INCOME TAX COMPLIER

Chapter 1 BASIC CONCEPTS 1- 6

Chapter 2 RESIDENCE AND SCOPE OF TOTAL INCOME 7 - 32

Chapter 3 INCOME FROM SALARY 33 - 62

Chapter 4 INCOME FROM HOUSE PROPERTY 63 - 78

Chapter 5 PROFITS AND GAINS OF BUSINESS OR PROFESSION 79 - 123

Chapter 6 CAPITAL GAINS 124 - 165

Chapter 7 INCOME FROM OTHER SOURCES 166 - 186

Chapter 8 INCOME OF OTHER PERSONS INCLUDED IN

ASSESSEE’S TOTAL INCOME 187 - 209

Chapter 9 AGGREGATION OF INCOME, SET-OFF AND CARRY

FORWARD OF LOSSES 210 - 239

Chapter 10 DEDUCTION FROM GROSS TOTAL INCOME 240 - 271

Chapter 11 TDS, TCS & ADVANCE TAX 272 -301

Chapter 12 PROVISION FOR FILING OF RETURN 302 - 316

Chapter 13 COMPUTATION OF TOTAL INCOME 317 - 396

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CHAPTER -1 BASIC CONCEPTS

STUDY MATERIAL (Discussed in classes)
ILLUSTRATION 1
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory.
30% of sugarcane produce is sold for 10 lakhs, and the cost of cultivation of such sugarcane is ₹
5 lakhs. The cost of cultivation of the balance sugarcane (70%) is 14 lakhs and the market value
of the same is ₹ 22 lakhs. After incurring ₹ 1.5 lakhs in the manufacturing process on the balance
sugarcane, the sugar was sold for ₹ 25 lakhs. Compute B's business income and agricultural income.
SOLUTION
Computation of Business Income and Agriculture Income of Mr. B
Particulars Business Income Agricultural Income
(₹) (₹) (₹)
Sale of Sugar
Business income
Sale Proceeds of sugar 25,00,000
Less: Market value of sugar- cane (70%) 22,00,000
Less: Manufacturing exp. 1,50,000
1,50,000
Agricultural income
Market value of sugarcane (70%) 22,00,000
Less: Cost of cultivation 14,00,000
8,00,000
Sale of sugarcane
Agricultural Income 10,00,000
Sale proceeds of sugarcane (30%)
Less: Cost of cultivation 5,00,000 5,00,000
13,00,000
ILLUSTRATION 2
Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in
the market for ₹ 30 lakhs. The cost of growing rubber plants is ₹ 10 lakhs and that of
manufacturing latex is ₹ 8 lakhs. Compute his total income.
SOLUTION
Agricultural income = 65% of ₹12 lakhs = ₹ 7.8 lakhs
Business income = 35% of 12 lakhs = ₹ 4.2 lakhs
ILLUSTRATION 3
Mr. X has a total income of ₹ 16,00,000 for P.Y.2024-25, comprising of income from house
property and interest on fixed deposits. Compute his tax liability for A.Y.2025 - 26 under the
default tax regime under section 115BAC.
SOLUTION
Computation of Tax liability of Mr. X for A.Υ. 2025-26
Tax liability: = ₹ 1,76,800

ILLUSTRATION 4
Mr. X has a total income of ₹ 16,00,000 for P.Y.2024-25, comprising of income from house
property and interest on fixed deposits. Compute his tax liability for A.Y.2025-26 assuming his
age is

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(a) 45 years
(b) 63 years
(c) 82 years
Assume that Mr. X has exercised the option to shift out/ opt out of the default tax regime.
SOLUTION
(a) Computation of Tax liability of Mr. X (aged 45 years)
Tax liability: ₹ 3,04,200
(a)Computation of Tax liability of Mr. X (aged 63 years)
Tax liability: = ₹ 3,01,600
(c) Computation of Tax liability of Mr. X (aged 82 years)
Tax liability: = ₹ 2,91,200

ILLUSTRATION 5
Compute the tax liability of Mr. A (aged 42), having total income of ₹ 51 lakhs for the Assessment
Year 2025-26. Assume that his total income comprises of salary income, Income from house
property and interest on fixed deposit. Assume that Mr. A has exercised the option to shift out
of section 115BAC.
SOLUTION Computation of tax liability of Mr. A for the A.Y.2025-26
(A)
(A)Income-tax (including surcharge) computed on total income
of ₹ 51,00,000
Tax liability (including cess) ₹ 14,69,000
(F) Marginal Relief (A – D) ₹64,250

ILLUSTRATION 6
Compute the tax liability of Mr. B (aged 51) under the default tax regime, having total income of
₹ 1,01,00,000 for the Assessment Year 2025-26. Assume that his total income comprises of salary
income, Income from house property and interest on fixed deposit.
SOLUTION - Computation of tax liability of Mr. B for the A.Y. 2025-26
(A) Income-tax (including surcharge) computed on total
income of ₹ 1,01,00,000
Tax liability (including cess) ₹ 31,81,360
(F) Marginal relief (A-D) ₹ 69,000

ILLUSTRATION 7
Compute the tax liability of Mr. C (aged 58), having total income of ₹ 2,01,00,000 for the
Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from
house property and interest on fixed deposit. Assume that Mr. C has exercised the option to shift
out of section 115BAC.
SOLUTION
Computation of tax liability of Mr. C for the A.Y. 2025-26
Tax liability (including cess) ₹ 70,55,750
(F) Marginal relief (A-D) ₹ 5,18,750

ILLUSTRATION 8
Compute the tax liability of Mr. D (aged 65) in a most beneficial manner. He is having total income
of ₹ 5,01,00,000 for the Assessment Year 2025-26. Assume that his total income comprises of
salary income, Income from house property and interest on fixed deposit and is the same under
both tax regimes.
SOLUTION
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Computation of tax liability of Mr. D under default tax

regime for the A.Y. 2025-26
Income-tax (including surcharge) computed on total income of ₹ ₹ 1,91,49,000
5,01,00,000

Computation of tax liability of Mr. D under optional tax

regime for the A.Y. 2025-26
(A) Income-tax (including surcharge) computed on total
income of ₹ 5,01,00,000
Tax liability (including cess) ₹ 1,93,57,000
(F) Marginal Relief (A – D) ₹ 17,18,300
It is beneficial for Mr. D to pay tax under default tax regime under section 115BAC, since his tax
liability would be lower by ₹ 2,08,000 (₹ 1,93,57,000 - ₹ 1,91,49,000).
ILLUSTRATION 9
Mr. Raghav aged 26 years and a resident in India, has a total income of ₹ 6,50,000, comprising his
salary income and interest on bank fixed deposit. Compute his tax liability for A.Y.2025-26 under
default tax regime under section 115BAC.
SOLUTION Computation of tax liability of Mr. Raghav for A.Y. 2025-26
Particulars ₹
Tax Liability Nil
ILLUSTRATION 10
Mr. Pawan aged 35 years and a resident in India, has a total income of ₹ 7,15,000, comprising his
salary income and interest on bank fixed deposit. Compute his tax liability for A.Y.2025-26 under
default tax regime under section 115BAC.
SOLUTION Computation of tax liability of Mr. Pawan for A.Y. 2025-26
Particulars ₹
Tax Liability 15,600

ILLUSTRATION 11
Mr. Piyush, aged 35 years and a resident in India, has a total income of ₹ 4,15,000, comprising his
salary income and interest on bank fixed deposit. Compute his tax liability for A.Y.2025-26 if he
exercises the option to shift out of the default tax regime.
SOLUTION Computation of tax liability of Mr. Piyush for A.Y. 2025-26
Particulars ₹
Tax Liability Nil

ILLUSTRATION 12
Mr. X, a resident, has provided the following particulars of his income for the P.Y. 2024-25.
i. Income from salary (computed) ₹10,80,000
ii. Income from house property (computed) ₹ 2,50,000
iii. Agricultural income from a land in Jaipur ₹ 4,80,000
iv. Expenses incurred for earning agricultural income ₹ 1,70,000
Compute his tax liability for A.Y. 2025-26 assuming his age is -
(a) 45 years
(b) 70 years
SOLUTION (a) Computation of tax liability (age 45 years)
Computation of total income of Mr. X for the A.Y. 2025-26 under default tax regime
under section 115BAC

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For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ₹ 5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ₹ 3,00,000. His tax liability is
computed in the following manner:
Particulars ₹
Total Income 13,30,000
Computation of total income of Mr. X for the A.Y. 2025-26 under normal
provisions of the Act
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
3. Net agricultural income exceeds ₹ 5,000 p.a., and
4. Non-agricultural income exceeds the basic exemption limit of ₹ 2,50,000. His tax liability is
computed in the following manner:
Particulars ₹
Total Income 13,30,000

(b) Computation of tax liability (age 70 years)

Computation of total income of Mr. X for the A.Y. 2024-25 under default tax regime
under section 115BAC
Tax liability of Mr. X would be same under default tax regime whether he is of age of 45 years
of 70 years i.e., ₹ 1,73,160.
Computation of total income of Mr. X for the A.Y. 2025-26 under
normal provisions of the Act
His tax liability is computed in the following manner:
Step 1: ₹ 7,30,000 + ₹ 3,10,000 = ₹ 16,40,000
Tax on ₹ 16,40,000 = ₹ 3,02,000
(i.e., 2% of ₹ 2,00,000 plus 20% of ₹ 5,00,000 plus 30% of ₹ 6,40,000)
Step 2: ₹ 3,10,000 + ₹ 3,00,000 = ₹ 6,10,000
Tax on ₹ 6,10,000 = ₹ 32,000
(i.e. 5% of ₹ 2,00,000 plus 20% of ₹ 1,10,000)
Step 3: ₹ 3,02,000 – ₹ 32,000 = ₹ 2,70,000
Step 4 & 5: Total tax payable = ₹ 2,70,000
= ₹ 2,70,000 + 4%
of ₹ 2,70,000 = ₹
2,80,800.

TEST YOUR KNOWLEDGE (Discussed in classes)

Que- 13.
Who is an “Assessee”? Explain.
Ans. In class
Que-14.
State any four instances where the income of the previous year is assessable in the previous year
itself instead of the assessment year.
Ans. In class
Que-15.
Whether the income derived from saplings or seedlings grown in a nursery is taxable under the
Income-tax Act, 1961? Examine.
Ans. In class
Que-16.
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What are the two schools of Hindu law and where are they prevalent? Explain. Also, mention the
difference between the two schools of Hindu Law.
Ans. In class
Que-17.
What is the difference between an Association of Persons and Body of Individuals?
Ans. In class
Que-18.
Mr. Sumit, a resident Indian, earns income of ₹ 15 lakhs from sale of rubber manufactured from
latex obtained from rubber plants grown by him in India and ₹ 20 lakhs from sale of rubber
manufactured from latex obtained from rubber plants grown by him in Malaysia during the
A.Y.2025-26. What would be his business income, assuming he has no other business?
Ans.
Business income = 35% of ₹ 15 lakhs + ₹ 20 lakhs = ₹ 25.25 lakhs
Que-19.
Mr. Raja, a resident Indian, earns income of ₹ 10 lakhs from sale of coffee grown and cured in
India during the A.Y.2024-25. His friend, Mr. Shyam, a resident Indian, earns income of ₹ 20
lakhs from sale of coffee grown, cured, roasted and grounded by him in India during the A.Y.2025-
26. What would be the business income chargeable to tax in India of Mr. Raja and Mr. Shyam?
Ans.
Business income of Mr. Raja = 25% of ₹ 10 lakhs = ₹ 2.5 lakhs Business income of Mr. Shyam =
40% of ₹ 20 lakhs = ₹ 8 lakhs
Que-20.
The Jain HUF in Assam comprises of Mr. Suresh Jain, his wife Mrs. Sapna Jain, his son Mr.
Sarthak Jain, his daughter-in-law Mrs. Preeti Jain, his daughter Miss Seema Jain and his
unmarried brother Mr. Pritam Jain. Which of the members of the HUF are eligible for
coparcenary rights?
Ans. In class
Que-21.
Compute the tax liability under default tax regime of Mr. Kashyap (aged 35), having total income
of ₹ 51,75,000 for the Assessment Year 2025-26. Assume that his total income comprises of
salary income, income from house property and interest on fixed deposit.
Ans. Computation of tax liability of Mr. Kashyap for the A.Y.2025-26 under default tax
regime
Tax liability ₹ 14,19,600
(F) Marginal Relief (A – D) ₹ 1,750
Que-22.
Mr. Agarwal, aged 40 years and a resident in India, has a total income of ₹ 6,50,00,000, comprising
long term capital gain taxable under section 112 of ₹ 55,00,000, short term capital gain taxable
under section 111A of ₹ 65,00,000 and other income of ₹ 5,30,00,000. Compute his tax liability
for A.Y.2025-26 under the default tax regime and optional tax regime as per the normal provisions
of the Act assuming that the total income and its components are the same in both tax regimes.
Ans. Computation of tax liability of Mr. Agarwal for the A.Y.2025-26 under default tax
regime
Particulars ₹
Tax Liability 2,27,48,700
Computation of tax liability of Mr. Agarwal for the A.Y.2024-25 under
normal provisions of the Act
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Particulars ₹
Tax Liability 2,48,68,870
Que-23.
Mr. Sharma aged 62 years and a resident in India, has a total income of ₹ 2,30,00,000, comprising
long term capital gain taxable under section 112 of ₹ 52,00,000,short term capital gain taxable
under section 111A of ₹ 64,00,000 and other income of ₹ 1,14,00,000. Compute his tax liability
for A.Y.2025-26 under the default tax regime and optional tax regime as per the normal provisions
of the Act assuming that the total income and its components are the same in both tax regimes.
Ans. Computation of tax liability of Mr. Sharma for the A.Y.2025-26 under
default tax regime
Particulars ₹
Tax Liability 60,27,840
Computation of tax liability of Mr. Sharma for the A.Y.2025-26 under
normal provisions of the Act
Particulars ₹
Tax Liability 61,71,360

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CHAPTER 2 - RESIDENCE AND SCOPE OF TOTAL INCOME

STUDY MATERIAL (Discussed in classes in Detail)

ILLUSTRATION 1
Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian ship engaged
in carriage of passengers in international traffic departing from Chennai port on 6th June, 2024.
From the following details for the P.Y. 2024-25, determine the residential status of Mr. Anand
for A.Y. 2025-26, assuming that his stay in India in the last 4 previous years (preceding P.Y. 2024-
25) is 400 days:
Particulars ₹
Date entered into the Continuous Discharge Certificate in respect 6th June, 2024
of joining the ship by Mr. Anand
Date entered into the Continuous Discharge Certificate in respect 9th December, 2024
of signing off the ship by Mr. Anand
SOLUTION
he is a non-resident for A.Y. 2025-26.
ILLUSTRATION 2
Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has
been his practice for the past 10 financial years. (a) Find out his residential status for the
assessment year 2025-26.
(b) Would your answer change if the above facts relate to Srinath, an Indian citizen who resides
in Australia and represents the Australian cricket team?
(c) What would be your answer if Srinath had visited India for 120 days instead of 100 days every
year, including P.Y.2024-25?
SOLUTION (a) Determination of Residential Status of Mr. Brett Lee for the A.Y. 2025-
26:
Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year 2024-
25 relevant to the assessment year 2025-26.
(b) he would be treated as non-resident in India
(c) he would be treated as resident but not ordinarily resident in India for P.Y.2024-25
If his total income (excluding income from foreign sources) does not exceed ₹ 15 lakh, he would
be treated as non-resident in India for the P.Y.2024-25, since his stay in India is less than 182
days in the P.Y.2024-25.
ILLUSTRATION 3
Mr. B, a Canadian citizen, comes to India for the first time during the P.Y. 2020-21. During the
financial years 2020-21, 2021-22, 2022-23, 2023-24 and 2024-25, he was in India for 55 days,
60 days, 90 days, 150 days and 70 days, respectively. Determine his residential status for the
A.Y. 2025-26.
SOLUTION
Therefore, he is a non-resident for the P.Y. 2024-25.
ILLUSTRATION 4
The business of a HUF is transacted from Australia and all the policy decisions are taken there.
Mr. E, the Karta of the HUF, who was born in Kolkata, visits India during the P.Y. 2024-25 after

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15 years. He comes to India on 1.4.2024 and leaves for Australia on 1.12.2024. Determine the
residential status of Mr. E and the HUF for A.Y. 2025-26.
SOLUTION
(a) Therefore, the residential status of Mr. E for the P.Y. 2024-25 is resident but not ordinarily
resident.
(b) Therefore, the HUF is a non-resident for the P.Y. 2024-25.

ILLUSTRATION 5
From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended
31.3.2025, compute the total income for the A.Y. 2025-26, if he is:
(i) Resident and ordinary resident;
(ii) Resident but not ordinarily resident;
(iii) Non-resident
Particulars ₹
Short term capital gains on sale of shares of an Indian Company, received in 15,000
Germany
Dividend from a Japanese Company, received in Japan 10,000
Rent from property in London deposited in a bank in London, later on remitted to 75,000
India through approved banking channels
Dividend from RP Ltd., an Indian Company 6,000
Agricultural income from land in Gujarat 25,000
SOLUTION
Computation of total income of Mr. Anirudh for the A.Y. 2025-26
Particulars Resident & Resident but not Non Resident
ordinarily ordinarily
resident resident
Total Income 83,500 21,000 21,000
Notes: (i) It has been assumed that the rental income is the gross annual value of the property.
Therefore, deduction @30% under section 24, has been provided and the net income so computed
is taken into account for determining the total income of a resident and ordinarily resident.
Particulars ₹
Rent received (assumed as gross annual value) 75,000
Less: Deduction under section 24 (30% of ₹ 75,000) 22,500
Income from house property 52,500
(ii) Agricultural income is exempt under section 10(1).
ILLUSTRATION 6
Mr. David, an Indian citizen aged 40 years, a Government employee serving in the Ministry of
External Affairs, left India for the first time on 31.03.2024 due to his transfer to High
Commission of Canada. He did not visit India any time during the P.Y. 2024-25. He has received
the following income for the F.Y. 2024-25:
S. No. Particulars ₹
(i) Salary (Computed) 5,00,000
(ii) Foreign Allowance [not included in (i) above] 4,00,000
(iii) Interest on fixed deposit from bank in India 1,00,000
(iv) Income from agriculture in Nepal 2,00,000
(v) Income from house property in Nepal 2,50,000

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Compute his Gross Total Income for A.Y. 2025-26.

SOLUTION
Mr. David is a non-resident.
Gross Total Income of Mr. David for A.Y. 2025-26
Particulars ₹
Salaries (computed) 5,00,000
Income from other sources (Interest on fixed deposit in India) 1,00,000
Gross Total Income 6,00,000
ILLUSTRATION 7
Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practising in
Colombo, specializing in project financing. The payment was made in Colombo. Mr. Kulasekhara is
a non-resident. The consultancy is related to a project in India with possible Ceylonese
collaboration. Is this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since
the services were used in India?
SOLUTION
In the instant case, since the services were utilized in India, the payment received by Mr.
Kulasekhara, a non-resident, in Colombo is chargeable to tax in his hands in India, as it is deemed
to accrue or arise in India.
ILLUSTRATION 8
Compute the total income in the hands of an individual aged 35 years, being a resident and
ordinarily resident resident but not ordinarily resident, and non-resident for the A.Y. 2025-26,
assuming that he has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A)–
Interest on UK Development Bonds, 50% of interest received in India 10,000
Income from a business in Chennai (50% is received in India) 20,000
Short term capital gains on sale of shares of an Indian company, received in London 20,000
Dividend from British company received in London 5,000
Long term capital gains on sale of plant at Germany, 50% of gains are received in 40,000
India
Income earned from business in Germany which is controlled in Delhi (₹ 40,000 is 70,000
received in India)
Profits from a business in Delhi but managed entirely from London 15,000
Income from house property in London deposited in a Bank at London, brought to 50,000
India (Computed)
Interest on debentures in an Indian company, received in London 12,000
Fees for technical services rendered in India but received in London Profits from a 8,000
business in Mumbai, managed from London 26,000
Income from property situated in Nepal received there (Computed) 16,000
Past foreign untaxed income brought to India during the previous year 5,000
Income from agricultural land in Nepal, received there and then brought to India 18,000
Income from profession in Kenya which was set up in India, received there but spent 5,000
in India
Gift received on the occasion of his wedding 20,000
Interest on savings bank deposit in State Bank of India 12,000
Income from a business in Russia, controlled in Russia 20,000
Dividend from Reliance Petroleum Limited, an Indian Company 5,000
Agricultural income from a land in Rajasthan 15,000

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SOLUTION
Computation of total income for the A.Y. 2025-26
Particulars Resident Resident Non
and but not resident
ordinarily ordinarily
resident resident
Gross Total Income 3,52,000 2,18,000 1,83,000
Less: Deduction under section 80TTA 10,000 10,000 10,000
[Interest on savings bank account subject to a
maximum of ₹ 10,000]
Total Income 3,42,000 2,08,000 1,73,000

TEST YOUR KNOWLEDGE (Discussed in classes in Detail)

Que- 9.
Mr. Ram, an Indian citizen, left India on 22.09.2024 for the first time to work as an officer of a
company in Germany. Determine the residential status of Ram for the A.Y. 2025-26.
Ans-
he is a non-resident for the A.Y. 2025-26.
Que- 10.
Mr. Dey, residing in US since 1990, visits India for 30 days every year. He came back to India on
1.4.2023 for permanent settlement. What will be his residential status for A.Y. 2025-26?
Ans-
his status would be “Resident but not ordinarily resident”
Que- 11.
Mr. Ramesh & Mr. Suresh are brothers and they earned the following incomes during the F.Y.
2024-25. Mr. Ramesh settled in Canada in the year 1996 and Mr. Suresh settled in Delhi. Compute
the total income for the A.Y. 2025-26 assuming that both have exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A).
Sr. Particulars Mr. Ramesh Mr. Suresh
No. (₹) (₹)
1. Interest on Canada Development Bonds (only 50% of 35,000 40,000
interest received in India)
2. Dividend from British company, received in London 28,000 20,000
3. Profits from a business in Nagpur, but managed directly 1,00,000 1,40,000
from London
4. Short term capital gain on sale of shares of an Indian 60,000 90,000
company, received in India
5. Income from a business in Chennai 80,000 70,000
6. Fees for technical services rendered in India, but 1,00,000 -
received in Canada
7. Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000
8. Agricultural income from a land situated in Andhra 55,000 45,000
Pradesh
9. Rent received in respect of house property at Bhopal 1,00,000 60,000
10. Life insurance premium paid - 30,000

Ans-computation of total income of Mr. Ramesh & Mr. Suresh for the A.Y. 2024-25

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S. Particulars Mr. Ramesh Mr. Suresh

No. (Non-Resident) (₹) (Resident) (₹)
Gross Total income 4,34,500 4,14,000
Less: Deduction under Chapter VI-A
Section 80C - Life insurance premium - 30,000
Section 80TTA (See Note 6) 7,000 10,000
Total Income 4,27,500 3,74,000
Notes:
Que-12.
Examine the correctness or otherwise of the statement - “Income deemed to accrue or arise in
India to a non-resident by way of interest, royalty and fees for technical services is to be taxed
irrespective of territorial nexus”.
Ans-
This statement is correct.
Que-13.
Examine with reasons whether the following transactions attract income-tax in India in the hands
of recipients:
(i) Salary payable by Central Government to Mr. John, a citizen of India of ₹ 7,00,000 for the
services rendered outside India considering that he pays tax as per the provisions of section
115BAC.
(ii) Interest on moneys borrowed from outside India ₹ 5,00,000 by a nonresident for the purpose
of business within India say, at Mumbai.
(iii) Post office savings bank interest of ₹ 19,000 received by a resident assessee, Mr. Ram, aged
46 years if he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).
(iv) Royalty paid by a resident to a non-resident in respect of a business carried on outside India.
(v) Legal charges of ₹ 5,00,000 paid in Delhi to a lawyer of United Kingdom who visited India to
represent a case at the Delhi High Court.
Ans- Taxability of receipts
Taxable/ Not Taxable Amount liable to tax (₹)
(i) Taxable 6,50,000
(ii) Taxable 5,00,000
(iii) Partly Taxable 5,500
(iv) Not Taxable -
(v) Taxable 5,00,000

PAST EXAM QUESTIONS

Illustration 14
Scope of total Income: Following incomes are derived by Mr. Krishna Kumar during the year
ended 31-3-2025:
Particulars Amount
Pension received from the US Government 3,20,000
Agricultural income from lands in Malaysia 2,70,000
Rent received from let out property in Colombo, Sri Lanka 4,20,000
Discuss the taxability of the above items where the assessee is (i) Resident, (ii) Non-resident (6
Marks, Nov 2018-NS)
Solution: Computation of Gross total income (amount in *)

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Particulars Resident Non Resident

Pension received from the US Government [Net of standard 2,70,000 -
deduction of ₹ 50,000]
Income from agriculture land situated in Malaysia 2,70,000 -
Rent received from let out property in Colombo, SriLanka 2,94,000 -
[WN]
Gross Total Income 8,34,000 Nil
It has been assumed that the above incomes has been received outside India. If the same is
received in India, then the said amounts will also be taxable even if Krishna Kumar is non resident.
Working Note: It has been assumed that the rental income is the gross annual value of the
property. Therefore, deduction @ 30% under section 24, has been provided and the net income
so computed is taken into account for determining the total income of a resident and ordinarily
resident.
Particulars Amount
Rent received (assumed as gross annual value) 4,20,000
Less: Deduction under section 24 (30% of ₹4,20,000) 1,26,000
Income from house property 2,94,000

Illustration 15
Scope of total Income: Explain with reasons whether the following transactions attract income-
tax in India in the hands of recipients?
i) Salary (Computed) paid to Mr. David, a citizen of India 15,00,000 by the Central
Government for the services rendered in Canada.
ii) Legal charges of ₹ 7,50,000 paid to Mr. Johnson, a lawyer of London, who visited India to
represent a case at the Supreme Court.
iii) Royalty paid to Rajeev, a non-resident by Mr. Kukesh, a resident for a business carried on
in Sri Lanka.
iv) Interest received of ₹ 1,00,000, on money borrowed from France, by Ms. Dyana, a non-
resident for the business at Bangalore. (4 Marks, May 2015)
Solution:
Taxable/ Amount ₹ Reason
Not liable to
Taxable tax
i) Taxable 15,00,000 As per Section 9(1)(iii), salaries payable by the Government
to a citizen of India for service rendered outside India
shall be deemed to accrue or arise in India. Therefore,
salary paid by Central Government to Mr. David for
services rendered outside India would be deemed to accrue
or arise in India since he is a citizen of India.
ii) Taxable 7,50,000 Legal charges paid to Mr. Johnson, a lawyer of London, who
visited India to represent a case at the Supreme Court,
since it accrues or arises in India.
iii) Not taxable - Royalty paid by a resident to a non-resident in respect of a
business carried outside India would not be taxable in the
hands of the non-resident provided the same is not
received in India. This has been provided as an exception
to deemed accrual mentioned in Section 9(1)(vi)(b).
iv) Taxable 1,00,000 As per Section 9(1)(v) (c), interest payable by a non-
resident on moneys borrowed and used for the purposes of
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 CA VARDHAMAN DAGA

business carried on by such person in India shall be deemed

to accrue or arise in India in the hands of the recipient.

Illustration 16
Computation of total income: Determine the taxability of income of US based company Heli Ltd.,
in India on entering following transactions during the financial year 2024-25:
i) ₹ 75 lacs received from an Indian domestic company for providing technical know how in India.
ii) ₹ 6 lacs from an Indian firm for conducting the feasibility study for the new project in
Finland.
iii) ₹ 4 lacs from a non-resident for use of patent for a business in India.
iv) ₹ 8 lacs from a non-resident Indian for use of know how for a business in Singapore.
v) ₹ 10 lacs for supply of manuals and designs for the business to be established in Singapore.
Explain the rate of tax applicable on taxable income for US based company, Heli Ltd., in India. (7
Marks, PCC Nov. 2009) (Similar: 4 Marks, May 2017)
Solution: A non resident is chargeable to tax in India in respect of following incomes:
i) Income received or deemed to be received in India.
ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions, taxability of income is determined in following manner:
Particulars ₹
i. Amount received from an Indian domestic company for providing technical 5,00,000
know how in India is from Business Connection in India, therefore taxable
in India.
ii. Conducting the feasibility study for the new project in Finland for the Nil
Indian firm is not taxable in India as done for the business outside India.
iii. The income from business set up in India is taxable in India. Therefore, 4,00,000
money received from a non-resident for use of patent for a business in
India is taxable in India
iv. Money received from a non-resident India for use of know-how for a Nil
business in Singapore is for the business outside India, therefore non
taxable in India.
v. Payment made for supply of manuals and designs for the business to be Nil
established in Singapore is not taxable in India
Total Income taxable in India 9,00,000
Tax rate applicable to Heli Ltd: In respect of foreign companies, certain specified income such
as Royalty and fees for technical service is taxable @ 10% + Surcharge + Health and education
cess. The rates are also depends on Double Taxation Avoidance Agreement, if any, entered into
between India and the respective country of the foreign company, whichever is more beneficial
to the assessee. The basic normal rate applicable for the US based company who is a foreign
company is 40%. In case the taxable income is more than 1 crore but upto 10 crores in the previous
year, the surcharge @ 2% is applicable. If Total income exceeds 10 crores surcharge of 5% is
applicable. The Health and education cess is payable @ 4%. The effective rate of tax in case of
foreign companies in India is 42.432% / 43.68% respectively.
Illustration 17
Computation of total income: From the following particulars of Income furnished by Mr. Anirudh
pertaining to the year ended 31-03-2025, compute the total income for the assessment year
2025-26, if he is:
i) Resident and ordinary resident;
ii) Resident but not ordinarily resident
iii) Non-resident: (10 Marks, IPCC May 2010)
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Particulars ₹
a) Profit on sale of shares in Indian Company received in Germany 15,000
b) Dividend from a Japanese Company received in Japan 10,000
c) Rent from property in London deposited in a bank in London, later on remitted 75,000
to India through approved banking channels
) Dividend from RP Ltd., an Indian Company 6,000
e) Agricultural income from lands in Gujarat 25,000
Solution: The total income, in each case, is computed herein below (amounts in-
Particulars Resident & Resident Non
ordinarily but not Resident
resident ordinarily
resident
Profit on sale of shares in Indian company 15,000 15,000 15,000
received in Germany
Dividend from Japanese company, received in 10,000 - -
Japan
Rent from property in London deposited in a 52,500 - -
bank in London[WN-1]
Dividend from RP Ltd. an Indian company 6,000 6,000 6,000
[WN-2]
Agricultural income from lands in Gujarat [WN-3] - - -
Total Income 83,500 21,000 21,000
Working Notes: 1) It has been assumed that the rental income is the gross annual value of the
property. Therefore, deduction @ 30% under section 24, has been provided and the net income
so computed is taken into account for determining the total income of a resident and ordinarily
resident
Particulars ₹
Rent received (assumed as gross annual value) 75,000
Less: Deduction under section 24 (30% of 75,000) 22,500
Income from house property 52,500
2) Dividend from Indian company is taxable in hands of shareholder.
3) Agricultural income is exempt under section 10(1).
Illustration 18
Computation of total income: Mrs. Geetha and Mrs. Leena are sisters and they earned the
following income during the Financial Year 2024-25. Mrs. Geetha is settled in Malaysia since 1988
and visits India for a month every year. Mrs. Leena is settled in Indore since her marriage in 1996.
Compute the total income of Mrs. Geetha and Mrs. Leena for the assessment year 2025-26:
Particulars Mrs. Geetha Mrs. Leena
1. Income from Profession in Malaysia, (set up in India) 15,000 -
received There
2. Profit from business in Delhi, but managed directly from 40,000 -
Malaysia
3. Rent (computed) from property in Malaysia deposited in 1,20,000 -
a Bank at Malaysia, later on remitted to India through
approved banking channels.
4. Dividend from PQR Ltd. an Indian Company 5,000 9,000
5. Dividend from a Malaysian company received in Malaysia 15,000 8,000

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 CA VARDHAMAN DAGA

6. Cash gift received from a friend on Mrs. Leena's 50th - 51,000

birthday
7. Agricultural income from land in Maharashtra 7,500 4,000
8 Past foreign untaxed income brought to India 5,000
9 Fees for technical services rendered in India received 25,000
in Malaysia
10. Income from a business in Pune (Mrs. Geetha receives 12,000 15,000
50% of the income in India)
11. Interest on debentures in an Indian company (Mrs. 18,500 14,000
Geetha received the same in Malaysia)
12. Short-term capital gain on sale of shares of an Indian 15,000 25,500
company
13. Interest on savings account with SBI 12,000 8,000
14. Life insurance premium paid to LIC - 30,000
(Similar PCC May 2012, 12 Marks) (Similar IPCC May 2013, 8 Marks) (8 Marks, Nov. 2014)
Solution: Computation of total income of Mrs. Geetha and Mrs. Leena (amount in ₹)
Particulars Geetha Leena
1. Income from Profession in Malaysia, (set up in India) received - -
there [WN-3]
2. Profit from a business in Delhi, but managed directly from 40,000 -
Malaysia
3. Rent (computed) from property in Malaysia deposited in a Bank - -
at Malaysia, later on remitted to India through approved
banking channels. (Remittance in India is not taxable)
4. Dividend from PQR Ltd. an Indian Company [Taxable in hands of 5,000 9,000
shareholder]
5. Dividend from a Malaysian company received in Malaysia - 8,000
6. Cash gift received from a friend on Mrs. Leena's 50th birthday - 51,000
7. Agricultural income from land in Maharashtra [WN-4] - -
8. Past foreign untaxed income brought to India [It is not taxable] - -
9. Fees for technical services rendered in India, but received in 25,000 -
Malaysia [WN-2]
10. Income from a business in Pune (Mrs. Geetha receives 50% of 12,000 15,000
the income in India)
11. Interest on debentures in an Indian company (Mrs. Geetha 18,500 14,000
received the same in Malaysia)
12. Short-term capital gain on sale of shares of an Indian company 15,000 25,500
13. Interest on savings account with SBI 12,500 8,000
Gross Total Income 1,27,500 1,30,500
Less: Deduction u/s 80C in respect of Life insurance premium - 30,000
paid
Less: Deduction u/s 80TTA in respect of Interest on deposits 10,000 8,000
in saving A/c
Total Income 1,17,500 92,500
Working Notes:
1) Mrs. Geetha is a non-resident since she has been living in Malaysia since 1988. Mrs. Leena, who
is settled in Indore, is a resident.

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 CA VARDHAMAN DAGA

2) In case of a resident, his global income is taxable as per section 5(1). However, as per section
5(2), in case of a non- resident, only the following income are chargeable to tax:
a) Income received or deemed to be received in India; and
b) Income accruing or arising or deemed to accrue or arise in India.
Therefore, fees for technical services rendered in India would be taxable in the hands of Mrs.
Geetha, even though she is a non-resident. The income referred to in SI. No. 10, 11, 12 and 13 are
taxable in the hands of both Mrs. Geetha and Mrs. Leena since they accrue or arise in India.
3) Income from Profession in Malaysia, (set up in India) received there by Mrs. Geetha is not
taxable since it accrues and received outside India.
4) Agricultural income from a land situated in India is exempt under section 10(1) in the case of
both non-residents and residents.
5) Interest on savings bank deposit is eligible for deduction u/s 80TTA subject to maximum limit
of 10,000.
Illustration 19
Computation of GTI: Mr. Rajnesh, a citizen of India, serving in the Ministry of Finance in India
and transferred to High Commission of Australia on 15th March 2024. He did not come to India
during the financial year 2024-25. His income during the financial year 2024-25 is given here
under :
Particulars ₹
Salary from Government of India 7,20,000
Foreign Allowances from Government of India 6,00,000
Rent from a house situated at London, received in London 3,60,000
Interest accrued on National Saving Certificate during the year 2023-24 45,000
Compute the Gross Total Income of Mr. Rajnesh for the Assessment Year 2025-26, if he has not
opted for default tax regime (4 Marks, Nov. 2016)
Solution: Mr. Rajnesh did not visited India during Financial Year 2024-25, hence he is non resident
in India. Since Mr. Rajnesh is an Indian citizen being government employee his salary income is
deemed to accrue or arise in India and is taxable in India. Thus even if he is non resident in India,
the salary income will be taxable in India.
Computation of Gross Total Income (amounts in ₹)
Particulars ₹ ₹
Income under the head Salaries 7,20,000
Foreign Allowances from Government of India [Such allowance is Nil
exempt u/s 10(7)]
Gross Salary 7,20,000
Less: Standard deduction u/s 16(ia) 75,000 6,45,000
Income from House property
Rent from house property situated in London, received in India [It will Nil
not be taxable, since he is non resident]
Interest accrued on National Saving Certificate during the year 2024- 45,000
25
Gross Total Income 6,90,000

Illustration 20
Determination of residential status and scope of total income: DAISY Ltd., a foreign company,
incorporated in USA and engaged in the manufacturing and distribution of diamonds, set up a
branch office in India in June 2024. The branch office was required to purchase uncut and

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 CA VARDHAMAN DAGA

unassorted diamonds from dealers of Mumbai and export them to USA. During the Previous Year
2024-25, profit from such export amounted to ₹ 75 lakhs.
Out of 20 shareholders of DAISY Ltd., 12 shareholders are non-resident in India. All the major
decisions were taken through Board Meetings held at USA.
i) Determine the residential status of DAISY Ltd. for the Assessment Year 2025-26
ii) Discuss the tax treatment of profit from export business. (5 Marks, Nov. 2017)
Solutions:
i) Residential Status of Daisy Ltd.: According to Section 6(3) of the Income tax Act, 1961, a
foreign company is said to be resident in India in any previous year, if its place of effective
management, in that year, is in India.
"Place of effective management" 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.
Since in case of Daisy Ltd., all the major decisions were taken through Board Meetings held at
USA, hence it will be non resident in India.
ii) According to Explanation 1(b) to Section 9(1)(i), in the case of a non-resident, no income shall
be deemed to accrue or arise in India to him through or from operations which are confined to
the purchase of goods in India for the purpose of export. Thus, export profits of 75 lakhs shall
not be taxable in India in hands of DAISY Ltd.
Illustration 21
Computation of GTI: Compute the Gross Total Income in the hands of an individual, if he is
a) a resident and ordinary resident; and
b) a non-resident for the A.Y. 2024-25
Particulars Amount ₹
i) Interest from German Derivatives Bonds (1/3rd received in India) 21,000
ii) Income from agriculture land situated in Malaysia, remitted to India 51,000
iii) Income earned from business in Dubai, controlled from India ( 20,000 received 75,000
in India)
iv) Profit from business in Mumbai, controlled from Australia 1,75,000
v) Interest received from Mr. Ashok (NRI) on loan provided to him for business in 35,000
India
vi) Dividend from Brown Ltd., an Indian Co. 30,000
vii) Profit from business in Canada controlled from Mumbai (60% of profits 60,000
deposited in a bank in Canada and 40% remitted to India)
viii) Amount received from an NRI for the use of know-how for his business in 8,00,000
Singapore
ix) Dividend received from foreign company in India 25,000
x) Past years untaxed foreign income brought to India 50,000
Solution: Computation of Gross total income (amount in ₹)
Particulars Resident Non Resident
i. Interest from German Derivatives Bonds (1/3rd received 21,000 7,000
in India) [WN-1]
ii. Income from agriculture land situated in Malaysia, 51,000 -
remitted to India [WN-1 & 3]
iii. Income earned from business in Dubai, controlled from 75,000 20,000
India (20,000 received in India) [WN-1]
iv. Profit from business in Mumbai, controlled from Australia 1,75,000 1,75,000
[WN-1]

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v. Interest received from Mr. Ashok (NRI) on loan provided 35,000 35,000
to him for business in India [WN-1]
vi. Dividend from Brown Ltd., an Indian Co. [Taxable in hands 30,000 30,000
of shareholder]
vii. Profit from business in Canada controlled from Mumbai 60,000 -
(60% of profits deposited in a bank in Canada and 40%
remitted to India) [WN-3]
viii. Amount received from an NRI for the use of know-how for 8,00,000 -
his business in Singapore [WN-4]
ix. Dividend received from foreign company in India [WN-2] 25,000 25,000
x. Past years untaxed foreign income brought to India - -
Gross Total Income 12,72,000 2,92,000
Working Notes:
(1) In case of a resident, his global income is taxable as per Section 5(1). However, as per Section
5
(2), in case of a non- resident, only the following income are chargeable to tax:
i) Income received or deemed to be received in India; and
ii) Income accruing or arising or deemed to accrue or arise in India
The income referred to in SI. No. (iv), and (v) are taxable in India whether assessee is resident
or non resident since they accrue or arise in India. Interest on German derivatives Bonds would
be fully taxable in case of resident, whereas only 1/3rd which is received in India is taxable in
the hands of Non resident.
(2) Dividend received from foreign company in India will be taxable in both cases since it is
received in India.
(3) In case of non resident, Receipt in India is chargeable to tax and not remittance. Hence, Profit
from business in Canada controlled from Mumbai and Agricultural Income from land situated in
Malaysia will not be taxable in case of non resident. No exemption will be available in respect of
agricultural income form Malaysia, since agricultural income from land situated in India is exempt
from tax under Section 10(1).
(4) In case use of know how is outside India, Income from it does not accrue or arise in India.
Hence, it will not be taxable in case of non resident.
Illustration 22
Computation of GTI: The following are the incomes of Shri Subhash Chandra, a citizen of India
for the previous year 2024-25:
i) Income from business in India 2,00,000. The business is controlled from London and 60,000
were remitted to London.
ii) Profits from business earned in Japan 70,000 of which 20,000 were received in India. This
business is controlled from India.
iii) Untaxed income of 1,30,000 for the year 2020-21 of a business in England which was
brought in India on 3rdMarch, 2025.
iv) Royalty of 4,00,000 received from Shri Ramesh, a resident for technical service provided
to run a business outside India.
v) Agricultural income of 90,000 in Bhutan.
vi) Income of 73,000 from house property in Dubai, which was deposited in bank at Dubai.
Compute Gross total income of Shri Subhash Chandra for the A.Y. 2025-26, if he is
a) A Resident and Ordinary Resident, and
b) A Resident and Not Ordinarily Resident (7 Marks, May 2019-NS)
Solution: Computation of Gross total income of Shri Subhash Chandra (amount in ₹)
Particulars Resident NOR
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 CA VARDHAMAN DAGA

i) Income from business in India 2,00,000 2,00,000

ii) Profits from business earned in Japan controlled from India 70,000 70,000
iii) Untaxed income from business in England - -
iv) Royalty received from resident for technical services provided to 4,00,000 4,00,000
run a business outside India (Income is deemed to accrue or arise
outside India)
v) Agricultural income in Bhutan 90,000 -
vi) Income from house property in Dubai which was deposited in 51,100 -
Gross total income 8,11,100 2,70,000
Illustration 23
Scope of total income: Mr. Thomas, a non-resident and citizen of Japan entered into following
transactions during the previous year ended 31-03-2025. Examine the tax implications in the
hands of Mr. Thomas for the Assessment Year 2025-26 as per Income-tax Act, 1961. (Give brief
reasoning)
i) Interest received from Mr. Marshal, a non-resident outside India (The borrowed fund is
used by Mr. Marshal for investing in Indian company's debt fund for earning interest).
ii) Received 10 lakhs in Japan from a business enterprise in India for granting license for
computer software (not hardware specific).
iii) He is also engaged in the business of running news agency and earned income of 10 lakhs
from collection of news and views in India for transmission outside India.
iv) He entered into an agreement with SKK & Co., a partnership firm for transfer of technical
documents and design and for providing services relating thereto, to set up a Denim Jeans
manufacturing plant, in Surat (India). He charged 10 lakhs for these services from SKK &
Co. (5 Marks, Nov. 2020)
Solution:
i) Not taxable, since interest payable by a non-resident to another non-resident would be
deemed to accrue or arise in India only if the borrowed fund is used for the purposes of
business or profession carried on by him in India. In this case, it is used for investing in
Indian company's debt fund for earning interest and not for the purposes of business or
profession. Hence, it is not taxable in India.
ii) Royalty includes, inter alia, consideration for grant of license for computer software.
Hence, the amount of 10 lakhs payable by a resident (business enterprise in India) for grant
of license for computer software would be royalty which is deemed to accrue or arise in
India in the hands of Mr. Thomas, a non-resident, since it is for the purpose of business in
India. Hence, the royalty is taxable in India.
iii) No income shall be deemed to accrue or arise to Mr. Thomas through or from activities
which are confined to the collection of news and views in India for transmission outside
India. Hence, ₹ 10 lakhs is not taxable in India in the hands of Mr. Thomas.
iv) 10 lakhs is deemed to accrue or arise in India to Mr. Thomas, a non-resident, since it
represents royalty/fees for technical services paid for services utilized in India, in this
case, for setting up a Denim Jeans manufacturing plant in Surat. Hence, the same would be
taxable in India in the hands of Mr. Thomas.
Illustration 24
Scope of total income: Examine the tax implications of the following transactions for the A.Y.
2025-26: (Give brief reason)
i) Government of India has appointed Mr. Rahul as an ambassador in Japan. He received salary of
₹ 7,50,000 and allowances of 2,40,000 during the previous year 2024-25 for rendering his

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 CA VARDHAMAN DAGA

services in Japan. He is an Indian citizen having status of non-resident in India for the previous
year 2024-25.
ii) Ms. Juhi, a non-resident in India is engaged in operations which are confined to purchase of
goods in India for the purpose of export. She has earned 2,50,000 during the previous year 2024-
25.
iii) Mr. Naveen, a non-resident in India, has earned 3,00,000 as royalty for a patent right made
available to Mr. Rakesh who is also a non-resident. Mr. Rakesh has utilized patent rights for
development of a product in India and 50% royalty is received in India and 50% outside India.
iv) Mr. James, a NRI, borrowed 10,00,000 on 01-04-2024 from Mr. Akash who is also a non-
resident and invested such money in the shares of an Indian Company. Mr. Akash has received
interest @12% per annum. (7 Marks, Dec. 2021)
SOLUTION:
i) As per section 9(1)(iii), salaries (including, inter alia, allowances) payable by the Government
to a citizen of India for services rendered outside India shall be deemed to accrue or arise
in India.
Thus, salary received from Government by Mr. Rahul, being a non-resident of ₹ 7,50,000
for rendering services in Japan would be taxable in his hands, after allowing standard
deduction of 50,000.
However, any allowance or perquisites paid or allowed outside India by the Government to a
citizen of India for rendering services outside India will be fully exempt u/s 10(7). Hence,
2,40,000, being the allowance would be exempt.
ii) In the case of a non-resident, no income shall be deemed to accrue or arise in India to him
through or from operations which are confined to the purchase of goods in India for the
purpose of export.
Thus, income of 2,50,000 arising in the hands of Ms. Juhi would not be taxable in her hands
in India, since her operations are confined to purchase of goods in India for the purpose of
export.
iii) Royalty payable by a non-resident would be deemed to accrue or arise in India in the hands
of the recipient only when such royalty is payable in respect of any right, property or
information used for the purposes of a business or profession carried on by such non-
resident in India or earning any income from any source in India.
In the present case, since Mr. Rakesh, a non-resident, paid the royalty of ₹ 3,00,000 for a
patent right used for development of a product in India, the same would be taxable in India
in the hands of the recipient, Mr. Naveen, a non-resident, irrespective of the fact that only
50% of the royalty is received in India.
iv) Interest payable by a non-resident on the money borrowed for any purpose other than a
business or profession in India, would not be deemed to accrue or arise in India.
In the present case, since Mr. James, a non-resident borrowed the money for investment
in shares of an Indian company, the interest on such borrowing of 1,20,000 (10,00,000 x
12%) payable to Mr. Akash, a non-resident would not be deemed to accrue or arise to him in
India. Hence, the same would not be taxable in India in the hands of Mr. Akash.
ILLUSTRATION 25
Determination of Residential Status and its effect on Tax incidence: Mr. Sarthak, an individual
and Indian citizen living abroad (Dubai), a tax haven, since year 2005 and never came to India for
a single day since then, earned the following incomes during previous year 2024-25:
Particulars Amount (in ₹)
(i) Income accrued and arisen in Dubai not taxable in Dubai (being tax 20,00,000
haven)
(ii) Income accrued and arisen in India 5,00,000
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 CA VARDHAMAN DAGA

(iii) Income deemed to accrue and arise in India 8,00,000

(iv) Income arising in Dubai from a profession set up in India 10,00,000
(I) Determine the residential status of Mr. Sarthak and taxable income for the previous year
2024-25 (assuming no other income arise during the previous year).
(II) What would be your answer if income arising in Dubai from a profession set up in India is ₹ 2
lakhs instead of ₹ 10 lakhs?
(III) What would be your answer, if Mr. Sarthak born in Dubai and his parents were born in India?
( 6 marks, Nov 2022)
SOLUTION
(I) Mr. Sarthak is an Indian citizen living in Dubai since 2005 who never came to India for a
single day since then, he would not be a resident in India for the P.Y. 2023-24 on the basis
of number of days of his stay in India as per section 6(1).
However, since he is an Indian citizen –
• having total income (excluding income from foreign sources) of ₹ 23 lakhs, which exceeds
the threshold of ₹ 15 lakhs during the previous year; and
• not liable to tax in Dubai, he would be deemed resident in India for the P.Y. 2023-24 by
virtue of section 6(1A).
A deemed resident is always a resident but not ordinarily resident in India (RNOR).
Computation of Total Income for A.Y. 2025-26 :
Particulars Amount (in ₹)
(i) Income accrued and arisen in Dubai (not taxable in case of an RNOR) –
(ii) Income accrued and arisen in India (taxable) 5,00,000
(ii) Income deemed to accrue or arise in India (taxable) 8,00,000
(iii) Income arising in Dubai from a profession set up in India would be 10,00,000
taxable in case of RNOR
Total income 23,00,000
II If income arising in Dubai from a profession set up in India is ₹ 2 lakhs instead of ₹ 10 lakhs,
his total income (excluding income from foreign sources) would be only ₹ 15 lakhs. Since the
same does not exceed the threshold limit of ₹ 15 lakhs, he would not be deemed resident.
Accordingly, he would be non-resident in India for the P.Y. 2024-25 and hence, his total
income would be only ₹ 13 lakhs (aggregate of (ii) and (iii) above i.e., ₹ 5 lakhs + ₹ 8 lakhs).
(III) If Mr. Sarthak is born in Dubai and his parents were born in India, he would not be an
Indian citizen, but he may qualify as person of Indian origin. In such case, the provisions
relating to deemed resident would not apply to him. Accordingly, he would be non-resident in
India during the P.Y. 2024-25 and his total income would be ₹ 13 lakhs.
Note : In sub-part III., it is inferred that he is not a citizen of India since he is not born in
India. It is assumed that he has not applied for citizenship by fulfilling the other specified
eligibility conditions.
ILLUSTRATION 26
Determination of Residential Status and its effect on Tax incidence : Mr. Jai Chand (an Indian
citizen) left India for employment in country X on 5th June, 2015. He regularly visited India and
stayed for 60 days in every previous year since then. However, in the financial year 2024-25, he
did not come to India at all. He owns a commercial building in Delhi which is let out. He has also
set a retail store in India which is controlled by his brother from India. He provides the following
information to you regarding his income for the financial year 2024-25:
Income from commercial building in Delhi –₹ 12,00,000 (computed as per the provisions of the
Act).
Income from the retail store – ₹ 4,50,000 (computed as per the provisions of the Act)

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Country X does not tax any individual on their income as there is no personal income-tax regime
there.
Determine the residential status of Mr. Jai Chand for the Assessment year 2024-25.
Will your answer change if he is a citizen of Country X? ( 3 marks, May 2023)
SOLUTION
Determination of residential status of Mr. Jai Chand for A.Y. 2025-26
Since Mr. Jai Chand, an Indian citizen employed in Country X, did not come to India at all during
the P.Y. 2024-25, he would not be a resident for A.Y. 2025-26 as per section 6(1). However, since
he is an Indian citizen
• having total income (excluding income from foreign sources) of ₹ 16,50,000 [₹ 12,00,000,
being income from commercial building in India + ₹ 4,50,000, being Income from retail store
in India], which exceeds the threshold of ₹ 15 lakhs during the previous year; and
• not liable to tax in Country
he would be deemed resident in India for the P.Y. 2024-25.
A deemed resident is always a resident but not ordinarily resident in India (RNOR).
Yes, in case Mr. Jai Chand is a citizen of Country X, he would be non-resident in India for the P.Y.
2024-25, since the provisions of deemed resident are applicable only to an Indian citizen.

ILLUSTRATION 27
Determination of Residential Status and Computation of Total Income: Mr. Prashant (aged 35
years) is an Australian citizen who is settled in Australia and visits India for 125 days in every
financial year since past 11 years. During the F.Y. 2024-25, he visited India for a total period of
200 days. The purpose of his visit was to meet his family members who are settled in India and
also for managing his family members who are settled in India and also for managing his business
in Sri Lanka through his office in Chennai, India.
During the P.Y. 2024-25, he has the following incomes:
A. Income from business in Australia controlled form Australia – ₹ 20,00,000
B. Income from business in Sri Lanka controlled form Chennai – ₹ 16,00,000
C. Short-term capital gains on sale of shares of an Indian company received in Australia – ₹
50,000. The shares were sold online from Australia.
D. Income from agricultural land in Australia, received there and then brought to India – ₹
2,00,000
Find out the residential status of Mr. Prashant and compute his total income for Assessment Year
2025-26. ( 4 marks, May 2023)
SOLUTION
Determination of Residential Status of Mr. Prashant: Mr. Prashant is an Australian citizen who
comes on a visit to India for 125 days in every financial year since the past 11 years. During the
P.Y. 2024-25, he visited India for 200 days. Since he stayed in India for 182 days or more during
the P.Y. 2024-25, he would be resident in India for the A.Y. 2025-26.
“An individual is said to be “Resident but not ordinarily resident [RNOR]” in India in any previous
year, if he satisfies any one of the following conditions:
• He is a non-resident in at least 9 out of 10 previous years preceding the relevant previous
year; or
• His stay in India in the last 7 years preceding the relevant previous year is 729 days or
less.
Mr. Prashant does not satisfy either of the above conditions on account of being resident in more
than 1 year out of 10 years and stay in India for 875 days in the 7 years preceding the P.Y. 2024-
25. Hence, he is a Resident and Ordinarily Resident in the P.Y. 2024-25.
Computation of Total Income of Mr. Prashant for A.Y. 2025-26:

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Particulars Amount (₹)

(i) Income from business in Australia 20,00,000
(ii) Income from business in Sri Lanka 16,00,000
(iii) Short-term capital gains on sale of shares of an Indian company 50,000
(iv) Income from agricultural land in Australia [would not be exempt, since it 2,00,000
is not from an agricultural land in India]
Total income 38,50,000
Illustration 28
Determination of residential status: Mr. Ram an Indian citizen left India on 22-9-2024 for the
first time to work as an officer of a company in Germany. Determine the residential status of
Ram for the assessment year 2025-26 and explain the conditions to be fulfilled for the same
under the Income-tax Act, 1951. (5 Marks, PCC Nov. 2010)
Solution: Mr. Ram is an Indian Citizen who left India during the previous year for employment
outside India. For him basic condition no. 2 is not applicable. Hence, for being resident in India,
he should be in India for 182 days or more during the previous year. In this case, Mr. Ram was in
India only for 175 days during the previous year (01-04-2024 to22-9-2024 = 30+31 +30 +31 +31
+22= 175 days). Since he does not satisfy the minimum criteria of residence of 182 days during
the previous year, hence, he is a non-resident for assessment year 2025-26.
Illustration 29
Determination of residential status: Teji, a citizen of India, is an export manager of Arjun
Overseas Ltd., an Indian company since 1 May, 2020. He has been regularly visiting USA for export
promotion. He spent the following days in USA during the last 5 years:
Previous year ended Number of days spent in USA
31-03-2021 320 Days
31-03-2022 150 days
31-03-2023 270 days
31-03-2024 (leap year) 310 days
31-03-2025 295 days
Determine his residential status for assessment year 2025-26 assuming that prior to 1st May,
2020 he had never travelled abroad
Solution: During the previous year 2024-25, Teji was in India for 70 days (365 days - 295 days
in USA) and during the immediately preceding previous year, he was in India for 411 days as shown
below,-
Year 2020-21 2021-22 2022-23 2023-24 Total
(leap
year)
No. of days spent in USA 320 150 270 310 1050
No. of days stayed in India 45 216 95 55 411
Thus, he satisfies one basic condition and thus, he is a resident in India for the previous year
2024-25. He does not satisfy any of the additional conditions, hence Mr. Teji is a resident &
ordinarily resident.
Illustration 30
Determination of residential status: A, a British national, comes to India for first time during
2020-21. During financial years 2020-21, 2021-22, 2022-23, 2023-24 and 2024-25, he was in
India for 65 days, 60 days, 80 days, 160 days and 70 days respectively. Determine his residential
status for assessment year 2025-26.
Solution: During the previous year 2024-25, a was in India for 70 days and during 4 years
immediately preceding the previous year, he was in India for 365 days as shown below,-
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Year 2020-21 2021-22 2022-23 2023-24 Total

No. of days stayed in India 65 60 80 160 365
Thus, he satisfies the second basic condition and is, therefore, resident in India for the previous
year 2024-25. Further, he satisfies additional conditions as follows,
a. He was non resident in India in all of the last 10 preceding years;
b. He resided in India only for 365 days during the 7 preceding previous years.
Accordingly, he is 'Not Ordinarily Resident in India' for the previous year 2024-25.
Illustration 31
Determination of residential status: Mrs. Karuna Kapoor, is a Hollywood actress. Her passport
reveals the following information about her stay in India.
2024-25 From April 3rd To July 11th
nd
2023-24 From June 22 To July 11th
2022-23 From February 10th To March 26th
th
2021-22 From September 7 To March 26th
2020-21 From May 17th To September 30th
2019-20 From April 3rd To July 11th
rd
2018-19 From April 3 To July 11th
2017-18 From April 3rd To July 11th
2016-17 From April 3rd To July 11th
Find out her residential status for the assessment year 2025-26 (5 Marks, May 2018)
Solution: An individual is said to be a Resident in India in any previous year if he satisfies one or
both of the basic conditions as given under section 6(1).
i) Basic conditions:
 He must be in India for a period of 182 days or more during the previous year; or
 He must be in India for a period of 60 days or more during the previous year and 365 days
or more during the four years preceding the previous year.
ii) If he does not satisfy either of these conditions, he would be a non resident.
During the previous year 2024-25, Mrs. Karuna Kapoor was in India for 100 days (April: 28+ May:
31 + June: 30 + July: 11) and during the immediately preceding 4 previous years, she was in India
for 404 days as shown below,-
Year 2019-20 2020-21 2020-22 2020-23 Total
No. of days stayed in India 137 202 45 20 404
Thus, she satisfies one basic condition and thus, she is a resident in India for the previous year
2024-25.
As per Section 6(6), a person will be "Not ordinarily Resident" in India in any previous year, if
such person:
(i) has been a non-resident in 9 out of 10 previous years preceding the relevant previous year;
or
(ii) has during the 7 previous years immediately preceding the relevant previous year been in
India for 729 days or less.
(iii) a citizen of India, or a person of Indian origin, having total income, other than the income
from foreign sources, exceeding 15 lakh during the previous year, and he comes to India
for the purpose of visit to India during the relevant previous year and he has been in India
for a period or periods amounting in all to 120 days or more but less than 182 days; or
(iv) a citizen of India who is deemed to be resident in India under section 6(1A).
Year 2017- 2018- 2019-20 2020- 2021- 2022- 2023- Total
18 19 21 22 23 24

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(Leap (Leap
Year) Year)
No. of days 100 100 100 137 202 45 20 704
stayed in India
She also satisfies the second additional condition, hence she is resident but not ordinarily
resident.
Illustration 32
Determination of residential status: Ms. Bindu, a non-resident, residing in New York since 1991,
came back to India on 19-02-2023 for permanent settlement in India. Explain her residential
status of Ms. Bindu for the Assessment Year 2025-26 in accordance with the various provision
of Indian Income-tax Act. (4 Marks, May 2015)
Solution: Ms. Bindu is a resident in assessment year 2025-26 since she has stayed in India for
a period of 365 days (more than 182 days) during the Previous Year 2024-25, respectively.
As per section 6(6), a person will be "Not ordinarily Resident" in India in any previous year, if
such person:
(i) has been a non-resident in 9 out of 10 previous years preceding the relevant previous
year; or
(ii) has during the 7 previous years immediately preceding the relevant previous year been
in India for 729 days or less
(iii) a citizen of India, or a person of Indian origin, having total income, other than the
income from foreign sources, exceeding 15 lakh during the previous year, and he comes
to India for the purpose of visit to India during the relevant previous year and he has
been in India for a period or periods amounting in all to 120 days or more but less than
182 days; or
(iv) a citizen of India who is deemed to be resident in India under section 6(1A)
If he does not satisfy any of these conditions, he would be a resident and ordinarily resident.
In the instant case, applying the above provision, the status of Ms. Bindu for the previous year
2024-25 (A.Y.2025-26) would be Resident but not ordinarily resident since she was non-resident
in 9 out of 10 previous years immediately preceding the previous year and also had stayed for
less than 729 days in 7 previous years immediately preceding the previous year.
Therefore her status for A.Y. 2025-26 - "Resident but not ordinarily resident".
Illustration 33
Determination of residential status of crew member of ship: Mr. Rohan is an Indian citizen
and a member of the crew of a London bound Indian ship engaged in carriage of passengers in
international traffic departing from Mumbai port on 10thAugust, 2024. From the following
details for the P.Y. 2024-25, determine the residential status of Mr. Rohan for A.Y. 2025-26,
assuming that his stay in India in the last 4 previous years (preceding P.Y. 2024-25) is 380 days
and last seven previous years (preceding P.Y. 2024-25) is 780 days:
(Similar: 4 Marks, May 2017)
Particulars Date
Date entered into the Continuous Discharge Certificate in respect 10thAugust, 2024
of joining the ship by Mr. Rohan
Date entered into the Continuous Discharge Certificate in respect 13th February, 2025
of signing off the ship by Mr. Rohan
Solution: As per Section 6, where an Indian citizen leaves India as a member of crew of an
Indian ship or for the purpose of employment outside India, he will be resident only if he stayed
for 182 days during the previous year. In this case, the voyage is undertaken by an Indian ship
engaged in the carriage of passengers in international traffic, originating from a port in India

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(i.e., the Mumbai port) and having its destination at a port outside India (i.e., the London port)
is an eligible voyage and therefore the period beginning on 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 shall not be counted for stay in
India.
Therefore, the period beginning from 10thAugust, 2024 and ending on 13thFebruary, 2025,
being the dates entered into the Continuous Discharge Certificate in respect of joining the ship
and signing off from the ship by Mr. Rohan, has to be excluded for computing the period of his
stay in India.
Accordingly, 188 days [ 22(August) + 30 (September) + 31 (October) +30 (November) + 31
(December) +31 (January) + 13 (February)] have to be excluded from the period of his stay in
India.
Consequently, Mr. Rohan's period of stay in India during the P.Y. 2024-25 would be 177 days
[i.e., 365 days -188 days]. Since his period of stay in India during the P.Y. 2023-24 is less than
182 days, he is a non-resident for A.Y. 2025-26.

