Income Tax Act, 1961

Chapter 1 – Basic Concepts

Topics covered in this Chapter:
 Overview of Income Tax Law
 Important Definitions
 Previous Year and Assessment Year
 Tax Rates

Overview of Income Tax Law:

 Article 265 of Constitution of India – “No tax shall be levied or collected except by authority
of Law.”
 Entry 82 of Union List (List 1) in the Seventh Schedule of Article 246 gives power to CG to
make law on taxes on income other than agricultural income.
 It extends to whole of India and came into force on 1st April 1962
 Section 1 to 298 and Schedule I to XIV
 Introduction to Finance Act and parts thereof.
 Income Tax Law = IT Act + Finance Act + IT Rules + Circulars + Notifications + Case Laws

General Rule of Taxation

Income of PY is assessed in the following PY.

Exception (i.e., Income of PY is assessed in that PY itself) [LE TDS]

1. Shipping business of NR
2. Person Leaving India (in opinion of AO)
3. AOP/BOI or Artificial Juridicial person formed for particular Event or purpose.
4. Person likely to Transfer property to avoid tax.
5. Discontinued business

Definitions:

1. Person (Section 2(31)):

Individual HUF Firm Company AOP/BOI

Artificial Juridicial Person Local Authority

HUF
There need not be more than 1 male member to form HUF as taxable entity. Under the Hindu
law, a joint family may consist of single male member and the widows of the deceased male
members, and the Act does not mandate that it should consist at least 2 male members.
 Company [Section 2(17)]

Class of
companies

Domestic Foreign

Indian co. i.e., Formed and Other co. which in respect of

Registered under Co. Act income liable to income tax has Co. other than
1956 AND has RO or made arrangements for payment of domestic.
principal office - India dividend within India

Income Tax Rates and Surcharge:

[Applicable w.e.f. AY 2024-25]

For Individuals, HUF, AOP, BOI and Artificial Juridicial Person:

(1) Individual [other than (2) and (3) below] or HUF or AOP or BOI or Artificial Juridicial Person,
whether Resident or not:
Where total income: Rate of Tax
<= Rs. 250,000 Nil
> 250,000 but <= 500,000 5%
> 500,000 but <= 10,00,000 20%
> 10,00,000 30%

(2) Resident Individual (age 60 years or more but less than 80 years):
Where total income: Rate of Tax
<= Rs. 300,000 Nil
> 300,000 but <= 500,000 5%
> 500,000 but <= 10,00,000 20%
> 10,00,000 30%

(3) Resident Individual (age 80 years or more):

Where total income: Rate of Tax
<= Rs. 500,000 Nil
> 500,000 but <= 10,00,000 20%
> 10,00,000 30%

Clarification – A person who has attained age of 60 years or 80 years on 1st April of 2023 shall be
eligible for higher basic exemption limit starting from PY 2022-23 itself i.e., AY 2023-24.
Therefore, if a person is born on 1st April 1964/1944, then he shall get slab benefit of Rs. 3
lakhs/Rs. 5 lakhs in PY 31/3/2024

Concept Clarity Check:

For Mr. John aged 83 years, the basic exemption limit will be?
Answer – If Mr. John is a NR, then Rs. 250,000 but if Mr. John is Resident, then Rs. 500,000.
Rates given in point (1) above is applicable for both R and NR whereas rates given in point (2) and
(3) applies only to R.

Surcharge:
Where total income (excluding Dividend Rate of Tax
Income, 111A, 112, 112A):
Upto 50 lakhs NIL
> 50 lakhs but <= 1 crore 10%
> 1 crore but <= 2 crores 15%
> 2 crores but <= 5 crores 25%
> 5 crores 37%

Note –
1. In case where the total income including dividend income, 111A, 112 or 112A exceeds Rs. 2
crores, the rate of surcharge shall be as follow:
Surcharge
On dividend income, 111A, 112 or 112A 15%
On the balance income (excluding 111A etc.)
Upto 2 crores 15%
2 crores – 5 crores 25%
Above 5 crores 37%

2. In case of AOP consisting of ONLY companies as its member, surcharge shall not > 15%

Example:
PGBP Rs. 90 lakhs
LTCG u/s 112A Rs. 65 lakhs
STCG u/s 111A Rs. 50 lakhs
Total Income Rs. 205 lakhs
Assess the income tax liability for PY 2023-24.

Solution:
Tax @ 10% on 112A (Rs. 1 lakh exempt) 6,40,000
Tax @ 15% on 111A 7,50,000
Tax on PGBP (slab rate) 25,12,500
Total Tax 39,02,500

Surcharge:
On 112A and 111A income @15% 2,08,500
 [15% of (6,40,000+7,50,000)
On PGBP income 3,76,875
[@15% as amount is less than 2 crores]
44,87,875
Add Health and Education Cess 4% 1,79,515
Total Tax 46,67,390

For Co-operative society:

Where total income: Rate of Tax
<= 10,000 10%
> 10,000 but <= 20,000 20%
> 20,000 30%

Surcharge:
Where total income: Rate of Tax
> 1 crore but <= 10 crore 7%
> 10 crores 12%

For Firms:
On the whole of total income 30%

Surcharge:
Where total income: Rate of Tax
> 1 crore 12%

For Local Authority:

