme of

such business on a presumptive basis. deduction and disallowance prescribed in Chapter IV-D.
This is quantified on presumptive basis by applying 7.5% on the aggregate
of the following:
(a) Amount paid or payable in India or outside India to the non-resident
or to any other person on his behalf on account of carriage of
goods, passengers, livestock or mails shipped at a port in India.
(b) Amount received or receivable in India by the non-resident or by
any other person on his behalf on account of carriage of goods,
passengers, livestock or mails shipped at a port outside India.
The sum (supra) shall include demurrage and handling charges.
[Explanation to S. 44B].
Against the presumptive income (supra), no deduction shall be allowed U/s
30 to S. 38.
Further, adjustment of unabsorbed depreciation of earlier years is also not
possible. [Universal Cargo Carrier Inc (cal)].
Vide the phrase ‘notwithstanding anything contained in S. 28 to S. 43A’ in S.
44B (1).
However, there is no restriction in doing loss adjustments as per Chapter VI.
Even there is no prohibition in claiming deduction under Chapter VI-A.
3 Applicable tax rate Normal tax rates are applicable.
3. Advantages of seeking regular assessment by exercising option U/s 172 (7):

1 Even if the non-resident is an individual, U/s 172 (4), the income element embedded in the freight gets taxed at 40%. By
exercising the option given U/s 172 (7) to seek regular assessment U/s 44B, the assessee could refund of some tax
paid U/s 172 (4).
2 Further, when regular assessment is sought, the assessee can get deduction under Chapter VI-A, if he is entitled
otherwise.
3 Also, he can do loss adjustments under Chapter VI.
6. Points requiring attention:

1 Non-resident has earned freight In respect of freight covered by S. 172, there will be summary assessment U/s 172 (4).
which are covered by S. 172 as well In respect of such freight, he can exercise option U/s 172 (7) and seek regular assessment.
as by S. 44B and has earned freight In respect of the freight which is covered by S. 44B and not by S. 172, he shall file ROI,
which are covered by S. 44B but not since it was not subjected to summary assessment U/s 172 (4) and the income embedded
by S. 172. What are the tax in such freight will be assessed to tax on presumptive basis U/s 44B.
implications?
2 Interest on refund pursuant to Where the regular assessment opted for U/s 172 (7) results in refund, on such refund the
regular assessment opted U/s 172 assessee shall be entitled to interest U/s 244A.
(7). This is because the provisions of S. 172 (7) have created a fiction treating the tax paid
pursuant to summary assessment U/s 172 (4) as payment in advance of tax leviable for the
AY relevant to the PY of departure of the ship.
Such fiction, if led to a logical conclusion, no doubt, entitles the assessee to get interest on
refund. [Glittre D/5 I/5 Garonne (A.S.) 225 ITR 739].
3 Interest U/s 234B to be levied if the Where the tax paid pursuant to summary assessment falls short of the tax payable
tax paid U/s 172 (4) falls short of the pursuant to regular assessment, then interest shall be levied U/s 234B. [Applying the same
requirement. analogy]. [CBDT Circular 9/2001].
4 Decision in V.S. Dempo & Co P Tax is not required to be deducted U/s 195 on the demurrage charges paid to a foreign
Ltd (2016) 381ITR 303 (Bom) (FB). shipping company which is governed by S. 172 for the purpose of levy and recovery of tax.
M. Taxation of non-resident in the business of operating aircrafts – S. 44BBA:

1 Applicability of S. 44BB (a) Assessee should be a non-resident.
(b) He should be engaged in the business of operation of aircrafts.
2 Quantification of profits and Profits and gains from this business are not quantified using the scheme of
gains from such business on a deduction and disallowance prescribed in Chapter IV-D.
presumptive basis. This is quantified on presumptive basis by applying 5% on the aggregate of the
following:
(a) Amount paid or payable in India or outside India to the NR or to any other
person on his behalf on account of carriage of goods, passengers,
livestock or mails from any place in India.

(b) Amount received or receivable in India by the NR or by any other person

on his behalf on account of carriage of goods, passengers, livestock or
mails from a place outside India.
Against the presumptive income (supra), no deduction shall be allowed U/s 30 to S.
38.
Further, adjustment of unabsorbed depreciation of earlier years is also not possible.
Vide the phrase ‘notwithstanding anything contained in S. 28 to S. 43A’ in S.
44BBA (1).
N. Taxation of non-resident engaged in the business of providing services or facilities etc in connection with
mineral oil exploration activity – S. 44BB:
1 Applicability (a) Assessee is a non-resident.
(b) Assessee is engaged in the business of:
(i) Providing services or facilities in connection with prospecting for, or extraction of, or
production of mineral oil, or
(ii) Supplying plant and machinery on hire in connection with prospecting for, or
extraction of, or production of mineral oil.
2 Meaning of mineral oil Mineral oil includes petroleum and natural gas.
3 Meaning of plant Plant includes ships, aircrafts, vehicles, drilling units, scientific apparatus and equipment,
used for the purposes of business (supra).
4 Quantification of profits and Profits and gains from this business are not quantified using the scheme of deduction and
gains from such business on a disallowance prescribed in Chapter IV-D.
presumptive basis. This is quantified on presumptive basis by applying 10% on the aggregate of the following:
(a) Amount paid or payable in India or outside India to the NR or to any other person on
his behalf on account of the provision of services and facilities in connection with, or
supply of plant and machinery on hire used, or to be used, in the prospecting for, or
extraction or production of, mineral oils in India; and
(b) Amount received or receivable in India by the NR or by any other person on his
behalf on account of the provisions of services and facilities in connection with, or
supply of plant and machinery on hire used, or to be used, in the prospecting for, or
extraction or production of, mineral oils outside India;
Against the presumptive income (supra), no deduction shall be allowed U/s 30 to S. 38.
Further, adjustment of unabsorbed depreciation of earlier years is also not possible.
Vide the phrase ‘notwithstanding anything contained in S. 28 to S. 43A’ in S. 44BBA (1).
6 Offering lower income than An assessee may claim lower profits and gains than the profits and gains quantified on
presumptive income. presumptive basis, if he keeps and maintains such books of account and other documents as
required U/s 44AA (2) and gets his accounts audited and furnishes a report of such audit as
required U/s 44AB.
Thereupon the AO shall proceed to make an assessment of the TI or loss of the assessee
U/s 143 (3) and determine the sum payable by, or refundable to, the assessee.
7 Actual income based on books The AO cannot ignore the provisions of S. 44BB. If the assessee offers presumptive income,
> presumptive income. What only it could be brought to tax. [DSD Noell Gmbh (Delhi)].
should be brought to tax?

1 Proviso to S. 44BB (1) S. 44BB shall not apply in a case where the provisions of S. 44D or 44DA or S. 115A or S.
293A apply for the purposes of computing profits or gains or any other income referred to in
those sections.
2 Provisions of S. 293A. (a) Power of the CG to come This section empowers the CG to issue notification in
with notification relaxing the official gazette through which it can provide the
the provisions of the Act following benefits to specified persons: (i) Exempt the
in relation to specified income from tax; (b) Reduce the tax rate; (c) Change

persons. the status in which assessment is to be made; (d)

modify the provisions of the Act.
(b) Meaning of ‘specified Any person with whom the CG has entered into
persons’. agreement for association or participation in the
business of mineral oil exploration.
Any person providing any services or facilities or
supplying any ship or aircraft or plant or machinery by
sale or by hire in connection with any business of
prospecting for or extraction or production of mineral oil
carried on by the CG or a person specified by the CG in
the official gazette.
Employees of the above persons.
3 Decision of the SC in ONGC Seismic survey and other allied services ≠ Technical services. S. 44D/S. 44DA/S. 115A does
Ltd case not apply. Only S. 44BB applies.
6 Tax payable by NR service It is perks arising in the course of business referred to in S. 44BB. S. 44BB is a self-contained
provider (covered by S. code.
44BB) borne by Indian Profits and gains arising from the business referred to in S. 44BB (including perks arising in
concern – Whether S. 28 (iv) the course of such business) shall be computed in accordance with S. 44BB without relying
can be invoked? [Oil India on any other provision.
Ltd (Ori) + ONGC (Raj)]. Mandate in S. 44BB is to apply 10% on gross receipts (including payments made on behalf of
non-resident).
It takes care of any perks arising in the course of such business.
S. 28 (iv) has no applicability in such case. Vide the phrase ‘notwithstanding anything
contained in S. 28 to S. 41…’ in s. 44BB (1).
7 Whether reimbursement of Yes. Only exception is reimbursement of customs duty.
expenses forms part of
receipts?
O. Deductibility of head office expenses – S. 44C:
The income of branches of foreign companies in India shall be computed normally as per S. 28 to 43A. However, the head
office expenditure shall be allowed to the extent of lower of the following:
(a) Amount equal to 5% of adjusted total income; or
(b) The amount of so much of the expenditure in the nature of head office expenditure attributable to business or profession of
assessee in India.
Note:
1 Meaning of adjusted TI Adjusted TI means the TI computed in accordance with the Income Tax Act, without giving
effect to:
(a) Brought forward depreciation
(b) Brought forward losses
(c) Deductions under Chapter-VIA
2 What is to be done if ATI S. 44C also provides that where adjusted TI of the assessee is a loss, then, deduction U/s 44C
is a loss? shall be 5% of average adjusted TI.
3 Average adjusted TI. Average adjusted TI means:
(a) If TI of branch is assessable in each of the immediately 3 preceding PYs, the average
of adjusted TI of such 3 PYs.
(b) If total income of branch is assessable in two of the aforesaid three PYs, the average of
adjusted TI of such 2 PYs.
(c) If total income of branch is assessable in only one of the aforesaid three preceding
PYs, the adjusted TI of such PY.

Chapter-44: PGBP - Summary
A. Charging section-S. 28:

The following income shall be chargeable to tax U/H PGBP:
S. 28 (i) Profits and gains arising from business or profession which was carried on by the assessee at any time
during the PY.
S. 28 (ii) (a) Compensation to MD/WTD/manager of Indian company for loss of office or modification of terms and
conditions of appointment to their detriment.
S. 28 (ii) (b) Compensation to persons managing the affairs in India of any other company for loss of office or modification
of terms and conditions of appointment to their detriment.
S. 28 (ii) (c) Compensation for termination of agency in India or for modification of terms and conditions of agency to the
detriment of the person holding agency.
S. 28 (ii) (d) Compensation for vesting in the Government or in any corporation owned or controlled by the Government,
of the management of any business under any law for the time being in force.
S. 28 (ii) (e) Any compensation at or in connection with the termination or the modification of the terms and
conditions, of any contract relating to business.
S. 28 (iii) Income derived by a trade, professional or similar association from specific services performed for its
members.
S. 28 (iiia) Export incentives.
to (iiiae)
S. 28 (iv) Value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of
profession.
S. 28 (v) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a
partner of a firm from such firm.
Proviso to However, interest and remuneration shall be taxed in the hands of the partners only to the extent to which it
S. 28 (v) was allowed as deduction in the hands of the firm.
S. 28 (va) Non-compete fee.
Fee for exclusivity of rights.
S. 28 (vi) Keyman insurance policy proceeds.
S. 28 (via) FMV of inventory as on the date on which it is converted into CA.
s. 28 (vii) Any sum, whether received or receivable, in cash or in kind, on account of any capital asset being
demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has
been allowed as a deduction U/s 35AD.

1 For invoking the charging section, the fact of assessee carrying on business is enough though the assessee does not own it.
2 Pre-incorporation profits cannot be taxed in the hands of the company. It shall be taxed in the hands of association of
promoters. [City mill distributors (SC)].
3 To invoke the head PGBP, the business or profession should have been carried on by the assessee at any time during the
PY. If the business or profession got discontinued even before the commencement of the PY, the head PGBP cannot be
invoked to tax any income. [Subject to exceptions contemplated in S. 41]. However, the difference between discontinuance of
business and suspension of business shall be well appreciated. There is no hurdle in invoking the head PGBP if the business
is suspended. This is because if the business is suspended it means that the business still exists but in dormant mode.
[Vikram Cotton Mills Ltd (SC)].
4 Where the B/P carried on by the assessee gets discontinued, any sum received after the discontinuance shall be deemed to
be income of the recipient and charged to tax accordingly, in the PY of receipt, if such sum would have been included in the
total income of the person who carried on B/P had it been received before such discontinuance. However, the sum received
shall not be taxed U/H PGBP but U/H IFOS. [S. 176 (3A) / S. 176 (4)].
5 Where speculative transactions carried on by the assessee are of such a nature as to constitute business, such business
shall be deemed to be distinct & separate from any other business. This is to give effect to the provisions of S. 73.
Some important judicial pronouncements in relation to S. 28:

1 Franchisee fees received for leasing out loss making hotel units should be charged to tax U/H PGBP. [TN Tourism
Development Corporation Ltd (2014) (Mad)].
2 Interest income on margin money deposited with bank for obtaining bank guarantee to carry on business is taxable as
business income. [K and Co. (2014) 364ITR 93 (Del) + Chinna Nachimuthu Constructions 297 ITR 70 (Kar)].
3 Interest awarded by the arbitrator in respect of delay in payment of business receipt should be charged to tax U/H
PGBP, since it is an accretion to business receipt. [Govinda Choudhury and sons (SC)].
4 Interest earned by the assessee-distributor on the advance given to manufacturer to ensure uninterrupted production
of goods shall be brought to tax U/H PGBP. [Favre-Leuba and Co. Ltd 120 ITR 897 (Bom)].

5 Benefit arising on account of forfeiture of margin money which was received from the defaulting constituent bank on
whose behalf securities were purchased by the assessee-bank in the ordinary course of its business shall be brought
to tax U/H PGBP. [Lakshmi Vilas Bank Ltd 220 ITR 305 (SC)].
6 If any sum is received in the ordinary course of trading, though it does not have the character of income at that time,
and if it is appropriated as its own money by the assessee at a later point of time, then it shall be charged to tax U/H
PGBP. [Sundaram Iyengar (T.V.) and Sons Ltd. 222 ITR 344 (SC)].
7 Only non-monetary benefits are captured by S. 28 (iv). [Mahindra & Mahindra (SC)].
8 S. 145B (2) is inserted which provides that the any claim for export incentives shall be deemed to be income of the PY
in which reasonable certainty of its realization is achieved.
9 Amount collected by an NBFC from its customers on adhoc basis towards possible sales tax liability which is disputed
by it, shall be treated as its income, if such sum is not kept in a separate interest-bearing account.
10 Interest on stick loans shall be offered to tax though it is not recognised in the BOA. [ICDS-IV].
Exception to the above provisions of ICDS-IV: S. 43D:

(a) In case of
(i) a PFI; or
(ii) a Scheduled bank; or
(iii) a Co-operative bank other than primary agricultural credit society or a primary cooperative agricultural
and rural development bank; or
(iv) a State Financial corporation; or
(v) a State Industrial Investment Corporation
the income by way of interest on such categories of bad and doubtful debts, as may be prescribed having regard to the
guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the PY in which it is credited to the
P&L account by the said institutions etc. for that year or in the PY in which it is actually received by them, whichever is
earlier.
(b) In the case of a public company, the income by way of interest in relation to such categories of bad and doubtful debts
as may be prescribed having regard to the guidelines issued by the National Housing Bank established under the NHB
Act, 1987 in relation to such debts shall be chargeable to tax in the PY in which it is credited to the P&L account by the
said public company for that year or in the PY in which it is actually received by it, whichever is earlier.
B. Deemed profits – S. 41:

Tax treatment of recovery in respect of loss or expenditure – S. 41 (1):
If the assessee had claimed deduction in respect of any expenditure or loss U/H PGBP in the earlier PY and the assessee has
obtained any sum (in money or in kind) in respect of such loss or expenditure in the PY under assessment, it shall be deemed
to be profits and gains of the business of such PY and shall be charged to tax in the hands of the assessee U/H PGBP in such
PY. [S. 41 (1) (a)].
This is so even if the business does not exist in the PY of recovery.

1 Where by virtue of a HC judgment, the assessee becomes entitled to refund of sales tax which had been granted
deduction in an earlier year, the amount so refunded is assessable in the AY relevant to the PY in which order of refund
is passed by the STO and not with reference to the year in which judgment is given by the court. [Rashmi Trading 103
ITR 312 (Guj)]. Further, it is taxable only in the year of receipt even if the assessee follows accrual system of
accounting. [Travancore chemicals and Manufacturing co Ltd. 237 ITR 821 (SC)].
2 If the sales tax refund is passed on to the customers, S. 41 (1) cannot be invoked. [Thirumalai Swamy Naidu and
sons 230 ITR 534 (SC)]. However, if the refund is not passed on to the customers in the same PY in which it was
obtained, then S. 41 (1) will be invoked to tax the refund. But it will be allowed as deduction in the PY in which it is
actually passed on to customer.
3 Where the sales tax was paid under protest in respect of which the assessee had enjoyed deduction and subsequently,
the Court had directed the Sales tax Department to refund the tax paid, the sum refunded shall be brought to tax U/s 41
(1), even though the Department has gone on further appeal. [Polyflex India (P) Ltd. 124 Taxman 373 (SC)].
Tax treatment of benefit accruing from remission or cessation of trading liability – S. 41 (1):
If the assessee had claimed deduction in respect of any trading liability U/H PGBP in the earlier PY and some benefit
accrues to the assessee in the PY of assessment on account of remission or cessation of such trading liability, it shall be
deemed to be profits and gains of business of such PY and shall be charged to tax in the hands of the assessee U/H PGBP
in such PY. [S. 41 (1) (a)].


1 Where a trading liability becomes time barred but is not written back to the P&L account and is still shown in the liability
side of the B/S, the AO cannot invoke S. 41 (1) (a). [Dhawan (Delhi) + Matru Prasad C. Pandey (2015) (Guj)].
2 Debt has become time-barred. It is written back to the P&L account unilaterally. S. 41 (1) (a) could be invoked.
[Explanation-1 to S. 41 (1)].
3 Remission or cessation of a trading liability takes effect only upon final resolution of disputes. [J. K. Synthetics Ltd
(SC)].
4 Benefit on account of waiver of loan – tax treatment. [Iskraemeco Regent Ltd 331 ITR 317 (Mad) + Tosha
International Ltd 331 ITR 440 (Del) + Solid containers limited 308 ITR 416 (Bom) + Logitronics (P) Ltd 333 ITR
386 (Del) + Jubilant Securities (P) Ltd [Del].
Purpose for which the waived loan was taken Tax treatment upon waiver
(a) Term loan taken for acquisition of fixed asset ≠ Trading liability.
Waiver results in benefit in capital field = capital receipt ≠
income
(b) Loan taken for working capital purpose (that is Trading liability.
day to day trading operations) Benefit arising on account of waiver shall be brought to tax
U/H PGBP in view of S. 41 (1) (a).
Provisions of S. 41 (b):
Where there is succession in business, the provisions of S. 41 (1) can be invoked against the successor to tax the sum
obtained in respect of loss or expenses claimed as deduction by the predecessor or to tax the benefit accrued on account of
remission or cessation of trading liability claimed as deduction by the predecessor.
C. Scheme of business deductions:

1 Types of business deductions U/H PGBP deduction is allowed in respect of business expenses and depreciation allowance.
2 Deduction in respect of These are provided in S. 32 and S. 32AD.
depreciation allowance and
additional investment allowance.
3 Deduction in respect of business Deduction in respect of specific expenses incurred in relation to business or profession is
expenses. provided in S. 30 to S. 36.
Further, the residuary S. 37 (1) extends deduction to items of business expenditure not
covered by S. 30 to S. 36, which are allowable according to the accepted commercial
practices.
1. Deduction U/s 30: Rent, rates, repairs and insurance for buildings:
Following expenses which are incurred in relation to a building which is used for the purpose of business or profession
carried on by the assessee shall be allowed as deduction:
1 Rent paid for the premises = Deductible.
used for the purpose of Salami money is not eligible for deduction.
business or profession Where the assessee himself is the owner of the premises and occupies them for his business
purposes, no notional rent would be allowed under this section.
2 Repairs to the premises. If the assessee is occupying the premises as a tenant, the amount paid on account of cost of repairs
shall be allowed as deduction, if the assessee has undertaken to bear such repairs to the premises.
If the building is occupied by the assessee otherwise than by way of tenant, the amount paid on
account of current repairs shall be allowed as deduction.
However, this section does not allow deduction in respect of any expenditure which is capital in
nature. [Explanation to S. 30].
3 Land revenue/local = Deductible
rates/municipal taxes paid. Cesses, rates and taxes levied by a foreign Government are also allowed.
If the land revenue local rates or municipal taxes are paid within the due date for filing ROI for the
PY under assessment, it shall be allowed as deduction while computing income U/H PGBP.
However, if it is paid after the due date (supra), it shall be allowed as deduction only in the PY of
payment. [S. 43B].
4 Insurance premium Insurance premium paid in respect of insurance against risk of destruction of the premises is allowed
as deduction under this section.
5 Deductibity of expenses Where the premises are used partly for business and partly for other purposes, only a proportionate
where premises are used part of the expenses attributable to that part of the premises used for purposes of business will be
partly for business and partly allowed as a deduction. [S. 38 (1)].
for other purposes.

2. Deduction U/s 31: Repairs and insurance of machinery, plant and furniture:
Following expenses which are incurred in relation to plant, machinery or furniture, which is used for the purpose of business
or profession carried on by the assessee shall be allowed as deduction: (a) Current repairs; (b) Insurance premium.