Note: Since the residential status of Mr. Rohan is "non-resident" for A.Y. 2025-26
consequent to his number of days of stay in P.Y. 2024-25 being less than 182 days, his
period of stay in the earlier previous years become irrelevant.

Illustration 34
Determination of residential status: Mrs. X, is an Indian citizen. Currently she is in employment
with an overseas company located in Dubai. Her passport reveals the following information about
her stay in India.

2024-25 From April 3rd To July 11th

nd
2023-24 From June 22 To July 11th
2022-23 From February 10th To March 26th
2021-22 From September 7th To March 26th
th
2020-21 From May 17 To September 30th
2019-20 From April 3rd To July 11th
2018-19 From April 3rd To July 11th
rd
2017-18 From April 3 To July 11th
2016-17 From April 3rd To July 11th
Find out her residential status for the assessment year 2025-26 if Mrs. X is not taxable in Dubai
or Territory by reason of her domicile or residence. Income of Mrs X in India for previous year
2024-25 any other country or (other than income from foreign sources) is ₹ 20,00,000.

Solution: An individual is said to be a Resident in India in any previous year if he satisfies one or
both of the basic conditions as given under section 6(1).
i) Basic conditions:
 He must be in India for a period of 182 days or more during the previous year; or
 He must be in India for a period of 60 days or more during the previous year and 365 days
or more during the four years preceding the previous year.

ii) If he does not satisfy either of these conditions, he would be a non resident unless his case
falls u/s 6(1A)
According to section 6(1A) of the Act, an individual shall be deemed to be resident in India if he
fulfills the following conditions:
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a. He must be citizen of India.

b. His total income, other than the income from foreign sources, must exceed 15 lakh during
the previous year; and
c. He is not liable to tax in any other country or territory by reason of his domicile or
residence or any other criteria of similar nature

If these conditions are satisfied he is deemed to be Not Ordinarily resident in India as per
Section 6(6)(d).
During the previous year 2024-25, Mrs. X was in India for 39 days (April: 28 + May: 11) Thus, she
does not satisfy any of the basic condition as per Section 6(1) of the Act. However, she satisfies
the conditions of Section 6(1A) read with Section 6(6)(d) hence she is resident but not ordinarily
resident in India.

Illustration 35
Determination of Residential status: Mr. X, Karta of HUF, claims that the HUF is nonresident
as the business of HUF is transacted from UK and all the policy decisions are taken there.
(2 Marks, PCC June, 2009)
Solution: True since the business of the HUF is transacted from UK and policy decisions are taken
there, therefore, the 'Control and Management' of its affairs is wholly situated outside India.
Illustration 36
Determination of Residential status: XYZ Inc is incorporated in Cayman Island. Its key
management and commercial decisions are taken in Board meetings held in Mumbai during financial
year 2024-25. Determine its residential status for assessment year 2025-26.
Solution: As per section 6(3), A company is said to be resident in India in any previous year, if its
place of effective management, in that year, is in India. In this case though the company is
incorporated outside India, it will be regarded as resident in India as its place of effective
management during the relevant financial year is in India since its key management and commercial
decisions are taken in its board meetings held in Mumbai.
Illustration 37
Determination of Residential status: Lotus Inc., a US company headquartered at New York, not
having a permanent establishment in India, has set up a liaison office in Delhi in April, 2024 in
compliance with RBI guidelines to look after its day to day business operations in India, spread
awareness about the company's products and explore further opportunities. The liaison office
takes decisions relating to day to day routine operations and performs support functions that are
preparatory and auxiliary in nature. The significant management and commercial decisions are,
however, in substance made by the Board of Directors at New York. Determine the residential
status
Solution: In the case of Lotus Inc., its place of effective management for P.Y. 2024-25 is not in
India, since the significant management and commercial decisions are, in substance, made by the
Board of Directors outside India in New York.
Lotus Inc. has only a liaison office in India through which it looks after its routine day to day
business operations in India. The place where decisions relating to day to day routine operations
are taken and support functions that are preparatory or auxiliary in nature are performed are not
relevant in determining the place of effective management.
Hence, Lotus Inc., being a foreign company is a non-resident for A.Y. 2025-26, since its place of
effective management is outside India in the P.Y. 2024-25.
Illustration 38
Determination of Residential status: Mrs. Shruti is an Indian citizen, is currently in employment
with an overseas company located in UAE. During the previous year 2024-25, she comes to India

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for 157 days. She is in India for 200 days, 100 days, 76 days and 45 days in the financial years
2020-21, 2021-22, 2022-23 and 2023-24, respectively. Her annual income for the previous year
2024-25 is as follows:
Particulars Amount (₹)
Income from salary earned and received in UAE 2,00,000
Income earned and received from a house property situated in UAE 5,00,000
Income deemed to be accrued and arise in India 5,00,000
Income from retail business (accrued and received outside India, controlled 10,00,000
from India)
Income accrued and arise in India 3,00,000
Life insurance premium paid by cheque in India 1,50,000
Determine the residential status of Mrs. Shruti for the assessment year 2025-26. (Support your
Answer with computation) (4 Marks, May 2022)
Solution: Mrs. Shruti is an Indian citizen in employment in UAE. She comes on a visit to India
during the P.Y. 2024-25 for 157 days.
Her stay in India in the four immediately preceding previous years is as follows:
P.Y. No. of days
P.Y. 2020-21 200
P.Y. 2021-22 100
P.Y. 2022-23 76
P.Y. 2023-24 45
Total 421
Computation of Total Income of Mrs. Shruti (excluding income from foreign sources)
Particulars (amount in ₹):
Income from salary earned and received in UAE (income from a foreign -
source, hence, to be excluded)
Income earned and received from a house property situated in UAE (income -
from a foreign source, hence, to be excluded)
Income deemed to accrue or arise in India 5,00,000
Income from retail business (to be included since the business is controlled 10,00,000
from India, even though such income accrues and is received outside India)
Income accrued and arising in India 3,00,000
18,00,000
Less: Deduction u/s 80C (LIC premium paid by cheque in India) - Assuming 1,50,000
other conditions are fulfilled
Total income (excluding income from foreign sources) 16,50,000
Mrs. Shruti, an Indian citizen visiting India in the P.Y. 2024-25, would be a resident in India
for A.Y. 2024-25, if she satisfies either of the following conditions
i) She is in India for 182 days or more during the P.Y. 2024-25; or
ii) She is in India for a period of 120 days or more during the P.Y. 2024-25 and her stay in
India in the four immediately preceding previous years is 365 days or more. [This condition will
apply to her since she comes on a visit to India during the previous year 2024-25 and her total
income (excluding income from foreign sources) is 16.50 lakhs, which exceeds the threshold of
₹ 15 lakhs]
This first condition is not satisfied since she is in India only for 157 days during the P.Y. 2024-
25.
The second condition is satisfied, since she has stayed in India for 157 days during the P.Y.
2024-25 and 421 days in the four immediately preceding previous years. Since she has become
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resident in India for A.Y. 2025-26 by satisfying this condition, by default, she would be treated
as resident but not ordinarily resident.
Conclusion: Mrs. Shruti's residential status for A.Y. 2025-26 is resident but not ordinarily
Resident
Illustration 39
Taxability of interest income: Mr. A, a citizen of India, left for USA for the purposes of
employment on 01-5-2024. He has not visited India thereafter. Mr. A borrows money from his
friend Mr. B, who left India one week before Mr. A's departure, to the extent of 10 lakhs and
buys shares in X Ltd., an Indian company. Discuss the taxability of the interest charged @ 10%
in B's hands where the same has been received in New York. (4 Marks, PCC May 2006)
Solution: In this case,
a) Mr. A and Mr. B are non-resident in India during the previous year 2024-25;
b) the purpose of borrowed by Mr. A is not 'carrying on of any business of profession in India'
but for the purpose of investment in India i.e. earning any source of income in India.
Hence, the provisions of section 9(1)(v) relating to deeming fiction of accrual is not applicable in
this case. Accordingly the interest does not accrue or arise in India and is, therefore, not taxable
in India.
Illustration 40
Taxability of fees for technical services: Miss Vivitha paid a sum of 5000 USD to Mr.
Kulasekhara, a management consultant practising in Colombo, specializing in project financing. The
payment was made in Colombo. Mr. Kulasekhara is a non-resident. The consultancy related to a
project in India with possible Ceylonese collaboration. Is this payment chargeable to tax in India
in the hands of Mr. Kulasekhara, since the services were used in India?(4 Marks,IPCC May 2011)
Solution: A non-resident is chargeable to tax in respect of income received outside India only if
such income accrues or arises or is deemed to accrue or arise to him in India. The income deemed
to accrue or arise in India under section 9 comprises, inter alia, income by way of fees for
technical services, which includes any consideration for rendering of any managerial, technical or
consultancy services. Therefore, payment to a management consultant relating to project
financing is covered within the scope of "fees for technical services".
According to explanation to section 9, income by way of, fees for technical services, from services
utilized in India would be deemed to accrue or arise in India in case of a non-resident and be
included in his total income, whether or not such services were rendered in India.
In the instant case, since the services were utilized in India, the payment received by Mr.
Kulasekhara, a non-resident, in Colombo is chargeable to tax in his hands in India, as it is deemed
to accrue or arise in India.
Illustration 41
Residential Status and its effect on tax incidence: Mr. Soham, an Indian Citizen left India on
20-04-2020 for the first time to setup a software firm in Singapore. On 10-04-2024, he entered
into an agreement with LK Limited, an Indian Company for the transfer of technical documents
and designs to setup an automobile factory in Faridabad. He reached India along with his team to
render the requisite services on 15-05-2024 and was able to complete his assignment on 20-08-
2024. He left for Singapore on 21-08-2024. He charged 50 lakhs for his services from LK Limited.
Determine the residential status of Mr. Soham for the Assessment Year 2025-26 and explain as
to the taxability of the fees charged from LK limited as per the Income-tax Act, 1961. (6 Marks,
Nov. 2015)
Solution: As per Section 6 an Indian citizen or a person of Indian origin, who being outside India,
comes on a visit to India shall be resident in India if he is in India for a period of 182 days or
more during the previous year or he comes on a visit to India in the previous year for a period of

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more than 120 days and was in India for a period of 365 days or more during 4 years preceding
the previous year and having total income, other than the income from foreign sources, exceeding
15 lakh rupees during the previous year.
In this case Mr. Soham came to India on 15-05-2024 and left for Singapore on 21-08-2024, hence
he was in India for a period of 99 days during previous year 2024-25. Hence, he is non-resident
in India.
According to Section 9(1)(vi), Income by way of royalty shall be deemed to accrue or arise in India
in hands of recipient (Mr. Soham) if it is payable by a person who is resident (LK Limited), except
where the royalty are payable in respect of services utilised in a business or profession carried
on by such person outside India or for the purposes of making or earning any income from any
source outside India. Hence, the income of 50,00,000 shall be deemed to accrue in India. The
income of a non-resident shall be deemed to accrue or arise in India under section 9(1)(vi) and
shall be included in the total income of the non-resident, whether or not, -
i) the non-resident has a residence or place of business or business connection in India; or
ii) the non-resident has rendered services in India.
Hence, sum of 50,00,000 will be taxable in hands of Mr. Soham.
ILLUSTRATION 42
Computation of Total Income in case of Resident and NOR : Mr. Tilak aged 35 years, furnishes
the following information regarding his income for the A.Y. 2025-26. Compute the total income if
he is :
(1) Resident and Ordinarily Resident.
(2) Resident but Not Ordinarily Resident
(Ignore the provisions of Section 115BAC).
(a) Remuneration of ₹ 50,000 for service rendered in Malaysia, credited to his bank account in
Malaysia and immediately remitted to his bank account in India.
(b) Profits from a business in England controlled from Bombay ₹ 3,00,000 (out of which ₹ 25,000
is received in India).
(c) Amount brought to India out of past untaxed profits earned in Singapore ₹ 1,00,000.
(d) Capital gain on sale of land in India but received in Malaysia ₹ 2,00,000.
(e) Income from agriculture land at Nepal of ₹ 18,000, received there and then brought to India.
(f) He paid ₹ 50,000 towards principal repayment of loan taken for construction of his self-
occupied house in India.
(g) Interest on saving bank deposit in State Bank of India of India of ₹ 12,000.
(6 Marks, May 2024)
SOLUTION Computation of total income of Mr. Tilak for the A.Y. 2025-26 :
Particulars ROR (₹) RNOR (₹)
(a) Remuneration for services rendered in Malaysia 50,000 Nil
Global income is taxable in case of a ROR. In case of
RNOR, remuneration would not be taxable in India
since neither services are rendered in India nor
remuneration received in India.
(b) Profit from business in England controlled from 3,00,000 3,00,000
Bombay
Global income is taxable in case of a ROR. In case of
RNOR, whole profits of ₹ 3,00,000 from business in
England is taxable since business is controlled from
India.

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 CA VARDHAMAN DAGA

(c) Past untaxed profits earned in Singapore and Nil Nil

brought to India in current year
(d) Capital gain on sale of land in India but received 2,00,000 2,00,000
in Malaysia
Deemed to accrue or arises in India, since the
property is situated in India.
(e) Income from agricultural land in Nepal, received 18,000 Nil
there
Global income is taxable in case of a ROR. In case of
RNOR, it would not be taxable in India, since neither
it is deemed to accrue or arise in India nor received
in India.
(f) Interest on saving bank deposit in SBI 12,000 12,000
Taxable since it is deemed to accrue or arises in
India.
Gross Total Income 5,80,000 5,12,000
Less: Deduction under Chapter VI-A
Deduction u/s 80C - For repayment of housing loan 50,000 50,000
Deduction u/s 80TTA - Interest on savings bank 10,000 10,000
account subject to a maximum of ₹ 10,000
Total Income 5,20,000 4,52,000
ILLUSTRATION 43
Computation of Total Income in case of Resident and NOR : Mr. Tilak aged 35 years, furnishes
the following information regarding his income for the A.Y. 2025-26. Compute the total income if
he is :
(1) Resident and Ordinarily Resident.
(2) Resident but Not Ordinarily Resident
(Ignore the provisions of Section 115BAC).
(a) Remuneration of ₹ 50,000 for service rendered in Malaysia, credited to his bank account in
Malaysia and immediately remitted to his bank account in India.
(b) Profits from a business in England controlled from Bombay ₹ 3,00,000 (out of which ₹ 25,000
is received in India).
(c) Amount brought to India out of past untaxed profits earned in Singapore ₹ 1,00,000.
(d) Capital gain on sale of land in India but received in Malaysia ₹ 2,00,000.
(e) Income from agriculture land at Nepal of ₹ 18,000, received there and then brought to India.
(f) He paid ₹ 50,000 towards principal repayment of loan taken for construction of his self-
occupied house in India.
(g) Interest on saving bank deposit in State Bank of India of India of ₹ 12,000.
(6 Marks, May 2024)
SOLUTION Computation of total income of Mr. Tilak for the A.Y. 2025-26 :
Particulars ROR (₹) RNOR (₹)
(a) Remuneration for services rendered in Malaysia 50,000 Nil
Global income is taxable in case of a ROR. In case of RNOR,
remuneration would not be taxable in India since neither

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 CA VARDHAMAN DAGA

services are rendered in India nor remuneration received in

India.
(b) Profit from business in England controlled from Bombay 3,00,000 3,00,000
Global income is taxable in case of a ROR. In case of RNOR,
whole profits of ₹ 3,00,000 from business in England is taxable
since business is controlled from India.
(c) Past untaxed profits earned in Singapore and brought to India Nil Nil
in current year
(d) Capital gain on sale of land in India but received in Malaysia 2,00,000 2,00,000
Deemed to accrue or arises in India, since the property is
situated in India.
(e) Income from agricultural land in Nepal, received there 18,000 Nil
Global income is taxable in case of a ROR. In case of RNOR, it
would not be taxable in India, since neither it is deemed to
accrue or arise in India nor received in India.
(f) Interest on saving bank deposit in SBI 12,000 12,000
Taxable since it is deemed to accrue or arises in India.
Gross Total Income 5,80,000 5,12,000
Less: Deduction under Chapter VI-A
Deduction u/s 80C - For repayment of housing loan 50,000 50,000
Deduction u/s 80TTA - Interest on savings bank account 10,000 10,000
subject to a maximum of ₹ 10,000
Total Income 5,20,000 4,52,000

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 CA VARDHAMAN DAGA

CHAPTER – 3: INCOME FROM SALARY

STUDY MATERIAL
ILLUSTRATION 1
Mr. Raj Kumar has Basic pay the following receipts from his employer:
(1) Basic pay 40,000 p.m.
(2) Dearness allowance (D.A.) 6,000 p.m
(3) Commission 50,000 p.a.
(4) Motor car for personal use expenses met by the employer 1,500p.m.
(5) House rent allowance 15,000 p.m
Find out the amount of HRA exempt in the hands of Mr. Raj Kumar assuming that he paid a rent
of ₹ 16,000p.m. for his accommodation at Kanpur. DA forms part of salary for retirement
benefits. Mr. Raj Kumar exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).
SOLUTION – Taxable HRA – 43,200

ILLUSTRATION 2
Mr. Srikant has two sons. He is in receipt of children education allowance of ₹ 150 p.m. for his
elder son and ₹ 70 p.m. for his younger son. Both his sons are going to school. He also receives the
following allowances:
Transport allowance : ₹ 1,800 p.m.
Tribal area allowance : ₹ 500 p.m.
Compute his taxable allowances
SOLUTION –
As per default tax regime – ₹30,240
As per normal provision - ₹25,800
ILLUSTRATION 3
Mr. Sagar who retired on 1.10.2024 is receiving ₹ 5,000 p.m. as pension. On 1.2.2025, he commuted
60% of his pension and received ₹3,00,000 as commuted pension. You are required to compute his
taxable pension assuming:
(a) He is a government employee.
(b) He is a private sector employee and received gratuity of ₹5,00,000 at the time of retirement.
(c) He is a private sector employee and did not receive any gratuity at the time of retirement.
SOLUTION – (a) exempt, 24,000 (b) 133,333 , 24,000 (c) 50,000 , 24,000

ILLUSTRATION 4
Mr. Ravi retired on 15.6.2024 after completion of 26 years 8 months of service and received
gratuity of ₹15,00,000. At the time of retirement, his salary was:
Basic Salary : ₹ 50,000 p.m.
Dearness Allowance : ₹ 10,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was
₹ 1,20,00,000)
Bonus : ₹ 25,000 p.a.
Compute his taxable gratuity assuming:
(a) He is private sector employee and covered by the Payment of Gratuity Act, 1972,
(b) He is private sector employee and not covered by Payment of Gratuity Act, 1972.
(c) He is a Government employee.
SOLUTION – (a) 5,65,385 (b) 6,42,000 (c) Nil

ILLUSTRATION 5
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Mr. Gupta retired on 1.12.2024 after 20 years of service and received leave salary of ₹ 5,00,000.
Other details of his salary income are:
Basic Salary : ₹ 5,000p.m. (₹ 1,000 was increased w.e.f. 1.4.2024)
Dearness Allowance : ₹3,000 p.m. (60% of which is for retirement benefits)
Commission : ₹ 500 p.m.
Bonus : ₹ 1,000 p.m.
Leave availed during service : ₹ 480 days
He was entitled to 30 days leave every year.
You are required to compute his taxable leave salary assuming:
(a) He is a government employee.
(b) He is a non-government employee.
SOLUTION – (a) Nil (b) 4,73,600

ILLUSTRATION 6
Mr. A retires from service on December 31, 2024, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2024-25:
Particulars ₹
Basic pay@ ₹ 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ₹8,000 per month for 72,000
9 months
Lumpsum payment received from the Unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the unrecognised provident fund, the employer's contribution
was 2,20,000 and the interest thereon ₹ 50,000. The employee's contribution was 2,70,000 and
the interest thereon 60,000. What is the taxable portion of the amount received from the
unrecognized provident fund in the hands of Mr. A for the assessment year 2025-26?
SOLUTION – employer contribution and interest – Salary, employee interest - IOS

ILLUSTRATION 7
Will your answer be any different if the fund mentioned above was a recognised provident fund?
SOLUTION – Exempt
ILLUSTRATION 8
Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2024-25. You are
required to compute his gross salary from the details given below:
Basic Salary 10,000 p.m.
D.A. (50% is for retirement benefits) 8,000 p.m.
Commission as a percentage of turnover 0.1%
Turnover during the year ₹ 50,00,000
Bonus ₹ 40,000
Gratuity ₹ 25,000
His own contribution in the RPF ₹ 20,000
Employer's contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% р. ₹ 13,000
SOLUTION – Gross salary – 2,92,740
ILLUSTRATION 9
Mr. Dutta received voluntary retirement compensation of ₹ 7,00,000 after 30 years 4 months of
service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing
basic salary 20,000 p.m.; Dearness allowance (which forms part of pay) ₹ 5,000 p.m. Compute his
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 CA VARDHAMAN DAGA

taxable voluntary retirement compensation, assuming that he does not claim any relief under
section 89.
SOLUTION – taxable – 2,00,000
ILLUSTRATION 10
Mr. X is appointed as a CFO of ABC Ltd. in Mumbai from 1.9.2022. His basic salary is 6,00,000
p.m. He is paid 8% as D.A. He contributes 10% of his pay and D.A. towards his recognized provident
fund and the company contributes the same amount. The accumulated balance in recognized
provident fund as on 1.4.2023, 31.3.2024 and 31.3.2025 is ₹ 9,81,137, ₹ 27,43,048 and ₹
46,48,555, respectively. Compute the perquisite value chargeable to tax in the hands of Mr. X u/s
17(2)(vii) and 17(2)(viia) for the A.Y. 2024-25 and A.Y. 2025-26. Prior to 1.9.2022, he was a
consultant, whose professional fees was taxable under the head "Profits and gains of business or
profession.
SOLUTION – For A.Y 2024-25 – 1532, For A.Y 2025-26 - 4069

ILLUSTRATION 11
Mr. D went on a holiday on 25.12.2023 to Delhi with his wife and three children (one son - age 5
years; twin daughters - age 3 years). They went by flight (economy class) and the total cost of
tickets reimbursed by his employer was ₹60,000 (₹45,000 for adults and ₹ 15,000 for the three
minor children). Compute the amount of LTC exempt if Mr. D exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A).
SOLUTION – Exempt
ILLUSTRATION 12
In the above illustration 11, will there be any difference if among his three children the twins
were 5 years old and the son 3 years old? Discuss.
SOLUTION – Exempt – 55,000
ILLUSTRATION 13
Compute the taxable value of the perquisite in respect of medical facilities received by Mr. G
from his employer during the P.Y. 2024-25:
Medical premium paid for insuring health of Mr. G 7,000
Treatment of Mr. G by his family doctor 5,000
Treatment of Mrs. G in a Government hospital 25,000
Treatment of Mr. G's grandfather in a private clinic 12,000
Treatment of Mr. G's mother (68 years and dependant) by family doctor 8,000
Treatment of Mr. G's sister (dependant) in a nursing home 3,000
Treatment of Mr. G's brother (independent) 6,000
Treatment of Mr. G's father (75 years and dependent) abroad 50,000
Expenses of staying abroad of the patient 30,000
Limit specified by RBI 75,000
SOLUTION – Taxable value of perquisite – 39,000
ILLUSTRATION 14
Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent- free unfurnished
accommodation in Mumbai. He gives you the following particulars:
Basic salary 6,000 p.m.
Dearness Allowance 2,000 p.m. (30% is for retirement benefits)
Bonus 1,500 p.m.
Even though the company allotted the house to him on 1.4.2024, he occupied the same only from
1.11.2024. Calculate the taxable value of the perquisite for A.Y.2025-26.
SOLUTION – value of rent-free accommodation – 5,300
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ILLUSTRATION 15
Using the data given in the previous illustration 14, compute the value of the perquisite if Mr. C
is required to pay a rent of ₹ 1,000p.m. to the company, for the use of this accommodation.
SOLUTION – value of accommodation - 300
ILLUSTRATION 16
Using the data given in illustration 14, compute the value of the perquisite if ABC Ltd. has taken
this accommodation on a lease rent of ₹ 1,025 p.m. and Mr. C is required to pay a rent of ₹ 1,000
p.m. to the company, for the use of this accommodation.
SOLUTION – value of accommodation - 125
ILLUSTRATION 17
Using the data given in illustration 14, compute the value of the perquisite if ABC Ltd. has provided
a television (WDV ₹10,000; Cost ₹25,000) and two air conditioners. The rent paid by the company
for the air conditioners is ₹400p.m. each. The television was provided on 1.1.2025. However, Mr.
C is required to pay a rent of 1,000 p.m. to the company, for the use of this furnished
accommodation.
SOLUTION – value of accommodation – 4,925
ILLUSTRATION 18
Using the data given in illustration 17 above, compute the value of the perquisite if Mr. C is a
government employee. The licence fees determined by the Government for this accommodation
was ₹ 700 p.m.
SOLUTION – value of accommodation – 3,125
ILLUSTRATION 19
Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following
perquisites were offered.
(i) For Mr. X, who engaged a domestic servant for ₹ 500 per month, his employer reimbursed the
entire salary paid to the domestic servant. ₹500 per month
(ii) For Mr. Y, he was provided with a domestic servant @ ₹500 per month as part of remuneration
package
You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y, who
are not specified employees.
SOLUTION – (i) taxable in case of all employees (ii) not taxable, not specified employee
ILLUSTRATION 20
Mr. X retired from the services of M/s Y Ltd. on 31.01.2025, after completing service of 30 years
and one month. He had joined the company on 1.1.1994 at the age of 30 years and received the
following on his retirement:
(i) Gratuity ₹ 6,00,000. He was covered under the Payment of Gratuity Act, 1972.
(ii) Leave encashment of ₹3,30,000 for 330 days leave balance in his account. He was credited 30
days leave for each completed year of service.
(iii) As per the scheme of the company, he was offered a car which was purchased on 30.01.2022
by the company for ₹ 5,00,000. Company has recovered ₹ 2,00,000 from him for the car. Company
depreciates the vehicles at the rate of 15% on Straight Line Method
(iv) An amount of ₹3,00,000 as commutation of pension for 2/3 of his pension commutation.
(v) Company presented him a gift voucher worth ₹6,000 on his retirement.
(vi) His colleagues also gifted him a Television (LCD) worth ₹50,000 from their own contribution.
Following are the other particulars:
(i) He has drawn a basic salary of ₹20,000 and 50% dearness allowance per month for the period
from 01.04.2024 to 31.01.2025.

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(ii) Received pension of ₹5,000 per month for the period 01.02.2025 to 31.03.2025 after
commutation of pension.
Compute his gross total income from the above for Assessment Year 2025-26 assuming he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION – Taxable salary – 6,82,769
ILLUSTRATION 21
Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of perquisites provided
by the company to him for the entire financial year 2024-25:
(i) Domestic servant was provided at the residence of Bala. Salary of domestic servant is ₹ 1,500
per month. The servant was engaged by him and the salary is reimbursed by the company
(employer).
In case the company has employed the domestic servant, what is the value of perquisite?
(ii) Free education was provided to his two children Arthy and Ashok in a school maintained and
owned by the company. The cost of such education for Arthy is computed at ₹ 900 per month and
for Ashok at ₹ 1,200 per month. No amount was recovered by the company for such education
facility from Bala.
(iii) The employer has provided movable assets such as television, refrigerator and air-conditioner
at the residence of Bala. The actual cost of such assets provided to the employee is ₹ 1,10,000
(iv) A gift voucher worth 10,000 was given on the occasion of his marriage anniversary. It is given
by the company to all employees above certain grade.
(v) Telephone provided at the residence of Shri Bala and the bill aggregating to 25,000 paid by
the employer.
(vi) Housing loan @ 6% per annum. Amount outstanding on 1.4.2024 is 6,00,000. Shri Bala pays
12,000 per month towards principal, on 5th of each month.
Compute the chargeable perquisite in the hands of Mr. Bala for the A.Y. 2025-26.
The lending rate of State Bank of India as on 1.4.2024 for housing loan may be taken as 10%.
SOLUTION – (i) taxable perquisite – 18,000 (ii) taxable perquisite – 14,400 (iii) value –
11,000 (iv) taxable – 10,000 (v) tax free (vi) value of perquisite – 20,880
ILLUSTRATION 22
AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2024. The shares were allotted
at ₹ 200 per share as against the fair market value of ₹ 300 per share on the date of exercise
of option by the allottee viz. Sri Chand. The fair market value was computed in accordance with
the method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the cost of
acquisition of those sweat equity shares?
SOLUTION – value of perquisite – 1,00,000
ILLUSTRATION 23
X Ltd. provided the following perquisites to its employee Mr. Y for the P.Y. 2024-25 -
(1) Accommodation taken on lease by X Ltd. for ₹ 15,000p.m. ₹ 5,000 p.m. is recovered from the
salary of Mr. Y.
(2) Furniture, for which the hire charges paid by X Ltd. is ₹3,000p.m. No amount is recovered
from the employee in respect of the same.
(3) A car of 1,200 cc which is owned by X Ltd. and given to Mr. Y to be used both for official and
personal purposes. All running and maintenance expenses are fully met by the employer. He is also
provided with a chauffeur
(4) A gift voucher of ₹ 10,000 on his birthday.

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Compute the value of perquisites chargeable to tax for the A.Y.2025-26, assuming his salary for
perquisite valuation to be ₹ 10 lakh.
SOLUTION – value of perquisite – 1,18,400
ILLUSTRATION 24
Mr. Goyal receives the following emoluments during the previous year ending 31.03.2025.
Basic pay ₹ 4,00,000
Dearness Allowance ₹ 1,50,000
Commission ₹ 1,00,000
Entertainment allowance ₹ 40,000
Medical expenses reimbursed ₹ 25,000
Professional tax paid ₹2,000 (₹1,000 was paid by his employer)
Mr. Goyal contributes ₹ 5,000 towards recognized provident fund. He has no other income.
Determine the income from salary for A.Y. 2025-26, if Mr. Goyal is a State Government employee
SOLUTION – (a) as per 115BAC – 6,41,000 (b) as per normal provision – 6,59,000
ILLUSTRATION 25
In the case of Mr. Hari, who turned 71 years on 28.3.2025, you are informed that the salary
(computed) for the previous year 2024-25 is ₹10,20,000 and arrears of salary received is ₹
3,45,000. Further, you are given the following details relating to the earlier years to which the
arrears of salary received is attributable to:
Previous year Taxable Salary (₹) Arrears now received (₹)
2010-2011 7,10,000 1,03,000
2011-2012 8,25,000 1,17,000
2012-2013 9,50,000 1,25,000
Compute the relief available under section 89 and the tax payable for the A.Y. 2025-26. Assume
that Mr. Hari exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).
Note: Rates of Taxes:
Assessment Year Slab rates of income-tax
For resident individuals of the age of For other resident individuals
60 years or more at any time during
the previous year
Slabs Rate Slabs Rate
2011-12 Upto 2,40,000 Nil Upto 1,60,000 Nil
₹ 2,40,001-₹ 5,00,000 10% ₹1,60,001-₹5,00,000 10%
₹ 5,00,001-₹ 8,00,000 20% ₹ 5,00,001-₹ 8,00,000 20%
Above ₹ 8,00,000 30% Above ₹ 8,00,000 30
2012-13 Upto ₹ 2,50,000 Nil Upto 1,80,000 Nil
₹ 2,50,001-₹ 5,00,000 10% ₹1,80,001-₹5,00,000 10%
₹ 5,00,001-₹ 8,00,000 20% ₹ 5,00,001-₹ 8,00,000 20%
Above ₹ 8,00,000 30% Above ₹ 8,00,000 30%
2013-14 Upto ₹ 2,50,000 Nil Upto 2,00,000 Nil
₹ 2,50,001-₹ 5,00,000 10% ₹2,00,001-₹5,00,000 10%
₹ 5,00,001-₹ 10,00,000 20% ₹ 5,00,001-₹ 10,00,000 20%
Above ₹ 10,00,000 30% Above ₹ 10,00,000 30%
Note-Education cess@2% and secondary and higher education cess@1% was attracted on the
income-tax for all above preceding years
SOLUTION – rebate u/s 89 – 15,455

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TEST YOUR KNOWLEDGE

Que-26.
Mr. Mohit is employed with XY Ltd. on a basic salary of ₹ 10,000p.m. He is also entitled to dearness
allowance @100% of basic salary, 50% of which is included in salary as per terms of employment.
The company gives him house rent allowance of 6,000p.m. which was increased to ₹7,000 p.m. with
effect from 01.01.2025. He also got an increment of ₹ 1,000p.m. in his basic salary with effect
from 01.02.2025. Rent paid by him during the P.Y.2024-25 is as under:
April and May, 2024- Nil, as he stayed with his parents
June to October, 2024 - ₹6,000p.m. for an accommodation in Ghaziabad
November, 2024 to March, 2025 - Delhi ₹8,000 p.m. for an accommodation in
Compute his gross salary for A.Y.2025-26, assuming he exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A).
Ans- Taxable HRA (total) = ₹ 12,000 + ₹ 7,500 +₹ 500 + ₹ 1,300 = ₹ 21,300, gross
salary – 2,65,300
Que -27.
Ms. Rakhi is an employee in a private company. She receives the following medical benefits from
the company during the previous year 2024-25:
Particulars ₹
1 Reimbursement of following medical expenses incurred by Ms. Rakhi 4,000
(A) On treatment of her self-employed daughter in a private clinic 8,000
(B) On treatment of herself by family doctor 5,000
(C) On treatment of her mother-in-law dependent on her, in a nursing 7,500
home
2. Payment of premium on Mediclaim Policy taken on her health 7,500
3. Medical Allowance 2,000 p.m
4. Medical expenses reimbursed on her son's treatment in a government 5,000
hospital
5. Expenses incurred by company on the treatment of her minor son abroad 1,05,000
including stay expenses
6. Expenses in relation to foreign travel of Rakhi and her son for medical 1,20,000
treatment
Note Limit prescribed by RBI for expenditure on medical treatment and
stay abroad is USD 2,50,000 per financial year under liberalized
remittance scheme.
Examine the taxability of the above benefits and allowances in the hands of Rakhi
Ans- Tax treatment of medical benefits, allowances and mediclaim premium in the hands of Ms.
Rakhi for A.Y. 2025-26
Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(A) The amount of ₹ 4,000 reimbursed by her employer for treatment of her self-employed
daughter in a private clinic is taxable perquisite.
(B) The amount of ₹ 8,000 reimbursed by the employer for treatment of Ms. Rakhi by family
doctor is taxable perquisite.
(C) The amount of ₹ 5,000 reimbursed by her employer for treatment of her dependant
mother-in-law in a nursing home is taxable perquisite.
The aggregate sum of ₹ 17,000, specified in (A), (B) and (C) above, reimbursed by the
employer is taxable perquisite

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2. Medical insurance premium of ₹ 7,500 paid by the employer for insuring health of Ms. Rakhi
is a tax free perquisite as per clause (iii) of the first proviso to section 17(2).
3. Medical allowance of ₹ 2,000 per month i.e., ₹ 24,000 p.a. is a fully taxable allowance.
4. As per clause (ii)(a) of the first proviso to section 17(2), reimbursement of medical expenses
of ₹ 5,000 on her son’s treatment in a hospital maintained by the Government is a tax-free
perquisite.
5. As per clause (vi) of the first proviso to section 17(2), the following expenditure incurred by
& the employer would be excluded from perquisite subject to certain conditions –
6. (i) Expenditure on medical treatment of the employee, or any member of stay expenses [₹
1,05,000, in this case];
(ii) Expenditure on travel of the employee or any member of the family of such employee for
medical treatment and one attendant who accompanies the patient in connection with such
treatment [₹ 1,20,000, in this case].
The conditions subject to which the above expenditure would be exempt are as follows –
the family of such employee, outside India including
(i) The expenditure on medical treatment and stay abroad would be excluded from perquisite
to the extent permitted by Reserve Bank of India;
(ii) The expenditure on travel would be excluded from perquisite only in the case of an
employee whose gross total income, as computed before including the said expenditure, does
not exceed ₹ 2 lakh.
Since the expenditure on medical treatment and stay abroad does not exceed the limit
permitted by RBI, they would be fully exempt. However, the foreign travel expenditure of
Ms. Rakhi and her minor son borne by the employer would be excluded from perquisite only if
the gross total income of Ms. Rakhi, as computed before including the said expenditure, does
not exceed ₹ 2 lakh.

Que- 28.
Mr. X is employed with AB Ltd. on a monthly salary of ₹25,000 per month and an entertainment
allowance and commission of ₹ 1,000p.m. each. The company provides him with the following
benefits:
(i) A company owned accommodation is provided to him in Delhi. Furniture costing ₹ 2,40,000 was
provided on 1.8.2024.
(ii) A personal loan of ₹5,00,000 on 1.7.2024 on which it charges interest @ 6.75% p.a. The entire
loan is still outstanding (Assume SBI rate of interest on 1.4.2024 was 12.75% p.a.)
His son is allowed to use a motor cycle belonging to the company. The company had purchased this
motor cycle for ₹ 60,000 on 1.5.2021. The motor cycle was finally sold to him on 1.8.2024 for ₹
30,000.
(iv) Professional tax paid by Mr. X is ₹ 2,000.
Compute the income from salary of Mr. X for the A.Y. 2025-26 assuming Mr. X exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
Ans- income from salary – 3,56,900
Que-29.
Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following information
for the year ended 31.03.2025:
(i) Basic salary upto 31.10.2024 ₹50,000 p.m.
Basic salary from 01.11.2024 ₹ 60,000 p.m.
Note - Salary is due and paid on the last day of every month.
(ii) Dearness allowance @ 40% of basic salary.

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 CA VARDHAMAN DAGA

(iii) Bonus equal to one month salary. Paid in October 2024 on basic salary plus dearness allowance
applicable for that month.
(iv) Contribution of employer to recognized provident fund account of the employee@16% of basic
salary
(v) Professional tax paid ₹ 2,500 of which ₹2,000 was paid by the employer.
(vi) Facility of laptop and computer was provided to Balaji for both official and personal use. Cost
of laptop ₹ 45,000 and computer ₹ 35,000 were acquired by the company on 01.12.2024.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided to
the employee from 01.11.2024 meant for both official and personal use. Repair and running
expenses of ₹ 45,000 from 01.11.2024 to 31.03.2025, were fully met by the employer. The motor
car was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children (one daughter aged 7
and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer ₹ 30,000
for adults and ₹ 45,000 for three children. Balaji is eligible for availing exemption this year to
the extent it is permissible in law.
Compute the salary income chargeable to tax in the hands of Mr. Balaji for the A.Y. 2025-26
assuming he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
Ans- taxable salary – 9,67,500
Que- 30:
From the following details, find out the salary chargeable to tax for the A.Y.2025-26 assuming
he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A)-
Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2024 in the scale
of ₹20,000 -₹ 1,000-₹30,000. He is paid 10% D.A. & Bonus equivalent to one month pay based on
salary of March every year. He contributes 15% of his pay and D.A. towards his recognized
provident fund and the company contributes the same amount. DA forms part of pay for
retirement benefits
He is provided free housing facility which has been taken on rent by the company at ₹ 10,000 per
month. He is also provided with following facilities:
(i) Facility of laptop costing ₹ 50,000.
(ii) Company reimbursed the medical treatment bill of his brother of ₹ 25,000, who is dependent
on him.
(iii) The monthly salary of ₹ 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of ₹ 10,000 on the occasion of his marriage anniversary.
(v) Conveyance allowance of ₹ 1,000 per month is given by the company towards actual
reimbursement of conveyance spent on official duty.
(vi) He is provided personal accident policy for which premium of ₹ 5,000 is paid by the
company.
(vii) He is getting telephone allowance @₹500 per month.
Ans – Salary income chargeable to tax – 3,28,749

Que-31.
You are required to compute the income from salary of Mr. Raja under default tax regime from
the following particulars for the year ended 31-03-2025:
(i) He retired on 31-12-2024 at the age of 60, after putting in 25 years and 9 months of service,
from a private company at Delhi.
(ii) He was paid a salary of ₹ 25,000 p.m. and house rent allowance of ₹ 6,000 p.m. He paid rent
of ₹ 6,500p.m., during his tenure of service.

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 CA VARDHAMAN DAGA

(iii) On retirement, he was paid a gratuity of ₹3,50,000. He was covered by the payment of
Gratuity Act, 1972. He had not received any other gratuity at any point of time earlier, other
than this gratuity.
(iv) He had accumulated leave of 15 days per annum during the period of his service, this was
encashed by him at the time of his retirement. A sum of ₹ 3,15,000 was received by him in this
regard. Employer allowed 30 days leave per annum.
(V) He is receiving ₹5,000 as pension. On 1.2.2025, he commuted 60% of his pension and received
₹3,00,000 as commuted pension.
(vi) The company presented him with a gift voucher of ₹ 5,000 on his retirement. His colleagues
also gifted him a mobile phone worth 50,000 from their own contribution.
Ans- (a) under 115 BAC – 4,11,333
Que-32.
Ms. Akansha, a salaried employee, furnishes the following details for the financial year 2024-25:
Particulars ₹
Basic salary 6,20,000
Dearness allowance 4,20,000
Commission 75,000
Entertainment allowance 9,000
Medical expenses reimbursed by the employer 18,000
Profession tax (of this, 50% paid by employer) 4,000
Health insurance premium paid by employer 8,000
Gift voucher given by employer on her birthday 10,000
Life insurance premium of Akansha paid by employer 26,000
Laptop provided for use at home. Actual cost of Laptop to employer 45,000
[Children of the assessee are also using the Laptop at home]
Employer company owns a Maruti Suzuki Swift car, which was provided to the
assessee, both for official and personal use. Driver was also provided. (Engine cubic
capacity more than 1.6 litres). All expenses are met by the employer
Annual credit card fees paid by employer [Credit card is not exclusively used for
official purposes; details of usage are not available) 7,000
You are required to compute the income chargeable under the head Salaries for the assessment
year 2025-26 if she pays tax under default tax regime.
Ans – income from salary – 11,51,600

PAST EXAM QUESTIONS

Illustration 33
Computation of taxable income: Mr. Narendra, who retired from the services of Hotel Samode
Ltd., on 31-1-2024 after putting on service for 5 years, received the following amounts from the
employer for the year ending on 31-3-2024: (6 Marks, PCC May 2008)
i) Salary @ 16,000 p.m. comprising of basic salary of 10,000, Dearness allowance of ₹ 3,000,
City compensatory allowance of 2,000 and Night duty allowance of 1,000.
ii) Pension @ 30% of basic salary from 1-2-2024.
iii) Leave salary of 75,000 for 225 days of leave accumulated during 5 year @ 45 days leave
per year.
iv) Gratuity of ₹ 50,000.
Compute the total income of Mr. Narendra if he has not opted for the provisions of section
115BAC.
Solution: Computation of total income of Mr. Narendra (amount in ₹) -

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 CA VARDHAMAN DAGA

Particulars ₹
Basic Salary (10,000 × 10) 1,00,000
Dearness Allowance (3,000 × 10) 30,000
City Compensatory Allowances (2,000 × 10) - Fully taxable 20,000
Night Duty Allowance (1,000 × 10) - Fully taxable 10,000
Pension (30% of 10,000 × 2) [February, 2023 to March, 2023] 6,000
Taxable leave encashment[WN-1] 25,000
Gratuity[WN-2] 25,000
Gross Salary 2,16,000
Less: Standard Deduction u/s 16(ia) 50,000
Salary Income/Total Income 1,66,000
Working Notes: 75,000
(1) Computation of taxable leave encashment (amount in ₹)
Leave salary received
Exemption: Least of the following is exempt
• Actual earned leave salary received 75,000
• 10 months' Average salary 10,00,000
• Earned leave to the credit x Average Salary (5 x 10,000) 50,000
• Amount notified by the Central Government 25,00,000 50,000
Taxable Leave Encashment = Sum Received - Exemption 25,000
Computation of leave of at the credit of an employee :
Particulars Company Income-tax
Leave entitlement for completed year 45 days 30 days
Completed years of service 5 5
Total leave entitlement (days) 225 150
Leave availed while in service (days) 0 0
Balance leave at his credit (days) 225 150
(2) Computation of taxable gratuity (amount in ₹)-
Particulars ₹ ₹
Gratuity received 50,000
Exemption u/s 10(10):The least of the following is
exempt
a) Gratuity received 50,000
b) 1/2 x Average Salary ( 10,000) x Completed Years (5) 25,000
c) Specified limit 20,00,000 25,000
Taxable Gratuity = Gratuity Received – Exemption 25,000
Illustration 34
Computation of taxable salary: Babu joined a Company on 01-06-2024 and was paid the following
emoluments and allowed perquisites as under-
Emoluments: Basic pay = ₹ 25,000 per month; DA = ₹ 10,000 per month; Bonus ₹ 50,000 per month.
Perquisites:
a) Furnished accommodation owned by the employer and provided free of cost. Value of
furniture therein 3,00,000.
b) Motorcar owned by the Company (with engine cubic capacity less than 1.6 litres) along with
chauffeur for official and personal use.
c) Sweeper salary paid by Company 1,500 per month.
d) Watchman salary paid by Company 1,500 per month.

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e) Educational facility for 2 children provided free of cost. School is ownedand maintained by
company.
f) Interest free loan of 5,00,000 given on 1-10-2024 for purchase of a house. No repayment
was made during the year. (SBI Rate 12.25%)
g) Interest free loan for purchase of computer 50,000 given on 1-1-2025 No repayment was
made during the year. (SBI Rate 15.25%)
h) Corporate membership of a club. The initial fee of 1,00,000 was paid by the Company. Babu
paid the bills for his use of club facilities.
You are required to compute the income of Babu under the Head "Salaries" if he has not opted
for the provisions of Section 115BAC. Suitable assumptions may be made, wherever necessary.
(May 2002)
Solution:Computation of Income of Babu under the Head "Salaries" (amounts in ₹) –
Particulars ₹
Basic Salary (25,000 × 10) 2,50,000
Dearness allowance (10,000 × 10) [WN-1] 1,00,000
Bonus (50,000 x 10 months) 5,00,000
Value of Accommodation [WN-2 & 3] 1,10,000
Sweeper Salary paid by employer ( 1,500 × 10) 15,000
Watchman Salary paid by employer (1,500 × 10) 15,000
Car facility [WN-4] 27,000
Club facility [WN-5] Nil
Education facility to children [WN-4] Nil
Interest free housing Loan (5,00,000 × 12.25% × 6+12) 30,625
Interest free Computer Loan (50,000 x 15.25% p.a. x 3 ÷ 12) 1,906
Gross Salary 10,49,531
Less: Standard Deduction u/s 16(ia) 50,000
Income under the head salaries 9,99,531
Working Notes:
i) It is assumed that DA forms the part of salary for retirement benefits.
ii) It is assumed that the place of accommodation has population exceeding 25 lakhs.
(3) Taxable value of Rent Free furnished Accommodation:
Particulars ₹
Valuation of rent free accommodation 10% of salary
Value of rent free accommodation (8,50,000 × 10%) 85,000
Add: Furniture (10% p.a. of original cost of furniture) (3,00,000× 10% × 25,000
10/12)
Taxable value of furnished accommodation 1,10,000
Salary for rent free accommodation:
Basic Pay 2,50,000
DA 1,00,000
Bonus 5,00,000
8,50,000
(4) The car is used partly for personal and partly for official use. Assuming that the maintenance
and running expenses are met by the owner-company, value of car facility = ₹ 1 ,800+ ₹ 900) x 10
= ₹ 27,000.
(5) The initial fee for corporate membership is exempt from tax.
(6) It is assumed that the cost of education per child does not exceed 1,000 p.m.
Illustration 35
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CONTACT NO. FOR CLASSES - 9039600091 pg. 44
 CA VARDHAMAN DAGA

Computation of gross salary: Sehwag is employed with Sure Shots Ltd. on a salary of 25,000 per
month. The company provides him with the following benefits:
a) A company owned accommodation at Delhi.
b) A housing loan of 5,00,000 on 1 July 2024 on which it charges interest @ 6% per annum. The
entire loan is still outstanding. The rate of SBI is 8% p.a.
c) The company gave him a watch worth 4,900 as gift on his 50th birthday on 21st October,
2024.
d) He made purchases of 12,000 on his credit card. This amount, along with the annual fee of
2,000, was paid by the company.
e) He is allowed to use the video camera belonging to the company. The company had purchased
this camera for60,000 on 1st May 2021. This camera was sold to him on 1st August 2024 for
30,000.
f) The company had purchased a car on 16th July 2021 for 2,50,000. This car was sold to Sehwag
on 14th July 2024 for 80,000.
g) The company pays telephone bills of 24,000 for the telephone installed at the residence of
Sehwag.
Compute the gross income from salary of Sehwag if he has not opted for the provisions of Section
115BAC.
Solution: Computation of Taxable Salary of Sehwag (amounts in ₹)-
Particulars ₹
Basic salary @ 25,000p.m. (₹ 25,000 x 12) 3,00,000
Rent free accommodation (10% of salary) 30,000
Concessional housing loan [WN-1] 7,500
Free gift of watch [WN-2] Exempt
Credit card facility (12,000+2,000) 14,000
Telephone facility [WN-3] Exempt
Use of Video camera [WN-4] 2,000
Sale of video camera [WN-5] 12,000
Sale of car [WN-6] 80,000
Gross Salary 4,45,500
Less: Standard Deduction u / s 16(ia) 50,000
Income under the head salaries 3,95,500
Working Notes:
(1) Value of concessional housing loan = ₹ 5,00,000x 2% x 9/12 = ₹ 7,500.
(2) The value of gift received is exempt from tax as the amount is below ₹ 5,000.
(3) Telephone facility provided is an exempt perquisite, hence not liable to tax.
(4) Taxable value for use of video camera = 60,000 × 10% × 4/12 = ₹ 2,000.
(5) Taxable value for use of video camera = WDV - Sale price = (₹ 60,000 - Depreciation @ 10%
for 3 years 18,000) - 30,000 = ₹ 42,000 - 30,000 = ₹ 12,000.
(6) Total depreciation for two completed years on motor car = ₹ 90.000 computed as follows
Depreciation for the 1st year @ 20% of cost = ₹ 50,000
WDV at the end of 1st year = ₹ 2,00,000
Depreciation for 2nd year @ 20% = ₹ 40,000
Hence, taxable value for sale of car = ₹ 2,50,000 - ₹ 90,000- ₹ 80,000 = ₹ 80,000.
Illustration 36
Computation of taxable salary: Naresh, who is neither a director nor he has substantial interest
in any company, is offered an employment by Freewheel Ltd., Mumbai with following alternatives:

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Alternative Alternative
I II
Basic pay 1,66,000 1,66,000
Bonus 9,000 9,000
Education allowance for 2 children/ Education facility for 2 30,200 30,200
children in a school maintained by employer
Sweeper allowance/Sweeper facility 10,000 10,000
Entertainment Allowance/Club facility 6,000 6,000
Transport allowance/Free car (1200cc) facility for personal 21,600 21,600
use (Car owned by the employer)
Medical allowance/Medical facility for Naresh and his family 18,000 18,000
Allowance for gas, electricity and water supply/ Free gas, 4,500 4,500
electricity and water supply (bills will be in the name of the
employer)
Holiday home allowance/Holiday home facility 8,000 8,000
Lunch allowance/ Free lunch (70 x 200 days + 80 × 50 days) 18,000 18,000
Diwali gift allowance/ Gift on Diwali 7,500 7,500
A rent-free unfurnished home - lease rent 30,000 30,000
Which of the two alternatives Naresh should opt for on the assumption that both employer and
employee will contribute 10% of salary towards unrecognised provident fund?
Interest-free loan of 20,000 will be given to him for purchasing household items.
Note: He has not opted for the provisions of Section 115BAC
Solution: Computation of Taxable Salary of Naresh under two Alternatives (amounts in ₹)
Alternative I Alternative II
Basic pay 1,66,000 1,66,000
Bonus 9,000 9,000
Education allowance/Education facility[WN-1] 27,800 30,200
Sweeper allowance/Sweeper facility 10,000 10,000
Entertainment Allowance/Club facility 6,000 6,000
Transport allowance/Free car (1200 cc) facility for 21,600 21,600
personal use[WN-2]
Medical allowance/Medical facility for Naresh and his 18,000 Exempt
family members in a hospital maintained by employer
Allowance for gas, electricity and water supply/Free gas, 4,500 4,500
electricity and water supply (bills will be in the name of the
employer)
Holiday home allowance/Holiday home facility 8,000 8,000
Lunch allowance/Free lunch[WN-3] 18,000 5,500
Diwali gift allowance/Gift on Diwali[WN-4] 7,500 7,500
Rent-free unfurnished home[WN-5] 29,640 17,500
Gross Salary 3,26,040 2,85,800
Less: Standard Deduction u/s 16(ia) 50,000 50,000
Total taxable salary 2,76,040 2,35,800
Hence, Naresh should opt for Alternative II, as taxable income is less in that case, thus his tax
liability will be less.
Working Notes:
(1) Alternative I: Taxable value of Education allowance = 30,200 - [ 100 × 12 × 2] = 27,800.

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 CA VARDHAMAN DAGA

Alternative II: Taxable value of Education facility for 2 children is fully taxable as the value
exceeds 1,000 p.m. per child.
(2) Alternative I: Taxable value of Transport Allowance = 21,600
Alternative II: Assuming that 21,600 includes all expenses incurred including normal wear &
tear, taxable value of Car Facility = 21,600.
(3) Alternative II: Free lunch is exempt upto 50 per meal, hence, taxable amount = (80-50) x 50
days + (70 - 50) × 200 days = ₹5,500.
(4) Alternative II: The gift received on Diwali is fully taxable as the value exceeds ₹ 5,000.
(5) Value of rent free house shall be lower of the following
Alternative I Alternative II
a) 10% of Monetary Salary (10% of 2,96,400 and 10% of 29,640 17,500
1,75,000)
b) Lease rent paid 30,000 30,000
Illustration 37
Computation of taxable salary: Mr. Janakaraj, employed as General Manager in Rajus
Refractories Pvt.Ltd., furnishes you the under-mentioned information for the year ended 31-03-
2025:
i) Basic salary upto 30-11-2024 = ₹ 70,000 p.m.
Basic salary from 01-12-2024 = ₹ 80,000 p.m.
Note: Salary is due and paid on the last day of every month.
ii) Dearness allowance @ 50% of basic salary (not forming part of salary for retirement
benefits).
iii) Bonus equal to one month salary. This was paid in November, 2024 on basic salary plus
dearness allowance applicable for that month.
iv) Contribution of employer to recognized provident fund account of the employee @ 18% of
basic salary, employee also contributing an equivalent amount.
v) Profession tax paid 6,000 of which 3,000 was paid by the employer.
vi) Facility of laptop was provided to Janakaraj for both official and personal use. Cost of laptop
65,000 and was purchased by the company on 11-10-2024.
vii) Leave travel concession given to Janakaraj, his wife and three children (one daughter aged 6
and twin sons aged 4). Cost of air tickets (economy class) reimbursed by the employer 20,000
for adults and lump sum of 25,000 for three children. Janakaraj is eligible for availing
exemption this year to the extent it is permissible under the Income-tax Act, 1961.
Compute the taxable salary of Mr. Janakaraj if he has not opted for the provisions of Section
115BAC. (6 Marks, Nov. 2018-NS)
Solution: Computation of income from salary of Mr. Janakaraj (amount in ₹):
Particulars ₹
Basic salary (₹ 70,000 × 8+ ₹80,000 × 4) 8,80,000
Dearness allowance (Fully taxable) [50% of basic salary] 4,40,000
Bonus on basis of salary for month of November [70,000+ 35,000] 1,05,000
Facility of laptop [WN-1] Exempt
Leave travel concession -Exempt under Section 10(5) [WN-3] Exempt
Tax paid on employment (Employee's obligation met by employer) [WN-2] 3,000
Employer's contribution to R.P.F. in excess of 12% of basic salary (i.e., 6% of 52,800
8,80,000)
Gross salary 14,80,800
Less: Standard Deduction u/s 16(ia) [WN-4] 50,000
Professional tax u/s Section 16(iii) [WN-2] 6,000

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Taxable Salary 14,24,800

Working Notes:
(1) As per Rule 3(7)(vii), facility of use of laptop and computer is an exempt perquisite, whether
used for official or personal purpose or both.
(2) As per Section 17(2)(iv), a "perquisite" includes any sum paid by the employer in respect of
any obligation which, but for such payment, would have been payable by the assessee.
Therefore, professional tax of 3,000 paid by the employer is taxable as a perquisite in the
hands of Mr. Janakaraj. As per Section 16(iii), a deduction from the salary is provided on
account of tax on employment i.e. professional tax paid during the year. Therefore, in the
present case, the professional tax paid by the employer on behalf of the employee 3,000 is
first included in the salary and deduction of the entire professional tax of 6,000 is provided
from salary.
(3) Mr. Janakraj can avail exemption u/s 10(5) on the entire amount of 45,000 reimbursed by
the employer towards Leave Travel Concession since the same was availed for himself, his
wife and three children and the journey was undertaken by economy class airfare. The
restriction imposed for two children is not applicable in case of multiple births which take
place after the first child.
(4) As per Section 16(ia), standard deduction will be allowed from gross salary amounting 50,000
or the amount of salary, whichever is less.
ILLUSTRATION 38
Computation of taxable salary: Mr. B is a sales manager in PQR Ltd. During F.Y. 2024-25 he has
received the following towards his salary and allowances/perquisites;
(i) Basic pay ₹ 85,000 per month upto December 2024 and thereafter an increase of ₹ 2,000
per month.
(ii) Dearness allowance 40% of basic pay forming part of retirement benefits.
(iii) Bonus 1 month basic pay based on the salary drawn during January month every year.
(iv) He contributes 14% of his basic pay & DA towards his recognized provident fund and his
employer company contributes the same amount.
(v) Travelling allowance of ₹ 5,000 per month towards on duty tours.
(vi) Research and training allowance ₹ 3,000 per month.
(vii) Children education allowance of ₹ 600 per month, per child for his 2 sons and 1 daughter.
(viii) Accommodation owned by PQR Ltd. was provided to him in Hyderabad for the whole year
and furniture of ₹ 2,00,000 was provided from 1st October, 2024.
(ix) Reimbursement of medical expenses on his treatment in private hospital – ₹ 15,000, medical
allowance ₹ 1,500 per month. Company has paid premium on medical policy purchased on his
health ₹ 12,500.
You are required to:
I. Compute the income chargeable to tax under the head "Income from Salary", assuming that he
has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
II. What will be the income under the head “Salaries”, if he under default tax regime?
(8 Marks, Nov. 2022)
SOLUTION
I. Computation of income chargeable to tax under the head “Salaries” for A.Y. 2024-25, if
Mr. B has exercised the option of shifting out of the default tax regime provided u/s
115BAC(1A) :
Particulars ₹ ₹
Basic Pay [₹ 85,000 × 9 + ₹ 87,000 × 3] 10,26,000

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 CA VARDHAMAN DAGA

Dearness Allowance [₹ 10,26,000 × 40%] 4,10,400

Bonus 87,000
Travelling allowance [Exempt, since provided towards duty tours] -
Research and training allowance [₹ 3,000 × 12] 36,000
Medical allowance [₹ 1500 × 12] 18,000
Children Education allowance [₹ 600 × 12 × 3] 21,600
Less: Exempt [₹ 100 × 12 × 2] 2,400 19,200
Salary (for the purpose of valuation of Rent-free 15,96,600
accommodation)
Value of Rent-free accommodation [10% of ₹ 15,96,600] 1,59,660
Add: Value of furniture [₹ 2,00,000 × 10% p.a. for 6 months] 10,000 1,69,660
Reimbursement of medical expenses [taxable, since amount is 15,000
reimbursed for treatment in private hospital]
Health insurance premium paid by PQR Ltd. [Exempt] -
Employers’ contribution to RPF in excess of 12% of salary = 2% of ₹ 28,728
14,36,400 (₹ 10,26,000 + ₹ 4,10,400)
Gross Salary 18,09,988
Less: Deductions under section 16
Standard deduction 50,000
Income chargeable under the head “Salaries” 17,59,988
II. Computation of income chargeable to tax under the head “Salaries” for A.Y. 2024-25,
if Mr. B is under default tax regime of section 115BAC :
Particulars ₹ ₹
Income chargeable under the head “Salaries” 17,59,988
Add: Exemption in respect of children education allowance [Not 2,400
allowable as per section 115BAC]
17,62,388
Less: Difference in standard deduction 25,000
Less: Value of rent-free accommodation (As per regular provisions) 1,69,660
15,67,728
Add: Value of Rent-free accommodation [10% of ₹ 15,99,000 (₹ 1,59,900
15,96,600 (as calculated above) + ₹ 2,400)]
Add: Value of furniture [₹ 2,00,000 × 10% p.a. for 6 months] 10,0000 1,69,900
Income chargeable under the head “Salaries” 17,37,628

ILLUSTRATION 39
Computation of taxable salary: Mr. Rohan retired from M/s. QRST Ltd. a private sector company,
on 31st March, 2025 after completing 28 years and 3 months of service. He received the following
sums/gifts on his retirement:
(i) Gratuity of ₹ 7,50,000. He was covered under the Payment of Gratuity Act, 1972.
(ii) Leave encashment of ₹ 3,25,000 for 210 days leave balance in his account. He was credited
with 30 days leave for each completed year of service.
(iii) Crockery set worth ₹ 4,500 from his employer at the farewell party which was organised
by the HR department a day before his retirement.
He drew a basic salary of ₹ 25,000 per month alongwith 50% of basic salary as dearness allowance
(not forming part of retirement benefits) for the period from 1 st April, 2024 to 31st March,
2025.
Further, during the year, his employer provided him a motor car of 1800 cc which was used by him
and his family solely for personal purposes. The cost of fuel and repairs were met by Mr. Rohan
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 CA VARDHAMAN DAGA

himself. The car was purchased by the employer on 1st April, 2023 at a cost of ₹ 8,00,000. Salary
of driver amounting to ₹ 10,000 per month was met by the employer only. Upon retirement, he
gave the car back to the employer.
You are required to compute the taxable salary of Mr. Rohan for A.Y.2025-26 assuming that he
does not claim any relief under section 89 and he has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A). (7 Marks, May 2023)
SOLUTION Computation of taxable salary of Mr. Rohan for A.Y. 2025-26
Particulars ₹ ₹
Basic Salary ₹ 25,000 × 12 3,00,000
Dearness Allowance (50% of basic salary) 1,50,000
Gratuity [₹ 7,50,000 – ₹ 6,05,769] 1,44,231
Less: Exempt under section 10(10) - Least of the following:
(i) Notified limit 25,00,000
(ii) Actual gratuity received 7,50,000
(iii) 15/26 × last drawn salary × number of completed years of 6,05,769
services or part in excess of 6 months [15/26 × 37,500 × 28]
Employers’ contribution to RPF in excess of 12% of salary = 2% of ₹
14,36,400 (₹ 10,26,000 + ₹ 4,10,400) Employers’ contribution to RPF
in excess of 12% of salary = 2% of ₹ 14,36,400 (₹ 10,26,000 + ₹
4,10,400) Employers’ contribution to RPF in excess of 12% of salary
= 2% of ₹ 14,36,400 (₹ 10,26,000 + ₹ 4,10,400) Employers’
contribution to RPF in excess of 12% of salary = 2% of ₹ 14,36,400
(₹ 10,26,000 + ₹ 4,10,400)
Leave encashment [₹3,25,000-₹1,75,000] 1,50,000
Less: Exempt under section 10(10AA) - Least of the following:
(i) Notified limit 25,00,000
(ii) Actual leave salary received 3,25,000
(iii) 10 months × ₹25,000 2,50,000
(vii) Cash equivalent of leave to his credit [₹ 25,000 × 210/30] 1,75,000
Crockery set [not a perquisite, since value of gift does not exceed ₹ -
5,000]
Perquisite value of car ₹ 80,000 [Diver’s salary met by employer ₹ 2,00,000
1,20,000 (i.e, ₹ 10,000×12) + ₹ 80,000(10% of ₹ 8,00,000), being
normal wear and tear on car]
Gross Salary 9,44,231
Less: Standard deduction u/s 16(ia) 50,000
Taxable Salary 8,94,231
Illustration 40
Computation of taxable salary: From the following details, find out the salary chargeable to tax
of Mr. Anand for the assessment year 2025-26: Mr. Anand is a regular employee of Malpani Ltd.
in Mumbai. He was appointed on 01-03-2024 in the scale of 25,000-2,500 - 35,000. He is paid
dearness allowance (which forms part of salary for retirement benefits) @ 15% of basic pay and
bonus equivalent to one and a half month's basic pay as at the end of the year. He contributes
18% of his salary (basic pay plus dearness allowance) towards recognized provident fund and the
Company contributes the same amount.
He is provided free housing facility which has been taken on rent by the Company at 15,000 per
month. He is also provided with following facilities.