On the whole of total income 30%

Surcharge:
Where total income: Rate of Tax
> 1 crore 12%

For Companies:
(1) In case of a domestic company:
Where total turnover or gross receipt in PY 25%
2020-21 does not exceed Rs. 400 crores
Other cases 30%

(2) In case of company other than domestic company:

On so much of total income consisting of: 50%
(a) Royalties from Government or Indian concern in pursuance of agreement
made between 1/4/1961 to 31/3/1976.
(b) Fees for technical services received from Government or Indian concern
in pursuance of agreement made between 1/3/1964 to 31/3/1976
On the balance income 40%
Surcharge:
Where total income: Domestic Company Foreign Company
> 1 crore but <= 10 crore 7% 2%
> 10 crores 12% 5%

Special Tax Rates:

Section Income Tax Rate
No.
112 LTCG (other than LTCG taxable u/s 112A) 20%
112A LTCG (in excess of Rs. 1 lakh) on transfer of: 10%
 Equity shares in a company
 Units of equity-oriented fund
 Units of business trust

Provided that, STT has been paid on such capital assets.

111A STCG on transfer of: 15%
 Equity shares in a company
 Units of equity-oriented fund
 Units of business trust

Provided that such sale is made on or after 01.10.2004

and STT has been paid on such capital assets.
115BB Winnings from Lotteries, crossword puzzles, race 30%
including horse races, card games, gambling, or betting of
any form.
115BBE Unexplained money, investment, expenditure, etc. 60%

Concept of Marginal Relief:

In case of surcharge:
Where total But does not
In case of: Surcharge shall be restricted to:
income exceeds exceed
(Tax on Rs. 50 lakhs) + (Total income –
Rs. 50 lakhs Rs. 1 crore
Rs. 50 lakhs)
(Tax on Rs. 1 crore with surcharge 10%)
Rs. 1 crore Rs. 2 crores
+ (Total income – Rs. 1 crore)
Individual and HUF
(Tax on Rs. 2 crores with surcharge
Rs. 2 crores Rs. 5 crores
15%) + (Total income – Rs. 2 crores)
(Tax on Rs. 5 crores with surcharge
Rs. 5 crores -
25%) + (Total income – Rs. 5 crores)
Local authority and (Tax on Rs. 1 crore) + (Total income – Rs.
Rs. 1 crore
co-operative society 1 crore)
Domestic or Foreign (Tax on Rs. 1 crore) + (Total income – Rs.
Rs. 1 crore Rs. 10 crores
Co. 1 crore)
(Tax on Rs. 10 crores with surcharge
Domestic company Rs. 10 crores -
7%) + (Total income – Rs. 10 crore)
(Tax on Rs. 10 crores with surcharge
Foreign Company Rs. 10 crores -
2%) + (Total income – Rs. 10 crore)
Example of marginal relief:
Assume case of resident individual of age 32 years:
Case Total income Income Tax Surcharge Total Restricted to
1 50,00,000 13,12,500 - 13,12,500 -
2 50,10,000 13,15,500 1,31,550 14,47,050 13,22,500
3 51,00,000 13,42,500 1,34,250 14,76,750 14,12,500
4 52,00,000 13,72,500 1,37,250 15,09,750 -
5 1,00,00,000 28,12,500 2,81,250 30,93,750 -
6 1,01,00,000 28,42,500 4,26,375 32,68,875 31,93,750
7 1,03,00,000 29,02,500 4,35,375 33,37,875 -

Section 87A: Rebate in case of Individual Resident:

In case of a resident individual whose total income <= Rs. 5 lakhs, he shall be eligible for a
deduction of Rs. 12,500 or amount of Income tax whichever is LOWER.

Provided that, where tax is chargeable u/s 115BAC and total income does not exceed Rs. 7 lakhs,
he shall be eligible for a deduction of Rs. 25,000 or the amount of Income tax whichever is
LOWER from the amount of Income tax.

Marginal relief under new tax regime (u/s 115BAC)

Where total income exceeds Rs. 7 lakhs and the income tax payable on such total income exceeds
(Total income less Rs. 7 lakhs), the assessee shall be eligible for a deduction of
[Tax payable – (Total income – Rs. 7 lakhs)]

Example:
Particulars Case 1 Case 2 Incremental
Total income 7,00,000 7,05,000 5,000
Tax Payable 25,000 25,500 -
Rebate u/s 87 25,000 0 -
Marginal Relief - 20,500 -
Net Tax Payable - 5,000 5,000
Note – Rebate u/s 87A not available in respect of tax payable u/s 112A @ 10%.

Health and Education Cess: 4% of (tax including surcharge)

Rounding off: Taxable income and tax payable shall be rounded off to nearest multiple of 10.
Example= Rs. 10,004 becomes Rs. 10,000 and Rs. 11,205 becomes Rs. 11,210.

Revenue Receipt vs Capital Receipt:

 Revenue receipts are considered as income and taxable under this Act. (E.g., Profit on sale of
goods, interest income, etc.)
 Cap. receipts are taxable only to extent specifically mentioned in the Act (such as cap. gain)
 Other capital receipts not specifically mentioned are not taxable in this act.
Example – Compensation for delay in delivery of capital asset.
Application of income vs Diversion of income:
Income when diverted (by overriding title) before reaching assessee is called as diversion of
income, whereas when the income is applied after it reaches the assessee, either due to
contractual obligation or exercise of discretion, it is called as application of income.