1 Hire charges Hire charges paid in respect of plant, machinery or furniture are eligible for
deduction U/s 37 (1) and not U/s 30.
2 Deductibity of expenses where If the expenses referred to above are incurred in relation to plant, machinery or
plant etc are used partly for furniture, which is partly used for business or profession and partly for other
business and partly for other purposes, then that portion of expenses which is attributable to the use for business
purposes. or profession shall be allowed as deduction. [S. 38 (1)].
Some judicial pronouncements:

1 Huge expenditure on repairs and reconditioning of a machinery which broke down years ago which infused new life into
the asset is a capital expenditure. Hence, it is not deductible U/s 31. [Bharat Gears Ltd. v. CIT (2011) 337 ITR 370
(Delhi)].
2 The expenditure incurred on the assessee-lawyer’s heart surgery shall not be allowed as deduction U/s 31 by treating it
as current repairs considering heart as plant or U/s 37 by treating it as expenditure incurred wholly and exclusively for
purposes of profession. [Shanti Bhushan v. CIT (2011) 336 ITR 26 (Delhi)].
3 Expenditure on replacement of dies and moulds in the place of worn out dies and moulds is a current repairs eligible for
deduction U/s 31. [TVS Motors Ltd (2014) 364 ITR 1 (Mad)].
3. Deduction U/s 35: Expenditure on scientific research:

1 What is allowed as deduction S. 35 allows deduction in respect of expenditure on scientific research related to the business
U/s 35? carried on by the assessee and also in respect of expenditure by way of donations or
contributions made by the assessee to outside agencies carrying on scientific research.
2 Meaning of scientific research It means activities for the extension of knowledge in the fields of natural or applied science
including agriculture, animal husbandry or fisheries. [S. 43 (4) (i)].
3 Meaning of scientific research Expenditure incurred on scientific research would include all expenditure incurred for the
expenditure [S. 43 (4) (ii)]. prosecution or the provision of facilities for the prosecution of scientific research but does not
include any expenditure incurred in the acquisition of rights in or arising out of scientific
research.
4 When can we say that Scientific research related to a business would include
scientific research is related to (i) any scientific research which may lead to or facilitate an extension of that business;
the business carried on by the (ii) any scientific research of a medical nature which has a special relation to the welfare
assessee? of the workers employed in that business.
5 Classification of expenditure (a) Revenue expenditure; (b) Capital expenditure.
on scientific research.
6 Classification of revenue Revenue expenditure on scientific research can be classified into (a) post-commencement
expenditure on scientific expenditure; (b) pre-commencement expenditure.
research.
7 Deductibility of post- Post-commencement revenue expenditure on scientific research is deductible in the PY in
commencement revenue which it is incurred. [S. 35 (1) (i)].
expenditure on scientific
research.
8 Deductibility of pre- Revenue expenditure on scientific research being (a) cost of material used in scientific
commencement revenue research; and (b) salary to research personnel incurred during a period of 3 years immediately
expenditure on scientific preceding the date of commencement of business, to the extent certified by the prescribed
research. [Explanation to S. authority, is allowed as a deduction in the PY in business commences.
35 (1) (i)]. Expenditure incurred in providing perquisites to the research personnel shall not qualify for
deduction.
9 Prescribed authority DGIT (Exemptions) and Secretary, Department of scientific research.
10 Research need not be carried Scientific research need not be carried on by the assessee himself. It is enough if it is carried
out by the assessee himself. on, on behalf of the assessee. Still, the expenditure thereon, is eligible for deduction U/s 35.
[Ciba of India (SC) + National Rayon Corporation Ltd (Bom)].
11 Classification of capital Capital expenditure on scientific research can be classified into (a) post-commencement
expenditure on scientific expenditure; (b) pre-commencement expenditure.
research.
12 Deductibility of post- Post commencement capital expenditure on scientific research (not being one on land) shall be

commencement capital allowed as deduction in the PY in which it is incurred.

expenditure on scientific However, no depreciation U/s 32 shall be allowed on assets resulting from such expenditure.
research. [S. 35 (1) (iv) + s. 35 (2)].
13 Deductibility of pre- Capital expenditure on scientific research (not being one on acquisition of land or interest in
commencement capital land) incurred during a period of 3 years immediately preceding the date of commencement of
expenditure on scientific business is allowed as deduction in the PY in which the business commences.
research. However, the capital expenditure incurred before the aforesaid 3 years is not eligible for
deduction U/s 35.
But it is eligible for depreciation U/s 32.
14 No certification from the For enjoying deduction in respect of pre-commencement capital expenditure, there is no
prescribed authority. requirement that it has to be certified by the prescribed authority.
15 Expenditure on construction of Held, approach road to research lab is a necessary adjunct to it. Therefore, expenditure on
approach road to research lab construction of approach road shall be treated on par with construction of research lab and
– deductible? therefore, is eligible for deduction U/s 35 (1) (iv). [Sandoz (India) Ltd (Bom)].
16 Buses purchased for providing Held, though it is not an expenditure for prosecution of scientific research, it is an expenditure
pick-up and drop facility to the incurred for provision of facilities for provision of facilities for the prosecution of scientific
research personnel – is it research. Therefore it is eligible for deduction. [Smith Kline & French (India) Ltd 77 Taxman
eligible for deduction? 153 (Kar)].
17 Deductibility of expenditure on Requirements of S. 35 are materially different from the requirements of S. 32.
on-going construction of
research lab. To enjoy deduction in respect of depreciation allowance U/s 32, the assessee should own the
asset and put it to business use.
However, S. 35 (1) (iv) allows deduction in respect of capital expenditure on scientific research,
the moment it is incurred.
There is no further requirement that the expenditure should have brought into existence an
asset which is complete in all respects.
Moreover, there is no requirement that the asset should be used for research purpose for
availing deduction U/s 35 in the PY in which the expenditure is incurred.
Deduction is allowed U/s 35 even in respect of expenditure on on-going construction of
scientific research lab.
The expenditure incurred in respective years shall be allowed as deduction in the respective
years. [Rane Brake Linings Ltd 126 Taxman 231 (Mad) + Gujarat Alluminium Extrusions
(P) Ltd 133 Taxman 542 (Guj)].
18 Shifting the asset from S. 35 (1) (iv) allows deduction in respect of capital expenditure on scientific research in the PY
business side to research side in which it is incurred.
– Tax implications. If the assessee has acquired some assets for the business and after using them for business
for some time, transfers them from the business side to the research side, he cannot get the
benefit of deduction U/s 35, since there is no explicit provision in the Act in this regard. [Multi
Metals Ltd Vs CIT 254 ITR 652 (Raj)].
19 Tax treatment of unabsorbed It shall be treated on par with unabsorbed depreciation which is governed by the provisions of
capital expenditure on S. 32 (2). [S. 35 (4)].
scientific research.
20 Carry forward of unabsorbed The unabsorbed capital expenditure on scientific research of amalgamating company shall be
capital expenditure not to be allowed to be carried forward by the amalgamated company, being an Indian company.
affected on account of
amalgamation. [S. 35 (5)].
21 Transfer of scientific research Asset acquired for scientific research is no longer required for research purpose. Therefore, it
asset without using it for any is transferred without bringing it to business proper.
other purpose – tax In such a case, the original cost of the asset or the sale price of the asset, whichever is less,
implications. shall be taxed U/H PGBP in the previous of transfer. [S. 41 (3)].
Capital gains shall be computed only when the asset is sold for a price more than its original
cost.

22 Bringing the scientific Asset acquired for scientific research is no longer required for research purpose. Therefore, it
research asset to business is brought to business proper.
proper after its use for In such a case, it shall get added to the block of assets.
research purpose ceases – But the amount to be added to the block shall be nil. [S. 43 (1) Explanation-1].
tax implications. Thereafter, if the scientific research asset gets transferred out of the block, in the PY of
transfer, STCG shall be computed within the parameters of S. 50.
23 Scientific research asset is Exchange loss arising at the time of payment shall be treated as scientific research expenditure
imported from abroad – and shall be allowed as deduction U/s 35 (1) (iv) read with S. 43A.
Transaction funded by foreign However, the exchange gain shall be assessed to tax U/s 41 (1) read with S. 43A. [Gujarat
currency loan – Treatment of Siddhi Cements Ltd (SC)].
exchange loss or gain.
24 Composite consideration for If land and building are purchased for a composite consideration, to be used as scientific
land and building acquired for research lab, then the cost of land and building shall be bifurcated on the basis of their FMV.
scientific research purpose. The cost of land is not allowable as deduction and the cost of building alone shall be allowed
as deduction U/s 35 (1) (iv).
25 Weighted deduction U/s 35 A company engaged in the business of bio-technology or in the business of manufacture or
(2AB) in respect of production of any article or thing, not being an article or thing specified in the list of the
expenditure on in-house Eleventh Schedule is eligible for deduction U/s 35 (2AB).
research and development Beer, wine, alcoholic spirit for human consumption, tobacco and its preparations, toilet
facility. cosmetics, tooth paste, projector, photographic equipments etc are covered in the Eleventh
schedule.
S. 35 (2AB) allows weighted deduction of 150% on the expenditure on in-house research and
development facility as approved by the prescribed authority.
However, the expenditure on land and building is not eligible for deduction U/s 35 (2AB). But
expenditure on building is eligible for 100% deduction in S. 35 (1) (iv). [Tube Investments of
India Ltd (Mad)].
In respect of the expenditure for which deduction is allowed U/s 35 (2AB), no deduction shall
be allowed under any other provisions of this Act for any AY.
Deduction U/s 35 (2AB) shall be allowed only if the company has entered into an agreement
with the prescribed authority for co-operation in such research and development facility and
fulfills such conditions with regard to the maintenance of accounts and audit thereof and
furnishing of reports in such manner as may be prescribed.
The prescribed authority shall submit its report in relation to the approval of the said facility to
the PCCIT or CCIT or PDGIT or DGIT in such form and within such time as may be prescribed.
26 Tax treatment of sale of asset S. 41 (1) shall apply and not S. 41 (3).
for which weighted deduction
allowed U/s 35 (2AB).
27 Deduction in respect to Any sum contributed to scientific research association approved by the CG is eligible for a
contribution to approved weighted deduction of 150%.
scientific research association Any sum contributed to a university, college or other institution approved by the CG to be used
etc. [S. 35 (1) (ii)]. for scientific research is eligible for a weighted deduction of 150%.
The scientific research carried on by these entities need not relate to the business carried on
by the assessee.
Subsequent withdrawal of approval by the CG will not affect the deduction available to the
assessee.
For the amount contributed, if deduction was enjoyed U/s 35 (1) (ii), then for the same sum
deduction is not available under any other provisions of the Act.
For an assessee not carrying on business or profession, in respect of the sums (supra) normal
deduction is available U/s 80GGA against the GTI. However, if the sum contributed exceeds
Rs. 10000, it should not be made in cash. [S. 80GGA (2A)].
28 Deduction in respect of Any sum paid to a company to be used by it for scientific research is eligible for deduction U/s
payment to a company for 35 (1) (iia).
scientific research – S. 35 (1) However, such deduction would be available only if (a) the company is registered in India; and
(iia). (b) has as its main object the scientific research and development.
Further, it should be approved by the prescribed authority and should fulfill the other prescribed
conditions.
The payee-company will not be entitled to claim weighted deduction of 150% U/s 35 (2AB).
However, it can continue to claim deduction U/s 35 (1) (i) or (iv).

29 Deduction in respect of Any sum contributed to a research association approved by the CG, the object of which is to
contribution to entities carry on social science research or statistical research, is eligible for deduction U/s 35 (1) (iii).
carrying on social science Any sum contributed to a university, college or other institution approved by the CG to be used
research or statistical for social science research or statistical research is eligible for deduction U/s 35 (1) (iii).
research – S. 35 (1) (iii). Subsequent withdrawal of approval by the CG will not affect the deduction available to the
assessee.
For the amount contributed, if deduction was enjoyed U/s 35 (1) (iii), then for the same sum
deduction is not available under any other provisions of the Act.
For an assessee not carrying on B/P, in respect of the sums (supra) normal deduction is
available U/s 80GGA against the GTI.
However, if the sum contributed exceeds Rs. 10000, it should not be made in cash. [S. 80GGA
(2A)].
30 Weighted deduction U/s 35 Any sum paid by an assessee to a National Laboratory or University or IIT or a specified
(2AA) person (approved by the prescribed authority) for carrying out programmes of scientific
research approved by the prescribed authority will be eligible for a weighted deduction of 150%
of the amount so paid.
The contribution for which weighted deduction was enjoyed U/s 35 (2AA) is not eligible for
deduction under any other provisions.
Subsequent withdrawal of approval granted to the donor-entities will not affect the deduction
available to the donor-assessee.
The prescribed authority before granting approval has to satisfy itself about the feasibility of
carrying out the scientific research and shall submit its report in the prescribed form to the
jurisdictional PCCIT or CCIT or PDGIT or DGIT.
4. Deduction U/s 35D: Amortisation of specifies preliminary expenses:

1 What is allowed as deduction U/s S. 35D allows deduction in respect of specified preliminary expenses incurred by the
35D? eligible assessee.
2 Eligible assessee Indian company
Non-corporate residents.
3 Timing of preliminary expenses Preliminary expenses may be incurred before commencement of business in connection
with setting up business.
Preliminary expenses may also be incurred after the commencement of business in
connection with extension of an industrial undertaking or in connection with setting up of
new Unit.
4 Specified preliminary expenses. Expenses on preparation of a feasibility report.
Expenses on preparation of a project report.
Expenses on conducting market survey or any other survey necessary for business.
Expenses on engineering services relating to assessee’s business.
Legal charges for drafting any agreement relating to setting up or extension of the business
of the assessee.
Charges for drafting and printing of MOA & AOA.
Fees for registering the company.
Expenses in connection with issue, for public subscription, of shares or debentures.
Underwriting commission.
Charges for drafting, typing, printing and advertisement of prospectus.
Expenditure incurred in refunding the share application money to the unsuccessful
applicants. [Shree synthetics Ltd (MP)].
5 Work to be done by the assessee or The work in connection with the preparation of feasibility report or the project report or the
concern approved by the CBDT. conducting of market survey or the engineering services referred above should be carried
out by the assessee himself or by a consultancy concern approved by the Board.
6 Specified expenditure to be subjected The sum total of all the specified expenditure incurred by the assessee shall be restricted
to ceiling to a ceiling.
7 Ceiling in case of Indian company 5% of project cost or 5% of capital employed (whichever is higher).
8 Ceiling in case of non-corporate 5% of project cost.
residents
9 Meaning of project cost where The actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery,
preliminary expenses are incurred furniture, fittings, railway sidings (including expenditure on the development of land,
before commencement of business (in buildings) which are shown in the books of the assessee as on the last day of the PY in
connection with setting up business) which the business of the assessee commences.

10 Meaning of project cost where The actual cost of the fixed assets being land, buildings, leaseholds, plant, machinery,
preliminary expenses are incurred furniture, fittings, and railway sidings (including expenditure on the development of land &
after the commencement of business buildings) which are shown in the books of the assessee as on the last day of the PY in
(in connection with extension of the which the extension of the undertaking is completed, in so far as such fixed assets have
existing undertaking) been acquired or developed in connection with the extension of the undertaking.
11 Meaning of project cost where The actual cost of the fixed assets being land, buildings, leaseholds, plant, machinery,
preliminary expenses are incurred furniture, fittings, and railway sidings (including expenditure on the development of land
after the commencement of business and buildings) which are shown in the books of the assessee as on the last day of the PY
(in connection with setting up new in which the new unit commences production or operation, in so far as such fixed assets
unit). have been acquired or developed in connection with setting up of the new unit.
12 Meaning of capital employed where The aggregate of the issued share capital, debentures and long-term borrowings as on the
preliminary expenses are incurred last day of the previous year in which the business of the company commences.
before commencement of business
(for its setting up).
13 Meaning of capital employed where The aggregate of the issued share capital, debentures, and long-term borrowings as on the
preliminary expenses are incurred last day of the PY in which the extension of the undertaking is completed, in so far as such
after the commencement of business capital, debentures and long-term borrowings have been issued or obtained in connection
(in connection with extension of the with the extension of the undertaking.
existing undertaking)
14 Meaning of capital employed where The aggregate of the issued share capital, debentures, and long-term borrowings as on the
preliminary expenses are incurred last day of the PY in which the unit commences production or operation in so far as such
after the commencement of business capital, debentures and long-term borrowings have been issued or obtained in connection
(in connection with setting up new with the setting up of the new undertaking.
unit).
15 Share premium – not to be included in Premium, if any collected by the company upon issue of shares does not constitute a part
computing the capital employed. of capital employed in the business of the company for the purpose of quantification of
deduction U/s 35D. [Berger paints India Ltd (SC)].
16 Meaning of long term borrowing Any moneys borrowed in India by the company from the Government or the Industrial
Finance Corporation of India or the ICICI or any other financial institution eligible for
deduction U/s 36 (1) (viii) or any banking institution, or
Any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase
outside India of plant and machinery where the terms under which such moneys are
borrowed or the debt is incurred provide for the repayment thereof during a period of not
less than 7 years.
17 Quantum and period of deduction (in Specified preliminary expenses which were restricted to ceiling are allowed as a deduction
case preliminary expenses were in 5 equal annual instalments beginning with the PY in which the business commences.
incurred before the commencement of
business)
case preliminary expenses were in 5 equal annual instalments beginning with the PY in which the extension of the
incurred after the commencement of undertaking is completed.
business (in connection with
extension of existing undertaking)).
case preliminary expenses were in 5 equal annual instalments beginning with the PY in which the new unit becomes
incurred after the commencement of operational.
business (in connection with setting
up new unit)).
20 Audit requirement In cases where the assessee is a person other than a company or a cooperative society,
the deduction would be allowable only if the accounts of the assessee for the year(s) in
which the expenditure is incurred have been audited by a CA and the assessee furnishes,
along with his ROI for the 1st year in respect of which the deduction is claimed, the report of
such audit in the prescribed form duly signed and verified by the auditor and setting forth
such other particulars as may be prescribed.
21 Bar on double deduction Where a deduction under this section is claimed and allowed for any AY in respect of any
item of expenditure, the expenditure in respect of which deduction is so allowed shall not
qualify for deduction under any other provision of the Act for the same or any other AY.
22 Special provisions for amalgamation. Where the assessee-company which has been enjoying deduction U/s 35D, gets
amalgamated with an Indian company, then the deduction U/s 35D shall continue in the
hands of amalgamated company for the unexpired residual period beginning with the PY in

which amalgamation took place.

23 Special provision for demerger. Where the business undertaking of the assessee-company in respect of the preliminary
expenses of which deduction has been enjoyed by the assessee-company gets transferred
to another Indian company pursuant to a scheme of demerger, then the deduction U/s 35D
shall continue in the hands of resulting company for the unexpired residual period
beginning with the PY in which the demerger took place.
24 Provisions of S. 35D does not It is to be noted carefully that the provisions of S. 35D do not supercede any other
supercede any other provisions of the provisions of this Act.
Act. [CBDT Circular 56]. The very purpose of insertion of S. 35D into the Act is to enable the assessees to get
deduction in respect of expenses which are preliminary or capital in nature for which
deduction is not available under any other provisions of this Act. Accordingly, S. 35D
cannot be applied to the disadvantage of the assessee.
If for an expenditure, a better deduction is available under any other provisions of this Act,
the Department shall not thrust the provisions of S. 35D on the unwilling assessee.
25 Decision in Sree Rama Multi Tech Interest income from share application money deposited in bank is eligible for set-off
Ltd. [2018] 403 ITR 426 (SC) against public issue expenses and cannot be subjected to tax U/H IFOS.
5. Amortisation of telecom licence fee – S. 35ABB:

1 Assessee eligible for deduction Persons engaged in the business of providing telecommunication services.
U/s 35ABB.
2 Expenditure eligible for Capital expenditure incurred for obtaining the right to operate telecommunication
amortisation U/s 35ABB. services. [i.e. licence fee].
3 Interest on overdue payments Interest payable on overdue payment of licence fee can’t be said to be capital expenditure
– not covered by S. 35ABB. and it is not qualified for deduction U/s 35ABB.
However, deduction is available U/s 37 (1). [Fascel (2009) (Delhi ITAT)].
4 Deduction only upon payment. Irrespective of the method of accounting regularly employed by the assessee, the
deduction U/s 35ABB is only upon payment.
5 Amortisation of telecom licence It shall be amortised equally over the period beginning with the PY in which the business
fee for which payment was commences and ending with the PY in which the licence expires.
made before the
commencement of business.
6 Amortisation of telecom licence It shall be amortised equally over the period beginning the PY in which the payment was
fee for which payment was made and ending with the PY in which the licence expires.
made after the commencement
of business.
7 No depreciation U/s 32. Though telecom licence, being a licence, is covered under intangible depreciable assets,
it is not eligible for depreciation U/s 32, since the telecom licence fee is amortised U/s
35ABB.
8 Transfer of telecom licence. Case-1: Telecom licence is transferred in its entirety.
Case-2: Telecom licence is transferred in part.
9 Telecom licence transferred in 1 Proceeds of sale of telecom licence *****
its entirety – tax implications. 2 Deduction allowed U/s 35ABB in the earlier years ****
3 Licence fee ****
Possibility Tax treatment U/H PGBP
(1+2) < 3 [3 – (1+2)] shall be allowed as deduction U/s 35ABB in the PY of
transfer.
(1+2) > 3 ([(1+2) - 3] or 2) whichever is less – shall be taxable as business income
of the PY of transfer.
Apart from this, capital gains shall also be computed.
10 Telecom licence transferred in 1 Proceeds of sale of telecom licence *****
part – tax implications. 2 Deduction allowed U/s 35ABB in the earlier years ****
3 Licence fee ****
(1+2) < 3 [3 – (1+2)] shall be allowed as deduction U/s 35ABB over the unexpired
residual period of licence.
Apart from this, capital gains shall also be computed. For this purpose, we shall take
proportionate part of COA.

11 Deduction not to be affected on Where the assessee-company which has been enjoying deduction U/s 35ABB, gets
account of amalgamation. amalgamated with an IC, then the deduction U/s 35ABB shall continue in the hands of
amalgamated company for the unexpired residual period beginning with the PY in which
amalgamation took place.
12 Deduction not to be affected on If the demerged company sells or transfers the licence to the resulting company, being an
account of demerger. IC, under the scheme of demerger, then the deduction U/s 35ABB shall continue in the
hands of resulting company for the unexpired residual period beginning with the PY in
which demerger took place.
6. Amortisation of spectrum fees – S. 35ABA:

1 Assessee eligible for deduction U/s Persons engaged in the business of providing telecommunication services.
35ABB.
2 Expenditure eligible for amortisation U/s Capital expenditure incurred for obtaining the right to use spectrum for telecommunication
35ABB. services. [i.e. spectrum fee].
3 Timing of payment of spectrum fees. Situation-1 Payment before the commencement of business
Situation-2 Payment after the commencement of business
4 Manner of payment of spectrum fee. There are two options available for the assessee in paying the spectrum fees:
Option-1 Full upfront payment of spectrum fees.
Option-2 Payment of spectrum fees on deferred payment basis.
5 Amortisation of spectrum fee paid or It shall be amortised equally over the period beginning with the PY in which the business
agreed to be paid before the commences and ending with the PY up to which the spectrum will be in force.
commencement of business.
6 Amortisation of upfront spectrum fee It shall be amortised equally over the period beginning with the PY in which the payment
paid after the commencement of was made and ending with the PY up to which the spectrum will be in force.
business.
7 Amortisation of spectrum fee incurred It shall be amortised equally over the period beginning with the PY in which the payment
after the commencement of business on deferred payment basis starts and ending with the PY up to which the spectrum will be
and payable on deferred payment basis. in force.
8 No depreciation U/s 32. Capital expenditure on spectrum is not eligible for depreciation U/s 32.
9 Consequences of termination of However, in case of deferred payment of spectrum fee, where there is failure by the
assignment of spectrum pursuant to assessee to comply with any of the conditions specified by the scheme of the Department
default in payment of spectrum fee of Telecommunications (DOT), GOI and DOT terminates the allotment or assignment of
instalment. spectrum, the AO shall re-compute the TI of the assessee for the PY in which the
deduction has been claimed and granted to him by deeming that,-
(i) the total amount of spectrum fee paid up to the date of termination is the amount
agreed to be paid on deferred payment basis.
(ii) the spectrum was in force up to the date of its termination for the purpose of
computing the PYs over which amortisation is to be done.
10 Transfer of right to get spectrum Case-1: Right to get spectrum assigned is transferred in full.
assigned. Case-2: Right to get spectrum assigned is transferred in part.
11 Right to get spectrum assigned is 1 Proceeds of sale of spectrum rights *****
transferred in full – Tax implications. 2 Deduction allowed U/s 35ABA in the earlier years ****
3 Spectrum fee ****
(1+2) < 3 [3 – (1+2)] shall be allowed as deduction U/s 35ABA in the PY of transfer.
Apart from this, capital gains shall also be computed.
12 Right to get spectrum assigned is 1 Proceeds of sale of spectrum rights *****
transferred in part – Tax implications. 2 Deduction allowed U/s 35ABA in the earlier years ****
3 Spectrum fee ****
(1+2) < 3 [3 – (1+2)] shall be allowed as deduction U/s 35ABA over the unexpired
residual period over which spectrum shall be in force.
Apart from this, capital gains shall also be computed. For this purpose, we shall take
proportionate part of COA.