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 CA VARDHAMAN DAGA

i) The company reimbursed the medical treatment bill of 40,000 of his daughter, who is
dependent on him.
ii) The monthly salary of 2,000 of a house keeper is reimbursed by the Company.
iii) He is getting telephone allowance @ 1,000 per month.
iv) A gift voucher of 4,700 was given on the occasion of his marriage anniversary.
v) The Company pays medical insurance premium to effect an insurance on the health of Mr.
Anand 12,000.
vi) Motor car running and maintenance charges fully paid by employer of 36,600. (The motor
car is owned and driven by Mr. Anand. The engine cubic capacity is below 1.60 litres. The
motor car is used for both official and personal purpose by the employee.)
vii) Value of free lunch provided during office hours is ₹ 2,200.
Note: He has not opted for the provisions of Section 115BAC. (8 marks, Nov 2013)
Solution: Computation of Salary chargeable to tax of Mr. Anand (amount in ₹)-
Particulars ₹
Basic pay [(25000 x 11) +( 27,500 x 1)] 3,02,500
Dearness allowance (15% of basic pay) 45,375
Bonus (27,500 x 1.5) [WN-1] 41,250
Telephone allowance (1000 x12 ) 12,000
Car facility (₹36,600- 1,800 x 12) [WN-2] 15,000
Employer's contribution to RPF in excess of 12% [WN-3] 20,873
Rent-free accommodation [WN-4] 40,113
Medical reimbursement [Fully Taxable] 40,000
Reimbursement of salary of housekeeper - Taxable u/s 17(2)(iv) 24,000
Medical insurance premium paid by employer on health of Mr.Anand [WN-5] Exempt
Gift voucher [WN-6] Exempt
Free lunch provided during office hours shall be exempt from tax Exempt
(assuming value per meal doesn't exceed50)
Gross Salary 5,41,111
Less: Standard Deduction u/s 16(ia) 50,000
Salary income chargeable to tax 4,91,111
Working Notes:
(1) Bonus has been taken as 1.5 month's basic pay as at the end of year i.e.₹ 27,500.
(2) In case motor car is owned by the employee and repair and maintenance expenses are met by
employer, then perquisite value shall be actual expenses incurred by employer as reduced by
1,800 p.m., since cubic capacity of engine does not exceed 1.6 litres.
(3) Taxable part of employer's contribution to RPF = 6% of (Basic pay + DA) = 6% of (3,02,500+
45,375) = 20,873. Since employer contributes to RPF on basic pay plus DA, hence, even the
DA forms the part of salary for computing retirement benefits.
(4) Value of taxable RFA = Lower of the two
a) 10% of salary ( 4,01,125) i.e. = ₹ 40,112
b) Lease rent ₹ 15,000 × 12 = 1,80,000.
Salary for rent free accommodation (amount in ₹)
Particulars ₹
Basic pay 3,02,500
Dearness allowance 45,375
Bonus 41,250
Telephone allowance 12,000
Total 4,01,125

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 CA VARDHAMAN DAGA

(5) Premium of 12,000 paid by company for medical insurance premium on health of Anand is not
liable to tax.
(6) Gifts below ₹ 5,000 are not taxable.
Illustration 41
Computation of taxable salary: Mr. Anand an employee of XYZ Co. Ltd. at Mumbai and covered
by Payment of Gratuity Act, retires at the age of 64 years on 31-12-2024 after completing 33
years and 7 months of service. At the time of retirement, his employer pays 20,51,640 as Gratuity
and 6,00,000 as accumulated balance of Recognised Provident fund. He is also entitled for monthly
pension of 8,000. He gets 75% of pension Commuted for4,50,000 on 1st February, 2025.
Determine the salary chargeable to tax for Mr. Anand for the AY 2024-25 with the help of
following information:
Basic Salary (80,000 × 9) = ₹ 7,20,000
Bonus = ₹ 36,000
House Rent Allowance ( 15,000 × 9) = ₹ 1,35,000
Rent paid by Mr. Anand ( 10,000 × 12) = ₹ 1,20,000
Employer contribution towards Recognized Provident Fund = ₹ 1,10,000
Professional Tax paid by Mr. Anand = ₹ 2,000
Note:Salary and Pension falls due on the last day of each month. He has not opted for the
provisions of Section115BAC. (8 Marks, Nov. 2014)
Solution: Computation of Income from salary (amount in ₹)
Particulars ₹
Basic Salary (80,000 × 9) 7,20,000
Bonus 36,000
Taxable House Rent Allowance [WN-1] 1,17,000
Employer contribution towards Recognized Provident Fund
[₹ 1,10,000 - 12% of ₹ 7,20,000] [WN-5] 23,600
Taxable Gratuity [WN-2] 4,82,409
Uncommuted pension [8,000 × 1 month (January, 2024) + ( 2,000 12,000
× 2 (February 2024 to March 2024)] [WN-3]
Taxable portion of commuted value of pension [WN-4] 2,50,000
Gross Salary 16,41,009
Less: Standard Deduction u/s 16(ia) 50,000
Less: Professional Tax paid by Mr. Anand 2,000
Income from salary 15,89,009
Working Notes:
(1) HRA is exempt to the extent least of the following (amount in ₹)
Particulars ₹
a) Actual HRA received 1,35,000
b) Rent paid - 10% of salary ( 90,000 - 10% of ₹ 7,20,000) 18,000
c) 50% of the salary (50% of 7,20,000) 3,60,000
Exempted HRA 18,000
Taxable HRA 1,17,000
(2) Computation of taxable gratuity (amount in ₹)
Particulars ₹
Completed years of service (Part thereof in excess of 6 months shall be
rounded off to higher side) 34
Exemption u/s 10(10): Least of the following is exempt
a) Gratuity received
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 CA VARDHAMAN DAGA

b) 15/26 x Salary last drawn > Completed years of service 20,51,640

c) Specified limit 15,69,231
20,00,000
Taxable Gratuity = Gratuity Received - Exemption 4,82,409
(3) Uncommuted Pension: Since Mr. Anand commuted 75% pension in February, 2024. His
uncommitted pension from February, 2023 onward shall be (₹ 8000 x 25%)= 2,000 p.m.
(4) Commuted pension:
a) % of pension commuted = 75%
b) Commuted value of pension (Pension received + % commuted) =4, 50,000/75% =₹6,00,000.
c) Exemption = 1 /3rdof commuted value of pension (₹ 6,00,000) = ₹ 2,00,000.
d) Taxable portion of commuted pension = ₹ 4,50,000- ₹ 2,00,000 = ₹ 2,50,000
(5) Employer's contribution is exempt upto 12% of salary.
Illustration 42
Computation of taxable salary: Mr. Nambi, a salaried employee, furnishes the following details
for the financial year 2024-25:
Particulars ₹
Basic salary 6,00,000
Dearness allowance 3,20,000
Commission 50,000
Entertainment allowance 7,500
Medical expenses reimbursed by the employer 21,000
Profession Tax (of this, 50% paid by employer) 7,000
Health insurance premium paid by employer 9,000
Gift voucher given by employer on his birthday 12,000
Life insurance premium of Nambi paid by employer 34,000
Laptop provided for use at home. Actual cost of Laptop to employer [Children of 30,000
the assessee are also using the Laptop at home]
Employer-Company owns a Tata Nano car, which was provided to the assessee,
both for official and personal use. No driver was provided. (Engine cubic capacity
less than 1.6 litres)
Annual credit card fees paid by employer [Credit card is not exclusively used for 2,000
official purposes details of usage are not available]
You are required to compute the income chargeable under the head "Salaries" for the AY 2025-
26 if he has not opted for the provisions of Section 115BAC. (8 Marks, May 2017)
Solution: Computation of Taxable Salary of Nambi (amounts in ₹) –
Particulars ₹
Basic salary 6,00,000
Dearness allowance 3,20,000
Commission 50,000
Entertainment allowance 7,500
Medical expenses reimbursed by the employer [Fully Taxable] 21,000
Profession Tax (50% paid by employer shall be treated as perquisite) 3,500
Health insurance premium paid by employer [Exempt from tax] -
Gift voucher given by employer on his birthday (taxable, as it is not below ₹ 5,000) 12,000
Life insurance premium of Nambi paid by employer [Employees obligation met 34,000
by employer, hence fully taxable]

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Laptop facility [Use of Laptops and computers belonging to or hired by the

employer is exempt]
Car facility for official and personal use [ 1,800 p.m. is taxable, since engine cubic 21,600
capacity less than 1.6litres] [1800 x 12]
Annual credit card fees paid by employer 2,000
Gross Salary 10,71,600
Less: Standard Deduction u/s 16(ia) 50,000
Less: Professional Tax paid 7,000
Income chargeable to tax under 'Salaries' 10,14,600
Illustration 43
Computation of taxable salary: Ms. Jaya is the marketing manager in XYZ limited. She gives you
the following particulars:
Basic Salary = ₹ 65,000 p.m.
Dearness Allowance = ₹ 22,000 p.m. (30% is for retirement benefits)
Bonus = ₹ 17,000 p.m.
Her employer has provided her with an accommodation on 1st April, 2024 at a concessional rent.
The house was taken on lease by XYZ Ltd. for 12,000 p.m. Ms. Jaya occupied the house from 1 st
November, 2024. 4,800 p.m. is recovered from the salary of Ms. Jaya.
The employer gave her a gift voucher of 8,000 on her birthday. She contributes 18% of her salary
(Basic Pay + DA) towards recognised provident fund and the company contributes the same
amount.
The company pays medical insurance premium to effect insurance on the health of Ms. Jaya
18,000.
Motor car owned by the employer (cubic capacity of engine exceeds 1.6 liters) provided to Ms.
Jaya from 1 November, 2024 which is used for both official and personal purposes. Repair and
running expenses of ₹ 50,000 were fully met bythe company. The motor car was self-driven by
the employee.
Compute the income chargeable to tax under the head "Salaries" in the hands of Ms. Jaya for the
A.Y. 2025-26 if she has not opted for the provisions of Section 115BAC. (10 Marks, Nov. 2017)
Solution: Computation of Salary chargeable to tax of Ms. Jaya (amount in ₹) –
Particulars ₹
Basic salary [(65000 x 12 )] 7,80,000
Dearness allowance [22,000 p.m. (30% is for retirement benefits)] [₹ 22000 x 2,64,000
12 ]
Bonus (₹ 17000 x 12 ) 2,04,000
Car facility (₹ 2,400 x 5) [WN-1] 12,000
Employer's contribution to RPF in excess of 12% [WN-2] 84,816
Rent-free accommodation [WN-3] 20,300
Medical insurance premium paid by employer on health of Ms Jaya [WN-4] Exempt
Gift voucher [WN-5] 8,000
Gross Salary 13,73,116
Less: Standard Deduction u/s 16(ia) 50,000
Salary income chargeable to tax 13,23,516
Working Notes:
(1) In case motor car is owned by the employer and repair and maintenance expenses are met by
employer, then perquisite value shall be 2,400 p.m., since cubic capacity of engine exceeds
1.6 litres. Since it is provided from 1 November, 2024, it will be taxable for 5 months.

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 CA VARDHAMAN DAGA

(2) Employer's contribution to recognized provident fund in excess of 12% of salary is taxable
as per Section 17(1)(vi). 18% x [(₹ 65,000 + 22,000) x 12] – 12% x [( ₹ 65,000 + ₹ 6,600 (being
30% of ₹ 22,000 = ₹ 1,87,920 - ₹ 1,03,104] [Salary = Basic Salary + Dearness Allowance to
the extent if Form part of pay for retirement benefits]
(3) In case of accommodation taken on lease by the employer, there would be deemed concession
in the matter of rent i.e. the rent paid by the employer or 15% of salary, whichever is lower,
exceeds rent recoverable from the employee. Hence, Value of concessional Accommodation =
Lower of the two
a) 10% of salary ( 4,43,000) i.e. 44,300 b) Lease rent ₹ 12000 x 5 =₹ 60,000 as reduced by rent
recovered from Ms. Jaya i.e.&[44,300 – (4,800 x 5)] =20,300
Salary for rent free accommodation (amount in ₹)
Particulars ₹
Basic pay (65,000x 5 ) 3,25,000
Dearness allowance (22000 x 30% x 5) 33,000
Bonus (₹ 17000 x5 ) 85,000
Total 4,43,000
Note: Since Ms. Jaya has occupied the house only from 1-11-2023, salary would be considered
only in respect of the months during which she has occupied the accommodation. Hence, salary
for 5 months (i.e. from 1-11-2023 to 31-3-2024) would be considered.
(4)Premium of 18,000 paid by company for medical insurance premium on health of Jaya is not
liable to tax.
(5) Gift voucher of 8,000 will be fully taxable, since it is not below ₹ 5,000.
Illustration 44
Computation of taxable salary: Mr. Honey is working with a domestic company having a production
unit in the U.S.A. for last 15 years. He has been regularly visiting India for export promotion of
company's product. He has been staying in India for at least 184 days every year.
He submits the following information:
Salary received outside India (For 6 months) ₹50,000 p.m.
Salary received in India (For 6 months) 50,000 p.m.
He has been given rent free accommodation in U.S.A. for which company pays ₹ 15,000 per month
as rent, but when he comes to India, he stays in the guest house of the company. During this
period he is given free lunch facility. During the previous year company incurred an expenditure
of ₹ 48,000 on this facility.
He has been provided a car of 2000 cc capacity in USA. which is used by him for both office and
private purposes. The actual cost of the car is ₹ 8,00,000. But when he is in India, the car is used
by him and the members of his family only for personal purpose. The monthly expenditure of car
is ₹ 5,000. His elder son is studying in India for which his employer spends ₹ 12,000 per year
where as his younger son is studying in U.S.A. and stays in a hostel for which Mr. Honey gets ₹
3,000 per month as combined allowance.
The company has taken an accident insurance policy and a life insurance policy. During the previous
year the company paid premium of 5,000 and 10,000 respectively. Compute Mr. Honey's taxable
income from salary for the Assessment Year 2025-26 if he has not opted for the provisions of
Section 115BAC (10 Marks, May 2018-NS)
Solution: Since Honey was in India for more than 182 days during the previous year, he is a
resident in India for assessment year 2025-26. Hence, his worldwide income will be taxable in
India.
Particulars ₹
Basic Salary [(50,000 × 6)+(50,000 × 6)] 6,00,000
Hostel and education allowance [3000 × 12] [WN-1] 36,000
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Education facility for elder child [WN-2] 12,000

Car facility for official and personal use in U.S.A. (2,400 × 6) [WN-3] 14,400
Car facility for personal use [WN-4] 70,000
Guest House [WN-5] Nil
Lunch facility [WN-5] 48,000
Rent-free accommodation (lease rent paid or 10% of salary whichever is less 63,600
[WN-6]
Premium of 5,000 paid by the company for personal accident policy [WN-7] Exempt
Life Insurance premium paid 10,000
Gross Salary 8,54,000
Less: Standard deduction u/s 16(ia) 50,000
Salary Income chargeable to Tax 8,04,000
Working Notes:
(1) No exemption is available in respect of allowance received for any education or hostel facility
of children outside India.
(2) If employer incurs expenditure on providing education facility to member of household, it is
fully taxable.
(3) Since car (2000cc) is used for official and personal purpose when Mr. Honey is in USA ₹
2,400 p.m. will be taxable.
(4) When Mr. Honey is in India, Car is used for personal purpose by his family members. Hence
amount to be taxable is arrived as under:
Particulars ₹
Deprecation of car @ 10% p.a. of original cost of car [8,00,000 × 10% × 6/12] 40,000
Monthly expenditure incurred by employer [ 5,000 × 6] 30,000
Total 70,000
(5) Guest house facility is not taxable, since it is provided for stay when he visits India wholly
for official purposes.
(6) Value of taxable RFA = Lower of the two-
a) 10% of salary ie. 63,600
b) Lease rent 15,000 × 6= ₹ 90,000
Salary for rent free accommodation:
Particulars ₹
Basic pay 3,00,000
Hostel and education allowance 36,000
Total 3,36,000
10% of salary 33,600
(7) Premium of 5,000 paid by company for personal accident policy is not liable to tax.
Illustration 45
Computation of salary income: Mrs. Padma (age: 25 years) is offered an employment by Pritam
Ltd. at a basic salary of 24,000 per month; other allowances according to rules of the company
are –
Dearness allowance : 18% of basic pay ( not forming part of salary for calculating retirement
benefits);
Bonus: 1 month basic pay; and Project allowance: 6% of basic pay.
The company gives Mrs. Padma an option either to take a rent-free unfurnished accommodation
at Mumbai for which the company would directly bear the rent of 15,000 per month or to accept
a house rent allowance of ₹ 15,000 per month and find out her own accommodation. If Mrs. Padma
opts for house rent allowance, she will have to pay ₹ 15,000 per month for an unfurnished house.

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 CA VARDHAMAN DAGA

Which one of the two options should be opted by Mrs. Padma in order to minimize her tax liability?
(Marks 5, CS June 2008)
Solution: Computation of total taxable income of Mrs. Padma (amount in ₹):
The valuation of RFA has been solved as per the applicable old rule (from 1st april to 31st august)
and as per amended rule (from 1st September to 31st march). Other questions have been solved
as per amended rule for the entire financial year.
Particulars Receipt of HRA Rent-free accommodation
Basic Salary (24,000 × 12) 2,88,000 2,88,000
Dearness Allowance (18% of basic salary 51,840 51,840
i.e. 18% of 2,88,000)
Bonus (1 month basic pay) 24,000 24,000
Project Allowances (6% of basic salary i.e. 17,280 17,280
6% of ₹ 2,88,000)
House Rent Allowance[WN-1] 36,000
Rent Free Accommodation[WN-2] 32,928
Salary Income 4,17,120 4,14,048
Basic Salary (1) Computation of taxable HRA:
Particulars ₹ ₹
HRA received 1,80,000
Least of following amount is exempt
a) Actual amount received 1,80,000
b) Rent paid less 10% of salary i.e. 1,80,000 - ₹ 28,800 1,51,200
c) 50% of salary 1,44,000 1,44,000
Taxable HRA 36,000
(2) Value of rent free accommodation shall be least of the following -
a) Actual rent paid or payable or 1,80,000
b) 10% of salary 32,928
(3) Salary for rent free accommodation:
Particulars ₹
Basic Salary 2,88,000
Bonus 24,000
Project Allowance 17,280
Total 3,29,280
Illustration 46 - Transfer of movable assets: Find out the taxable value of perquisites from the
following particulars in case of an employee to whom the following assets held by the company
were sold on 13th June, 2024 (amt. ₹)
Car Laptop Furniture
Cost of purchase (in May 2022) 8,72,000 1,22,500 35,000
Sale price 5,15,000 25,000 10,000
The assets were put to use by the company from the day these were purchased.
Solution: Computation of taxable value of perquisite (amounts in ₹)
Car Laptop Furniture
(20% WDV) (50% WDV) (10% SLM)
Cost of the asset 8,72,000 1,22,500 35,000
Less: Depreciation for each completed year of use

1 year ending May 2022 1,74,400 61,250 3,500

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Balance as on 1st June 2023 6,97,600 61,250 31,500

2nd year ending May 2023 1,39,520 30,625 3,500
Balance as on 1st June 2024 5,58,080 30,625 28,000
Less: Sale Price 5,15,000 25,000 10,000
Taxable value of perquisites 43,080 5,625 18,000
Illustration 47
Interest free loan and transfer of movable asset: Following benefits have been granted by Ved
Software Ltd. to one of its employees Mr. Badri:
i) Housing loan @ 6% per annum. Amount outstanding on 01-4-2024 is 6,00,000. Mr. Badri
pays 12,000 per month, on 5th of each month.
ii) Air conditioners purchased 4 years back for 2,00,000 have been given to Mr. Badri for
90,000
Compute the chargeable perquisite in the hands of Mr. Badri for the assessment year 2025-26.
The lending rate of SBI as on 1-4-2024 for housing loan may be taken as 10%. (6 Marks, PCC
May 2008)
Solution: Computation of Taxable Perquisite in the hands of Mr. Badri (amounts in ₹)
Particulars ₹ ₹
1) Concessional loan (See Note) 20,880
2) Transfer of movable asset: Actual cost of the air conditioner 2,00,000
Less:(i) 10% depreciation on SLM basis for 4 years 80,000
(ii) Amount paid by Mr. Badri 90,000 30,000
Total value of taxable perquisite 50,880
Note: Total maximum monthly outstanding balance means the amount outstanding on the last day
of the concerned month.
Month Maximum outstanding monthly balance Perquisite value
₹
April 2024 5,88,000 1,960
May 2024 5,76,000 1,920
June, 2024 5,64,000 1,880
July, 2024 5,52,000 1,840
August, 2024 5,40,000 1,800
September, 2024 5,28,000 1,760
October, 2024 5,16,000 1,720
November, 2024 5,04,000 1,680
December, 2024 4,92,000 1,640
January, 2025 4,80,000 1,600
February, 2025 4,68,000 1,560
March, 2025 4,56,000 1,520
Total 20,880
Illustration 48
Computation of taxable value of perquisites: Shri Bala employed in ABC Co. Ltd. as Finance
Manager gives you the list of perquisites provided by the company to him for the entire FY 2024-
25:
i) Medical facility given to his family in a hospital maintained by the company. The estimated
value of benefit because of such facility is 40,000.
ii) Domestic servant was provided at the residence of Bala. Salary of domestic servant is 1,500
per month. The servant was engaged by him and the salary is reimbursed by the company

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(employer). In case, the company has employed the domestic servant, what is the value of
perquisite ?
iii) Free education was provided to his two children Arthy and Ashok in a school maintained and
owned by the company. The cost of such education for Arthy is computed at 900 per month
and for Ashok at 1,200 per month. No amount was recovered by the company for such
education facility from Bala.
iv) The employer has provided movable assets such as television, refrigerator and air-
conditioner at the residence of Bala. The actual cost of such assets provided to the
employee is 1,10,000.
v) A gift voucher worth 10,000 was given on the occasion of his marriage anniversary. It is
given by the company to all employees above certain grade.
State the taxability or otherwise of the above said perquisites and compute the total value of
taxable perquisites (8 Marks, PCC May 2011)
Solution: Computation of total value of taxable perquisites (amount in ₹)-
Particulars ₹ ₹
i) Medical facility to family in a hospital maintained by the [WN-1] Exempt
company
ii) Salary of domestic servant of Bala reimbursed by the [WN-2] 18,000
company ( 1,500 × 12)
iii) Free education provided to children of Bala in a school [WN-3] 14,400
maintained by the company
iv) Movable assets provided by the ABC Co. Ltd [WN-4] 11,000
v) Gift voucher given by the company to Bala on his marriage
anniversary anniversary
Total value of taxable perquisites 53,400
Working Notes:
1) The medical facility provided to an employee in a hospital maintained by the employer is
exempt from tax under proviso to section 17(2).
2) Here, the servant is engaged by Bala i.e. reimbursement by the employer-company would
be employee's obligation met by employer, hence, taxable under section 17(2)(iv). In case,
the company has employed the domestic servant, then the same shall be taxable if Bala is
specified employee.
3) Free education provided in a school maintained and owned by the employer is exempt if
the cost of such education does not exceed 1,000 per month per child, otherwise it is fully
taxable. In this case, free education for Arthy shall be exempt since it does not exceed
1,000 p.m.; but the free education for Ashok, which exceeds1,000 per month shall be fully
liable to tax [1,200 × 12].
4) In case employer allows use of movable asset, the value of perquisite shall be - 10% p.a. of
the actual cost. Hence, taxable value = 10% of 1,10,000 = ₹ 11,000.
5) Gifts, the value of which is below 5,000, are exempt from tax. Here, the value of the gift
voucher is 10,000, hence it is fully taxable.
Illustration 49
Compute taxable gratuity: Mr. Shah, an Accounts Manager, has retired from JK Ltd. On 15-1-
2025 after rendering services for 30 years 7 months. His salary is 25,000 p.m. up to 30-09-2024
and 27,000 thereafter. He also gets 2,000 p.m. as dearness allowance (55% of it is a part of
salary for computing retirement benefits). He is not ₹ covered by the Payments of Gratuity Act,
1972. He has received 8 lacs as gratuity from the employer company. Compute taxable gratuity.
(4 Marks, IPCC Nov. 2010)
Solution: Computation of taxable gratuity: The relevant computations are as follows (amount ₹)
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Particulars ₹ ₹
Gratuity received 8,00,000
Exemption u/s 10(10):The least of the following is exempt -
a) Gratuity received 8,00,000
b) 1/2 x Average Salary ( 26,700) x Completed years (30) [WN] 4,00,500
c) Specified limit 20,00,000 4,00,500
Taxable Gratuity = Gratuity Received – Exemption 3,99,500
Working Notes:
Ten months immediately preceding the month of retirement Basic Salary 1-3-2023 to 31-
for the said ten months [25,000 x 7+27,000 × 3] DA (to the extent it 12-2023 2,56,000
forms part of retirement benefits), 55% of ₹ 2,000 × 10 11,000
Total Salary during the said ten months 2,67,000
Average salary for the said ten months 26,700
Completed years of service ignoring any fraction 30
Illustration 50
Computation of Gross salary: Mr. Jain retires from a Private service on 1stAugust 2024. At the
time of his retirement after 28 years and 8 months of service, he was getting the salary of
34,000 per month. He gets pension of 10,000 per month upto 31st December 2024. With effect
from 1st January 2025 he gets 4 /5thof his pension commuted for 12,00,000. Determine his gross
salary.
Solution: Computation of gross salary (amounts in-
Particulars ₹
Salary @34,000 per month (April 2024 to July 2024) 1,36,000
Un commuted pension [₹10000 x 5 months (August 2024 to December 2024) +(
2000x 3 (January 2025 to March 2025)][WN-1] 56,000
Taxable portion of commuted value of pension[WN-1] 4,50,000
Gross salary 6,42,000
Working Notes:
(1) Un commuted Pension: Since Mr. Jain commuted 4/5thpension in December, 2024. His
uncommuted pension from January, 2025 onward shall be [10,000 × 1/5)=2,000 p.m.
(2) Commuted pension:
a) % of pension commuted = 4/5 = 80%
b) Commuted value of pension (Pension received + % commuted) =12,00,000/80% =
₹15,00,000
c) Exemption = 1/2 of commuted value of pension (₹ 15,00,000) = ₹ 7, 50,000 .
d) Taxable portion of commuted pension = ₹ 12,00,000 - ₹ 7,50,000 = ₹ 4,50,000
Illustration 51
Computation of taxable salary: Mr. M is an area manager of M/s. N. Steels Co. Ltd. During the
previous year 2024-25 he gets following emoluments from his employer:
Basic salary: upto 31-08-2024 = ₹ 20,000 p.m
from 01-09-2024 = ₹ 25,000 p.m.
Transport Allowance = ₹ 2,000 p.m
Contribution to recognized provident fund = 15% of basic salary and D.A.
Children education allowance = ₹ 500 p.m. for two children
City Compensatory Allowance = ₹ 300 p.m
Hostel expenses allowance = ₹ 380 p.m. for two children
Tiffin allowance (actual expenses ₹ 3,700) = ₹ 5,000 p.a.
Tax paid on employment = ₹ 2,500

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Compute taxable salary of Mr. M. if he has not opted for the provisions of Section 115BAC.(6
Marks, PCC Nov. 2008)
Solution:Computation of income from salary of Mr. M (amount in ₹):
Particulars ₹ ₹
Basic salary ( 20,000 × 5+ ₹ 25,000 × 7) 2,75,000
Transport Allowance (₹ 2,000 p.m. x 12) 24,000
Less:Exempt Nil 24,000
Children education allowance (500 p.m. × 12) 6,000
Less:Exempt ( 100 × 2 × 12) 2,400 3,600
Hostel expenses allowance ( 380 × 12) 4,560 3,600
Less:Exempt (300 × 2 × 12)=7,200 but restricted to the actual allowance 4,560 Exempt
of ₹ 4,560
Tiffin allowance (Fully taxable)
Tiffin allowance (Fully taxable) 5,000
Tax paid on employment (Employee's obligation met by employer)[WN-2] 2,500
Employer's contribution to R.P.F. In excess of 12% of salary (ie., 3% of ₹
2,75,000)[WN-1] 8,250
Gross salary 3,21,950
Less:Standard Deduction u/s 16(ia)[WN-3] 50,000
Employment tax u/s Section 16(iii) 2,500
Taxable Salary 2,69,450

(1) The question states that contribution to recognised provident fund is at 15% of Basic
salary + D.A. However, since the amount or rate of D.A. is not given in the question,
contribution to recognised provident fund has been taken as 15% of basic salary.
(2) Employment tax paid by employer should be included in the salary of Mr. M as a perquisite
since it is discharge of monetary obligation of the employee by the employer. Thereafter,
deduction of employment tax paid is allowed to the employee from his gross salary.
(3) As per Section 16(ia), standard deduction will be allowed from gross salary amounting ₹
50,000 or the amount ofsalary, whichever is less.

ILLUSTRATION 52
Interest-Free Loan : Ranjit has taken an interest-free loan of ₹ 10 lakhs from his company. The
amount is utilized by him for purchasing a house on 30-06-2023. The house is self-occupied. As
per the scheme of the company, loan would be recovered in 40 equal monthly instalments
recoverable immediately after the completion of 18 th month from the date of purchase. The SBI
lending rate of similar loan on 01-04-2024 was 9.75%. Calculate the perquisite value of such loan
in the hands of Ranjit for the assessment year 2025-26.
Is it possible to get deduction of perquisite value of interest under section 24(b)? Does it make
any difference, if the house is given on rent ?

SOLUTION

First installment will be due on 01-01-2025. Amount of instalment will be = ₹ 10,00,000/40 = ₹

25,000. Therefore, value for perquisite for interest-free loan will be calculated by applying the
interest rate charged by the State Bank of India on the outstanding amount of loan. Therefore,
the value of perquisite will be as follows :
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Particulars ₹
From April 2024 to December 2024 (₹ 10,00,000 × 9.75% × 9/12) 73,125
For the month of January 2025 (₹ 9,75,000 × 9.75% × 1/12) 7,922
For the month of February 2025 (₹ 9,50,000 × 9.75% × 1/12) 7,719
For the month of March 2025 (₹ 9,25,000 × 9.75% × 1/12) 7,516
Total 96,281
Deduction u/s 24(b) : Interest on capital borrowed for the purchase, construction, re-
construction, repair or renewals of house property is deductible under section 24(b). In this case,
capital is borrowed from the employer without interest. There is no interest paid or payable in
respect of the amount of loan of ₹ 10 lacs. Consequently, no deduction under section 24(b) would
be available, whether the house is self-occupied or given on rent.

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CHAPTER – 4 UNIT –INCOME FROM HOUSE PROPERTY

STUDY MATERIAL
ILLUSTRATION 1
Jayashree owns five houses in India, all of which are let-out. Compute the GAV of each house
from the information given below
Partizculars House I House II House III House IV House IV
(₹) (₹) (₹) (₹) (₹)
Municipal Value 80,000 55,000 65,000 24,000 80,000
Fair Rent 90,000 60,000 65,000 25,000 75,000
Standard Rent N.A. 75,000 58,000 N.A 78,000
Actual rent received/receivable 72,000 72,000 60,000 30,000 72,000
SOLUTION – GAV (a) 90,000 (b) 72,000 (c) 60,000 (d) 30,000 (e) 78,000

ILLUSTRATION 2
Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y.2023-24.
He owns a house in London, which he has let out at £ 10,000 p.m. The municipal taxes paid to the
Municipal Corporation of London is £ 8,000 during the P.Y.2024-25. The value of one £ in Indian
rupee to be taken at ₹ 95. Compute Rajesh’s Net Annual Value of the property for the A.Y. 2025-
26.
SOLUTION – NAV – 1,06,40,000

ILLUSTRATION 3
Mr. Manas owns two house properties one at Bombay, wherein his family resides and the other at
Delhi, which is unoccupied. He lives in Chandigarh for his employment purposes in a rented house.
For acquisition of house property at Bombay, he has taken a loan of ₹ 30 lakh@10% p.a. on
1.4.2023. He has not repaid any amount so far. In respect of house property at Delhi, he has taken
a loan of ₹ 5 lakh@11% p.a. on 1.10.2023 towards repairs. Compute the deduction which would be
available to him under section 24(b) for A.Y.2025-26 in respect of interest payable on such loan
if he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
SOLUTION – Deduction u/s 24 – 2,00,000

ILLUSTRATION 4
Anirudh has a property whose municipal valuation is ₹ 1,30,000 p.a. The fair rent is ₹ 1,10,000 p.a.
and the standard rent fixed by the Rent Control Act is ₹ 1,20,000 p.a. The property was let out
for a rent of ₹ 11,000 p.m. throughout the previous year. Unrealised rent was ₹ 11,000 and all
conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation.
Interest on borrowed capital was ₹ 40,000 for the year. Compute his income from house property
for A.Y.2025-26.
SOLUTION – income from house property – 35,600
ILLUSTRATION 5
Ganesh has a property whose municipal valuation is ₹ 2,50,000 p.a. The fair rent is ₹ 2,00,000 p.a.
and the standard rent fixed by the Rent Control Act is ₹2,10,000 p.a. The property was let out
for a rent of ₹ 20,000 p.m. However, the tenant vacated the property on 31.1.2025. Unrealised
rent was ₹ 20,000 and all conditions prescribed by Rule 4 are satisfied. He paid municipal taxes
@8% of municipal valuation. Interest on borrowed capital was ₹ 65,000 for the year. Compute the
income from house property of Ganesh for A.Y.2025-26.
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SOLUTION – income from house property – 47,000

ILLUSTRATION 6
Poorna has one house property at Indira Nagar in Bangalore. She stays with her family in the
house. The rent of similar property in the neighbourhood is ₹ 25,000 p.m. The municipal valuation
is ₹ 2,80,000 p.a.. Municipal taxes paid is ₹ 8,000. The house construction began in April 2018
with a loan of ₹ 20,00,000 taken from SBI Housing Finance Ltd. @9% p.a. on 1.4.2018. The
construction was completed on 30.11.2020. The accumulated interest up to 31.3.2020 is ₹
3,60,000. On 31.3.2025, Poorna paid ₹ 2,40,000 which included ₹ 1,80,000 as interest. There was
no principal repayment prior to this date. Compute Poorna’s income from house property for A.Y.
2025-26 assuming that she has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).
SOLUTION – loss from house property – 2,00,000

ILLUSTRATION 7
Smt. Rajalakshmi owns a house property at Adyar in Chennai. The municipal value of the property
is ₹ 5,00,000, fair rent is ₹ 4,20,000 and standard rent is ₹ 4,80,000. The property was let-out
for ₹ 50,000 p.m. up to December 2024. Thereafter, the tenant vacated the property and Smt.
Rajalakshmi used the house for self-occupation. Rent for the months of November and December
2024 could not be realisedin spite of the owner’s efforts. All the conditions prescribed under
Rule 4 are satisfied. She paid municipal taxes @12% during the year. She had paid interest of ₹
25,000 during the year for amount borrowed for repairs for the house property. Compute her
income from house property for the A.Y. 2025-26.
SOLUTION – income from house property – 2,69,000
ILLUSTRATION 8
Ganesh has three houses, all of which are self-occupied. The particulars of the houses for the
P.Y.2024-25 are as under:
Particulars House I House II House III
Municipal valuation p.a. ₹ 3,00,000 ₹ 3,60,000 ₹ 3,30,000
Fair rent p.a. ₹ 3,75,000 ₹ 2,75,000 ₹ 3,80,000
Standard rent p.a. ₹ 3,50,000 ₹ 3,70,000 ₹ 3,75,000
Date of completion/purchase 31.3.2000 31.3.2002 01.4.2016
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for repair of - ₹ 55,000 -
property during the current year
Interest for current year on money borrowed in ₹ 1,75,000
April, 2017 for purchase of
Compute Ganesh’s income from house property for A.Y.2025-26 and suggest which houses should
be opted by Ganesh to be assessed as self-occupied so that his tax liability is minimum.
SOLUTION – (a) under 115BAC – H1 & H2 SOP, H3 LOP, income from house property –
73,640 (b) under normal provision – H1 & H3 SOP, H2 LOP, income from house propert –
1,840
ILLUSTRATION 9
Prem owns a house in Madras. During the previous year 2024-25, 2/3rd portion of the house was
self-occupied and 1/3rd portion was let out for residential purposes at a rent of ₹ 8,000 p.m.
Municipal value of the property is ₹ 3,00,000 p.a., fair rent is ₹ 2,70,000 p.a. and standard rent
is ₹ 3,30,000 p.a. He paid municipal taxes @10% of municipal value during the year. A loan of ₹
25,00,000 was taken by him during the year 2020 for acquiring the property. Interest on loan
paid during the previous year 2024-25 was ₹ 1,20,000. Compute Prem’s income from house

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property for the A.Y.2025-26 assuming that he has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A).
What would be Prem’s income from house property under the default tax regime?
SOLUTION – loss from house property – 57,000
ILLUSTRATION 10
Mr. Anand sold his residential house property in March, 2024.
In June, 2024, he recovered rent of ₹ 10,000 from Mr. Gaurav, to whom he had let out his house
for two years from April 2018 to March 2020. He could not realise two months rent of ₹ 20,000
from him and to that extent his actual rent was reduced while computing income from house
property for A.Y.2020-21.
Further, he had let out his property from April, 2020 to February, 2024 to Mr. Satish. In April,
2022, he had increased the rent from ₹ 12,000 to ₹ 15,000 per month and the same was a subject
matter of dispute. In September, 2024, the matter was finally settled and Mr. Anand received ₹
69,000 as arrears of rent for the period April 2022 to February, 2024.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand,
and if so in which year?
SOLUTION – income from house property – 55,300
ILLUSTRATION 11
Ms. Aparna co-owns a residential house property in Calcutta along with her sister Ms. Dimple,
where her sister’s family resides. Both of them have equal share in the property and the same is
used by them for self-occupation. Interest is payable in respect of loan of ₹ 50,00,000@10%
taken on 1.4.2023 for acquisition of such property. In addition, Ms. Aparna owns a flat in Pune in
which she and her parents reside. She has taken a loan of ₹ 3,00,000@12% on 1.10.2023 for
repairs of this flat. Compute the deduction which would be available to Ms. Aparna and Ms. Dimple
under section 24(b) for A.Y.2025-26, if both exercise the option of shifting out of the default
tax regime provided under section 115BAC(1A).
SOLUTION – deduction – 2,00,000

TEST YOUR KNOWLEDGE

Que - 12.
Mr. Raman is a co-owner of a house property along with his brother holding equal share in the
property.
Particulars ₹
Municipal value of the property 1,60,000
Fair rent 1,50,000
Standard rent under the Rent Control Act 1,70,000
Rent received 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged by the
bank is ₹ 25,000, out of which ₹ 21,000 has been paid. Interest on the unpaid interest is ₹ 450.
To repay this loan, Raman and his brother have taken a fresh loan and interest charged on this
loan is ₹ 5,000. The municipal taxes of ₹ 5,100 have been paid by the tenant.
Compute the income from this property chargeable in the hands of Mr. Raman for the A.Y. 2025-
26.
Ans – income from house property – 96,000 (50% share each – 48,000)

Que-13.
Mr. X owns one residential house in Mumbai. The house is having two identical units. First unit of
the house is self-occupied by Mr. X and another unit is rented for ₹ 8,000 p.m. The rented unit

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was vacant for 2 months during the year. The particulars of the house for the previous year 2024-
25 are as under:
Standard rent ₹ 1,62,000 p.a
Municipal valuation ₹1,90,000 p.a.
Fair rent ₹ 1,85,000 p. a
Municipal tax (Paid by Mr. X) 5% of municipal valuation
Light and water charges ₹ 500 p.m.
Interest on borrowed capital ₹ 1,500 p.m
Lease money. ₹ 1,200 p.a
Insurance charges . ₹ 3,000 p.a.
Repairs ₹ 12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2025-26 if he exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A).
Ans – income from house property – 34,675

Que- 14.
Mr. Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent are ₹ 96,000,
₹ 1,26,000 and ₹ 1,08,000 (per annum), respectively. During the F.Y. 2024-25, one-third of the
portion of the house was let out for residential purpose at a monthly rent of ₹ 5,000. The
remaining two-third portion was self-occupied by him. Municipal tax @11% of municipal value was
paid during the year.
The construction of the house began in June, 2017 and was completed on 31-5-2020. Vikas took a
loan of ₹ 1,00,000 on 1-7-2017 for the construction of building. He paid interest on loan @ 12%
per annum and every month such interest was paid.
Compute income from house property of Mr. Vikas for the A.Y. 2025-26 if he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).
Ans – income from house poperty – 20,936
Que -15.
Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the
financial year 2024-25. She owns a house property at Los Angeles, U.S.A., which is used as her
residence. The annual value of the house is $20,000. The value of one USD ($) may be taken as ₹
75.
She took ownership and possession of a flat in Chennai on 1.7.2024, which is used for self-
occupation, while she is in India. The flat was used by her for 7 months only during the year ended
31.3.2025. The municipal valuation is ₹ 3,84,000 p.a. and the fair rent is ₹ 4,20,000 p.a. She paid
the following to Corporation of Chennai:
Property Tax ₹ 16,200
Sewerage Tax ₹ 1,800
She had taken a loan from Standard Chartered Bank in June, 2022 for purchasing this flat.
Interest on loan was as under:
Particulars ₹
Period prior to 1.4.2024 49,200
1.4.2024 to 30.6.2024 50,800
1.7.2024 to 31.3.2025 1,31,300
She had a house property in Bangalore, which was sold in March, 2021. In respect of this house,
she received arrears of rent of ₹ 60,000 in March, 2025. This amount has not been charged to
tax earlier.

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Compute the income chargeable from house property of Mrs. Rohini Ravi for the A.Y. 2025-26 if
she has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
Would your answer change if she pays tax under the default tax regime under section 115BAC?
Ans- loss from house property – 1,49,940
Que- 16.
Two brothers Arun and Bimal are co-owners of a house property with equal share. The property
was constructed during the financial year 2016-2017. The property consists of eight identical
units and is situated at Cochin. During the financial year 2024-25, each co-owner occupied one
unit for residence and the balance of six units were let out at a rent of ₹ 12,000 per month per
unit. The municipal value of the house property is ₹ 9,00,000 and the municipal taxes are 20% of
municipal value, which were paid during the year. The other expenses were as follows:

₹
(i) Repairs 40,000
(ii) Insurance premium (paid) 15,000
(iii) Interest payable on loan taken for construction of house 3,00,000
One of the let out units remained vacant for four months during the year.
Arun could not occupy his unit for six months as he was transferred to Chennai. He does not own
any other house.
The other income of Mr. Arun and Mr. Bimal are ₹ 2,90,000 and ₹ 1,80,000, respectively, for the
financial year 2024-25.
Compute the income under the head ‘Income from House Property’ and the total income of two
brothers for the A.Y. 2025-26 if they pay tax under the default tax regime under section 115BAC.
Also, show the computation of income under this head, if they both exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
Ans – (a) under 115 BAC – Arun – 4,15,850 Bimal – 3,05,850 (b) under normal provision –
Arun – 3,78,350 Bimal – 2,68,350
PAST EXAM QUESTIONS
Illustration 17
Computation of Total Income: From the following particulars furnished by Kiran for the previous
year ending 31-3-2024, compute the taxable income:
i) He owns a house property at Metro City. The fair rental value per annum is 27,000 and the
Municipal value is ₹ 24,000.
ii) The house was let out from 1-4-2024 to 31-8-2024 at a monthly rent of ₹ 2,100. From 1-9-
2024 Kiran occupies for his residence (self).
iii) Expenditure incurred on property and paid a) Municipal tax= ₹4,000 b) Fire Insurance = ₹2,500
c) Land Revenue = ₹ 4,600 d) Repairs = ₹ 1,000
iv) Interest paid on borrowing for construction: a) For the year = ₹ 21,600 b) Proportionate pre-
construction interest = ₹ 12,960
v) Income from Firm (PF A/c) as partner: Salary 25,000; Interest on Capital ₹ 20,000; and Share
Income ₹ 35,000
Solution: Computation of Total Income of Kiran (amounts in ₹)
Particulars ₹
Gross Annual Value [WN-1] 27,000
Less: Municipal Taxes paid 4,000
Net Annual Value 23,000
Less: Deduction under section 24

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CONTACT NO. FOR CLASSES - 9039600091 pg. 67
 CA VARDHAMAN DAGA

a) Standard deduction 30% of NAV 6,900

b) Interest on Borrowed Capital (21,600 + 12,960) 34,560
Income from House Property 18,460
Profits and Gains of Business or Profession[WN-2] 45,000
Gross Total Income/Total Income 26,540
Working Notes:
(1) GAV = (a) Expected Rent 27,000 (being higher of Municipal Value or Fair Rent); or (b) ARR
10,500 (2,100 × 5 months)= ₹ 27,000, whichever is higher.
(2) Salary and interest from partnership firm is taxable under the head profits and gains of
business or profession, however share income from firm is exempt under section 10(2A).
Illustration 18
Computation of Income from house property: Rohit is the owner of a house property, its
municipal valuation is 80,000. It has been let-out for 1,20,000 per annum. The local taxes payable
by the owner amount to 16,000, but as per agreement between the tenant and the landlord, the
tenant has paid the amount directly to the municipality. The landlord, however, bears the following
expenses on tenant's amenities:
Extension of water connection = ₹ 3,000
Water charges = ₹ 1,500
Lift maintenance = ₹ 1,500
Salary of gardener = ₹ 1,800
Lighting of stairs = ₹ 1,200
Maintenance of swimming pool = ₹ 750
The landlord claims the following deductions:
a) Repairs and collection charges = ₹ 7,500
b) Land revenue paid = ₹ 1,500
Compute the taxable income of Rohit from the house property. (10 Marks, CS Executive Dec.
2009)
Solution: Computation of income from the property (amount in ₹):
Particulars ₹
Total sum received from the tenant 1,20,000
Less: Sum incurred towards tenant's amenities [WN-1]
Extension of water connection -3,000
Water charges -1,500
Lift maintenance -1,500
Salary of gardener -1,800
Lighting of stairs -1,200
Maintenance of swimming pool -750
Total Rent received for the property 1,10,250
Less: Municipal taxes Nil
Net annual value 1,10,250
Less: Standard Deduction u/s 24 @ 30% [WN-3] 33,075
Income from house property 77,175
Working Notes:
(1) The expenses borne by the landlord towards amenities of the tenant is included in the rent of
1,20,000, hence the same is to be excluded for calculating actual rent as the same have been
incurred on behalf of the tenant, for his personal amenities.

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CONTACT NO. FOR CLASSES - 9039600091 pg. 68
 CA VARDHAMAN DAGA

(2) No deduction shall be allowed for municipal taxes as the same have been paid by the tenant.
(3) No deduction is allowed for repair and collection charges and land revenue paid by the landlord,
only a standard deduction under section 24 @ 30% of the NAV shall be allowed.
Illustration 19
Computation of Income from house property: Mr. Raphael constructed a shopping complex. He
had taken a loan of 25 lakhs for construction of the said property on 01-08-2022 from SBI @
10% for 5 years. The construction was completed on 30-06-2023. Rental income received from
shopping complex 30,000 per month-let out for the whole year. Municipal Taxes paid for shopping
complex ₹ 8,000.
Arrears of rent received from shopping complex 1,20,000.
Interest paid on loan taken from SBI for purchase of house for use as own residence for the
period 2024-25, 3 lakhs. You are required to compute Income from House property of Mr. Raphael
for A.Y. 2025-26 (8 Marks, Nov. 2015) (Similar: 4 Marks, May 2017).
Solution: Computation of Income From House Property of Mr. Raphael (amount in ₹)
Particulars ₹
Let out property [Shopping Complex]
Gross Annual Value (30,000 × 12) 3,60,000
Less: Municipal taxes paid 8,000
Net Annual Value 3,52,000
Less: Deductions under section 24
a) Standard deduction @ 30% of NAV 1,05,600
b) Interest on Housing Loan[WN-2] 2,83,333
Net annual value -36,933
Add: Arrears of rent received [WN-3] 84,000
Income from let out property [A] 47,067
Self occupied house:
Net Annual Value Nil
Less: Interest on borrowed capital[WN-1] -2,00,000
Income From Self occupied property [B] -2,00,000
Income from House property [A] + [B] -1,52,933
Working Notes: (1) The maximum amount of interest on borrowed capital to be allowed as
deduction in case of self occupied house is ₹ 2,00,000
(2) The pre-construction period starts from 01-08-2022 (date of loan) and ends on 31-03-2023.
The interest for the said period i.e. for 8 months shall be - 25,00,000 × 10% x (8 ÷ 12)= 166,667.
Such interest is deductible in 5 equal annual instalments starting with previous year 2023-24,
each installment being 33,333 (ie., 1,66,667 ÷ 5). Interest of 2,50,000 for current year will be
deductible. Therefore, total interest deductible=283,333 (i.e.,33,333 + 2,50,000).
(3) Taxable value of arrears of rent under section 25A=1,20,000 - 30% of 1,20,000 = ₹84,000.
Illustration 20
Computation of Income from house property: Mr. Aditya, a resident but not ordinarily resident
in India during the Assessment Year 2025-26. He owns two house, one in Dubai and the other in
Mumbai. The house in Dubai is let out there at a rent of DHS 20,000 p.m. (1 DHS INR 18). The
entire rent is received in India. He paid Property tax of DHS 2,500 and Sewerage Tax DHS 1,500
there, for the Financial Year 2024-25. The house in Mumbai is self-occupied. He had taken a loan
of 25,00,000 to construct the house on 1st June, 2021 @ 12%. The construction was completed
on 31 May, 2023 and he occupied the house on 1st June, 2024. The entire loan is outstanding as
on 31st March, 2025. Property tax paid in respect of the second house is 2,400 for the Financial
Year 2024-25.

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CONTACT NO. FOR CLASSES - 9039600091 pg. 69
 CA VARDHAMAN DAGA

Compute the income chargeable under the head "Income from House Property" in the hands of
Mr. Aditya for the Assessment Year2025-26 if he has not opted for the provisions of Section
115BAC. (5 Marks, Nov. 2017)
Solution: Though Mr. Aditya is a resident but not ordinarily resident in India but the income from
property in Dubai will be taxable in India since the rent is received in India.
Particulars ₹
Let out property [Dubai House]
Gross Annual Value (DHS 20,000 x 18 x 12) 43,20,000
Less: Municipal taxes paid (DHS (2,500 + 1,500) x 18) 72,000
Net Annual Value 42,48,000
Less: Deductions under section 24- 12,74,400
a) Standard deduction @ 30% of NAV
b) Interest on Housing Loan
Income from let out property[A] 29,73,600
Self occupied house:
Net Annual Value Nil
Less: Interest on borrowed capital[WN] -2,00,000
Income From Self occupied property [B] -2,00,000
Income from House property [A] + [B] 27,73,600
Working Note: The pre-construction period starts from 01-06-2021 (date of loan) and ends on
31-03-2023. The interest for the said period i.e. for 22 months shall be- 25,00,000 × 12% x (22
÷ 12) 550,000. Such interest is deductible in 5equal annual instalments starting with previous year
2023-24, each installment being 1,10,000 (i.e., 5,50,000 ÷ 5).
Interest for current year is 3,00,000 ( 25,00,000 × 12% x 1). Therefore, total interest = 410,000
(i.e., 1,10,000 ÷ 3,00,000). Since the house is self-occupied the maximum allowable interest is ₹
2,00,000.
Illustration 21
Computation of Income from house property: Mrs. Disha Khanna, a resident of India, owns a
house property at Bhiwani in Haryana. The Municipal value of the property is 7,50,000, Fair Rent
of the property is 6,30,000 and Standard Rent is 7,20,000 per annum.
The property was let out for 75,000 per month for the period April 2024 to December 2024.
Thereafter, the tenant vacated the property and Mrs. Disha Khanna used the house for
selfoccupation. Rent for the months of November and December 2024 could not be realized from
the tenant. The tenancy was bonafide but the defaulting tenant was in occupation of another
property of the assessee, paying rent regularly.
She paid municipal taxes @ 12% during the year and paid interest of 35,000 during the year for
amount borrowed towards repairs of the house property.
You are required to compute her income from "House Property" for the A.Y. 2025-26. (7 Marks,
Nov. 2018-NS)
Solution: Computation of Income from House Property (amount in ₹)
Particulars ₹ ₹
Annual value [WN-1] 7,20,000
Less: Municipal taxes paid (7,50,000 × 12%) 90,000
Net Annual Value (NAV) 6,30,000
Less: Deductions u/s 24
a) Standard deduction @ 30% of NAV 1,89,000
b) Interest on borrowed capital 35,000
Income from House Property 4,06,000

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CONTACT NO. FOR CLASSES - 9039600091 pg. 70
 CA VARDHAMAN DAGA

Working Notes: (1) Where the property is let for a part of a year and self-occupied for remaining
period, the benefit of self-occupation shall not be available and the annual value shall be
determined as per Section 23(1)(a).
Thus, annual value =
a) Expected Rent i.e. Municipal Value (7,50,000) or Fair Rent (6,30,000) whichever is higher
subject to maximum of Standard Rent (7,20,000) i.e. 7,20,000; or
b) Actual Rent i.e. 75,000 × 9675000;
whichever is higher.
(2) Unrealised Rent cannot be deducted from actual rent since the conditions of Rule 4 have not
been satisfied.
Illustration 22
Computation of Total Income: Mr. Ravi, a resident and ordinarily resident in India, owns a let out
house property having different flats in Kanpur which has municipal value of 27,00,000 and
standard rent of 29,80,000. Market rent of similar property is 30,00,000. Annual rent was
40,00,000 which includes 10,00,000 pertaining to different amenities provided in the building.
One flat in the property (annual rent is 2,40,000) remains vacant for 4 months during the previous
year. He has incurred following expenses in respect of aforesaid property:
• Municipal taxes of 4,00,000 for the financial year 2024-25 (10% rebate is obtained for
payment before due date). Arrears of municipal tax of financial year 2023-24 paid during
the year of 1,40,000 which includes interest on arrears of 25,000.
• Lift maintenance expenses of ₹ 2,40,000 which includes a payment of ₹ 30,000 which is
made in cash.
• Salary of ₹ 88,000 paid to staff for collecting house rent and other charges.
Compute the total income of Mr. Ravi for the assessment year 2025-26 assuming that Mr. Ravi
has not opted for the provisions under section 115BAC. (6 Marks, Dec. 2021)
Solution: Computation of total income of Mr. Ravi for A.Y. 2025-26 under the regular
provisions of the Act:
Particulars ₹ ₹
Income from house property
Gross Annual Value
• Expected rent 29,80,000 (Higher of Municipal Value of 27,00,000
p.a. and Fair Rent of 30,00,000 p.a., but restricted to Standard
Rent of 29,80,000 p.a.]
• Actual rent 29,40,000 [30,00,000, being annual rent for house
property less rent of 60,000 (2,40,000 × 4/12 x 3/4) due to
vacancy]
Gross Annual Value 29,40,000
In this case, the actual rent is lower than the expected rent due to
vacancy. Otherwise, the actual rent of 30,00,000 would have been
higher than the expected rent. In such a case, the actual rent would
be the gross annual value, even if it is lower than the expected rent.
Less: Municipal taxes actually paid during the year:
• 4,00,000 rebate of ₹ 40,000 3,60,000
• 1,40,000 arrears 25,000 interest 1,15,000 4,75,000
Net Annual Value 24,65,000
Less: Deduction from Net Annual Value 30% of Net Annual Value 7,39,500 17,25,500
Income from Other Sources/Profits and gains from business or
Profession
Rent for amenities 10,00,000
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CONTACT NO. FOR CLASSES - 9039600091 pg. 71
 CA VARDHAMAN DAGA

Less: Loss due to vacancy 2,40,000 x 4/12 x 1/4] 20,000

9,80,000
Less: Expenditure in respect thereof
• Lift maintenance expenses [excluding cash payment of 30,000
disallowed] = 2,40,000 - ₹30,000 2,10,000
• Salary to staff 88,000 × 1/4, being
the proportion pertaining to amenities] 22,000 2,32,000 7,48,000
Total Income 24,73,500
Illustration 23
Computation of Gross Annual Value : Vinod is the owner of the three houses, which are all let
out and covered by the Rent Control Act. From the following particulars, find out the gross annual
value in each case:
Particulars House-I House-II House-III
Municipal value 30,000 30,000 35,000
Annual rent 42,000 36,000 30,000
Fair rent 36,000 28,000 30,000
Standard rent 30,000 35,000 36,000
Unrealised rent 7,000 9,000 36,000
Period of vacancy 1 month 2 month 3 month
Solution: Computation of Gross Annual Value (amount in ₹)
Particulars House-I House-II House-III
Expected rent [WN-1] 30,000 28,000 35,000
Let out period (in months) 11 10 9
Proportionate Expected Rent for the [WN-2] 27,500 23,333 26,250
Actual rent for let out period 38,500 30,000 22,500
Actual rent received (ARR) [WN-3] 31,500 21,000 20,000
Gross Annual Value (GAV) [WN-4] 31,500 28,000 35000
Working Notes:
(1) ER = Municipal Value or Fair Rent, whichever is higher subject to maximum of Standard
Rent
i. PER =ER x Let -out period ÷ 12.
(2) ARR = Actual rent - Unrealised rent.
(3) If ARR is greater than or equal to PER, then GAV = ARR, otherwise GAV = ER.
Illustration 24
Self occupied properties: Nisha has two houses, both of which are self occupied. The particulars
of these are given below:
Particulars (Value in ₹)
House - I House – II
Municipal Valuation per annum 1,20,000 1,15,000
Fair Rent per annum 1,50,000 1,75,000
Standard rent per annum 1,00,000 1,65,000
Date of completion 31-03-2017 31-03-2017
Municipal taxes payable during the year (paid for House II 12% 8%
only)
Interest on money borrowed for acquisition of house 1,80,000 80,000
properties
Compute Nisha's income from the House Property if she has shifted out of default tax regime.