Note: Application of income is taxable in the hand of assessee whereas diversion of income is not.

Example:
1. I paid my first month salary to a relative – This is the case of application of income as there is
no contractual obligation.
2. R, A and M are partners in a firm. R was asked to resign. As per the terms of the resignation, it
was included in the deed that 10% of the profit of the firm will be given to Mrs. R. This is case
of diversion of income and such 10% shall not be taxable in hands of firm.
3. In case of a lottery, as per the lottery agreement certain percentage of the first prize is to be
paid to the state government and the lottery agent. In this case, the lottery income is subject
to a legal obligation and therefore the amount paid to the state government and lottery agent is
on account of a legal obligation. Therefore, the said amount is not taxable in the hands of winner.
[Refer Illustration 1 and 2 of ICAI Module]

Significant case laws:

CIT vs Saurashtra Cement Ltd. (2010 – SC)
Issue Whether Liquidated damages received by company from supplier for failure to supply
machine within stipulated time is capital receipt or revenue receipt?
Decision  Damages are directly linked with capital assets (i.e., cement plant)
 It was not a receipt in course of profit earning process.
 Therefore, such receipt is not in OCOB hence it is a capital receipt.
AuthorÕs Section 28(ii)(e) shall not apply here as compensation is neither due to termination
Note nor due to modification of original contract. The original contract still holds good and
hence this compensation is not taxable.

Honda Siel Cars India Ltd. v CIT (2017 – SC)

Issue Whether technical fee paid under agreement for setting up JV in India is revenue or
capital expenditure where upon termination of agreement, JV would come to an end?
Decision It is capital expenditure in nature.

CIT v M. Venkateswara Rao (2015)

Issue Can capital contribution of individual partner in the books of firm be taxed as cash
credit in hands of firm where partners have admitted their contribution but failed to
explain the source of such receipts in individual hands?
Decision  Section 68 cannot be pressed against the firm.
 At most, enquiry can be made against individual partner and not firms when
partners have admitted capital contribution.
 In the absence of any material to indicate that they are profits of the firm, cash
credits cannot be assessed in hands of the firm though it may be assessed in
hands of the individual partner.
 Chapter 6 – Profits and Gains of Business or Profession
[Section 28 to 44DB]

Meaning of Business and Profession

Business Includes any trade, commerce or manufacture or any adventure or concern in the
[2(13)] nature of trade, commerce or manufacture
Profession Includes vocation.
[2(36)] (It means an occupation requiring some degree of learning)

Note:

1. Voluntary receipts are taxable in the hands of recipient.

2. Capital receipts are generally not included in this head.
3. To attract Sec 28, it is necessary to carry business or profession at least some time during the
year but not necessarily throughout the year.
4. Assessee-owner need not carry on the business personally to attract sec 28. It should be
under his direction and control.
5. Illegality of income does not exempt it from taxation.

Section 145: Method of accounting

(1) Income chargeable under PGBP and IFOS shall be computed as per either cash or mercantile
system of accounting regularly employed by assessee.
(2) CG may notify in the official gazette Income Computation and Disclosure Standard (ICDS) to
be followed by class of assessee.
CG hereby notifies 10 ICDS applicable to all assessees following mercantile system of
accounting (other than individual/HUF not required to get audited u/s 44AB)
(3) Where AO is not satisfied about the correctness or completeness of accounts or method of
accounting or compliance of ICDS – AO may make assessment u/s 144

145A 145B and ICDS pending.

Section 28: Charging section of PGBP:

The following income shall be chargeable under the head PGBP:
(i) Profits and gains of any business or profession carried on by assessee at any time during PY
(ii) Any compensation or other payment due to or received by:
a. any person, by whatever name called, managing the whole or substantially the whole of
affairs of Indian co., at or in connection with termination of his management or
modification of T&C relating thereto.
b. any person, by whatever name called, managing the whole or substantially the whole of
affairs in India of any other co., at or in connection with termination of his management
or modification of T&C relating thereto.
c. any person holding an agency in India for any part of the activities relating to the
business of any person, at or in connection with termination of agency or modification of
T&C relating thereto.
 d. any person, for or in connection with the vesting in the Government, or in any
corporation owned or controlled by the Government, under any law for the time being in
force, of the management of any property or business;
e. 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.
(iii) Income derived by a trade, professional or similar association from specific services
performed for its members.
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955 made under
Imports and Exports (Control) Act, 1947; [E.g. – Replenishment license]
(iiib) cash assistance received or receivable by any person against exports under any scheme of
the Government of India [Cash compensatory support]
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against
exports under the Customs and Central Excise Duties Drawback Rules, 1971;
(iiid) any profit on transfer of Duty Entitlement Pass Book Scheme, being Duty Remission Scheme
under export & import policy of Foreign Trade (Development and Regulation) Act, 1992;
(iiie) any profit on transfer of Duty Free Replenishment Certificate, being Duty Remission Scheme
under export & import policy of Foreign Trade (Development and Regulation) Act, 1992;
(iv) the value of any benefit or perquisite arising from business or profession whether:
a. convertible into money or not; or
b. in cash or in kind or partly in cash and partly in kind.
(Ex: FMV of air tickets to Thailand as incentive for meeting targets or business loans waived)
[Amendment FA 2023]
(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.
Provided that where such amount has not been allowed to be deducted under section 40(b),
income under this clause shall be adjusted to the extent of amount not so allowed to be
deducted.
(va) any sum, whether received or receivable, in cash or kind, under an agreement for:
a. not carrying out any activity in relation to any business or profession. (E.g., Non-compete)
Understanding non-compete fees taxation:
PVR pays Rs. 10 crores to Mukta Cinema as non-compete fees.
In hands of Mukta – Rs. 10 crores is PGBP income and taxable (not capital receipt)
PVR – Rs. 10 crores is an intangible asset depreciable at 25% (discussed later)

b. Not sharing any know-how, patent, copyright, trademark, license, franchise or any other
business or commercial right of similar nature or information or technique likely to assist
in manufacturing or processing of goods or provision for services.