13 Deduction not to get affected on Where the assessee-company which has been enjoying deduction U/s 35ABA, gets
account of amalgamation. amalgamated with an Indian company, then the deduction U/s 35ABA shall continue in the
hands of amalgamated company for the unexpired residual period beginning with the PY in
which amalgamation took place.
14 Deduction not to get affected on If the demerged company sells or transfers the licence to the resulting company, being an
account of demerger. Indian company, under the scheme of demerger, then the deduction U/s 35ABA shall
continue in the hands of resulting company for the unexpired residual period beginning
with the PY in which demerger took place.
7. Weighted deduction in respect of expenditure incurred on notified agricultural extension project [S. 35CCC]:
1 Eligible project and Quantum In order to incentivize the business entities to provide better and effective agriculture extensive
of Deduction services, S. 35CCC provides a weighted deduction of a sum equal to 150% of expenditure (100%
from AY 20121-22 onwards) incurred by an assessee on agricultural extension project in
accordance with the prescribed guidelines.
2 No other deduction In case deduction in respect of such expenditure is allowed under this section then, no deduction
in respect of such expenditure shall be allowed under any other provisions of the Act in the same
or any other AY.
8. Weighted deduction in respect of expenditure incurred by companies on notified skill development project [S.
35CCD]:
1 Nature of expenditure eligible In order to encourage companies to invest on skill development projects in the manufacturing
for deduction and quantum of sector, S. 35CCD provides for a weighted deduction of a sum equal to 150% (100% from the
deduction. AY 2021-22 onwards) of the expenditure (not being expenditure in the nature of cost of any
land or building) on skill development project incurred by the company in accordance with the
prescribed guidelines.
2 No other deduction In case deduction in respect of such expenditure is allowed under this section then, no
deduction in respect of such expenditure shall be allowed under any other provisions of the Act
in the same or any other AY.
9. Amortisation of expenses for prospecting and development of certain minerals [S. 35E R. 6AB]:
1 Assessee eligible for Indian company or non-corporate resident who are engaged in any operations relating to
deduction prospecting for or extracting or production of specified minerals (mentioned in VII schedule).
2 Eligible expenditure This section allows deduction with respect to specified expenditure incurred by the assessee
during the specified period.
3 Meaning of specified It means expenditure incurred by the assessee wholly and exclusively:
expenditure (a) on any operations relating to prospecting for any mineral or group of associated minerals
specified in Part A or Part B of the 7th schedule (Gold, silver, zinc, lime stone, coal etc) or
(b) on development of mine or other natural deposit of any such mineral or group of
associated minerals.
4 Grants and subsidies to be That portion of expenditure met directly or indirectly by any other person or authority shall be
excluded excluded from specified expenditure.
5 Other exclusions from The following expenditure shall stand excluded from specified expenditure:
specified expenditure. (a) Expenditure on acquisition of the site of source of any of the aforesaid minerals or group
of associated minerals.
(b) Expenditure on acquisition of right over the aforesaid site.
(c) Expenditure on acquisition of the deposits of such mineral or group of associated
minerals.
(d) Capital expenditure on any building, machinery, plant or furniture for which depreciation is
admissible U/s 32.
6 Meaning of specified PY of commercial production + 4 PYs immediately preceding that PY.
period.
7 Period of deduction Deduction under this section is allowed for a period of 10 years beginning with the PY of
commercial production.
8 Quantum of deduction in SN Particulars Amount
each of the aforesaid 10 1 1/10th of the Specified expenditure (referred to as instalment amount) ****
years. 2 Income of the PY arising from commercial exploitation of any mine (including ****
old mines) or deposits of minerals (before deduction U/s 35E)
3 Deduction U/s 35E (lesser of 1 and 2) ****

9 Tax treatment of Where the instalment amount relating to any of the relevant PYs remains unallowed either in full or
unabsorbed instalment in part, the unallowed portion shall be carried forward and added to the instalment relating to the
amount previous year next following and deemed to be part of that instalment, and so on, for succeeding
PYs.
However, no part of any instalment shall be carried forward beyond the 10 th PY as reckoned from
the year of commercial production.
10 Bar on double deduction Where a deduction under this section is claimed and allowed for any AY in respect of the aforesaid
expenditure, the expenditure in respect of which deduction is allowed shall not be eligible for
deduction under any other provisions of this Act for the same or any other AY.
11 Audit of account – For availing deduction under this section, the assessee shall get his books of accounts audited by
precondition a CA.
Then, the assessee shall furnish, along with the ROI for the first year in which the deduction under
this section is claimed, the report of such audit in Form No. 3AE.
But there is no audit requirement for companies and co-operative societies.
12 Deduction not to be In case of amalgamation of the assessee company with another Indian company, the deduction
affected because of under this section shall continue in the hands of amalgamated company for the unexpired residual
amalgamation or period right from the PY of amalgamation.
demerger. Similarly, in case of demerger, the deduction under this section shall continue in the hands of
resulting company for the unexpired residual period right from the PY of demerger, provided the
demerged company is an Indian company.
10. Amortisation of expenses incurred in relation to Amalgamation/demerger [S. 35DD]:

1 Assessee eligible for deduction Indian company
2 Expenditure eligible for Expenditure, wholly and exclusively for the purpose of amalgamation or demerger.
deduction
3 Amount of deduction The assessee shall be allowed a deduction equal to 1/5th of such expenditure for 5
successive PYs beginning with the PY in which amalgamation or demerger takes place.
4 Bar on double deduction No deduction shall be allowed in respect of the above expenditure under any other
11. Deduction in respect of voluntary retirement compensation – S. 35DDA:

1 What is allowed as S. 35DDA allows deduction in respect of compensation paid to employees who have opted to retire
deduction U/s under a voluntary retirement scheme.
35DDA?
2 Deduction upon Irrespective of the method of accounting regularly employed by the assessee, deduction shall be allowed
payment under this section only upon payment.
3 Quantum and period Voluntary retirement compensation paid shall be allowed as deduction in 5 equal annual installments
of deduction beginning with the PY in which the compensation was paid.
4 No double Where the assessee avails deduction under this section with respect to the aforesaid expenditure, he is
deduction not entitled to get deduction with respect to the same expenditure under any other provisions of this Act.
5 Special provision in Where there is succession in business on account of amalgamation, demerger, conversion of SPC into
case of company, conversion of firm into company or conversion of company into LLP and as a result the
amalgamation etc. predecessor could not enjoy deduction under this section for a full period of 5 years, then the deduction
under this section shall continue in the hands of successor for the unexpired residual period beginning
with the PY of succession.
12. Tea Development Account/Coffee Development Account/Rubber Development Account [S. 33AB]:
1 Assessee eligible of Assessee engaged in the business of growing and manufacturing tea or coffee or rubber in India.
deduction
2 Conditions to be satisfied The assessee should deposit money in an eligible account within the specified time.
for availing deduction. The assessee should get his books audited and furnish the audit report along with the ROI. The audit
report should be in Form No. 3AC.
In case books of accounts are required to be audited under any other law, no fresh audit is required
for the purpose of this section. It is enough if the assessee furnishes the audit report as required under
any other law and a further report in Form No. 3AC.
3 Meaning of eligible A special account maintained by the assessee with NABARD in accordance with and for the purpose
account specified in a scheme approved by the Tea Board/Coffee Board/Rubber Board or
A deposit a/c opened by the assessee in accordance with and for the purpose specified in a scheme
approved by the Tea Board/Coffee Board/Rubber Board with the previous approval of the CG.

4 Time limit for depositing in Within 6 months from the end of the PY or before furnishing return of income whichever is earlier.
the eligible account
5 Quantum of deduction Amount deposited in the eligible account or 40% of profits of tea/coffee/rubber business (whichever is
less).
6 Manner of computation of The profits of tea/coffee/rubber business should be computed U/H PGBP (before deduction under this
profits section).
7 Bar on double deduction. If a deduction has been allowed U/s 33AB, no deduction shall be allowed in respect of such amount in
any other PY.
8 Manner of utilisation of The amount standing to the credit of the assessee in the eligible account is to be utilized for the
amount deposited. business of the assessee in accordance with the aforesaid scheme.
It should not be utilized for purchase of non-eligible assets.
9 No deduction w.r.t Where any amount standing to the credit of the assessee in the eligible account is utilised for the
expenditure incurred out purpose of any expenditure in connection with the business in accordance with the scheme, such
of amount withdrawn from expenditure shall not be allowed as deduction in computing income U/H PGBP.
eligible account
10 Meaning of non-eligible Any machinery or plant in any office premises or residential accommodation, including guest house.
assets Any office appliances (other than computers).
Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by
way of depreciation or otherwise) in computing the income chargeable U/H PGBP of any one PY.
Any new machinery or plant to be installed in an industrial undertaking for the purposes of business of
construction, manufacture or production of any article specified in the list in the 11 th schedule.
11 Consequence of purchase The amount withdrawn from eligible account for purchase of non-eligible assets shall be deemed to be
of non-eligible asset. the profits of business of the PY in which it is utilised.
12 Tax treatment of amount Where the assessee withdraws any amount from the eligible account for any purpose in accordance
withdrawn and which is with the scheme, the amount remaining unutilized at the end of the PY in which it is withdrawn, shall
remaining unutilised in the be deemed to be the profits of business of that PY.
PY of withdrawal.
13 Other circumstances in Apart from withdrawing the amount from the eligible account for the purpose of business in
which amount can be accordance with the scheme, the assessee can also withdraw under the following circumstances:
withdrawn from the (a) Closure of business;
eligible account. (b) Death of assessee (where assessee is an individual);
(c) Partition of HUF (where assessee is a HUF);
(d) Dissolution of firm (where assessee is a firm);
(e) Liquidation of company (where assessee is a company).
14 Tax treatment of amount Where the amount is withdrawn from the eligible account during the PY under the circumstances
withdrawn under the referred to in a) & d), the amount withdrawn shall be regarded as profits of the business of the PY in
aforesaid circumstances. which it is withdrawn.
The amount withdrawn under other circumstances shall not be assessed to tax.
15 Withdrawal of deduction Where the assessee transfers any eligible asset acquired out of an amount withdrawn from the eligible
upon sale of eligible asset account within 8 years from the end of the PY which it was acquired, such amount which was used for
within 8 years. purchasing the eligible asset shall be regarded as profits of the business of the PY in which transfer
takes place.
16 No withdrawal of There will be no withdrawal of deduction in the following cases, though the eligible asset is transferred
deduction in certain within 8 years:
cases. (a) Eligible asset is transferred by the assessee to the Government, the Local authority, a
statutory corporation or a Government company.
(b) Assessee-firm is succeeded by a company and as a result, interalia eligible asset gets
transferred to the company. (Subject to the conditions given below).
17 Conditions to be complied All the assets and liabilities of the firm relating to the business of the firm before succession shall
with in respect of the become the assets and liabilities of the company.
aforesaid succession. All the shareholders of the company were partners of the firm immediately before succession.
13. Site Restoration Fund [S. 33ABA]:
1 Assessee eligible for Assessee carrying on business consisting of prospecting for or extraction or production of
deduction U/s 33ABA petroleum or natural gas or both in India and who has entered to an agreement with the CG in
relation to such business.
2 Conditions to be satisfied for The assessee should deposit money in an eligible account within the specified time.
availing deduction The assessee should get his books audited & furnish the audit report along with ROI.

The audit report should be in Form No. 3AD.

In case books of accounts are required to be audited under any other law, no fresh audit is
required for the purpose of this section. It is enough if the assessee furnishes the audit report
as required under any other law and a further report in Form No. 3AD.
3 Meaning of eligible account A special account maintained by the assessee with SBI in accordance with and for the
purposes specified in a scheme approved by the Ministry of Petroleum and Natural Gas of the
GOI or
Site restoration account opened by the assessee in accordance with and for the purposes
specified in a scheme framed by the aforesaid Ministry.
4 Time limit for depositing in Before the end of the PY.
the eligible account
5 Quantum of deduction Amount deposited in the eligible account or 20% of profits of business of production of
petroleum or natural gas (whichever is less).
6 Bar on double deduction. If a deduction has been allowed U/s 33ABA, no deduction shall be allowed in respect of such
amount in any other PY.
7 Manner of utilization of The amount standing to the credit of the assessee in the eligible account (including interest
amount deposited. thereon) is to be utilized for the business of the assessee in accordance with the aforesaid
scheme.
It should not be utilized for purchase of non-eligible assets.
8 No deduction w.r.t Where any amount standing to the credit of the assessee in the eligible account is utilised for
expenditure incurred out of the purpose of any expenditure in connection with the business in accordance with the
amount withdrawn from scheme, such expenditure shall not be allowed as deduction in computing income U/H PGBP.
eligible account.
9 Meaning of non-eligible Any machinery or plant in any office premises or residential accommodation, including guest
assets. house.
Any office appliances (other than computers).
Any machinery or plant, the whole of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise) in computing the income chargeable U/H PGBP
of any one PY.
Any new machinery or plant to be installed in an industrial undertaking for the purposes of
business of construction, manufacture or production of any article specified in the list in the 11th
schedule.
10 Consequence of purchase of The amount withdrawn from eligible account for purchase of non-eligible assets shall be
non-eligible assets deemed to be the profits of business of the PY in which it is utilised.
11 Tax treatment of unutilized Where the assessee withdraws any amount from the eligible account for any purpose in
amount. accordance with the scheme, the amount remaining unutilized at the end of the PY in which it
is withdrawn, shall be deemed to be the profits of business of that PY.
12 Prohibition on withdrawal of Any amount standing to the credit of the eligible account (including interest thereon) cannot be
deposit withdrawn, except for the purposes specified in the scheme.
13 Tax consequences of Where any amount standing to the credit of the assessee (including interest thereon) is
withdrawal of deposit withdrawn on closure of the account during any PY by the assessee, the amount so withdrawn
from the account, as reduced by the amount, if any, payable to the CG by way of profit share
as provided in the agreement referred to in S. 4, shall be deemed to be the profits of the
business of that PY.
14 Withdrawal of deduction Where the assessee transfers any eligible asset acquired out of an amount withdrawn from the
upon sale of eligible asset eligible account within a period of 8 years from the end of the PY which it was acquired, such
within 8 years amount which was used for purchasing the eligible asset shall be regarded as profits of the
business of the PY in which transfer takes place.
15 No withdrawal of deduction in There will be no withdrawal of deduction in the following cases, though the eligible asset is
certain cases transferred within a period of 8 years:
(a) Eligible asset is transferred by the assessee to the Government, the Local authority, a
statutory corporation or a Government company.
(b) Assessee-firm is succeeded by a company and as a result, interalia eligible asset gets
transferred to the company. (Subject to the conditions given below).
16 Conditions to be complied All the assets and liabilities of the firm relating to the business of the firm before succession
with in respect of the shall become the assets and liabilities of the company.
aforesaid succession All the shareholders of the company were partners of the firm immediately before succession.

14. Deduction U/s 36:

S. 36 (1) (i)
S. 36 (1) (i) provides deduction in respect of premium paid to insure against the risk of damage or destruction of stocks or
stores of the business or profession.
S. 36 (1) (ia)
Assessee eligible for Federal milk co-operative society
deduction.
Expenditure eligible for Premium paid to effect an insurance on the life of cattle owned by a member of a co-
deduction. operative society being a primary society engaged in supply of milk raised by its members
to such Federal Milk Co-operative Society.
S. 36 (1) (ib)
Expenditure eligible for Provides deduction in respect of premium paid to effect an insurance on the health of
deduction employees.
Conditions to be fulfilled for Premium should be paid otherwise than by way of cash.
enjoying deduction. Premium is paid under a scheme framed by GIC and approved by the CG or under a
scheme framed by any other insurer and approved by IRDA.
S. 36 (1) (ii)
Expenditure eligible for Bonus or commission paid to employees for the services rendered by them.
deduction. But this bonus or commission should not be one which would have been otherwise
distributed as dividend or profits.
PY in which deduction is Deduction is allowed in the PY in which bonus or commission is incurred provided the
allowed. [S. 43B]. payment is made either in the same PY or within the due date for filing ROI for that PY.
However, if the payment is made beyond the due date for filing ROI, it shall be allowed as
deduction in the PY in which payment is made.
Shasun Chemicals & In a case where payment of bonus due to employees is paid to a trust and such amount is
Drugs Ltd (2016) 388 ITR subsequently paid to the employees before the stipulated due date, it would be allowable
1 (SC). U/s 36 (1) (ii) while computing business income.
S. 36 (1) (iii)
Expenditure eligible for Amount of interest paid in respect of capital borrowed for the purpose of business or
deduction. profession.
However, if the interest is paid on borrowing made for the purpose of acquisition of asset
used for the purpose of B/P, the interest attributable to the period up to the date on which
the asset first put to use shall not be allowed as deduction U/s 36 (1) (iii). It shall be
capitalised. [Proviso to S. 36 (1) (iii)].
Interest attributable to the period falling after the date on which asset is first put to use shall
not be capitalised but shall be allowed as deduction U/s 36 (1) (iii). [Explanation-8 to S.43
(1)].
PY in which deduction is Interest is allowed as deduction in the PY in which it is incurred.
allowed. [S. 43B]. However, if interest is payable on any loan or advance taken from a schedule bank or co-
operative bank (other than a primary agricultural credit society or primary co-operative
agricultural and rural development bank) or any PFI or any SFC or SIIC, deduction is
allowed in the PY in which it is incurred provided the payment is made either in the same
PY or within the due date for filing ROI for that PY.
However, if the payment is made beyond the due date for filing ROI, it shall be allowed as
deduction in the PY in which payment is made.
Issues in S. 36 (1) (iii):
1 Meaning of the term ‘Interest’ means interest payable in any manner in respect of any moneys borrowed
‘interest’ in S. 2 (28A) or debt incurred (including a deposit, claim or other similar right or obligation) and
‘Interest’ includes any service fee or other charges in respect of moneys borrowed
or debt incurred or in respect of any credit facility which has not been utilized.
2 Brokerage paid for = interest (Vide S. 2 (28A)). Hence, deductible U/s 36 (1) (iii). However, it if is
arrangement of loan covered by the Proviso to S. 36 (1) (iii), it shall be capitalised.
3 Loan application charges = interest (vide S. 2 (28A)). Hence, deductible U/s 36 (1) (iii).
paid to bank or FI.
4 Commitment charges paid to = interest (Vide S. 2 (28A)). Still, it is not deductible U/s 36 (1) (iii). However,
bank or FI deductible U/s 37 (1). [Gujarat Alkalies and Chemicals Ltd (SC)].
5 Interest on unpaid purchase Deductible U/s 37 (1). [Kerala Road lines Ltd (SC)].
consideration – is deductible
U/s 36 (1) (iii).

6 Necessity of, and prudence [Bombay Samachar Ltd 74 ITR 723 (Bom) + Gautam Motors 194 Taxman 21
in, borrowing cannot be (Del)].
questioned.
7 Funds borrowed for the Not deductible. Borrowing is not for the purpose of business or profession. It is for
purpose of payment of payment of statutory dues. Therefore, interest on such borrowing is not to be
income-tax dues – Whether allowed as deduction. [East India Pharmaceuticals Works Ltd (SC)].
interest is allowable as
deduction?
8 Whether interest paid under No. [Bharat Commerce & Industries Ltd 98 Tax 151 (SC) + National
the IT Act are eligible for Engineering Industries Ltd 113 ITR 252 (SC)].
deduction?
9 Whether interest on Yes. [Shree Changdeo Sugar Mills Ltd 143 ITR 469 (Bom)].
borrowing made for payment
of dividend is deductible?
10 Part of borrowed funds used No. The company is not in money lending business. Further, giving loans to
for giving loans to directors directors carrying concessional rate of interest does not serve any business
at a concessional rate. purpose. [HR Sugar Factory (P) Ltd 189 ITR 363 (All)].
Whether interest on that
portion of borrowed funds is
eligible for deduction?
11 Whether interest attributable If diverting a part of borrowed funds by way of interest-free loan to sister concern
to that portion of borrowed does not serve any business purpose, then the interest attributable to such portion
funds which is used for of borrowed funds shall be disallowed while computing income U/H PGBP.
giving interest-free loan to However, out of borrowed funds, if the interest free loan is given to sister concern as
sister concerns be a measure of commercial expediency (Say for example, the holding company out of
disallowed? its borrowed funds gives loan to its WOS in which it has deep business interest),
then even such portion of borrowed funds are regarded as used only for the purpose
of business and hence, no part of the interest on borrowed funds shall be
disallowed. [S. A. Builders (SC) + Madhav Prasad Jatia (SC)].
12 Deep business interest in Assessee-company guarantees the loan granted by a FI to its WOS in which it has
subsidiary – Guarantees deep business interest. The subsidiary commits default in repayment of loan and in
loan granted to it – payment of interest, since it incurred heavy losses in the relevant year.
subsidiary defaults – interest Upon enforcement of guarantee, the assessee-company started making loan
paid by the assessee – repayment and interest payment. The interest paid is claimed as deduction U/s 36
Deductible? (1) (iii). The claim was upheld. [J. K. Synthetics Ltd (All)].
13 Decision in Tulip Star Hotels A company engaged in the business of owning, running and managing hotels can
Ltd (SC) claim interest on borrowed funds, used by it for investing in the equity share capital
of a WOS, as deduction where the WOS was formed for exercising effective control
of new hotels acquired by the parent company under its management.
14 Whether interest on funds Where the business activity discontinued is one of the lines of business activities of
borrowed for the purpose of the assessee constituting an indivisible business, then the interest on funds
a business which is not borrowed for the purpose of such business activity though not continued in the
continued in the relevant PY relevant PY is eligible for deduction against the income from the continuing business
is eligible for deduction? activities.
[West Bengal Coal Fields However, if the activity discontinued together with the continuing activities does not
Ltd 233 ITR 139 (Cal) + constitute an indivisible business, then the interest on funds borrowed for the activity
Veecumsees 220 ITR 185 which got discontinued cannot be allowed as deduction against income from the
(SC)]. continuing activity.
15 Factors to be seen for Common business organisation and administration (i.e. unit of management, control
judging whether the and decision making).
business activities together Common funds
constitute an indivisible Complete inter-connection, inter-lacing and inter-dependence among activities.
business. Common employees
Same set of books of accounts.
16 Whether payment of interest Interest to PFI, SFC, SIIC, Scheduled bank and Co-operative bank will be allowed
beyond the due date for as a deduction in the PY of incurrence, only when it is paid in the same PY or within
filing returns but within the the due date for filing return for that PY. Otherwise, the deduction will be only in the
time extended by the CBDT PY of payment.
invites disallowance U/s Where the interest (supra) is paid beyond the due date for filing returns but within

43B? the time extended by the CBDT, then there is no need for invoking S. 43B, since the
payment with the extended time is deemed to be a payment within the due date for
filing return. [Narendar Anand (2011) (Del)].
17 Conversion of outstanding Interest payable to PFI, SFC, SIIC, Scheduled bank or Co-operative bank shall be
interest into funded interest deductible only if such interest has been actually paid and such interest which has
term loan does not amount been converted into a loan or borrowing shall not be deemed to have been actually
to payment. paid. [Explanation-3C and Explanation-3D to S. 43B].
The manner in which the converted interest will be allowed as deduction has been
clarified in Circular No.7/2006 dated 17.7.2006. The unpaid interest, whenever
actually paid to the bank or financial institution, will be in the nature of revenue
expenditure deserving deduction in the computation of income. Therefore,
irrespective of the nomenclature, the deduction will be allowed in the PY in which
the converted interest is actually paid.
18 Deductibility of pre-payment Pre-payment premium paid to IDBI shall be fully allowed as deduction in the PY of
premium. payment. [Gujarat Guardian Ltd (Del)].
19 Issue in Taparia tools Ltd Upfront one-time interest payment to the debenture-holders in the PY of issue, as
(SC). per the terms of issue of debentures, shall be fully allowed as deduction in that PY.
20 ICDS on borrowing cost (ICDS-IX)
Meaning of borrowing cost It means interest and other cost incurred by a person in connection with borrowing
of funds.
It includes (a) commitment charges; (b) amortised amount of discounts or premiums
relating to borrowing; (c) amortised amount of ancillary costs incurred in connection
with the arrangement of borrowing; (d) finance charges in respect of assets acquired
under finance lease or under similar arrangements.
Treatment of borrowing cost SN Category of BC Treatment of BC
(BC) 1 BC attributable to acquisition, Capitalised as a part of the cost of the
construction or production of a asset in accordance with ICDS-IX
qualifying asset
2 Other BC Treated in accordance with the
Not covered by ICDS.
Meaning of qualifying asset Tangible asset Land
(QA) Building
Machinery
Plant
Furniture
Intangible asset Know-how
Patent
Copyright
Trademark
Licence
Franchise
Any other business or commercial rights of similar
nature.
Inventories Inventories that require a period of 12 months to
bring them to a saleable condition.
Classification of borrowing Borrowing made specifically for the purpose of acquisition or construction or
production of a qualifying asset.
Borrowing made generally and utilised for the purpose of acquisition or construction
or production of a QA.
Capitalisation of BC 1 Date of commencement Date on which funds were borrowed.
attributable to Specific of capitalisation of BC
borrowing 2 Date of cessation of Date on which the QA is first put to use. [In case
capitalisation of BC QA = Tangible or intangible asset]
Date when substantially all the activities
necessary to prepare inventory for its intended
sale are complete. [In case QA = Inventories].
3 Amount of BC to be Actual BC incurred during this period on the
capitalised. funds so borrowed.