YOUTUBE & TELEGRAM – ARHAM INSTITUTE,

CONTACT NO. FOR CLASSES - 9039600091 pg. 72
 CA VARDHAMAN DAGA

Solution: Section 23 of the Income-tax Act provides relief to the taxpayer by allowing him an
option to claim nil annual value in respect of any two houses, declared as self-occupied. Besides
this section 24 of the Income-tax Act provides that the monetary limit of deduction on account
of interest payable on borrowed capital i.e. ₹ 30,000/ ₹ 2,00,000 shall continue to apply to the
aggregate of the amounts of deduction in case of more than one self-occupied houses. Hence, the
Income from house property shall be computed as under:
b) Computation of income from houses when they are treated as self-occupied (amount in ₹)-
Particulars House I & II
Annual Value [Since both the houses are self occupied] Nil
Less: Interest on loans [House - I: 1,80,000 and House - II: 80,000 (Restricted 2,00,000
to 2,00,000)
Income from house property -2,00,000
Illustration 25
Self occupied properties: Mr. X has three houses, all of which are self occupied. The particulars
of these are given below:
Particulars (Value in ₹)
House - I House – II House – III
Municipal Valuation per annum 1,20,000 1,15,000 2,00,000
Fair Rent per annum 1,50,000 1,75,000 2,50,000
Standard rent per annum 1,00,000 1,65,000 2,40,000
Date of completion 31-03-2017 31-03-2017 31-03-2019
Municipal taxes payable during the year (paid 12% 8% 10%
for House II only)
Interest on money borrowed for acquisition of 1,80,000 80,000 75,000
house properties
Compute Mr. X income from the House Property if he has shifted out of default tax regime
Solution: Section 23 of the Income-tax Act provides relief to the taxpayer by allowing him an
option to claim nil annual value in respect of any two houses, declared as self-occupied, instead of
one such house as provided earlier. Besides this section 24 of the Income-tax Act provides that
the monetary limit of deduction on account of interest payable on borrowed capital i.e.₹ 30,000/
₹ 2,00,000 shall continue to apply to the aggregate of the amounts of deduction in case of more
than one self-occupied houses.
Thus, assessee has the following options:
Option I: House I and II self occupied and House III - deemed to be let out.
Option II: House I and III self occupied and House II - deemed to be let out.
Option III: House II and III self occupied and House I - deemed to be let out.
The lowest value of house property amongst the above options shall be offered for taxation.
Hence, the Income from house property shall be computed as under:
1) Computation of income from houses when they are deemed to be let out (amount in ₹) -
Particulars House-I House-II House-III
Gross Annual Value[Note-A] 1,00,000 1,65,000 2,40,000
Less: Municipal taxes paid[Note-B] Nil 9,200 20,000
Net Annual Value 1,00,000 1,55,800 2,20,000
Less: Deductions under section 24-
a) Statutory Deduction @ 30% of NAV 30,000 46,740 66,000
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CONTACT NO. FOR CLASSES - 9039600091 pg. 73
 CA VARDHAMAN DAGA

b) Interest on loans 1,80,000 80,000 75,000

Income from house -1,10,000 29,060 79,000
Notes:
A) GAV = Municipal Value or Fair Rent, whichever is higher subject to maximum of Standard Rent.
B) Municipal taxes actually paid shall only be allowed as deduction.
2) Computation of income from houses when they are treated as self-occupied (amount in
₹)-
Particulars House-I House-II House-III
Annual Value [Since both the houses are self Nil Nil Nil
occupied]
Less: Interest on loans (Restricted to 2,00,000 2,00,000 1,55,000
2,00,000)
Income from house property -2,00,000 -2,00,000 -1,55,000
3) Hence, the taxable value shall be arrived as under:
Option Total
Option I: House I and II self occupied and House III - deemed to be let out -1,21,000
Option II: House I and III self occupied and House II - deemed to be let Out -1,70,940
Option III: House II and III self occupied and House I - deemed to be let out. -2,65,000
Illustration 26
Determination of heads of income for taxability: In the following cases, state the head of
income under which the receipt is to be assessed and comment
a) X Ltd. lets out its property to Y. Y sublets the same.
b) X has built a house on a leasehold land. He has let out the above property and claims income
from House Property under other Sources and deducted expenses on repair, security
charges, insurance and collection charges in all amounting to 40% of receipts.
Solution: (a) income from subletting (Subletting receipts Less rent paid to X Ltd.) shall be taxed
as "Income from Other Sources" in hands of Y.
(b) House constructed on leasehold land is assessable under head "Income from house property",
hence the rent there from shall be taxable as Income from house property. Further, the standard
deduction under section 24 @ 30% of NAV and interest on capital borrowed will only be allowable
to him.
Illustration 27
Self-occupied and let out property period wise: Ram owned a house property at Madras which
was occupied by him for the purpose of his residence. He was transferred to Bombay in June,
2024 and therefore he let out the property with effect from 1-7-2024 on a monthly rent of ₹
3,000. The corporation tax payable in respect of the property was 6,000 of which 50% was paid
by him before 31-3-2025. Interest on money borrowed for the construction of the property
amounted to 20,000. Compute the income from house property.
Solution: Computation of Income from House Property (amount in ₹)
Particulars ₹
Annual value [WN-1] 36,000
Less: Municipal taxes paid (6,000 × 50%) [WN-2] 3,000
Net Annual Value (NAV) 33,000
Less: Deductions under section 24 -
a) Standard deduction @ 30% of NAV 9,900
b) Interest on borrowed capital 20,000
Interest on borrowed capital 3,100
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 CA VARDHAMAN DAGA

Working Notes:
1) Where the property is let for a part of a year and self-occupied for remaining period, the
benefit of self-occupation shall not be available and the annual value shall be determined as per
Section 23(1)(a). Thus, annual value =
a) Expected Rent i.e. 3,000 × 12 = ₹ 36,000; or
b) Actual Rent i.e. 3,000 × 9= ₹ 27,000;
whichever is higher.
2) Municipal taxes paid by Ram shall only be allowed as deduction.
Illustration 28
Computation of Income from House Property: A and B construct their houses on a piece of land
purchased by them at New Delhi. The built up area of each house is 1,000 sq. ft. (ground floor and
an equal area in the first floor). A starts construction on April 1, 2023 and completes it on March
31, 2024. B starts the construction on April 1, 2023 and completes on June 30, 2024 and lets out
the first floor for a rent of 15,000 per month. The tenant vacates the house on December 31,
2024 and B occupies the entire house during the period January 1, 2025 to March 31, 2025.
The following are the other information (amount in₹ ):
Particulars ₹
Fair rental value of each unit (ground floor/first floor) (per annum) 72,000
Municipal value of each unit (ground floor/first floor) (per annum) 1,00,000
Municipal taxes paid by – A 8,000
-B 8,000
Repair and maintenance charges paid by – A 28,000
-B 30,000
A has availed a housing loan of 20 lakhs @ 12% on April 1, 2023. B has availed a housing loan of 12
lakh @ 10% on July 1, 2023. No repayment is made by either of them till March 31, 2025.
Compute the Income from house property if they have exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A).
Solution: Computation of Income from House Property of A and B (amounts in ₹)
1) In case of Mr. A:
Particulars ₹
Net Annual Value (self-occupied) Nil
Less: Interest on borrowed capital [WN] 2,00,000
Income from House Property -2,00,000
Working Note:
'A' started construction on 01-04-2022, which ended on 31-03-2023. Since A had taken loan on
01-04-2022 and the construction was completed on 31-03-2023, there is no pre-construction
period. Thus, interest from 01-4-2023 to 31-03-2024 i.e.₹ 2,40,000 shall be deductible, subject
to maximum of ₹ 2,00,000.
2) In case of Mr. B:
Particulars Unit 1 – Self Unit 2 - Partly
occupied SOP and partly
let out
Expected Rent [WN-1] - 75,000
ARR ( 15,000 × 6) - 90,000
Gross Annual Value [WN-2] - 90,000
Less: Municipal taxes (50% of 8,000) - 4,000
Net Annual Value Nil 86,000
Less: Deductions under section 24 -

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 CA VARDHAMAN DAGA

(a) Statutory deduction @ 30% of NAV - 25,800

(b) Interest on borrowed capital [WN-3] 69,000 69,000
Income from house property -69000 -8800
Working Notes:
1) ER = Municipal value (of 9 months) or Fair rent (of 9 months), whichever is higher = higher of
75,000 or ₹ 54,000 = 75,000. B has occupied the ground floor for self-occupation from 01-
072023. Its annual value will be computed as per Section 23(2). The first floor is let for a
part of the year and then it is self-occupied. Its annual value will also be computed as per
Section 23(1). However, since the house has come into existence on 01-07-2023, the annual
fair value and annual municipal value for the period when the property was in existence (9
months) shall be considered for computing GAV.
2) Since ARR is greater than ER, hence GAV = ARR.
3) The pre-construction period starts from 01-07-2022 (date of loan) and ends on 31-03-2023.
The interest for the said period i.e. for 9 months shall be 12,00,000 × 10% x (9 ÷ 12)=90,000;
45,000 for ground floor and₹45,000 for 1st floor. Such interest is deductible in 5 equal
annual instalments starting with previous year2023-24, each installment being 9,000 (i.e.,
45,000 ÷ 5). Interest of 1,20,000 for current year will be apportioned between the 2 units
at 60,000 each. Therefore, total interest deductible= 69,000 (i.e., 60,000+9,000) in each
case.
Illustration 29
Computation of Income from House Property: Mrs. Indu, a resident individual, owns a house in
U.S.A. She receives rent @ $2,000 per month. She paid municipal taxes of $1,500 during the
financial year 2024-25. She also owns a two storied house in Mumbai, ground floor is used for her
residence and first floor is let out at a monthly rent of 10,000. Standard rent for each floor is
11,000 per month. Municipal taxes paid for the house amounts to 7,500. Mrs. Indu had constructed
the house by taking a loan from a nationalised bank on 20-6-2022. She repaid the loan of 54,000
including interest of 24,000. The value of one dollar is to be taken as 75.
Compute total income from house property of Mrs. Indu if they have exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A). (7 Marks, PCC Nov.
2009)
Solution: Computation total Income from House Property of Mrs. Indu (amounts in ₹)
1) Mumbai House - Ground Floor:
Particulars ₹
Net Annual Value Nil
Less: Interest on borrowed capital [See Note] 12,000
Net Income from Ground Floor -12,000
Note: Interest on capital borrowed for construction = 24,000 x 1/2 = 12,000, remaining half is
for 1st floor.
2) Mumbai House - First Floor:
Particulars ₹
Gross Annual Value being actual rent [WN-1] 1,20,000
Less: Municipal Taxes paid [WN-2] 3,750
Net Annual Value 1,16,250
Less: Deductions under section 24-
(a) Statutory deduction @ 30% of NAV 34,875
(b) Interest on borrowed capital 12,000
Income from First Floor of Mumbai House 69,375

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Working Notes:
(a) GAV = 10,000 x 121 = ₹ 20,000
(b) Municipal taxes paid in respect of first floor = 7,500 x 1/2 = ₹3,750, as balance half is for
ground floor.
(c) Interest on capital borrowed for construction 24,000 x 1/2 = 12,000.
3) U.S.A. House:
Particulars ₹
Gross Annual Value [WN-1] 18,00,000
Less: Municipal Taxes paid [WN-2] 1,12,500
Net Annual Value 16,87,500
Less: Standard Deduction u/s 24 @ 30% of NAV 5,06,250
Income from U.S.A. House 11,81,250
Working Notes:
(1) GAV = $2,000 × 12 × 75 per dollar = ₹ 1800000.
(2) Municipal Taxes paid = $ 1,500 x 75 = 112500.
Therefore, total Income from House Property of Mrs. Indu= (-12,000) +69,375 +11,81,250 =
1,238,625.
Illustration 30
Tax treatment of unrealised rent: An owner of a house property is allowed a deduction of 12,000
by way of unrealized rent for assessment year 2019-20. He sold the house on 15-4-2024 and
ceases to be the owner thereof. A decree for the unrealized rent was given in his favour on 1-12-
2024 and he receives the full amount on 1-2-2025. Examine the tax consequence. (May 2006)
Solution: According to Section 25A, recovery of unrealized rent is taxable as "Income from House
Property" whether the assessee is owner of the house or not. Hence, in the given case, the amount
of 12,000 received by A by way of unrealised rent after giving deduction of 30%, shall be taxable
as his income for the previous year 2024-25 even if he ceases to be the owner of the house
property during the previous year.
Taxable (amount in ₹)
Particulars ₹
The amount received as unrealised rent 12,000
Less: Standard Deduction @ 30% of such amount 3,600
Income from house property 8,400
Illustration 31
Computation of income from house property: X is the owner of a commercial property let out at
20,000 p.m. The municipal tax on the property is 25,000 annually, 50% of which is payable by the
tenant. This tax was actually paid on 15-4-2025. He had borrowed a sum of 10 lacs from his cousin,
resident in USA (In Dollars) for the construction of the property on which interest at 10% is
payable. He has also received arrears of rent of 20,000 during the year, which was not charged
to tax in the earlier years. What is the property income of X? (Nov. 2002)
Solution: Computation of Income From House Property of Mr. X (amount in ₹)
Particulars ₹
Gross Annual Value (₹ 20,000 × 12) 2,40,000
Less: Municipal taxes paid[WN-1] Nil
Net Annual Value 2,40,000
Less: Deductions under section 24-
a) Standard deduction @ 30% of NAV 72,000
b) Interest on Housing Loan (10,00,000 × 10%)[WN-2] 1,00,000
68,000

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Add: Arrears of rent received[WN-3] 14,000

Income from House Property 82,000
Working Notes:
(1) No deduction shall be allowed for municipal taxes as the same were not actually paid during
the previous year.
(2) It is assumed that the tax has been deducted at source on the amount of interest paid outside
India.
(3) Taxable value of arrears of rent under section 25A = 20,000 -30% of 20,000 = 14,000.
Illustration 32
Computation of taxable income: Ramesh (58 years) retired as General Manager of XYZ Co. Ltd.
on 30-11-2024 after rendering service for 20 years and 10 months. He received 3,00,000 as
gratuity from the employer. (He is not covered by Gratuity Act, 1972). His salary particulars are
given below:
Basic Pay 10,000 p.m. upto 30-06-2024
Basic Pay 12,000 p.m. from 01-07-2024
Dearness allowance (Eligible for retirement 50% of basic pay
benefits)
Transport Allowance 2,300 p.m.
He resides in his own house. Interest on monies borrowed for the self-occupied house is 24,000
for the year-ended 31-3-2025. From a fixed deposit with a bank he earned interest income of
18,000 for the year ending 31-3-2025. Compute taxable income of Ramesh if he has not opted for
the provisions of Section 115BAC of the Act. (May 2004)
Solution: Computation of taxable income of Ramesh (amount in ₹)
Particulars ₹ ₹ ₹
Income from Salaries
Basic Pay (10,000 x 3 + 12,000 × 5) 90,000
Dearness Allowance (50% of basic pay) 45,000
Transport Allowance (2,300 x 8)[WN-1] 18,400
Gratuity Received 3,00,000
Less: Exempt[WN-2] 1,62,000 1,38,000
Gross Salary 2,91,400
Less: Standard deduction u/s 16(ia) 50,000 2,41,400
Income from House Property
Annual Value Nil
Less: Interest on borrowed capital[WN-3] 24,000 -24,000
Income from other sources (Bank Interest) 18,000
Total Income 2,35,400
Working Notes:
(1) Transport allowance is fully taxable.
(2) Gratuity received shall be exempt to the extent of least of the following (Payment of
Gratuity Act is not applicable)
a) Actual amount received = ₹ 3,00,000
b) Notified Amount = ₹ 20,00,000
c) 1/2 x Average Salary x No. of completed years of service = 1/2 × 16,200 × 20 years
= ₹ 1,62,000 Average Salary = Basic and DA for 10 months preceding the month of
retirement i.e. January to October ÷ 10 = [(10,000 × 6 ÷ 12,000 × 4) ÷ 50% of (10,000
× 6 ÷ 12,000 × 4)] = ₹1,62,000.
(3) Since the house is self-occupied, hence its annual value shall be Nil.
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 CA VARDHAMAN DAGA

CHAPTER – 5: PROFITS AND GAINS OF BUSINESS OR

PROFESSION
STUDY MATERIAL
ILLUSTRATION 1
Mr. X, a proprietor engaged in manufacturing business, furnishes the following particulars:
Particulars ₹
(1) Opening balance of plant and machinery as on 1.4.2024 (i.e., WDV as on 30,00,000
31.3.2024 after reducing depreciation for P.Y. 2023-24)
(2) New plant and machinery purchased and put to use on 8.06.2024 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2024 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2025 3,00,000
Compute the amount of depreciation and additional depreciation for the A.Y. 2025-26, if Mr. X
has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A). Assume that all the assets were purchased by way of account payee cheque.
SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2025-26
Particulars Plant & Computer
Machinery (40%)
(15%)
Total depreciation 12,90,000 60,000

ILLUSTRATION 2
A car purchased by Dr. Soman on 10.08.2021 for ₹ 5,25,000 for personal use is brought into
professional use on 1.07.2024 by him, when its market value was ₹ 2,50,000.
Compute the actual cost of the car and the amount of depreciation for the A.Y. 2025-26 assuming
the rate of depreciation to be 15%.
SOLUTION
As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the
assessee.
The purchase price of ₹ 5,25,000 is, therefore, the actual cost of the car to Dr. Soman. Market
value (i.e. ₹ 2,50,000) on the date when the asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y.2025-26 would be ₹
78,750, being ₹ 5,25,000 x 15%.
ILLUSTRATION 3
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the
following assets in his office during F.Y. 2024-25 at the cost shown against each item. Calculate
the amount of depreciation that can be claimed from his professional income for A.Y.2025-26.
Assume that all the assets were purchased by way of account payee cheque.
Sl. Description Date of Date when Amount
No acquisition put to use ₹
1. Computer including computer software 27 Sept., 24 1 Oct., 24 35,000
2. Computer UPS 2 Oct., 24 8 Oct., 24 8,500
3. Computer printer 1 Oct., 24 1 Oct., 24 12,500
4. Books (other than annual publications are of 1 Apr., 24 1 Apr., 24 13,000
₹ 12,000
5. Office furniture (Acquired from a practicing 1 Apr., 24 1 Apr., 24 3,00,000
C.A.)
6. Laptop 26 Sep., 24 8 Oct., 24 43,000
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SOLUTION
Computation of depreciation allowable for A.Y.2025-26
Asset Rate Depreciation
(₹)
Block 1 Furniture 10% 30,000
Block 2 Plant (Computer including computer software, Computer UPS, 40% 34,500
Laptop, Printers and Books)
Total depreciation allowable 64,500
ILLUSTRATION 4
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor vehicles
on 1.1.2024. The manufacturing unit was set up on 1.5.2024. He commenced his manufacturing
operations on 1.6.2024. The total cost of the plant and machinery installed in the unit is ₹ 120
crore. The said plant and machinery included second hand plant and machinery bought for ₹ 20
crore and new plant and machinery for scientific research relating to the business of the assessee
acquired at a cost of ₹ 15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961 in
respect of the assessment year 2025-26. Assume that all the assets were purchased by way of
account payee cheque and Mr. Gamma has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).
SOLUTION
Computation of depreciation allowable for the A.Y. 2025-26 in the hands of Mr. Gamma
Particulars ₹ in crore
Depreciation allowable for A.Y.2024-25 32.75
ILLUSTRATION 5
Mr. A, furnishes (i) the following particulars for the P.Y.2024-25. Compute the deduction
allowable under section 35 for A.Y.2025-26, while computing his income under the head “Profits
and gains of business or profession”, if. he is paying tax under default tax regime under section
115BAC
(ii) he has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A)
Particulars ₹
1. Amount paid to notified approved Indian Institute of Science, Bangalore, for 1,00,000
scientific research
2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000
3. Amount paid to X Ltd., a company registered in India which has as its main 4,00,000
object scientific research and development, as is approved by the prescribed
authority
4. Expenditure incurred on in-house scientific research and
development facility as approved by the prescribed authority related to his
business
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land ₹ 5,00,000) on 7,50,000
scientific research
SOLUTION
(i)If Mr. A is paying tax under default tax regime under section 115BAC
Computation of deduction under section 35 for the A.Y.2024-25

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Particulars ₹ Section Allowability Amount of

deduction
(₹)
Payment for scientific research
Indian Institute of Science,
Bangalore 1,00,000 35(1)(ii) Not allowable Nil
IIT, Delhi 2,50,000 35(2AA) under default Nil
X Ltd. 4,00,000 35(1)(iia) tax regime Nil
Expenditure incurred on in-house
research and development
facility
Revenue expenditure 3,00,000 35(1)(i) Allowable 3,00,000
Capital expenditure 2,50,000 35(1)(iv) Under default 2,50,000
(excluding cost of acquisition of read with tax regime
land ₹ 5,00,000) 35(2)(ia
Deduction allowable under section 35 5,50,000
(ii)If Mr. A has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A)
Computation of deduction under section 35 for the A.Y.2024-25
Particulars ₹ Section % of Amount of
deduction deduction
(₹)
Payment for scientific research
Indian Institute of Science, 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on in-house research and development facility
Revenue expenditure 3,00,000 35(1)(i) 100% 3,00,000
Capital expenditure 2,50,000 35(1)(iv) 100% 2,50,000
(excluding cost of acquisition of land ₹ read with
5,00,000) 35(2)(ia)
Deduction allowable under section 35 13,00,000

ILLUSTRATION 6
Mr. A commenced operations of the businesses of setting up a warehousing facility for storage
of food grains, sugar and edible oil on 1.4.2024. He incurred capital expenditure of ₹ 80 lakh, ₹
60 lakh and ₹ 50 lakh, respectively, on purchase of land and building during the period January,
2024 to March, 2024 exclusively for the above businesses, and capitalized the same in its books
of account as on 1st April, 2023. The cost of land included in the above figures is ₹ 50 lakh, ₹ 40
lakh and ₹ 30 lakh, respectively. During the P.Y. 2024-25, he incurred capital expenditure of ₹ 20
lakh, ₹ 15 lakh & ₹ 10 lakh, respectively, for extension/reconstruction of the building purchased
and used exclusively for the above businesses.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2025-26 and the loss to be carried forward, assuming that Mr. A is exercising the option of
shifting out of the default tax regime provided under section 115BAC(1A) and has fulfilled all the
conditions specified under section 35AD and wants to claim deduction under section 35AD and
has not claimed any deduction under Chapter VI-A under the heading “C – Deductions in respect
of certain incomes”.

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The profits from the business of setting up a warehousing facility for storage of food grains,
sugar and edible oil (before claiming deduction under section 35AD and section 32) for the A.Y.
2025-26 is ₹ 16 lakhs, ₹ 14 lakhs and ₹ 31 lakhs, respectively. Also, assume in respect of
expenditure incurred, the payments are made by account payee cheque or use of ECS through
bank account.
SOLUTION
Computation of profits and gains of business or profession for A.Y.2025-26
Particulars ₹ (in
lakhs)
Profit from business of setting up of warehouse for storage of edible oil (before 31
providing for depreciation under section 32)
Less: Depreciation under section 32 10% of ₹ 30 lakh, being (₹ 50 lakh – ₹ 30 lakh + 3
₹ 10 lakh)
Income chargeable under “Profits and gains from business or profession” 28
Computation of income/loss from specified business under section 35AD Particulars
Particulars Food Sugar Total
Grains
₹ (in lakhs)
(A) Profits from the specified business of setting up a
warehousing facility (before providing deduction u/s 35AD)
Less: Deduction under section 35AD 16 14 13
(B) Capital expenditure incurred prior to 1.4.2023 (i.e., prior to
commencement of business) and capitalized in the books of
account
as on 30 20 50
(C) Capital expenditure incurred during the P.Y. 2023-24 20 15 35

(D) Total capital expenditure (B + C) 50 35 85

(E) Deduction under section 35AD
100% of capital expenditure (food grains/ sugar) 50 35 85
Total deduction u/s 35AD for A.Y.2025-26 50 35 85
(F) Loss from the specified business of setting up and (34) (21) (55)
operating a warehousing facility (after providing for
deduction under section 35AD) to be carried forward as
per section 73A (A-E)
Notes:
(i) Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2025-
26 in respect of specified business of setting up and operating a warehousing facility for
storage of sugar and setting up and operating a warehousing facility for storage of
agricultural produce where operations are commenced on or after 1.4.2012 or on or after
1.4.2009, respectively.
(ii) However, since setting up and operating a warehousing facility for storage of edible oils is
not a specified business, Mr. A is not eligible for deduction under section 35AD in respect
of capital expenditure incurred in respect of such business.
(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital
expenditure incurred on buildings. It is presumed that the buildings were put to use for
more than 180 days during the P.Y.2024-25.
(iv) Loss from a specified business can be set-off only against profits from another specified
business. Therefore, the loss of ₹ 55 lakh from the specified businesses of setting up and
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 CA VARDHAMAN DAGA

operating a warehousing facility for storage of food grains and sugar cannot be set-off
against the profits of ₹ 28 lakh from the business of setting and operating a warehousing
facility for storage of edible oils, since the same is not a specified business. Such loss can,
however, be carried forward indefinitely for set-off against profits of the same or any
other specified business.

ILLUSTRATION 7
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star hotel in
Madurai, Tamil Nadu on 1.4.2024. He incurred capital expenditure of ₹ 50 lakh during the period
January, 2024 to March, 2024 exclusively for the above business, and capitalized the same in his
books of account as on 1st April, 2024. Further, during the P.Y. 2024-25, he incurred capital
expenditure of ₹ 2 crore (out of which ₹ 1.50 crore was for acquisition of land) exclusively for
the above business.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2025-26, assuming that he has fulfilled all the conditions specified under section 35AD and
opted for claiming deduction under section 35AD; and he has not claimed any deduction under
Chapter VI-A under the heading “C – Deductions in respect of certain incomes”. He has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
The profits from the business of running this hotel (before claiming deduction under section
35AD) for the A.Y.2025-26 is ₹ 25 lakhs. Assume that he also has another existing business of
running a four-star hotel in Coimbatore, which commenced operations fifteen years back, the
profits from which are ₹ 120 lakhs for the A.Y.2025-26. Also, assume that payments for capital
expenditure were made by net banking.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2025-26
Particulars ₹
Profits from the specified business of new hotel in Madurai (before providing 25 lakh
deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2024-25 (excluding the expenditure
incurred on acquisition of land) = ₹ 200 lakh – ₹ 150 lakh 50 Lakh
Capital expenditure incurred prior to 1.4.2024 (i.e.,
prior to commencement of business) and capitalized in the books
of account as on 1.4.2024 50 lakh
Total deduction under section 35AD for A.Y.2025-26 100 lakh
Loss from the specified business of new hotel in Madurai (75
Lakh)
Profit from the existing business of running a hotel in Coimbatore 120
Net profit from business after set-off of loss of specified business against 45
profits of another specified business under section 73A
ILLUSTRATION 8
Mr. Arnav is a proprietor having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2023 and it claimed deduction of ₹ 100 lacs incurred on
purchase of two buildings for ₹ 50 lacs each (for operating a warehousing facility for storage of
sugar) under section 35AD for A.Y.2024-25. However, in February, 2025, Unit A transferred one
of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of Mr. Arnav.
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SOLUTION
Since the capital asset, in respect of which deduction of ₹ 50 lacs was claimed u/s 35AD, has
been transferred by Unit A carrying on specified business to Unit B carrying on non-specified
business in the P.Y.2024-25, the deeming provision u/s 35AD(7B) is attracted during the
A.Y.2025-26.
Particulars ₹
Deduction allowed u/s 35AD for A.Y.2024-25 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2024-25 [10% of ₹ 50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000
Mr. Arnav, however, by virtue of proviso to Explanation 13 to section 43(1), can claim depreciation
u/s 32 on the building in Unit B for A.Y.2025-26. For the purpose of claiming depreciation on
building in Unit B, the actual cost of the building would be:
Particulars ₹
Deduction allowed u/s 35AD for A.Y.2024-25 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2024-25 [10% of ₹ 50 lacs] 5,00,000
Actual cost in the hands of Mr. Arnav in respect of building in its Unit B 45,00,000

ILLUSTRATION 9
Delta Ltd. credited the following amounts to the account of resident payees in the month of
March, 2025 without deduction of tax at source. What would be the consequence of non-deduction
of tax at source by Delta Ltd. on these amounts during the financial year 2024-25, assuming that
the resident payees in all the cases mentioned below, have not paid the tax, if any, which was
required to be deducted by Delta Ltd.?
Particulars Amount in
₹
(1) Salary to its employee, Mr. X (credited and paid in March, 2025) 12,00,000
(2) Directors’ remuneration (credited in March, 2025 and paid in April, 2025) 28,000
Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April,
2024 at the time of payment and remitted the same in July, 2025?
SOLUTION
The amount to be disallowed u /s 40(a)(ia) while computing business income for A.Y.2024-25 is as
follows –
Particulars Amount paid Disallowance u/s
in ₹ 40(a)(ia) @30%
Disallowance under section 40(a)(ia) 3,68,400
If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2025-26 at the time
of payment and remitted to the Government, the amount of ₹ 8,400 would be allowed as deduction
while computing the business income of A.Y. 2026-27.
ILLUSTRATION 10
During the financial year 2024-25, the following payments/expenditure were made/ incurred by
Mr. Raja, a resident individual (whose turnover during the year ended 31.3.2024 was ₹ 99 lacs):
(i) Interest of ₹ 45,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;
(ii) ₹ 10,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iii) Commission of ₹ 16,000 was paid to Mr. Vidyasagar, a resident, on 2.7.2024 without
deduction of tax at source.

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Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) assuming
that the payees in all the cases mentioned above, have not paid the tax, if any, which was required
to be deducted by Mr. Raja?
SOLUTION
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee
fails to deduct tax at source as is required under the Act, or having deducted tax at source, fails
to remit the same to the credit of the Central Government within the stipulated time limit.
(i) The obligation to deduct tax at source from interest paid to a resident arises u/s 194A in
the case of an individual, whose total turnover in the immediately preceding P.Y., i.e.,
P.Y.2023-24 exceeds ₹ 1 crore. Thus, in present case, since the turnover of the assessee is
less than ₹ 1 crore, he is not liable to deduct tax at source. Hence, disallowance u/s 40(a)(ia)
is not attracted in this case.
(ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would be attracted in
respect of all sums on which tax is deductible under Chapter XVIIB. Section 192, which
requires deduction of tax at source from salary paid, is covered under Chapter XVII-B. The
obligation to deduct tax at source under section 192 arises, in the hands all assessee-
employer even if the turnover amount does not exceed ₹ 1 crore in the immediately
preceding previous year. Therefore, in the present case, the disallowance under section
40(a)(ia) is attracted for failure to deduct tax at source under section 192 from salary
payment. However, only 30% of the amount of salary paid without deduction of tax at source
would be disallowed.
(iii) The obligation to deduct tax at source under section 194H from commission paid in excess
of ₹15,000 to a resident arises in the case of an individual, whose total turnover in the
immediately preceding previous year, i.e.,P.Y.2023-24 exceeds ₹ 1 crore. Thus, in present
case, since the turnover of the assessee is less than ₹ 1 crore, he is not liable to deduct
tax at source u/s 194H. Mr. Raja is not required to deduct tax at source u/s 194M also since
the aggregate of such commission to Mr. Vidyasagar does not exceed ₹ 50 lakh during the
P.Y. 2024-25. Therefore, disallowance under section 40(a)(ia) is not attracted in this case.
ILLUSTRATION 11
A firm has paid ₹ 7,50,000 as remuneration to its partners for the P.Y.2024-25, in accordance
with its partnership deed, and it has a book profit of ₹ 10 lakh. What is the remuneration allowable
as deduction?
SOLUTION The allowable remuneration calculated as per the limits specified in section 40(b)(v)
would be –
Particulars ₹
Allowable remuneration 6,90,000
The excess amount of ₹ 70,000 (i.e., ₹ 8,50,000 – ₹ 7,80,000) would be disallowed as per section
40(b)(v).
ILLUSTRATION 12
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ₹ 7,00,000
before deduction of the following items:
(1) Salary of ₹ 40,000 each per month payable to two working partners of the firm (as authorized
by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ₹ 1,50,000.
(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital
eligible for interest is ₹ 5,00,000.
Compute: (i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the A.Y. 2025-26 as per section 40(b).
SOLUTION
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 CA VARDHAMAN DAGA

Computation of Book Profit of the firm under section 40(b)

Particulars ₹ ₹
Book Profit 14,90,000
Therefore, the maximum allowable working partners’ salary for the A.Y. 2025-26 in this case
would be:
Particulars ₹
Maximum allowable partners’ salary 10,74,000
Hence, allowable working partners’ salary for the A.Y.2024-25 as per the provisions of section
40(b)(v) is ₹ 9,60,000.
ILLUSTRATION 13
X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay
of the employees.
Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the
employees aggregate to ₹ 10 lakh. Would disallowance under section 40A(9) be attracted, and if
so, to what extent?
SOLUTION
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)
Particulars ₹
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of ₹ 10 lakh) 2,00,000
Less: Permissible deduction under section 36(1)(iva) (10% of basic
salary plus dearness pay = 14% of ₹ 14,00,000 = ₹ 1,96,000) 1,96,000
Excess contribution disallowed under section 40A(9) 4,000

ILLUSTRATION 14
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation (APSFC)
and Indian Bank and has not paid interest as detailed hereunder:
Particulars ₹
(i) Andhra Pradesh State Financial Corporation (P.Y. 2023-24 & 2024-25) 15,00,000
(ii) Indian Bank (P.Y. 2023-24) 30,00,000
45,00,000
Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2024-
25, converted the above interest payable by Hari to them as a loan repayable in 60 equal
installments. During the year ended 31.3.2025, Hari paid 5 installments to APSFC and 3
installments to Indian Bank.
Hari claimed the entire interest of ₹ 45,00,000 as an expenditure while computing the income
from business of purchase and sale of agricultural commodities. Examine whether his claim is valid
and if not what is the amount of interest, if any, allowable.
SOLUTION
Accordingly, the amount of interest eligible for deduction for the A.Y.2025-26 shall be calculated
as follows:
Interest Number of Amount per Instalments Interest
outstanding Instalments instalment paid Allowable (₹)

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 CA VARDHAMAN DAGA

APSFC 15 lakh 60 25,000 5 1,25,000

Indian Bank 30 lakh 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000

ILLUSTRATION 15
Vinod is a person carrying on profession as film artist. His gross receipts from profession are as
under:
Particulars ₹
Financial year 2021-22 1,15,000
Financial year 2022-23 1,80,000
Financial year 2023-24 2,10,000
What is his obligation regarding maintenance of books of accounts for Assessment Year 2025-
26 under section 44AA of Income-tax Act, 1961?
SOLUTION
In the present case, Vinod is a person carrying on profession as film artist, which is a notified
profession. Since his gross receipts have not exceeded ₹ 1,50,000 in financial year 2021-22, the
requirement under section 44AA to compulsorily maintain the prescribed books of account is not
applicable to him.
Mr. Vinod, however, required to maintain such books of accounts as would enable the Assessing
Officer to compute his total income.
ILLUSTRATION 16
Mr. Praveen engaged in retail trade, reports a turnover of ₹ 2,98,50,000 for the financial year
2024-25. Amount received in cash during the P.Y. 2024-25 is ₹ 14,00,000 and balance through
prescribed electronic modes on or before 31st October 2025. His income from the said business
as per books of account is ₹ 15,00,000 computed as per the provisions of Chapter IV-D “Profits
and gains from business or Profession” of the Income-tax Act, 1961. Retail trade is the only source
of income for Mr. Praveen. A.Y. 2024-25 was the first year for which he declared his business
income in accordance with the provisions of presumptive taxation u/s 44AD.
(i) Is Mr. Praveen also eligible for presumptive determination of his income chargeable to tax
for the assessment year 2025-26?
(ii) If so, determine his income from retail trade as per the applicable presumptive provision.
(iii) In case Mr. Praveen wants to declare profits as per books of account from retail trade,
what are his obligations under the Income-tax Act, 1961?
(iv) What is the due date for filing his return of income under both the options?
SOLUTION
(i) Yes. Since his cash receipts during the P.Y. does not 5% of the total turnover
(14,00,000/2,98,50,000 x 100) and his total turnover for the F.Y.2023-24 is below ₹ 300
lakhs, he is eligible for presumptive taxation scheme under section 44AD in respect of his
retail trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under section 44AD,
would be ₹ 18,19,000 (₹ 1,12,000, being 8% of ₹ 14,00,000 + ₹ 17,07,000, being 6% of ₹
2,84,50,000).
(iii) Mr. Praveen had declared profit for the previous year 2022-23 in accordance with the
presumptive provisions and if he wants to declare profits as per books of account which is
lower than the presumptive income for any of the five consecutive assessment years i.e.,
A.Y. 2024-25 to A.Y. 2028-29, he would not be eligible to claim the benefit of presumptive
taxation for five assessment years subsequent to the assessment year relevant to the
previous year in which the profit has not been declared in accordance the presumptive
provisions i.e. if he declares profits lower than the presumptive income in say P.Y. 2023-24

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 CA VARDHAMAN DAGA

relevant to A.Y.2024-25, then he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2025-26 to A.Y. 2029-30.
Consequently, Mr. Praveen is required to maintain the books of accounts and get them audited
under section 44AB, since his income exceeds the basic exemption limit.
(iv) In case he declares presumptive income under section 44AD, the due date would be 31st
July, 2024.
In case he declares profits as per books of account which is lower than the presumptive income,
he is required to get his books of account audited, in which case the due date for filing of return
of income would be 31st
ILLUSTRATION 17
Mr. X commenced the business of operating goods vehicles on 1.4.2024. He purchased the
following vehicles during the P.Y.2024-25. Compute his income under section 44AE for A.Y.2025-
26.
Gross Vehicle Weight (in Number Date of purchase
kilograms)
1) 7,000 2 10.04.2024
2) 6,500 1 15.03.2025
3) 10,000 3 16.07.2024
4) 11,000 1 02.01.2025
5) 15,000 2 29.08.2024
6) 15,000 1 23.02.2025
Would your answer change if the goods vehicles purchased in April, 2024 were put to use only in
July, 2024?
SOLUTION
The presumptive income of Mr. X under section 44AE for A.Y.2025-26 would be ₹ 6,82,500, i.e.,
55 × ₹ 7,500, being for other than heavy goods vehicle + 18 x ₹ 1,000 x 15 ton being for heavy
goods vehicle.
The answer would remain the same even if the two vehicles purchased in April, 2024 were put to
use only in July, 2023, since the presumptive income has to be calculated per month or part of
the month for which the vehicle is owned by Mr. X.
ILLUSTRATION 18
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from
various operations (relating to plantations and estates owned by her) during the year ended 31-
3-2025:
S. No. Particulars ₹
I. Income from sale of centrifuged latex processed from rubber plants 3,00,000
grown in Darjeeling.
II. Income from sale of coffee grown and cured in Yercaud, Tamil Nadu. 1,00,000
III. Income from sale of coffee grown, cured, roasted and grounded, in 2,50,000
Colombo. Sale consideration was received at Chennai.
IV. Income from sale of tea grown and manufactured in Shimla. 4,00,000
V. Income from sapling and seedling grown in a nursery at Cochin. Basic 80,000
operations were not carried out by her on land.
You are required to compute the business income and agricultural income of Miss Vivitha for the
A.Y. 2025-26.
SOLUTION
Computation of business income and agricultural income of Ms. Vivitha
for the A.Y.2025-26
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Sr. Source of income Gross (₹) Business income Agricultural

No. income
(i) Sale of centrifuged latex 3,00,000 35% 1,05,000 1,95,000
from rubber plants grown in India.
(ii) Sale of coffee grown and cured in 1,00,000 25% 25,000 75,000
India
(iii) Sale of coffee grown, cured, roasted 2,50,000 100% 2,50,000 -
and grounded outside India. (See
Note 1 below)
(iv) Sale of tea grown and manufactured 4,00,000 40% 1,60,000 2,40,000
in India
(v) Saplings and seedlings grown in 80,000 Nil 80,000
nursery in India (See Note 2 below)
Total 5,40,000 5,90,000
Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by the seller
in India, 40% of such income is taken as business income and the balance as agricultural income.
However, in this question, these operations are done in Colombo, Sri lanka. Hence, there is no
question of such apportionment and the whole income is taxable as business income. Receipt of
sale proceeds in India does not make this agricultural income. In the case of an assessee, being a
resident and ordinarily resident, the income arising outside India is also chargeable to tax.
2.Explanation 3 to section 2(1A) provides that the income derived from saplings or Seedlings
grown in a nursery would be deemed to be agricultural income whether or not the basic operations
were carried out on land. Therefore, such income would be exempt u/s 10(1).

TEST YOUR KNOWLEDGE

Que - 19.
Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars relating to
its manufacturing unit at Chennai, for the year ending 31-3-2025:
Particulars (₹ in lakhs)
WDV of Plant and Machinery on 31.3.2024 30.00
Depreciation including additional depreciation for P.Y. 2023-24 4.75
New machinery purchased on 1-9-2024 10.00
New machinery purchased on 1-12-2024 8.00
Computer purchased on 3-1-2025 4.00
Additional information: •
• All assets were purchased by A/c payee cheque.
• All assets were put to use immediately.
• New machinery purchased on 1-12-2024 and computer have been installed in the office.
• During the year ended 31-3-2024, a new machinery had been purchased on 31-10-2023, for
₹ 10 lakhs. Additional depreciation, besides normal depreciation, had been claimed thereon.
• Depreciation rate for machinery may be taken as 15%.
• The assessee has no brought forward business loss or unabsorbed depreciation as on
1.4.2024.
Compute the depreciation available to the assessee as per the provisions of the Income-tax Act,
1961 and the WDV of different blocks of assets as on 31-3-2025 if -
(i)he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A)

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 CA VARDHAMAN DAGA

(ii) he pays tax under the default tax regime under section 115BAC.
Ans- Computation of written down value of block of assets of Venus Ltd. as on 31.3.2024

Particulars Plant & Computer

Machinery (₹ in lacs)
(₹ in lacs)
Written down value (as on 31.3.2023) 30.00 Nil
Less: Depreciation including additional depreciation for P.Y. 4.75 -
2022-23
Opening balance as on 1.4.2023 25.25
Add: Actual cost of new assets acquired during the year New
machinery purchased on 1.9.2023 10.00 -
New machinery purchased on 1.12.2023 8.00 -
Computer purchased on 3.1.2024 - 4.00
Less: Assets sold/discarded/destroyed during the year 43.25 4.00
Nil Nil
Written Down Value (as on 31.03.2024) 43.25 4.00
(i) If Mr. Venus exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)
In this case, since his income would be computed under the optional tax regime as per the normal
provisions of the Act, he would be entitled for normal depreciation and additional depreciation,
subject to fulfilment of conditions.
Computation of depreciation for A.Y. 2024-25
Particulars Plant & Computer
Machinery (₹ in lacs)
(₹ in lacs)
Total Depreciation (A+B+C) 8.89 0.80
(i) If Mr. Venus pays tax under default tax regime under section 115BAC
In this case, under the default tax regime as per section 115BAC, he would be entitled only for
normal depreciation but not additional depreciation.
Computation of depreciation for A.Y. 2024-25
Particulars Plant & Computer
Machinery (₹ in
(₹ in lacs) lacs)
Total Depreciation 5.89 0.80
Que- 20.
Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He
opts to claim depreciation on written down value for income-tax purposes. From the following
details, compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for
the A.Y. 2025-26, assuming he has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A):
Particulars (₹ in lacs)
(i) WDV of block as on 31.3.2024 (15% rate) 50.00
(ii) Depreciation for P.Y. 2023-24 7.50
(iii) New machinery purchased on 12-10-2024 10.00
(iv) Machinery imported from Colombo on 12-4-2024. 9.00

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This machine had been used only in Colombo earlier and the assessee is
the first user in India.
(v) New computer installed in generation wing unit on 15-7-2024 2.00
All assets were purchased by A/c payee cheque.
Ans- Computation of depreciation under section 32 for A.Y.2024-25
Particulars ₹ ₹
Depreciation on Plant and Machinery 10,67,500
Que - 21.
Examine with reasons, the allowability of the following expenses incurred by Mr. Manav, a
wholesale dealer of commodities, under the Income-tax Act, 1961 while computing profit and gains
from business or profession for the A.Y. 2025-26 if he has exercised the option of shifting out
of the default tax regime provided under section 115BAC(1A) –
(i) Construction of school building in compliance with CSR activities amounting to ₹ 5,60,000.
(ii) Purchase of building for the purpose of specified business of setting up and operating a
warehousing facility for storage of food grains amounting to ₹ 4,50,000.
(iii) Interest on loan paid to Mr. X (a resident) ₹ 50,000 on which tax has not been deducted. The
sales for the P.Y. 2023-24 was ₹ 202 lakhs. Mr. X has not paid the tax, if any, on such interest.
(iv) Commodities transaction tax paid ₹ 20,000 on sale of bullion.
Ans- Allowability of the expenses incurred by Mr. Manav, a wholesale dealer in
commodities, while computing profits and gains from business or profession
(i) Construction of school building in compliance with CSR activities Under section 37(1), only
expenditure not being in the nature of capital expenditure or personal expense and not covered
under sections 30 to 36, and incurred wholly and exclusively for the purposes of the business is
allowed as a deduction while computing business income.
However, any expenditure incurred by an assessee on the activities relating to corporate social
responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have
been incurred for the purpose of business and hence, shall not be allowed as deduction under
section 37.
Accordingly, the amount of ₹ 5,60,000 incurred by Mr. Manav, towards construction of school
building in compliance with CSR activities shall not be allowed as deduction under section 37.
(ii) Purchase of building for setting up and operating a warehousing facility for storage of
food grains
Mr. Manav, would be eligible for investment-linked tax deduction under section 35AD, since he
has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A). The deduction u/s 35AD would be 100% of ₹ 4,50,000, being the amount invested in
purchase of building for setting up and operating a warehousing facility for storage of food grains
which commences operation on or after 1st April, 2009 (P.Y.2024-25, in this case).
Therefore, the deduction under section 35AD while computing business income of such specified
business would be ₹ 4,50,000, if Mr. Manav opts for section 35AD.
(iii) Interest on loan paid to Mr. X (a resident) ₹ 50,000 on which tax has not been deducted
As per section 194A, Mr. Manav, being an individual is required to deduct tax at source on the
amount of interest on loan paid to Mr. X, since his turnover during the previous year 2023-24
exceeds ₹ 100 lakhs.
Therefore, ₹ 15,000, being 30% of ₹ 50,000, would be disallowed under section 40(a)(ia) while
computing the business income of Mr. Manav for non-deduction of tax at source under section
194A on interest of ₹ 50,000 paid by it to Mr. X.
The balance ₹ 35,000 would be allowed as deduction under section 36(1)(iii), assuming that the
amount was borrowed for the purposes of business.

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(iv) Commodities transaction tax of ₹ 20,000 paid on sale of bullion

Commodities transaction tax paid in respect of taxable commodities transactions entered into in
the course of business during the previous year is allowable as deduction, provided the income
arising from such taxable commodities transactions is included in the income computed under the
head “Profits and gains of business or profession”. Taking that income from this commodities
transaction is included while computing the business income of Mr. Manav, the commodity
transaction tax of ₹ 20,000 paid is allowable as deduction under section 36(1)(xvi).
Que- 22.
Examine with reasons, for the following sub-divisions, whether the following statements are true
or false having regard to the provisions of the Income-tax Act, 1961:
(i) For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.
(ii) Where a person follows mercantile system of accounting, an expenditure of ₹ 25,000 has
been allowed on accrual basis and in a later year, in respect of the said expenditure,
assessee makes the payment of ₹ 25,000 through a crossed cheque, ₹ 25,000 can be the
profits and gains of business under section 40A(3A) in the year of payment
(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961,
while computing income under the head “Profits and Gains from Business and Profession”.
(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by an account payee
cheque on 27.12.2024 is a deductible expenditure under section 36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary
Retirement Scheme at the time of retirement alone, can be done.
(vi) An individual engaged in trading activities and exercising the option of shifting out of the
default tax regime provided under section 115BAC(1A) can claim additional depreciation
under section 32(1)(iia) in respect of new plant acquired and installed in the trading concern,
where the increase in value of such plant as compared to the approved base year is more
than 10%.
Ans-
(i) True: Section 36(1)(xv) allows a deduction of the amount of securities transaction tax paid
by the assessee in respect of taxable securities transactions entered into in the course of
business during the previous year as deduction from the business income of a dealer in
shares and securities.
(ii) True: As per section 40A(3A), in the case of an assessee following mercantile system of
accounting, if an expenditure has been allowed as deduction in any previous year on due
basis, and payment exceeding ₹ 10,000 has been made in the subsequent year otherwise
than by an account payee cheque or an account payee bank draft or use of ECS through a
bank account or through such other prescribed electronic modes such as credit card, debit
card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay, then, the payment so
made shall be deemed to be the income of the subsequent year in which such payment has
been made.
(iii) True: According to the Explanation 5 to section 32(1), allowance of depreciation is
mandatory. Therefore, depreciation has to be provided mandatorily while calculating income
from business/ profession whether or not the assessee has claimed the same while
computing his total income.
(iv) True: Section 36(1)(ib) provides deduction in respect of premium paid by an employer to
keep in force an insurance on the health of his employees under a scheme framed in this
behalf by GIC or any other insurer. The medical insurance premium can be paid by any mode
other than cash, to be eligible for deduction under section 36(1)(ib).

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(v) False: Expenditure incurred in making payment to the employee in connection with his
voluntary retirement either in the year of retirement or in any subsequent year, will be
entitled to deduction in 5 equal annual installments beginning from the year in which each
payment is made to the employee.
(vi) False: Additional depreciation can be claimed only in respect of eligible plant and machinery
acquired and installed by an assessee engaged in the business of manufacture or production
of any article or thing or in the business of generation or transmission or distribution of
power.
In this case, the individual is engaged in trading activities and the new plant has been acquired
and installed in a trading concern. Hence, he will not be entitled to claim additional depreciation
under section 32(1)(iia), even though he has exercised the option of shifting out of the default
tax regime provided under section 115BAC(1A).
Que- 23.
Examine, with reasons, the allowability of the following expenses under the Income-tax Act, 1961
while computing income from business or profession for the A.Y. 2025-26:
(i) Provision made on the basis of actuarial valuation for payment of gratuity ₹ 5,00,000.
However, no payment on account of gratuity was made before due date of filing return.
(ii) Purchase of oil seeds of ₹ 50,000 in cash from a farmer on a banking day.
(iii) Tax on non-monetary perquisite provided to an employee ₹ 20,000.
(iv) Payment of ₹ 50,000 by using credit card for fire insurance.
(v) Salary payment of ₹ 10,00,000 to Mr. X outside India by a company without deduction of
tax assuming Mr. X has not paid tax on such salary income.
(vi) Payment made in cash ₹ 30,000 to a transporter in a day for carriage of goods.
Ans-
(i) Not allowable as deduction: As per section 40A(7), no deduction is allowed in computing
business income in respect of any provision made by the assessee in his books of account for the
payment of gratuity to his employees except in the following two cases:
(1) where any provision is made for the purpose of payment of sum by way of contribution towards
an approved gratuity fund; or
(2) where any provision is made for the purpose of making any payment on account of gratuity
that has become payable during the previous year.
Therefore, in the present case, the provision made on the basis of actuarial valuation for payment
of gratuity has to be disallowed under section 40A(7), since, no payment has been actually made
on account of gratuity.
Note: It is assumed that such provision is not for the purpose of contribution towards an approved
gratuity fund.
(ii) Allowable as deduction: As per Rule 6DD, in case the payment is made for purchase of
agricultural produce directly to the cultivator, grower or producer of such agricultural produce,
no disallowance under section 40A(3) is attracted even though the cash payment for the expense
exceeds ₹ 10,000.
Therefore, in the given case, disallowance under section 40A(3) is not attracted since, cash
payment for purchase of oil directly to the farmer.
(iii) Not allowable as deduction: Income-tax of₹20,000 paid by the employer in respect of non-
monetary perquisites provided to its employees is exempt in the hands of the employee under
section 10(10CC).
As per section 40(a)(v), such income-tax paid by the employer is not deductible while computing
business income.
(iv) Allowable as deduction: Payment for fire insurance is allowable as deduction under section
36(1). Since payment is made by credit card, which is a prescribed electronic ₹source.
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(vi) Allowable as deduction: The limit for attracting disallowance under section 40A(3) for
payment otherwise than by way of account payee cheque or account payee bank draft or use of
ECS through a bank account or through such other prescribed electronic mode is ₹ 35,000 in case
of payment made for plying, hiring or leasing goods carriage. Therefore, in the present case,
disallowance under section 40A(3) is not attracted for payment of ₹ 30,000 made in cash to a
transporter for carriage of goods.
Que- 24.
Examine with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th February, 2025 for ₹
25,000 through a crossed cheque is hit by the provisions of section 40A(3).
(b) (i) It is a condition precedent to write off in the books of account, the amount due from debtor
to claim deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter
alia, from the amounts payable to a nonresident as rent or royalty, will result in disallowance while
computing the business income where the non-resident payee has not paid the tax due on such
income.
Ans- (a) True: In order to escape the disallowance specified in section 40A(3), payment in respect
of the business expenditure ought to have been made through an account payee cheque. Payment
through a crossed cheque will attract disallowance under section 40A(3).
(b) (i) True: It is mandatory to write off the amount due from a debtor as not receivable in the
books of account, in order to claim the same as bad debt under section 36(1)(vii). However, where
the debt has been taken into account in computing the income of the assessee on the basis of
ICDSs notified under section 145(2), without recording the same in the accounts, then, such debt
shall be allowed in the previous year in which such debt becomes irrecoverable and it shall be
deemed that such debt or part thereof has been written off as irrecoverable in the accounts for
the said purpose.
(ii) True: Section 40(a)(i) provides that failure to deduct tax at source from, inter alia, rent or
royalty payable to a non-resident, in accordance with the provisions of Chapter XVII-B, will result
in disallowance of such expenditure, where the non-resident payee has not paid the tax due on
such income.
Que- 25.
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for
the year ended 31st March, 2025:
Trading and Profit and Loss Account for the year ended 31.03.2025
Particulars ₹ Particulars ₹
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600
1,13,97,600 1,13,97,600
To Salary 60,000 By Gross profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of shares 8,100
(Short-term)

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To Other general expenses 7,060

To Net Profit 50,000
3,06,000 3,06,000
Additional Information:
(i) It was found that some stocks were omitted to be included in both the Opening and Closing
Stock, the values of which were:
Opening stock ₹ 9,000
Closing stock ₹ 18,000
(ii) Salary includes ₹ 10,000 paid to his brother, which is unreasonable to the extent of ₹ 2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of one-time payment
to Mr. Ramesh.
(iv) The depreciation provided in the Profit and Loss Account ₹ 1,05,000 was based on the
following information:
(v) The opening balance of plant and machinery (i.e., the written down value as on 31.3.2024
minus depreciation for P.Y. 2023-24) is ₹ 4,20,000. A new plant falling under the same block
of depreciation was bought on 01.7.2024 for ₹ 70,000. Two old plants were sold on 1.10.2024
for ₹ 50,000.
(vi) Rent and rates includes GST liability of ₹ 3,400 paid on 7.4.2025.
(vii) Other general expenses include ₹ 2,000 paid as donation to a Public Charitable Trust.
You are required to compute the profits and gains of Mr. Sivam under presumptive taxation u/s
44AD and profits and gains as per the regular provisions of the Act assuming he has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A). Assume
that the whole of the amount of turnover received by account payee cheque or use of electronic
clearing system through bank account during the previous year.
Ans-.Computation of business income of Mr. Sivam for the A.Y. 2024-25
Particulars ₹ ₹
Business Income 1,30,900
Computation of business income as per section 44AD:
As per section 44AD, where the amount of turnover is received, inter alia, by way of account
payee cheque or use of electronic clearing system through bank account or through such other
prescribed electronic modes,
presumptive business income would be 6% of turnover, i.e., ₹ 1,12,11,500 x 6 /100 = ₹ 6,72,690
Que- 26.
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2024, he owns
10 trucks (out of which 6 are heavy goods vehicles, the gross vehicle weight of such goods vehicle
is 15,000 kg each). On 2nd May, 2024, he sold one of the heavy goods vehicles and purchased a
light goods vehicle on 6th May, 2024. This new vehicle could, however, be put to use only on 15th
June, 2024.
Compute the total income of Mr. Sukhvinder for the A.Y. 2025-26, taking note of the following
data:
Particulars ₹ ₹
Freight charges collected 12,70,000
Less: Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non-business income 70,000
Ans -
Computation of total income of Mr. Sukhvinder for A.Y. 2024-25
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Particulars Presumptive Where books

income ₹ are maintained
₹
Income from business of plying goods carriages [See Note 2 13,72,500 4,45,000
Below] 70,000 70,000
Other business and non-business income
Total Income 14,42,500 5,15,000
2. Computation of total income of Mr. Raju for the A.Y. 2024-25 Particulars

Type of carriage No. of Rate per ton Ton Amount

months per month/
per month
(1) (2) (3) (4)
Heavy goods vehicle 15 30,000
1 goods carriage upto 1st May 2 1000 (15,000/1,000)
5 goods carriage held throughout 12 1000 15 9,00,000
the year (15,000/1,000)
Goods vehicle other than heavy
goods vehicle
1 goods carriage from 6th May 11 7500 82,500
4 goods carriage held 12 7500 3,60,000
throughout the year
Total 13,72,500
Que- 27.
Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss
Account for the year ended 31.03.2025:
Manufacturing, Trading and Profit & Loss Account
for the year ended 31.03.2025
Particulars ₹ Particulars ₹
To Opening Stock 71,000 By Sales 2,32,00,000
To Purchase of Raw Materials 2,16,99,000 By Closing stock 2,00,000
To Manufacturing Wages & 5,70,000
Expenses
To Gross Profit 10,60,000
2,34,00,000 2,34,00,000
To Administrative charges 3,26,000 By Gross Profit 10,60,000
To SGST penalty 5,000 By Dividend from domestic 15,000
companies
To GST paid 1,10,000 By Income from agriculture 1,80,000
(net)
To General Expenses 54,000
To Interest to Bank (On 60,000
machinery term loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000
Following are the further information relating to the financial year 2024-25:
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(i) Administrative charges include ₹ 46,000 paid as commission to brother of the assessee.
The commission amount at the market rate is ₹ 36,000.
(ii) The assessee paid ₹ 33,000 in cash to a transport carrier on 29.12.2024. This amount is
included in manufacturing expenses. (Assume that the provisions relating to TDS are not
applicable to this payment)
(iii) A sum of ₹ 4,000 per month was paid as salary to a staff throughout the year and this has
not been recorded in the books of account.
(iv) Bank term loan interest actually paid upto 31.03.2025 was ₹ 20,000 and the balance was
paid in November 2025.
(v) Housing loan principal repaid during the year was ₹ 50,000 and it relates to residential
property acquired by him in P.Y. 2023-24 for self-occupation. Interest on housing loan was
₹ 23,000. Housing loan was taken from Canara Bank. These amounts were not dealt with in
the profit and loss account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of following
information:
Plant & Machinery (Depreciation rate@15%) ₹
WDV as on 31.03.2024 minus Depreciation for P.Y. 2023-24 11,90,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Compute the total income of Mr. Raju for the A.Y. 2025-26 assuming he pays tax under default
tax regime.
Note: Ignore application of section 14A for disallowance of expenditures in respect of any exempt
income.
Ans- Computation of total income of Mr. Raju for the A.Y. 2025-26
Particulars ₹ ₹
Total Income 3,03,500

Que- 28.
Mr. Tenzingh is engaged in composite business of growing and curing (further processing) coffee
in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information
pertaining to the year ended 31.3.2025 are given below:
Particulars ₹
Opening balance of car (only asset in the block) as on 1.4.2024 3,00,000
(i.e. WDV as on 31.3.2024 (-) depreciation for P.Y. 2023-24)
Opening balance of machinery as on 1.4.2024 (i.e., WDV as on 31.3.2024 (-) 15,00,000
depreciation for P.Y. 2023-24)
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use; disallowance
for personal use may be taken at 20%. The expenses incurred for car running and maintenance
are ₹ 50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the A.Y. 2025-06.
Ans-Where an assessee is engaged in the composite business of growing and curing of coffee,
the income will be segregated between agricultural income and business income, as per Rule 7B of
the Income-tax Rules, 1962. As per the above Rule, income derived from sale of coffee grown and
cured by the seller in India shall be computed as if it were income derived from business, and
25% of such income shall be deemed to be income liable to tax. The balance 75% will be treated
as agricultural income.