Provided that sub-clause (a) shall not apply to:

(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the
right to manufacture, produce or process any article or thing or right to carry on any
business, or profession which is chargeable under the head "Capital gains"
(Note – Generally transfer of patent, etc. is taxable under capital gain but this is sum
received for not sharing)
 (ii) any sum received as compensation, from multilateral fund of the Montreal Protocol on
Substances that Deplete the Ozone layer under United Nations Environment Programme,
as per the terms of agreement entered into with the Government of India. (Tax carbon
credits @10% u/s 115BBG. No deduction shall be allowed)

(vi) any sum received under a Keyman insurance policy (as per section 10(10D)) including sum
allocated by way of bonus on such policy;
(via) the fair market value of inventory as on the date on which it is converted into, or treated as,
a capital asset determined in the prescribed manner;

(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset
(other than land or goodwill or financial instrument) being demolished, destroyed, discarded
or transferred, if whole of expenditure thereon has been allowed as a deduction u/s 35AD;

Explanation: Where speculative transactions carried on by an assessee are of such a nature

as to constitute a business, the business (hereinafter referred to as "speculation business")
shall be deemed to be distinct and separate from any other business.

Speculative transaction [Section 43(5) read with Section 73] –

It means a transaction in which a contract for purchase or sale of any commodity, including stock
and shares, is settled otherwise than by actual delivery.

Following shall not be deemed to be speculative transaction:

 a contract in respect of raw materials entered in course of manufacturing to guard against
loss through future price fluctuation for actual delivery.
 a contract in respect of stock and shares entered into by a dealer to guard against loss in his
holdings through price fluctuation.
 a contract by member of forward market or stock exchange in the nature of arbitrage to
guard against loss in OCOB.
 an eligible transaction w.r.t. trading in derivatives carried out in recognised stock exchange.
 an eligible transaction w.r.t. trading in commodity derivatives carried out in RSE chargeable
to commodities transaction tax (CTT).
Note – For trading in agricultural commodity derivatives, requirement of CTT not applicable.

Note relating to Section 9B: (related to capital gain)

 Where a specified person, being partner of a firm or member in other AOP/BOI receives
during PY any stock in trade from such firm/AOP or BOI w.r.t. the dissolution or reconstitution
of such entity, then such entity shall be deemed to have transferred such stock in trade to the
specified person in the year in which such stock in trade are received by the specified person.
 Profits from such deemed transfer shall be taxable in hands of specified entity under PGBP in
the year of receipt by specified person.

Section 29: Charging section of PGBP:

The income referred to in section 28 shall be computed in accordance with the provisions
contained in sections 30 to 43D.
 Computation of Income from Business or Profession (Sec 29)

Admissible Inadmissible Expenses not deductible Profits

Other
deduction deduction in certain cases chargeable to tax
provisions
(Sec 30 to 37) (Section 40) (Sec 40A) (Section 41)

Section 30: Rent, rates, taxes, repair and insurance for buildings
In respect of:
Rent Rates Taxes Repairs Insurance for premises
used for the purposes of the business or profession, the following deductions shall be allowed:
(a) where the premises are occupied by assessee:
(i) as a tenant - rent paid + amount of repairs undertaken to bear;
(ii) otherwise (i.e., owner) - amount paid for current repairs;
(b) land revenue, local rates, or municipal taxes (subject to sec 43B);
(c) amount of insurance premium against risk of damage or destruction of the premises.

Explanation: Repair expense mentioned in clause (a) (i) and (ii) shall not include any capital exp.

Concept clarity check:

1. No rental deduction will be allowed in case where assessee is the owner of such property.
2. In case where a firm uses a premises owned by a partner, rent payable to partner will be an
allowable deduction to the extent it is reasonable and not excessive.
3. Cess, rates, and taxes levied by foreign government is also allowed.
4. Premises used partly for business and partly other purpose – Proportionately allowed (as AO
may determine).
5. Amount paid by landlord to tenant for vacating the property is considered as cost of
improvement of building in the hands of landlord.

Summary Da Summary!
Tenant Owner
Revenue Repairs Capital Repairs Revenue Repairs Capital Repairs
Allowed as deduction if Deemed building Deduction shall be Added to the cost of
done as per agreement. and add to block allowed building
Otherwise, deduct u/s 37 for depreciation

Section 31: Repairs and insurance of machinery, plant and furniture

In respect of repairs and insurance of machinery, plants or furniture used for B/P, following
deduction shall be allowed:
(i) current repairs
(ii) insurance premium against risk of damage or destruction thereof.