Capitalisation of BC 1 Date of commencement of Date on which funds are utilised.

attributable to general capitalisation of BC
borrowing
2 Date of cessation of Date on which the QA is first put to use. [In
capitalisation of BC case QA = Tangible or intangible asset]
Date when substantially all the activities
necessary to prepare inventory for its
intended sale are complete. [In case QA =
Inventories].
3 Amount of BC to be (A*B)/C
capitalised.
4 A= BC incurred during the PY except on
borrowing directly relatable to specific
purposes.
5 C= The average of the amount of total assets as

appearing in the balance sheet of a person
on the first day and the last day of the PY,
other than those assets which are directly
funded out of specific borrowings.
6 B= SN Situation B
1 QA appears (Cost of QA as
both on the on the first day +
first and last Cost of QA as on
day of the PY the last day)/2
2 QA does not 50% of cost of
appear on the QA
first day of the
PY
3 QA does not (Cost of QA as
appear as on on the first day +
the last day of Cost of QA as on
the PY the date of
putting it to
use)/2
QA in situation-1, 2 and 3 means QA
other than QA which are directly funded
out of specific borrowing.
S. 36 (1) (iiia)
Expenditure eligible Discount on ZCB
Discount Difference of the amount received or receivable by an infrastructure capital
company/infrastructure capital fund/public sector company/ scheduled bank on issue of the
bond and the amount payable by such company or fund or bank on maturity or redemption of
the bond.
Manner of allowing On pro rata basis having regard to the period of life of the bond to be calculated in the manner
deduction prescribed.
Period of life of the The period commencing from the date of issue of the bond and ending on the date of the
bond. maturity or redemption shall be regarded as life of the bond.
If the number of days in the month of issue of bond coming within the life of the bond is less
than 15 days, the month of issue shall not be taken into account for computing the life of the
bond.
Similarly, if the number of days in the month of redemption of bond coming within the life of the
bond is less than 15 days, the month of redemption shall not be taken in to account for
computing the life of the bond.
S. 36 (1) (iv)
Expenditure eligible for Contribution to recognised provident fund or approved superannuation fund for the benefit of
deduction employees.
Satisfactory arrangement should have been made for deduction of tax at source from the sum

payable out of provident fund to the employee at the time of termination of his service, in case
it is taxable in the hands of the employee.
Otherwise, the contribution made by the employer to these funds shall not be allowed as
deduction in his hands. [S. 40 (a) (iv)].
PY in which deduction Deduction is allowed in the PY in which contribution becomes due provided the contribution is
is allowed. [S. 43B]. made either in the same PY or within the due date for filing ROI for that PY.
However, if the contribution is made beyond the due date for filing ROI, it shall be allowed as
deduction in the PY in which contribution is made.
S. 36 (1) (v) + S. 40A (7)
Disallowance of Provision for gratuity is not to be allowed as deduction. [S. 40A (7)].
provision for gratuity.
Exception-1 Where the employee retires in the relevant PY and the gratuity becomes payable to the
employee, the provision created for payment of such gratuity shall not be disallowed.
Where deduction was allowed in respect of such provision, deduction can’t be allowed again in
the PY in which payment was made.
Exception-2 Where the provision is created for making contribution to the approved gratuity fund, such
provision can’t be disallowed. [S. 40A (7)].
It is eligible for deduction U/s 36 (1) (v).
Deduction is allowed in the PY in which contribution becomes due provided the contribution is
made either in the same PY or within the due date for filing ROI for that PY.
However, if the contribution is made beyond the due date for filing ROI, it shall be allowed as
deduction in the PY in which contribution is made.
Where deduction is enjoyed in respect contribution to the approved gratuity fund, the deduction
shall not be allowed again upon payment of gratuity.
Satisfactory Satisfactory arrangement should have been made for deduction of tax at source from the
arrangement for taxable portion of gratuity payable to the employee at the time of termination of his service.
deduction of tax at Otherwise the contribution to the approved gratuity fund will not be allowed as deduction in his
source hands. [S. 40 (a) (iv)].
S. 36 (1) (iva)
Eligible expenditure Employer`s contribution to the account of the employee under a Pension Scheme referred to in
S. 80CCD.
Ceiling on deduction 10% of [Basic salary + DA if the terms of employment so provides].
S. 36 (1) (va)
Deemed income by Any sum retained by the employer out of the salary payable to the employee by way of
virtue of S. 2 (24) (x) contribution towards provident fund or any other welfare fund shall be regarded as income in
the hands of the employer.
Deduction U/s 36 (1) However, if the sum retained is deposited into the account of employee under the relevant fund
(va) within the due date specified in the Act governing such fund, then it shall be allowed as
deduction in the hands of employer.
Can employees’ In other words, the issue under consideration is whether extended time limit upto the due date
contribution to PF and of filing the ROI contained in S. 43B would be available in respect of remittances which are
ESI Insurance be governed by S. 36 (1) (va).
allowed as deduction S. 43B (b) pertaining to employer`s contribution cannot be applied with respect to employees`
where the assessee- contribution which is governed by S. 36 (1) (va). So far as the employee`s contribution is
employer had not concerned, the Explanation to S. 36 (1) (va) continues to remain in the statute and there is no
remitted the same on or provision for applying the extended time limit provided under section 43B for remittance of
before the “due date” employee`s contribution.
under the relevant Act The amount of employee`s contribution to PF and ESI is an income upon recovery from salary
but remitted the same and its remittance within the `due date` as specified in Explanation to S. 36 (1) (va) makes it
on or before the due eligible for deduction.
date for filing of ROI U/s Employees` contribution recovered by the employer is not eligible for extended time limit upto
139(1)? the due date of filing of ROI, which is available U/s 43B in the case of employer`s own
contribution.
Hence, the delayed remittance of employees` contribution beyond the `due date` prescribed in
S. 36 (1) (va), is not deductible while computing the business income, even though such
remittance has been made before the due date of filing of ROI U/s 139 (1). [Gujarat State
Road Transport Corpn (2014) 366 ITR 170 (Guj)].
A contrary view was expressed by Uttrakhand HC in the case of Kichha Sugar Co. Ltd (2013)

356 ITR 351 holding that the employees` contribution to PF, deducted from the salaries of the
employees of the assessee, shall be allowed as deduction from the income of the employer-
assessee, if the same is deposited by the employer-assessee with the PF authority on or
before the due date of filing the ROI for the relevant PY.
S. 36 (1) (vi)
Where the animals used by the assessee in his business or profession have died or become permanently useless, then the
difference between the cost for which such animals were acquired and the sum realised from disposal of such animals or
their carcasses shall be allowed as deduction in the PY in which such animals were disposed off.
Deduction U/s 36 (1) (vii):

1 What is eligible for deduction U/s S. 36 (1) (vii) allows deduction in respect of amount of bad debts written off as
36 (1) (vii)? irrecoverable in the books of accounts of the assessee for the relevant PY.
However, deduction U/s 36 (1) (vii) is subject to the provisions of S. 36 (2).
2 Whether demonstrative infallible For claiming deduction U/s 36 (1) (vii), what is required is writing off of bad debts in the
proof is to be produced for proving books of accounts. There is no requirement that the assessee should produce
bad debts in order to claim demonstrative and infallible proof to establish bad debts. [T. R. F. Ltd (SC) + CBDT
deduction U/s 36 (1) (vii)? Circular 12/2016].
Even if the assessee recovers the amount written off a bad debts at a later stage, still,
the Department can have recourse to S. 41 (4) and it is not at a loss.
3 Action of write off need not take U.P. Rajkiya Nirman Nigam Ltd (All) (2013).
place in the relevant PY. It can
take place even beyond that.
4 Creation of provision – not enough. Merely by creating provision for bad and doubtful debts the assessee will not get
deduction U/s 36 (1) (vii). [Explanation-1 to S. 36 (1) (vii)].
5 Provision created for bad debts Held, besides debiting the P & L ac/c and creating a PBDD, the assessee has
adjusted against the debts - debts correspondingly/simultaneously obliterated (wiped out) the said provision from its
are shown in the B/S net of accounts by reducing the corresponding amount from loans and advances/debtors on
provision – whether deduction U/s the assets side of the B/S.
36 (1) (vii) could be denied?
Consequently at the end of the year, the figure in the loans and advances or the debtors
on the assets side of the B/S is shown as net of the provision for bad debt. This itself
amounts to write-off.
Explanation to S. 36 (1) (vii) does not mandate closure of each of individual a/c of
debtors for allowability of bad debts.
6 Deemed write off contemplated in Where a debt which was not recognised in the books of accounts as per the requirement
2nd proviso to S. 36 (1) (vii). of accounting standards but has been taken into account in computing the income of the
assessee on the basis of notified ICDS, has become irrecoverable, it can still be claimed
as bad debts U/s 36 (1) (vii) since it is deemed that the debt has been written off as
irrecoverable in the books of accounts of the assessee.
7 Debt should have been considered Deduction U/s 36 (1) (vii) shall not be allowed unless such debt:
in computing the income of the (i) has been taken into account in computing the income of the
assessee in current or earlier assessee of the PY in which the amount of such debt is written off
years. [S. 36 (2)]. or of an earlier PY,
(ii) or represents money lent in the ordinary course of the business of
banking or money-lending which is carried on by the assessee;
8 Whether successor is entitled to A successor who has taken over the business of the predecessor is entitled to write off
deduction upon predecessor’s debt the predecessor's debt as a bad debt and claim deduction if the other conditions are
becoming bad? [Veerabhadra Rao fulfilled.
K. Koteswara Rao & Co 155 This is so because the benefit of deduction in respect of bad debt has not accrued to the
(SC)]. assessee by way of personal relief but relates to the business.
Thus, the identity of the business is important and not that of the assessee. In other
words, we should whether the same business is continued and not whether the same
assessee in whose income-sheet the debt was considered claims deduction in respect of
bad debts.
9 Recovery of bad debts – tax If a deduction has been allowed in respect of a bad debt U/s 36 (1) (vii), and
implications. [S. 41 (4)]. subsequently the amount recovered in respect of such debt is more than the amount due
after the allowance had been made, the excess shall be deemed to be the profits and
gains of business or profession and will be chargeable as income of the PY in which it is
recovered, whether or not the business or profession in respect of which the deduction
has been allowed is in existence at the time. [See illustration given below].

10 Recovery by successor of sum This cannot be brought to tax in the hands of successor invoking S. 41 (4). There is no
which was written off as specific provision to tax it. [Kaimal (P.K.)-123 ITR 755-(Mad)].
irrecoverable by the predecessor.
Deduction U/s 36 (1) (viia):

1 What is eligible for deduction S. 36 (1) (viia) allows deduction in respect of provision for bad and doubtful debts.
U/s 36 (1) (viia)? (subject to ceiling)
2 Who is eligible for deduction Specified assessee.
U/s 36 (1) (viia)?
3 Category of specified Category-1 Scheduled bank – Non scheduled banks – Co-operative banks
assessees (not being primary agricultural credit society and primary co-
operative agricultural and rural development bank)
Category-2 Foreign banks – PFI – SFC – SIIC – NBFC
4 Ceiling on deduction Category-1 8.5% of GTI (before allowing deduction U/s 36 (1) (viia)) +
specified 10% aggregate average advances made by rural
assessee branches.
Category-2 5% of GTI
specified
assessee
5 Whether an assessee In case of an assessee to which S. 36 (1) (viia) applies, the amount of deduction
eligible for deduction U/s 36 relating to any such bad debt or part thereof U/s 36 (1) (vii) shall be limited to the
(1) (viia) is eligible for amount by which such debt or part thereof exceeds the credit balance in PBDD account
deduction U/s 36 (1) (vii) made U/s 36 (1) (viia). [Proviso-1 to S. 36 (1) (vii)].
also? Where such bad debt or part thereof relates to advances made by an assessee to
which S. 36 (1) (viia) applies, no such deduction shall be allowed unless the assessee
has debited the amount of such debt or part thereof in the PY to the PBDD account
made U/s 36 (1) (viia). [S. 36 (2) (v)].
6 Only one PBDD account in For the purpose of proviso to S. 36 (1) (vii) and S. 36 (2) (v), the account referred to
respect of rural as well as therein shall be only one account in respect of PBDD U/s 36 (1) (viia) and such account
urban advances. shall relate to all types of advances including advances made by rural branches.
[Explanation-2 to S. 36 (1) (vii)].
Deduction U/s 36 (1) (viii):

1 Eligibility for enjoying Specified entities engaged in eligible business are entitled to deduction U/s 36 (1) (viii).
deduction U/s 36 (1) (viii)
2 Meaning of ‘specified SN Specified entities Eligible business
entities’ and ‘eligible 1 Financial corporation specified in S. 4AThe business of providing long-term
business’ of the Companies Act finance
2 Financial corporation which is a public (i) for industrial development or
sector company (ii) for agricultural development
3 Banking company or
4 a co-operative bank other than a (iii) for development of
primary agricultural credit society or a infrastructure facility in India
primary co-operative agricultural and or
rural development bank (iv) for construction or purchase
of houses in India for
residential purposes.
5 A housing finance company The business of providing long-term
finance for the construction or
purchase of houses in India for
residential purposes.
6 Any other financial corporation The business of providing long-term
including a public company finance for development of
infrastructure facility in India.
3 Meaning of long-term The expression “Long term finance” is defined to mean any loan or advance repayable
finance during a period of not less than 5 years.
4 Conditions to be fulfilled To avail deduction under this clause, the assessee should comply with the following
for availing deduction conditions:

1 The assessee should create and maintain a special reserve account.

2 During the PY, the assessee should have transferred an amount to this reserve
account from the profit earned from the eligible business (computed U/H PGBP).
5 Quantum of deduction Deduction shall be the least of the following:
1 Amount transferred to the special reserve account during the PY.
2 20% of profits derived from eligible business
3 [200% of paid up capital + General Reserves as on the last day of the PY] (-) the
balance in the reserve account on the first day of the PY.
6 Tax treatment of amount Conditions to be fulfilled for invoking S. 41 (4A): Following are the conditions to be
withdrawn from special fulfilled for invoking S. 41 (4A):
reserve account - S. 41 1 In respect of amount transferred to the special reserve account, the assessee
(4A): should have availed deduction U/s 36 (1) (viii)
2 During the PY, the assessee should have withdrawn money from special reserve
account.
3 After such withdrawal, the amount remaining in the special reserve account should
be less than the aggregate amount of deduction allowed in respect of the amount
transferred to the special reserve account till date.
Effect of invoking S. 41 (4A): Lesser of the following shall be assessed to tax U/H PGBP
in the PY in which withdrawal takes place:
1 Amount withdrawn from special reserve a/c during the PY.
2 The aggregate amount of deduction allowed in respect of the amount transferred
to the special reserve account till date (-) Amount remaining in the special reserve
account after the withdrawal.
Continuance of business-not necessary: To assess the aforesaid amount in the year of
withdrawal, the business in respect of which the deduction was availed earlier need not
continue.
S. 36 (1) (ix)
Who is eligible for deduction? Corporate assessee.
Expenditure eligible for deduction S. 36 (1) (ix) allows deduction in respect of expenditure incurred in connection
with promotion of family planning amongst employees.
Classification of expenditure (supra) (a) Revenue expenditure; (b) Capital expenditure.
Deductibility of revenue expenditure Revenue expenditure on promotion of family planning amongst employees shall
on promotion of family planning. be allowed as deduction in the PY in which it is incurred.
Deductibility of capital expenditure on It is allowed as deduction in 5 equal annual instalments beginning with the PY in
promotion of family planning. which it is incurred.
Tax treatment of unabsorbed Unabsorbed expenditure on promotion of family planning shall be treated on par
expenditure on promotion of family with unabsorbed depreciation.
planning.
Carry forward allowed toWhere amalgamation takes place, the unabsorbed expenditure on promotion of
amalgamated company family planning incurred by the amalgamating company shall be allowed to be
carried forward by the amalgamated company (if it is an Indian company).
S. 36 (1) (xv)
The amount of STT paid by the assessee during the year in respect of taxable securities transactions entered into in the course
of business shall be allowed as deduction U/s 36 (1) (xv) subject to the condition that such income from taxable securities
transactions is included U/H PGBP.
S. 36 (1) (xvi)
1 The Finance Act, 2013 has introduced a new tax called Commodities Transaction Tax (CTT) to be levied on taxable
commodities transactions entered into in a recognised association, vide Chapter VII of the Finance Act, 2013.
2 For this purpose, a `taxable commodities transaction` means a transaction of sale of commodity derivatives in respect of
commodities, other than agricultural commodities, traded in recognised associations.
3 CTT is to be levied at 0.01% on sale of commodity derivative. CTT is to be paid by the seller.
4 Consequently, S. 36(1) (xvi) provides that an amount equal to the CTT paid by the assessee in respect of the taxable
commodities transactions entered into in the course of his business during the PY shall be allowable as deduction, if the
income arising from such taxable commodities transactions is included in the income computed U/H PGBP.
S. 36 (1) (xvii)
Section 36(xvii) provides for deduction of expenditure incurred by a co-operative society engaged in the business of manufacture
of sugar for purchase of sugarcane at a price equal to or less than the price fixed or approved by the Government.

15. Deduction U/s 37 (1):

Nature of provisions. Residuary provisions.
Conditions for The expenditure should not be of the nature described in S. 30 to 36.
availing deduction It should have been incurred by the assessee in the relevant PY.
U/s 37 (1) It should be in respect of a business carried on by the assessee the profits of which are being
computed and assessed.
It must have been incurred after the business was set up.
It should not be in the nature of any personal expenses of the assessee.
It should have been laid out or expended wholly and exclusively for the purposes of such business.
It should not be in the nature of capital expenditure.
Explanation-1 The expenditure should not have been incurred by the assessee for any purpose which is an
offence or is prohibited by law.
Explanation-2 CSR activity expenses are to be disallowed while computing income U/H PGBP.
Disallowance U/s 37 S. 37 (2B) disallows expenses on advertisement in political magazines made by any person
(2B). carrying on business or profession in computing income U/H PGBP.
However, Indian companies could deduction in respect of this U/s 80GGB (if the payment is
otherwise than by way of cash).
Capital expenditure Vs Revenue expenditure:

1 Capital Any expenditure which results in creation, acquisition or construction of a capital asset is capital in
expenditure nature.
Also expenditure which results in enduring benefit in capital field is regarded as capital expenditure.
In other words, any expenditure which results in creation of a profit-making apparatus or substantially
improving the profit-making ability of the profit-making apparatus is regarded as capital expenditure.
2 Revenue Any expenditure which does not result in enduring benefit is regarded as revenue expenditure.
expenditure Also expenditure which results in enduring benefit but in revenue field is regarded as revenue
expenditure.
In other words, any expenditure which is incurred for operating and maintenance of the profit making
apparatus or for removing impediments in operation of the profit making apparatus shall be regarded
as revenue expenditure.
Issues in S. 37 (1):
Issue-1: Deductibility of share issue expenses
1 Whether share issue These expenses are incurred in connection with issue of shares (whether it is public
expenses are deductible? issue or rights issue) and are directly related to the expansion of the capital base of the
company. Therefore, these are capital in nature. Hence not deductible U/s 37 (1).
[Brooke Bond India Ltd 225 ITR 798 (SC) + Motor Industries Co Ltd 173 ITR 374
(Kar) + CWS (India) Ltd-242 ITR 429 (Ker)].
However, the possibility of amortizing them U/s 35D could be explored.
2 Whether bonus issue Expenditure incurred in connection with the issue of bonus shares is revenue in nature. It
expenses are deductible? does not result in inflow of any fresh funds or increase in capital base. It merely involves
reallocation of existing funds of the shareholders. Hence, it is deductible U/s 37 (1). [GIC
205 CTR 280 (SC)].
3 Whether expenditure These are nothing but share issue expenses and hence, are not deductible U/s 37 (1).
incurred in relation to [Aditya Mills-181 ITR 195-Raj + Tungabhadra Industries Ltd - 207 ITR 553-Cal +
enhancing the authorised Punjab State Industrial Development Corporation Ltd - 225 ITR 792].
capital is deductible? However, the increase in authorised capital is for the purpose of issue of bonus shares,
these are deductible U/s 37 (1).
4 Are abortive expenses on Share issue expenses are capital in nature irrespective of the purpose for which capital is
share issue deductible? raised.
Hence, these are not deductible. [Mascon Technical Services Ltd (2013) 358 ITR 545
(Mad.)]
Issue-2: Deductibility of expenditure incurred in connection with borrowing

1 Whether the expenditure Held, loan obtained is neither an asset nor an advantage of enduring nature. To the
incurred in connection with contrary, it is an obligation.
borrowing are eligible for Therefore, the expenditure (supra) is revenue in nature.
deduction U/s 37 (1)? [India The purpose of borrowing is not relevant for deciding the nature of the expenditure
cements Ltd (SC)]. incurred in relation thereto.

2 Deductibility of debenture Expenditure incurred in connection with issue of debentures is nothing but expenditure
issue expenses. [East India incurred in connection with borrowing. Hence, it is deductible U/s 37 (1).
Hotels Ltd - 252 ITR 860 -
Cal].
3 Deductibility of discount on The SC in Madras Industrial Investment Corporation Ltd - 225 ITR 0802 upheld the
issue of debentures. claim of the assessee in relation to deduction of amortised portion of discount on issue
of debentures.
However, the SC in Taparia tools Ltd clarified that entire discount could have been
claimed as deduction by the assessee-company in the year of issue of debentures.
4 Deductibility of premium on Conclusions in point-3 hold good even here.
redemption of debentures
5 Deductibility of expenditure View-1: Banco products (India) Ltd (Ahd):
incurred in connection with (a) Basic requirement of debt is repayability.
issue of partly convertible (b) Convertible portion of debentures ≠ debt.
debentures. (c) Such portion has characteristics of equity shares.
(d) They are equity shares in embryo.
(e) Upon conversion, such portion leads to augmentation of capital base.
(f) Therefore, expenditure attributable to convertible portion = capital
expenditure.
(g) Therefore, it is not deductible U/s 37 (1).
View-2: ITC Hotels Ltd (Kar):
(a) Conversion is a composite event which involves (a) repayment of debentures;
and (b) raising of equity.
(b) Netting off done for convenience. Primarily, the expenditure is incurred for
issue of debentures.
(c) Therefore, expenditure is revenue in nature.
(d) Hence, it is deductible U/s 37 (1).
6 Deductibility of guarantee Held, all expenses incurred in connection with borrowings are revenue expenditure
commission paid in and hence, shall be allowed as a deduction. Deferred payment arrangement is also a
connection with import of financing arrangement and guarantee commission is one incurred in connection
machinery on deferred therewith. Hence, it is revenue expenditure and shall be allowed as a deduction.
payment basis. [Sivakami mills Ltd (SC) 227 ITR 465 + Akkamamba Textiles Ltd 227 ITR 464
(SC)].
Issue-3: Deductibility of business expansion or exploration expenses.