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 CA VARDHAMAN DAGA

Particulars ₹ ₹
Total profits from composite activities 12,89,000
Business income (25% of above) 3,22,250
Agricultural income (75% of above) 9,66,750

Computation of depreciation for P.Y. 2023-24

Particulars ₹ ₹
Car
Opening balance as on 1.4.2023 (i.e., WDV as on 31.3.2023 (-) 3,00,000
depreciation for P.Y.2022-23)
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
Machinery
Opening balance as on 1.4.2023 (i.e., WDV as on 31.3.2023 (-) 15,00,000
depreciation for P.Y.2022-23)
Depreciation @ 15% for P.Y. 2023-24 2,25,000
Explanation 7 to section 43(6) provides that in cases of ‘composite income’, for the purpose of
computing written down value of assets acquired before the previous year, the total amount of
depreciation shall be computed as if the entire composite income of the assessee (and not just
25%) is chargeable under the head “Profits and gains of business or profession”. The depreciation
so computed shall be deemed to have been “actually allowed” to the assessee.
PAST EXAM QUESTIONS
Illustration 29
Computation of Business profits: Following is the Profit and Loss account of Mr. A (amounts in ₹)-
Particulars ₹ Particulars ₹
To Repairs on building 1,30,000 By Gross profit 6,01,000
To Advertisement 51,000 By IT Refund 4,500
To Amount paid to Scientific 1,00,000 By Interest from 6,400
Research Association approved u/s 35 company deposits
By Dividends 3,600
To Interest 1,10,000
To Traveling 1,30,000
To Miscellaneous Expenditure 550
To Net Profit 93,950
6,15,500 6,15,500
Following additional information is furnished:
(i) Repairs on building includes 95,000 being cost of raising a compound wall for the own
business premises.
(ii) Interest payments include interest of 12,000 payable to a resident Indian on which tax has
not been deducted and penalty of 24,000 for contravention of Central Goods and Services
Tax Act.
Compute the income chargeable under the head 'Profits and gains of business or profession' of
Mr. A ignoring depreciation. (7 Marks, May 2006) (Similar IPCC May 2012, 10 Marks)
Solution: Profits and gains of business or profession of Mr. A (amounts in ₹)-
Particulars ₹ ₹
Net profit as per Profit and Loss Account 93950

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Add: Expenses not allowable

Expenses on raising a compound wall [WN-1] 95,000
Penalty for contravention of CGST Act [WN-2] 24,000
Interest payable to a resident, as tax has not been [WN-5] 3,600 1,22,600
deducted on the same ₹ 12,000 × 30%
Less: Income not forming part of business income – [WN-3] 6400
Interest from company deposits [WN-4] 4,500
I.T. Refund Dividend [WN-6] 3,600 14,500
Profit and Gains of Business or Profession 2,02,050
Working Notes:
(1) Expenses on raising a compound wall shall not be deductible as it is a capital expenditure.
(2) Penalty paid for violation or infringement of any law is not allowable as deduction under
section 37(1).
(3) Interest from company deposits shall not form part of business income as it is taxable as
Income from other sources.
(4) I.T. Refund is not taxable, as it is not 'income'.
(5) 30% of interest payable to a resident, as tax has not been deducted on the same shall not be
allowed as deduction under section 40(a).
(6) Dividend from shares of Indian Company is taxable in hands of shareholder under the head
Income from other sources.
(7) Amount paid to Scientific Research Association approved u/s 35 is eligible for 100%
deduction. Since the same is debited to profit and loss account, hence no adjustment will be
required.
Illustration 30
Computation of Business profits: Ram, who is 28 years of age, is a businessman in Delhi. On the
basis of the following profit and loss account for the financial year 2024-25, compute his taxable
income:
Particulars ₹ Particulars ₹
Opening stock 20,700 Sales 15,00,000
Purchases 10,00,000 Closing stock 25,200
Household expenses 10,000
Income-tax for the financial year 2024-25 30,000
Interest on capital 8,400
Depreciation on furniture 12,000
Reserve for bad debts 1200
Salaries and wages 60,000
Rent and rates 25,000
Net profit 3,57,900
15,25,200 15,25,200
Other relevant particulars are as follows:
(i) Opening stock and closing stock have consistently been valued at 10% below cost price.
(ii) Household expenses include a contribution of ₹ 1,500 towards public provident fund.
(iii) Amount of depreciation on furniture as per income-tax provisions is 10,000. (6 Marks, CS
Executive Dec. 2008)
Solution: Computation of taxable income of Mr. Ram (amounts in ₹) -
Particulars ₹ ₹
Net profit as per Profit and Loss A/c 3,57,900

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Add: Expenses not allowable

Household expenses 10,000
Income-tax for the financial year 2021-22 30,000
Interest on capital 8,400
Depreciation on furniture 12,000
Reserve for bad debts 1,200 61,600
Add: Undervaluation of closing stock ( 25,200 × 1/9) 2,800
Less: Undervaluation of opening stock ( 20,700 x 1/9) -2,300
Less: Allowable depreciation -10,000
4,10,000
Less: Deduction u/s 80C for contribution to PPF 1,500
Total income 4,08,500

Illustration 31
Computation of Business Income: Mr. Rameshwar is registered Medical practitioner. He keeps
his book on cash basis and his summarised cash account for year ended 31 March 2024 is as under
(amounts in ₹):
Particulars ₹ Particulars ₹
To Balance b/d 2,700 By Costs of medicines 20,000
To Loan from Bank 6,000 By Surgical equipment 6,000
To Sale of medicines 30,500 By Motor car purchased 12,000
To Consultation fees 50,10,000 By Car expenses 1,800
To Visiting fees 8,000 By Salaries 48,01,200
To Interest on investments 9,000 By Rent on dispensary 1,200
To Dividend on shares 7,200 By General expenses 600
To Sale of building 15,000 By Personal expenses 3,600
To Sale of furniture 5,000 By Life insurance premium 2,000
50,93,400 By Insurance of personal 400
property
By Interest on bank loan for 360
investment
By Fixed Deposit in Bank 30,000
By Balance c/d 2,14,240
50,93,400 50,93,400
Compute his Income from profession taking into account the following further information:
(1) 1/3rd of the motorcar expenses is in respect of his personal use.
(2) The original cost of the building was 20,000 and written down value of furniture as on 1st
April 2023 was ₹ 4,000. There was no other asset in this block.
(3) The rate of depreciation on motorcar and on surgical equipments is 15%. An old car was
purchased in May 2023 while the surgical equipments were purchased in December 2023.
(4) Outstanding consultancy fees and outstanding salaries are 20,000 and 1,000 respectively.
Further, medicines valuing 5,000 were sold to Mr. Babu on credit.
Solution: Computation of taxable income from profession (amounts in ₹)-
Particulars ₹ ₹
Gross Receipts: Sale of medicines 30,500
Consultation fees 50,10,000
Visiting fees 8,000
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 CA VARDHAMAN DAGA

Less: Allowable expenses viz. cost of medicines 20,000

Car expenses (1,800 × 2/3) 1,200
Salaries 48,01,200
Rent of dispensary 1,200
General Expenses 600
Allowable Depreciation Motor car ( 12,000 × 15% ) × 2/3 1,200
Surgical equipment (7.5% x 6,000) 450 48,25,850
Income from profession 2,22,650
Note: Since the assessee maintains accounts as per cash basis, therefore, outstanding
consultancy fees, outstanding salaries and sale of medicines on credit will not be considered.
Illustration 32
Taxability/ Deductibility of various items: Ramji Ltd., engaged in manufacture of medicines
(pharmaceuticals) furnishes the following information for the year ended 31-03-2025
(i) Municipal tax relating to office building 51,000 not paid till 31-10-2025.
(ii) Patent acquired for ₹ 20,00,000 on 01-09-2024 and used from the same month.
(iii) Capital expenditure on scientific research 10,00,000 which includes cost of land ₹ 2,00,000.
(iv) Amount due from customer X outstanding for more than 3 years written off as bad debt in
the books 5,00,000.
(v) Income tax paid 90,000 by the company in respect of non-monetary perquisites provided to
its employees.
(vi) Provident fund contribution of employees ₹ 5,50,000 remitted in July 2025.
(vii) Expenditure towards advertisement in souvenir of a political party 1,50,000.
(viii) Refund of Goods and Services Tax 75,000 received during the year, which was claimed as
expenditure in an earlier year.
State with reasons the taxability or deductibility of the items given above under Income-tax Act,
1961. Note: Computation of total income is not required. (8 Marks, CA IPCC Nov. 2011)
Solution: The treatment is as under
(i) As per Section 43B, municipal tax is not deductible for assessment year 2025-26 since it
is not paid on or before 31-10-2025, being the due date of filing the return for assessment
year 2025-26.
(ii) Patent is an intangible asset eligible for depreciation @ 25%. Since, it has been acquired
and put to use for more than 180 days during the previous year 2024-25, full depreciation
of 5,00,000 (i.e. 25% of 20,00,000) is allowable as deduction under section 32.
(iii) Deduction @ 100% is available under section 35(2AB) in respect of expenditure incurred by
a company on scientific research on in-house research and development facility as approved
by the prescribed authority. However, cost of land is not eligible for deduction. Deduction
under section 35(2AB) = 100% of 8 lakhs = ₹ 8,00,000.
(iv) Bad debts i.e. 5,00,000 written off in the books of account as irrecoverable is deductible
under section 36(1)(vii), provided the debt has been taken into account in computing the
income of the company in the current previous year or any of the earlier previous years.
(v) As per Section 40(a)(v), income-tax of 90,000 paid by the company in respect of non-
monetary perquisites provided to its employees, exempt in the employee's hands under
section 10(10CC), is not deductible while computing business income of the employer-
company.
(vi) The employees' contribution to provident fund is taxable in the hands of the company since
it is included in the definition of income under section 2(24)(x). As per section 36(1)(va),
provident fund contribution of employees is deductible only if such sum is credited to the
employee's provident fund account on or before the due date under the Employees'

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 CA VARDHAMAN DAGA

Provident Fund and Miscellaneous Provisions Act, 1952. In this case, since it is remitted
after the due date under the said Act, it is not deductible.
(vii) Expenditure towards advertisement in souvenir of a political party is disallowed under
section 37(2B) while computing business income. However, the same is deductible under
section 80GGB from gross total income.
(viii) Refund of a trading liability is taxable under section 41(1), if a deduction was allowed in
respect of the same to the taxpayer in an earlier year. Since Goods and Services Tax was
claimed as expenditure in an earlier year, refund of the same during the year would attract
the provisions of Section 41(1).
Illustration 33
Computation of IHP & PGBP: Mr. Ramesh constructed a big house (construction completed in P.Y.
2008-09) with 3 independent units. Unit 1 (50% of floor area) is let out for residential purpose
at monthly rent of 15,000. A sum of 3,000 could not be collected from the tenant and a notice to
vacate the unit was given to the tenant. No other property of Mr. Ramesh is occupied by the
tenant. Unit - 1 remains vacant for 2 months when it is not put to any use. Unit 2 (25% of the
floor area) is used by Mr. Ramesh for the purpose of his business, while Unit - 3 (the remaining
25%) is utilized for the purpose of his residence. Other particulars of the house are as follows:
Particular Amount ₹
Municipal valuation 1,88,000
Fair rent 2,48,000
Standard rent under the Rent control Act 2,28,000
Municipal taxes 20,000
Repairs 5,000
Interest on capital borrowed for the construction of the property 60,000
Ground rent 6,000
Fire insurance premium paid 60,000
Income of Ramesh from the business is 1,40,000 (without debiting house rent and other incidental
expenditure). Determine the taxable income of Mr. Ramesh for the assessment year 2025-26 if
he does not opts to be taxed under section 115BAC. (6 Marks, July 2021)
Solution: Computation of Taxable Income of Mr. Ramesh under the regular provisions of the Act
(amount in ₹)
Income from house property:
Unit-1 [50% of floor area - Let out]
Gross Annual Value, higher of•
Expected rent 1,14,000 [Higher of Municipal Value of 94,000 1,14,000
p.a. and Fair Rent of 1,24,000 p.a., but restricted to Standard Rent of
1,14,000 p.a.]
Actual rent 1,47,000 [15,000 × 10] [Less unrealized rent of 3,000 1,47,000
since conditions of Rule 4 has been satisfied]
Gross Annual Value 1,47,000
Less: Municipal taxes [50% of 20,000] [Assumed to have been paid
during the year by Mr. Ramesh] 10,000
Net annual value 1,37,000
Less: Deductions from Net Annual Value
(a) 30% of Net Annual Value 41,100
(b) Interest on loan [50% of 60,000] 30,000
Unit -3 [25% of floor area - Self occupied]

Net Annual Value 65,900

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 CA VARDHAMAN DAGA

Less: Interest on loan [25% of 60,000] 15,000 - 15,000

Income from house property 50,900
Profits and gains from business or profession:
Business Income [without deducting expenditure on Unit - 2 25% floor 1,40,000
area used for business purposes]
Less: Expenditure in respect of Unit -2
• Municipal taxes [25% of 20,000] [Assumed to have been paid on or
before the due date u/s 139(1)] 5,000
Repairs [25% of ₹ 5,000] 1,250
• Interest on loan [25% of 60,000] 15,000
• Ground rent [ 25% of ₹ 6,000] 1,500
• Fire Insurance premium [25% of ₹ 60,000] 15,000 37,750 1,02,250
Taxable Income 1,53,150

Illustration 34
Computation of tax liability in case of Business income & Other income: Mr. Avani, a resident
aged25 years, manufactures tea leaves from the tea plants grown by him in India. These are then
sold in the Indian market for 40 lakhs. The cost of growing tea plants was 15 lakhs and the cost
of manufacturing tea leaves was 10 lakhs. Compute his tax liability for the Assessment Year 2025-
26 if he has not opted for the provisions of Section 115BAC. (7 Marks, May 2018-NS)
Solution: Computation of tax liability of Mr. Avani (amount in ₹)
Particulars ₹ ₹
Sale value of manufactured Tea 40,00,000
Less: Expenditure incurred for growing tea plants 15,00,000
Expenditure incurred for manufacturing tea leaves 10,00,000 25,00,000
Composite income from growing and manufacturing tea 15,00,000
Agricultural Income @ 60% 9,00,000
Business Income @ 40% 6,00,000
Computation of tax payable by Mr. Avani (amounts in ₹)
Particulars ₹
Tax on business income including agricultural income (6,00,000+ 9,00,000) 2,62,500
Less: Tax on agricultural income + basic exemption (9,00,000+ 2,50,000) 1,57,500
Tax payable 1,05,000
Add: HEC @ 4% 4,200
Tax liability (rounded off) 1,09,200

Illustration 35
Agricultural Income: Discuss the taxability of the following transactions giving reasons, in the
light of relevant provisions, for your conclusion.
(i) Mr. Rajpal took a land on rent from Ms. Shilpa on monthly rent of 10,000. He sublets the
land to Mr. Manish for a monthly rent of 11,500. Manish uses the land for grazing of cattle
required for agricultural activities. Mr. Rajpal wants to claim deduction of 10,000 (being
rent paid by him to Ms. Shilpa) from the rental income received by it from Mr. Manish.
(ii) Mr. Pratham, a non-resident in India, received a sum of 1,14,000 from Mr. Rakesh, a resident
and ordinarily resident in India. The amount was paid to Pratham on account of transfer of
right to use the manufacturing process developed by Pratham. The manufacturing process
was developed by Mr. Pratham in Singapore and Mr. Rakesh uses such process for his
business carried on by him in Dubai.

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 CA VARDHAMAN DAGA

(iii) Mr. Netram grows paddy on land. He then employs mechanical operations on grain to make
it fit for sale in the market, like removing hay and chaff from the grain, filtering the grain
and finally packing the rice in gunny bags. He claims that entire income earned by him from
sale of rice is agricultural income not liable to income tax since paddy as grown on land is
not fit for sale in its original form. (3 x 2 = 6 Marks, Jan. 2021)
Solution:
(i) The rent or revenue derived from land situated in India and used for agricultural purposes
would be agricultural income under section 2(1A)(a). Therefore, rent received from sub-
letting of the land used for grazing of cattle required for agriculture activities is
agricultural income. The rent can either be received by the owner of the land or by the
original tenant from the sub-tenant. Accordingly, rent received by Mr. Rajpal from Mr.
Manish for using land for grazing of cattle required for agricultural activities is agricultural
income exempt u/s 10(1). As per section 14A, no deduction is allowable in respect of exempt
income.
(ii) Consideration for transfer of right to use the manufacturing process falls within the
definition of royalty. Income by way royalty payable by Mr. Rakesh, a resident and ordinarily
resident, is not deemed to accrue or arise in India in the hands of Mr. Pratham as per
section 9(1)(vi)(b), since royalty is payable in respect of right used for the purposes of a
business carried on by Mr. Rakesh outside India i.e., in Dubai.
(iii) The income from the process ordinarily employed to render the produce fit to be taken to
the market would be agricultural income under section 2(1A)(b)(ii). The process of making
the rice ready from paddy for the market may involve manual operations or mechanical
operations, both of which constitute processes ordinarily employed to make the product fit
for the market. Accordingly, the entire income earned by Mr. Netram from sale of rice is
agricultural income.
Illustration 36
Computation of Agricultural Income and WDV: Mr. Kabra is engaged in the business of growing
and curing (further processing) coffee in the state of Karnataka. The whole of coffee grown in
his plantation is cured. Relevant information pertaining to the year ended 31-03-2025 are given
hereunder:
Particulars ₹
Opening balance of the car as on 01-04-2024 3,00,000
Opening balance of machinery as on 01-04-2024 15,00,000
Expenses incurred in growing coffee 3,10,000
Expenses of curing coffee 3,00,000
Sale value of cured coffee 22,00,000
The car is used for the agricultural operations and the machine was used for coffee curing
business operations. Compute the income arising from the above activities for the assessment
year 2025-26 and the written down value as on 01-04-2024 (WDV as on 31-03-2025 less
depreciation for the P.Y. 2024-25). (4 Marks, May 2022)
Solution: Computation of Income from growing and curing coffee of Mr. Kabra for A.Y. 2025-
26
(amount in ₹)
Particulars ₹ ₹
Income from growing and curing coffee
Sale value of cured coffee 22,00,000
Less: Expenses incurred in growing coffee 3,10,000
Depreciation on Car (15% of 3,00,000) 45,000 3,55,000

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18,45,000
Less: Expenses of curing coffee 3,00,000
Depreciation on machinery (15% of ₹ 15,00,000) 2,25,000 5,25,000
13,20,000
Business Income [25% of 13,20,000] 3,30,000
Agricultural Income [75% of 13,20,000] 9,90,000
Computation of Written Down Value as on 1-4-2025
Opening balance of Car as on 1-4-2024 3,00,000
Less: Depreciation @ 15% on 3 lakh 45,000
WDV of car as on 1-4-2025 2,55,000
Opening balance of machinery as on 1-4-2024 15,00,000
Less: Depreciation @ 15% on 15 lakh 2,25,000
WDV of machinery as on 1-4-2025 12,75,000
Illustration 37
Computation of depreciation: A car purchased by S on 10-08-2018 for 3,25,000 for personal use
is brought into the business of the assessee on 01-12-2024, when its market value is 1,50,000.
Compute the actual cost of the car and the amount of depreciation for the assessment year 2024-
25 assuming the rate of depreciation to be 15%. (4 Marks, Nov. 2004)
Solution: As per Explanation 5 to section 43(1), building previously the property of the assessee,
is now brought into use for the purpose of business of the assessee, the actual cost shall be the
actual cost of the building as reduced by the depreciation that would have been allowed, had the
asset been used for business purpose since the date of its acquisition. However, it does not
provide any mode for a motorcar which is brought into business use after being initially used for
personal purposes. Therefore, Actual cost of motorcar brought into business use = actual cost to
assessee=3,25,000. (The market value of motorcar as on date of bringing it into business use is
irrelevant) Thus, actual cost of car = 3,25,000 & depreciation = 7.5% of 3,25,000 = 24,375 (since
the car was used for less than 180 days in the previous year).
Illustration 38
Block exists but there is no WDV: Mr. Prakash has the following assets which are eligible for
depreciation at 15% on Written Down Value (WDV) basis:
01-04-2021 WDV of plant 'X' and Plant 'Y ₹ 2,00,000
10-12-2024 Acquired a new plant 'Z' for ₹ 2,00,000
22-01-2025 Sold Plant 'Y' for ₹ 4,00,000
Expenditure incurred in connection with transfer ₹ 10,000
Compute eligible depreciation claim/chargeable capital gain if any. (7 Marks, PCC May 2010)
Solution: Computation of capital gain/depreciation claim of Mr. Prakash (amount in ₹) –
Particulars ₹ ₹
Sale proceeds of Plant Y 4,00,000
Less: Deduction under section 50(1)
Purchase of new Plant 'Z' 2,00,000
WDV as on 1-4-2024 of Block comprising of Plants 'X' and 'Y'[WN- 1,22,825
1]
Expenditure incurred in connection with such Transfer 10,000 3,32,825
Short-term capital gains for 2024-25 (Assessment Year 2025- 67,175
26)
Working Notes:
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 CA VARDHAMAN DAGA

(1) Computation of WDV:

Particulars ₹
WDV as on 1-4-2021 of Block comprising of Plants 'X' and 'Y' 2,00,000
Less: Depreciation for previous year 2021-22 @ 15% 30,000
WDV as on 1-4-2022 1,70,000
Less: Depreciation for previous year 2022-23 @ 15% 25,500
WDV as on 1-4-2023 1,44,500
Less: Depreciation for previous year 2023-24 @ 15% 21,675
WDV as on 1-4-2024 1,22,825
(2) Since the block is reduced to Nil, hence, no depreciation shall be admissible for assessment
year 2025-26.
Illustration 39
Computation of depreciation: From the following data, calculate the depreciation admissible to
an individual carrying on trading business :
Particulars ₹
Factory Building (WDV) 5,00,000
Plant and Machinery (WDV): 8,00,000
Additions-30-06-2024 1,00,000
31-12-2024 1,00,000
Sales-01-12-2024 6,00,000
Computer Addition 1-1-2025 ( 60,000 is paid through A/c payee cheque and 80,000
balance in cash)
Furniture and Fixtures (WDV) 1,00,000
Motor-car (WDV) 60,000
Solution: The admissibility of depreciation shall be computed as follows (amount in₹ )-
Particulars Block 1Plant Block 2- Block 3- Block
& Furniture & Factory 5Computer
Machinery Fittings Building (40%)
& Motor (10%) (10%)
Car(15%)
WDV as on 1-4-2024 8,60,000 1,00,000 5,00,000 Nil
Add: Actual cost of asset acquired 1,00,000 Nil Nil Nil
during the year - 30-06-2024
31-12-2024 & 1-1-2025 1,00,000 Nil Nil Nil
10,60,000 1,00,000 5,00,000 Nil
Less: Sales (1-12-2025) 6,00,000 Nil Nil Nil
WDV as on 31-3-2025 4,60,000 1,00,000 5,00,000 60,000
Less: Depreciation at block rate 61,500 10,000 50,000 12,000
WDV as on 1-4-2025 3,98,500 90,000 4,50,000 48,000
Working Notes:
(1) Since assessee is carrying on trading business, no additional depreciation is admissible.
(2) Since the new plant acquired during the previous year is put to use for less than 180 days
depreciation on such plant is calculated at half of the block rate. Hence, depreciation on
Plant & Machinery and motor car = 15% of ₹ 3.6 lakh +50% of 15% of 1 lakh (since used
for less than 180 days) = 61,500
(3) Though purchase price of computer is 80,000 but 20,000 is paid in cash, hence its actual
cost will be 80,000 - 20,000 = ₹ 60,000. Since the new computer acquired during the
previous year is put to use for less than 180 days, hence depreciation on such computer is
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calculated at half of the block rate. Depreciation on computer = 50% of 40% of 60,000 =
₹12,000.
Illustration 40
Computation of depreciation: A newly qualified Chartered Accountant Mr. Dhaval, commenced
practice and has acquired the following assets in his office at the cost shown against each item.
Calculate the amount of depreciation that can be claimed from his professional income:
Description Date of Date when Amount
Acquisition put to use (₹)
a) Computer 27 Sept., 2024 2 Oct., 2024 35,000
b) Computer software 2 Oct., 2024 4 Oct., 2024 8,500
c) Computer printer 2 Oct., 2024 3 Oct., 2024 12,500
d) Books (of which books being annual 1 Apr., 2024 1 Apr., 2024 13,000
Publications are of 12,000)
e) Office furniture (Acquired from 1 Apr., 2024 1 Apr., 2024 3,00,000
practicing C.A.)
f) Laptop 26 Sept., 2024 4 Oct., 2024 43,000
g) Fire extinguisher 1 Apr., 2024 No instance 2,500
arose to use
during F.Y.
2024-25
h) Purchased practicing CA's office in April 2024 who had run it for 4 years, for 5 lakhs
which includes 2 lakhs for goodwill and 3 lakhs for cost of furniture (included in (e) above)
Note: Depreciation is to be provided at the applicable rates. (Take 365 days in a year) (8 Marks,
May 2007)
Solution: Computation of depreciation allowable (amounts in₹)
Particulars Block 1 (Computer, Computer Block 2 Block 4 (Fire
software, Laptop & Books (Furniture) Extinguisher)
being non-annual publications, 10% 15%
Books being Annual
publications & Computer
Printer) - 40%
Assets put to use for 60,500 3,00,000 2,500
180 days or more
Assets put to use for 51,500 Nil Nil
less than 180 days.
Allowable Depreciation 34,500 30,000 375
Working Notes:
(1) Goodwill of profession is not eligible for depreciation.
(2) Depreciation on fire extinguisher will be available even if it is not actually put to use
because of its nature.
(3) Computer printer is eligible for depreciation at the rate of computer.

Illustration 41
Computation of depreciation: Mr. Rangamannar resides in Delhi. As per new rule in the city,
private cars can be plied in the city only on alternate days.
He has purchased a car on 21-09-2024, for the purpose of his business as per following details:
Cost of car (excluding GST) 12,00,000
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 CA VARDHAMAN DAGA

Add: Delhi GST at 14% 1,68,000

Add: Central GST at 14% 1,68,000
Total price of car 15,36,000
He estimates the usage of the car for personal purposes will be 25%. He is advised that since the
car has run only on alternate days, half the depreciation, which is otherwise allowable, will be
actually allowed.
He has started using the car immediately after purchase.
Determine the depreciation allowable on car for the assessment year 2025-26, if this is the only
asset in the block.
If this car were to be used in the subsequent assessment year 2025-26 on the same terms and
conditions above, what will be the depreciation allowable? Assume that there is no change in the
legal position under the Income-tax Act, 1961. (4 Marks, Nov. 2018-NS)
Solution: According to Section 32, if an asset is acquired by the assessee during the previous year
and the same is put to use for less than 180 days during that previous year, then the depreciation
will be limited to 50% of the depreciation allowable on such asset as per the rate prescribed in
Rule 5(1). Since the car was ready for use for more than 180 days, the date of purchase being 21-
09-2024 (the date when car was put to use), hence depreciation will be allowed on such car at full
rate.
Since, no input tax credit is admissible of CGST and SGST paid in respect of motor vehicles
(subject to certain exceptions), the actual cost of car shall be 15,36,000.
Where any motor car is not exclusively used for the purposes of business or profession, then the
deduction u/s 32 shall be restricted to a fair proportionate part thereof which is used for the
purpose of business. The amount of depreciation actually allowed shall be reduced from the
written down value to find out depreciated value of the block of asset.
Thus, taking into account the above observations depreciation shall be computed as under (amount
₹)
Particulars ₹ ₹
Assessment Year 2025-26:
Actual cost of car 15,36,000
Less: Depreciation @ 15% of 15,36,000 2,30,400
Less: Disallowed as per Section 38(2) for personal use [25%] 57,600 1,72,800
Depreciated value of the block at the end of year 13,63,200
Assessment Year 2025-26:
Depreciated value of the block at the beginning of year 13,63,200
Less: Depreciation @ 15% of 13,63,200 2,04,480
Less: Disallowed as per Section 38(2) for personal use [25%] 51,120 1,53,360
Depreciated value of the block at the end of year 12,09,840
Thus, depreciation allowable for A.Y. 2025-26 is 1,72,800 and for A.Y. 2025-26 is 1,53,360.
Illustration 42
Apportionment of Depreciation: Sai Ltd. has a block of assets carrying 15% rate of depreciation,
whose written down value on 01-04-2024 was 40 lacs. It purchased another asset of the same
block on 01-11-2024 for 14.40 lacs and put to use on the same day. Sai Ltd. was amalgamated with
Shirdi Ltd. with effect from 01-01-2025.
Compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous year ended on 31-
03-2025 assuming the assets transferred of Shirdi Ltd. at 60 lacs. (8 Marks, IPCC Nov. 2010)
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 CA VARDHAMAN DAGA

Solution: The amount of depreciation in any previous year, on tangible and intangible assets,
allowable to amalgamating company and amalgamated company shall not exceed the depreciation
calculated at prescribed rates, had such amalgamation not taken place. Such depreciation
determined shall be apportioned between amalgamating company and amalgamated company, in the
ratio of the number of days of use of assets by them during that previous year.
Apportionment of Depreciation: Number of days in the year = 365; Date of amalgamation = 01-
01-2025
Asset Total Total Days Days Sai Ltd. Shirdi Ltd.
Depreciation Days used used by
Used by Sai Shirdi
(a) On opening balance 6,00,000 366 275 91 4,50,820 1,49,180
[WN-1]
(b) Additions made by 1,08,000 152 61 91 43,342 64,658
Sai Ltd. [WN-2]
Total 7,08,000 4,94,162 2,13,838
Working Notes:
(1) Statement showing computation of depreciation:
Particulars ₹
WDV as on 1-04-2023 40,00,000
Add: Actual cost of asset acquired during the year (used for less than 180 14,40,000
Days)
Depreciation on 40,00,000 @ 15% 6,00,000
Depreciation on 14,40,000 @ 7.5% 1,08,000
(2) The price at which the assets were transferred, i.e., 60 lacs, has no effect on depreciation.
Illustration 43
Computation of depreciation and additional depreciation: Venus Ltd., engaged in manufacture of
pesticides, furnishes the following particulars relating to its manufacturing unit at Chennai (for
the year ending 31-03-2025):
Opening WDV of Plant and Machinery = ₹ 20
New machinery purchased on 1-9-2024 = ₹ 10
New car purchased on 1-12-2024 = ₹ 8
Computer purchased on 3-1-2025 = ₹ 4
Additional information:
 All assets were put to use immediately.
 Computer has been installed in the office.
 During the year ended 31-3-2024, a new machinery had been purchased on 31-10-2023, for
10 lacs. Additional depreciation, besides normal depreciation, had been claimed thereon.
 Depreciation rate of machinery may be taken as 15%.
Compute the depreciation available to the assessee as per the provisions of the Income-tax Act,
1961 and the WDV of different blocks of assets as on 31-3-2025. (8 Marks, May 2016)
Solution: Computation of depreciation and the WDV of different blocks of asset as on 31-03-
2025 (amount in ₹):
Particulars Block I (Plant Block II
& Machinery) (Computer)
& (Car) Block Block Rate
Rate 15% 40%
Opening WDV [Opening WDV in case of car is Nil] 20,00,000 Nil

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 CA VARDHAMAN DAGA

Add: Assets acquired during the previous year (10,00,000 18,00,000 4,00,000
+ 8,00,000)(Computer = 4,00,000)
Less: Moneys payable in respect of assets sold during the Nil Nil
year
WDV as on 31-3-2024 eligible for depreciation 38,00,000 4,00,000
Less: (a)Normal Depreciation - On car (8,00,000 × 7.5%,
since used for less than 180 days and balance WDV i.e.
30,00,000 × 15%) - On Computer (4,00,000 × 40% x 50%,
since used for less than 180 days) 5,10,000 80,000
(b)Additional Depreciation - On plant ( 10,00,000 × 20%, 2,00,000 -
since used for more than 180 days) [WN]
(c)Additional Depreciation - On plant (10,00,000 × 10%, 1,00,000
since purchased in FY2023-24 and put to use for less than
180 days) [WN]
WDV as on 1-4-2025 29,90,000 3,20,000
Working Notes:
(1) In case of new machinery of 20,00,000, additional depreciation is calculated @ 20% of
actual cost since the asset is acquired during the previous year and put to use for a period
of not less than 180 days.
(2) Since the computer is installed in office building, the same shall not be eligible for
additional depreciation.
(3) Where an asset is acquired by the assessee during the previous year and is put to use for
the purposes of business for a period of less than 180 days in that previous year, and the
additional depreciation in respect of such asset is restricted to 10% of the actual cost
for that previous year, then, the deduction for the balance additional depreciation i.e.
10% of the actual cost of such asset shall be allowed in the immediately succeeding
previous year in respect of such asset. Hence, on plant of 10,00,000 which was purchased
in FY 2023-24 and put to use for less than 180 days in that year, the remaining additional
depreciation @ 10% is allowed in FY 2024-25.
Illustration 44
Computation of depreciation and additional depreciation: Mr. Abhimanyu is engaged in the
business of generation and distribution of electric power. He always opts to claim depreciation on
written down value for income-tax purposes. From the following details, compute the depreciation
allowable as per the provisions of the Income-tax Act, 1961 for the assessment year 2025-26:
(i) Opening WDV of block (15% rate) = ₹ 42
(ii) New machinery purchased on 12-10-2024 = ₹ 10
(iii) Machinery imported from Colombo on 12-04-2024. This machine had been used only in
Colombo earlier and the assessee is the first user in India. = ₹ 9
(iv) New computer installed in generation wing of the unit on 15-07-2024. = ₹ 2
Solution: Computation of depreciation (amount in ₹):
Particulars Block I (Plant) Block II
Block Rate 15% (Computer)
Block Rate 40%
Opening WDV 42,00,000 Nil
Add: Assets acquired during the previous year 19,00,000 2,00,000
(10,00,000+ 9,00,000)
Less: Moneys payable in respect of assets sold during Nil Nil
the year

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 CA VARDHAMAN DAGA

WDV as on 31-3-2025 eligible for depreciation 61,00,000 2,00,000

Less:(a)Normal Depreciation - On plant (10,00,000 x 8,40,000 80,000
7.5%, since used for less than 180 days and balance
WDV i.e. 51,00,000 x 15%) - On Computer (2,00,000 x
40%)
(b) Additional Depreciation - On plant (10,00,000 × 1,00,000 40,000
10%, since used for less than 180 days) - On computers
(2,00,000 x 20% ) [WN]
WDV as on 1-4-2025 51,60,000 80,000
Working Notes:
(i) No Additional depreciation shall be allowed in respect of Machinery imported from
Colombo which before its installation by the assessee, was used by any other person.
(ii) In case of new machinery of 10,00,000, additional depreciation is calculated @ 10% of
actual cost since the asset is acquired during the previous year and put to use for a
period of less than 180 days. The balance additional depreciation amounting 1,00,000 will
be allowed in the immediately succeeding previous year.
(iii) Since the computer is installed in generation wing of the unit, the same shall be eligible
for additional depreciation @20% i.e.2,00,000 x 20% 40,000.
Illustration 45
Expenditure on Scientific research: Vivitha Bio-medicals Ltd. is engaged in the business of
manufacture of bio-medical items. The following expenses were incurred in respect of activities
connected with scientific research:

Year ended Item ₹

31-03-2021 Land 10,00,000
(incurred after 1-9-2021) Building 25,00,000
31-03-2022 Plant and machinery 5,00,000
31-03-2024 Raw materials 2,20,000
31-03-2025 Raw materials and salaries 1,80,000
The business was commenced on 01-09-2024. In view of availability of better model plant and
machinery, the existing plant and machinery were sold for 8,00,000 on 01-03-2025.
Discuss the implications of the above for assessment year 2025-26 along with brief computation
of deduction permissible under section 35, assuming that necessary conditions have been fulfilled.
(7 Marks, PCE Nov. 2007)
Solution: Expenditure incurred (other than cost of land or building) on in-house research and
development facility as approved by the prescribed authority, by a company engaged in the
business of bio-technology shall be allowed as deduction to the extent of 100% of such
expenditure under section 35(2AB).
Expenditure incurred within the 3 years preceding the date in which the business commences, on
salary paid to an employee engaged in such scientific research or on the purchase of materials
used in such scientific research, or capital expenditure (other than cost of land), shall be allowed
as deduction, to the extent of 100% of such expenditure (allowed in the previous year i.e. year of
commencement of business). The relevant computation is as under•
Computation of amount of deduction under section 35 (amounts in ₹)
Particulars Expenditure allowable u/s Expenditure allowable u/s
35(2AB) at 100%
Land - -
Building 25,00,000 -

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 CA VARDHAMAN DAGA

Plant and Machinery 5,00,000 -

Raw material 2,20,000 -
Raw material and salaries 1,80,000
Eligible expenditure 32,20,000 1,80,000
Deduction allowable 32,20,000 1,80,000
Total deduction allowable u/s 35 34,00,000
• When the asset is sold without being used for other purposes: In such a case, there shall
be deemed profits in the year in which sale took place.
(a) The taxable amount under section 41(3) shall be = So much of the sale proceeds which
do not exceed the amount of deduction allowed under section 35 i.e. 5 lakhs.
(b) Capital gains under section 45 Excess of sale proceeds over the cost of acquisition and
expenditure incurred on transfer. Short-term capital gains = Moneys payable - Cost =
8 lakhs - 5 lakhs = 3 lakhs.

Illustration 46
Consequences of mis-utilisation of asset whose deduction is claimed u/s 35AD: XYZ Ltd.
commenced business of production of fertilizer on 1-4-2022. The company purchased plant and
machinery for manufacture of the fertilizer amounting 100 lakhs for which deduction was claimed
under Section 35AD. In financial year 2024-25 the said asset was used for non specified business.
You are required to determine the tax implications of the said transaction in hands of XYZ Ltd.
Solution: According to Section 35AD(7B), if any asset is used for any purpose other than the
specified business, the total amount of deduction so claimed and allowed in any previous year in
respect of such asset, as reduced by the amount of depreciation allowable in accordance with the
provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed
to be income of the assessee chargeable under the head "Profits and gains of business or
profession" of the previous year in which the asset is so used. Hence, the relevant computation
will be as under:
Particulars ₹ in lakh
Total amount of deduction claimed and allowed in respect of such asset 100
u/s 35AD
Less: Depreciation eligible under Section 32 in respect of such asset [WN] 44.75
Deemed profits u/s 35AD 55.25

Particulars ₹ in lakh
Actual Cost of asset 100
Less: Depreciation eligible under Section 32 (including additional depreciation) for 35
FY 2022-23
WDV 65
Less: Depreciation eligible under Section 32 for FY 2023-24 9.75
WDV as on 01-04-2024 55.25
Deduction admissible on account of depreciation for FY 2022-23 and 2023- 44.75
24
Illustration 47
Allowable expenditure: Discuss the tax implications of the following in the case of a doctor
running a nursing home (amount in ₹):
1) Amount paid to a scientific research association approved by the Central Government and
run by a drug manufacturing company = ₹ 20,000

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 CA VARDHAMAN DAGA

2) Payments made in cash towards purchases of medicines = ₹ 50,000

3) Amounts received from the employees of the nursing home as contributions towards
Provident Fund for the month of March 2025, paid to the P.F. Commissioner on 25-4-2025
= ₹ 25,000
Solution: Tax implications of the following in the case of a doctor running a nursing home (amounts
in –
Cases Deduction
1) Amount paid to a scientific research association approved by the Central 20,000
Government and run by a drug manufacturing company [WN-1]
2) Payments made in cash towards purchases of medicines [WN-2] Nil
3) Amounts received from the employees of the nursing home as contributions Nil
towards Provident Fund [WN-3]
Working Notes:
(1) 100% of such expenditure is allowable as deduction under section 35(1)(ii) i.e. 100% of
20,000 = 20,000
(2) Such cash payments are not allowable under section 40A(3) since the same exceeds
10,000.
(3) The amount received will be first included in income of the assessee and then deduction
shall be allowed under section 36(1)(va) if payment is made on or before due date of
relevant fund i.e. 15-04-2025 + 5 days. In this case since payment was made on 25-04-
2025 therefore no deduction shall be allowed under section 36(1)(va).
Illustration 48
Deduction on payment basis: An analysis of the profit and loss account and the balance sheet of
Kapil as at 31 March, 2025 reveals that the following expenses which were due, were though
debited to the profit and loss account, but have been paid after 31 March, 2025:
(i) Goods and Services Tax: 50,000 (20,000 paid on 14th September, 2025; and 30,000 paid
on 15th December, 2025)
(ii) Customs duty: 1,20,000 (40,000 paid on 14th September, 2025; 40,000 paid on 15th
December, 2025; and 40,000 paid on 24th December, 2025).
(iii) Bonus to staff: 60,000 (58,000 paid on 10th September, 2025; & 2,000 paid on 15th
December, 2025).
(iv) Employer's contribution to provident fund: 55,000 (25,000 paid on 15th July, 2025; 10,000
paid on 30th September, 2025; and 20,000 paid on 15th December, 2025).
(v) Interest on term loan from cooperative bank: 1,50,000 (1,20,000 paid on 14th July, 2025;
and 30,000 paid on 15th December, 2025).
The due date for filing of return is 31" October, 2025. In which previous years can the above
payments be claimed as a deduction? (Modified CS Dec. 2004)
Solution: The aforesaid amounts shall be deductible as follows –
Expenses Amount of Date of Amount of Previous year in
Expenditure payment payment which
deductible
Goods and Services Tax 50,000 14-09-2025 20,000 2024-25
15-12-2025 30,000 2025-26
Customs duty 1,20,000 14-09-2025 40,000 2024-25
15-12-2025 40,000 2025-26
Bonus to staff 60,000 10-09-2025 58,000 2025-26

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15-12-2025 2.000 2024-25

Employer's contribution to PF 55,000 15-07-2025 25,000 2024-25
30-09-2025 10,000 2024-25
15-12-2025 20,000 2025-26
Interest on term loan from 1,50,000 14-07-2025 1,20,000 2024-25
cooperative bank
15-12-2025 30,000 2025-26
Illustration 49
Applicability of Section 43CA: Mr. Ramesh, a property dealer, purchased a building on 15 July
2024 for a sum of 65 lakh. The said building was sold by him during the course of his business to
his friend Mahesh, who is a dealer in cosmetic goods, for 90 lakh on 1-1-2025, when the stamp
duty value was 185 lakh. The agreement was entered on the same day and the property was
registered on the same day. Discuss tax implications in hands of Ramesh.
What would be your answer if the agreement was entered into on 1-7-2024 when the stamp duty
value was 120 lakh. Mr. Ramesh had received a down payment of 15 lakh by cheque from Mahesh
on the date of agreement. Will your answer change if the said sum of 15 lakhs has been received
by cash instead of cheque.
Solution: The tax implications in hands of Ramesh shall be as under
Case I: In case the agreement has been entered on the date of sale and property has been
registered on the same day: The provisions of section 43CA would be attracted, since the
building represents his stock-in-trade and he has transferred the same for a consideration less
than the stamp duty value on the date of registration of property and the stamp duty value
exceeds 110% of the consideration. Therefore, 120 lakh, being the difference between the stamp
duty value on the date of registration (i.e., 185 lakh) and the purchase price (i.e. 65 lakh), would
be chargeable as business income in the hands of Mr. Ramesh.
Case II: In case the agreement has been entered on 1-7-2024: In this case the stamp duty
value on the date of agreement will be considered to compute business profits since, Mr. Ramesh
had received a down payment of ₹ 15 lakh by cheque from Mahesh on the date of agreement and
stamp duty does exceeds 110% of the consideration received or accruing as a result of the
transfer. Therefore, 55 lakh, being the difference between the stamp duty value on the date of
agreement (i.e. 120 lakh) and the purchase price (i.e. ₹ 65 lakh), would be chargeable as business
income in the hands of Mr. Ramesh.
Yes, the answer will change in case if on the date of agreement cash has been received instead of
cheque. In such case stamp duty value on the date of agreement shall not be considered but the
stamp duty value on the date of registration of property shall be considered and the business
profits shall be ₹ 120 lakhs.
Illustration 50
Presumptive basis taxation Section 44AD: Mr. Querashi is a business man. During the year ended
31-03-2025 he was engaged in the business of Hypermarket and Super Market. He maintains
proper books of accounts for both businesses in mercantile system. Sales from Hypermarket
achieved a turnover of ₹ 75 lakhs and all receipts were in cash. However, Supermarket business
is through online and entire receipts of ₹ 50 lakhs during the year were received though online in
his bank account. The expenses were incurred in the ratio 65:35.
Following additional information is furnished:
To Salary = ₹ 10,00,000
To Repairs on building = ₹ 1,81,000
To Interest = ₹ 1,10,000
To Travelling = ₹ 1,30,550

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To Depreciation = ₹ 8,12,000
Net profit = ₹ 3,93,950
(a) In addition to the above, repairs of ₹ 1,00,000 was incurred for building a new room which
was debited to P&L a/c.
(b) Depreciation as per Income-tax Act is 7,17,000.
(c) ₹ 75,000 was paid in cash on 30-09-2024 to Mrs. Ann, accountant for preparation of the
accounts for the year ended 31-03-2024 and adjusted under the head "expenses payable"
account.
(d) He was forced to shutdown his furniture business in the year 2021 as his accountant
absconded with cash of 5 lakhs and fully allowed in that year. Unabsorbed business loss
of furniture business is 3 lakhs. 4 lakhs was received as insurance compensation on 31-03-
2025 for the cash theft.
(e) Mr. Querashi wants to declare income under "Presumptive income" basis. Compute the
income chargeable under the head profits and gains of business or profession of Mr.
Querashi under Presumptive Income scheme u/s 44AD and his Total Income for the year
ended 31-03-2024. (10 Marks, May 2018)
Solution:
(1) As per Section 44AD, in case of an eligible assessee engaged in an eligible business
(a) a sum equal to 8% of the total turnover or gross receipts of the assessee in the previous
year on account of such business (6% of the amount of total turnover or gross receipts
which is received by an account payee cheque or an account payee bank draft or use of
electronic clearing system through a bank account during the previous year or before
the due date specified in Section 139(1) in respect of that previous year); or
(b) a sum higher than the aforesaid sum claimed to have been earned by the eligible
assessee, shall be deemed to be the profits and gains of such business chargeable to
tax under the head "Profits and gains of Business or Profession".
(2) Any deduction allowable under the provisions of Sections 30 to 38 (including unabsorbed
depreciation, unabsorbed capital expenditure on scientific research/ family planning) shall
be deemed to have been already deducted and no further deduction under those sections
shall be allowed. Thus, His Presumptive Income under section 44AD is as under = 8% of
turnover of 75,00,000+ 6% of turnover of 50,00,000 = ₹ 900,000.
Particulars ₹ ₹
Presumptive Income under Section 44AD 9,00,000
Furniture business Recovery against deduction
taxable as business profits [WN-1] 4,00,000
Less: Unabsorbed business loss as per Section 41(5) [WN-2] 3,00,000 1,00,000
Profits and Gains of Business and Profession/Total Income 10,00,000
In the question it is stated that Mr. Querashi "maintains proper books of accounts for both
businesses in mercantile system". The income as per regular books of account has to be computed
and if such income is more than the presumptive income computed under section 44AD, the higher
income can be declared under section 44AD. Hence, income of Mr. Querashi for the assessment
year 202425 as per books of account is computed below: (amount in ₹)
Particulars ₹ ₹
Income under the head Profits & Gains of Business and Profession
Net profit as per Profit and Loss Account 3,93,950
Add: Expenses not allowable
Depreciation debited in Profit and loss Account 8,12,000

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Cash payment in excess of 10,000 made in a day in the current year in 75,000
respect of expenditure allowed on mercantile basis in the previous year,
would be deemed as income in the current year
Building construction expenditure debited to P & LA/c 1,00,000 13,80,950
Less: Expenses allowable under this head
Depreciation as per Income-tax Act, 1961 7,17,000
Depreciation on building extension of a room @ 10% 10,000 7,27,000
Profits and gains of business computed as per books of account 6,53,950
Note: The assessee's total income from hypermarket and supermarket business computed as per
books of account is less than the income computed under section 44AD. The question states that
the assessee wants to declare income under presumptive provision i.e. section 44AD. Hence, the
total income computation would include only the presumptive income computed under section 44AD
for both hypermarket and supermarket businesses.
Computation of Total Income (amount in ₹)
Particulars ₹ ₹
Presumptive Income under Section 44AD 9,00,000
Furniture business Recovery against deduction taxable as
business profits [WN-1] 4,00,000
Less: Unabsorbed business loss as per Section 41(5) [WN-1] 3,00,000 1,00,000
Profits and Gains of Business and Profession/Total 10,00,000
Income
Working Note:
(1) As per provisions of Section 41(1), recovery of any amount in respect of any loss which
was earlier claimed as deduction is chargeable to tax under the head Profits and gains
of business whether the business is in existence or not. Hence, 4,00,000 shall be treated
as taxable profits.
(2) As per Section 41(5), where the business or profession is no longer in existence; and
there is income chargeable to tax under section 41(1) in respect of that business or
profession any loss, not being a loss sustained in speculation business, which arose in that
business or profession during the previous year in which it ceased to exist and which
could not be set off against any other income of that previous year shall be set off
against such deemed profits to the extent of such profits. Thus, loss of 3,00,000 shall
be set-off from such recovery of 4,00,000 and balance amount will be taxable.
Illustration 51
Presumptive basis u/s 44ADA: Ms. Kriti is a Chartered Accountant in practice. She maintains
her accounts on cash basis. Her Income and Expenditure account for the year ended 31 March,
2025 reads as follows:
Expenditure ₹ Income ₹ ₹
Salary to staff 5,50,000 Fees earned:
Stipend to articled 37,000 Audit 17,88,000
assistants Taxation services 5,40,300
Incentive to articled 3,000 Consultancy 2,70,000 25,98,300
assistants
Office rent 24,000 Dividend on shares of Indian
companies (Gross) 10,524
Printing and stationery 22,000 Income from units of mutual
fund (Gross) 7,600

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Meeting, seminar and 31,600 Honorarium received from

conference various institutions for
valuation of answer papers 15,800
Purchase of car 80,000 Rent received from
residential flat let out 85,600
Repair, maintenance 4,000
Travelling expenses 35,000
Municipal tax paid in
respect of house
Property 3,000
Net Profit 19,28,224
27,17,824 27,17,824
Other Information:
(i) Allowable rate of depreciation on motor car is 15%.
(ii) Incentives to articled assistants represent amount paid to two articled assistants for
passing IPCC Examination at first attempt
(iii) Salary include 15,000 to a computer specialist in cash on 15-07-2024 for assisting Ms.
Kriti in one professional assignment.
On the basis of above information, determine whether Ms. Kriti should opt for presumptive
basis taxation for computation of her Gross Total Income for assessment year 2025-26.
Solution: Computation of the Gross Total Income for the assessment year 2025-26
• CASE I: When Ms. Kriti opt for the provisions of Section 44ADA: Computation of gross
total income (amounts in ₹)
Particulars ₹ ₹
Income from house property:
Actual Rent Received [Being Gross Annual Value u/s 23(1)] 85,600
Less: Municipal taxes paid 3,000
Net Annual Value (NAV) 82,600
Less: Standard deduction u/s 24 @ 30% of NAV 24,780 57,820
Income under the head Profits & Gains of Business and Profession
50% of the Gross receipts i.e. 50% of 25,98,300 is deemed profits
from profession under Section 44ADA 12,99,150
Income from other sources:
Dividends from Indian companies [Taxable in hands of shareholder] 10,524
Income from Unit Trust of India. [Taxable in hands of unit holder] 7,600
Honorarium for valuation of answer papers 15,800 33,924
Gross Total Income 13,90,894
CASE II: When income is computed as per normal provisions of the Act.
Computation of gross total income (amounts in ₹):
Particulars ₹ ₹
Income from house property:
Actual Rent Received [Being Gross Annual Value u/s 23(1)] 85,600
Less: Municipal taxes paid 3,000
Net Annual Value (NAV) 82,600
Less: Standard deduction u/s 24 @30% of NAV 24,780 57,820
Income under the head Profits & Gains of Business and Profession
Net profit as per Income and Expenditure Account 19,28,224
Add: Expenses debited but not allowable -
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Municipal Taxes of house property in respect of residential flat let 3,000

out
Salary paid to computer specialist in cash disallowed u/s 40A(3), since
such cash payment is in excess of 10,000 15,000
Amount paid for purchase of car is not allowable u/s 37(1) since it is 80,000
a capital expenditure
Less: Income credited but not taxable under this head
Dividend on shares of Indian Companies [The same taxable under the
head Income From Other Sources] 10,524
Income from Unit Trust of India [The same taxable under the head
Income From Other Sources] 7,600
Honorarium for valuation of answer papers [The same is taxable under 15,800
the head 'Income from other sources']
Rent received from residential flat let out [The same is taxable under 85,600
the 'Income from house property']
Depreciation on Motor Car @ 15% [WN] 12,000 18,94,700
Income from other sources:
Dividends from Indian companies [Taxable in hands of shareholder] 10,524
Income from Unit Trust of India. [Taxable in hands of shareholder] 7,600
Honorarium for valuation of answer papers 15,800 33,924
Gross Total Income 19,86,444
Working Note: It has been assumed that the motor car was put to use for more than 180 days
during the previous year and hence, full depreciation @ 15% has been provided for under section
32(1)(ii).
Conclusion: The assessee should opt for the provisions of Section 44ADA since her income from
profession as per the said section is ₹12,99,150 which is less than actual income of 18,94,700.
Illustration 52
Income from plying goods carriages: Ramamurthy had 4 light goods vehicles as on 1-4-2024. He
acquired 7 light goods vehicles on 27-6-2024. He sold 2 light goods vehicles on 31-5-2024. He has
brought forward business loss of 50,000 relating to A.Y. 2021-22 of a discontinued business.
Assuming that he opts for presumptive taxation of income as per section 44AE, compute his total
income chargeable to tax. (4 Marks, PCC May 2011)
Solution: In this case, section 44AE shall apply because Ramamurthy didn't have more than 10
vehicles at any time during the previous year.
The relevant computations are
No. of light Goods Period during which owned No. of Rate Amount ₹
Vehicle months p.m.
2 01-04-2023 to 31-03-2024 12 7,500 1,80,000
2 01-04-2023 to 31-05-2023 5 7,500 30,000
7 27-06-2023 to 31-03-2024 10 7,500 5,25,000
Profits from the business referred to u/s 44AE 7,35,000
Less: Set-off of the brought forward business loss 50,000
Total Income 6,85,000
As per provision of Section 44AE, the computed income is profits and gains of business or
profession. Hence, the assessee will be entitled to set off other business loss from such
presumptive income.
Illustration 53

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Presumptive incomes under section 44AD & 44AE: Mr. R furnishes you the following information
for the year-ended 31-3-2025 (amounts in ₹):
(i) Income from plying of vehicles (computed as per books) (He owned 5 light goods vehicle
throughout the year) = ₹ 5,10,000
(ii) Income from retail trade of garments (computed as per books) (Sales turnover 81,70,000)
= ₹ 2,00,000
(iii) Brought forward depreciation relating to assessment year 2024-25 = ₹ 1,20,000
(iv) Amount deposited into PPF Account on 06-04-2025 = ₹ 1,00,000
Compute taxable income of Mr. R and his tax liability if sale proceeds of garments is received
through account payee cheque and he has not opted for the provisions of Section 115BAC. (May
2004)
Solution: If Mr. R opts for presumptive taxation under section 44AD and 44AE, then, any
deduction allowable under the provisions of Sections 30 to 38 (including unabsorbed depreciation,
unabsorbed capital expenditure on scientific research/ family planning) shall be deemed to have
been already deducted and no further deduction under those sections shall be allowed. The
relevant computation is as under:
Computation of taxable income of R and his tax liability (amounts in ₹) –
Particulars Presumptive Income as
taxation per books
Income from plying of vehicles (7,500 x 12 x 5) 4,50,000 5,10,000
Income from retail trade business (6% of 81,70,000) (Since 4,90,200 2,00,000
sale proceeds are received through account payee cheque)
9,40,200 9,10,000
Less: Unabsorbed depreciation - 1,20,000
Gross total income 9,40,200 7,90,000
Gross total income [WN-1] 7,90,000
Less: Deduction u/s 80C in respect of PPF [WN-2] Nil
Taxable income 7,90,000
Income tax on total income 70,500
Add: HEC @ 4% 2,820
Tax liability (rounded off) 73,320
Working Notes:
(1) Since total income as per books of accounts is lower than presumptive income under
section 44AD and Section 44AE, therefore, Mr. R should claim his income as per books
and get his such books of accounts audited.
(2) Deduction in respect of PPF is not allowable as it is not paid upto 31-3-2025.
Illustration 54
Presumptive incomes under section 44AE: Mr. Prakash is in the business of operating goods
vehicles. As on 1 April, 2024, he had the following vehicles:
Vehicle Gross Vehicle Weight (in Date of Put to use during F.Y.
Kgs.) Purchase 2024-25
A 8,500 02-04-2023 Yes
B 13,000 15-05-2023 Yes
C 12,000 04-08-2023 No (as under repairs)
During P.Y. 2024-25, he purchased the following vehicles:
Vehicle Gross Vehicle Date of Purchase Date on which put
Weight (in Kgs.) to use
D 11,000 30-04-2024 10-05-2024
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E 15,000 15-05-2023 18-05-2024

Compute his income under section 44AE of the Income-tax Act, 1961 for A.Y. 2025-26. (4 Marks,
Nov. 2019)
Solution: Since Mr. Prakash does not own more than 10 vehicles at any time during the previous
year 2023-24, he is eligible to opt for presumptive taxation scheme under section 44AE. ₹ 1,000
per ton of gross vehicle weight or unladen weight per month or part of the month for each heavy
goods vehicle and 7,500 per month or part of month for each goods carriage other than heavy
goods vehicle, owned by him would be deemed as his profits and gains from such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000
kg. Computation of income u/s 44AE:
Type of Number Date of No. of months Deemed Amount ₹
Carriage of purchase for which income per
Vehicles vehicle is month
owned
For Heavy goods B 15-05-2022 12 13,000 1,56,000
Vehicle E 15-05-2023 11 15,000 1,65,000

For goods vehicle A 02-04-2022 12 7,500 90,000

other than heavy C 04-08-2022 12 7,500 90,000
goods vehicle D 30-04-2023 12 7,500 90,000
Profits from the business referred to u/s 44AE 5,91,000
Illustration 55
Computation of Business and agricultural Income: Mr. Tony had estates in Rubber, Tea and
Coffee. He derives income from them. He has also a nursery wherein he grows plants and sells.
For the previous year ending31-3-2025, he furnishes the following particulars of his sources of
income from estates and sale of plants
Particulars ₹
(a) Manufacture of Rubber 5,00,000
(b) Manufacture of Coffee grown and cured 3,50,000
(c) Manufacture of Tea 7,00,000
(d) Sale of plants from nursery 1,00,000
You are requested to compute the taxable income. (5 Marks, CA PE-II Nov. 2004)
Solution: Computation of taxable income of Tony (amount in ₹)-
Particulars Business income Agricultural income
Income from growing and manufacturing rubber 1,75,000 3,25,000
(Rule 7A) - 35% : 65%
Income from growing and curing coffee (Rule 7B) - 87,500 2,62,500
25%:75%
Income from growing and manufacturing tea (Rule 2,80,000 4,20,000
8) 40% : 60%
Sale of plants from nursery (It is an agricultural Nil 1,00,000
income)
Total 5,42,500 11,07,500
Hence, total income of Mr. Tony = 5,42,500.
Illustration 56
Computation of Business and agricultural Income: Miss. Kavita, a resident and ordinarily resident
in India, has derived the following income for the year ended 31-3-2025:

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(i) Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling
= ₹ 1,00,000
(ii) Income from sale of coffee grown and cured in Yereaud, Tamil Nadu = ₹ 2,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded in Colombo. Sale
consideration was received in Chennai. = ₹ 5,00,000
(iv) Income from sale of tea grown and manufactured in Shimla = ₹ 10,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic operations were not
carried out by her on land. = ₹ 2,00,000
You are required to compute the business income and agricultural income of Miss. Kavita for the
Assessment Year 2025-26. (5 Marks, May 2018) (Similar: 6 Marks, CA PE-II June, 2009)
Solution: Computation of taxable income of Miss Kavita (amounts in ₹) –
Particulars Business Agricultural
Income Income
Income from growing & manufacturing rubber in India (Rule 35,000 65,000
7A) - 35% : 65%
Income from growing and curing coffee in India (Rule 7B) 25% 50,000 1,50,000
: 75%
Income from growing/curing/roasting etc. coffee out of India 5,00,000
in Colombo (Sri Lanka) [WN-1]
Income from growing and manufacturing tea in India (Rule 4,00,000 6,00,000
8) - 40% : 60%
Income from sapling and seedling grown in a nursery[WN-2] 2,00,000
Total 9,85,000 10,15,000
Working Note:
1) Income from a land situated outside India is Non-Agricultural Income. Since the operations
have taken place outside India, hence, no part of such income can be regarded as agricultural
income (Rule 7B will not apply). Since Miss Kavita is resident in India, hence, this income will
be taxed in India.
2) Income from sapling and seedling grown in a nursery is deemed agricultural income even if
no basic operations have been carried out
Illustration 57
Computation of tax liability in case of Business income & Other income: Mr. X, a resident, has
provided the following particulars of his income for the P.Y. 2024-25. Compute his tax liability if
he has not opted for the provisions of Section 115BAC.
Particulars ₹
(a) Income from salary (Computed) ₹ 3,80,000
(b) Income from house property (computed) ₹ 2,00,000
(c) Agricultural income from a land in Jaipur ₹ 2,80,000
(d) Expenses incurred for earning agricultural income ₹ 1,70,000
Solution: Computation of total income of Mr. X for the A.Y. 2025-26 (amount in ₹)
Income from salary (Computed) 3,80,000
Income from house property 2,00,000
Net agricultural income [ 2,80,000 - 1,70,000] 1,10,000
Less: Exempt under section 10(1) -1,10,000
Gross Total Income 5,80,000
Less: Deductions under Chapter VI-A
Total Income 5,80,000
Computation of tax payable by Mr. X (amounts in ₹)
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Particulars ₹
Tax on business income including agricultural income (5,80,000+ 1,10,000) 50,500
Less: Tax on agricultural income + basic exemption (1,10,000+2,50,000) 5,500
Tax payable 45,000
Add: HEC@ 4% 1,800
Tax liability (rounded off) 46,800
Illustration 58
Computation of Business and agricultural Income: Mr. Kamal grows paddy and uses the same for
the ne of Mr. Kamal. purpose of manufacturing of rice in his own Rice Mill. The cost of cultivation
of 40% of paddy produce is ₹ 7,00,000 which is sold for 15,00,000; and the cost of cultivation of
balance 60% of paddy is 12,00,000 and the market value of such paddy is 24,00,000. To
manufacture the rice, he incurred ₹ 2,00,000 in the manufacturing process on the balance (60%)
Solution: Computation of Business income and Agriculture Income of Mr. Kamal (amount in ₹)
Particulars ₹ ₹
Agricultural Income:
Sale value of paddy 15,00,000
Less: Cost of Cultivation 7,00,000 8,00,000
Market value of paddy used for production of rice 24,00,000
Less: Cost of Cultivation 12,00,000 12,00,000
Business Income:
Sale Value of Rice 30,00,000
Less: Cost of Paddy [Market Valued Paddy is taken for 24,00,000
computing Business Income as u/r 7]
Less: Further Processing Cost [Note: These are processing 2,00,000 4,00,000
Costs, not Agri. Operations]
ILLUSTRATION 59
Expenditure on Scientific research : Mr. Rao furnished the following information regarding the
payments made towards Scientific Research during the financial year 2024-25 :
(i) Revenue expenditure on Scientific Research incurred during the year ₹ 1,00,000.
(ii) Capital Expenditure for Scientific Research ₹ 3,00,000.
(iii) Contribution to Notified approved research association ₹ 1,50,000.
(iv) Amount paid to H Limited an Indian company which has as its main object scientific research
and approved by the prescribed authority ₹ 2,50,000.
(v) Expenditure of ₹ 2,50,000 towards purchase of Land for scientific research.
(vi) He also incurred revenue expenditure of ₹ 2,00,000 towards salary of research staff in the
F.Y. 2023-24 (before commencement of business) and certified by the prescribed authority.
Compute the deduction allowable u/s 35 for the assessment year 2025-26, assuming, that he has
not opted for default tax regime u/s 115BAC. (4 Marks, May 2024)
SOLUTION Computation of deduction allowable u/s 35 for the A.Y. 2025-26
Particulars ₹
(i) Revenue expenditure on scientific research allowable as deduction u/s 1,00,000
35(1)(i), assuming such expenditure is related to his business.
(ii) Capital expenditure allowable as deduction u/s 35(1)(iv), assuming such 3,00,000
expenditure is incurred for his business.
(iii) Contribution to notified approved research association for scientific 1,50,000
research – 100% of the amount paid is allowed as deduction u/s 35(1)(ii).

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(iv) Amount paid to H Ltd., an Indian company approved by the prescribed 2,50,000
authority - 100% of the amount paid is allowed as deduction u/s 35(1)(iia)
(v) Expenditure towards purchase of land – not allowed as deduction Nil
(vi) Revenue expenditure towards salary of research staff incurred in the F.Y. 2,00,000
2023-24 (before commencement of business) – allowed as deduction u/s
35(1)(i) in the P.Y. 2024-25 as it was expended within the 3 years
immediately preceding the commencement of business (assuming business is
commenced during the P.Y. 2024-25).
Total deduction allowable 10,00,000

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CHAPTER – 6: CAPITAL GAINS

STUDY MATERIAL
ILLUSTRATION 1
How will you calculate the period of holding in case of the following assets?
(1) Shares held in a company in liquidation
(2) Bonus shares
(3) Flat in a co-operative society
SOLUTION
(1) Shares held in a company in liquidation - The period after the date on which the company
goes into liquidation shall be excluded while calculating the period of holding. Therefore, the
period of holding shall commence from the date of acquisition and end with the date on which
the company goes into liquidation.
(2) Bonus shares - The period of holding shall be reckoned from the date of allotment of bonus
shares and will end with the date of transfer.
(3) Flat in a co-operative society - The period of holding shall be reckoned from the date of
allotment of shares in the society and will end with the date of transfer.
Note – Any transaction whether by way of becoming a member of, or acquiring shares in, a co-
operative society or by way of any agreement or any arrangement or in any other manner
whatsoever which has the effect of transferring, or enabling enjoyment of, any immovable
property is a transfer as per section 2(47)(vi). Hence, it is possible to take a view that any date
from which such right is obtained may be taken as the date of acquisition.