Note:
1. Current repairs shall not include any capital expenditure. Such capex on P&M:
(i) will be added to actual cost of P&M if such assessee is owner.
(ii) will be disallowed if such P&M is taken on rent.
2. To claim deduction u/s 31, the asset must have been used for purpose of assesseeÕs own
business. “Used” has a wide sense so as to include passive as well as active user.
3. Repair includes renewal or renovation of an asset but not replacement or reconstruction.
4. Insurance premium may even take form of contribution to trade association which undertakes
to indemnify members against loss.
5. Machinery used partly for business and partly other purpose – Deduction as AO may determine.
6. Rent on plant and machinery not covered u/s 31. But covered u/s 37.
Section 32 - Depreciation:
(1) In respect of depreciation of:
buildings, plant and know-how, patents, copyrights, trade marks, licences,
machinery, furniture franchises or any other similar rights, being intangible assets
being tangible assets; acquired on or after 01/04/1998 not being goodwill of a B/P

owned, wholly or partly, by assessee AND used for B/P, following deduction shall be allowed:
(i) in case of asset of an undertaking engaged in generation or generation & distribution of
power – Prescribed % of actual cost.
Note:
 Such assessee have the option to claim depreciation either on SLM or WDV.
 Such option is to be exercised before due date of return u/s 139 (1) and once
exercised, it shall apply to all subsequent AYs.
 In case they opt for SLM, on discarding the asset – Terminal depreciation (in case of
loss) is deductible or Balancing Charge is taxable.
 Terminal depreciation (TD):
o When asset is sold, discarded etc. in PY in which it is first put to use, any loss
arising therefrom is not allowed as TD but is treated as capital loss.
o TD is allowed only if it is actually written off in books of the assessee.
 Balancing charge (BC) u/s 41(2):
o So much of the surplus which is = Amount of depreciation already claimed, is
taxable as balancing charge u/s 41(2) as business income.
o The remaining surplus (if any) is taxable under the head “Capital Gains”
o Where an asset is sold, discarded etc. in PY in which it is first put to use, any
profit thereon will not be chargeable to tax as BC but will be treated as CG.

(ii) in case of block of assets – Prescribed % of WDV

Depreciation in case of succession of firm by company or amalgamation demerger etc:
In such case, depreciation in hands of resulting company shall not exceed amount
calculated as if amalgamation, demerger had NOT taken place.

It is also provided that - depreciation shall be apportioned between two entities in ratio
of number of days for which assets were used by them.

(iia) in case of any new machinery or plant (other than ships and aircrafts) which has been
acquired AND installed (and put to use) after 31/03/2005 by assessee engaged in:
 business of manufacturing or production of any article or thing or
 business of generation, transmission or distribution of power,
a further sum of 20% of actual cost shall be allowed as deduction.

Note – Where undertaking is set up on or after 1/4/2015 in any backward area notified by
CG in state of AP, Bihar, Telangana or West Bengal and acquires and installs any new
machinery or plant for said undertaking during 1/4/2015 to 31/3/2020, 35% additional
depreciation shall be allowed.

Provided further that no deduction shall be allowed if: [UV ROW]

  any machinery or plant which, before installation was used whether in India or outside
India by any other person. [i.e., Second hand]
 any machinery or plant installed in office premises or residential accommodation
(including guest house)
 any office appliances or road transport vehicles
 any machinery or plant, the whole of actual cost of which is allowed as deduction
(whether as depreciation or otherwise) in any PY while computing PGBP income.

Note –
1. Additional dep. is allowed only once and that too in PY in which asset is installed.
2. Additional dep. shall be allowed on computers used in factory.
3. Forklift trucks and cranes mounted on wheels are not road transport vehicles hence
additional depreciation allowed.
4. Additional depreciation shall also be available in case of machinery assembled.

(iii) Terminal depreciation in case of power concerns covered under clause (i):
In case of building, machinery, plant, or furniture (i.e., tangibles) in respect of which
depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished,
or destroyed in PY (other than PY in which it is first brought into use) - Amount by which
the moneys payable in respect of such asset + scrap value, if any, fall short of the WDV.

Provided that such deficiency is actually written off in the books of the assessee.

Note:
1. Partial Depreciation in case where asset is acquired and put to use during PY for < 180 days:
 Normal depreciation restricted to 50% of actual in that PY.
 In case of additional depreciation, 50% will be allowed in that PY and balance 50% will be
allowed in immediately succeeding PY.
Note:
a. Roughly calculated, if asset is put to use after 3rd October, 50% will be allowed.
b. If asset is purchased in PY 23-24 but put to use on 10/10/2024, depreciation in PY 24-25 will
be 50% of actual full depreciation.

2. In case of a company, deduction w.r.t. any block of asset shall be restricted to 75% of the amount
calculated at % on WDV.
3. Ownership (wholly or partly) is important for depreciation.
However, where B/P is carried on building not owned but leased and any capex is incurred for
purpose of B/P on construction of any structure or doing any work by way of renovation or
improvement, this provision shall apply as if said work is a building owned by assessee.
4. "Know-how" means any industrial information or technique likely to assist in:
 manufacture or processing of goods or
 working of a mine, oil-well or other sources of mineral deposits
 including searching for discovery or testing of deposits for the winning of access thereto.
5. Depreciation is compulsory whether or not the assessee claims it.
(But why would the assessee not claim it in the first place?)