1 Travel expenditure on exploring the Deductible.
possibility of expansion of existing What is important is that the expenditure should be incurred for the purpose of
business. business. If this requirement is satisfied, then they become eligible for
deduction even though they ultimately prove to be abortive or futile or non-
remunerative. [Woodcraft Products Ltd 217 ITR 862 (Cal)].
2 Would expenditure incurred on Decision of the HC: Held, since the feasibility studies were conducted by the
feasibility study conducted for assessee for the existing business with a common administration and common
examining proposals for fund and the studies were abandoned without creating a new asset, the
technological advancement relating expenses were of revenue nature. Hence, the expenses are eligible for
to the existing business be classified deduction. [Priya Village Road shows Ltd. (2011) 332 ITR 594 (Delhi)].
as revenue expenditure, where the
project was abandoned without
creating a new asset?
3 Whether travel expenditure on The expenditure for exploring the possibility of establishing a joint venture unit
exploring the possibility of setting up in Malaysia could not be said to be revenue in nature. This expenditure is
a new joint venture unit is deductible capital in nature. Hence, it cannot be allowed as a deduction. [Mc Gaw
against income from existing Ravindra Laboratories (India) Ltd 210 ITR 1002 (Guj)].
business?
Issue-4: Deductibility of retrenchment compensation

Case-1 The business carried on by the assessee The retrenchment compensation paid to the employees is not a
was discontinued and the employees business expenditure and hence, it is not to be allowed as
were retrenched. deduction U/s 37 (1).
Case-2 The business carried on by the assessee The retrenchment compensation paid to the employees is a

was not discontinued but the excessive business expenditure and hence, it is to be allowed as deduction
employees were retrenched. U/s 37 (1).
Case-3 Assessee is engaged in different lines of The retrenchment compensation paid to the workers or
business activities which together employees deployed in the discontinued line of business activity is
constitute an indivisible business. deductible while arriving at income from the continuing lines of
However, one of the business activities business activities. [India manufacturing (Madras) (P) Ltd (Mad)
gets discontinued and retrenchment + Margarine and Refined oils co Ltd (Kar) + K.
compensation is paid to the retrenched Ravindranathan Nair 247 ITR 178 (SC) + Pfizer Ltd [2011] 330
employees of the closed division. ITR 62 (Bom) + KJS India (P) Ltd (2012) (Delhi) + DCM Ltd
(2010) (Del)].
Issue-5: Deductibility of expenditure on shifting

1 Whether expenditure incurred in shifting factory Plant relocation expenses being the one on (a) dismantling the
from one location to another location is deductible plant and machinery; (b) loading; (c) transit insurance; (d)
U/s 37 (1)? [India Pistons Repco Ltd 143 ITR transport; (e) unloading; (f) erection, commissioning and
424 (Mad) + Bimetal Bearings Ltd 210 ITR 945 installation; and (f) trail run, are capital in nature, since these
(Mad)]. result in enduring benefit in capital field.
These are not eligible for deduction U/s 37 (1). However, these
could be capitalized.
2 Whether expenditure incurred in shifting Held that the expenditure incurred in shifting the administrative
administrative office is eligible for deduction U/s office is not capital expenditure. There is no enduring benefit. It
37 (1)? shall be allowed as a revenue deduction. [Madura Coats Ltd 253
ITR 62 (Mad)].
Issue-6: Deductibility of expenditure of acquisition of software and expenditure on hardware and software
Upgradation:
1 Whether expenditure incurred in Expenditure incurred in acquisition of standardised software is revenue
acquisition of standardised expenditure, since there is no enduring benefit. The assessee needs to frequently
software is eligible for deduction incur expenditure on upgradation of the software acquired. Therefore, it is eligible
U/s 37 (1)? for deduction U/s 37 (1). [CIT Vs G. E. Capital Services Ltd-300 ITR 420 - Del].
2 Whether expenditure on No. It is not eligible for deduction U/s 37 (1). It is eligible for depreciation @ 40%.
customized software is eligible for
deduction U/s 37 (1)?
3 Whether software and hardware Held that these expenses are made for making changes which are required for the
upgradation expenses are eligible purpose of achieving business results in a fast changing scientific scenario.
for deduction U/s 37 (1)? Therefore, these are not capital expenditure. [Southern Roadways Ltd 282 ITR
379 – Mad + Sundaram Clayton Ltd 321 ITR 69 (Mad)].
4 Whether expenditure incurred in Held that the purpose of developing web-site is to disseminate information (like
developing website is eligible for scope, activity and profile of the assessee) about its business to its potential
deduction U/s 37 (1)? customers.
This is intended to secure mass-scale publicity using advance technology.
Web-site is like electronic brochure. It has no geographical barrier. It’s a cost
effective means of advertising.
Further, expenditure had to be incurred for registering and renewing domain name
and for constantly updating the information on website from time to time.
Therefore, there is no enduring benefit. Even if it is urged that there is enduring
benefit, it is certainly in revenue field.
Therefore, web-site development expenditure is revenue in nature and hence, it is
deductible U/s 37 (1). [Indian Visit.com (P) Ltd 176 Taxman 164 (Del)].
Issue-7: Deductibility of replacement expenses

1 Whether expenditure incurred in replacing petrol Held that the expenditure resulted in enduring benefit in revenue
engine by diesel engine is eligible for deduction U/s field and is, hence, deductible U/s 37 (1). [Polyolefins
37 (1)? Industries Ltd - 169 ITR 538 - Bom].

2 Can the amount incurred by the assessee for This had not benefited the assessee in any way with regard to
replacing the old mono sound system in its cinema the TI since there was no change in the seating capacity of the
theatre with a new Dolby stereo system be treated theatre or increase in the tariff rate of the ticket.
as revenue expenditure?
In such a case, the expenditure on such change of sound system
could not be considered capital in nature. [Sagar Talkies (2010)
325 ITR 133 (Kar].
3 Whether expenditure on beautification of hotel is The expenditure incurred for this purpose is revenue in nature
eligible for deduction U/s 37 (1)? and is eligible for deduction U/s 37 (1). [Hotel Dasaprakash 114
ITR 210-Mad].
4 What is the nature of expenditure incurred on glow- Held that the expenditure incurred by the assessee on glow sign
sign boards displayed at dealer outlets - capital or boards does not bring into existence an asset or advantage for
revenue? the enduring benefit of the business, which is attributable to the
capital.
The glow sign board is not an asset of permanent nature. It has a
short life.
The materials used in the glow sign boards decay with the effect
of weather. Therefore, it requires frequent replacement.
Consequently, the assessee has to incur expenditure on glow
sign boards regularly in almost each year.
The assessee incurred expenditure on the glow sign boards with
the object of facilitating the business operation and not with the
object of acquiring asset of enduring nature.
Therefore, such expenditure on glow sign boards displayed at
dealer outlets was revenue in nature and are eligible for
deduction U/s 37 (1). [Orient Ceramics and Industries Ltd.
(2013) 358 ITR 49 (Delhi)].
Issue-8: Deductibility of expenditure incurred in removing the impediments in operating the profit-making
apparatus.
1 Can expenditure incurred on Held that by incurring this expenditure, the assessee does not get any right or
alteration of a dam to ensure ownership in the dam or water. The assessee’s share of water is also
adequate supply of water for the determined by the SG.
smelter plant owned by the The expenditure incurred by the assessee is to facilitate its trade operation and
assessee be allowed as revenue enable the management to conduct business more efficiently and profitably, the
expenditure? expenditure is revenue in nature and hence, allowable as deduction.
[Hindustan Zinc Ltd. (2010) 322 ITR 478 (Raj)]
2 Whether payment for use of Deductible. [IBM Global Services India (P) Ltd (2014) (Kar)].
customer data base and trained
personnel is eligible for deduction
U/s 37 (1)?
3 Whether contribution to Housing The expenditure in question brought into existence no capital asset to the
board for construction of tenements assessee-company as the tenements remained the property and assets of
to workers is eligible for deduction MHB.
U/s 37 (1)? In other words, the assessee-company did not acquire ownership rights in the
said tenements.
The expenditure resulted in the benefit of better and cheaper housing obtained
by the industrial workers of the assessee-company. There is no direct benefit of
an enduring nature to the assessee-company.
The expenditure was incurred merely with a view to carry on the business of the
assessee-company more efficiently by having a contended labour force.
Hence, it is a revenue expenditure and is deductible
Issue-9: Payment of expenditure in instalments is not a conclusive ground to regard it as revenue expenditure.
Whether consideration paid for securing mining Capital expenditure. Not deductible. [Enterprising Enterprises 160
rights in instalments is a revenue expenditure or Taxman 188 (SC)].
capital expenditure?

Issue-10: Deductibility of development charges paid to the nodal agency appointed by the Government:
Payment of development charges to the nodal agency appointed for developing industrial area for creation of infrastructure
facilities is a capital expenditure and is not eligible for deduction. [Jaswant Trading company (Raj)]
Issue-11: Deductibility of corporate membership fee

No asset is brought into existence by incurring this expenditure. Though, the payment of membership fee results in obtaining
of club facility (membership) for a period beyond the year of payment, the benefit remains in revenue field. The expenditure
is meant for having a contended team of employees. Therefore, it is revenue expenditure and is eligible for deduction U/s 37
(1). [Groz Beckert Asia Ltd. (2013) 351 ITR 196 (P&H) (FB)].
Issue-13: Deductibility of expenditure incurred as a measure of commercial expediency

1 Whether expenditure incurred in arranging Held whatever the assessee has done, is done as a measure of commercial
raids against illicit brewing is eligible for expediency to protect his business interest. These are steps to carry on his
deduction U/s 37 (1)? [A. Janardhana trade effectively and smoothly.
Shetty 254 ITR 281 (Kar)].
Therefore, the expenditure in question is incurred for the purpose of
assessee’s business and hence, is eligible for deduction U/s 37 (1).
2 Whether expenditure incurred to keep a It shall be allowed as deduction. [Rajasthan Spinning and Weaving Mills
contended work force is eligible for Ltd 281 ITR 408 (Raj)].
deduction?
3 Whether the expenses incurred in running a Yes, since it is incurred as a measure of commercial expediency.
school in which children of the employee are [Travancore Cochin Chemicals Ltd (Ker)].
studying partly shouldered by the assessee-
company is eligible for deduction?
4 Whether the expenses incurred by the The expenditure thereon, was allowed as deduction U/s 37 (1) as one
assessee-company in installation of traffic incurred as a measure of commercial expediency. [Infosys technologies
signals in the nearby area to reduce traffic Ltd (Kar)].
and congestion are eligible for deduction?
5 Whether gratuity paid to the family members Held that this is done as a measure of commercial expediency.
of director died on business trip abroad is The payment (supra) creates good relationship with employees, boosts their
eligible for deduction? [Laxmi Cement confidence in the employer company, creates a sense of security in the
Distributors (P) Ltd 104 ITR 711 (Guj)]. minds of the employees, develops loyalty and motivates them and enables
securing their devouted services.
Hence, it is incurred for the purpose of business and is eligible for deduction
U/s 37 (1).
6 Assessee incurred expenditure on bringing Yes. It is deductible. If the chairman were alive, it would have been the duty
back the dead body of the Chairman who of the assessee to bear all expenses for his return. The death of the
dies while on business tour. Is it deductible? chairman did not make any difference. [Karam Chand Thapar & Bros (P)
Ltd 157 ITR 212 (Cal)].
7 Whether tea samples and complimentary tea Yes. [Tirrihammah co Ltd 195 ITR 393 (Cal)].
distributed to the shareholders and directors
at the AGM of the assessee-company is
eligible for deduction U/s 37 (1)?
8 Deduction based on CBDT circular (a) Fees paid to ROC on the occasion of filing documents.
(b) Profession tax paid by a person carrying on trade or business.
(c) Diwali and festival celebration expenses.
(d) Premium paid on account of loss of profits consequent upon
damage by fire, strike, lock out etc.
(e) Annual listing fees paid to stock exchanges.
9 Whether salary paid to a pujari for performing Yes. Deductible. [Commercial Ahmedabad Mills Co Ltd 204 ITR 505
puja in a temple in the mill premises of the (Guj)].
assessee-company for the general benefit of
the employees is deductible?
10 Whether the provision created for warranty Yes. [Rotork Controls India (P) Ltd 314 ITR 62 (SC)].
obligation based on past data is eligible for
deduction?

Issue-14: Are these personal expenses?

1 Whether expenditure incurred on Held that in the modern age, and more so in the western countries, the senior
the foreign trip of wife of MD when executives are, as a matter of social custom accompanied by their wives when
he is on business tour is eligible they visit, though for a business purpose, has necessarily some social aspects
for deduction? [Glaxo industries also.
(India) Ltd (Mum-SB)].
Therefore, even the travel expenses which are attributable to the wife of MD are
eligible for deduction U/s 37 (1).
2 Usage of vehicles given to Held that this is perquisite given to the directors, being a compensation for the
directors as per the terms of services rendered by them. Hence, it is not personal expense. It is allowable as
service agreement – Whether deduction. [Sayaji Iron & Engineering Co 253 ITR 749 (Guj)].
expenses on such vehicle are
deductible?
3 Can the expense incurred by the No. [Naidunia News and Networking (P) Ltd. (2012) 210 Taxman 73 (MP)].
assessee on the education and
travelling of an employee, for
acquiring knowledge relating to
assessee’s business, be
disallowed merely on the ground
that the employee is the son of an
ex-director of the assessee
company?
4 Litigation expenses to defend The legal expenses (supra) are not personal expenses. These are deductible U/s
director in criminal proceeding in 37 (1).
official capacity – is it deductible?
Issue-15: Issues relating to Explanation-1 to S. 37 (1)

1 Is the amount paid by a construction Held, construction of a building or part thereof without a sanctioned plan is
company as regularization fee for an offence under the Karnataka Municipal Corporations Act, 1976 and the
violating building bye-laws allowable building regulations.
as deduction? [Millennia Developers
Such offence does not get effaced out on account of compounding.
(P) Ltd (2010) 322 ITR 401 (Kar) +
Mamta Enterprises (Kar)]. When an offence is compounded, the person who compounds it only avoids
the penal consequences of committing the offence (like demolition of the
building, imprisonment, penalty etc).
Therefore, the regularization fee paid by the assessee, is, infact an
expenditure incurred for the purpose of an offence and hence, it is squarely
within the ambit of Explanation-1 to S. 37 (1). It shall be disallowed.
2 Can payment to police personnel and Held that any payment made to the police (a public servant and a
gundas to keep away from the cinema Government employee) illegally amounts to bribe/illegal gratification. Bribing
theatres run by the assessee be a Government employee is an offence under the Prevention of corruption
allowed as deduction? Act. The sum paid cannot be considered as an allowable deduction.
Similarly, any payment to a gunda as a precautionary measure so that he
shall not cause any disturbance in the theatre run by the assessee is an
illegal payment (which is opposed to public policy) for which no deduction is
allowable under the Act. [Neelavathi & Others (2010) 322 ITR 643 (Kar)].
3 Are redemption fine paid U/s 125 of S. 125 of the Customs Act gives an option to the owner of the goods to pay
the Customs Act deductible? in lieu of confiscation a fine as may be levied by the authorities.
Accordingly, the assessee paid the redemption fine and claimed it as
deduction which was disallowed by the AO.
Held that redemption fine was paid for infraction of law which cannot be a
normal incident of business and it is not eligible for deduction. [Haji Aziz &
Abdul Shakoor Bros (SC)].
Now, also in term of the provisions of Explanation-1 to S. 37 (1), it is not
eligible for deduction.
4 Whether penalty paid for violation of Held that the violation of provisions of law cannot be incidental to business.
import licence is eligible for deduction? Hence, the penalty paid for infraction of law cannot be allowed as deduction.
[Agra Leatheries Ltd 200 ITR 792 (All)].

5 Whether commission paid to Held that a Government doctor is not entitled to realise any amount for the
Government doctors for prescribing purpose of prescribing medicines of the assessee, thereby, promoting the
assessee’s medicines is allowable as business interest of the assessee. The amount so paid as commission to
deduction? Government doctors amounts to illegal gratification or bribe. Hence, it is to
be disallowed in view of Explanation-1 to S. 37 (1). [Vishwanath Sharma
316 ITR 419 (SC)].
6 Is the commission paid to doctors by a Held that these payments are opposed to public policy. These payments will
diagnostic centre for referring patients temp the doctors to prescribe medical tests to patients even in a case where
for diagnosis be allowed as a business the tests are unwarranted (on the greed of getting referral fee).
expenditure U/s 37 or would it be Further, as per the IMC (Professional Conduct, Etiquette and Ethics)
treated as illegal and against public Regulations, 2002, no physician shall give, solicit, receive, or offer to give,
policy to attract disallowance? solicit or receive, any gift, gratuity, commission or bonus in consideration of
a return for referring any patient for medical treatment.
The demanding as well as paying of such commission is bad in law. It is not
a fair practice and is opposed to public policy and should be discouraged.
Hence, the commission paid to doctors for referring patients for diagnosis is
not allowable as business expenditure. [Kap Scan & Diagnostic Centre P.
Ltd. (2012) 344 ITR 476 (P&H)].
7 Inadmissibility of expenses incurred in The claim of any expense incurred in providing freebees (such as gifts,
providing freebees to medical travel facility, hospitality, cash or monetary grant etc) to medical practitioner
practitioner by pharmaceutical and is in violation of the provisions of Indian Medical Council (Professional
allied health sector industry. [Circular Conduct, Etiquette and Ethics) Regulations, 2002. It is a salutary regulation
No. 5/2012 dated 1-8-2012]. in the interest of the patients and the public, considering the increase in
complaints against the medical practitioners prescribing branded medicines
instead of generic medicines, solely in lieu of gifts and other freebies
granted to them by some particular pharma industries.
Hence, it shall be inadmissible U/s 37 (1) being an expense prohibited by
the law.
The disallowance shall be made in the hands of such pharmaceutical or
allied health sector industry or other assessee which has provided aforesaid
freebees and claimed it as a deductible expense in its accounts against
income.
Also, a sum equivalent to value of freebees enjoyed by the aforesaid
medical practitioner or professional associations is also taxable as business
income or IFOS, as the case may be, depending on the facts of each case.
8 Whether payment of ransom to dacoits Held that S. 364A of the Indian Penal Code, 1860, provides that kidnapping
is eligible for deduction? a person for ransom is an offence and any person doing so or compelling to
pay is liable for the punishment as provided in the section, but nowhere it is
provided that to save a life of the person if a ransom is paid, it will amount to
an offence.
There is no provision that payment of ransom is an offence. Accordingly, the
payment of the aforesaid amount cannot be treated as an action which is
prohibited under the law. Explanation to S. 37(1) has no applicability.
[Khemchand Motilal Jain, Tobacco Products (P) Ltd [2011] (MP)].
9. Some more issues on infraction of law
(a) Penalty levied for contravention Not deductible. Swadeshi Cotton Mills Ltd 233 ITR 199 (SC)].
of provisions of CST Act
(b) Interest on arrears of sales tax It is compensatory and not penal. Hence, it is deductible. [Lakshmandas
or on the outstanding amount of Mathuradas 254 ITR 799 (SC) + H.P. State Forest Corporation [2010] 320 ITR
sales tax 170 (HP)].
(c) Payment of surcharge to State It is not penalty. It is deductible. [Cables (India) Ltd 212 CTR 513 (P & H)].
Electricity Board for using
excess load
(d) Penal interest paid to the There is no violation of provisions of any law. Explanation to S. 37 (1) does not
banker pursuant to agreement apply. It is deductible.
with banker.
(e) Interest paid under EPF&MP It is deductible. It is compensatory. [Hyderabad Allwyn Metal Works Ltd].
Act 1952
(f) Demurrage paid to Port Trust It is not a fine for infraction of law – It is deductible. [Nanhoomal Jyoti Prasad].

Authorities in connection with

release of seized goods
(g) Fine imposed on the assessee, It cannot be disallowed as the same cannot be treated as violation of statutory law.
a member of NSE, for violation [Goldcrest Capital Markets Ltd Vs ITO [2010] 36 DTR 177 (Mum)].
of regulation of NSE.
10 Tax treatment of composite Penal element to be disallowed.
penalty. Compensatory element shall be allowed as deduction.
Held that Rs. 1L partake the nature of compensation and represents the sales tax
at full rate which is obligatory. Rs. 25000 partake the character of penalty. Former
is deductible and not latter. [Malwa Vanaspathi and Chemical co 225 ITR 383
(SC)].
11 Can encashment of bank Held that the assessee had taken a conscious business decision not to honour its
guarantee by the Export commitment of fulfilling the export entitlements in view of losses being suffered by
Promotion Council on account it.
of failure of the assessee to There is no contravention of any provision of law.
utilize its export entitlements be The forfeiture of bank guarantee is compensatory in nature. Therefore, it is
considered as compensatory in deductible U/s 37 (1). [Regalia Apparels Pvt. Ltd. (2013)352 ITR 71 (Bom)].
nature to be eligible for
deduction U/s 37 (1), where the
failure to honour export
commitment was a business
decision taken by the assessee
in view of losses incurred by it?
16. Deduction in respect of expenditure on production of feature films – R. 9A:

In computing the profits and gains of the business of production of feature film carried on by a film producer, the deduction in
respect of the cost of production of feature film certified for release by the Board of Film Censors in a previous year shall be
allowed in the following manner:
SN Situations Quantum of deduction
Film is released for Films is not released for
exhibition on commercial exhibition on commercial basis
basis atleast 90 days before atleast 90 days before the end of
the end of the PY the PY
1 Feature film is certified for release by the Entire cost of production (Date of release is irrelevant)
Board of Film Censors in the PY and the film
producer sells all the rights of exhibition of
the film in such PY.
2 Feature film is certified for release by the Entire cost of production (a) Cost of production or (b) amount
Board of Film Censors in the PY and realised by exhibiting the film and
(a) the film producer himself exhibits the film sale of rights of exhibition
on commercial basis in all or some of the (whichever is less).
areas or Note: Balance cost of production, if
(b) the film producer sells the rights of any, shall be carried forward to the
exhibition in the film in respect of some of next following year and allowed as a
the areas or deduction in that year.
(c) the film producer himself exhibits the film
on a commercial basis in certain areas and Provisions of S. 80 read with S. 139
sells the rights of exhibition of the film in (3) shall not apply.
respect of all or some of the remaining areas
3 Feature film is certified for release by the No deduction will be allowed in the PY in which the film is certified.
Board of Film Censors in the PY and the film The entire cost of production shall be carried forward and allowed as
producer neither exhibits the film nor sells deduction in the next following year. Provisions of S. 80 read with S.
the exhibition rights during the PY. 139 (3) shall not apply.
Note:
1 ‘Cost of production’ in relation to a feature film, means the expenditure incurred on the production of the film, not being –
(a) The expenditure incurred for the preparation of the positive prints of the film; and
(b) The expenditure incurred in connection with the advertisement of the film after it is certified for release by the

Board of Film Censors.