ILLUSTRATION 2
A is the owner of a car. On 1-4-2024, he starts a business of purchase and sale of motor cars. He
treats the above car as part of the stock-in-trade of his new business. He sells the same on 31-
3-2025 and gets a profit of ₹ 1 lakh. Discuss the tax implication in his hands under the head
“Capital gains”.
SOLUTION
Since car is a personal asset, conversion or treatment of the same as the stock-intrade of his
business will not be trapped by the provisions of section 45(2). Hence, A is not liable to capital
gains tax.
ILLUSTRATION 3
X converts his capital asset (acquired on June 10, 2006 for ₹ 60,000) into stock-in-trade on
March 10, 2024. The fair market value on the date of the above conversion was ₹ 5,50,000. He
subsequently sells the stock-in-trade so converted for ₹ 6,00,000 on June 10, 2024. Discuss the
year of chargeability of capital gain and business income.
SOLUTION
Since the capital asset is converted into stock-in-trade during the previous year 2023-24 relevant
to the A.Y. 2024-25, it will be a transfer u/s 2(47) during the P.Y. 2023-24. However, the profits
or gains arising from the above conversion will be chargeable to tax during the A.Y. 2025-26,
since the stock-in-trade has been sold only on June 10, 2024. For this purpose, the fair market
value on the date of such conversion (i.e. 10th March, 2024) will be the full value of consideration
for computation of capital gains. The business income of ₹ 50,000 (i.e., ₹ 6,00,000 (-) ₹ 5,50,000,
being the fair market value on the date of conversion) would also be taxable in the A.Y.2025-26.
Thus, both capital gains and business income would be chargeable to tax in the A.Y.2025-26.
ILLUSTRATION 4
M held 2000 shares in a company ABC Ltd., an Indian company. This company amalgamated with
another Indian company XYZ Ltd. during the previous year ending 31-3-2025. Under the scheme

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of amalgamation, M was allotted 1000 shares in the new company. The market value of shares
allotted is higher by ₹ 50,000 than the value of holding in ABC Ltd. The Assessing Officer
proposes to treat the transaction as an exchange and to tax ₹ 50,000 as capital gain. Is he
justified?
SOLUTION
In the above example, the transaction is squarely covered by the exemption explained above and
the proposal of the Assessing Officer to treat the transaction as a transfer is not justified.
ILLUSTRATION 5
In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ₹ 25,000. In the P.Y. 2024-25, he gifted it to his son at
the time of marriage. Fair market value (FMV) of the gold on the day the gift was made was
₹ 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1945 for ₹ 20,000. It is given
to one of the family members in the P.Y. 2024-25 at the time of partition of the family.
FMV on the date of partition was ₹ 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ₹ 40,000 in 1995 which are converted into
500 shares worth ₹ 85,000 in November 2024 by the company.
SOLUTION
We know that capital gains arises only when we transfer a capital asset. The liability of capital
gains tax in the situations given above is discussed as follows:
(i) As per the provisions of section 47(iii), gift of a capital asset is not regarded as transfer
for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the
given situation.
(ii) As per the provisions of section 47(i), distribution of a capital asset (being in kind) on the
total or partial partition of Hindu undivided family is not regarded as transfer for the
purpose of capital gains. Therefore, capital gains tax liability does not arise in the given
situation.
(iii) As per the provisions of section 47(x), conversion of bonds or debentures, debenture stock
or deposit certificates in any form of a company into shares or debentures of that company
is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax
liability does not arise in the given situation.
ILLUSTRATION 6
Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek
did not repay the loan on maturity and hence gave possession of the house to the bank, to
discharge his loan. How will the treatment of long-term capital gain be on such reverse mortgage
transaction?
SOLUTION
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government shall not be considered as a transfer
for the purpose of capital gain. Accordingly, the mortgaging of residential house with bank by Mr.
Abhishek will not be regarded as a transfer. Therefore, no capital gain will be charged on such
transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan, either
in lump sum or in installment, in a transaction of reverse mortgage would be exempt from
income-tax. Therefore, the monthly installment amounts received by Mr. Abhishek would not be
taxable.

ILLUSTRATION 7
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 CA VARDHAMAN DAGA

Examine, with reasons, whether the following statements are True or False.
(i) Alienation of a residential house in a transaction of reverse mortgage under a scheme made
and notified by the Central Government is treated as "transfer" for the purpose of capital
gains.
(ii) Zero coupon bonds of eligible corporation, held for 14 months, will be longterm capital
assets.
(iii) Zero Coupon Bond means a bond on which no payment and benefits are received or receivable
before maturity or redemption.
SOLUTION
(i) False
(ii) True
(iii) True
ILLUSTRATION 8
Mr. A converts his capital asset acquired for an amount of ₹ 50,000 in June, 2004 into stock in
trade in the month of November, 2023. The fair market value of the asset on the date of
conversion is ₹ 4,50,000. The stock in trade was sold for an amount of ₹ 6,50,000 in the month
of September, 2024. What will be the tax treatment?
Financial year Cost Inflation Index
2004-05 109
2023-24 348
2024-25 363
SOLUTION
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the
given case. It arises in the year of conversion (i.e. P.Y. 2023-24) but will be taxable only in the
year in which the stock-in-trade is sold (i.e. P.Y. 2024-25). Profits from business will also be
taxable in the year of sale of the stock-in trade (P.Y. 2024-25).
The LTCG and business income for the A.Y.2025-26 are calculated as under:
Particulars ₹
Profits and Gains from Business or Profession 2,00,000
Long term capital gains 2,96,018
Note: For the purpose of indexation, the cost inflation index of the year in which the asset is
converted into stock-in-trade should be considered.
ILLUSTRATION 9
Singhania & Co., a sole proprietorship owns six machines, put in use for business in March, 2023.
The depreciation on these machines is charged@15%. The opening balance of these machines
after providing depreciation for P.Y. 2023-24 was ₹ 8,50,000. Three of the old machines were
sold on 10th June, 2024 for ₹ 11,00,000. A second hand plant was bought for ₹ 8,50,000 on 30th
November, 2024. You are required to:
(i) determine the claim of depreciation for Assessment Year 2025-26.
(ii) compute the capital gains liable to tax for Assessment Year 2025-26.
(i) If Singhania & Co. had sold the three machines in June, 2024 for ₹ 21,00,000, will there be
any difference in your above workings? Explain.
SOLUTION
(i)Computation of depreciation for A.Y.2024-25
Particulars ₹
W.D.V of the block as on 31.03.2024 6,00,000

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Since the value of the block as on 31.3.2025 comprises of a new asset which has been put to use
for less than 180 days, depreciation is restricted to 50% of the prescribed percentage of 15%
i.e. depreciation is restricted to 7½%. Therefore, the depreciation allowable for the year is ₹
45,000, being 7½% of ₹ 6,00,000.
(ii) The provisions under section 50 for computation of capital gains in the case of depreciable
assets can be invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than the value of
the block.
(b) When all the assets are transferred for a consideration more than the value of the block.
(c) When all the assets are transferred for a consideration less than the value of the block.
Since in the first two cases, the sale consideration is more than the written down value of the
block, the computation would result in short term capital gains.
In the third case, since the written down value of the block exceeds the sale consideration, the
resultant figure would be a short-term capital loss of the block.
In the given case, capital gains will not arise as the block of asset continues to exist, and some of
the assets are sold for a price which is lesser than the written down value of the block.
(iii) If the three machines are sold in June, 2024 for₹ 21,00,000, then short term capital gains
would arise, since the sale consideration is more than the aggregate of the written down value of
the block at the beginning of the year and the additions made during the year.
Particulars ₹ ₹
Short term capital gains 4,00,000

ILLUSTRATION 10
Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2024 his Unit 1
by way of slump sale for a total consideration of ₹ 25 lacs. The fair market value of capital assets
of unit 1 on 1.4.2024 is ₹ 30 lacs. Unit 1 was started in the year 2005-06. The expenses incurred
for this transfer were ₹ 28,000. His Balance Sheet as on 31.3.2024 is as under:
Liabilities Total (₹) Assets Unit 1(₹) Unit 2 (₹) Total (₹)
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reserve 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
(for building of unit 1)
Bank loan (70% for 2,00,000 Debtors 1,00,000 40,000 1,40,000
unit 1)
Trade creditors (25% 1,50,000 Other 1,50,000 60,000 2,10,000
for unit 1) assets
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000
Other information:
(i) Revaluation reserve is created by revising upward the value of the building of Unit 1. (ii) No
individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit 1 include patents acquired on 1.7.2022 for ₹ 50,000 on which no
depreciation has been charged.
Compute the capital gain for the assessment year 2025-26.
SOLUTION
Computation of capital gains on slump sale of Unit 1
Particulars ₹
Long-term capital gain 17,21,375
Notes:
1. Computation of net worth of Unit 1 of Akash Enterprises
Particulars ₹ ₹
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 CA VARDHAMAN DAGA

Net worth 12,50,625

2. Written down value of patents as on 1.4.2023
Value of patents: ₹
Balance as on 1.4.2024 28,125
For the purposes of computation of net worth, the written down value determined as per section
43(6) has to be considered in the case of depreciable assets. The problem has been solved
assuming that the Balance Sheet values of ₹ 3 lakh and ₹ 9 lakh (₹ 12 lakh – ₹ 3 lakh) represent
the written down value of machinery and building, respectively, of Unit 1.
3.Since the Unit is held for more than 36 months, capital gain arising would be long term capital
gain. However, indexation benefit is not available in case of slump sale.
ILLUSTRATION 11
Mr. Cee purchased a residential house on July 20, 2022 for ₹ 10,00,000 and made some additions
to the house incurring ₹ 2,00,000 in August 2022. He sold the house property in April 2024 for
₹ 20,00,000. Out of the sale proceeds, he spent ₹ 5,00,000 to purchase another house property
in September 2024.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2025-26?
SOLUTION
The house is sold before 24 months from the date of purchase. Hence, the house is a short-term
capital asset and no benefit of indexation would be available.
Particulars ₹
Short-term capital gains 8,00,000
Note - The exemption of capital gains under section 54 is available only in case of long-term capital
asset. As the house is short-term capital asset, Mr. Cee cannot claim exemption under section 54.
Thus, the amount of taxable short-term capital gains is ₹ 8,00,000.
ILLUSTRATION 12
Long term capital gain of ₹ 75 lakh arising from transfer of building on 1.5.2024 will be exempt
from tax if such capital gain is invested in the bonds redeemable after five years, issued by NHAI
under section 54EC. Examine with reasons whether the given statement is true or false having
regard to the provisions of the Income-tax Act, 1961.
SOLUTION
False
ILLUSTRATION 13
Calculate the income-tax liability for the assessment year 2025-26 in the following cases:
Mr. A (age Mrs. B (age 62) Mr. C (age Mr. D
45) 81) (age 82)
Status Non- Non-resident Resident Non-
Resident resident
Total income other than 2,40,000 3,10,000 5,90,000 4,80,000
long term capital gain
Long-term capital gain 85,000 from 10,000 60,000 Nil
[assume transfer took place sale of vacant from sale of from sale of
before 23.07.2024] site listed equity agricultural
shares (STT paid land in
on sale and rural area
purchase of
shares)

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 CA VARDHAMAN DAGA

(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax regime
and pay tax under the optional tax regime as per the normal provisions of the Act.
SOLUTION
(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC.
Computation of income-tax liability for the A.Y.2025-26
Particulars Mr. A (age Mrs. B (age Mr. C Mr. D
45) 62) (age 81) (age 82)
Residential Status Non-Resident Non-resident Resident Non-resident

Total tax liability 17, 680 ₹ 520 Nil ₹ 9,360

Note: Since Mr. A and Mr. C are residents whose total income does not exceed ₹ 7 lakhs, they
are eligible for rebate of ₹ 25,000 or the actual tax payable, whichever is lower, under section
87A.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax regime
and pay tax under the optional tax regime as per the normal provisions of the Act
Computation of income-tax liability for the A.Y.2025-26
Particulars Mr. A (age Mrs. B (age Mr. C Mr. D
45) 62) (age 81) (age 82)
Residential Status Non-Resident Non-resident Resident Non-resident

Total tax liability 17,680 ₹ 3,120 18,720 ₹ 11,960

Notes:
1. Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic exemption limit of
₹ 3,00,000 and ₹ 5,00,000 for persons over the age of 60 years and 80 years, respectively. Also,
they are not eligible for rebate under section 87A even though their total income does not exceed
₹ 5 lakh.
2. Since Mr. A is a resident whose total income does not exceed ₹ 5 lakh, he is eligible for rebate
of ₹ 12,500 or the actual tax payable, whichever is lower, under section 87A.

TEST YOUR KNOWLEDGE

Que-14.
Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01-04-2007 at rate of ₹
1,000 per share in public issue of the company by paying securities transaction tax.
Company allotted bonus shares in the ratio of 1:1 on 01.12.2023. He has also received dividend of
₹ 10 per share on 01.05.2024.
He has sold all the shares on 01.10.2024 at the rate of ₹ 4,000 per share through a recognized
stock exchange and paid brokerage of 1% and securities transaction tax of 0.02%.
Compute his total income and tax liability for A.Y. 2025-26 if Mr. Mithun pays tax under default
tax regime, assuming that he is having other income of 8,00,000. Fair market value of shares of
M/s Goodmoney Co. Ltd. on 31.1.2018 is ₹ 2,000.
Ans- Computation of total income & tax liability of Mr. Mithun for A.Y. 2025-26
Particulars ₹
Long term capital gains on sale of original shares
Gross sale consideration (100 x ₹ 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition (100 x ₹ 2,000) (Refer Note 1) 2,00,000
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Long term capital gains 1,96,000

Short term capital gains on sale of bonus shares
Gross sale consideration (100 x ₹ 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains 3,96,000
Income from other sources
Dividend received from M/s Good money Co. Ltd. is taxable in the hands of 2,000
shareholders [200 shares x 10 per share]
Other income 8,00,000
Total Income 13,94,000
Tax Liability
Tax on dividend (since it is lower than the basic exemption limit) Nil
Tax on STCG u/s 11A
20% of ₹ 3,96,000 79,200
Tax on LTCG u/s 112A
12.5% of (₹ 1,96,000 - ₹ 1,25,000) since, it is transferred on or after 8,875
23.07.2024
Tax on total income of 8,20,000 1,18,275
Add: Health and education cess @4% 4,731
Tax liability 1,23,006
Tax liability (rounded off) 1,23,010
Notes:
(1) Cost of acquisition of such equity shares acquired before 1.2.2018 is higher of
- Cost of acquisition i.e., ₹ 1,000 per share and
- lower of
Fair market value of such asset i.e., ₹ 2,000 per share and
Full value of consideration i.e., ₹ 4,000 per share.
Therefore, the cost of acquisition of original share is ₹ 2,000 per share.
(2) Securities transaction tax is not allowable as deduction.
Que- 15.
Aarav converts his plot of land purchased in July, 2004 for ₹ 80,000 into stock-in-trade on 31st
March, 2024. The fair market value as on 31.3.2024 was ₹ 3,00,000. The stock-in-trade was sold
for ₹ 3,25,000 in the month of January, 2025.
Find out the taxable income, if any, and if so under which head of income and for which
Assessment Year?
Cost Inflation Index: F.Y. 2004-05:113; F.Y. 2023-24: 348; F.Y. 2024-25: 363.
Ans- Computation of taxable income of Mr. Aarav for A.Y.2024-25
Particulars ₹
Profits and gains from business or profession 25,000
Long term capital gains 53,628
Taxable Income 78,628
Que-16.
Mrs. Harshita purchased a land at a cost of ₹ 35 lakhs in the F.Y. 2004-05 and held the same as
her capital asset till 20th March, 2024.
She started her real estate business on 21st March, 2024 and converted the said land into stock-
in-trade of her business on the said date, when the fair market value of the land was ₹ 210 lakhs.
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She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is
₹ 10 lakhs. Construction was completed in February, 2025. She sold 10 flats at ₹ 30 lakhs per flat
in March, 2025. The remaining 5 flats were held in stock as on 31st March, 2025.
She invested ₹ 50 lakhs in bonds issued by National Highways Authority of India on 31st March,
2025 and another ₹ 50 lakhs in bonds of Rural Electrification Corporation Ltd. in April, 2025.
Compute the amount of chargeable capital gain and business income in the Hands of Mrs. Harshita
arising from the above transactions for A.Y. 2025-26 indicating clearly the reasons for treatment
for each item.
[Cost Inflation Index: F.Y. 2004-05: 113; F.Y. 2023-24: 348; F.Y. 2024-25: 363].
Ans- Computation of capital gains and business income of Harshita for A.Y. 2025-26
Particulars ₹
Capital gains chargeable to tax for A.Y.2025-26 18,14,159
Business income chargeable to tax for A.Y.2025-26 60,00,000
Que-17.
Mr. A is an individual carrying on business. His stock and machinery were damaged and destroyed
in a fire accident which incurred in December 2024.
The value of stock lost (total damaged) was ₹ 6,50,000. Certain portion of the machinery could
be salvaged. The opening balance of the block as on 1.4.2024 (i.e., WDV as on 31.3.2024 after
providing depreciation for P.Y. 2023-24) was ₹ 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his
gold chain and a diamond ring, which he had purchased in April, 2005 for ₹ 1,20,000. The market
value of these two items as on the date of fire accident was ₹ 1,80,000. Mr. A received the
following amounts from the insurance company:
(i) Towards loss of stock ₹ 4,80,000
(ii) Towards damage of machinery ₹ 6,00,000
(iii) Towards gold chain and diamond ring ₹ 1,80,000
You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.
Ans- (i) Compensation towards loss of stock: Hence, ₹ 4,80,000 received as insurance claim for
loss of stock has to be assessed under the head “Profit and gains of business or profession”.
(ii) Compensation towards damage to machinery: Therefore, ₹ 4,80,000 being the excess of
written down value (i.e. ₹ 10,80,000) over the insurance compensation (i.e. ₹ 6,00,000) will be
assessable as a short-term capital loss.
(iii) Compensation towards loss of gold chain and diamond ring: since the gold chain and diamond
ring has been destroyed during fire fighting operation (the immediate cause thereof being the
fire). The capital gain has to be computed by reducing the cost of acquisition of jewellery from
the insurance compensation of 1,80,000

Que-18.
Mr. Sarthak entered into an agreement with Mr. Jaikumar to sell his residential house located at
Kanpur on 16.08.2024 for ₹ 1,50,00,000.
The sale proceeds were to be paid in the following manner:
(i) 20% through account payee bank draft on the date of agreement.
(ii) 60% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title to the property.
Mr. Jaikumar was handed over the possession of the property on 15.12.2024 and the registration
process was completed on 14.01.2025. He paid the sale proceeds as per the sale agreement.
The value determined by the Stamp Duty Authority

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 CA VARDHAMAN DAGA

(a) on 16.08.2024 was ₹ 1,70,00,000;

(b) on 15.12.2024 was ₹ 1,71,00,000; and
(c) on 14.01.2025 was ₹ 1,71,50,000.
Mr. Sarthak had acquired the residential house at Kanpur on 01.04.2001 for ₹ 30,00,000. After
recovering the sale proceeds from Jaikumar, he purchased two residential house properties, one
in Kanpur for ₹ 20,00,000 on 24.3.2025 and another in Delhi for ₹ 35,00,000 on 28.5.2025.
Compute the income chargeable under the head "Capital Gains" of Mr. Sarthak for the Assessment
Year 2025-26.
Cost Inflation Index for Financial Year(s): 2001-02 - 100; 2024-25 - 363
Ans- Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y.
2025-26
Particulars ₹
Long term capital gains chargeable to tax 85,00,000
Que-19.
Mrs. Yuvika bought a vacant land for ₹ 80 lakhs in May 2005. Registration and other expenses
were 10% of the cost of land. She constructed a residential building on the said land for ₹ 100
lakhs during the financial year 2007-08.
She entered into an agreement for sale of the above said residential house with Mr. Johar (not a
relative) in April 2015. The sale consideration was fixed at ₹ 700 lakhs and on 23-4-2015, Mrs.
Yuvika received ₹ 20 lakhs as advance in cash by executing an agreement. However, due to failure
on part of Mr. Johar, the said negotiation could not materialise and hence, the said amount of
advance was forfeited by Mrs. Yuvika.
Mrs. Yuvika, again entered into an agreement on 01.08.2024 for sale of this house at ₹ 810 lakhs.
She received ₹ 80 lakhs as advance by RTGS. The stamp duty value on the date of agreement was
₹ 890 lakhs. The sale deed was executed and registered on 14-7-2024 for the agreed
consideration. However, the State stamp valuation authority had revised the values, hence, the
value of property for stamp duty purposes was ₹ 900 lakhs. Mrs. Yuvika paid 1% as brokerage on
sale consideration received.
Subsequent to sale, Mrs. Yuvika made following acquisition/investments:
(i) Acquired two residential houses at Delhi and Chandigarh for ₹ 130 lakhs and ₹ 50 lakhs,
respectively, on 31.1.2025 and 15.5.2025
(ii) Acquired a residential house at UK for ₹ 180 lakhs on 23.3.2025.
(iii) Subscribed to NHAI capital gains bond (approved under section 54EC) for ₹ 50 lakhs on
30-11-2024 and for ₹ 40 lakhs on 9-1-2025.
Compute the income chargeable under the head 'Capital Gains' of Mrs. Yuvika for A.Y.2025-26.
The choice of exemption must be in the manner most beneficial to the assessee.
Cost Inflation Index: F.Y. 2005-06 – 117; F.Y. 2007-08 – 129; F.Y. 2024-25 - 363.
Ans- Computation of income chargeable under the head “Capital Gains” of Mrs. Yuvika for
A.Y.2025-26
Particulars ₹ (in ₹ (in
lakhs) lakhs)
Long term capital gains chargeable to tax 67.47
Que-20.
Mr. Shiva purchased a house property on February 15, 1979 for ₹ 3,24,000. In addition, he has
also paid stamp duty value @10% on the stamp duty value of ₹ 3,50,000.
In April, 2008, Mr. Shiva entered into an agreement with Mr. Mohan for sale of such property
for ₹ 14,35,000 and received an amount of ₹ 1,11,000 as advance. However, the sale consideration
did not materialize and Mr. Shiva forfeited the advance. In May 2015, he again entered into an

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 CA VARDHAMAN DAGA

agreement for sale of said house for 20,25,000 to Ms. Deepshikha and received ₹1,51,000 as
advance. However, as Ms. Deepshikha did not pay the balance amount, Mr. Shiva forfeited the
advance. In August, 2015, Mr. Shiva constructed the first floor by incurring a cost of ₹ 3,90,000.
On November 15, 2024, Mr. Shiva entered into an agreement with Mr. Manish for sale of such
house for ₹ 30,50,000 and received an amount of ₹ 1,50,000 as advance through an account payee
cheque. Mr. Manish paid the balance entire sum and Mr. Shiva transferred the house to Mr. Manish
on February 20, 2025. Mr. Shiva has paid the brokerage @1% of sale consideration to the broker.
On April 1, 2001, fair market value of the house property was ₹ 11,85,000 and Stamp duty value
was ₹ 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on 15th
November, 2024 was ₹ 39,00,000 and on 20th February, 2025 was ₹ 41,00,000.
Compute the capital gains in the hands of Mr. Shiva for A.Y.2025-26.
CII for F.Y. 2001-02: 100; F.Y. 2008-09: 137; F.Y. 2015-16: 254; F.Y. 2024-25: 363
Ans-Computation of Capital gains in the hands of Mr. Shiva for A.Y. 2025-26
Particulars Amount Amount
(₹) (₹)
Long term capital gain 25,20,500
Notes: (1) Computation of indexed cost of acquisition
Particulars Amount Amount
(₹) (₹)
On LTCG of 25,20,500 * 12.5% 3,15,063
Add: HEC @4% 12,603
3,27,666
On LTCG with indexation benefit
Net sale consideration 38,69,500
Less: ICOA (9,59,000*363/100) 34,81,170
Less: ICOI (3,90,000*363/254) 5,57,362
LTCL (1,69,032)

PAST EXAM QUESTIONS

Illustration 21
Computation of capital gains: Mr. Malik owns a factory building on which he had been claiming
depreciation for the past few years. It is the only asset in the block. The factory building and
land appurtenant thereto were sold during the year. The following details are available (amt ₹)
Particulars (₹)
Building completed in September, 2004 for 10,00,000
Land appurtenant thereto purchased in April, 2003 11,00,000
for Advance received from a prospective buyer for land in May, 2004, 50,000
forfeited in favour of assessee, as negotiations failed
WDV of the building block as on 1-4-2024 8,74,800
Sale value of factory building in November, 2024 8,00,000
Sale value of appurtenant land 40,00,000
The assessee is ready to invest in long-term specified assets under section 54EC within specified
time.
Compute the amount of taxable capital gain for the assessment year 2025-26 and the amount to
be invested under section 54EC for availing the maximum exemption. (10 Marks, Nov. 2006)
Cost inflation index for various financial year are as under: 2003-04: 109, 2004-05:113 and 2024-
25: 363

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CONTACT NO. FOR CLASSES - 9039600091 pg. 133
 CA VARDHAMAN DAGA

Solution: Computation of Capital Gain (amount in ₹)

Particulars (₹)
Sale consideration of the block 8,00,000
Less: Cost of acquisition i.e. WDV of block 8,74,800
Short-term capital loss -74,800
Full value of consideration of land 40,00,000
Less: Indexed cost of land (10,50,000 x 363 ÷ 109) [WN] 34,96,789
Long-term capital gains 5,03,211
Taxable long-term capital gains (after set-off of short-term capital loss) 4,28,411
Working Note: ₹ 50,000 advance forfeited by Mr. Malik shall be deducted from cost of
acquisition Exemption u/s 54EC: The aforesaid amount of taxable net long-term capital gains
4,28,411 should be invested within 6 months u/s 54EC for availing the maximum exemption.

Illustration 22
Computation of total income: Mr. Y submits the following information pertaining to the year
ended 31st March, 2025:
(1) On 30-11-2024, when he attained the age of 60, his friends in India gave a flat at Surat as
a gift, each contributing a sum of 20,000 in cash. The cost of flat purchased using various
gifts was ₹ 3.4 lakhs.
(2) His close friend abroad sent him a cash gift of 75,000 through his relative, for the above
occasion.
(3) Mr. Y sold the above flat on 30-1-2025 for 3.6 lakhs. The Registrar's valuation for stamp
duty purposes was 4 lakhs. Neither Mr. Y nor the buyer, questioned the value fixed by the
Registrar.
(4) He had purchased some equity shares in X Pvt. Ltd. on 5-2-2024 for 3.5 lakhs. These shares
were sold on 15-3-2025 for 2.8 lakhs.
You are requested to calculate the total income of Mr. Y for the assessment year 2025-26. (6
Marks, May 2005)
Solution: Computation of total income of Mr. Y (amounts in ₹)
Particulars Flat* Equity
shares
Full value of consideration [Since stamp duty value exceeds 110% of
actual consideration] 4,00,000 2,80,000
Less: Cost of acquisition 3,40,000 3,50,000
Short-term capital gains/loss 60,000 -70,000
Short term capital Loss to be carried forward -10,000
Income from other sources (cash gift of 75,000+ Flat of 3.4 lakh) 4,15,000
Total Income 4,15,000
Working Notes:
(1) Gift of flat in excess of 50,000 is taxable under section 56(2)(x). The cost of such gifted
asset will be ₹ 3,40,000, being the fair market value taken for the purpose of taxability
under section 56(2)(x).
(2) Cash gift exceeding 50,000 from an unrelated person is taxable as Income from other
sources.
(3) Equity shares of unlisted company held for more than 24 months from the date of purchase
are long-term capital asset. Hence, the same shall be regarded as short term capital asset.
Illustration 23

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CONTACT NO. FOR CLASSES - 9039600091 pg. 134
 CA VARDHAMAN DAGA

Computation of Capital gains and Tax liability: Mukesh (aged 55 years) owned a residential house
at Nagpur. It was acquired by Mukesh on 10-10-2004 for 14,50,000. It was sold for 55,00,000 on
04-11-2024. The State stamp valuation authority fixed the value of the property at 85,00,000.
The assessee paid 2% of the sale consideration as brokerage for the sale of said property.
Mukesh acquired a residential house at Chennai on 10-12-2024 for 10,00,000 and deposited
10,00,000 on 10-04-2025 in the capital gain bond of Rural Electrification Corporation Ltd (REC).
He deposited 5,00,000 on 06-07-2025 in the Capital Gain Deposit Scheme in a nationalised bank
for construction of additional floor on the residential house property acquired at Chennai.
Compute the capital gain chargeable to tax in the hands of Mr. Mukesh he has shifted out of
default tax regime.
Calculate the income-tax payable on the assumption that he has no other income chargeable to
tax. (7 Marks, PCC Nov. 2010)
Cost inflation index for various financial year are as under: 2004-05: 113 and 2024-25: 363
Solution: Computation of capital gains and tax thereon in the hands of Mukesh (amounts in ₹)-
Option (1) – in case he avail benefit of indexation
Particulars (₹)
Full value of consideration [WN-1] 85,00,000
Less: Brokerage @ 2% of actual sale consideration of ₹ 55,00,000 1,10,000
Net sale consideration 83,90,000
Less: Indexed cost of acquisition (14,50,000 x 363÷113) 46,57,965
Capital Gains 37,32,035
Less: Exemption under section 54 [WN-2] 15,00,000
Exemption under section 54EC [WN-3] 10,00,000
Income by way of Long-term capital gain 12,32,035
Less: Basic Exemption Limit of 2,50,000 [WN-4] 2,50,000
Income Tax @ 20% 1,96,408
Add: Health & Education cess @ 4% 7,856
Total Tax (rounded off) 2,04,260
Option (2) – in case he do not avail benefit of indexation
Particulars (₹)
Full value of consideration [WN-1] 85,00,000
Less: Brokerage @ 2% of actual sale consideration of ₹ 55,00,000 1,10,000
Net sale consideration 83,90,000
Less: cost of acquisition 14,50,000
Capital Gains 69,40,000
Less: Exemption under section 54 [WN-2] 15,00,000
Exemption under section 54EC [WN-3] 10,00,000
Income by way of Long-term capital gain 44,40,000
Less: Basic Exemption Limit of 2,50,000 [WN-4] 2,50,000
Income Tax @ 12.5% 5,23,750
Add: Health & Education cess @ 4% 20,950
Total Tax (rounded off) 5,44,700
Working Notes:
(1) As per the provisions of Section 50C, in this case the value assessed by the stamp valuation
authority exceed 110% of the consideration received therefore, the stamp duty value shall
be deemed as the full value of consideration.
(2) Exemption under section 54 = Cost of residential house acquired at Chennai on 10-12-2023 +
amount deposited in Capital Gains Accounts Scheme on 6-7-2024 (before the due date of
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CONTACT NO. FOR CLASSES - 9039600091 pg. 135
 CA VARDHAMAN DAGA

filing of return of income) for construction of additional floor on residential house property
acquired at Chennai = 10 lakhs + 5 lakhs = 15 lakhs.
(3) Exemption under section 54EC = amount deposited in RECL bonds on 10-04-2024 (within 6
months from the date of transfer)=10 lakhs.
(4) Since Mukesh is a resident individual having no other income, hence, he will be entitled to
basic exemption limit in respect of the income from LTCG - Section 112.
Illustration 24
Computation of Tax liability: The total income of Mrs. Z is ₹3,50,000, which includes the
following:
Particulars ₹
Long-term capital gains 30,000
Winnings from lotteries 20,000
Short-term capital gains covered by Section 111A 10,000
60,000
Agricultural income earned by her was 50,000. Compute the tax payable by Mrs. Z. if she shift
out of the default tax regime and pay tax under the optional tax regime as per the normal
provisions of the act. (6 Marks, May 2006)
Solution: Computation of tax payable by Mrs. Z (amounts in ₹)-
Particulars ₹
Tax on incomes taxable at special rates:
Tax on STCG u/s 111A @20% [10,000 × 20%] 2,000
Tax on LTCG u/s 112 @ 12.5% [30,000 × 12.5%] 3,750
Tax on Lottery income @30% [20,000 × 30% ] 6,000
Tax on balance income: Balance income including agricultural income (50,000 + 4,500
2,90,000)
Less: Tax on agricultural income + basic exemption (2,50,000 + 50,000) -2,500
Tax payable 13,750
Less: Tax rebate u/s 87A [100% of tax or 12,500 which ever is less] 12,500
Balance tax 1,250
Add: Health & Education cess @ 4% 50
Tax payable by Mrs. Z (rounded off) 1300

Illustration 25
Computation of Capital gains and tax liability: Mr. C inherited from his father 8 plots of land in
1980. His father had purchased the plots in 1960 for 5 lakhs. The fair market value of the plots
as on 1-4-2001 was 8 lakhs. (1 lakh for each plot)
On 1st June 2001, C started a business of dealer in plots and converted the 8 plots as stock-in-
trade of his business. He recorded the plots in his books at 45 lakhs being the fair market value
on that date. In June 2005, C sold the 8 plots for 50 lakhs.
In the same year, he acquired a residential house property for 45 lakhs. He invested an amount
of 5 lakhs in construction of one more floor in his house in June 2006. The house was sold by him
in June 2024 for 90,00,000.
The valuation adopted by the registration authorities for charge of stamp duty was 1,60,50,000.
As per the assessee's request, the Assessing Officer made a reference to a Valuation Officer.
The value determined by the Valuation Officer was 1,70,00,000.
Brokerage of 1% of sale consideration was paid by C. Give the tax computation for the relevant
assessment years with reasoning if he has shifted out of the default tax regime. (Modified 8
Marks: Nov. 2012 & Similar Nov. 2016)

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CONTACT NO. FOR CLASSES - 9039600091 pg. 136
 CA VARDHAMAN DAGA

Cost inflation index for various financial year are as under: 2005-06: 117, 2006-07: 122 and 2024-
25: 363
Solution: Computation of total income and tax liability of Mr. C (amount in ₹):
Particulars ₹ ₹
Capital Gains on sale of residential house property
Full value of consideration [WN-1] 1,60,50,000
Less: Brokerage @ 1% of sale consideration (1% of 90,00,000 90,000
Net consideration 1,59,60,000
Less: Indexed cost of acquisition ( 45,00,000 x 363/117) 1,39,61,538
Less: Indexed cost of improvement (5,00,000 × 363/122) 14,87,705 1,54,49,243
Long-term capital gains (Total Income) (rounded off) 5,10,760
Tax on total income [WN-2]
Long-term capital gain taxable @ 20% (5,10,760 - 2,50,000) 52,152
Add: Health & Education cess @ 4% 2,086
Total tax liability 54,240
Working Notes:
(1) As per the provisions of Section 50C, in this case the value assessed by the stamp valuation
authority exceed 110% of the consideration received therefore, the stamp duty value shall
be deemed as the full value of consideration.
(2) As per Section 112, the unexhausted basic exemption limit can be exhausted against the long-
term capital gains. Since Mr. C does not have any other income in the current year, the whole
of the basic exemption limit of 2,50,000 is exhausted against the long-term capital gains of
11,49,160 and the balance long-term capital gains shall be taxable @ 20%. It is assumed that
Mr. C is a resident individual below the age of 60 years
Illustration 26
Computation of Capital gain: Ms. Neelima had purchased 500 equity shares in A Ltd. at a cost of
₹30 per share (brokerage 1%) in February 1995. She got 50 bonus shares in September 1999. She
again got 550 bonus shares by virtue of her holding on March, 2005. Fair market value of the
shares of A Ltd. on April, 2001 is 45. In January 2025, she transferred all her shares @ 280 per
share (brokerage 2% ). The FMV of shares as on 31-01-2018 is 150 per share. Compute the capital
gains taxable in the hands of Ms. Neelima assuming
(i) A Ltd. is an unlisted company and securities transaction tax was not applicable at the time
of sale.
(ii) A Ltd. is a listed company and the shares are sold in a recognised stock exchange and
securities transaction tax was paid at the time of purchase and sale.
Solution: (i) Computation of capital gains [unlisted shares] (amount in ₹)
Particulars Original 1st Bonus 2nd Bonus
shares [A] shares [B] shares [C]
No. of shares 500 50 50
Full value of consideration (@280 per share) 1,40,000 1,40,000 1,54,000
Less: Brokerage paid 2,800 2,80 3080
Net sale consideration 1,37,200 13,720 1,50,920
Less: cost of acquisition [ no benefit of indexation 22,500 2,250 Nil
will be available as unlisted are transferred in jan
2025]
Long term capital gain 1,14,700 11,470 1,50,920
Long term capital gains [A+B+C] 2,77,090
Notes: Cost of acquisition of bonus shares shall be NIL.
(ii) Computation of capital gains [Listed shares] (amount in ₹)
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CONTACT NO. FOR CLASSES - 9039600091 pg. 137
 CA VARDHAMAN DAGA

Particulars Original 1st Bonus 2nd Bonus

shares [A] shares [B] shares [C]
No. of shares 500 50 550
Full value of consideration (@280 per share) 1,40,000 14,000 1,54,000
Less: Brokerage paid 2,800 280 3,080
Net sale consideration 1,37,200 13,720 1,50,920
Less: Cost of acquisition [No benefit of indexation 75,000 7500 82,500
will be available as per Section 112A]
Long term capital gain 62,200 6,220 68,420
Long term capital gains [A+B+C] 1,36,840

Illustration 27
Computation of Capital Gains and Tax Liability: Mr. Roy, aged 55 years owned a Residential
House in Ghaziabad. It was acquired by Mr. Roy on 10-10-1986 for 6,00,000. The fair market
value as on 01-04-2001 was 18,00,000. He sold it for 53,00,000 on 4-11-2024. The stamp valuation
authority of the state fixed value of the property at 94,00,000. The Assessee paid 2% of the
sale consideration as brokerage on the sale of the said property.
Mr. Roy Acquired a Residential House property at Kolkata on 10-12-2024 for 10,00,000 and
deposited ₹ 7,00,000 on 10-04-2025 and 5,00,000 on 15-06-2025 in the capital gains bonds of
Rural Electrification Corporation Ltd. He deposited 4,00,000 on 06-07-2025 and 3,00,000 on 01-
11-2025 the capital gain deposit scheme in a Nationalized Bank for construction of an additional
floor on the residential house property in Kolkata.
Compute the Capital Gain chargeable to Tax for the Assessment Year 2025-26 and Income Tax
chargeable thereon assuming Mr. Roy has no other income and he has shifted out of the default
tax regime (8 Marks, May 2014) (Similar: 8 Marks, May 2017)
Solution: Computation of Capital Gains (amounts in –
Particulars ₹
Full Value of Consideration (i.e. Stamp Duty Value) [WN-1] 94,00,000
Less: Expenses on transfer (2% expenses on transfer of 53,00,000) 1,06,000
Net consideration 92,94,000
Less: Cost being: Indexed Cost of Acquisition (18,00,000 × 363/100) 65,34,000
Long Term Capital Gains 27,60,000
Less: Exemption u/s 54 (10,00,000 + 4,00,000) [WN-2] 14,00,000
Exemption u/s 54EC in respect of bonds of REC [WN-3] 7,00,000
Taxable Long Term Capital Gains 6,60,000
Total Income (rounded off) 6,60,000
Tax on long-term capital gains [WN-4] 82,000
Add: HEC@4% 3,280
Tax payable (rounded off) 85,280
Working Notes:
(1) In case the stamp duty value fixed by the stamp valuation authority exceeds 110% of actual
sale consideration, the stamp duty value shall be deemed as the full value of consideration.
(2) Exemption u/s 54 is available if one/two new residential house(s) is/are purchased within 1
year before or 2 years after the date of transfer. Here the new house is purchased within
the said time limit, further the cost of new residential house is less than the capital gain,
capital gain to the extent of cost of new asset is exempt u/s 54. Besides this the amount
deposited in capital gains account scheme on or before the due date of furnishing the return
of income shall also qualify for deduction even if it is deposited for construction of additional
floor of the house.
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 CA VARDHAMAN DAGA

(3) Exemption under section 54EC is available in respect of investment in bonds of Rural
Electrification corporation only if the investment is made within a period of 6 months after
the date of such transfer. In this case the investment made after 6 months amounting
5,00,000 shall not qualify for exemption under section 54EC.
(4) Tax on LTCG = 20% of ( 6,60,000 - basic exemption limit of ₹ 2,50,000 (assuming that the
assessee is resident in India) 20% of 4,10,000 = 82,000.
(5) The tax liability on LTCG after indexation @20% will be lower than tax computed @12.5% on
LTCG without benefit of indexation. Hence, he would take benefit of indexation for
computing LTCG on transfer of residential house.
(6) Since the total income of Mr Roy exceeds 5,00,000, he is not entitled for tax rebate under
Section 87A.
Illustration 28
Computation of capital gains and tax liability: Mr. Martin sold his residential house property on
08-06-2024 for ₹ 70 lakhs which was purchased by him for ₹ 20 lakhs on 05-05-2006.
(1) He paid 50,000 as brokerage for the sale of said property. The stamp duty valuation assessed
by sub registrar was 99 lakhs.
(2) He bought another house property on 25-12-2024 for 15 lakhs.
(3) He deposited 10 lakhs on 10-11-2024 in the capital gain bond of National Highway Authority
of India (NHAI).
(4) He deposited another ₹ 10 lakhs on 10-07-2025 in the capital gain deposit scheme with SBI
for construction of additional floor of house property.
Compute income under the head "Capital Gains" for A.Y. 2025-26 as per Income-tax Act, 1961
and also Income tax payable on the assumption that he has no other income chargeable to tax. (8
Marks, Nov. 2015)
Cost inflation index for various financial year are as under: 2006-07: 122 and 2024-25: 363
Solution: Computation of capital gains and tax thereon in the hands of Mr. Martin (amounts
in ₹) –
Option (1) – in case he avail benefit of indexation
Particulars ₹
Full value of consideration [WN-1] 99,00,000
Less: Brokerage 50,000
Net sale consideration 98,50,000
Less: Indexed cost of acquisition (20,00,000 × 363/122) 59,50,820
Capital Gains 38,99,180
Less: Exemption under section 54 [WN-2] 25,00,000
Exemption under section 54EC [WN-3] 10,00,000
Income by way of Long-term capital gain/ Total Income (rounded off) 3,99,180
Less: Basic Exemption Limit of ₹ 2,50,000 [WN-4] 2,50,000
LTCG on which tax imposable 1,49,180
Income Tax @ 20% 29,836
Less: Tax rebate u/s 87A [100% of tax or 12,500 whichever is less] 12,500
Balance Income tax 17,336
Add: Health & Education cess @ 4% 693
Total Tax (rounded off) 18,030
Option (2) – in case he do not avail benefit of indexation
Particulars ₹
Full value of consideration [WN-1] 99,00,000
Less: Brokerage 50,000
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 CA VARDHAMAN DAGA

Net sale consideration 98,50,000

Less: cost of acquisition 20,00,000
Capital Gains 78,50,000
Less: Exemption under section 54 [WN-2] 25,00,000
Exemption under section 54EC [WN-3] 10,00,000
Income by way of Long-term capital gain/ Total Income (rounded off) 43,50,000
Less: Basic Exemption Limit of ₹ 2,50,000 [WN-4] 2,50,000
LTCG on which tax imposable 41,00,000
Income Tax @ 20% 5,12,500
Less: Tax rebate u/s 87A [100% of tax or 12,500 whichever is less] Nil
Balance Income tax 5,12,500
Add: Health & Education cess @ 4% 20,500
Total Tax (rounded off) 5,33,000
Working Notes:
(1) Value assessed by the stamp valuation authority exceeds 110% of the consideration received,
so the stamp duty value will be deemed as FVC=97 lakhs.
(2) Exemption under section 54 = Cost of residential house acquired on 25-12-2023 + amount
deposited in Capital Gains Accounts Scheme on 10-7-2024 (before the due date of filing of
return of income) for construction of additional floor on residential house property = 15 lakhs
+ 10 lakhs = 25 lakhs.
(3) Exemption under section 54EC = amount deposited in NHAI bonds on 10-11-2023 (within 6
months from the date of transfer) = 10 lakhs.
(4) Since Mr. Martin is a resident individual having no other income, hence, he will be entitled to
basic exemption limit in respect of the income from LTCG - Section 112.
Illustration 29
Capital gains in case of Reverse Mortgage and Tax laibility: Mrs. Mahalakshmi an individual,
aged 68 years, mortgaged her Residential Property, purchased for 3 lakhs on 01-10-2002, with a
bank, under a notified reverse mortgage scheme and was sanctioned a loan of 20 lakhs. As per the
said scheme she was receiving the loan amount in equal monthly installments of 30,000 per month
from the bank. Mrs. Mahalakshmi was not able to repay the loan on maturity and in lieu of
settlement of the loan surrenders the residential property to the bank. Bank sold the property
for 25 lakhs on 22-02-2025. She had no other income during the year.
Discuss the Tax consequences and compute tax he has shifted out of the default tax regime
for the Assessment Year 2025-26. Cost Inflation Index: 2002-03 = 105 and 2023-24 = 363. (5
Marks, May 2018)
Solution: The tax consequences in hands of Mrs. Mahalaksmi are as under:
(1) At the time of mortgage:
• As per section 47(xvi), any transfer of a capital asset in a transaction of reverse mortgage under
a scheme made and notified by the Central Government will not be regarded as a transfer.
Therefore, capital gains tax liability is not attracted.
• Section 10(43) provides that the amount received by a senior citizen as a loan, either in lump
sum or in installments, in a transaction of reverse mortgage would be exempt from income-tax.
Therefore, the amount received by Mrs. Mahalakshmi in a transaction of reverse mortgage of her
residential building is exempt under section 10(43).
(2) At the time of alienation of house property: When the bank alienates the property for the
purpose of recovery of the loan on non-payment of the loan, then the same will constitute
'transfer' and the capital gains so computed will be taxed accordingly. Thus, Capital Gains in hands
of Mrs. Mahalakshmi is as under:
YOUTUBE & TELEGRAM – ARHAM INSTITUTE,
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 CA VARDHAMAN DAGA

Particulars ₹
Full value of consideration 25,00,000
Less: cost of acquisition 3,00,000
Long-term capital gains/ Gross Total Income 22,00,000
Less: Deduction under Chapter VI-A Nil
Total Income (rounded off) 22,00,000
Tax on long-term capital gains
Option 1 [Tax on LTCG = 12.5% of (₹22,00,000 (without indexation benefit) - 2,37,500
Basic exemption limit of ₹3,00,000 (assuming that the assessee is resident in
India)] or
Option 2 [Tax on LTCG = 20% of (14,62,860 (after indexation benefit) - Basic 2,32,572
exemption limit of ₹3,00,000 (assuming that the assessee is resident in
India)] or
Lower of Option (1) and (2) 2,32,572
Less: Tax rebate u/s 87A (Nil, since her Total Income exceeds 5,00,000) Nil
Balance tax 2,32,572
Add: HEC @ 4% 9,303
Tax payable (rounded off) 2,41,870
Computation of LTCG with indexation
Full value of consideration 25,00,000
Less: Indexed Cost of acquisition 10,37,143
Long-term Capital gains (after indexation benefit) 14,62,857
Illustration 30
Computation of Capital Gains and tax liability: Examine the taxability of Capital gains in the
following scenarios for the Assessment Year 2024-25, determine the taxable amount and rate of
tax applicable:
(i) On 28th February, 2025 10,000 shares of XY Ltd., a listed company are sold by Mr. B @
550 per share and STT was paid at the time of sale of shares. These shares were acquired
by him on 5th April, 2017 @395 per share by paying STT at the time of purchase. On 31
January, 2018, the shares of XY Ltd. were traded on a recognized stock exchange at the
Fair Market Value of 390 per Share.
(ii) Mr. A is the owner of residential house which was purchased on 1 September, 2016 for
9,00,000. He sold the said house on 4th June 2024 for 19,00,000. Valuation as per stamp
valuation authorities was 45,00,000. He invested 19,00,000 in NHAI Bonds on 21 March,
2025.
Cost Inflation Index: F.Y. 2016-2017: 264 and F.Y. 2024-2025 -363 (2 x 2 = 4 Marks,
July 2021)
Solution:
(i) Long-term capital gain on transfer of 10,000 shares of XY Ltd. [taxable u/s 112A @
12.5% on amount exceeding ₹ 1,25,000]:
Particulars ₹
Full value of consideration [10,000 × 550] 55,00,000
Less: Cost of acquisition
Higher of –
Cost of acquisition [10,000 × 395] 39,50,000
Lower of fair market value per share as on 31-1-2018 i.e., 390 per
share and sale consideration i.e., 550 per share [10,000 × 390] 39,00,000 15,50,000
Long term capital gain taxable u/s 112

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 CA VARDHAMAN DAGA

A Long-term capital gain exceeding 1 lakh i.e., ₹ 14,25,000 would be taxable @

12.5%
(ii) Sale of residential house [long-term capital asset, since held for more than 24
months]:
Particulars ₹
Full value of consideration [stamp duty value, since it exceeds 110% of actual
sale consideration] 45,00,000
Less: Indexed cost of acquisition [9,00,000 × 363/264] 12,37,500
32,62,500
Less: Deduction u/s 54EC [No deduction u/s 54EC would be allowed on investment Nil
of 19,00,000 in NHAI bonds, since such investment is made on 21st March 2025
i.e., after six months from the date of transfer i.e., 4th September, 2024]
Long-term capital gain taxable u/s 112 @ 20% 32,62,500
Illustration 31
Computation of Capital Gains: A owns a capital asset which was purchased by him on 1-5-1999
for 4,00,000. The market value of the said asset as on 1-4-2001 was 3,00,000. The said asset was
sold for 18,00,000 on 15-04-2024. Expense incurred on transfer amounted to 5,000. Compute the
capital gain for the A.Y. 2025-26. (Cost inflation index for F.Y. 2001-02 = 100 and 2024-25= 363)
Solution: Computation of capital gains chargeable to tax (amount in ₹) –
Particulars ₹
Full value of consideration 18,00,000
Less: Expenses on transfer 5,000
Net Consideration 17,95,000
Less: Indexed cost of acquisition (4,00,000 x 363/100) 14,52,000
Long term capital gain 3,43,000
Illustration 32
Computation of Capital Gains - Long Term: A owns a commercial property which was purchased
by him on 15-10-2016 for 8,00,000. The said asset was sold for 15,75,000 on 30-01-2025. Expense
incurred on transfer amounted to 5,000. Compute the capital gain for the assessment year 2025-
26. (Cost inflation index for F.Y. 2016-17= 264 and 2023-24= 363)
Solution: Computation of capital gains chargeable to tax (amount in ₹)
Particulars ₹
Full value of consideration 15,75,000
Less: Expenses on transfer 5,000
Net Consideration 15,70,000
Less: Cost of acquisition [WN] 8,00,000
Long-term Capital Gains 7,70,000
Working Note: Since the commercial property is held for more than 24 months immediately
preceding the date of transfer the said capital asset is long term capital asset
Illustration 33
Computation of Capital gains: Ram purchases a house property for ₹ 15,00,000 on 30th June,
1994. The following expenses were incurred by him for making addition/ alteration to the house
property:
Particulars ₹
Cost of construction of first floor in 1995-1996 5,00,000
Cost of construction of second floor in 2002-03 7,50,000
Alteration/reconstruction of the property in 2006-07 6,25,000
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 CA VARDHAMAN DAGA

Fair market value of the property on 1 April, 2001 21,00,000

Stamp duty value of the property as on 1 April, 2001 20,00,000
The house property is sold by him on 15th June, 2024 for 1,25,00,000 (expenses incurred on
transfer ₹ 1,15,000).
Compute the amount of capital gains chargeable to tax for the assessment year 2025-26.
Cost inflation indices: FY 2001-02: 100; FY 2002-03: 105; FY 2006-07: 122 and 2024-25: 363.
Solution: Computation of capital gains/loss chargeable to tax (amount in ₹)
Particulars ₹
Full value of consideration 1,25,00,000
Less: Expenses on transfer 1,15,000
Net Consideration 1,23,85,000
Less: Indexed cost of acquisition (20,00,000 × 363/100) 72,60,000
[Stamp duty value will be considered as cost of acquisition since it is less than
the fair market value of the property]
Less: Indexed cost of improvement (second floor) (7,50,000 x 363/105) 25,92,857
Less: Indexed cost of improvement (6,25,000 x 363/122) 18,59,631
Long-term Capital Gains 6,72,511

Illustration 34
Perquisite and Capital gains of ESOP: AB Co. Ltd. allotted 1,000 sweat equity shares to Sri Chand
in June 2024. The shares were allotted at 200 per share as against the fair market value of 300
per share on the date of exercise of option by the allottee viz., Sri Chand. The fair market value
was computed in accordance with the method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the cost of
acquisition of those sweat equity shares ?
Solution:
(i) As per Section17(2)(vi), the value of sweat equity shares chargeable to tax as perquisite
shall be the fair market value of such shares on the date on which the option is exercised
by the assessee as reduced by the amount actually paid by, or recovered from, the
assessee in respect of such shares.
Particulars ₹
Fair market value of 1,000 sweat equity shares @ ₹ 300 each 3,00,000
Less: Amount recovered from Sri Chand 1,000 shares @ 200 each 2,00,000
Value of perquisite of sweat equity shares allotted to Sri Chand 1,00,000
(ii) As per section 49(2AA), where capital gain arises from transfer of sweat equity shares,
the cost of acquisition of such shares shall be the fair market value which has been taken
into account for perquisite valuation under section 17(2) (vi). Therefore, in case of
subsequent sale of sweat equity shares by Sri Chand, the cost of acquisition would be ₹
3,00,000.
Illustration 35
Conversion of stock in trade into Capital Asset: Mr. X, a trader in gold and silver jewellery
furnishes you with the following information
(1) On 14th May, 2023, X purchases 100 grams of gold bullion the rate of 30,000 per 10 gram
as his stock-in-trade
(2) This stock-in-trade is not sold till 31 March, 2024. FMV of gold bullion on 31 March, 2024
is ₹31,500 per 10 grams.

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CONTACT NO. FOR CLASSES - 9039600091 pg. 143
 CA VARDHAMAN DAGA

(3) The above inventory of 100 grams gold bullion is converted into capital asset on 10th July,
2024. FMV of Gold bullion on 10th July, 2024 is ₹31,750 per ten grams.
(4) X transfers 50 grams of gold bullion on 25th March, 2025 at the rate of 32,500 per 10
gram.

Find out tax consequences of these transactions (assume that X has not undertaken any other
transaction during the previous years 2023-24 and 2024-25).
Solution:
(1) For the previous year 2022-23, business income from the above transaction will be
determined as Follows

Particulars ₹ ₹
Opening stock on 1st April, 2022 Nil
Purchase of inventory during 2022-23 [30,000 ÷ 10 × 100] 3,00,000
Sales during 2022-23 Nil
Closing value of inventory (cost or market price, whichever is 3,00,000
lower)
Net profit Nil
Total 3,00,000 3,00,000
(2) Business income of X for the previous year 2023-24 will be computed as follows (amount
in ₹)

Particulars ₹ ₹
Opening stock on 1st April, 2023 3,00,000
Purchase of inventory during 2023-24 Nil
Sales during 2023-24 Nil
Fair market value on the date of conversion as per Section 3,17,500
28(via) [ 31,750 ÷ 10 x 100]
Closing value of inventory Nil
Net profit 17,500
Total 3,17,500 3,17,500
(3) Income under the head "Capital gains"will be as follows (amount in –
Particulars ₹
Full value of consideration (32,500 x 50/10) 1,62,500
Less: Cost of acquisition (being fair market value on the date of conversion) 1,58,750
(31,750 × 50/10) [WN]
Short-term capital gain 3,750
Working Note: Where the capital gain arises from the transfer of a capital asset referred to in
Section 28(via) i.e. inventory converted into capital asset, the cost of acquisition of such asset
shall be deemed to be the fair market value which has been taken into account for the purposes
of Section 28(via) and the period of holding of such capital asset shall be reckoned from the date
of conversion or treatment.
Illustration 36
Compensation by Interim order: Mr. X purchased an urban land on 25-04-2006 for 6,00,000. His
property was acquired in land acquisition proceedings on 15-07-2012 and award of 15,00,000 was
determined and the same was paid on 18-07-2012. The assessee filed an appeal against the award
so determined. The land acquisition court, by order dated 01-05-2013, enhanced the compensation
amount by 10,00,000, which was not paid to the assessee on account of the contest by the State

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 CA VARDHAMAN DAGA

through an appeal. The High Court by interim order allowed the assessee to withdraw 50% of the
enhanced compensation on 15-07-2024 and the assessee received the amount in the relevant
financial year. The court by final order dated 01-10-2025 held the enhancement of compensation
as valid and assessee received the balance award on 17-12-2025. Discuss the taxability of the
said compensation.
Solution: The original compensation will be taxable in the year of receipt. However, the amount
of compensation received in pursuance of an interim order of the court, Tribunal or other
authority shall be deemed to be income chargeable under the head 'Capital gains' in the previous
year in which the final order of such court, Tribunal or other authority is made. Hence, the
relevant computation will be as under: Computation of long term capital gains on receipt of original
compensation (amount in ₹)
Particulars ₹
Full value of consideration 15,00,000
Less: Indexed cost of acquisition (6,00,000 × 200/122) 9,83,607
Long term capital gains taxable in AY 2013-14 5,16,393
Computation of long term capital gains on receipt of enhanced compensation (amount in ₹):
Particulars ₹
Full value of consideration 10,00,000
Less: Indexed cost of acquisition NIL
Long term capital gains taxable in AY 2026-27 10,00,000
Note: The interim compensation of 5,00,000 will not be taxable in AY 2025-26 but will be taxable
when the final award is received i.e. AY 2026-27.
Illustration 37
Computation of capital gains in case of slump sale: Mr. Patel is a proprietor of Star Stores
since 20-05-2022. He has transferred his shop by way of slump sale for a total consideration of
40 lakh. The fair market value of capital assets on 31-03-2025 is 38 lacs. The professional fees
& brokerage paid for this sale are 80,000. His balance sheet as on 31-03-2025 is as under:
Liabilities ₹ Assets ₹
Own Capital 10,50,000 Building 5,00,000
Bank Loan 5,00,000 Furniture 5,00,000
Trade Creditors 2,50,000 Debtors 2,00,000
Unsecured Loan 2,00,000 Other Assets 8,00,000
Total 20,00,000 Total 20,00,000
Other Information:
(1) No individual value of any asset is considered in the transfer deed.
(2) Other assets include trademarks valuing 2,00,000 as on 01-04-2024 on which no
depreciation has been provided.
(3) Furniture of 1,50,000 purchased on 05-11-2024 on which no depreciation has been provided.
(4) Unsecured loan includes 50,000 as advance received from his wife, which she has agreed to
waive off. Compute the capital gain for A.Y. 2025-26. (4 Marks, July 2021)
Solution: Computation of capital gains on slump sale of shop (amount in ₹)
Particulars ₹
Full Value of consideration [Higher of FMV of capital assets transferred or FMV
of monetary consideration received] 40,00,000
Less: Expenses on sale [professional fees & brokerage] 80,000
Net sale consideration 39,20,000
Less: Net worth (See Working Note below) 10,42,500

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 CA VARDHAMAN DAGA

Short-term capital gain [Since shop is held for not more than 36 months 28,77,500
immediately preceding the date of transfer]
Working Note: Computation of net worth of shop (amount in ₹)
Particulars ₹ ₹
Building 5,00,000
Furniture 5,00,000
Less: Deprecation on 1,50,000 @ 5%, being 50% of 10% since
furniture is put to use for less than 180 days during the previous
year Debtors 2,00,000
Other assets 8,00,000
Less: Deprecation on 2,00,000, being intangible asset @ 25% 50,000 7,50,000
Total assets 19,42,500
Less: Bank loan. 5,00,000
Trade creditors 2,50,000
Unsecured loan 2,00,000 less 50,000, being the amount waived off 1,50,000 9,00,000
by his wife
Net worth 10,42,500
Illustration 38
Capital gains on Land - Stamp Value to be full value of consideration Section 50C: Mr.
Ramesh purchased a building on 10-04-2001 for a sum of 35 lakh. The said building was sold by
him to Mahesh, for 90 lakh on 1-1-2025, when the stamp duty value was 185 lakh. The agreement
was entered on the same day and the property was registered on the same day. Discuss tax
implications in hands of Ramesh.
What would be your answer if the agreement was entered into on 1-8-2024 when the stamp duty
value was 130 lakh. Mr. Ramesh had received a down payment of 15 lakh by cheque from Mahesh
on the date of agreement. Will your answer change if the said sum of 15 lakhs has been received
by cash instead of Cheque
Solution:
(1) The tax implications in hands of Ramesh shall be as under-
CASE I: In case the agreement has been entered on the date of sale and property has
been registered on the same day: Full Value of Consideration = Value fixed by stamp valuation
authority, as per the provisions of Section 50C i.e. 1,85,00,000 on the date of registration will
be taken as full value of consideration since the stamp duty value exceeds 110% of the actual
consideration and capital gains shall be computed as under:
Particulars ₹
Full value of consideration [Section 50C] 1,85,00,000
Less: Indexed cost of acquisition 35,00,000
Long-term capital gains 1,50,00,000
CASE II: In case the agreement has been entered on 1-8-2024: In this case the stamp duty
value on the date of agreement will be considered to compute capital gains since on the date of
agreement, sum of 15 lakh has been received by an account payee cheque and the value adopted
or assessed or assessable by the stamp valuation authority exceed 110% of the consideration
received as a result of transfer of capital asset. The capital gains shall be computed as under:
Particulars ₹
Full value of consideration [Section 50C] 1,30,00,000
Less: Indexed cost of acquisition 35,00,000
Long-term capital gains 95,00,000

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 CA VARDHAMAN DAGA

(2) Yes, the answer will change in case if on the date of agreement cash has been received instead
of an account payee cheque. In such case stamp duty value on the date of agreement shall not be
considered but the stamp duty value on the date of registration of property shall be considered
and capital gains shall be 1,50,00,000.
Illustration 39
Capital gains on Land- Stamp Value to be full value of consideration: Bala sold his vacant site
on 30-09-2024 for 12,00,000. It was acquired by him on 01-10-1998 for 1,50,000. The fair
market value on 01-04-2001 is 2,00,000 and the stamp duty value as on 01-04-2001 is 1,80,000.
The State stamp valuation authority fixed the value of the site at the time of transfer at
12,60,000. Compute income under the head capital gains in the hands of Bala and give your reasons
for computation.
Solution: Computation of capital gains of Bala (amounts in –
Particulars ₹
Full value of consideration [WN-1] 12,00,000
Less: Indexed cost of acquisition [WN-2] 1,80,000
Long-term capital gains 10,20,000
Working Note:
1. Since the value adopted or assessed or assessable by the stamp valuation authority i.e.
12,60,000 does not exceed 110% of the consideration received i.e. 12,00,000, the
consideration so received or accruing as a result of the transfer shall be deemed to be
the full value of the consideration.
2. In case of a capital asset, being land or building or both, the fair market value of such
asset on 01-04-2001 shall not exceed the stamp duty value, wherever available, of such
asset as on 01-042001. Hence, in this case the SDV as on 01-04-2001 i.e.1,80,000 shall be
taken as cost of acquisition.
Illustration 40
Computation of Capital gains - Implications of Section 50C: Mr. Vaibhav sold a house, held as
a capital asset, to his friend Mr. Dhanush on 1st December, 2024 for a consideration of ₹
25,00,000. The Sub-Registrar refused to register the document for the said value, as according
to him, stamp duty valuation based on State Government guidelines was 45,00,000. Mr. Vaibhav
preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as
35,00,000 (22,00,000 for land and the balance for building portion). The differential stamp duty
was paid, accepting the said value determined. Mr. Vaibhav had purchased the land on 1st June,
2007 for ₹ 6,10,000 and completed the construction of the house on 21st December, 2023 for ₹
14,00,000.
Briefly discuss the tax implications in the hands of Mr. Vaibhav and compute the capital gains
chargeable to tax. (4 Marks, Nov. 2013)
Note: Cost of Inflation Indices for the FY 2007-08 and FY 2024-25 are 129 and 363 respectively.
Solution: Computation of capital gains chargeable to tax of Mr. Vaibhav (amount in ₹):
Particulars Land Building
Full value of consideration (Section 50C) [WN2] 22,00,000 13,00,000
Less: cost of acquisition (benefit of indexation is not available in 6,10,000 14,00,000
case transfer take place after 22/7/2024
Long-term capital gain 15,90,000
Short-term capital gain/loss -1,00,000
Taxable Capital Gains 14,90,000
Working Notes:

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CONTACT NO. FOR CLASSES - 9039600091 pg. 147
 CA VARDHAMAN DAGA

(1) In case, a land is held by the assessee for more than 24 months but the building
constructed over it is held for not more than 24 months, then there will be long-term
capital gains on sale of the land and short-term capital gains on sale of building - CIT v.
Citibank N.A. [2003] 261 ITR 570 (Bom.). Hence, the capital gains have been computed
accordingly.
(2) As per provisions of Section 50C, if the stamp duty value adopted by stamp valuation
authority is disputed in appeal and the same is reduced by the appellate authority, the
reduced value shall be taken to be full value of consideration for computing the capital
gains chargeable to tax. Since the value adopted or assessed or assessable by the stamp
valuation authority as revised by Revenue Divisional Officer i.e. 35,00,000 exceed 110%
of the consideration received i.e. 25,00,000, Value fixed by stamp valuation authority, as
per the provisions of Section 50C shall be deemed to be the full value of the consideration
i.e. 35,00,000.
(3) Short term capital loss can be set off from long term capital gains in accordance with
provisions of Section 74 of the Income-tax Act, 1961.
Illustration 41
Computation of Capital gains - Implications of Section 50C: Mr. T inherited a house in Jaipur
under will of his father in May, 2002. The house was purchased by his father in January, 1980
for 2,50,000. He invested an amount of 7,00,000 in construction of one more floor in this house
in June, 2006. The house was sold by him in June, 2024 for 37,50,000. The valuation adopted by
the registration authorities for charge of stamp duty was 47,25,000 which was not contested by
the buyer, but as per assessee's request, the Assessing Officer made a reference to Valuation
Officer. The value determined by Valuation Officer was 47,50,000. Brokerage @ 1% of sale
consideration was paid by Mr. T to Mr. S. The market value of house as on 1-4-2001 was 2,70,000.
Compute the capital gain chargeable to tax. (9 Marks, PCE Nov. 2007)
Note: Cost Inflation Index: FY 2002-03 = 105; FY 2006-07 = 122 and FY 2024-25 = 363.
Solution: Computation of capital gains chargeable to tax of Mr. T (amount in ₹):
Particulars ₹ ₹
Full value of consideration [WN-1] 47,25,000
Less: Expenses of transfer i.e. brokerage @ 1% of ₹
37,50,000 37,500
Net sale consideration 46,87,500
Less: Indexed cost of acquisition (2,70,000 × 363 ÷ 100) [WN-2] 9,80,100
Indexed cost of improvement (7,00,000 × 363 ÷ 122) 20,82,787 30,62,887
Long-term capital gains 16,24,613
Working Notes:
(1) As per Section 50C, where the value adopted or assessed or assessable by the stamp
valuation authority exceeds 105% of the consideration received, the stamp duty value
shall be deemed to be the full value of the consideration. Hence, in the given case - Sales
consideration = 37,50,000, 110% of Sale Consideration=41,25,000, Stamp duty value =
47,25,000, Valuation made by Valuation officer = 47,50,000, Therefore, full value of
consideration = Higher of 41,25,000 and 47,50,000; subject to maximum of 47,25,000 =
47,25,000.
(2) Since the house has been obtained under inheritance i.e. one of the modes specified under
section 49(1), therefore, its cost shall be the cost to the previous owner (father) i.e. FMV
as on 1-4-2001 i.e. 2,70,000. The CII of acquisition will be of 2001-02 since his father
has acquired the property prior to 01-04-2001.
Illustration 42

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CONTACT NO. FOR CLASSES - 9039600091 pg. 148
 CA VARDHAMAN DAGA

Advance money received-forfeited by the assessee: Mr. Rakesh purchased a house property on
14th April, 1999 for 9,05,000. He entered into an agreement with Mr. B for the sale of house on
15th September, 2002 and received an advance of 25,000. However, since Mr. B did not remit the
balance amount, Mr. Rakesh forfeited the advance. Later on, he gifted the house property to his
brother Mr. A on 15th June, 2006.
Following renovations were carried out by Mr. Rakesh and Mr. A to the house property:
Particulars Amounts ₹
By Mr. Rakesh during FY 1999-2000 10,000
By Mr. Rakesh during FY 2003-04 50,000
By Mr. A during FY 2007-08 1,90,000
The fair market value of the property as on 01-04-2001 is ₹11,00,000.
Mr. A entered into an agreement with Mr. C for sale of the house on 1 st June, 2012 and received
an advance of ₹ 80,000. The said amount was forfeited by Mr. A, since Mr. C could not fulfil the
terms of the agreement. Finally, the house was sold by Mr. A to Mr. Sanjay on 2 nd May, 2024 for
a consideration of 52,00,000.
Compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2025-
26. Cost inflation indices are as under:
Financial Year Cost inflation index
2001-02 100
2003-04 109
2006-07 122
2007-08 129
2024-25 363
Solution: Computation of capital gains taxable in the hands of Mr. A: Here, the house property so
transferred shall be the long term capital asset for Mr. A as he has acquired the property from
Mr. Rakesh by way of gift [one of the modes specified in Section 49(1)], hence, his period of
holding = 14-4-1999 to 2-1-2025 i.e. more than 3 years. (amount in ₹)
Particulars ₹
Full value of consideration 52,00,000
Less: Indexed cost of acquisition (10,20,000 x 363 ÷ 100) [WN-1] 37,02,600
Less: Indexed cost of improvement by Mr. Rakesh (50,000 × 363÷109) [WN-2] 1,66,514
Less: Indexed cost of improvement by Mr. A (1,90,000 x 363 ÷ 129) 5,34,651
Long-term Capital Gains 7,96,235
Working Notes
(1) Cost of acquisition = FMV as on 01-04-2001 Less Advance forfeited by Mr. A= 11,00,000
- 80,000 = 10,20,000. Forfeiture made by Mr. Rakesh (previous owner) shall be ignored.
(2) Cost of improvement by Mr. Rakesh shall not include the improvements made before 1-04-
2001.
Illustration 43
Exemption under section 54: Mr. Surinder furnishes the following particulars for the previous
year ending 31-3-2025, and requests you to compute the taxable capital gain:
(i) He had a residential house inherited from father in 2006, the fair market value of which
as on 1-4-2001 is 5 lakhs.
(ii) In the year 2007-08, further construction and improvements costed 6 lakhs.