6. Participating Interest (PI) by Oil Exploration and Production companies:

  Amount paid for acquiring PI shall neither be treated as cost for acquiring share in
partnership or investment for acquisition of memberÕs interest in AOP or BOI, rather it would
be treated as payment made to acquire underlying assets.
 Amount paid for acquiring PI after reducing cost attributable to tangible assets for purpose
of section 32(1)(i) would be treated as intangible asset (being a business right akin to license)
eligible to claim depreciation under 32(1)(ii).

7. Rule 5(2): Increased rate of depreciation for certain assets:

Where a new machinery or plant is installed for manufacture of article or thing which:
 is manufactured using technology (including any process) or other know-how developed in, or
 is an article or thing invented in,
a laboratory owned or financed by Government or laboratory owned by public sector company or
University recognized by Government,
such asset shall be treated as part of block of asset eligible for depreciation @ 40% of WDV
provided that:
a. right to use such technology has been acquired from the owner of such lab
b. Income tax return of such assessee shall be accompanied by a certificate from Secretary,
Department of Scientific and Industrial Research, GoI to the effect that such article is
manufactured using technology developed in such laboratory or is an article invented therein.
c. Such asset is not used for manufacture of article specified in 11th schedule of the Act.

Concept clarity notes:

1. There is no depreciation on Land. The term building will not include Land.
2. Non-compete fees is considered as intangible asset.
3. The term building includes roads, bridges, wells and tube wells.
4. As per section 43(3):
The term "plant":

Includes - ships, vehicles, books, scientific Not include - tea bushes or livestock
apparatus and surgical equipment used for B/P or buildings or furniture & fittings

5. The term building includes roads, bridges, wells and tube wells.
6. The asset must be “put to use” at any time during PY. However, depreciation is not
proportionate to period of use. Ready to use is not enough to claim depreciation.
7. If asset not put to use – No depreciation but add to block of asset.
8. Use includes passive use. (E.g., Standby equipment - Fire extinguisher or generator)

As per ICDS V – Tangible Fixed Asset:

 Stand-by & servicing equipment are to be capitalised (i.e., add to block of asset and
depreciate @15%)
 Machinery spares shall be charged to the revenue as and when consumed.
 When such spares can be used only in connection with an item of tangible fixed asset and
their use is expected to be irregular, they shall be capitalised.

9. If asset is not exclusively used for B/P – Depreciation allowed proportionately.

10. Depreciation is allowed even if asset is used by person other than owner (E.g., Lessee) provided
such lease is in OCOB.
11. Registration of name under the Registration Act is not determinative of ownership. What has
to be seen is beneficial ownership.
12. Block of asset simply means same class of asset with same rate of depreciation.
13. Business of printing or printing and publishing amounts to manufacture of article or things.
14. Treatment in case of Lease:
Irrespective of the treatment under Accounting standards and irrespective of whether it is
operating or finance lease, under Income Tax act, depreciation shall always be claimed by
LESSOR.
As per AS, under operating lease, depreciation is claimed by lessor vs under financial lease, it is
claimed by Lessee.

Lease Hire Purchase

Lessor to claim depreciation Hirer (lessee) to claim depreciation
Lease rentals to be shown as income in hands Financing charges inherent in instalments will
of lessor and allowable expense for lessee. be taxed as the hire-vendorÕs income and
allowed as the hirerÕs expense.
At the end of the lease, the asset is At the end of hire purchase, the hirer has
transferred back to the lessor the right to buy asset at nominal price.

15. Revaluation of asset is irrelevant for Income Tax Act. Only actual cost is relevant.
16. In case where asset is partly used for business and partly for personal use – Depreciation shall
be allowed in such proportion as AO may determine.

Summary of Depreciation Rates as per Appendix I: (Detailed sheet attached at the end)
1. Buildings:
Residential – 5%; General – 10%; Temporary Structures – 40%
2. Furniture and Fittings: 10%
3. Plant and Machinery
General (including Oil wells) 15%
Mobile Phone and EPABX 15%
Ship 20%
Motor Cars 15%
[If acquired and put to use between 23/8/19 – 31/3/20] 30%
Motor vehicles used for Hire. 30%
[If acquired and put to use between 23/8/19 – 31/3/20] 45%
Books 40%
Renewable Energy Devices; Air pollution control equipments 40%
Computer including computer software* (including peripherals 40%
such as UPS, printer, etc.
*Payment made for purchase or development of computer software is treated as royalty u/s
9 and is fully allowable as deduction u/s 37(1)
4. Intangible asset – 25%

Concept clarity check:

Tata Motors Ltd. (lessor) leased some motor cars to Akbar Travels Ltd. who is using such motor
cars for running them on hire. Who will claim the depreciation and rate? – Lessor @ 15%30%

Section 43(6) – Written Down Value

WDV = Actual Cost Less Depreciation Actually Allowed.

Note:
1. Unabsorbed depreciation u/s 32(2) shall be deemed to be depreciation actually allowed.

2. Where income of assessee is derived partly from agriculture and partly from business, for
computing WDV, total depreciation shall be computed as if entire income is derived from
business and such depreciation shall be deemed to be depreciation actually allowed.
Rule 8: Income from manufacture of tea – Only 40% of income is liable to tax.