2 However, the expenditures referred to in (a) and (b) above are allowable as revenue expenditure in the year of release
of the firm.
3 The cost of production of a feature film shall be reduced by the subsidy received by the film producer, under any
scheme framed by the Government.
17. Deduction w.r.t expenditure on acquisition of distribution rights of feature films – R. 9B:
In computing the profits and gains of the business of distribution of feature film carried on by a film distributor, the deduction
in respect of the cost of acquisition of feature film shall be allowed in the following manner:
SN Situations Quantum of deduction
Film is released for Films is not released for exhibition on
exhibition on commercial commercial basis atleast 90 days before
basis atleast 90 days the end of the PY
before the end of PY
1 Feature film is acquired by film Entire cost of acquisition Entire cost of acquisition
distributor in the PY and he sells all Date of release is irrelevant.
rights of exhibition of the film in such
PY.
2 Feature film is acquired by the film Entire cost of acquisition (a) Cost of acquisition or (b) amount
distributor in the PY and realised by exhibiting the film and sale of
(a) he himself exhibits the film on rights of exhibition (whichever is less).
commercial basis in all or some of the
areas or Note: Balance cost of acquisition, if any,
(b) he sells the rights of exhibition in the shall be carried forward to the next
film in respect of some of the areas or following year and allowed as a deduction
(c) he himself exhibits the film on a in that year. S. 80 read with S. 139 (3) shall
commercial basis in certain areas and not apply.
sells the rights of exhibition of the film in
respect of all or some of the remaining
areas
3 Feature film is acquired by the film No deduction will be allowed in the PY in which the film is certified. The
distributor in the PY and the film entire cost of production shall be carried forward and allowed as deduction
distributor does not exhibit the film or in the next following year. Provisions of S. 80 read with S. 139 (3) shall not
does not sell during the PY. apply.
18. Deductibility of losses:

1 S. 30 to S. 38 provide for deduction in respect of business expenditure and depreciation allowance.
2 There is no specific provision which allows deduction in respect of losses arising in the course of business.
3 In Calcutta co Ltd, the SC held that the business income of the assessee shall be computed in accordance with the
principles of commercial expediency subject to the express provisions of the Act.
4 Therefore, even in the absence of the specific provisions for allowing deduction in respect of losses, these are to be
allowed as deduction U/s 28.
5 However, the loss should (a) be a real loss and not a notional or fictional loss; (b) not be an anticipated loss or
contingent loss; (c) be a revenue loss; (d) be incidental to business of the assessee.
Issues in deductibility of losses:

1 Loss on account of cash embezzlement shall be allowed as deduction in the PY of crystalisation, if there are no
prospects of recovery. [Shiv Narain Karmendra Narain (All)].
2 Loss on account of non-recovery of advance given to supplier of raw materials = deductible. [Mysore Sugar Co Ltd 46
ITR 649 (SC)].
3 Advance given to employees which proves to be irrecoverable = deductible.
4 Loss on account of non-recovery of security deposit placed with landlord at the inception of lease, being a loss in
capital front, is not recoverable. [Triveni Engg. & Industries Ltd. (2012) 343 ITR 245 (Delhi)].
5 Loss on account of destruction of stock-in-trade = deductible. [Nainital Bank Ltd 55 ITR 707 (SC)].
6 Loss on account of confiscation of goods in the course of illegal business is also eligible for deduction. [Dr. T. A.
Quereshi (2006) 287 ITR 547 (SC)].
7 Loss in the course of illegal business on account of confiscation of currency notes is eligible for deduction. [Piara
Singh 124 ITR 40 (SC)].
8 Cancellation charges paid for cancelling a contract for purchase of machinery is a capital loss and is not eligible for

deduction. [Patel Brass Works Vs CIT 286 ITR 598 (Guj)].

9 Loss on account of theft of a machinery which was found upon physical verification = capital loss. It is not deductible.
10 For some reason or other, some films are abandoned. No certificate is received for release from the Board of film
censors. The resultant loss is eligible for deduction. [CBDT Circular 16/2015].
Deductibility of marked to market losses:

1 Finance Act, 2018 inserts S. 36 (1) (xviii), w.e.f 01.04.2017, that is, AY 2017-18.
2 MTM loss or other expected loss as computed in accordance with ICDS shall be allowed as deduction in computing
income referred to in S. 28.
3 Finance Act, 2018 inserts S. 40A (13) providing for disallowance of the said loss except when allowable U/s 36 (1)
(xviii).
Valuation of inventories – S. 145A:

For the purpose of determining the income chargeable U/H PGBP:
(i) The valuation of inventory shall be made at lower of actual cost or NRV computed in accordance with ICDS notified
U/s 145 (2);
(ii) The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of
any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or
services to the place of its location and condition as on the date of valuation;
For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time
being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.
[Explanation-1].
(iii) The inventory being securities not listed on a RSE, or listed but not quoted on a RSE with regularity from time to
time, shall be valued at actual cost initially recognised in accordance with the ICDS notified U/s 145 (2).
(iv) The inventory being securities other than those referred to in (iii), shall be valued at lower of actual cost or NRV in
accordance with ICDS notified U/s 145 (2).
Inventory being securities held by a scheduled bank or PFI shall be valued in accordance with ICDS notified U/s 145
(2) after taking into account the extant guidelines issued by the RBI in this regard. [Proviso-1].
The comparison of actual cost and NRV shall be made category-wise. [Proviso-2].
E. Issues in valuation of stock-in-trade:

1 Where the firm is dissolved and the business is discontinued, stock shall be valued at NRV. [ALA Firm (SC)]. However, if the
business is not discontinued, normal stock valuation principles shall apply. [Shakthi Trading co (SC)].
2 NRV prevalent in the foreign market is not relevant in case of an assessee who does not effect export sales. [Hindustan Zinc
Ltd 291 ITR 391 (SC)].
3 Assessee can change method of valuation of stock provided the change is made for bonafide reason and is followed consistently
in future. [Hela Holdings (P) Ltd 133 Taxman 16 (Cal)].
4 Method of valuation of inventory should not only be consistent but also be correct. [British Paints India Ltd 188 ITR 44 (SC)].
5 ICDS VIII requires securities held as stock-in-trade to be valued at lower of actual cost initially recognized or NRV at the end of
the year, whichever is lower. Further, such comparison has to be done category-wise and not for each individual security. For
this purpose, securities shall be classified into the following categories, namely:‐ (a) shares; (b) debt securities; (c) convertible
securities; and (d) any other securities not covered above.
6 In case where a security is acquired by issue of shares or securities, the cost of acquisition shall be the fair value of securities so
acquired.
7 Where a security is acquired in exchange for another asset, the cost of acquisition is the fair value of the security so acquired.
8 If securities of a company are exchanged with securities of another company, it can be said that the assessee has made a
realisation of the value of the securities of the first company and the difference between the value of securities of another
company and cost of securities of the first company is taxable profits. [Orient Trading Company 224 ITR 371 (SC)].
9 Where unpaid interest has accrued before the acquisition of an interest bearing security and is included in the price paid for the
security, the subsequent receipt of the interest is allocated between the pre-acquisition and post-acquisition periods; the pre-
acquisition portion of interest is deducted from the actual cost.
Some special provisions relating to inventory:

S. 43C (1): Where an amalgamating company transfers a CA as SIT to the amalgamated company and such SIT is sold by the
amalgamated company, then the COA of SIT shall be ∑ of the following:
(a) Cost of acquisition of the said asset to the amalgamating company;
(b) Expenditure on improvement of the said asset incurred by the amalgamating company and the amalgamated company; and
(c) Expenditure incurred wholly and exclusively in connection with the transfer by the amalgamating company.

S. 43C (2): Where a CA is transferred as SIT under gift, will, irrevocable trust or on partition of HUF and such SIT is sold, then the COA
of SIT shall be the aggregate of the following:
(a) Cost of acquisition of the said asset to the transferor;
(b) Expenditure on improvement of the said asset incurred by the transferor and transferee; +
(c) Expenditure incurred wholly and exclusively in connection with the transfer by the transferor including probate
fees, expenses incurred to effect the partition of HUF or to create a trust.
F. Provisions, Contingent Liabilities & Contingent Assets: [ICDS-X]:

1. Condition for recognition of Contingent Asset:
1 A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
2 Both AS 29 and ICDS X provide that a contingent asset should not be recognized. Further, both AS 29 and ICDS X require contingent
assets to be assessed continually.
3 Thereafter, recognition of contingent assets and related income is required in – AS 29, if inflow of economic benefits is “virtually
certain”;
4 ICDS X, if inflow of economic benefits is “reasonably certain”.
5 The requirement of “reasonable certainty” in ICDS X to recognize a contingent asset and the related income is more stringent as
compared to the requirement of “virtual certainty” in AS 29.
6 This deviation between AS 29 and ICDS X would have the effect of advancing recognition of income for tax purposes and
consequently, result in earlier payment of taxes.
2. Condition for recognition of Provision:

1 AS 29 requires recognition of a provision when it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
2 ICDS X requires recognition of a provision only when it is reasonably certain that an outflow of resources embodying
economic benefits will be required to settle the obligation.
3 The requirement of “reasonable certainty” in ICDS X to recognize a provision is more stringent as compared to the requirement
of “probability” in AS 29.
4 This will have the effect of postponing the recognition of provision for tax purposes and consequently, result in earlier payment
of taxes.
Computation of income from construction and service contracts – S. 43CB:

(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined
on the basis of percentage of completion method in accordance with the ICDS notified U/s 145 (2).
Proviso Profits and gains arising from a contract for providing services:
(i) With duration of not more than 90 days shall be determined on the basis of project completion method;
(ii) Involving indeterminate number of acts over a specific period of time shall be determined on the basis of
straight line method.
(2) For the purposes of percentage of completion method, project completion method or straight line method referred
to in (1):
(i) The contract revenue shall include retention money;
(ii) The contract costs shall not be reduced by any incidental income in the nature of interest, dividends or
capital gains.
Recognition of expected loss on construction contracts:

1 AS 7 permits recognition of expected loss on construction contract immediately as an expense, when it is probable that
total contract costs will exceed total contract revenue.
2 However, it is disallowed U/s 40A (13).
Taxability of certain income – S. 145B:

(1) Notwithstanding anything to the contrary contained in S. 145, the interest received by the assessee on any
compensation or on enhance compensation, as the case may be, shall be deemed to be the income of the PY in which
it is received.
(2) Any claim for escalation of price in a contract or export incentive shall be deemed to be the income of the PY in which
reasonable certainty of its realisation is achieved.
(3) The income referred to in S. 2 (24) (xviii) (i.e. Government grants) shall be deemed to be the income of the PY in
which it is received, if not charged to income-tax in any earlier PY.

Taxation of foreign exchange fluctuations – S. 43AA:

(1) Subject to the provisions of S. 43A, any gain or loss arising on account of change in foreign exchange rates shall be
treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with ICDS
notified U/s 145 (2).
(2) For the purposes of (1), the gain/arising on account of effects of change in foreign exchange rates shall be in respect
of all foreign currency transactions, including those relating to:
(a) Monetary items and non-monetary items;
(b) Translation of financial statements of foreign operations;
(c) Forward exchange contracts;
(d) Foreign currency translation reserves.
Forward exchange contracts:

1 Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over
the life of the contract.
2 Exchange differences on such a contract shall be recognised as income or expense in the PY in which the exchange rates
change.
3 Any profit/ arising on cancellation or renewal shall be recognised as income or loss for the PY.
4 However, the premium, discount or exchange differences on contracts that are intended for trading or speculation purposes, or
that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be
recognised at the time of settlement.
H. Disallowance of expenses:
1. Disallowance U/s 40 (a) (i):
1 What is disallowed U/s Expense by way of interest, royalty, FTS or any other sum chargeable to tax in the hands of
40 (a) (i)? the recipient, payable outside India.
Expense by way of interest, royalty, FTS or any other sum chargeable to tax in the hands of
the recipient being a FC/NCNR, payable in India.
2 When it is disallowed? Situation-1: Tax was not deducted at source during the PY.
Situation-2: Tax was deducted at source during the PY but it was not remitted to the credited
of the Government within the due date specified in S. 139 (1) for filing return for the PY.
3 Deduction in the PY of Expense aforesaid disallowed U/s 40 (a) (i) in PY of incurrence, could be allowed as
remittance. deduction in PY of remittance of TDS. [Proviso to S. 40 (a) (i)].
Issues in S. 40 (a) (i):

1 Disallowance U/s 40 (a) (i) is not applicable, if payments made to NR are not taxable in their hands in view of provisions of the Act or
DTAA. [NQA Quality systems registrar Ltd 2 SOT 249 (Delhi)].
2 Increase in liability towards technical know-how fee on account of year-end restatement of liability need not be subjected to TDS and
hence, cannot be disallowed. [Mac Charles (India) Ltd [2010] 195 Taxman 296 (Kar)].
3 Where the sum remitted to a foreign company or NCNR without TDS is not a pure income payment (like interest, dividend, salary etc)
but a composite payment in which income element is hidden or embedded and no application has been made to AO U/s 195 (2) to
determine the income element hidden or embedded, then the AO shall determine the income element hidden in the composite
payment which is chargeable to tax to ascertain the tax liability on which the deductor shall be deemed to be an AID U/s 201.
Only the income element hidden in the composite payment which is chargeable to tax so determined by the AO shall be disallowed
U/s 40 (a) (i) and not the entire composite payment. [Instruction no. 2/2014 and Instruction no. 3/2015].
2. Disallowance U/s 40 (a) (ia):

1 What is disallowed U/s 40 Expense by way of any sum payable to a resident, on which there is an obligation for the
(a) (i)? assessee under Chapter XVII-B to deduct tax at source.
2 When it is disallowed? Situation-1: Tax was not deducted at source during the PY.
Situation-2: Tax was deducted at source during the PY but it was not remitted to the credited of
the Government within the due date specified in S. 139 (1) for filing return for the PY.
3 Quantum disallowed 30% of the expense.
4 Deduction in respect of Expense aforesaid to the extent disallowed U/s 40 (a) (ia) in the PY of incurrence, could be
disallowed portion in the allowed as deduction in the PY of remittance of TDS. [Proviso-1 to S. 40 (a) (ia)].
PY of remittance.

Proviso-2 to S. 40 (a) (ia):

1 A sum (on which tax is deductible at source under Chapter XVII-B) is paid to a resident without deducting tax at source.
2 However, the payee includes such sum in computing the returned income of the relevant PY, files return for the PY U/s 139 and
the tax on the returned income was fully paid by way of advance tax or otherwise.
3 And the payer obtains a certificate in Form-26A from a CA to the effect that the payee has complied with the conditions aforesaid.
4 Then, tax on the sum (supra) is deemed to have been deducted at source and remitted to the credit of Government on the date of
filing of return by the payee. [Proviso-2 to S. 40 (a) (ia)].
5 In this case, 30% of the sum is disallowed U/s 40 (a) (ia) in the hands of payer in the PY of incurrence, it will be allowed in the PY
in which the return in filed by the payee.
Disallowance of any sum paid to a resident at any time during the PY without deduction of tax U/s 40 (a) (ia) [ Palam
gas service (2017) (SC) + Circular No.10/2013, dated 16.12.2013]
1 The provisions of S. 40 (a) (ia) would cover not only the amounts which are payable as on 31st March of a PY but also
amounts which are payable at any time during the year.
2 The statutory provisions are amply clear and in the context of S. 40 (a) (ia), the term "payable" would include "amounts
which are paid during the PY".
3. Disallowance U/s 40 (a) (iii):
Any sum which is chargeable U/H `Salaries` if it is payable outside India or to a NR and if the tax has not been paid thereon
nor deducted therefrom under Chapter XVII-B shall be disallowed.
4. Disallowance U/s 40 (a) (ii):

Any sum paid on account of tax or cess levied on profits on the basis of or in proportion to the profits and gains of any
business or profession shall be disallowed.
5. Disallowance U/s 40 (a) (iib):

1 What is disallowed Any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge, etc.,
U/s 40 (a) (iib)? which is levied exclusively on a SGU, by the SG or
Amount appropriated, directly or indirectly, from a SGU, by the SG.
2 Meaning of SGU. (a) A corporation established by or under any Act of the SG;
(b) A company in which more than 50% of the paid up equity share capital is held by the SG;
(c) A company in which more than 50% of the paid up equity share capital is held singly or jointly
by (a) or (b);
(d) A company or corporation in which the SG has the right to appoint the majority of directors or
to control the management or policy decisions;
(e) An authority, a board or an institution or a body established or constituted by or under any Act
of the SG or owned or controlled by the SG.
6. Disallowance U/s 40 (a) (iv):

Any contribution to a PF or fund established for the benefit of employees of assessee shall be disallowed, unless assessee
has made effective arrangements to make sure that tax shall be deducted at source from any payments made from fund
which are chargeable to tax U/H `Salaries`.
7. Disallowance U/s 40 (a) (v):

(i) Tax paid on non-monetary perquisites on behalf of employees is not deductible.
(ii) In case of an employee, deriving income in the nature of perquisites (other than monetary payments), the amount of
tax on such income paid by his employer is exempt from tax in the hands of that employee.
(iii) Correspondingly, such payment is not allowed as deduction from the income of the employer.
(iv) Thus, the payment of tax on perquisites by an employer on behalf of employee will be exempt from tax in the hands of
employee but will not be allowable as deduction in the hands of the employer.
8. Disallowance U/s 40A (2):

Assessee incurs expenditure in connection with purchase of goods or availing of services or facilities from connected
persons.
The payment in this regard is excessive or unreasonable having regard to (a) FMV of the commodity purchased or service
availed; (b) legitimate business needs of the assessee; (c) benefit derived by the assessee as a result of this expenditure.
See the table given below.


If the following conditions are fulfilled, an expenditure incurred by the assessee shall be disallowed in computing the
business income:
1 The assessee incurs an expenditure which is otherwise deductible in computing income U/H PGBP.
2 The amount of expenditure exceeds Rs. 10000.
3 Payment in respect of this expenditure or part thereof in a day exceeds Rs. 10000.
4 Payment is made otherwise than by way of APC or APBD or by use of ECS through a bank a/c.
Note 1: In case of payment made to transport operators for plying, hiring or leasing goods carriages, the amount of Rs.
10000 should be replaced with Rs.35000
Note 2: However, Rule 6 DD provides circumstances under which there will be no disallowance even if the payment
exceeding Rs. 10000 is made otherwise than by way of APC or APBD or by use of ECS through a bank account.
Exceptions U/R 6DD:

1 Payments made to RBI
2 Payments made to a banking company.
3 Payments made to SBI or its subsidiaries.
4 Payments made to co-operative bank
5 Payments made to land mortgage bank
6 Payments made to any primary agricultural credit society
7 Payments made to LIC
8 Payments made to the Government and, under the rules framed by it, such payment is to be made in legal tender.
9 Payment made by any letter of credit arrangement through a bank.
10 Payment made by a mail or telegraphic transfer through a bank.
11 Payment made by a bill of exchange made payable only to a bank.
12 Payment through the use of electronic clearing system through a bank account
13 Payment made through a credit card
14 Payment made through a debit card
15 Payment by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services
rendered by the assessee to payee.
16 Payment made for purchase of (a) agricultural or forest produce (b) the produce of animal husbandry (including livestock, meat,
hides and skins), dairy or poultry farming (c) fish or fish products (d) the products of horticulture, to the cultivator, grower, or
producer of such articles, produce or products.
17 Payment made for the purchase of the products manufactured without the aid of power in a cottage industry, to the producer of
such products.
18 Payment in a village or town, which on the date of payment is not served by any bank, to any person who ordinarily resides, or
is carrying on any business or profession or vocation, in any such village or town.
19 Payment made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement,
retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar
terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50000.
20 Payment made by an assessee by way of salary to his employee after deducting the income tax from salary in accordance with
S. 192 and when such employee-
(i) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a
ship and
(ii) does not maintain any account in any bank at such place or ship.
21 Payment required to be made on a day on which the banks were closed either on account of holiday or strike.
22 Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such
person.
23 Payment made by an authorized dealer or a money changer against purchase of foreign currency or traveler’s cheque in the
normal course of his business.
Note-3:
1 The expression `fish or fish products` referred to above would include `other marine products such as shrimp, prawn, cuttlefish,
squid, crab, lobster etc`. [CBDT Circular 10/2008].
2 The `producers` of fish or fish products for the purpose of R. 6DD would include, besides the fishermen, any headman of
fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish
products to traders, exporters etc.
3 However, the above exception will not be available on the payment for the purchase of fish or fish products from a person who
is not proved to be a `producer` of these goods and is only a trader, broker or any other middleman, by whatever name called.

Cash payment made in excess of Rs. 10,000 deemed to be the income of the subsequent year, if an expenditure has
been allowed as deduction in any PY on due basis: [S. 40A (3A)].
In case of an assessee following mercantile system of accounting, if an expenditure has been allowed as deduction in any
PY on due basis, and payment has been made in a subsequent year otherwise than by account payee cheque or account
payee bank draft or use of ECS through a bank account, then the payment so made shall be deemed to be the income of
the subsequent year if such payment or aggregate of payments made to a person in a day exceeds Rs. 10,000. [S. 40A
(3A)].
Issues in S. 40A (3):

1 S. 40A (3) could not be invoked in respect of assessee who is offering income under the presumptive schemes referred
to in Chapter-IVD.
2 Where the BOA are rejected by the AO, then the AO cannot disallow a particular expenditure on the basis of books of
accounts. [Banwari Lal Banshidhar 229 ITR 229 + Smt. Santosh Jain 296 ITR 324 (P&H)].
3 Processor of fish = Producer of fish product. Hence, payments made to him are protected U/R 6DD. [Inter-seas, Sea
Food Exporters [2010] 188 Taxman 343 (Kar)].

1 Where an assessee (being an employer) contributes towards recognized provident fund / approved superannuation fund
/ approved gratuity fund/ approved pension fund, it is deductible subject to S. 36 (1) and S. 43B.
2 But where the assessee as an employer makes any payment for setting up any trust, company, association or society,
or contributes to any fund other than those referred to above, and such contribution or payment is not required by the
law, then such payment or contribution is not allowed as deduction.
11. Disallowance U/s 43B:

The following sums are allowed as deduction only on the basis of actual payment within the time limits specified in section
43B:
(a) Any sum payable by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force.
(b) Any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund
or gratuity fund or any other fund for the welfare of employees.
(c) Bonus or Commission for services rendered payable to employees.
(d) Any sum payable by the assessee as interest on any loan or borrowing from any PFI or a State Financial Corporation
or a State Industrial Investment Corporation.
(e) Interest on any loan/advance from a scheduled bank or co-opertive bank other than a primary agricultural credit
society or a primary co-operative agricultural and rural development bank.
(f) Any sum paid by the assessee as an employer in lieu of earned leave of his employee.
(g) Any sum payable by the assessee to the Indian Railways for use of Railway assets.
The above sums can be paid by the assessee on or before the due date for furnishing the ROI U/s 139 (1) in respect of the
PY in which the liability to pay such sum was incurred.
Issues in S. 43B:
1 Bottling fee paid to SG is not covered by S. 43B. Furnishing bank guarantee does not amount to payment for the
purpose of S. 43B. [Mc Dowell & Co Ltd 314 ITR 167 (SC) + Udaipur distillery Co Ltd 314 ITR 188 (SC)].
2 Sales tax withheld as per sales tax deferral scheme cannot be disallowed U/s 43B. [CBDT circular 674].
3 Conversion of sales tax into loan amounts to payment of sales tax and hence, provisions of S. 43B cannot be invoked.
I. Presumptive taxation:
1. Special provisions for computing profits of business on presumptive basis – S. 44AD:

1 Eligible assessee Resident individuals, HUFs and partnership firms (but not LLPs) who have not
claimed deduction U/s 10AA and under Chapter VIA Part-C in the relevant AY.
2 Who are not eligible for A person carrying on profession as referred to in S. 44AA (1) i.e., legal, medical,
coming/s 44AD? engineering or architectural profession or the profession of accountancy or
technical consultancy or interior decoration or any other profession as is notified by
the Board (namely, authorized representatives, film artists, company secretaries
and profession of information technology);
A person earning income in the nature of commission or brokerage;
A person carrying on any agency business.
3 Income covered Profits and gains from eligible business.