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 CA VARDHAMAN DAGA

(iii) On 10-5-2024, the house was sold for 90 lakhs. Expenditure in connection with transfer
= ₹ 50,000.
(iv) On 20-12-2024, he purchased a residential house for ₹ 10 lakhs. Cost Inflation Index: FY
2006-07-122; FY 2007-08 129 and FY 2024-25 363. (May 2002)
Solution: Computation of Capital gains (amounts in ₹)
Particulars ₹ ₹
Full value of consideration 90,00,000
Less: Expenditure in connection with transfer 50,000
Net Sale Consideration 89,50,000
Less: Indexed Cost of Acquisition (5,00,000 x 363 ÷ 100) [WN 1] 18,15,000
Less: Indexed Cost of Improvement (6,00,000 x 363 ÷ 16,88,372 35,03,372
129)
Long Term Capital Gains 54,46,628
Less: Exemption u/s 54 [WN 2] 10,00,000
Taxable Long Term Capital Gains 44,46,628
Working Note:
1) In this question it is assumed that his father has acquired the property before 01-04-2001.
Hence, cost inflation index of the year 2001-02 is taken for determining indexed cost of
acquisition.
2) Exemption under section 54 shall be the cost of new house acquired i.e. 10,00,000 as the
amount of capital gain is more than the cost of new house.
Illustration 44
Section 50C and Exemption u/s 54: Mr. Sunil entered into an agreement with Mr. Dhaval to sell
his residential house located at Navi Mumbai on 16-06-2024 for 80,00,000. The sale proceeds
was to be paid in the following manner:
(i) 20% through account payee bank draft on the date of agreement.
(ii) 60% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title of the property.
Mr. Dhaval was handed over the possession of the property on 15-12-2024 and the registration
process was completed on 14-01-2025. He paid the sale proceeds as per the sale agreement.
The value determined by the Stamp Duty Authority on 16-08-2024 was 1,10,00,000 whereas, on
14-01-2025 it was 1,11,50,000.
Mr. Sunil had acquired the property on 01-04-2001 for 20,00,000. After recovering the sale
proceeds from Dhaval, he purchased another residential house property for 32,00,000.
Compute the income under the head "Capital Gains" for the Assessment Year 2025-26.
Cost Inflation Index for Financial Year(s):2001-02-100; 2002-03-105 and 2023-24-363. (5
Marks, Nov. 2017)
Solution: Computation of taxable capital gains (amount in ₹) :
Particulars ₹
Full value of consideration [Section 50C] [WN-1] 1,10,00,000
Less: Indexed cost of acquisition (20,00,000 x 363 ÷ 100) [WN-2] 72,60,000
Long-term capital gains 37,40,000
Less: Exemption u/s 54 [WN-3] 32,00,000
Taxable long-term capital gains 5,40,000
Working Notes:
1) As per provisions of section 50C, since the value adopted or assessed or assessable by the
stamp valuation authority i.e.1,10,00,000 exceeds 110% of the consideration received i.e.
80,00,000, stamp duty value will be taken as full value of consideration. In this case the

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 CA VARDHAMAN DAGA

stamp duty value on the date of agreement will be considered to compute capital gains since
on the date of agreement, 20% of sales consideration i.e. 16 lakh has been received by an
account payee bank draft.
2) Since the residential house property was held by Mr. Sunil for more than 24 months
immediately preceding the date of its transfer, the resultant capital gains will be long term
capital gains.
3) Exemption under section 54 shall be available in respect of one/two new house(s) purchased
within 2 years from the date of transfer of existing residential house.
Illustration 45
Exemption u/s 54: The following information is given by X and Y for the previous year 2024-25:
Particulars ₹ ₹
Sales consideration of a residential house property situated in
Mumbai sold on 15-06-2024 2,30,00,000 9,80,00,000
Stamp duty value on the date of transfer 2,55,00,000 10,00,00,000
Cost of acquisition in 1996-97 8,00,000 1,60,00,000
Fair market value on 1 April, 2001 9,00,000 2,10,00,000
Cost of improvement incurred in 2002-03 40,000 50,00,000
Expenditure on transfer borne by transferor 40,000 50,000
Purchase of residential house property in Cochin on 1st 60,70,000 20,10,000
December, 2024
Purchase of another residential house property in Mumbai on 2,02,00,000 1,20,00,000
th
10 July 2025
Determine taxable capital gains for assessment year 2025-26.
Cost Inflation Index for Financial Year(s):2001-02: 100; 2002-03: 105 and 2022-23: 363.
Solution: Computation of capital gains-
Particulars ₹ ₹
Full value of consideration (In case of Mr. X stamp duty 2,55,00,000 9,80,00,000
value is taken as it exceeds 110% of sale consideration)
Less: Expenses on transfer 40,000 50,000
Net Consideration 2,54,60,000 9,79,50,000
Less: Indexed cost of acquisition:
− In the case of X (9,00,000 x 363 ÷ 100) 31,67,000 -
− In the case of Y (2,10,00,000 x 363 ÷ 100) - 7,62,30,000
Indexed cost of improvement:
− In the case of X (40,000 x 363 ÷ 105) 1,38,286 -
− In the case of Y (50,00,000 x 363 ÷ 105) - 1,72,85,714
Long-term capital gain before exemption 2,20,54,719 44,34,286
Less: Exemption u/s 54
− In the case of X (as long-term capital gain exceeds 2 crore, X 2,02,00,000 -
can avail section 54 exemption only for investment in one
residential house property)
− In the case of Y (as long-term capital gain does - 44,34,286
not exceed 2 crore, Y can claim section 54 exemption for
investment in two residential house properties) 20,10,000
+1,20,00,000, subject to maximum of long-term capital gain of
13,38,571)
Income under the head "Capital gains" 18,54,714 Nil
Illustration 46 –
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CONTACT NO. FOR CLASSES - 9039600091 pg. 151
 CA VARDHAMAN DAGA

Exemption u/s 54: Mr. Roy owned a residential house in Noida. It was acquired on 09-09-2009
for 30,00,000. He sold it for 1,57,00,000 on 07-01-2021.
Mr. Roy utilized the sale proceeds of the above property to acquire a residential house in
Panchkula for 2,05,00,000 on 20-07-2021. The said house property was sold on 31-05-2024 and
he purchased another residential house in Delhi for ₹ 2,57,00,000 on 02-03-2025. The property
at Panchkula was sold for ₹ 3,25,00,000.
Calculate capital gains chargeable to tax for the A.Y. 2021-22 and 2025-26. All workings should
form part of your answer. (6 Marks, May 2019-NS)
Cost inflation index for various financial year are as under:2009-10: 148, 2018-19: 289 2021-22:
317 and 2024-25: 363
Solution 1) Computation of capital gains for A.Y. 2019-20 (amount in ₹) :
Particulars ₹
Sale of Residential House in Noida
Full value of consideration 1,57,00,000
Less: Indexed Cost of Acquisition ( 30,00,000 x 301/148) 61,01,351
Long-term capital gains 95,98,648
Less: Exemption u/s 54 (Since investment in new residential house in 95,98,648
Panchkula exceeds the capital gains, entire capital gains shall be exempt from
tax)
Taxable Long-term capital gains Nil
2) Computation of capital gains for A.Y. 2025-26 (amount in ₹)
Particulars ₹ ₹
Sale of Residential House in Panchkula Full value of consideration 3,25,00,000
Less: Indexed cost of acquisition Cost of Acquisition 2,05,00,000
Less: Exemption claimed u/s 54 [See Note] 98,98,642
(1,09,01,351 x 363/317) 1,09,01,351 1,24,83,251
Long term capital gains 2,00,16,749
Less: Exemption u/s 54 (on purchase of new house at Delhi) 2,00,16,749
Taxable Long-term capital gains Nil
Note: The house purchased in Panchkula has been transferred before 3 years from the date of
its acquisition, hence cost of the asset will be reduced by capital gains exempted earlier for
computing capital gains.
Illustration 47
Exemption under Section 54EC: X transfers the following long-term capital assets
Capital asset Date of transfer Full Value of Indexed cost Investment in
Consideration of acquisition NHAI/REC bonds
(date of investment)
Land 03-04-2024 ₹ 95 lakhs ₹ 40 lakhs ₹ 40 lakh (01-09-2024)
Commercial 05-11-2024 ₹ 65 lakhs ₹ 20 lakhs ₹ 20 lakhs (1-04-2025)
House
Find out exemption under section 54EC and taxable capital gain for AY 2025-26.
Solution: Computation of Taxable Capital Gains Assessment year 2025-26 (₹ lakh):
Particulars ₹
Long-term capital gain on transfer of Land and Commercial House (55 lakh +₹ 45 lakh) 100
Less: Exemption u/s 54EC (Investment in NHAI/REC bonds: 40 lakh + 40 lakh, limited 50
to 50 lakh)
Long-term capital gain chargeable to tax 50

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 CA VARDHAMAN DAGA

Illustration 48
Exemption under section 54 and its withdrawal: Mr. Selvan acquired a residential house in
January, 2002 for 10,00,000 and made some improvements by way of additional construction to
the house, incurring expenditure of 2,00,000 in October, 2004. He sold the house property in
October, 2024 for 75,00,000. The value of property was adopted as 88,00,000 by the State
stamp valuation authority for registration purpose. He acquired a residential house in January,
2024 for 25,00,000. He deposited 20,00,000 in capital gains bonds issued by National Highways
Authority of India (NHAI) in June, 2025.
Compute the capital gain chargeable to tax for the A.Y. 2025-26.
What would be the tax consequence and in which assessment year it would be taxable, if the house
property acquired in January, 2024 is sold for 40,00,000 in December, 2025? (8 Marks, IPCC
Nov. 2011)
Solution: (1) Computation of Capital Gains (amounts in ₹)
Particulars ₹
Full Value of Consideration (i.e. Stamp Duty Value) [WN-1] 88,00,000
Less: Cost being: Indexed Cost of Acquisition 10,00,000
Indexed Cost of Improvement 2,00,000 12,00,000
Long Term Capital Gains 76,00,000
Less: Exemption u/s 54 [WN-2] 25,00,000
Exemption u/s 54EC in respect of bonds of NHAI [WN-3] NIL
Taxable Long Term Capital Gains 51,00,000
Working Notes:
1) As per the provisions of Section 50C, in this case the value assessed by the stamp valuation
authority exceed 110% of the consideration received therefore, the stamp duty value shall
be deemed as the full value of consideration.
2) Exemption under section 54 is available if a one/two residential house(s) is/are purchased
within 1 year before or 2 years after the date of transfer. Here the new house is purchased
within the said time limit, further the cost of new residential house is less than the capital
gain, capital gain to the extent of cost of new asset is exempt under section 54.
3) Exemption under section 54EC is available in respect of investment in bonds of National
Highways Authority of India only if the investment is made within a period of 6 months
after the date of such transfer. In this case, since the investment is made after 6 months,
exemption under section 54EC would not be available.
4) Short Term capital gains for the A.Y. 2025-26 sale of house = Full value of consideration -
Cost of acquisition = 40,00,000 - NIL= ₹ 40,00,000.
Since exemption was claimed under section 54 in respect of the house and the same has
been sold within 3 years from the date of its acquisition, therefore, the exemption will be
withdrawn. Accordingly, cost of acquisition of house = Original Cost of purchase - Exemption
claimed under section 54 = 25 lakhs-25 lakhs = NIL.
Illustration 49
Section 50C and Investment to be made in bonds of NHAI/REC: Mr. A who transfers land and
building on 02-01-2024, furnishes the following information:
(i) Net consideration received 16 lakhs.
(ii) Value adopted by stamp valuation authority, which was not contested by Mr. A ₹ 21 lakhs.
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer 25 lakhs.
(iv) This land was distributed to Mr. A on the partial partition of his HUF on 1-4-2001. Fair
market value of the land as on 1-4-2001 was 1,00,000.

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 CA VARDHAMAN DAGA

(v) A residential building was constructed on the above land by Mr. A at a cost of 3,00,000
(construction completed on 1-12-2004) during the financial year 2004-05.
(vi) Short-term capital loss incurred on sale of shares during the financial year 2018-19 ₹
2,05,000
Mr. A seeks your advice as to the amount to be invested in NHAI bonds so as to be exempt from
clutches of capital gain tax. (8 Marks, Modified May 2006) (8 Marks, IPCC May 2012)
Cost inflation index for various financial year are as under: 2004-05: 113 and 2024-25: 363
Solution: Computation of Capital Gains of Mr. A (amounts in ₹)-
Particulars ₹ ₹
Full value of consideration [WN-1] 21,00,000
Less: Indexed cost of land (1,00,000 × 363 ÷ 100) [WN-1] 3,63,000
Indexed cost of building (3,00,000 × 363 ÷ 113) 9,63,717 13,26,717
Long-term capital gains 7,73,283
Less: Brought forward short-term capital loss set off 2,05,000
Amount to be invested in NHAI/REC bonds to claim exemption 5,68,283
u/s 54EC
Working Notes:
(1) As per Section 50C, where the value assessed by the stamp valuation authority exceeds 110%
of the consideration received then the stamp duty value shall be deemed to be the full value
of the consideration. Hence, in the given case - Sales consideration = 16,00,000, 110% of Sale
Consideration = 17,60,000, Stamp duty value = 21,00,000. Valuation made by Valuation officer
25,00,000. Therefore, full value of consideration = Higher of 16,00,000 and 25,00,000;
subject to maximum of 21,00,000.
(2) Since acquisition of capital asset on partition of HUF is one of the modes specified in Section
49(1), hence, cost thereof shall be the cost to the previous owner. Hence, FMV as on 1-4-
2001 shall be the cost of acquisition and shall be eligible for indexation.
Illustration 50
Exemption w/s 54 and 54F: Mr. X owns a residential house, which is self-occupied, and also a
plot of land (he owns no other house). He sells the house on January 2, 2025 and the plot on July
11, 2024 for 18,00,000 and 12,00,000 respectively. The house was purchased on June, 2001 for
4,50,000 and the plot on March 31, 2002 for ₹ 3,00,000. X has purchased a new residential house
on April 25, 2025 for 7,00,000 and claims exemption in respect of such house. On 1-1-2026, he
transfers the said residential house for 8,25,000 and purchases a new house on 31-3-2026. for
12,00,000. Compute the capital gains for relevant years. Cost inflation index for various financial
year are as under: 2001-02: 100 and 2024-25: 363
Solution: X can claim exemption under section 54 in respect of capital gains on sale of residential
house and exemption under section 54F in respect of capital gains on sale of plot. Since the
exemption under section 54 is available on investment of capital gains, therefore, first of all,
exemption under section 54 will be claimed. Thereafter, exemption under section 54F, which is
available on investment of net consideration, shall be claimed. The exemption under section 54F
will be available only in respect of balance cost of new house i.e. Original cost of new house -
Exemption u/s 54.
Computation of Capital Gains for assessment year 2025-26 (amounts in ₹)-
Particulars Residential house Plot
Full Value of consideration 18,00,000 12,00,000
Less: Indexed cost [(4,50,000 x 363 ÷ 100); (3,00,000 × 363 16,33,000 10,89,000
÷ 100)]
Long term capital gains 1,66,500 1,11,000

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 CA VARDHAMAN DAGA

Less: Exemption u/s 54 1,66,500 49,349

Exemption u/s 54F [WN]
Taxable long term capital gains Nil 61,650
Working Note: Exemption under section 54F-
Capital gains x (cost of new house- exemption u/s 54) = 111000 x (7,00,000-166500) = ₹ 49,349
Net consideration of plot 12,00,000
Computation of capital gains on sale of residential house for assessment year 2026-27 (amounts
in ₹)-
Particulars ₹
Sale price of the residential house (acquired on 25-4-2024) 8,25,000
Less: Cost of Acquisition (7,00,000 – 1,66,500 i.e. exemption claimed u/s 54) 5,33,500
Short-term capital gains for assessment year 2026-27 2,91,500
Long-term capital gains (Exemption claimed u/s 54F shall be chargeable as long- 49,349r
term capital gains of the year in which the house is transferred i.e. assessment
year 2026-27)
(ii) Note: No exemption u/s 54 or 54F will be available in respect of second new house
acquired on 31-3-2025 since the house transferred on 1-1-2024 is a short-term capital
asset.
Illustration 51
Computation of LTCG on sale of Equity shares: From the following information determine
taxable capital gains. Mr. X has acquired 1,000 equity shares on 1-04-2017 for 15,25,000 (STT
paid @ 0.1%). The fair market value of shares as on 31-01-2018 was 15,00,000. He sold the shares
on 25-08-2024 for 14,75,000 (STT paid @ 0.1%). Brokerage Expenses incurred on transfer: 0.5%
of the Sales consideration.
Solution: Computation of taxable capital gains (amount in ₹)
Particulars ₹
Full value of consideration 14,75,000
Less: Expenses on transfer (0.5% of the gross consideration) 7,375
Net consideration 14,67,625
Less: Cost of acquisition [WN] 15,25,000
Long-term capital loss -57,375
Working Note: The cost of acquisition of equity shares shall be determined as under
 Step 1: Cost of acquisition of such equity shares i.e., ₹ 15,25,000
 Step 2: Lower of (a) the fair market value of such asset as on 31-01-2018 i.e. 15,00,000;
or (b) the full value of consideration received or accruing as a result of the transfer of
the capital asset i.e. 14,75,000 = 14,75,000.
 Step 3: Cost of acquisition shall be deemed to the amount computed at Step 1 or Step 2
whichever is higher i.e. ₹ 15,25,000

Illustration 52
Computation of LTCG on sale of Equity shares: From the following information determine
taxable capital gains. Mr. X has acquired 1,000 equity shares on 1-04-2017 for 15,25,000 (STT
paid @ 0.1%). The fair market value of shares as on 31-01-2018 was ₹ 16,50,000. He sold the
shares on 25-08-2024 for 16,00,000 (STT paid @ 0.1%).
Solution: Computation of taxable capital gains (amount in ₹)
Particulars ₹
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CONTACT NO. FOR CLASSES - 9039600091 pg. 155
 CA VARDHAMAN DAGA

Full value of consideration 16,00,000

Less: Expenses on transfer Nil
Net consideration 16,00,000
Less: Cost of acquisition [WN] 16,00,000
Long-term capital gains Nil
Working Note: The cost of acquisition of equity shares shall be determined as under
 Tax on long-term capital gain u/s 112A [10% of (long-term capital Step 2: Lower of (a) the
fair market value of such asset as on 31-01-2018 i.e. 16,50,000; or (b) the full value of
consideration received or accruing as a result of the transfer of the capital asset i.e.
16,00,000 = 16,00,000.
 Step 3: Cost of acquisition shall be deemed to the amount computed at Step 1 or Step 2
whichever is higher i.e. 16,00,000.

Illustration 53
Computation of tax liability: Mr. X (64 years) is a resident individual. For the A.Y. 2025-26, he
has following income
Long-term capital gain on transfer of equity shares as computed as per provisions of section 112A)
= ₹ 1,80,000
Other income = ₹ 2,75,000
Compute his tax liability for A.Y. 2025-26 if he has not opted for the provisions of Section 115BAC
Solution: Computation of tax liability (amount in ₹):
Particulars ₹
Tax on long-term capital gain u/s 112A [12.5% of ( 1,80,000 – 125000) – 25000 shortfall 3,750
in other income]
Add: Health and education cess @ 4% 150
Tax liability 3,900
Working Note: In this case, the other income falls short of maximum amount not chargeable to
tax by 25,000 [3,00,000 - 2,75,000], hence long term capital gains will be reduced by such
shortfall. Taxable LTCG under Section 112A 55,000. No rebate under Section 87A shall be
admissible from tax on long term capital gains computed as per the provisions of Section 112A of
the Income tax Act, 1961.

Illustration 54
Computation of Capital Gains and Tax liability: Mr. Rajan provides you the following details with
regard to sale of certain securities by him during F.Y. 2024-25:
(i) Sold 10000 shares of A Ltd. on 05-08-2024 @ 650 per share: A Ltd. is a listed
company. These shares were acquired by Mr. Rajan on 05-04-2017 @ 100 per share. STT
was paid both at the time of acquisition as well as at the time of transfer of such shares
which was affected through a recognized stock exchange. On 31-01-2018, the shares of
A Ltd were traded on a recognized stock exchange as under:
Highest price-300 per share
Average price-290 per share
Lowest price-280 per share
(ii) Sold 1000 units of B Mutual Fund on 20-08-2023 @50 per unit: B Mutal Fund is an
equity oriented fund. These units were acquired by Mr. Rajan on 15-04-2017 @ 10 per unit.

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CONTACT NO. FOR CLASSES - 9039600091 pg. 156
 CA VARDHAMAN DAGA

STT was paid only at the time of transfer of such units. On 31-01-2018, the Net Asset
Value of the units of B Mutual Fund was 55 per unit.
(iii) Sold 100 shares of C Ltd. on 25-04-2024 @ 250 per share : C Ltd. is an un-listed
company. These shares were issued by the company as bonus shares on 30-09-1997. The
Fair Market Value of these shares as on 01-04-2001 was 50 per share.
Calculate the amount chargeable to tax under the head Capital Gains and also calculate
tax on such gains for assessment year 2024-25 assuming that the other incomes of Mr.
Rajan exceeds the maximum amount not chargeable to tax. (ignore surcharge and cess).
Cost Inflation Index for various financial year are as under: 2001-02: 100, 2016-17: 264,
2017-18: 272, 2021-22: 301 and 2024-25:363. (6 Marks, Nov. 2019)
Solution: Computation of taxable capital gains and tax thereon (amount in ₹):
Particulars ₹ ₹
Long term Capital gains on sale of Shares of A Ltd. (listed in
RSE)
Full value of consideration 65,00,000
Less: Expenses on transfer Nil
Net consideration 65,00,000
Less: Cost of acquisition (No benefit of indexation is [WN-1] 30,00,000 35,00,000
available)
Long term Capital gains on sale of units of B Mutual Fund
Full value of consideration 50,000
Less: Expenses on transfer Nil
Net consideration 50,000
Less: Cost of acquisition (No benefit of indexation is [WN-2] 50,000 Nil
available)
Long term Capital gains on sale of Shares of C Ltd.
(unlisted company)
Full value of consideration 25,000
Less: Expenses on transfer Nil
Net consideration 25,000
Less: Indexed Cost of acquisition [ 50 x 100 x 363 ÷ 100] 18,150 6,850
Total Taxable LTCG 35,06,850
Computation of tax on Capital gains 4,21,875
Tax on long term capital gains on sale of Shares of A Ltd.
(listed in RSE) taxable u/s 112A @12.5% in excess of
1,25,000
Tax on long term capital gains on sale of Shares of C Ltd. 1,370
(unlisted company) @ 20%
Working Notes:
(1) The cost of acquisition of equity shares shall be determined as under
Step 1: Cost of acquisition of such equity shares (100 x 10,000) i.e. 10,00,000
Step 2: Lower of (a) the fair market value of such asset as on 31-01-2018 (being highest
price i.e. 300 per shares) i.e. 300 × 10,000; or (b) the full value of consideration received
or accruing as a result of the transfer of the capital asset i.e. 65,00,000 = 30,00,000.
Step 3: Cost of acquisition shall be deemed to the amount computed at Step 1 or Step 2
whichever is higher i.e. 30,00,000.
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 CA VARDHAMAN DAGA

(2) The cost of acquisition of mutual fund units shall be determined as under
Step 1: Cost of acquisition of such units ( 10 x 1,000) i.e. 10,000
Step 2: Lower of (a) the fair market value of such asset as on 31-01-2018 ( 55 per unit)
i.e. 55 x 1,000; or (b) the full value of consideration received or accruing as a result of
the transfer of the capital asset i.e. 50,000 = 50,000
Step 3: Cost of acquisition shall be deemed to the amount computed at Step 1 or Step 2
whichever is higher i.e. ₹ 50,000.
Illustration 55
Computation of capital gains in case of conversion of a capital asset into stock-in-trade: Mr.
Govind purchased 600 shares of "Y" limited at 130 per share on 26-02-1979. "Y" limited issued
him, 1,200 bonus shares on 20-02-1984. The fair market value of these share at Mumbai Stock
Exchange as on 01-04-2001 was 900 per share and 2,000 per share as on 31-01-2018. On 31-01-
2024 he converted 1000 shares as his stock in trade. The shares was traded at Mumbai Stock
Exchange on that date at a high of 2,200 per share and closed for the day at 2,100 per share. On
07-07-2024 Mr. Govind sold all 1800 shares @ 2,400 per share at Mumbai Stock Exchange and
securities transaction tax was paid. Compute total income of Mr. Govind for the A.Y. 2025-26. (5
Marks, Nov. 2020)
Solution: Computation of total income of Mr. Govind for the A.Y. 2024-25 (amount in ₹)
Particulars ₹ ₹
I Profits and gains of business and profession
Full value of consideration [1000 shares x 2,400 per share] 24,00,000
Less: FMV on the date of conversion (2,100 x 1000 shares]
[See Note below] 21,00,000 3,00,000
II Capital Gains:
In respect of 800 shares held as capital asset up-to the date
of sale -
Full value of consideration [800 shares x 2,400 per share] 19,20,000
Less: Cost of acquisition [800 shares 2,000] (See Working 16,00,000
Note below)
3,20,000
In respect of 1,000 shares converted into stock in trade
on 31-12024
(Capital gains is taxable in the P.Y. 2024-25, when the stock
in trade is sold) Full value of consideration [1000 shares x 21,00,000
2,100, being FMV on the date of conversion]
Less: Cost of acquisition [1000 shares 2,000] (See Working
Note below) 20,00,000
1,00,000
Total Income 7,20,000
Working Note: Cost of acquisition (per share) (amount in ₹)
Higher of (i) and (ii), below 2,000
i) ₹ 900 per share, being –
In case of shares purchased - Original cost of acquisition
(130) or FMV as on 1-4-2001 (900), at the option of the
assessee In case of bonus shares - FMV as on 1-4-2001 (Nil
or 900, at the option of the assessee)

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 CA VARDHAMAN DAGA

ii) ₹ 2,000 per share, being the lower of FMV as on 31-1-2018 -

₹
2,000 per share Sale consideration - ₹ 2,400 per share
Working Note: Explanation to section 55(2)(ac) defines "fair market value" as the highest price
of capital asset quoted on the stock exchange only for the purpose of the said clause (ac) i.e., to
arrive at the FMV as on 31-1-2018 for computing cost of acquisition of shares.
However, the question states two prices on 31-1-2024, being the date of conversion of capital
asset into stock in trade for which we have to consider the definition of "fair market value" as
per section 2(22B). As per this definition, FMV refers to the price that the capital asset would
ordinarily fetch on sale in the open market on the relevant date. In the question, two prices are
given on the relevant date i.e., the date of conversion of capital asset into stock in trade, namely,
the highest price and the closing price. The above solution is given considering the closing price
as the FMV as on 31-1-2024.

ILLUSTRATION 56
Capital gains on compulsory acquisition under any law: A piece of land owned by Mr. Mishra
located on Jaipur-Delhi highway was acquired by NHAI in the Financial Year 2010-11, but the
award ordered in financial year 2011-12 was paid in the financial year 2024-25. This land was
purchased by him on 2-4-1997 for 1,000. The fair market value of the land as on 1-4-2001 was
₹900. Compensation paid was ₹ 5 lacs.
Other piece of land located in Chennai purchased in April, 2008 for ₹ 25 lacs was also sold by him
in February, 2025 for ₹65 lacs, but sale deed there of could not be executed by 31-3-2025. The
value for the purpose of stamp duty applied by the stamp valuation authority was ₹ 85 lacs.
Compute the income chargeable to tax arising as a result of these transactions in the A.Y. 2025-
26.
The Clls for the F.Y. 2008-09: 137, 2010-11: 167 and 2024-25: 363 respectively.
SOLUTION
Computation of taxable income of Mr. Mishra -
Particulars ₹
Capital Gains:
Long-term capital gain derived from transfer of land on Jaipur-Delhi highway
acquired by NHAI in F.Y. 2010-11 for which award was paid in F.Y. 2024-25 is
chargeable to tax in A.Y, 2025-26 [WN-1]
Sale consideration Le compensation paid 5,00,000
Less: Indexed cost of acquisition (₹ 1,000 × 167)/100 [WN-2] 1,670
4,98,330
Sale of land at Chennai in February 2025 [WN-3]
Full value of consideration as per Section 50C [WN-4] 85,00,000
Less: Cost of acquisition 25,00,000
60,00,000
Long-term capital gains 64,98,330

Working Notes:
(1) The capital gains arising on compulsory acquisition shall be charged to tax in the year in which
the compensation is first received.
(2) The option of fair market value as on 01-04-2001 is not exercised by the assessee since the
fair market value is lower than the cost.

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(3) The execution of sale deed is not compulsory for the purpose of charge of capital gain
because the transfer of right enabling enjoyment of immovable property gives rise to charge
of capital gains as held by the Kerala High Court in the case of CIT v. C.F. Thomas [2006]
284 ITR 557 (Ker.)
(4) As per Section 50C, the value applied by the stamp valuation authority is deemed to be the
full value of consideration received or accruing as a result of such transfer, since such value
is higher than 110% of the sale consideration.

ILLUSTRATION 57
Exemption u/s 54: Hari has acquired a residential house property in Delhi on 1 April, 2001 for
₹10,00,000 and decided to sell the same on 3rd May, 2003 to Ms. Pari and an advance of ₹25,000
was taken from her. The balance money was not paid by Ms. Pari and Hari has forfeited the entire
advance sum. On 3 June, 2024, he has sold this house to Mr. Suri for ₹ 55,00,000. In the meantime
on 4th April, 2024, he had purchased a residential house in Delhi for₹ 8,00,000, where he was
staying with his family on rent for the last 5 years and paid the full amount as per the purchase
agreement. However, Hari does not possess any legal title till 31 March, 2025, as such transfer
was not registered with the registration authority
Hari has purchased another old house in Chennai on 14 th October, 2024, from Mr. X, an Indian
resident by paying ₹ 5,00,000 and purchase was registered with the appropriate authority.
Determine the taxable capital gain arising from above transactions in the hands of Hari.
Cost inflation Index: 2001-02: 100; 2003-04: 109.
SOLUTION
Computation of taxable capital gain in the hands of Mr. Hari:
Particulars ₹
Sale proceeds 55,00,000
Less: Indexed cost of acquisition [WN-1] 35,39,250
Long Term Capital Gain 19,60,750
Less: Exemption u/s 54 in respect of investment in house at Delhi and Chennai 13,00,000
[WN-2]
Taxable Long-Term capital gain 6,60,750
Working Notes:
(1) Computation of indexed cost of acquisition:
Particulars ₹
Cost of acquisition 10,00,000
Less: Advance taken and forfeited 25,000
Cost for the purpose of Indexation 9,75,000
Indexed cost of acquisition (₹9,75,000 × 363 + 100) 35,39,250

(2) In order to avail exemption of capital gains under section 54, new residential house should be
purchased within 1 year before or 2 years after the date of transfer or constructed within a
period of 3 years after the date of transfer.
In this case, Hari has purchased the residential house in Delhi within 1 year before the date of
transfer and paid the full amount as per the purchase agreement, though he does not possess any
legal title till 31-3-2025 since the transfer was not registered with the registration authority.
However, for the purpose of claiming exemption under section 54, holding of legal title is not
necessary. If the taxpayer pays the full consideration in terms of the purchase agreement within

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the stipulated period, the exemption under section 54 would be available. It was so held in Balraj
v CIT [2002] 254 ITR 22 (Del) and CIT v. Shahzada Begum [1988] 1731/R397 (A.R)
Hari has purchased the Chennai house within 2 years after the date of transfer. Since the amount
of capital gains does not exceed 2 crores he will be entitled exemption is respect of second house
also.

ILLUSTRATION 58
Section 50C and Exemption u/s 54F: Mr. X sold a plot of land to Mr. Y for ₹ 50,00,000 on 15
July 2024 The said plot of land was acquired on 15th March 2000 for a sum of ₹ 1,01,000. The
fair market value of plot of land as on 1 April 2001 was ₹ 1,00,000. Mr. Y paid stamp duty ₹
6.20,000 @ 10% of stamp value Mr. X did not objected the stamp duty value of the plot of land.
Mr. X invested ₹ 54,00,000 (₹4,00,000 was invested out of agricultural income) on 31-03-2025
for construction of new residential house for claiming exemption under section 54F. The
Assessing Officer allowed exemption under section 54F, taking into consideration investment in
construction of residential house, to the extent of actual net consideration of ₹ 50 lakhs. He had
not considered the balance amount of ₹ 4 lakhs, invested in the construction of residential house,
out of agricultural income, for computation of exemption under section 54F
Discuss whether the contention of assessing officer is correct in law. Also compute taxable capital
gains in hands of Mr. X and tax implications in hands of Mr. Y for Assessment Year 2025-26.
SOLUTION
The facts of the case are similar to the decision of Gouli Mahadevappa v. ITO [2013] 356 ITR
90 (Kar.) The High Court held that when capital gain is assessed on notional basis as per the
provisions of section 50C and the higher value Le, the stamp duty value of ₹ 62 lakhs under section
50C has been adopted as the full value of consideration, then the entire amount of ₹ 54 lakhs
reinvested in the residential house within the prescribed period should be considered for the
purpose of exemption under section 54F irrespective of the source of funds for such
reinvestment.
The capital gains in hands of Mr. X will be computed as under
Particulars ₹
Full Value of consideration (Stamp duty value since it is more than 110% of actual 62,00,000
consideration)
Less: Indexed Cost of acquisition (₹ 1,01,000x363/100) 3,66,630
Capital Gains 58,33,370
Less: Exemption under Section 54F (₹ 58.33.370 x 54,00,000/₹62,00,000) 50,80,677
Taxable Capital Gains 7,52,693
Tax implications in hands of Mr. Y. : Immovable property acquired for inadequate
considerations taxable us 56(2x) if the difference between the stamp duty value and
consideration exceeds higher of 10% of consideration or ₹ 50.000 whichever is higher. Hence,
income of t ₹ 12,00,000 will be chargeable to tas in hands of Mr. Y under Income from other
sources

ILLUSTRATION 59
First Proviso to Section 48 : Rakshit, a non-resident, remits US $ 80,00,000 to India on 16 th
September, 2001. The amount is partly utilised on 3rd October, 2001 for purchasing 10,000 shares
in Amrit Ltd., an Indian company, at the rate of ₹ 12 per share. These shares are sold for ₹ 48.40
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per share on 28th February, 2025. Compute the capital gains chargeable to tax on the assumption
that telegraphic transfer buying and selling rate of US dollars adopted by the State Bank of India
is as follows :

Telegraphic Transfer Rate

Buy a US $ (₹) Sell a US $
(₹)
16th September, 2001 18 20
3rd October, 2001 19 21
28th February, 2025 79 81
SOLUTION
Computation of capital gains chargeable to tax –
Particulars US $
Full value of consideration (₹ 48.40 × 10,000 ÷ ₹ 80) (Avg. exchange rate on date 6,050.00
of transfer i.e. 28-2-2025)
Less: Cost of acquisition (₹ 12 ×10,000 ÷ ₹ 20) (Avg. exchange rate on date of 6,000.00
purchase i.e. 03-10-2001)
Capital Gains 50.00
Capital Gains (in ₹)= Gains in US $ × ₹ 59 (TT buying rate on date of transfer i.e. ₹ 3,950
28-2-2025)
ILLUSTRATION 60
Computation of total income and tax liability : X (52 years) acquires 5,000 shares in XYZ Ltd.
on 5th February, 2018 (through a transaction in NSE) at the rate of ₹ 150 per share. Fair market
value on 31st January, 2018 as per highest quotation in NSE is ₹ 140 per share. He transfers 4,000
shares in XYZ Ltd. on 1st March, 2025 at the rate of ₹ 530 per share (shares are transferred
through National Stock Exchange).
His income from other sources is ₹ 1,10,00,000 for the previous year 2024-25. Y has brought
forward long-term capital loss of ₹ 4,00,000 (assessment year 2021-22). X is eligible for a
deduction of ₹ 2,00,000 under section 80CCD.
Compute his tax liability if he shift out of the default tax regime and pay tax under the optional
tax regime as per the normal provisions of the Act.
SOLUTION Computation of total income and tax liability :
Particulars ₹
Full value of consideration (₹ 530 × 4,000 shares) 21,20,000
Less: Cost of acquisition (₹ 150 × 4,000 shares) 6,00,000
Long-term capital gain 15,20,000
Less: Brought forward long-term capital loss 4,00,000
Long-term capital gain 11,20,000
Income from other sources 1,10,00,000
Gross total income 1,21,20,000
Less: Deduction u/s 80CCD 2,00,000
Net income 1,19,20,000
Computation of tax :
Income-tax on long-term capital gain u/s 112A [12.5% (₹ 11,20,000 – ₹ 1,24,375
1,25,000 being exemption limit)]
Income-tax on other income of ₹ 1,08,00,000 30,52,500
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Income-tax 31,76,875
Add: Surcharge @ 15% 4,76,531
Income-tax and surcharge 36,53,406
Add: Health and education cess @ 4% 1,46,136
Tax liability (rounded off) 37,99,540

ILLUSTRATION 61
Computation of total income and tax liability : Mr. X (52 years) purchased 1,000 shares in PQR
Ltd.. on 10-07-2012 from a friend at the rate of ₹ 158 per share (though shares in PQR Ltd.. are
quoted in Bombay Stock Exchange, securities transaction tax is not paid as transaction is made
outside the stock exchange). Highest market quotation on 31 st January, 2018 is ₹ 298 per share.
He transfers 1000 shares in PQR Ltd.. on 15 th June, 2024 at the rate of ₹ 389 per share
(securities transaction tax is paid at the time of transfer). Income of X from other sources for
the previous year 2024-25 is ₹ 18,00,000.
Determine his tax liability if he shift out of the default tax regime and pay tax under the optional
tax regime as per the normal provisions of the Act.
SOLUTION
Shares were purchased outside stock exchange. Securities transaction tax was not paid at
the time of acquisition hence tax will be computed under section 112 as follows–
Particulars ₹
Full value of consideration (₹ 389 × 1000 shares) 3,89,000
Less: Indexed cost of acquisition [₹ 158 × 1000 × 363 ÷ 200] 2,86,770
Long-term capital gain 1,02,230
Income from other sources 18,00,000
Net income 19,02,230
Computation of tax :
Income-tax on long-term capital gain u/s 112 [20% of ₹ 1,02,230 or 10% of capital 20,446
gain without indexation of ₹ 2,31,000 i.e. [(389 -158) × 1000], whichever is lower]
Tax on other income 3,52,500
Income-tax 3,72,946
Add: Health and education @ 4% 14,918
Tax liability (rounded off) 3,87,860

ILLUSTRATION 62
Computation of total income and tax liability : Mr. X (61 years) acquires 5,000 equity shares in
PQR Ltd. on 16th March, 2006. He gets 5,000 bonus shares on 11th March,2012.He transferred
original shares in the previous year 2019-20. He transfers 5,000 bonus shares on 10 th July 2024,
at the rate of ₹ 880 per share. Fair market value of shares in PQR Ltd. as per Bombay Stock
Exchange quotation is ₹ 280 on 31st January, 2018. Income of X for the previous year 2024-25
from other sources is ₹ 25,00,000. He has a brought forward short-term capital loss of ₹
3,00,000 pertaining to the assessment year 2021-22. Determine his tax liability if he shift out
of the default tax regime and pay tax under the optional tax regime as per the normal provisions
of the Act.
SOLUTION Computation of total income and tax liability :
Particulars ₹
Full value of consideration (₹ 880 × 5,000 shares) 44,00,000
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Less: Cost of acquisition [₹ 280 × 5,000 shares) 14,00,000

Long-term capital gain 30,00,000
Less: Brought forward capital loss 3,00,000
Long-term capital gain 27,00,000
Other income 25,00,000
Net income 52,00,000
Computation of tax :
Income-tax on long-term capital gain u/s 112A [12.5% of [₹ 27,00,000 – ₹ 3,21,875
1,25,000]]
Income-tax on other income of ₹ 25,00,000 4,40,000
Income-tax 7,61,875
Add: Surcharge @ 10% 76,188
Income-tax and surcharge 8,38,063
Add: HEC @ 4% 33,523
Tax liability (rounded off) 8,71,590

ILLUSTRATION 63
Taxability of capital gains : Ms. Smriti purchased 40 capital indexed bonds issued by
Government listed in RSE for ₹ 10,000 each on 01-04-2008. She sold all the bonds @ ₹ 40,500
per bond on 28th June 2024. She invested ₹ 80,000 in bonds of NABARD on 01-11-2024 and ₹
70,000 in the bonds National Highway Authority of India on 31-03-2025. Compute the tax liability
of Ms. Smriti assuming that she has no other income chargeable to tax and if she shift out of the
default tax regime and pay tax under the optional tax regime as per the normal provisions of the
Act.
SOLUTION Computation of tax liability of Ms. Smriti :
Particulars ₹
Full value of consideration (₹ 40,500 × 40) 16,20,000
Less: Indexed Cost of acquisition (40 × ₹ 10,000 × 363 ÷ 137) 10,59,854
Long-term capital gains 5,60,146
Less: Exemption u/s 54EC [WN-1] Nil
Taxable long-term capital gains 5,60,146
Total Income (rounded off) 5,60,150
Tax on LTCG (No rebate u/s 87A is admissible since, total income exceeds ₹
5,00,000) [WN-2] 62,030
Add: Health & Education cess @ 4% 2,481
Tax Liability (rounded off to nearest ₹ 10) 64,511
Working Notes :
(1) Benefit of Section 54EC is not available on LTCG arising from transfer of bonds.
(2) Tax on LTCG shall be lower of the following :
(a) 20% of (LTCG – basic exemption limit of ₹ 2,50,000) = 20% of (₹ 6,03,940 – ₹ 2,50,000)
= ₹ 70788
(b) 10% of LTCG without indexation & basic exemption = 10% of [(₹ 40,500 – ₹ 10,000) × 40]
= ₹ 122000.
ILLUSTRATION 64
Exemption u/s 54 : Mr. Surinder furnishes the following particulars for the previous year ending
31-03-2025. He had a Residential House, inherited from his father in December 2009, the Fair

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Market Value of which on 01-04-2001 is ₹ 13 lakhs. In the year 2013-14, further construction and
improvements costing of ₹ 10 lakhs. The House was originally purchased by his father on 01-03-
2000 for ₹ 10 lakhs. On 10-05-2024, the House was sold for ₹ 80 lakhs. Expenditure in connection
with transfer is ₹ 50,000. On 20-12-2024, he purchased a Residential House for ₹ 12 lakhs and
he does not own any other house. Compute the taxable Capital Gain for the assessment year 2025-
26.
(Cost Inflation Index: F.Y. 2013-14 = 220, F.Y. 2025-26 = 363, F.Y. 2009-10 = 148 and F.Y. 2001-
02 = 100) (4 Marks, May 2024)
SOLUTION
Computation of Taxable Capital Gains for A.Y. 2025-26
Particulars ₹
Less: Expenditure in connection with transfer 50,000
Net Sales Consideration 79,50,000
Less: Indexed cost of acquisition [₹ 13,00,000 (higher of actual cost to the 47,19,000
previous owner of ₹ 10 lakhs and Fair market value as on 1.4.2001 of ₹ 13 lakhs)
× 363/100]
Less: Indexed cost of improvements [₹ 10 lakhs × 363/220] 16,50,000
15,81,000
Less: Exemption u/s 54 – in respect of residential house purchased on 12,00,000
20.12.2024
Taxable Long Term Capital Gains 3,81,000
Note : The above answer is on the basis of the view expressed by Bombay High Court in CIT
v. Manjula J. Shah 16 Taxman 42, wherein it was held that Indexed cost of acquisition in case
of gifted asset has to be computed with reference to the year in which the previous owner first
held the asset and not the year in which the assessee became the owner of the asset.

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CHAPTER - 7 : INCOME FROM OTHER SOURCES

STUDY MATERIAL
ILLUSTRATION 1
Rahul, a resident Indian, holding 28% of equity shares in a company, took a loan of ₹ 5,00,000
from the same company. On the date of granting the loan, the company had accumulated profit of
₹ 4,00,000. The company is engaged in some manufacturing activity.
(i) Is the amount of loan taxable as deemed dividend, if the company is a company in which the
public are substantially interested?
(ii) What would be your answer, if the lending company is a private limited company (i.e. which is
not a company in which the public are substantially interested)?
SOLUTION
Any payment by a company, other than a company in which the public are substantially interested,
of any sum by way of advance or loan to an equity shareholder, being a person who is the beneficial
owner of shares holding not less than 10% of the voting power, is deemed as dividend under section
2(22)(e), to the extent the company possesses accumulated profits.
(i) The provisions of section 2(22)(e), however, will not apply where the loan is given by a
company in which public are substantially interested. In such a case, the loan would not be
taxable as deemed dividend.
(ii) However, if the loan is taken from a private company (i.e., a company in which the public are
not substantially interested), which is a not a company where lending of money is a
substantial part of the business of the company, the provisions of section 2(22)(e) would
be attracted. In this case, since the company is a manufacturing company and not a lending
company and Rahul holds more than 10% of the equity shares in the company, the provisions
of section 2(22)(e) would be attracted. The amount chargeable as deemed dividend cannot,
however, exceed the accumulated profits held by the company on the date of giving the
loan. Therefore, the amount taxable as deemed dividend would be limited to the
accumulated profit i.e., ₹ 4,00,000 and not the amount of loan which is ₹ 5,00,000.

ILLUSTRATION 2
Mr. A, a dealer in shares, received the following without consideration during the P.Y. 2024-25
from his friend Mr. B,
(1) Cash gift of ₹ 75,000 on his anniversary, 15th April, 2024.
(2) Bullion, the fair market value of which was ₹ 60,000, on his birthday, 19th June, 2024.
(3) A plot of land at Faridabad on 1st July, 2024, the stamp value of which is ₹ 5 lakh on that
date. Mr. B had purchased the land in April, 2009.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd. @ ₹
400 each on 19th June, 2023, the fair market value of which was ₹ 600 each on that date. Mr. A
sold these shares in the course of his business on 23rd June, 2024.
Further, on 1st November, 2024, Mr. A took possession of property (office building) booked by
him two years back at ₹ 20 lakh. The stamp duty value of the property as on 1st November, 2024
was ₹ 32 lakh and on the date of booking was ₹ 23 lakh. He had paid ₹ 1 lakh by account payee
cheque as down payment on the date of booking.
On 1st March, 2025, he sold the plot of land at Faridabad for ₹ 7 lakh.

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Compute the income of Mr. A chargeable under the head “Income from other sources” and “Capital
Gains” for A.Y. 2025-26.
SOLUTION
Computation of “Income from other sources” of Mr. A for the A.Y. 2025-26
Particulars ₹
1) Cash gift is taxable under section 56(2)(x), since it exceeds ₹ 50,000 75,000
(2) Since bullion is included in the definition of property, therefore, when bullion 60,000
is received without consideration, the same is taxable, since the aggregate fair
market value exceeds ₹ 50,000
(3) Stamp value of plot of land at Faridabad, received without consideration, is
taxable under section 56(2)(x) 5,00,000
(4) Difference of ₹ 2 lakh in the value of shares of X Ltd. purchased from Mr. C, -
a dealer in shares, is not taxable as it represents the stock-in trade of Mr. A.
Since Mr. A is a dealer in shares and it has been mentioned that the shares were
subsequently sold in the course of his business, such shares represent the stock-
in-trade of Mr. A.
( (5) Difference between the stamp duty value of ₹ 23 lakh on the date of booking 3,00,000
and the actual consideration of ₹ 20 lakh paid is taxable under section 56(2)(x)
since the difference exceeds ₹ 2,00,000, being the higher of ₹ 50,000 and 10%
of consideration
Income from Other Sources 9,35,000

Computation of “Capital Gains” of Mr. A for the A.Y.2025-26

Particulars ₹
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to tax under 5,00,000
section 56(2)(x) as per section 49(4)]
Short-term capital gains 2,00,000
Note – The resultant capital gains will be short-term capital gains since for calculating the period
of holding, the period of holding of previous owner is not to be considered .

ILLUSTRATION 3
Discuss the taxability or otherwise of the following in the hands of the recipient under section
56(2)(x) the Income-tax Act, 1961
(i) Akhil HUF received ₹ 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister).
Akhil is the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is ₹ 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25th
marriage anniversary. The fair market value on that date was ₹ 100 per share. He also
received jewellery worth ₹45,000 (FMV) from his nephew on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board
examination. The fair market value of the car is ₹ 5,25,000.
SOLUTION
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 CA VARDHAMAN DAGA

Taxable/ Amount Reason

Non liable to
taxable tax (₹)
(i) Taxable 75,000 Sum of money exceeding ₹ 50,000 received without
consideration from a non-relative is taxable under section
56(2)(x). Daughter of Mr. Akhil’s sister is not a relative of
Akhil HUF, since she is not a member of Akhil HUF.
(ii) Non-taxable Nil Immovable property received without consideration by a HUF
from its relative is not taxable under section 56(2)(x). Since
Nitisha is a member of the HUF, she is a relative of the HUF.
However, income from such asset would be included in the
hands of Nitisha under 64(2).
(iii) Taxable 55,000 As per provisions of section 56(2)(x), in case the aggregate
fair market value of property, other than immovable property,
received without consideration exceeds ₹ 50,000, the whole
of the aggregate value shall be taxable. In this case, the
aggregate fair market value of shares (₹ 10,000) and jewellery
(₹ 45,000) exceeds ₹ 50,000. Hence, the entire amount of `
55,000 shall be taxable.
(iv) Non-taxable Nil Car is not included in the definition of property for the
purpose of section 56(2)(x), therefore, the same shall not be
taxable.

ILLUSTRATION 4
Mr. Hari, a property dealer, sold a building in the course of his business to his friend Mr. Rajesh,
who is a dealer in automobile spare parts, for ₹ 90 lakh on 1.1.2025, when the stamp duty value
was ₹ 150 lakh. The agreement was, however, entered into on 1.9.2024 when the stamp duty value
was ₹ 140 lakh. Mr. Hari had received a down payment of ₹ 15 lakh by a crossed cheque from
Rajesh on the date of agreement. Discuss the tax implications in the hands of Hari and Rajesh,
assuming that Mr. Hari has purchased the building for ₹ 75 lakh on 12th July, 2023.
Would your answer be different if Hari was a share broker instead of a property dealer?
SOLUTION
Case 1: Tax implications if Mr. Hari is a property dealer
In the hands of the seller, Mr. Hari In the hands of the buyer, Mr. Rajesh
In the hands of Hari, the provisions of section Since Mr. Rajesh is a dealer in automobile
43CA would be attracted, since the building spare parts, the building purchased would be a
represents his stock-in-trade and he has capital asset in his hands. The provisions of
transferred the same for a consideration less section 56(2)(x) would be attracted in the
than the stamp duty value; and the stamp duty hands of Mr. Rajesh who has received
value exceeds 110% of consideration. immovable property, being a capital asset, for
Under section 43CA, the option to adopt the inadequate consideration and the difference
stamp duty value on the date of agreement can between the consideration and stamp duty
be exercised only if whole or part of the value exceeds ₹ 9,00,000, being the higher of

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consideration has been received on or before ₹ 50,000 and 10% of consideration.

the date of agreement by way of account Therefore, ₹ 60 lakh, being the difference
payee cheque or draft or by use of ECS between the stamp duty value of the property
through a bank account or through credit card, on the date of registration (i.e., ₹ 150 lakh)
debit card, net banking, IMPS (Immediate and the actual consideration (i.e., ₹ 90 lakh)
payment Service), UPI (Unified Payment would be taxable under section 56(2)(x) in the
Interface), RTGS (Real Time Gross hands of Mr. Rajesh, since the payment on the
Settlement), NEFT (National Electronic Funds date of agreement is made by crossed cheque
Transfer), and BHIM (Bharat Interface for and not account payee cheque/draft or ECS or
Money) Aadhar Pay on or before the date of through credit card, debit card, net banking,
agreement. In this case, since the down IMPS (Immediate payment Service), UPI
payment of ` 15 lakh is received on the date (Unified Payment Interface), RTGS (Real Time
of agreement by crossed cheque and not Gross Settlement), NEFT (National Electronic
account payee cheque, the option cannot be Funds Transfer), and BHIM (Bharat Interface
exercised. Therefore, ₹ 75 lakh, being the for Money) Aadhar Pay.
difference between the stamp duty value on
the date of transfer i.e., ₹ 150 lakh, and the
purchase price i.e., ₹ 75 lakh, would be
chargeable as business income in the hands of
Mr. Hari, since stamp duty value exceeds
110% of the consideration
Case 2: Tax implications if Mr. Hari is a share broker
In the hands of the seller, Mr. Hari In the hands of the buyer, Mr. Rajesh
In case Mr. Hari is a share broker and not a There would be no difference in the taxability
property dealer, the building would represent in the hands of Mr. Rajesh, whether Mr. Hari
his capital asset and not stock-in-trade. In is a property dealer or a stock broker.
such a case, the provisions of section 50C Therefore, the provisions of section 56(2)(x)
would be attracted in the hands of Mr. Hari, would be attracted in the hands of Mr. Rajesh
since building is transferred for a who has received immovable property, being a
consideration less than the stamp duty value; capital asset, for inadequate consideration and
and the stamp duty value exceeds 110% of the difference between the consideration and
consideration. Thus, ₹ 75 lakh, being the stamp duty value exceeds ₹ 9,00,000, being
difference between the stamp duty value on the higher of ₹ 50,000 and 10% of
the date of registration (i.e., ₹ 150 lakh) consideration.
and the purchase price (i.e., ₹ 75 lakh) Therefore, ₹ 60 lakh, being the difference
would be chargeable as short-term capital between the stamp duty value of the property
gains. on the date of registration (i.e., ₹ 150 lakh)
It may be noted that under section 50C, the and the actual consideration (i.e., ₹ 90 lakh)
option to adopt the stamp duty value on the would be taxable under section 56(2)(x) in the
date of agreement can be exercised only if hands of Mr. Rajesh, since the payment on the
whole or part of the consideration has been date of agreement is made by crossed cheque
received on or before the date of agreement and not account payee cheque/draft or ECS or
by way of account payee cheque or draft or by through credit card, debit card, net banking,
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use of ECS through a bank account or through IMPS (Immediate

credit card, debit card, net banking, IMPS payment Service), UPI (Unified Payment
(Immediate payment Service), UPI (Unified Interface), RTGS (Real Time Gross
Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay.
Money) Aadhar Pay on or before the date of
agreement. In this case, since the down
payment of ` 15 lakhs has been received on the
date of agreement by crossed cheque and not
account payee cheque, the option cannot be
exercised.

ILLUSTRATION 5
Compensation on account of disaster received from a local authority by an individual or his/her
legal heir is taxable. Examine the correctness of the statement with reference to the provisions
of the Income-tax Act, 1961.
SOLUTION
The statement is not correct. As per section 10(10BC), any amount received or receivable as
compensation by an individual or his/her legal heir on account of any disaster from the Central
Government, State Government or a local authority is exempt from tax. However, the exemption
is not available to the extent such individual or legal heir has already been allowed a deduction
under this Act on account of such loss or damage caused by such disaster.

ILLUSTRATION 6
Interest on enhanced compensation received by Mr. G during the previous year 2024-25 is ₹
5,00,000. Out of this interest, ₹ 1,50,000 relates to the previous year 2020-21, ₹ 1,65,000
relates to previous year 2021-22 and ₹ 1,85,000 relates to previous year 2022-23. Discuss the
tax implication, if any, of such interest income for A.Y.2025-26.
SOLUTION
The entire interest of ₹ 5,00,000 would be taxable in the year of receipt, namely, P.Y. 2024-25.
Particulars ₹
Interest chargeable under the head “Income from other sources” 2,50,000

TEST YOUR KNOWLEDGE

ILLUSTRATION -7.
Examine under which heads the following incomes are taxable:
(i) Rental income in case property held as stock-in-trade for 3 years
(ii) Salary received by a partner from his partnership firm
(iii) Rental income of machinery
(iv) Winnings from lotteries by a person having the same as business activity
(v) Salaries received by a Member of Parliament
(vi) Receipts without consideration
(vii) In case of retirement, interest on employee’s contribution if provident fund is unrecognized.
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(viii) Rental income in case of a person engaged in the business of letting out of properties.
Ans- Head under which following incomes are taxable:
Particulars Head of Income
(i) Rental income in case property held as stock-in Income from house property
trade for 3 years
(ii) Salary by partner from his partnership firm Profits and gains of business or
profession
(iii) Rental income of machinery (See Note below) Profits and gains of business or
profession/Income from other
sources
(iv) Winnings from lotteries by a person having the same Income from other sources
as business activity
(v) Salaries payable to a Member of Parliament Income from other sources
(vi) Receipts without consideration Income from other sources
(vii) In case of retirement, interest on employee’s Income from other sources
contribution if provident fund is unrecognized
(viii) Rental income in case of a person engaged in the Profits and gains from business or
business of letting out of properties profession
Note - As per section 56(2)(ii), rental income of machinery would be chargeable to tax under the
head “Income from Other Sources”, if the same is not chargeable to income-tax under the head
“Profits and gains of business or profession”.