3. WDV cannot be negative.

4. Amendment vide Finance Act 2021:
Where the block of asset as on 1st April 2020 includes goodwill, the depreciated amount of
goodwill (as if goodwill were the only asset in the block) shall be deducted from the block.
5. Succession other than death
WDV in hands of successor = WDV in hand of party succeeded to.
6. Moneys payable means sale price of the asset and shall include insurance, salvage or
compensation. (on accrual basis). No expense on transfer will be adjusted against this.
Illustration:
WDV of block of asset – Rs. 10 lakhs
Asset sold – Rs. 2 lakhs
Expense on sale – Rs. 50,000
How much amount will be adjusted in the block?

Solution:
Amount to be adjusted in block = Gross sale consideration i.e., Rs. 2 lakhs.
The expense of Rs. 50,000 shall be allowed as revenue expenditure u/s 37

Calculation of WDV (format):

WDV of block in immediately preceding PY (PY 2022-23) XX
Less: Depreciation actually allowed in PY 22-23 (XX)
WDV of block at the beginning of the PY (PY 23-24) XX
Add: Actual cost of assets acquired during the PY 23-24 XX
Less: Moneys payable on assets which are sold, discarded or amount of scrap value (XX)
Less: Actual cost of asset transferred by slump sale (XX)
WDV of block for beginning of next FY XX

Section 43(1) – Actual Cost

Actual Cost = Actual cost of asset (-) Portion of cost met by any other person or authority.

Note – Payments made in a day, otherwise than by account payee cheque or account payee bank
draft or electronic clearing system, > Rs. 10,000 – Ignore such payment for purpose of actual cost.

Explanation:
1. Asset used in business after it ceases to be used scientific research:
Amount to be added to block = Actual cost less deduction allowed u/s 35(1)(iv)
In effect, the amount to be added shall be NIL as 100% deduction can be claimed u/s 35(1)(iv)
1A. Inventory converted into capital asset u/s 28(via) and used for B/P
Actual cost = FMV of such asset as on date of conversion.

Illustration:
Lodha Developers had purchased a building on 1st April 2015 for Rs. 10 lakhs and was held as
stock in trade. As on 31st March 2023, the building continued to be valued at Rs. 10 lakhs. On
15/12/2023, Lodha Developers decided to use the building for business purpose and hence
converted it into capital asset. FMV on 15/12/2023 is Rs. 15 lakhs. Discuss implication.

Solution:
1. Business income under PGBP = Rs. 5 lakhs
2. Actual cost to be added in block = Rs. 15 lakhs
3. Depreciation for PY 23-24 @ 5% (because asset used for < 180 days)

2. Where asset is acquired by way of Gift or Inheritance:

Actual cost = Actual cost to previous owner (-) Depreciation allowable as if this asset was the
only asset in the relevant block of assets.

Note: Section 56(2)(x) is not attracted in case of gift of machinery. [To be discussed later]

3. Second hand asset:

Where the asset was used by any other person for B/P and AO is satisfied that such asset is
acquired by the assessee for reduction of income tax liability in hands of assessee (by claiming
depreciation on enhanced cost):
Actual cost = Amount determined by AO (with previous approval of JC)

Note – Where the AO changes actual cost in the hands of assessee, it will NOT impact the sale
price of the seller from whom such asset is acquired.
Example - Mr. A sold an asset of Rs. 10 lakhs to Mr. B for Rs. 1 crore. The AO may consider
actual cost in hands of Mr. B to be Rs. 15 lakhs (say). But that would not impact the sale price
of Mr. A. He will still have to pay taxes as if asset is sold for Rs. 1 crore.

4. Re-acquired asset used for B/P:

Actual cost on re-acquisition shall be LOWER of:
 Actual cost when he first acquired it (-) depreciation allowable as if such asset was the
only asset in the block of asset. (consider depreciation only till date of transfer)
 Actual price for which asset is re-acquired by him.

Illustration:
Mr. Happy purchased an asset on 1/4/2010 at Rs. 10 lakhs and added it to a block of asset
depreciable at 10%. He then sold such asset to Mr. Bade for Rs. 12,00,000 on 1/4/2013. He
then re-acquired the asset from Mr. Bade on 1/4/2016 for Rs. 13,00,000. Calculate the
actual cost of such asset in hands of Mr. Happy.

Solution:
Actual cost on reacquisition shall be lower of:
  Rs. 10 lakhs (-) Depreciation from 1/4/2010 – 31/3/20162013 = Rs. 7,29,000
 Rs. 13,00,000

Hence, Rs. 7,29,000 is the actual cost for Happy.

4A. Sale and lease back

Where an asset is acquired by the assessee from another person who had used such asset for
his B/P and claimed depreciation thereon and then, such asset is leased back to such other
person:
Actual Cost = WDV of assets in hands of transferor at time of trf to assessee (assuming such
asset is the only asset in block).

Note – Explanation 4A overrides Explanation 3.

5. Building (no other asset) converted from personal use to business use:
Actual cost to add to block = Actual cost in hands of assessee (-) Depreciation calculated at
rate in force on THAT date that would have been allowable had building been used for B/P
since date of acquisition.

Illustration:
Mr. Ivaan purchased a building for his personal use on 1/4/2023 for Rs. 10 lakhs. On
1/4/2025, he decided to start using it as factory building for B/P instead of personal use.
What is the amount to be added to block on 1/4/2025?