4 What do we mean by eligible Any business (except the business of plying, hiring and leasing goods carriages
business? covered U/s 44AE) with total turnover/gross receipts of up to Rs. 200L.
5 How do we compute profits By applying 6% on that portion of the turnover from eligible business which is
and gains from the eligible received by way of APC/APBD/by use of ECS through bank account during the PY
business on a presumptive or before the due date for filing return U/s 139 (1) for that PY and by applying 8%
basis? on the remaining portion of the turnover from the eligible business.
6 No further deduction would be All deductions allowable U/s 30 to 38 shall be deemed to have been allowed in full
allowed. and no further deduction shall be allowed.
7 WDV of assets to be updated The WDV of any asset of eligible business shall be calculated as if the assessee
had claimed and had been actually allowed deduction in respect of depreciation for
each of the relevant AYs.
8 Relief from maintenance of Assessees opting for the presumptive scheme U/s 44AD are not required to
BOA and audit. maintain BOA U/s 44AA or get them audited U/s 44AB.
9 Higher threshold for non-audit S. 44AB makes it obligatory for every person carrying on business to get his
of accounts for assessees accounts of any PY audited if his total sales, turnover or gross receipts exceed Rs.
opting for presumptive 100L. However, if an eligible person opts for presumptive taxation scheme as per
taxation. S. 44AD (1), he shall not be required to get his accounts audited if the total
turnover or gross receipts of the relevant PY does not exceed Rs. 200L .
10 Advance tax obligation. (xi) The eligible assessee is required to pay advance tax by 15th March of the FY.
11 Not eligible to opt (xii) for Where an eligible assessee declares profit for any PY in accordance with the
presumptive taxation U/s 44AD provisions of this section and he declares profit for any of the 5 consecutive AYs
for 5 AYs. relevant to the PY succeeding such PY not in accordance with the provisions of S.
44AD (1), he shall not be eligible to claim the benefit of the provisions of this
section for 5 AYs subsequent to the AY relevant to the PY in which the profit has
not been declared in accordance with the provisions of S. 44AD (1). [S. 44AD (4)].
12 Books of accounts and Audit(x)if An eligible assessee to whom the provisions of S. 44AD (4) are applicable and
S. 44AD (4) attracted. whose TI exceeds the BEL has to maintain books of account U/s 44AA and get
them audited and furnish a report of such audit U/s 44AB. [S. 44AD (5)].

2. Presumptive taxation scheme for assessees engaged in eligible profession – S. 44ADA:

1 Eligible assessee A resident assessee who is engaged in any profession referred to in S. 44AA (1) such
as legal, medical, engineering or architectural profession or the profession of
accountancy or technical consultancy or interior decoration or any other profession as
is notified by the Board in the Official Gazette; and whose total gross receipts does not
exceed Rs. 50L in a PY.
2 Manner of computation By applying 50% on the total gross receipts.
3 No further deduction would All deductions allowable U/s 30 to 38 shall be deemed to have been allowed in full and
be allowed. no further deduction shall be allowed.
4 WDV of the assets to be The WDV of any asset of eligible profession shall be calculated as if the assessee had
updated claimed and had been actually allowed deduction in respect of depreciation for each of
the relevant AYs.
5 Relief from maintenance of Assessees opting for the presumptive scheme U/s 44ADA are not required to maintain
books of accounts and audit. books of account U/s 44AA or get them audited U/s 44AB.
6 Option to claim lower profits. An assessee may claim that his profits and gains from the aforesaid profession are
lower than the profits and gains deemed to be his income U/s 44ADA (1); and if such TI
exceeds the BEL, he has to maintain books of account U/s 44AA and get them audited
and furnish a report of such audit U/s 44AB.
7 Advance tax obligation. The eligible assessee is required to pay advance tax by 15th March of the FY.
3. Special provisions for computing profits and gains of business of plying, hiring or leasing goods carriages: S.
44AE:
1 Who is eligible to come U/s Assessee who carries on the business of plying, hiring or leasing goods
44AE for getting taxed on carriages and who does not own more than 10 goods vehicles at any time
presumptive basis? during the PY.
2 How do we compute profits In case of heavy goods vehicle (that is, any goods carriage, the gross vehicle
and gains from this business weight of which exceeds 12000 kilograms), the income is Rs. 1000 per tonne of
on a presumptive basis? gross vehicle weight for every month or part of a month during which such vehicle is
owned by the assessee for the PY.
In case of other vehicles, Rs. 7,500 for every month or part of a month during which
such vehicle is owned by the assessee for the PY.
3 No further deduction would be All deductions allowable U/s 30 to 38 shall be deemed to have been allowed in full
allowed. and no further deduction shall be allowed.
However, in the case of a firm, salary and interest would be allowed as deduction
subject to the conditions & limits prescribed U/s 40 (b).
4 WDV of the assets to be The WDV of any asset of this business shall be calculated as if the assessee had
updated as if depreciation was claimed and had been actually allowed deduction in respect of depreciation for each
allowed. of the relevant AYs.
5 Relief from maintenance of Assessees opting for the presumptive scheme U/s 44AE are not required to maintain
BOA and audit. BOA U/s 44AA or get them audited U/s 44AB.
6 Option to claim lower profits. An assessee may claim that his profits & gains from the aforesaid business are lower
than the profits & gains deemed to be his income U/s 44AE; and if such TI > BEL, he
has to maintain BOA U/s 44AA and get them audited and furnish a report of such
audit U/s 44AB.
J. Compulsory maintenance of accounts: [S. 44AA]:
S. Maintain the books of account This section provides that every person carrying on the legal, medical,
44AA and other documents by engineering or architectural profession or accountancy or technical
(1) notified profession consultancy or interior decoration or any other profession as has been
notified by the CBDT in the OG must statutorily maintain such books of
accounts and other documents as may enable the AO to compute his
TI in accordance with the provisions of the Act.
Notified professions The professions notified so far are (a) the profession of authorised
representative; (b) the profession of film artist (actor, camera man, director,
music director, art director, dance director, editor, singer, lyricist, story
writer, screen play writer, dialogue writer and dress designer); (c) the
profession of Company Secretary; and (d) profession of information
technology.
S. Maintain the BOA and other Every person carrying on business or profession (other than the
44AA documents if income / sales / professions specified above) must statutorily maintain such books of

(2) turnover /gross receipts accounts and other documents as may enable the AO to compute his TI in
exceeds the prescribed limits. accordance with the provisions of the Act in the specified circumstances.
Specified circumstances (in Existing In cases where the income from the existing business
case of individual or HUF) business or or profession exceeds Rs. 2,50,000 or the total sales
profession turnover or gross receipts, as the case may be, in the
business or profession exceed Rs. 25,00,000 in any
one of 3 years immediately preceding the PY;
Newly set up In cases where the business or profession is newly
business or set up in any PY, if his income from business or
profession profession is likely to exceed Rs. 2,50,000 or his total
sales turnover or gross receipts, as the case may be,
in the business or profession are likely to exceed Rs.
25,00,000 during the PY.
Specified circumstances (in Existing In cases where the income from the existing
case of persons other than business or business or profession exceeds Rs. 1,20,000 or the
individual or HUF) profession total sales turnover or gross receipts, as the case
may be, in the business or profession exceed Rs.
10,00,000 in any one of 3 years immediately
preceding the PY; or
Newly set up In cases where the B/P is newly set up in any PY, if
business or his income from business or profession is likely to
profession exceed Rs. 1,20,000 or his total sales turnover or
gross receipts, as the case may be, in the B/P are
likely to exceed Rs. 10L during the PY.
Showing lower income as Where profits and gains from the business are calculated on a presumptive
compared to income computed basis U/s 44AE and the assessee has claimed that his income is lower than
on presumptive basis U/s 44AE the profits or gains so deemed to be the profits and gains of his business.
Where the provisions of S. In cases where an assessee becomes ineligible to claim the benefit of the
44AD (4) are applicable in his provisions of S. 44AD (1) for 5 AYs subsequent to the AY relevant to the
case and his income > BEL in PY in which the profit has not been declared in accordance with the
any PY. provisions of S. 44AD (1) and his income > BEL during the PY.
S. Power to prescribe books of The CBDT has been authorised, having due regard to the nature of the
44AA accounts and other documents business or profession carried on by any class of persons, to prescribe by
(3) to be kept. rules the books of account and other documents including inventories,
wherever necessary, to be kept and maintained by the taxpayer, the
particulars to be contained therein and the form and manner in which and
the place at which they must be kept and maintained.
S. Period for which the books of The CBDT has also been empowered to prescribe, by rules, the period for
44AA account and other documents which the books of account and other documents are required to be kept
(4) are required to be kept and and maintained by the taxpayer.
maintained

1 Rules pertaining to maintenance of books of accounts & other documents – R. 6F (1):
(a) R. 6F contains the details relating to the books of account and other documents to be maintained by certain
professionals U/s 44AA.
(b) As per R. 6F, every person carrying on legal, medical, engineering, or architectural profession or the profession of
accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and
maintain the specified books of account and other documents in the following cases :
(a) if his gross receipts exceed Rs. 1,50,000 in all the 3 years immediately preceding the PY; or
(b) if, where the profession has been newly set up in the PY, his gross receipts are likely to exceed Rs. 1,50,000
in that year.
(c) It should be noted that professionals whose gross receipts are less than the specified limits given above are also
required to maintain books of account but these have not been specified in the Rule.
(d) In other words, they are required to maintain such books of account and other documents as may enable the AO to
compute the total income in accordance with the provisions of this Act.
2 Prescribed books of accounts and other documents – R. 6F (2):
(i) The following books of account and other documents are required to be maintained:
(a) a cash book;

(b) a journal, if accounts are maintained on mercantile basis ;

(c) a ledger;
(d) Carbon copies of bills and receipts issued by the person whether machine numbered or otherwise serially
numbered, in relation to sums exceeding Rs. 25;
(ii) Original bills and receipts issued to the person in respect of expenditure incurred by the person, or where such bills
and receipts are not issued, payment vouchers prepared and signed by the person, provided the amount does not
exceed Rs. 50. Where the cash book contains adequate particulars, the preparation and signing of payment vouchers
is not required.
(iii) In case of a person carrying on medical profession, he will be required to maintain the following in addition to the
list given above:
(a) a daily case register in Form 3C.
(b) an inventory under broad heads of the stock of drugs, medicines and other consumable accessories as on
the first and last day of the previous year used for his profession.
3 Place at which books to be kept and maintained: The books and documents shall be kept and maintained at the
place where the person is carrying on the profession, or where there is more than one place, at the principal place of
his profession. However, if he maintains separate set of books for each place of his profession, such books and
documents may be kept and maintained at the respective places.
4 Prescribed period: The above books of account and documents shall be kept and maintained for a minimum of 6
years from the end of the relevant AY.
K. Audit of accounts of certain persons carrying on business or profession – S. 44AB:

(i) Who are required to get the accounts audited?
It is obligatory in the following cases for a person carrying on business or profession to get his accounts audited before the
"specified date" by a CA:
1 if the total sales, turnover or gross receipts in business exceeds Rs. 100L in any PY; or
2 if the gross receipts in profession exceeds Rs. 50L in any PY; or
3 where the assessee is covered U/s 44AE and claims that the profits and gains from business are lower than the profits
and gains computed on a presumptive basis. In such cases, the normal monetary limits for tax audit in respect of
business would not apply.
4 where the assessee is carrying on a notified profession U/s 44AA, and he claims that the profits and gains from such
profession are lower than the profits and gains computed on a presumptive basis U/s 44ADA and his income > the BEL.
5 where the assessee is covered U/s 44AD (4) and his income exceeds the BEL.
(ii) Audit Report:
The person mentioned above would have to furnish by the specified date a report of the audit in the prescribed forms. For this
purpose, the Board has prescribed U/R 6G, Forms 3CA/3CB/3CD containing forms of audit report and particulars to be
furnished therewith.
(iii) Accounts audits under other statutes are considered:
In cases where the accounts of a person are required to be audited by or under any other law before the specified date, it will
be sufficient if the person gets his accounts audited under such other law before the specified date and also furnish by the said
date the report of audit in the prescribed form in addition to the report of audit required under such other law.
Thus, for example, the provision regarding compulsory audit does not imply a second or separate audit of accounts of
companies whose accounts are already required to be audited under the Companies Act, 2013. The provision only requires
that companies should get their accounts audited under the Companies Act, 2013 before the specified date and in addition to
the report required to be given by the auditor under the Companies Act, 2013 furnish a report for tax purposes in the form to be
prescribed in this behalf by the CBDT.
(iv) Non-applicability:
The requirement of audit U/s 44AB does not apply to a person who declares profits and gains on a presumptive basis U/s
44AD and his total sales, turnover or gross receipts does not exceed Rs. 2 crore.
(v) Specified date:
The expression “specified date” in relation to the accounts of the PY (s) relevant to any AY means the due date for furnishing
the ROI U/s 139 (1).
(vi) Penal provision:
It may be noted that U/s 271B, penal action can be taken for not getting the accounts audited and for not filing the audit report
by the specified date.

Chapter-45: Penalty for under-reporting and mis-reporting - Summary
1. Penalty for under-reporting (UR) and mis-reporting (MR) – S. 270A:

1 Levy of penalty for UR/MR. [S. In the course of assessment or reassessment proceedings, if the AO is
270A (1) + S. 270A (12)]. satisfied, that the assessee has under-reported or mis-reported his
income, then the AO, may, through an order in writing, direct the assessee
to pay penalty on the under-reported income.
Similarly, in the course of appellate proceedings, if the CIT (A) is satisfied,
that the assessee has under-reported or mis-reported his income, then the
CIT (A), may, through an order in writing, direct the assessee to pay
penalty on the under-reported income.
In the same way, in the course of revisionary proceedings, if the CIT is
satisfied, that the assessee has under-reported or mis-reported his
income, then the CIT, may, through an order in writing, direct the assessee
to pay penalty on the under-reported income.
2 Cases of UR of income. [S. A person shall be considered to have under reported his income, in the
270A (2)]. following cases:
Case-1: ROI has been filed. It was 1 When there is Income assessed > Income determined U/s 143
processed U/s 143 (1). under- (1) (a). [S. 270A (2) (a)].
Assessment is made for the reporting?
first time thereafter. 2 Quantum of Income assessed – Income determined U/s 143
UR income. (1) (a). [S. 270A (3) (i) (a)].
3 Tax on UR Tax on (UR income + income determined U/s 143
income. (1) (a)) – Tax on income determined U/s 143 (1)
(a). [S. 270A (10) (b)].
4 Quantum of Situation Quantum of
penalty penalty
UR income is in 200% of tax on
consequence of MR by UR income. [S.
the assessee. 270A (8)].
UR income is not in 50% of tax on UR
consequence of MR by income. [S. 270A
the assessee. (7)].
Case-2 Assessee has not furnished 1 When there is Income assessed > BEL. [S. 270A (2) (b)].
ROI for the relevant AY. under-reporting?
However, assessment was 2 Quantum of UR Income assessed (in case of
made for the first time. income. [S. 270A company/firm/local authority).
(3) (i) (b)] Income assessed – BEL (in case of others).
3 Tax on UR Tax on UR income as if it were the TI (in
income. [S. 270A case of company/firm/local authority).
(10) (a)] Tax on (UR income + BEL) as if it were the
TI (in case of others)
4 Quantum of Same
penalty
Case-3 For the relevant AY, 1 When there is Income re-assessed > Income
reassessment got over. under-reporting? assessed/reassessed immediately before
such reassessment. [S. 270A (2) (c)].
2 Quantum of UR Income reassessed – Income assessment in
income. [S. 270A preceding order.
(3) (ii)]
3 Tax on UR Tax on (UR income + income assessed in
income. [S. 270A preceding order) – Tax on income assessed
(10) (c)] in preceding order.
4 Quantum of Same
penalty
Case-4 S. 115JB/S. 115JC applies to 1 When there is Deemed TI assessed as per S.
the assessee. ROI was filed by under-reporting? 115JB/S.115JC > Deemed TI as per S.
the assessee for the relevant 115JB/S. 115JC determined U/s 143 (1) (a).
AY. It was processed U/s 143 [S. 270A (2) (d)].
(1). Subsequently, assessment

was made for the first time. 2 Quantum of UR Additions made under the normal total
income. [Proviso- income route + additions made under the BP
1 to S. 270A (3)] or ATI route.
3 Overlapping Where addition is made under the normal
additions to be total income route and under the BP route or
ignored. [Proviso- ATI route on the same issue, such addition
2 to S. 270A (3)]. shall not be considered in computing the UR
income under the BP route or ATI route.
4 Tax on UR I. Tax on UR income under the general

income. [S. 270A provisions = [Tax on (UR income + income
(10) (c)] determined U/s 143 (1) (a)) – Tax on income
determined U/s 143 (1) (a)].
II. Tax on UR income under the BP route or
ATI route = [Tax on (UR income + Deemed
TI referred to in S. 115JB/S. 115JC
determined U/s 143 (1) (a)) – Tax on deemed
TI referred to in S. 115JB/S. 115JC
determined U/s 143 (1)].
III. Tax on UR income = I + II.
5 Quantum of Same
penalty
Case-5 S. 115JB/S.115JC applies to 1 When there is Deemed TI assessed as per S.
the assessee. For the relevant under-reporting? 115JB/S.115JC > BEL. [S. 270A (2) (e)].
AY, no ROI was filed by the 2 Quantum of UR Additions made under the normal total
assessee. Assessment was income. [Proviso- income route + additions made under the BP
made for the first time. 1] or ATI route.
income. [S. 270A provisions = [Tax on UR income as if it were
(10) (c)] the TI].
ATI route = [Tax on UR income as it were the
TI]
5 Quantum of Same
penalty
Case-6 S. 115JB/S. 115JC applies to 1 When there is Deemed TI assessed as per S.
the assessee. For the relevant under-reporting? 115JB/S.115JC > Deemed TI as per S.
AY, assessment got over. 115JB/S. 115JC assessed immediately
Subsequently, reassessment before such reassessment. [S. 270A (2) (e)].
is made. 2 Quantum of UR Additions made under the normal total
income. [Proviso- income route + additions made under the BP
1 to S. 270A (3)] or ATI route.
income. [S. 270A provisions = Tax on (TI originally assessed
(10) (c)] as per general provisions + UR income) –
Tax on TI originally assessed as per general
provisions.

ATI route = Tax on (BP originally assessed +

UR income) – Tax on BP originally assessed.
5 Quantum of Same
penalty
Case-7 Loss was offered in the return. 1 When there is Loss determined U/s 143 (1) (a) gets
Thereafter, it was processed. under-reporting? reduced or converted into income, upon
Subsequently assessment was assessment. [S. 270A (2) (g)].
made. 2 Quantum of UR Loss assessed or income assessed – loss
income. determined U/s 143 (1) (a).
3 Tax on UR Tax on UR income as if it were the TI of the

income assessee. [S. 270A (10) (b)].
4 Quantum of Same
penalty
Case-8 In case of assessee, originally 1 When there is Loss in assessment immediately before such
assessment was made. under-reporting? reassessment gets reduced or converted into
Subsequently, reassessment income, upon reassessment. [S. 270A (2)
is made. (g)].
2 Quantum of UR Loss reassessed or income reassessed –
income. loss assessed in the preceding assessment
order.
3 Tax on UR Tax on UR income as if it were the TI of the
income assessee. [S. 270A (10) (b)].
4 Quantum of Same
penalty
2. Exclusions from UR income – S. 270A (6):

1 UR income shall not include amount of income for which the assessee offers an explanation.
The AO / CIT (A) / CIT is satisfied about the explanation that it is bonafide.
The AO / CIT / CIT (A) is satisfied that the assessee has disclosed all the material facts to substantiate the explanation.
2 UR income shall not include the amount of UR income determined on the basis of estimate provided:
(i) the accounts are correct and complete to the satisfaction of AO/CIT/CIT (A).
(ii) the method employed does not enable proper determination of income.
This is possible where additions are made based on estimation of GP, against the declared profits, without rejecting the
books of accounts and/or without finding that the audited F/S of the assessee are not true and correct.
In such a case, the difference attributable to estimated amount of GP shall be excluded from the UR income.
3 UR income shall not include an amount of UR income determined on the basis of an estimate, if the assessee has, on his
own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the
computation of his income and has disclosed all the facts material to the addition or disallowance.
4 UR income shall not include the amount of UR income represented by any addition made in conformity with ALP
determined by the TPO, where the assessee had maintained information and documents as prescribed U/s 92D, declared
the IT under Chapter-X, and disclosed all the material facts relating to the transaction.
5 UR income excludes the amount of undisclosed income referred to in S. 271AAB.
3. MR of income – S. 270A (9):

The following are the cases of MR of income:
Provision Case
S. 270A (9) (a) Misrepresentation or suppression of facts
S. 270A (9) (b) Failure to record investment in the BOA
S. 270A (9) (c) Claim of expenditure not substantiated by any evidence.
S. 270A (9) (d) Recording of any false entry in the BOA.
S. 270A (9) (e) Failure to record any receipt in BOA having a bearing on the TI
S. 270A (9) (f) Failure to report any IT, deemed IT or SDT to which the provisions of Chapter-X apply.

4. Meaning of Under-reported income in a case where the source of any receipt, deposit or investment is linked to
an earlier year [S. 270A (4) & (5)]:
(i) In a case where the source of any receipt, deposit or investment appearing in the current AY is claimed to be an
amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in
any earlier AY and no penalty was levied for such preceding year, UR income shall include such amount as is
sufficient to cover such receipt, deposit or investment.
(ii) Such amount shall be deemed to be the amount of income under-reported for the preceding year in the following order
–
(i) The preceding year immediately before the year in which the receipt, deposit or investment appears,
being the first preceding year; and
(ii) Where the amount added or deducted in the first preceding year is not sufficient to cover the receipt,
deposit or investment, the year immediately preceding the first preceding year and so on.
5. Immunity from imposition of penalty and prosecution– S. 270AA:

1 Application to be made by the An assessee may make an application to the AO for grant of immunity from
assessee to AO for grant of imposition of penalty U/s 270A and initiation of proceedings U/s 276C or S.
immunity from penalty and 276CC, if he:
prosecution [S. 270AA (1)]. (i) pays the tax and interest payable as per the order of assessment U/s 143
(3) or reassessment U/s 147, within the period specified in such NOD;
and
(ii) does not prefer an appeal against such assessment/reassessment order.
2 Time limit for making application The assessee can make such application in the prescribed form and verified in
[S. 270AA (2)]. the prescribed manner within one month from the end of the month in which the
order of assessment or reassessment is received.
3 Circumstances in which the AO The AO shall grant immunity from initiation of penalty U/s 270A and prosecution
cannot grant immunity from U/s 276C or S. 276CC, on fulfilment of the conditions (supra) and after the expiry
penalty and prosecution [S. of period of filing appeal as specified in S. 249 (2).
270AA (3)] However, the AO shall not grant immunity from imposition of penalty U/s 270A if
the proceedings were initiated on account of misreporting.
4 Time limit for passing order The AO shall pass an order accepting or rejecting the application for immunity
accepting or rejecting application from penalty U/s 270A or prosecution U/s 276C or S. 276CC within a period of
for immunity from penalty and one month from the end of the month in which such application is received.
prosecution [S. 270AA (4)]. However, in the interest of natural justice, no order rejecting the application shall
be passed by the AO unless the assessee has been given an opportunity of being
heard.
5 Finality of order passed by the The order of the AO passed U/s 270AA (4) accepting or rejecting the application
AO U/s 270AA (4) [S. 270AA made by the assessee for immunity from penalty U/s 270A or prosecution U/s
(5)]. 276C or S. 276CC shall be final.
6 Order of assessment / No appeal U/s 246A or an application for revision U/s 264 shall be admissible
reassessment, in respect of against the order of assessment or reassessment referred to in S. 270A (1) (a), in
which application for immunity is a case where an order U/s 270AA (4) has been made accepting the application.
accepted, is neither appealable [S. 270AA (6)].
nor revisionable U/s 264.
7 If assessment got over U/s 144, If assessment is completed U/s 144, the assessee cannot avail of the benefit of
no benefit U/s 270AA. immunity from imposition of penalty by filing a petition to AO U/s 270AA.
This benefit is available only if tax is computed U/s 143 (3) or S. 147.
8 Exclusion of period when As per S. 249 (2) (b), an appeal before the CIT (A) is to be made within 30 days
application for immunity is of the receipt of the notice of demand relating to an assessment or penalty, where
pending before AO from the time the appeal relates to such assessment or penalty.
limit for filing of appeal before In a case where the assessee makes an application U/s 270AA seeking immunity
CIT (A), in a case where such from penalty, then, the following period has to be excluded for calculation of the
application is rejected [2nd aforesaid 30 day period –
Proviso to S. 249 (2) (b)]. Exclusion of period
beginning from ending with
the date on which application U/s the date on which the order rejecting
270AA for immunity from penalty U/s the application is served on the
270A is made assessee.

6. Points requiring attention U/s 270A:

1 If the AO is to levy penalty U/s 270A, then the penalty proceedings must be initiated by the AO before completion of
assessment.
2 If the CIT (A) is to levy penalty U/s 270A, then the penalty proceedings must be initiated by the CIT (A) before he
passes the order U/s 250.
3 If the CIT U/s 263 increases the income, then he must initiate the penalty proceedings before he passes the order U/s
263.
4 Respective authorities shall levy penalty U/s 270A in respect of UR found by them.
5 S. 270A order passed by the AO can be questioned U/s 246A / S. 264 / S. 154.
6 S. 270A order passed by the CIT or CIT (A) could be challenged in appeal before ITAT U/s 253.
7 Time-limit for passing penalty order U/s 270A is given in S. 275.
7. Provisions of S. 274:
S. 274 OBH through No order imposing a penalty shall be made unless the assessee has been given a
(1) SCN reasonable OBH.
Points requiring Service of a valid notice is a condition precedent to the assumption of jurisdiction by the AO.
attention In other words, penalty proceedings can be validly initiated only upon issue of SCN.
Presence of any defect in the SCN shall not be the sole ground for challenging the penalty
order.
S. 292B gives immunity to the validity of SCN against any defect in it.
However, S. 292B cannot come to the rescue of the Department where the SCN is not
signed. It does not exist in the eyes of law. In other words, the deficiency in the nature of
unsigned notice is not curable U/s 292B. Consequently, the order of penalty will be held
invalid. [Aparna Agency (P) Ltd 267 ITR 50 (Cal)].
S. 274 Prior approval of No order imposing a penalty shall be made—
(2) JCIT in certain (a) by the ITO, where the penalty exceeds Rs. 10000;
cases (b) by the ACIT or DCIT, where the penalty exceeds Rs. 20000,
except with the prior approval of the JCIT.
S. 274 Sending penalty An ITA on making an order imposing a penalty, unless he is himself the AO, shall forthwith
(3) order to the AO send a copy of such order to the AO.
8. Time-limit for passing order of penalty U/s 270A – S. 275:
A. UR is due to additions made by the AO in the course of assessment. What is the time limit for the AO to pass
order of penalty U/s 270A?
SN Situation Time limit
1 Appeal has been filed against the 1 year from the end of the FY in which the order of CIT (A) is received by CIT.
assessment order to CIT (A).
2 Appeal has been filed against the 6 m from the end of the month in which the order of ITAT is received by CIT.
CIT (A)’s order before the ITAT
3 Revision application has been 6 months from the end of the month in which revision order U/s 264 is passed.
filed U/s 264
4 Appeal or revision is not preferred End of the FY in which the assessment proceedings are completed or 6 months
from the end of the month in which the penalty proceedings are initiated
(whichever is later).
B. UR is on account of enhancement of assessment by the CIT (A) in the course of appeal proceedings. What is the
time limit for the CIT (A) to pass order of penalty U/s 270A?
SN Situations Time limit
1 Appeal has been 6m from the end of the month in which the order of ITAT is received by CIT.
filed to ITAT
2 No appeal filed End of the FY in which the order U/s 250 is passed or 6m from the end of the month in which
the penalty proceedings are initiated by CIT (A) (whichever is later).
C. UR is on account of additions made by the CIT in the course of revision proceedings U/s 263. What is the time
limit for the CIT to pass the order of penalty U/s 270A?
SN Situations Time limit
1 Appeal has been filed to ITAT 6m from the end of the month in which the order of ITAT is received by CIT.
2 No appeal filed 6 months from the end of the month in which order of revision is passed U/s 263.

D. Extension to time limit in certain cases – Explanation to S. 275:

In computing the period of limitation, the time taken to give the assessee a reasonable opportunity of being heard or reheard
U/s 129 and any period during which the proceedings for the levy of the penalty are stayed by an order or injunction of the
Court or any period during which the immunity granted U/s 245H received in force will be excluded.
Note:
1 The SC has in Pradip Lamps Works 249 ITR 797 ruled that where the assessee replied to the show cause notice
issued by the predecessor–AO, the successor–AO can levy penalty without giving a fresh notice of hearing to the
assessee in the absence of a demand by the assessee for re-hearing.
2 The Karnataka HC, in B. N. Amarnath 259 ITR 590, held that the Explanation to S. 275(2) could not be invoked by
the Department unilaterally to compute the period of limitation on its own, by issue of notice U/s 129, without there being
any request for re-hearing by the assessee.
E. Time limit for imposing/reducing/cancelling penalty based on the appellate or revisionary order – S. 275 (1A):
SN Situation Time-limit
1 Addition made by the AO – penalty levied by AO – order of 6 months from the end of the month in which the
assessment subjected to appeal – Additions deleted by CIT order of the CIT (A) is received by the CIT.
(A) – Time limit for cancelling penalty.
assessment subjected to appeal – Additions deleted by CIT order of the ITAT is received by the CIT.
(A) – Order of penalty cancelled - Department prefers appeal
to ITAT – ITAT confirms addition - Time limit for imposing
penalty.
assessment subjected to appeal – Additions confirmed by CIT order of the ITAT is received by the CIT.
(A) – ITAT deletes all the additions - Time limit for cancelling
penalty.
assessment subjected to appeal – Additions confirmed by CIT order of the ITAT is received by the CIT.
(A) – ITAT deletes additions partially - TL for reducing penalty.
10. Power of the CIT to waive or reduce penalty – S. 273A:

1 Power of CIT to waive or S. 273A (1) authorises the PCIT or CIT to reduce or waive the amount of penalty U/s
reduce penalty U/s 270A. 270A payable by an assessee. The exercise of this power by CIT is purely at his
[S. 273A (1)]. discretion and may be done either on his own motion or otherwise, that is on receipt of an
application from the assessee.
There is no time limit specified in the Act for filing the application of waiver or reduction. It
can be filed any time.
The application may pertain to one year or more than one year.
Even penalty already imposed may be waived or reduced.
Even if the penalty is paid, upon waiver or reduction, it shall be refunded to the assessee.
[Garden Silk Weaving Factory 76 Taxman 408 (Guj)].
The application for waiver or reduction can be made even if the order levying penalty is
challenged in appeal proceedings. [Seetha Mahalakshmi Rice & Groundnut Oil Mill
Contractors Co (AP)].
There is no time-limit of the CIT or PCIT to pass order U/s 273A (1).
2 Conditions to be fulfilled (a) True and full voluntary disclosure of income particulars in good faith before the
for waiver or reduction detection of concealment by the AO; (b) Co-operation in enquiry relating to assessment;
U/s 273A (1). (c) Payment of tax or satisfactory arrangement for payment of tax and interest.
3 When true and full For purposes of waiver of the penalty, a person must be deemed to have made a full and
disclosure is not deemed true disclosure of his income or of all the particulars relating thereto in any case where
to have been made? the excess of income assessed over the income returned is of such a nature as not to
attract the imposition of any penalty U/s 270A. In other words in every case where there
is the scope for levying penalty on an assessee for having under-reported his income or
mis-reported his income, the assessee would not be deemed to have made a full and true
disclosure of his income.
4 Power to waive or reduce This is power is only a discretionary power. Note the words ‘in his discretion’.
penalty is discretionary. However, the discretion shall be used judiciously and not arbitrarily or randomly. The
[Anwar Ali 196 ITR 354 power of CIT U/s 273A is quasi-judicial power.

(AP) + Ganesh Trading If the discretion is not exercised in providing relief to the assessee, the reasons for the
Co 134 Taxman 441 same should be contained in his order. In other words, his order should be a speaking
(P&H)]. order. Otherwise it is void ab initio and is bound be quashed by the Courts.
In other words, if the conditions laid down for exercise of discretion are satisfied, the CIT
has no discretion to refuse to exercise the discretion. The CIT is under statutory duty to
exercise the discretion. [K.S.N. Murthy Vs Chairman, CBDT 119 Taxman 310 (AP)].
5 Prior approval of PCCIT If, in a case falling U/s 270A, the amount of income in respect of which the penalty is
or CCIT or PDGIT or imposed or imposable for the relevant AY or where such disclosure relates to more than
DGIT required in certain one AY, the aggregate amount of such income for those years exceeds Rs. 5L, the PCIT
cases. [S. 273A (2)]. or CIT would be entitled to exercise his power only after getting the previous approval of
the PCCIT or CCIT or PDGIT or DGIT.
6 Power to waive or reduce The CIT may, on an application made in this behalf by an assessee, and after recording
any penalty and to stay his reasons for so doing, reduce or waive the amount of any penalty payable by the
recovery proceedings. [S. assessee under this Act or stay any proceeding for the recovery of any such amount, if
273A (4)]. he is satisfied that—
(i) to do otherwise would cause genuine hardship to the assessee, having regard to
the circumstances of the case; and
(ii) the assessee has co-operated in any inquiry relating to the assessment or any
proceeding for the recovery of any amount due from him:
The ‘genuine hardships’ referred to in S. 273A (4) should exist at the time at which the
application is made by the assessee and should also exist even at the time of passing of
an order U/s 273A (4) by the CIT. [CBDT Circular 784].
7 Time-limit for passing The order U/s 273A (4), either accepting/rejecting the application in full or in part, shall be
order U/s 273A (4). [S. passed within 12 months from the end of the month in which the application U/s 273A (4)
273A (4A)]. is received by the CIT.
No order rejecting the application, either in full or in part, shall be passed unless the
assessee has been given an OBH. [Proviso to S. 273A (4A)].
8 Permission of CCIT or Where the amount of any penalty payable under this Act or, where such application
DGIT is required in relates to more than one penalty, the aggregate amount of such penalties exceeds Rs.1L,
certain cases. [Proviso to no order reducing or waiving the amount or staying any proceeding for its recovery U/s
S. 273A (4)]. 273A (4) shall be made by the CIT except with the previous approval of the CCIT or
DGIT.
9 Order U/s 273A is final. Every order made under this section shall be final and shall not be called into question by
[S. 273A (5)]. any court or any other authority.
10 Constitutional remedy – 1 The order U/s 273A is a final order and no appeal is possible against it.
available. 2 However the assessee can challenge the order passed U/s 273A in the HC
through writ petition.
3 If the CIT has not acted in accordance with law, the Courts will quash the order
passed U/s 273A and direct the CIT to make an order U/s 273A in accordance
with law.
11 Relief U/s 273A (1) - Where an order has been made U/s 273A (1) in favour of any person, whether such order
once in life time. [S. 273A relates to one or more AYs, he shall not be entitled to any relief U/s 273A in relation to
(3)]. any other AY at any time after the making of such order.
12 Re-entry into S. 273A is 1 S. 273A (3) prohibits the assessee from claiming further relief U/s 273A if relief
possible where relief was has already been granted to the assessee U/s 273A (1).
provided initially U/s 2 It does not prohibit the assessee to claim relief U/s 273A (1) or (4) if the relief has
273A (4). already been claimed by the assessee U/s 273A (4).
3 Therefore, the assessee can claim relief U/s 273A (1) or S. 273A (4). [P. K. P.
Mohammed 208 ITR 7 (Ker)].
13 Dropping of prosecution S. 279 (1A) provides that the prosecution proceedings shall be dropped for an AY in
proceedings upon waiver respect of which penalty U/s 271 (1) (c) has been reduced or waived by an order passed
or reduction of by the CIT U/s 273A. [S. 279 (1A)].
concealment penalty.
10. Unexplained cash credit – S. 68:

S. 68 Where any sum is found credited in the books of an assessee maintained for any PY, and the assessee offers
no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of
the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that
PY.

1st Proviso However, where the assessee is a company, (not being a company in which the public are substantially
to S. 68 interested) and the sum so credited consists of share application money, share capital, share premium or any
such amount by whatever name called, any explanation offered by such assessee-company shall be deemed
to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company
also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the AO aforesaid has been found to be satisfactory
2nd Nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is
Proviso to recorded, is a VCF or a VCC
S. 68

Chapter-46: Equalisation levy - Summary
Equalisation levy – Chapter VIII in the Finance Act, 2016:

1 Basis for levy In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled "Equalisation
Levy", provides for an equalisation levy of 6% of the amount of consideration for specified services
received or receivable by a NR not having PE in India, from a resident in India who carries out
business or profession, or from a NR having PE in India.
Every person, being a resident and carrying on business or profession or a NR having a PE in
India shall deduct equalisation levy from the amount paid or payable to a NR in respect of the
specified service.
2 Meaning of Specified Specified service means
Service (i) Online advertisement;
(ii) Any provision for digital advertising space or any other facility or service for the purpose
of online advertisement;
(iii) Any other service as may be notified by the CG.
3 Relief to small In order to reduce burden of small players in the digital domain, it is also provided that no such
players in the digital levy shall be made if the aggregate amount of consideration for specified services received or
domain receivable by a NR from a person resident in India or from a NR having a PE in India does not
exceed Rs. 1L in any PY.
Further, equalisation levy shall not be charged where the payment for the specified service by the
person resident in India or the PE in India, is not for the purposes of carrying out business or
profession.
4 Time period for The equalisation levy so deducted during any calendar month shall be paid by every assessee to
remittance of the credit of the CG by the 7th of the month immediately following the said calendar month.
equalisation levy Equalisation levy deducted during any calendar month is to be paid to the credit of the Central
Government by remitting it to the Reserve Bank of India or the State Bank of India or any other
authorised bank, accompanied by an equalisation levy challan.
5 Consequence of Any assessee who fails to deduct equalization levy shall, notwithstanding such failure, be liable
failure to deduct to pay the levy to the credit of the CG by the 7th of the month immediately following the said
equalisation levy calendar month. Thus, if the assessee responsible for deducting equalisation levy, fails to so
deduct, he has, in any case, to pay such levy to the credit of the CG by the 7th of the month
immediately following the said calendar month.
6 Interest on delayed Every assessee, who fails to credit the equalisation levy or any part thereof within 7 th of the month
payment of following the calendar month in which it is deducted to the account of the CG, shall pay simple
equalisation levy. interest at the rate of 1% of such levy for every month or part of a month by which such crediting of
the tax or any part thereof is delayed.
7 Penalty for failure to Situation Narration of the situation Penalty
deduct or pay 1 Failure to deduct equalisation In addition to payment of equalisation levy and
equalisation levy. levy interest, penalty equal to the amount of
equalisation levy that he failed to deduct would
be leviable.
2 Failure to remit equalisation levy In addition to paying the equalisation levy and
to the CG on or before 7 of the interest, a penalty of Rs. 1,000 for every day
following month, after deduction. during which the failure continues is leviable.
However, such penalty shall not exceed the
amount of equalisation levy that he failed to
pay.
8 Exemption U/s 10 In order to avoid double taxation, S. 10 (50) provides exemption of any income arising from
(50) providing any specified service on or after the date on which the provisions of Chapter VIII of the
Finance Act, 2016 comes into force, and chargeable to equalisation levy under that Chapter.
9 Disallowance U/s 40 In order to ensure compliance with the provisions this Chapter, S. 40 (a) (ib) provides that if any
(a) (ib) consideration is paid or payable to a NR for a specified service on which equalization levy is
deductible, and such levy has not been deducted or after deduction, has not been paid on or
before the due date U/s 139 (1), then, such expenses incurred by the assessee towards
consideration for specified service shall not be allowed as deduction.
However, where in respect of such consideration, if the equalization levy has been deducted in any
subsequent year or has been deducted during the previous year but paid after the due date
specified U/s 139 (1), such sum shall be allowed as deduction in computing the income of the PY
in which such levy has been paid.

Chapter-47: Statement of financial transaction or reportable account - Summary
Obligation to furnish statement of financial transaction or reportable account [S. 285BA]:

The statement of financial transaction required to be furnished U/s 285BA (1) shall be furnished by every person mentioned
in column (3) of the Table below in respect of all the transactions of the nature and value specified in the corresponding
entry in column (2) of the said Table, which are registered and recorded by him on or after 1st April, 2016.
SN Nature and value of transaction Class of person (reporting person)
1. (a) Payment made in cash for purchase of bank drafts or A banking company or a co-operative bank to which the Banking
pay orders or banker’s cheque of an amount Regulation Act, 1949 applies (including any bank or banking
aggregating to Rs. 10L or more in a FY. institution referred to in section 51 of that Act)
(b) Payments made in cash aggregating to Rs. 10L or
more during the financial year for purchase of pre-paid
instruments issued by RBI under the Payment and
Settlement Systems Act, 2007.
(c) Cash deposits or cash withdrawals (including
through bearer’s cheque) aggregating to Rs. 50L or more in a
financial year, in or from one or more current account of a
person.
2. Cash deposits aggregating to Rs. 10L or more in a financial (i) A banking company or a co- operative bank to which the
year, in one or more accounts (other than a current account Banking Regulation Act, 1949 applies (including any bank
and time deposit) of a person. or banking institution referred to in section 51 of that Act);
(ii) Post Master General as referred to in the Indian Post
Office Act, 1898.
3. One or more time deposits (other than a time deposit made (i) A banking company or a co- operative bank to which the
through renewal of another time deposit) of a person Banking Regulation Act, 1949 applies (including any bank
aggregating to Rs. 10L or more in a financial year of a or banking institution referred to in section 51 of that Act);
person. (ii) Post Master General as referred to in the Indian Post
Office Act, 1898;
(iii) Nidhi referred to in section 406 of the Companies Act,
2013;
(iv) NBFC which holds a certificate of registration under
section 45- IA of the Reserve Bank of India Act, 1934, to
hold or accept deposit from public.
4. Payments made by any person of an amount aggregating to- A banking company or a co-operative bank to which the Banking
(i) Rs. 1L or more in cash; or Regulation Act, 1949 applies (including any bank or banking
(ii) Rs. 10L or more by any other mode, against bills raised in institution referred to in section 51 of that Act) or any other
respect of one or more credit cards issued to that person, company or institution issuing credit card.
in a financial year.
5. Receipt from any person of an amount aggregating to Rs. 10L A company or institution issuing bonds or debentures.
or more in a financial year for acquiring bonds or debentures
issued by the company or institution (other than the amount
received on account of renewal of the bond or debenture
issued by that company).
6. Receipt from any person of an amount aggregating to Rs. 10L A company issuing shares
or more in a financial year for acquiring shares (including
share application money) issued by the company.
7. Buy back of shares from any person (other than the shares A company listed on a recognised stock exchange purchasing its
bought in the open market) for an amount or value own securities under section 68 of the Companies Act, 2013.
aggregating to Rs. 10L or more in a financial year.
8. Receipt from any person of an amount aggregating to Rs. 10L A trustee of a Mutual Fund or such other person managing the
or more in a financial year for acquiring units of one or more affairs of the Mutual Fund as may be duly authorised by the
schemes of a Mutual Fund (other than the amount received trustee in this behalf.
on account of transfer from one scheme to another scheme of
that Mutual Fund).
9. Receipt from any person for sale of foreign currency including Authorised person as referred to in section 2(c) of the Foreign
any credit of such currency to foreign exchange card or Exchange Management Act, 1999.
expense in such currency through a debit or credit card or
through issue of travelers cheque or draft or any other
instrument of an amount aggregating to Rs. 10L or more
during a financial year

Chapter-47: Statement of financial transaction or reportable account - Summary
10. Purchase or sale by any person of immovable property for an Inspector-General appointed under the Registration Act, 1908 or
amount of Rs. 30L or more or valued by the stamp valuation Registrar or Sub-Registrar appointed under that Act
authority referred to in section 50C at Rs. 30L or more
11. Receipt of cash payment exceeding Any person who is liable for audit under section 44AB of the
Rs. 2L for sale, by any person, of goods or services of any Act.
nature (other than those specified at Sl. Nos. 1 to 10 of this
rule, if any).
12. Cash deposits during the period 9.11.2016 to 30.12.2016 (i) A banking company or a co- operative bank to which the
aggregating to – Banking Regulation Act, 1949 applies (including any
(i) Rs. 12.50 lakhs or more, in one or more current bank or banking institution referred to in section 51 of that
account of a person; Act)
(ii) Rs. 2.50 lakhs or more, in one or more accounts (other
than current account) of a person
Post Master General referred to in the Indian Post Office
(ii) Act, 1898
13. Cash deposits during the period 1.4.2016 to 9.11.2016 in (i) A banking company or a co- operative bank to which the
respect of accounts that are reportable under Sl. No.12 Banking Regulation Act, 1949 applies
Post Master General referred to in the Indian Post Office

(ii) Act, 1898

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Preface

It is a great pleasure in presenting this Summary Book on Direct

I am thankful to my friend Prof. S. S. Rajagopal FCA, Grad CMA, for

R. Soumyanarayanan FCA, Grad CMA

2 Issues in Salary 7-8

3 Issues in IFHP 9-10

4 Taxation of gifts 11-13

5 Capital gains 14-58

5A Chapter VI A deductions 59-67

5C Miscellaneous amendments 73-73

6 S. 269SS, S.269T, S. 269ST 74-76

7 Business Trust 77-79

8 Mutual fund 80-81

9 New Pension Scheme 82-82

10 Electoral Trust 83-83

11 Taxation of NRI 84-85

12 Taxation of non-resident sportsmen etc 86-86

14 Taxation of overseas financial organization 88-88

15 Assessment of Co-operative society 89-90

16 Taxation of dividend 91-95

17 Assessment of Trust 96-108

18 Assessment of political parties 109-109

19 Clubbing provisions 110-114

20 Assessment procedure 115-151

21 Advance tax Interest under S. 234A, S. 234B and 152-157

22 Refund and interest under S. 244A 158-160

23 Revisionary Powers of CIT 161-164

24 Assessment of AOP & BOI 165-168

25 Assessment of Firm 169-172

26 Investment fund 173-174

27 Securitisation Trust 175-175

28 Collection and recovery 176-182

29 Liabilities in special cases 183-187

32 Set off and carry forward of losses 211-215

33 Restriction on carry forward of losses 216-217

35 Settlement commission 220-227

36 Advance Ruling 228-231

38 Profit linked deductions and investment linked 239-249

39 Alternate minimum tax 250-251

40 Double Taxation Avoidance Relief 252-256

41 Transfer pricing 257-272

43 Taxation of non-residents 277-300

45 Penalty for under-reporting and mis-reporting 342-349

46 Equalisation levy 350-350

47 Statement of financial transaction or reportable 351-352

1. Tax rates applicable for AY 2019-20:

(c) Super-senior citizen:

(d) Co-operative society:

(e) Firm/Indian LLP:

(f) Local authority:

MT Educare – CA Final DT Classes – R. SOUMYANARAYANAN. FCA. GRAD CWA. Page-1

Applicability of Health & Education cess (HEC):

2. Rebate U/s 87A:

C. Computation of marginal relief in case of domestic companies:

MT Educare – CA Final DT Classes – R. SOUMYANARAYANAN. FCA. GRAD CWA. Page-2

3 TI – Rs. 100L (****) 3 TI – Rs. 1000L (****)

D. Computation of marginal relief in case of foreign companies:

4. Tax treatment of various receipts:

MT Educare – CA Final DT Classes – R. SOUMYANARAYANAN. FCA. GRAD CWA. Page-3

modification of the terms and conditions of any

25 Tax treatment of refund of GG-1 Increase the actual cost or WDV.

5. Basic principles clarifying the concept of income:

6. Important rulings in mutuality:

3 TI – Rs. 100L () 3 TI – Rs. 1000L ()