Solution:
Actual cost = Rs. 10 lakhs (-) Depreciation @ 10% for 2 years.

Note – That rate which is in force on the date of such conversion will be taken into
consideration. Not the older rates (unlike explanation 11)

Explanation 6 to 7A – Prefer doing along with capital gain.

6. Transfer of capital asset from holding to subsidiary of vice versa subject to Sec 47(iv) & (v):
Actual cost in hands of transferee = Same as it would have been if transferor company had
continued to hold such capital asset for B/P

Explanation 2 to Section 43(6):

 Where in PY, block of asset is transferred by holding co. to subsidiary or vice-versa, then
 notwithstanding 43(1),
 Actual cost for transferee co. = WDV of block in hands of transferor co. for immediately
preceding PY (-) Depreciation actually allowed for said preceding PY

Section 47 (iv) and (v):

Nothing contained in section 45 shall apply to:
(iv) Trf. of capital asset by a co. to its subsidiary provided – such subsidiary is wholly owned
and is an Indian co.
(v) Trf. of capital asset by a subsidiary co. to its holding provided – such subsidiary is wholly
owned, and the holding co. is an Indian co.
 Provided that, above provision shall not apply to trf. of capital asset made as stock in trade.

Note:
Explanation 6 to Sec 43(1) shall apply in case of non-depreciable asset whereas Explanation 2 to
Sec 43(6) shall apply in case of depreciable asset.

7. Capital asset transferred from amalgamating co. (PVR & Inox) to amalgamated co (PVR – Inox):
Actual cost in hands of amalgamated co = Same as it would have been in hands of amalgamating
co. if it continued to hold the capital asset for its own business.

Explanation 2 to Section 43(6):

 Where in PY, block of asset is transferred by amalgamating co. to amalgamated co., then
 notwithstanding 43(1),
 Actual cost for transferee co. = WDV of block in hands of amalgamating co. for immediately
preceding PY (-) Depreciation actually allowed for said preceding PY

7A. Capital asset transferred from demerged co. to resulting company:

Actual cost in hands of resulting co = Same as it would have been in hands of demerged co. if it
continued to hold the capital asset for its own business.

Note – Such actual cost shall not exceed WDV in hands of demerged company.

Refer Explanation 2A to Section 43(6)

8. Any amount paid or payable as interest for acquisition of asset after such asset is put to use
shall not be included in actual cost.

Refer Section 36(1)(iii) as well/

ICDS V – Tangible Fixed Asset:

 Expense on start up and commissioning of project including expense on test run, etc. – To
be capitalised.
 Expense after plant has begun commercial production – Reven ue expenditure.

Note -Sale price of products generated from test runs shall go to reduce cost of such asset.

9. Actual cost shall be reduced by excise duty or additional duty (or GST) w.r.t. which claim of
credit has been made and allowed under Custom Tariff Act [CENVAT credit or GST Input
credit]

10. Grant or subsidy from CG or SG shall not form part of actual cost.
However, where such grant or subsidy cannot be directly related to asset acquired, then such
subsidy or grant shall be allocated proportionately to the total asset.

As per section 2(24)(xviii):

 Income includes assistance in the form of subsidy, grant, cash incentive, duty drawback,
waiver (of loan), concession or reimbursement,
 by the CG or the SG or any other agency
  in cash or kind to the assessee
 other than:
o subsidy taken into account for determination of actual cost as per Sec 43(1) Expln 10
o subsidy by CG for the purpose of corpus of a trust formed by CG or SG.

Note: LPG subsidy or any other welfare subsidy received by an individual in his personal
capacity and not in connection with B/P shall not be taxable.
11. Where a NR (including foreign company) acquires asset outside India and such asset is brought
to India and used for B/P, actual cost = Actual cost (-) Depreciation calculated at rate in force
that would have been allowable had the asset been used in India for said purpose since date of
its acquisition.

Note – Dep. rates of respective years will be taken into consideration.

12. In case of corporatisation of RSE approved by SEBI, actual cost = Deemed amount of actual
cost had there been no corporatisation.

13. Actual cost in case of capital asset on which deduction allowed u/s 35AD = NIL.
Section 50: Special Provision for Capital Gains in case of transfer of depreciable asset (Cover
after capital gain)
In case of transfer of a capital asset forming part of block of asset:
(1) Transfer of one or more capital asset:
Where full value of consideration EXCEEDS (Opening WDV of block + Actual Cost of asset
acquired during PY + Expenses incurred for such transfer) , such excess = STCG

(2) Block ceases to exist:

Where block of asset ceases to exist as all assets in that block are transferred, cost of
acquisition the following shall be short term capital gain/(loss):
Full value of consideration Less (Opening WDV of block + Actual Cost of asset acquired during
PY + Expenses incurred for such transfer) = STCG or STCL

Note:
1. WDV of block of asset is computed ONLY on 31st March of PY and not on daily basis.
2. In case where Stamp duty value exceeds sale consideration, take SDV to be full value
consideration.

Section 32(2) – Carry forward and Set off of depreciation:

Unabsorbed depreciation shall be carried forward indefinitely till it is fully set off (except against
salary).

Order of set off:

1. Current year depreciation
2. B/F business losses
3. Unabsorbed depreciation of prior years

Section 2(24) – Definition of income:

Income includes:
(i) Profits and gains
(ii) Dividend
(iii)