ILLUSTRATION-8.
Examine whether the following are chargeable to tax and the amount liable to tax:
(i) A sum of ₹ 1,20,000 was received as gift from non-relatives by Raj on the occasion of
the marriage of his son Pravin.
(ii) Interest on enhanced compensation of ₹ 96,000 received on 12-3-2025 for acquisition
of urban land, of which 40% relates to P.Y.2023-24.
Ans- Taxability of Receipts
S. No. Taxable/ Not Taxable Amount liable to tax (₹)
(i) Taxable 1,20,000
(ii) Taxable 48,000

ILLUSTRATION-9.
On 10.10.2024, Mr. Govind (a bank employee) received ₹ 5,00,000 towards interest on enhanced
compensation from State Government in respect of compulsory acquisition of his land effected
during the financial year 2016-17.
Out of this interest, ₹ 1,50,000 relates to the financial year 2017-18; ₹ 1,65,000 to the financial
year 2018-19; and ₹ 1,85,000 to the financial year 2019-20. He incurred ₹ 50,000 by way of legal
expenses to receive the interest on such enhanced compensation.
How much of interest on enhanced compensation would be chargeable to tax in the A.Y.2025-26?
Ans- Section 56(2)(viii) states that such income shall be taxable as ‘Income from other sources’.
50% of such income shall be allowed as deduction by virtue of section 57(iv) and no other
deduction shall be permissible from such Income.
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Therefore, legal expenses incurred to receive the interest on enhanced compensation would not
be allowed as deduction from such income.

ILLUSTRATION -10. The following details have been furnished by Mrs. Hemali pertaining to the
year ended 31.3.2025:
(i) Cash gift of ₹ 51,000 received from her friend on the occasion of her “Shastiaptha Poorthi”,
a wedding function celebrated on her husband completing 60 years of age. This was also her
25th wedding anniversary.
(ii) On the above occasion, a diamond necklace worth ₹ 2 lacs was presented by her sister living
in Dubai.
(iii) When she celebrated her daughter's wedding on 21.2.2025, her friend assigned in Mrs.
Hemali's favour, a fixed deposit held by the said friend in a scheduled bank; the value of
the fixed deposit and the accrued interest on the said date was ₹ 52,000.
Compute the income, if any, assessable as “Income from other sources” for A.Y.2025-26.
Ans-
(i) Any sum of money received by an individual on the occasion of the marriage of the individual
is exempt. This provision is, however, not applicable to a cash gift received during a wedding
function celebrated on completion of 60 years of age.
The gift of ₹ 51,000 received from a non-relative is, therefore, chargeable to tax under
section 56(2)(x) in the hands of Mrs. Hemali, since the same exceeds ₹ 50,000.
(ii) The provisions of section 56(2)(x) are not attracted in respect of any sum of money or
property received from a relative. Thus, the gift of diamond necklace received from her
sister, being a relative, is not taxable under section 56(2)(x), even though jewellery falls
within the definition of “property”.
(iii) To be exempt from applicability of section 56(2)(x), the property should be received on the
occasion of the marriage of the individual, not that of the individual’s son or daughter.
Therefore, this exemption provision is not attracted in this case.
Any sum of money received without consideration by an individual is chargeable to tax under
section 56(2)(x), if the aggregate value exceeds ₹ 50,000 in a year. “Sum of money” has,
however, not been defined under section 56(2)(x).
Therefore, there are two possible views in respect of the value of fixed deposit assigned
in favour of Mrs. Hemali –
(1) The first view is that fixed deposit does not fall within the meaning of “sum of money”
and therefore, the provisions of section 56(2)(x) are not attracted. It may be noted
that fixed deposit is also not included in the definition of “property”.
(2) However, another possible view is that fixed deposit assigned in favour of Mrs. Hemali
falls within the meaning of “sum of money” received.
Income assessable as “Income from other sources”
If the first view is taken, the total amount chargeable to tax as “Income from other sources”
would be ₹ 51,000, being cash gift received from a friend on her Shastiaptha Poorthi.
As per the second view, the provisions of section 56(2)(x) would also be attracted in respect of
the fixed deposit assigned and the “Income from other sources” of Mrs. Hemali would be ₹
1,03,000 (₹ 51,000 + ₹ 52,000).

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ILLUSTRATION -11.
Examine the following transactions in the context of Income-tax Act, 1961:
(i) Mr. B transferred 500 shares of R (P) Ltd. to M/s. B Co. (P) Ltd. on 10.10.2024 for ₹
3,00,000 when the fair market value was ₹ 5,00,000. The indexed cost of acquisition of
shares for Mr. B was computed at ₹ 4,45,000. The transfer was not subjected to securities
transaction tax.
Determine the income chargeable to tax in the hands of Mr. B and M/s. B Co. (P) Ltd.
because of the above said transaction.
(ii) Mr. Chezian is employed in a company with taxable salary income of ₹ 5,00,000. He received
a sum of ₹ 1,00,000 from Atma Charitable Trust (registered under section 12AB) by account
payee cheque in December 2024 for meeting his medical expenses. Is the sum of money so
received from the trust chargeable to tax in the hands of Mr. Chezian?
Ans-
(i) Any movable property received for inadequate consideration by any person is chargeable to
tax under section 56(2)(x), if the difference between aggregate Fair Market Value of the
property and consideration exceeds ₹ 50,000.
Thus, share received by M/s B. Co. (P) Ltd. from Mr B for inadequate consideration is
chargeable to tax under section 56(2)(x) to the extent of ₹ 2,00,000.
As per section 50CA, since, the consideration is less than the fair market value of unquoted
shares of R (P) Ltd., fair market value of shares of the company would be deemed to be the
full value of consideration. It is presumed that the shares of R (P) Ltd are unquoted shares.
The full value of consideration (₹ 5,00,000) less the indexed cost of acquisition (₹ 4,45,000)
would result in a long term capital gains of ₹ 55,000 in the hands of Mr. B.
(ii) The provisions of section 56(2)(x) would not apply to any sum of money or any property
received from any trust or institution registered under section 12AB. Therefore, the sum
of ₹ 1 lakh received from Atma Charitable Trust, being a trust registered under section
12AB, for meeting medical expenses would not be chargeable to tax under section 56(2)(x)
in the hands of Mr. Chezian.

PAST EXAM QUESTION

ILLUSTRATION-12
Taxation of dividends received from domestic companies: Mr. X resident individual 45 years of
age gives the following information pertaining to the assessment year 2025-26:
Particulars ₹
Business Income 15,00,000
Dividend from shares of Indian company (net) 9,00,000
Interest Expenses incurred on making investment in shares 2,50,000
Long term capital gains on sale of building (after indexation) 18,60,000
Determine the amount of Total Income and tax liability for the assessment year 2025-26 if he
has shifted out of default tax regime.
Solution: Computation of amount of total income and tax liability for AY 2025-26 (amount in ₹):
Particulars ₹ ₹
Business Income 15,00,000

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Long term capital gains on sale of building 18,60,000

Income from other sources:
Dividend from shares of Indian company [Gross Amount (9,00,000 10,00,000
x 100/90)]
Interest Expenses incurred for making investment in shares 2,00,000 8,00,000
(Subject to maximum of 20% of dividend income)
Total Income (rounded off 41,60,000
Tax liability:
Particulars ₹
Long term capital gains taxable under Section 112 @ 20% 3,72,000
(₹ 18,60,000 × 20%)
Balance Income taxable at normal rates (₹ 23,00,000) 5,02,500
Total Tax 8,74,500
Add: HEC @ 4% 34,980
Total tax liability (rounded off) 9,09,480
Less: TDS u/s 194 on dividends 1,00,000
Tax payable 8,09,480

ILLUSTRATION 13
Taxability of deemed dividend u/s 2(22)(e): Rahul, holding 28% of equity shares in a company,
took a loan of 5,00,000 from the same company. On the date of granting the loan, the company
had accumulated profits of 4,00,000. The company is engaged in some manufacturing activity.
(i) Is the amount of loan taxable as deemed dividend in the hands of Rahul, if the company is
a company in which the public are substantially interested?
(ii) What would be your answer, if the lending company is a private limited company (i.e.) a
company in which the public are not substantially interested?
Solution:
i) The provisions of section 2(22)(e) will not apply where the loan is given by a company in
which public are substantially interested. In the given case, the loan would not be taxable
as deemed dividend in the hands of Rahul as the company which has extended loan is a
company in which public are substantially interested.
ii) If the loan is taken from a private limited company (i.e. a company in which the public are
not Substantially interested), which is a manufacturing company and not a company where
lending of money is a substantial part of the business of the company, then, the provisions
of section 2(22)(e) would be attracted.
Since Rahul is holding more than 10% of the equity shares in the company, thus loan granted
by the company to him is treated as deemed dividend to the extent of accumulated profits.
Hence, the loan of 5 lakhs shall be deemed to be dividend in the hands of Mr. Rahul only
upto the extent of accumulated profits of ₹ 4 lakhs. Accordingly, 4 lakhs shall be taxable
in the hands of Mr. Rahul under section 2(22)(e) as deemed dividend.

ILLUSTRATION - 14.
Examine with brief reasons, whether the following is chargeable to income-tax and the
amount liable to tax with reference to the provisions of the Income-tax Act, 1961: During
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 CA VARDHAMAN DAGA

the previous year 2024-25, Mrs. Aishwarya, resident, received a sum of 8,50,000 as dividend
from Indian companies and 4,00,000 as dividend from Indian equity oriented mutual fund units.
Ans. Dividend from shares of Indian company and Dividend from units of Indian Equity oriented
mutual fund is taxable in hands of Mrs. Aishwarya, Total amount received if ₹ 12,50,000. Gross
amount taxable in hands of Ashwariys will be (12,50,000 ÷ 90) x100=1,388,889.

Illustration 15
Taxability of gifts: Discuss the taxability of the following receipts in the hands of Mr. Sanjay
Kamboj under the Income-tax Act, 1961 for A.Y. 2025-26:
i) ₹ 51,000 received from his sister living in US on 1-6-2024.
ii) Received a car from his friend on payment of 2,50,000, the FMV of which was 5,50,000.
Provisions of taxability or Non-taxability must be discussed.
Solution
i) Not taxable : Gift from sister i.e. 'relative' is not liable to tax under section 56(2)(x).
ii) Not taxable: Car is not included in the definition of property for the purpose of Section
56(2)(x), therefore, the same shall not be taxable.

Illustration 16
Taxability of the gifts: Mr. Sharma asks you to compute his taxable income from the following
transactions which took place with his friends during January 2025
i) Cash gifts received by him from Mr. A and Mr. Z: 32,000 each;
ii) Two plot of lands gifted to him by Mr. B and Mr. C whose stamp values are 3,50,000 and
50,000 respectively;
iii) He purchased a residential house at ₹ 6,00,000 from Mr. D, which was not registered,
but the prevalent stamp value of which was 7,50,000;
iv) A sculpture and jewellery worth 50,000 and 35,000 respectively were gifted by Mr. E
and Mr. F;
v) A silver coin purchased by him at 10 lakhs from Mr. G, when prevalent market value is
10.5 lakhs And shares purchased by him at 3 lakhs from Mr. H, when fair market value
thereof was 3.3 lakhs.
vi) A diamond ring purchased at 50 lakhs from M/s. Pearl Jewels (a jewellery shop of his
close friend) when the fair market value was 55 lakhs for the purpose of Sharma Gem
and Jewellery Mart (a jewellery shop owned by Mr. Sharma).
Solution: Mr. Sharma has received cash and various items of property, which are covered by
Section 56(2)(x). Hence, the taxability of these amounts in view of said section is as follows-
Particulars ₹
Cash gifts received from Mr. A and Mr. Z [WN-1] 64,000
Gift of plot of land from Mr. B (fully taxable, as stamp value exceeds ₹50,000) 3,50,000
Gift of plot of land from Mr. C (not taxable, as stamp value doesn't exceed Nil
₹ 50,000)
Residential house acquired for inadequate consideration [WN-2] 1,50,000
Sculpture and jewellery gifted by Mr. E and Mr. F [WN-3] 85,000
Silver coin and shares purchased by him from Mr. G and Mr. H [WN-4] 80,000
Diamond ring purchased from M/s. Pearl Jewels [WN-5] Nil

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Total Income 7,29,000

Working Notes:
(1) Aggregate of cash gifts received by Mr. Sharma = 32,000 x 2 = 64,000 i.e. exceeding
50,000, hence fully taxable.
(2) Difference between the stamp duty value of 7,50,000 and the actual consideration of
6,00,000 paid is taxable under section 56(2)(x) since the difference exceeds 50,000
being, the higher of 50,000 and 10% of consideration i.e. 60,000.
(3) Aggregate value of gift in form of movable properties=50,000+ 35,000 = 85,000 i.e.
exceeding 50,000, hence fully taxable.
(4) Aggregate value of inadequate consideration of movable properties = (10.5 lakhs - 10 lakhs)
+ (3.3 lakhs - 3 lakhs)=80,000 i.e. exceeding 50,000, hence, whole of the difference will
be taxable.
(5) Purchase of diamond ring for business purposes at less than fair market value cannot be
treated as gift in hands of Mr. Sharma since the said ring is held as stock-in-trade by Mr.
Sharma, hence cannot be regarded as property in the hands of Mr. Sharma, as the same
is specifically excluded from the definition of capital asset. Accordingly, in adequacy of
consideration is not taxable.

Illustration 16
Taxability of gifts: Discuss the taxability or otherwise of the following in the hands of the
recipient under section 56(2)(x) the Income-tax Act, 1961
i) Ankit HUF received 1,75,000 in cash from niece of Ankit (ie., daughter of Ankit's sister).
Ankit is the Karta of the HUF
ii) Nikita, a member of her father's HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is 19,00,000.
iii) Mr. Rakshit received 100 shares of A Ltd. from his friend as a gift on occasion of his 25th
marriage anniversary. The fair market value on that date was 120 per share. He also
received jewellery worth 45,000 (FMV) from his nephew on the same day.
iv) Rakesh HUF gifted a car to son of Karta for achieving good marks in XII board
examination. The fair market value of the car is ₹ 3,00,000.
v) Ms. Kareena purchased a land from PMC Co. a partnership concern for 7,15,000. The stamp
duty value of the same was 12,00,000.
Solution: The taxability in the hands of the recipient under section 56(2)(x) is as under-
Taxable/Non- Amount Reason
taxable liable to
tax (₹)
(i) Taxable 1,75,000 Sum of money exceeding 50,000 received without
consideration from a non relative is taxable under section
56(2)(x). Daughter of Mr. Ankit's sister is not a relative
of Ankit HUF, since she is not a member of Ankit HUF.
(ii) Non-taxable Nil Immovable property received without consideration by a
HUF from its relative is not taxable under section
56(2)(x). Since Nikita is a member of the HUF, she is a

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 CA VARDHAMAN DAGA

relative of the HUF. However, income from such asset

would be included in the hands of Nikita under section
64(2).
(iii) Taxable 57,000 As per provisions of section 56(2)(x), in case the
aggregate fair market value of property, other than
immovable property, received without consideration
exceeds 50,000, the whole of the aggregate value shall
be taxable. In this case, the aggregate fair market value
of shares (12,000) and jewellery (45,000) exceeds
50,000. Hence, the entire amount of 57,000 shall be
taxable.
(iv) Non-taxable Nil Car is not included in the definition of property for the
purpose of section 56(2)(x), therefore, the same shall
not be taxable.
(v) Taxable 4,85,000 Difference between the stamp duty value of 12,00,000
and the actual consideration of 7,15,000 paid is taxable
under section 56(2)(x) since the difference exceeds
50,000 being, the higher of 50,000 and 10% of
consideration i.e. 71,500.

Illustration 17
Taxability of various receipts: Discuss the taxability or otherwise in the hands of the recipients,
as per the provisions of the Income-tax Act, 1961:
i) Mr. A received an advance of 50000 on 1-9-2024 against the sale of his house. However,
due to non-payment of instalment in time, the contract has cancelled and the amount of
50,000 was forfeited.
ii) Mr. N, a member of his father's HUF, transferred a house property to the HUF without
consideration. The value of the house is 10 lacs as per the registrar of stamp duty.
iii) Mr. Kumar gifted a car to his sister's son (Sunil) for achieving goods marks in CA Final
exam. The fair market value of the car is 5,00,000.
Solution:
i) Any sum of money received as an advance or otherwise in the course of negotiations for
transfer of a capital asset, if such sum is forfeited and the negotiations do not result in
transfer of such capital asset. Hence, amount of 50,000 received by Mr. A will be taxable
as income from other sources.
ii) Any property received without consideration by a HUF from its relative is not taxable u/s
56(2)(x) Since ‘N’ is a member of his father's HUF, he is a "relative" of the HUF.
Therefore, if HUF receives any property (house, in this case) from its member, i.e., "N",
without consideration, then, the stamp duty value of such property will not be chargeable
to tax in the hands of the HUF, since gift received from a "relative" is excluded from the
scope of section 56(2)(x)
iii) Car is not included in the definition of property for the purpose of section 56(2)(x)
therefore, the same shall not be taxable.

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Illustration 18
Capital gains & Gift in case of inadequate consideration: Mr. Raj Kumar sold a house to his
friend Mr. Dhruv on 1/6/2024 for a consideration of 25,00,000. The Sub-Registrar refused to
register the document for the said value, as according to him, stamp duty had to be paid on
₹45,00,000, which was the Government guideline value. Mr. Raj Kumar preferred an appeal to the
Revenue Divisional Officer, who fixed the value of the house as 32,00,000 (22,00,000 for land;
balance for building portion). The differential stamp duty was paid, accepting the said value
determined. Assuming that the fair market value is 32,00,000, what are the tax implications in
the hands of Mr. Raj Kumar and Mr. Dhruv for the assessment year 2025-26?
Mr. Raj Kumar had purchased the land on 1/6/2011 for 5,19,000 and completed the construction
of house on 1/12/2022 for 14,00,000.
Cost inflation index for various financial year are as under: 2011-12: 184, 2022-23: 331 and 2024-
25: 363
Solution: Computation of capital gains in the hands of Mr. Rajkumar : In case a land is held by the
assessee for more than 24 months but the building constructed over it is held for not more than
24 months, then there will be long-term capital gains on sale of the land and short-term capital
gains on sale of building. - CIT v. Citibank N.A. [2003] 261 ITR 570 (Bom.) In the given case, the
land was purchased on 1-6-2006 and sold on 1-11-2023, hence, it is a long-term capital asset, while
the building thereon was constructed on 1-12-2020, hence it is a short-term capital asset.
As per provisions of Section 50C, if the stamp duty value adopted by stamp valuation authority is
disputed in appeal and the same is reduced by the appellate authority, the reduced value shall be
taken to be full value of consideration for computing the capital gains chargeable to tax since the
difference between the stamp duty value (as reduced) and the actual consideration exceeds 10%
of the actual consideration. Hence, in this case the full value of consideration for the purpose of
computing capital gains shall be 32 lakhs (22 lakhs for the land and ₹ 10 lakhs).
The relevant computations are as follows (amounts in ₹):
Particulars Land Building
Full value of consideration 22,00,000 10,00,000
Less: Expenditure in connection with transfer (Not given) Nil Nil
Net consideration 22,00,000 10,00,000
Less: Indexed cost of acquisition of land [5,19,000 × 363 ÷184] 10,23,897
Cost of acquisition of building 14,00,000
Long-term Capital Gains 11,76,103
Short-term Capital Loss -4,00,000
Taxable Capital Gains 7,76,103
Tax consequences in the hands of Dhruv :Mr. Rajkumar sold the house property to Mr. Dhruv for
25 lakhs, while its stamp value/fair value is 32 lakhs. Hence, there is an inadequate consideration
of 7 lakhs (32 lakhs - 25 lakhs), i.e. difference between the stamp duty value of 32 lakhs and the
actual consideration of 25 lakhs paid is taxable under section 56(2)(x) since the difference
exceeds 1,25,000 being, the higher of 50,000 and 10% of consideration (25,00,000) i.e. 2,50,000.]

Illustration 19

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 CA VARDHAMAN DAGA

Computation of Total Income: Ms. Mohini transferred a house to her friend Ms. Ragini for
35,00,000 on 01-06-2024. The Sub Registrar valued the land at 60,00,000. Ms. Mohini contested
the valuation and the matter was referred to Divisional Revenue Officer, who valued the house at
58,50,000. Accepting the said value, differential stamp duty was also paid and the transfer was
completed.
The total income of Mohini and Ragini for the assessment year 2025-26, before considering the
transfer of said house are 2,80,000 and 3,45,000, respectively. Ms. Mohini had purchased the
house on 15th May 2010 for 25,00,000 and registration expenses were 1,50,000.
You are required to explain provisions of Income-tax Act, 1961 applicable to present case and also
determine the total income of both Ms. Mohini and Ms. Ragini taking into account the above said
transactions.
Cost inflation index for various financial year are as under: 2010-11: 167 and 2024-25: 363
Solution: Computation of Total Income chargeable to tax of Ms. Mohini (amount in ₹):
Particulars ₹ ₹
Capital Gains
Full value of consideration (Section 50C) [WN] 58,50,000
Less: Indexed cost/cost of acquisition (26,50,000 × 363 ÷ 167) 57,60,180 89,820
Other Income 2,80,000
Total Income (rounded off) 3,69,820
Working Notes: As per provisions of Section 50C, if the stamp duty value adopted by stamp
valuation authority is disputed in appeal and the same is reduced by the appellate authority, the
reduced value shall be taken to be full value of consideration for computing the capital gains
chargeable to tax since the difference between the stamp duty value (as reduced) and the actual
consideration exceeds 10% of the actual consideration. Hence, in this case the full value of
consideration for the purpose of computing capital gains shall be 55.50 lakhs.
Computation of Total Income chargeable to tax of Ms. Ragini (amount in ₹):
Income from other sources:
Purchase of Immovable property for inadequate consideration [Note] 23,50,000
Other Income 3,45,000
Total Income 26,95,000
Note: Since Ms. Ragini purchased immovable property for inadequate consideration, as per Section
56(2)(x) (58,50,000 - 35,00,000) = 23,50,000 i.e. difference between the stamp duty value of
55.50 lakhs and the actual consideration of 35 lakhs paid is taxable under section 56(2)(x) as
Income from other sources, since the difference exceeds 3,50,000 being, the higher of 50,000
and 10% of consideration (35,00,000) i.e.₹ 3,50,000.]

Illustration 20
Capital gains & Gift in case of inadequate consideration :Mr. Subramani sold a house plot to
Mrs. Vimala for 45 lakhs on 12-05-2024. The valuation determined by the stamp valuation
authority was 53 lakhs. Discuss the tax consequences of above, in the hands of each one of them,
viz, Mr. Subramani & Mrs. Vimala. Mrs. Vimala has sold this plot to Ms. Padmaja on 21-05-2025
for 55 lakhs. The valuation as per stamp valuation authority remains the same at 53 lakhs. Compute
the capital gains arising on sale of the house plot by Mrs. Vimala.

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 CA VARDHAMAN DAGA

Note: None of the parties viz Mr. Subramani, Mrs. Vimala & Ms. Padmaja are related to each
other; the transactions are ala & Ms. P between outsiders.
Solution: Tax implications in hands of Mr. Subramani: As per Section 50C, where the value
adopted or assessed or assessable by the stamp valuation authority exceeds 110% of the
consideration received, the stamp duty value shall be deemed to be the full value of the
consideration. Hence, in the given case - Sales consideration=45,00,000, 110% of Sale
Consideration=4950000, Stamp duty value = 53,00,000. Hence, 53,00,000 will be taken as Full
Value of consideration in hands of Mr. Subramani for computing his capital gains.
Tax implications in hands of Mrs. Vimala on purchase of immovable property: Difference
between the stamp duty value of 53,00,000 and the actual consideration of 45,00,000 paid is
taxable under 56(2)(x) since the difference exceeds 450000 being, the higher of 50,000 and
10% of consideration i.e.450000. Thus, Income from other sources taxable in hands of Mrs. Vimala
= 8,00,000 [53,00,000 - 45,00,000].
Sale of immovable property to Ms. Padmaja: Capital Gains will arise in hands of Vimala on sale
of immovable property to Padmaja. Since immovable property is not held for more than 24 months,
the resultant capital gains shall be short term capital gains. The stamp duty value so taken into
account for computing Income from other sources shall become cost of acquisition in hands of
Vimala as per provisions of Section 49(4).
Short term capital gains: [55,00,000-53,00,000]=2,00,000.

Illustration 21
Deemed Dividend & Interest on enhanced compensation: Ms. Julie received following amounts
during the previous year 2024-25.
1) Received loan of 5,00,000 from the ABC Private Limited, a closely held company engaged in
textile business. She is holding 10% of the equity share capital in the said company. The
accumulated profit of the company was 2,00,000 on the date of the loan.
2) Received Interest on enhanced compensation of 5,00,000. Out of this interest, 1,50,000
relates to the previous year 2021-22, 1,90,000 relates to previous year 2022-23 and
1,60,000 relates to previous year 2023-24. She paid 1 lakh to her advocate for his efforts
in the matter.
Discuss the tax implications, if any, arising from these transactions in her hand with reference
to Assessment Year 2025-26.
Solution: The tax implications are discussed as under:
1) Any payment by way of loan by a closely held company to its shareholder holding not less
than 10% of voting power is deemed as dividend, to the extent of accumulated profits of
the company. Accordingly, out of 5 lakhs given by ABC Pvt. Ltd. to Ms. Julie, loan to the
extent of 2 lakhs would be treated as deemed dividend for the A.Y. 2025-26 and will be
taxable in her hands.
2) Interest on enhanced compensation is chargeable to tax under the head "Income from other
sources" in the year of receipt, after providing for deduction of 50% of such income.
Accordingly, 2,50,000 [5,00,000 - ₹2,50,000, being 50% of 5 lakh] would be chargeable to
tax in the hands of Ms. Julie under the head "Income from Other Sources" for the A.Y.
2025-26.

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 CA VARDHAMAN DAGA

Illustration 22
Computation of income from other sources: From the following particulars of Pankaj for the
previous year ended 31 March, 2025 compute the Income under the head "Income from other
Sources":
S.No Particulars ₹
(i) Directors Fee from a Company 10,000
(ii) Interest on Bank Deposits 3,000
(iii) Income from undisclosed source 12,000
(iv) Winnings from Lotteries (Net) 33,936
(v) Royalty on a book written by him 9,000
(vi) Lectures in Seminars 5,000
(vii) Interest on loan given to a relative 7,000
(viii) Interest on Debentures of a Company (listed in a Recognized Stock 7,200
Exchange) Net of Taxes
(ix) Interest on Post Office Savings Bank Account 500
(x) Interest on Government Securities 2,200
(xi) Interest on Monthly Income Scheme of Post office 33,000
He paid 1,000 for typing the manuscript of book written by him.
Solution: Computation of the Income under the head "Income from other Sources" (amounts in
₹)-
Particulars ₹
(i) Directors Fee from a Company 10,000
(ii) Interest on Bank Deposits 3,000
(iii) Income from undisclosed source 12,000
(iv) Winnings from Lotteries [WN-1] 48,480
(v) Royalty on a book written by him [WN-2] 8,000
(vi) Lectures in Seminars 5,000
(vii) Interest on loan given to a relative 7,000
(viii) Interest on Debentures of a Company (listed in a Recognized Stock
Exchange) Net of Taxes [WN-3] 8,000
(ix) Interest on Post Office Savings Bank Account [WN-4] Exempt
(x) Interest on Government Securities 2,200
(xi) Interest on Monthly Income Scheme of Post office 33,000
Income from Other Sources 1,36,680
Working Notes:
1) Gross winnings from lotteries = Income (net of TDS) x 100 ÷ (100-TDS rate) = 33,936 ×
100+ 70 = 48,480.
2) Royalty income is taxed under the head 'Profits and gains of Business or Profession' only
if the assessee is an author by profession. In the given case, it is assumed that the royalty
income doesn't fall under PGBP head, hence the same shall be taxable under the head
'Income from Other Sources'.
Taxable Amount = Royalty Less Expenses on typing manuscript = 9,000 - 1,000 = 8,000.
3) Gross interest on debentures = 7,200 × 100 ÷90=8,000.
4) Interest on Post Office Savings Bank Account is exempt under section 10(15) up to ₹
3,500.
Illustration 23

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 CA VARDHAMAN DAGA

Taxability of various receipts: State with brief reasoning whether the following receipts are
chargeable to income-tax or are exempt (if chargeable, the amount taxable is to be mentioned)
for the assessment year 2025-26:
Nature of receipt Amount (₹)
Interest on enhanced compensation received on 12-03-2025 for acquisition of 96,000
urban land, of which 40% relates to the earlier year
Rent received for letting out agricultural land for a movie 72,000
Computation is NOT required.
Solution:
(1) Section 145B(1) provides that interest received by the assessee on enhanced compensation
shall be deemed to be the income of the assessee of the year in which it is received,
irrespective of the method of accounting followed by the assessee and irrespective of the
financial year to which it relates. Section 56(2)(viii) states that such income shall be taxable
as 'Income from other sources'. 50% of such income shall be allowed as deduction by virtue
of section 57(iv) and no other deduction shall be permissible from such Income. Hence,
taxable interest under the head Income from other sources is 48,000.
(2) Income derived from any farm building or land from its use for non-agricultural purposes
(including letting for residential purpose or for the purpose of any business or profession)
shall not be agricultural income. Hence, Rent received for letting out agricultural land for a
movie shooting shall be chargeable to tax.

Illustration 28
Taxability of various receipts: Discuss the tax implications under section 56(2) in respect of
each of the following transactions
1) Mr. Tejpal received a painting by M. F. Hussain worth 2 lakh from his nephew on his 10th
wedding anniversary.
2) Verma's son transferred shares of D Ltd. to Verma HUF without any consideration. The
fair market value of the shares is 2.5 lakh.
3) Mr. Sharan's land was acquired by the Government in August 2011. He received interest
of 5,40,000 on enhanced compensation in January, 2025, out of which 1,20,000 related to
the year 2020-21, ₹ 1,60,000 related to the year 2021-22, ₹ 2,00,000 related to the year
2022-23 and 60,000 related to the year 2023-24.
4) Mr. Rajan decided to sell capital asset to Mr. Mahajan and received an advance of ₹
1,00,000 on 1 October, 2024. Mr. Mahajan could not pay the balance sum and advance
money was forfeited by Mr. Rajan on 15th January, 2025.

Solution: Tax implications u/s 56(2)-

a. Since paintings are included in the definition of "property", therefore, when paintings are
received without consideration, the same is taxable under section 56(2)(x), as the
aggregate fair market value of paintings exceed ₹ 50,000. Therefore, 2,00,000, being the
value of painting gifted by his nephew, would be taxable under section 56(2)(x) in the
hands of Mr. Tejpal, since "nephew" is not included in the definition of "relative"
thereunder.

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 CA VARDHAMAN DAGA

b. Any property received without consideration by a HUF from its relative is not taxable
under section 56(2)(x). Since Verma's son is a member of Verma HUF, he is a "relative"
of the HUF. Therefore, if Verma HUF receives any property (shares, in this case) from
its member, i.e., Verma's son, without consideration, then, the fair market value of such
shares will not be chargeable to tax in the hands of the HUF, since gift received from a
"relative" is excluded from the scope of section 56(2)(x).
c. As per section 145B(1), interest received on enhanced compensation shall be deemed to
be the income of the previous year in which it is received, irrespective of the method of
accounting followed by the assessee. Therefore, in this case, interest on enhanced
compensation received by Mr. Sharan in January, 2025 shall be deemed to be the income
of P.Y. 2024-25, i.e., the year of receipt, irrespective of the method of accounting
followed by him. Such interest is taxable under section 56(2)(viii)
(1,20,000+1,60,000+ 2,00,000+ 60,000) = 5,40,000
Less: Deduction under section 57(iv) @ 50% of ₹ 5,40,000 = 2,70,000
d. Any sum of money received as an advance or otherwise in the course of negotiations for
transfer of a capital asset, if such sum is forfeited and the negotiations do not result in
transfer of such capital asset. Hence, amount of 1,00,000 received by Mr. Rajan will be
taxable as income from other sources.
Illustration 29
Taxability of gifts – Mr. Y a non-resident has received the following gifts from his friend X who
is resident in India during the half year ended 31-03-2025. Determine his income from other
sources.
1) Gift of 25 lakh by NEFT transfer from X's bank account (PNB, Mumbai) to Y's bank account
in New York, US.
2) Gift of 15 lakh to Y (X has a bank account in Citibank, New York. Permission of RBI has taken
for this purpose. This gift is transferred from Citibank, New York account of X to the
account of Y in Deutsche Bank, New York).
3) Gift of house property situated in New Jersey (market value: 2.70 crore).
4) Diamond Jewellery (market value ₹ 50 lakh) given in New York from X's locker in New York.
Solution: According to Section 9(1)(viii), Income arising outside India, being any sum of money
referred to in Section 2(24) (xviia) i.e. gifts paid by a person resident in India to a non-resident,
not being a company, or to a foreign company shall be deemed to accrue or arise in India. In light
of the above provisions the taxability in hands of Mr. Y is as under ₹-
Particulars ₹
a. Gift by way of NEFT to foreign bank [The same shall be taxable in India
as the Income is deemed to accrue of arise in India as per the provisions
of Section 9(1)(viii)] 25,00,000
b. Gift by bank transfer in New York [The same shall be taxable in India as
the Income is deemed to accrue of arise in India as per the provisions of
Section 9(1)(viii)] 15,00,000
c. Gift of house property situated in New Jersey [The same shall not be
taxable in India as the provisions of Section 9(1)(viii) applies only in
respect of money and not in respect of other property] Nil
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 CA VARDHAMAN DAGA

d. Gift of diamond Jewellery outside India [The same shall not be taxable
in India as the provisions of Section 9(1)(viii) applies only in respect of
money and not in respect of other property] Nil
Income from Other Sources 40,00,000

Illustration 30
FOS and Capital Gains: Mr. Lalit, a dealer in shares and securities, has entered into following
transactions during the previous year 2024-25:
i) Received a motor car of ₹ 5,00,000 as gift from his friend Sunil on the occasion of his
marriage anniversary.
ii) Cash gift of 21,000 each from his four friends.
iii) Land at Jaipur on 1 July, 2024 as a gift from his friend Kabra, the stamp duty value of
the land is 6 lakhs as on the date. The land was acquired by Mr. Kabra in the previous
year 2001-02 for 2 lakhs.
Mr. Lalit purchased from his friend Mr. Abhishek, who is also a dealer in shares, 1000 shares of
ABC Ltd. @ 400 each on 19th June,2024 the fair market value of which was 600 each on that
date. Mr. Lalit sold these shares in the course of his business on 23rd June, 2024.
Further, on 1st November, 2024, Mr. Lalit took possession of his residential house booked by him
two years back at 20 lakh. The stamp duty value of the property as on 1" November, 2024 was 32
lakh and on the date of booking was ₹ 24 lakh. He had paid 1 lakh by account payee cheque as down
payment on the date of booking.
He received a shop (building) of the fair market value 1,50,000 and cash 50,000 in distribution
from the ABC (P) Ltd. at the time of liquidation process of the company in proportion of his share
capital. The balance in general reserve of the company attributable to his share capital is
₹1,25,000.
On 1st march, 2025, he sold the plot of land at Jaipur for 8 lakh.
The value of the cost inflation index is 100 and 363 for the previous year 2001-02 and 2024-25
respectively.
Compute the income of Mr. Lalit chargeable under the head "Income from other sources" and
"Capital Gains" for A.Y.2025-26
Solution: Computation of "Income from Other Sources" of Mr. Lalit for the A.Y. 2025-26 (amount
in ₹)
Particulars ₹
(i) Motor car is not included in the definition of "property" for the purpose
of section 56(2)(x) , hence, value of the same is not taxable, even though
it is received without any consideration.
(ii) Cash gift is taxable u/s 56(2)(x) [since the aggregate of 84,000(21000 84,000
x 4) exceeds 50,000]
(iii) Stamp value of plot of land at Jaipur, received without consideration, is 6,00,000
taxable u / s 56(2)(x) since the same exceeds 50,000
(iv) Difference of 2 lakh [1000 shares x 200] in the value of shares of ABC -
Ltd. purchased from Mr. Abhishek, a dealer in shares, is not taxable as
it represents the stock-in-trade of Mr. Lalit (since he is a dealer in

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 CA VARDHAMAN DAGA

shares) and not capital asset. [Since Mr. Lalit is a dealer in shares and it
has been mentioned that the shares were subsequently sold in the course
of his business, such shares represent the stock-in-trade of Mr. Lalit.]
(v) Difference between the stamp duty value of 24 lakh on the date of 4,00,000
booking (since advance was paid by account payee cheque on that date)
and the actual consideration of 20 lakh paid is taxable u / s 56(2)(x)
since the difference exceeds 2,00,000, being the higher of ₹ 50,000 and
10% of consideration
(vi) Distribution of assets by ABC (P) Ltd. on liquidation attributable to the 1,25,000
accumulated profits (general reserve) of the company is taxable as
dividend u / s 2(22)(c)
Income taxable under the head "Income from other sources" 12,09,000

Computation of "Capital Gains" of Mr. Lalit for the A.Y. 2024-25 (amount in ₹)
Particulars ₹
Capital gains on sale of land at Jaipur Sale Consideration 8,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to tax u /s 6,00,000
56(2)(x)
Short-term capital gains (since held for a period of not more than 24 months.
Period of holding of previous owner, Mr. Kabra, not to be considered) 2,00,000
Capital gains on distribution of assets on liquidation of ABC (P) Ltd.
Full value of consideration for capital gains on distribution of assets on
liquidation of ABC (P) Ltd.
FMV of assets distributed 1,50,000
Cash 50,000
2,00,000
Less: Deemed dividend under section 2(22)(c) 1,25,000
Full value of consideration for computing capital gains 75,000
Note:
i) As cost of acquisition of shares in ABC(P) Ltd. is not given in the question, capital gains on
distribution of assets on liquidation of ABC(P) Ltd. in the hands of Mr. Lalit has not been
computed.
ii) As per section 56(1)(i) dividend income is chargeable under the head "Income from Other
Sources". Hence, deemed dividend u / s 2(22)(c) would be taxable under the head "Income
from Other Sources" in the hands of Mr. Lalit, who is a dealer in shares.
Illustration.31
From the following calculate the taxable amount under the proper head of income for FY 2024-
25 of Mr L. who is resident and 56 years old. The reasons should from part of your answer:
(i) Dividend of ₹ 50,000 received in April 2024. The dividend was declared by the company, ie
LMN Limited, at its annual general meeting held in October 2023.
(ii) Advance forfeited amounting to ₹ 1,00,000 on 01.05.2024 as the negotiation for transfer of
capital asset did not result in transfer of capital asset.
(iii) Cash gift received from non-relative on the occasion of marriage of son, ₹ 51,000,

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 CA VARDHAMAN DAGA

(iv) During FY 2024-25, he received ₹ 99,000 as pension from employer of deceased wife.
Ans- Computation Of Taxable Amount Of Mr L For FY 2024-25:
S.No. Particulars Amount (₹)
1. Dividend from LMN Ltd would be chargeable to tax u/h "Income from Nil
Other Sources". Since dividend was declared by LMN Ltd at its annual
general meeting held in October 2023, the amount of dividend was
taxable in FY 2023-24. Accordingly, the dividend of 50,000 would not be
taxable in the current FY 2024-25.
Note: Since the exact amount of dividend to be taxable can be
determined only at the time of payment or distribution of dividend,
alternate view is possible to tax such dividend on receipt basis.
2. Advance of ₹ 1,00,000 forfeited on 1.5.2024 would be subject to tax u/h 1,00,000
"Income from Other Sources" as per Section 56.
3. Cash gifts from non-relative on marriage of son of ₹ 51,000 - Since gift 51,000
is received by Mr L from a non-relative on the occasion of marriage of
his son, it would be taxable in his hands u/h "Income from Other
Sources" as per Section 56(2)(x).
4. If an employee passes away, any amount received as family pension is 84,000
taxable in the hands of the recipient family member u/h "Income from
Other Sources" as per Section 56. Lower of the following two figures is
available as deduction:
- 15,000; or
- 1/3rd of the family pension received (ie, 1/3rd of 99,000 = 33,000)
Thus, taxable pension is 84,000 (₹99,000-15,000)
Total Income 2,35,000

ILLUSTRATION 32
Deemed Dividend u/s 2(22)(e) : Mr. Ravi received an advance of ₹ 2,00,000 on 10-05-2024 from
a closely held manufacturing company (private company in which the public are not substantially
interested) in which he holds 22% shareholding. The company had an accumulated profit of ₹
1,00,000 at the time of giving the advance.
Compute the amount of income to be included in the hands of Mr. Ravi for the assessment year
2025-26 and also state the head under which it is to be included. (2 Marks, May 2024)
SOLUTION
In the present case, the amount of advance of ₹ 2,00,000 received by Mr. Ravi from closely held
manufacturing company would be deemed as dividend to the extent of accumulated profit of ₹
1,00,000, since Mr. Ravi holds 22% shareholding in the company which is not less than 10% of the
voting power in the company.
Accordingly, deemed dividend of ₹ 1,00,000 would be taxable in the hands of Mr. Ravi under the
head “Income from Other Sources” for the A.Y. 2025-26.

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 CA VARDHAMAN DAGA

CHAPTER 8 - INCOME OF OTHER PERSONS INCLUDED IN

ASSESSEE’S TOTAL INCOME
STUDY MATERIAL
ILLUSTRATION 1
Mr. Vatsan has transferred, through a duly registered document, the income arising from a
godown to his son, without transferring the godown. In whose hands will the rental income from
godown be charged?
SOLUTION
Section 60 expressly states that where there is transfer of income from an asset without
transfer of the asset itself, such income shall be included in the total income of the transferor.
Hence, the rental income derived from the godown shall be clubbed in the hands of Mr. Vatsan.
ILLUSTRATION 2
Mr. A holds shares carrying 25% voting power in X (P) Ltd. Mrs. A is working as a computer
software programmer in X (P) Ltd. at a salary of ₹ 30,000 p.m. She is, however, not qualified for
the job. The other income of Mr. A & Mrs. A are ₹ 7,00,000 & ₹ 4,00,000, respectively. Compute
the gross total income of Mr. A and Mrs. A for the A.Y.2025-26 if they are paying tax under
default tax regime
SOLUTION
Mr. A holds shares carrying 25% voting power in X (P) Ltd i.e., a substantial interest in the
company. His wife is working in the same company without any professional qualifications for the
same. Thus, by virtue of the clubbing provisions of the Act, the salary received by Mrs. A from X
(P) Ltd. will be clubbed in the hands of Mr. A.
Computation of Gross total income of Mr. A
Particulars ₹ ₹
Salary received by Mrs. A (₹ 30,000 × 12) 3,60,000
Less: Standard deduction under section 16(ia) 75,000 2,85,000
Other Income 7,00,000
Gross total income 9,85,000
The gross total income of Mrs. A is ₹ 4,00,000.
ILLUSTRATION 3
Will your answer be different if Mrs. A was qualified for the job?
SOLUTION
If Mrs. A possesses professional qualifications for the job, then the clubbing provisions shall not
be applicable. Gross total income of Mr. A = ₹ 7,00,000 [Other income]. Gross total income of
Mrs. A = Salary received by Mrs. A [ ₹ 30,000×12] less ₹ 75,000, being the standard deduction
under section 16(ia) plus other income [₹ 4,00,000] = ₹ 6,85,000
ILLUSTRATION 4
Mr. B holds shares carrying 30% voting power in Y (P) Ltd. Mrs. B is working as accountant in Y (P)
Ltd. getting income under the head salary (computed) ₹ 3,44,000 without any qualification in
accountancy. Mr. B also receives ₹ 30,000 as interest on securities. Mrs. B owns a house property
which she has let out. Rent received from tenants is ₹ 6,000 p.m. Compute the gross total income
of Mr. B and Mrs. B for the A.Y.2025-26.
SOLUTION
Since Mrs. B is not professionally qualified for the job, the clubbing provisions shall be
applicable.
Computation of Gross total income of Mr. B
Particulars ₹
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Income under the head “Salary” of Mrs. B (Computed) 3,44,000

Income from other sources
- Interest on securities 30,000
Gross total income 3,74,000

Computation of Gross total income of Mrs. B

Particulars ₹ ₹
Income from Salary Nil
[Clubbed in the hands of Mr. B]
Income from house property
Gross Annual Value [₹ 6,000 × 12] 72,000
Less: Municipal taxes paid -
Net Annual Value (NAV) 72,000
Less: Deductions under section 24
- 30% of NAV i.e., 30% of ₹ 72,000 21,600
- Interest on loan - 50,400
Gross total income 50,400
ILLUSTRATION 5
Mr. Vaibhav started a proprietary business on 01.04.2023 with a capital of ₹ 5,00,000. He
incurred a loss of ₹ 2,00,000 during the year 2023-24. To overcome the financial position, his
wife Mrs. Vaishaly, a software Engineer, gave a gift of ₹ 5,00,000 on 01.04.2024, which was
immediately invested in the business by Mr. Vaibhav. He earned a profit of ₹ 4,00,000 during the
year 2024-25. Compute the amount to be clubbed in the hands of Mrs. Vaishaly for the A.Y. 2025-
26. If Mrs. Vaishaly gave the said amount as loan, what would be the amount to be clubbed?
SOLUTION
The income to be clubbed in the hands of Mrs. Vaishaly for the A.Y. 2024-25 is computed as
under:
Particulars Mr. Vaibhav’s capital Capital Total
contribution (₹) contribution out of (₹)
gift from Mrs.
Vaishaly (₹)
Capital as on 1.4.2024 3,00,000 5,00,000 8,00,000
(5,00,000 – 2,00,000)
Profit for P.Y.2024-25 to be 1,50,000 2,50,000 4,00,000
apportioned on the basis of 4,00,000× 3/8 4,00,000×3/ 8
capital employed on the first
day of the previous year i.e.,
as on 1.4.2024 (3:5)
Therefore, the income to be clubbed in the hands of Mrs. Vaishaly for the A.Y.2024-25 is ₹
2,50,000. In case Mrs. Vaishaly gave the said amount of ₹ 5,00,000 as a bona fide loan, then,
clubbing provisions would not be attracted.
ILLUSTRATION 6
Mrs. Kasturi transferred her immovable property to ABC Co. Ltd. subject to a condition that out
of the rental income, a sum of ₹ 36,000 per annum shall be utilized for the benefit of her son’s
wife.
Mrs. Kasturi claims that the amount of ₹ 36,000 (utilized by her son’s wife) should not be included
in her total income as she no longer owned the property.
Examine with reasons whether the contention of Mrs. Kasturi is valid in law.
SOLUTION
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Therefore, income of ₹ 36,000 meant for the benefit of daughter-in-law is chargeable to tax in
the hands of transferor i.e., Mrs. Kasturi in this case.
The contention of Mrs. Kasturi is, hence, not valid in law.
In order to attract the clubbing provisions under section 64(1)(viii), the transfer should be
otherwise than for adequate consideration. In this case, it is presumed that the transfer is
otherwise than for adequate consideration and therefore, the clubbing provisions are attracted.
Moreover, the provisions of section 56(2)(x) would also get attracted in the hands of ABC Co Ltd.,
if the conditions specified thereunder are satisfied.
Note – If the transfer was for adequate consideration, the provisions of section 64(1)(viii) would
not be attracted.

ILLUSTRATION 7
Mr. A has three minor children – two twin daughters, aged 12 years, and one son, aged 16 years.
Income of the twin daughters is ₹ 2,000 p.a. each and that of the son is ₹ 1,200 p.a. Mrs. A has
transferred her flat to her minor son on 1.4.2024 out of natural love and affection. The flat was
let out on the same date and the rental income from the flat is ₹ 10,000 p.m. Compute the income,
in respect of minor children, to be included in the hands of Mr. A and Mrs. A u/s 64(1A) (assuming
that Mr. A’s total income is higher than Mrs. A’s total income, before including the income of
minor children and both Mr. A and Mrs. A exercise the option of shifting out of the default tax
regime provided under section 115BAC(1A).
SOLUTION
Taxable income, in respect of minor children, in the hands of Mr. A is:
Particulars ₹ ₹
Twin minor daughters [₹ 2,000 × 2] 4,000
Less: Exempt under section 10(32) [₹ 1,500 × 2] 3,000 1,000
Minor son 1,200
Less: Exempt under section 10(32) 1,200 Nil
Income to be clubbed in the hands of Mr. A 1,000

ILLUSTRATION 8
Compute the gross total income of Mr. A & Mrs. A from the following information assuming both
exercise the option of shifting out of the default tax regime provided under section 115BAC(1A):
Particulars ₹
(a) Salary income (computed) of Mrs. A 2,30,000
(b) Income from profession of Mr. A 3,90,000
(c) Income of minor son B from company deposit 15,000
(d) Income of minor daughter C from special talent 32,000
(e) Interest from bank received by C on deposit made out of her special talent 3,000
(f) Gift received by C on 30.09.2024 from friend of Mrs. A 2,500
Brief working is sufficient. Detailed computation under various heads of income is not required.
SOLUTION
Computation of gross total income of Mr. A for the A.Y. 2025-26
Particulars ₹ ₹
Income from profession 3,90,000
Income of minor son B from company deposit 15,000
Less: Exemption under section 10(32) 1,500 13,500
Income of minor daughter C
From special talent – not to be clubbed 3,000
Interest from bank

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Gift of ₹ 2,500 received from a non-relative is not taxable under section Nil
56(2)(x) being less than the aggregate limit of ₹ 50,000 3,000
1,500
1,500
Less : Exemption under section 10(32)
4,05,000
Gross Total Income

ILLUSTRATION 9
Mr. Vasudevan gifted a sum of ₹ 6 lakhs to his brother's wife on 14-6-2024. On 12-7-2024, his
brother gifted a sum of ₹ 5 lakhs to Mr. Vasudevan's wife. The gifted amounts were invested as
fixed deposits in banks by Mrs. Vasudevan and wife of Mr. Vasudevan's brother on 01-8-2024 at
9% interest. Examine the consequences of the above under the provisions of the Income-tax Act,
1961 in the hands of Mr. Vasudevan and his brother.
SOLUTION
In the given case, Mr. Vasudevan gifted a sum of ₹ 6 lakhs to his brother’s wife on 14.06.2023
and simultaneously, his brother gifted a sum of ₹ 5 lakhs to Mr. Vasudevan’s wife on 12.07.2023.
The gifted amounts were invested as fixed deposits in banks by Mrs. Vasudevan and his brother’s
wife. These transfers are in the nature of cross transfers. Accordingly, the income from the
assets transferred would be assessed in the hands of the deemed transferor because the
transfers are so intimately connected to form part of a single transaction and each transfer
constitutes consideration for the other by being mutual or otherwise.
If two transactions are inter-connected and are part of the same transaction in such a way that
it can be said that the circuitous method was adopted as a device to evade tax, the implication of
clubbing provisions would be attracted. It was so held by the Apex Court in CIT vs. Keshavji
Morarji (1967) 66 ITR 142.
Accordingly, the interest income arising to Mrs. Vasudevan in the form of interest on fixed
deposits would be included in the total income of Mr. Vasudevan and interest income arising in the
hands of his brother’s wife would be taxable in the hands of Mr. Vasudevan’s brother as per
section 64(1), to the extent of amount of cross transfers i.e., ₹ 5 lakhs.
This is because both Mr. Vasudevan and his brother are the indirect transferors of the income
to their respective spouses with an intention to reduce their burden of taxation. However, the
interest income earned by his spouse on fixed deposit of ₹ 5 lakhs alone would be included in the
hands of Mr. Vasudevan’s brother and not the interest income on the entire fixed deposit of ₹ 6
lakhs, since the cross transfer is only to the extent of ₹ 5 lakhs.

TEST YOUR KNOWLEDGE

Que - 10.
Mr. Sharma has four minor children - 2 daughters and 2 sons. The annual income of 2 daughters
were ₹ 9,000 and ₹ 4,500 and of sons were ₹ 6,200 and ₹ 4,300, respectively. The daughter who
has income of ₹ 4,500 was suffering from a disability specified under section 80U.
Compute the amount of income earned by minor children to be clubbed in hands of Mr. Sharma
assuming he has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A).
ANS-
Computation of income earned by minor children to be clubbed with
the income of Mr. Sharma
Particulars ₹
(ii) Income of one daughter 9,000
Less: Income exempt under section 10(32) 1,500
Total (A) 7,500
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(ii) Income of two sons (₹ 6,200 + ₹ 4,300) 10,500

Less: Income exempt under section 10(32) (₹ 1,500 + ₹ 1,500) 3,000
Total (B) 7,500
Total Income to be clubbed as per section 64(1A) (A+B) 15,000
Que - 11.
During the previous year 2024-25, the following transactions occurred in respect of Mr. A.
(a) Mr. A had a fixed deposit of ₹ 5,00,000 in Bank of India. He instructed the bank to credit
the interest on the deposit @ 9% p.a. from 1-4-2024 to 31-3-2025 to the savings bank
account of Mr. B, son of his brother, to help him in his education.
(b) Mr. A holds 75% profit share in a partnership firm. Mrs. A received a commission of ₹ 25,000
from the firm for promoting the sales of the firm. Mrs. A possesses no technical or
professional qualification.
(c) Mr. A gifted a flat to Mrs. A on April 1, 2024. During the previous year 2024-25, Mrs. A’s
from house property” (computed) was “Income ₹ 52,000 from such flat.
(d) Mr. A gifted ₹ 2,00,000 to his minor son who invested the same in a business and he derived
income of ₹ 20,000 from the investment.
(e) Mr. A’s minor son derived an income of ₹ 20,000 through a business activity involving
application of his skill and talent.
During the year, Mr. A got a monthly pension of ₹ 10,000. He had no other income. Mrs. A received
salary of ₹ 20,000 per month from a part time job.
Examine the tax implications of each transaction and compute the total income of Mr. A, Mrs. A
and their minor child assuming that they exercise the option of shifting out of the default tax
regime provided under section 115BAC(1A).
ANS-Computation of total income of Mr. A, Mrs. A and their minor son for the A.Y. 2025-
26
Particulars Mr. A (₹) Mr. A Minor
(₹) Son (₹)
Income under the head “Salaries”
Salary income (of Mrs. A) 2,40,000
Pension income (of Mr. A) (₹ 10,000×12)
Less: Standard deduction under section 16(ia) 50,000 50,000
70,000 1,90,000
Income from House Property [See Note (3)
below]
Income from other sources 45,000
Interest on Mr. A’s fixed deposit with Bank of
India (₹ 5,00,000×9%) [See Note (1) below]
Commission received by Mrs. A from a
partnership firm, in which Mr. A has substantial
interest [See Note (2) below] 25,000 70,000
Income before including income of minor son 1,92,000 1,90,000
under section 64(1A)
Income of the minor son from the investment 18,500 - -
made in the business out of the amount gifted by
Mr. A [See Note (4) below]
Total Income 2,10,500 1,90,000 20,000
Notes:
(1) As per section 60, in case there is a transfer of income without transfer of asset from which
such income is derived, such income shall be treated as income of the transferor. Therefore,
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the fixed deposit interest of ₹ 45,000 transferred by Mr. A to Mr. B shall be included in the
total income of Mr. A.
(2) As per section 64(1)(ii), in case the spouse of the individual receives any amount by way of
income from any concern in which the individual has substantial interest (i.e. holding shares
carrying at least 20% voting power or entitled to at least 20% of the profits of the concern),
then, such income shall be included in the total income of the individual. The only exception
is in a case where the spouse possesses any technical or professional qualifications and the
income earned is solely attributable to the application of her technical or professional
knowledge and experience, in which case, the clubbing provisions would not apply.
(a) In this case, the commission income of ₹ 25,000 received by Mrs. A from the partnership
firm has to be included in the total income of Mr. A, as Mrs. A does not possess any technical
or professional qualification for earning such commission and Mr. A has substantial interest
in the partnership firm as he holds 75% profit share in the firm.
(3) According to section 27(i), an individual who transfers any house property to his or her spouse
otherwise than for adequate consideration or in connection with an agreement to live apart,
shall be deemed to be the owner of the house property so transferred. Hence, Mr. A shall be
deemed to be the owner of the flat gifted to Mrs. A and hence, the income arising from the
same shall be computed in the hands of Mr. A.
Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mrs. A, since
she has received immovable property without consideration from a relative i.e., her husband.
(4) As per section 64(1A), the income of the minor child is to be included in the total income of
the parent whose total income (excluding the income of minor child to be so clubbed) is
greater. Further, as per section 10(32), income of a minor child which is includible in the
income of the parent shall be exempt to the extent of ₹ 1,500 per child.
Therefore, the income of ₹ 20,000 received by minor son from the investment made out of
the sum gifted by Mr. A shall, after providing for exemption of ₹ 1,500 under section 10(32),
be included in the income of Mr. A, since Mr. A’s income of ₹ 1,92,000 (before including the
income of the minor child) is greater than Mrs. A’s income of ₹ 1,90,000. Therefore, ₹ 18,500
(i.e., ₹ 20,000 – ₹ 1,500) shall be included in Mr. A’s income. It is assumed that this is the
first year in which clubbing provisions are attracted.
Note: The provisions of section 56(2)(x) would not be attracted in the hands of the minor
son, since he has received a sum of money exceeding ₹ 50,000 without consideration from a
relative i.e., his father.
(5) In case the income earned by the minor child is on account of any activity involving application
of any skill or talent, then, such income of the minor child shall not be included in the income
of the parent, but shall be taxable in the hands of the minor child.
Therefore, the income of ₹ 20,000 derived by Mr. A’s minor son through a business activity
involving application of his skill and talent shall not be clubbed in the hands of the parent.
Such income shall be taxable in the hands of the minor son.
Que- 12.
Mr. A has gifted a house property valued at ₹ 50 lakhs to his wife, Mrs. B, who in turn has gifted
the same to Mrs. C, their daughter-in-law. The house was let out at ₹ 25,000 per month
throughout the year. Compute the total income of Mr. A and Mrs. C.
Will your answer be different if the said property was gifted to his son, husband of Mrs. C?
ANS-As per section 27(i), an individual who transfers otherwise than for adequate consideration
any house property to his spouse, not being a transfer in connection with an agreement to live
apart, shall be deemed to be the owner of the house property so transferred. Therefore, in this
case, Mr. A would be the deemed owner of the house property transferred to his wife Mrs. B
without consideration. As per section 64(1)(vi), income arising to the son’s wife from assets
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transferred, directly or indirectly, to her by an individual otherwise than for adequate

consideration would be included in the total income of such individual.
Income from let-out property is ₹ 2,10,000 [i.e., ₹ 3,00,000, being the actual rent calculated at
₹ 25,000 per month less ₹ 90,000, being deduction under section 24@30% of ₹ 3,00,000]
In this case, income of ₹ 2,10,000 from let-out property arising to Mrs. C, being Mr. A’s son’s
wife, would be included in the income of Mr. A, applying the provisions of section 27(i) and section
64(1)(vi). Such income would, therefore, not be taxable in the hands of Mrs. C.
In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64 would not
apply, since the son is not a minor child. Therefore, the income of ₹ 2,10,000 from letting out of
property gifted to the son would be taxable in the hands of the son.
It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands of
the recipient of house property, since the receipt of property in each case was from a “relative”
of such individual. Therefore, the stamp duty value of house property would not be chargeable to
tax in the hands of the recipient of immovable property, even though the house property was
received by her or him without consideration. Note - The first part of the question can also be
answered by applying the provisions of section 64(1)(vi) directly to include the income of ₹
2,10,000 arising to Mrs. C in the hands of Mr. A. [without first applying the provisions of section
27(i) to deem Mr. A as the owner of the house property transferred to his wife Mrs. B without
consideration], since section 64(1)(vi) speaks of clubbing of income arising to son’s wife from
indirect transfer of assets to her by her husband’s parent, without consideration. Gift of house
property by Mr. A to Mrs. C, via Mrs. B, can be viewed as an indirect transfer by Mr. A to Mrs. C.
Que-13.
A proprietary business was started by Smt. Rani in the year 2021. As on 1.4.2023 her capital in
business was ₹ 3,00,000.
Her husband gifted ₹ 2,00,000 on 10.4.2023 to her and such sum is invested by Smt. Rani in her
business on the same date. Smt. Rani earned profits from her proprietary business for the
Financial year 2023-24, ₹ 1,50,000 and Financial year 2024-25 ₹ 3,90,000. Compute the income,
to be clubbed in the hands of Rani’s husband for the Assessment year 2025-26 with reasons.
ANS- Section 64(1) of the Income-tax Act, 1961 provides for the clubbing of income in the hands
of the individual, if the income earned is from the assets transferred directly or indirectly to
the spouse of the individual, otherwise than for adequate consideration. In this case Smt. Rani
received a gift of ₹ 2,00,000 from her husband which she invested in her business. The income
to be clubbed in thes hands of Smt. Rani’s husband for A.Y.2025-26 is computed as under:
Particulars Smt. Rani’s Capital Total
Capital Contribution
Contribution Out of gift
from
husband
₹ ₹ ₹
Capital as at 1.4.2023 3,00,000 - 3,00,000
Investment on 10.04.2023 out of gift received from 2,00,000 2,00,000
her husband
profit for F.Y. 2023-24 to be apportioned on the 3,00,000 2,00,000 5,00,000
basis of capital employed on the first day of the
previous year i.e., on 1.4.2023
Capital employed as at 1.4.2024 4,50,000 2,00,000 6,50,000
Profit for F.Y.2024-25 to be apportioned on the
basis Of capital employed as at 1.4.2024 (i.e., 45 : 2,70,000 1,20,000 3,90,000
20)
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Therefore, the income to be clubbed in the hands of Smt. Rani’s husband for A.Y.2025-26 is ₹
1,20,000.
Que -14.
Mr. B is the Karta of a HUF, whose members derive income as given below:
Particulars ₹
(i) Income from B' s profession 45,000
(ii) Mrs. B' s salary as fashion designer 76,000
(iii) Minor son D (interest on fixed deposits with a bank which were gifted to him 10,000
by his uncle)
(iv) Minor daughter P's earnings from sports 95,000
(v) D's winnings from lottery (gross) 1,95,000
Examine the tax implications in the hands of Mr. and Mrs. B.
ANS-Clubbing of income and other tax implications As per the provisions of section 64(1A), in
case the marriage of the parents subsist, the income of a minor child shall be clubbed in the hands
of the parent whose total income, excluding the income of the minor child to be clubbed, is
greater. In this problem, it has been assumed that the marriage of Mr. B and Mrs. B subsists.
Further, in case the income arises to the minor child on account of any manual work done by the
child or as a result of any activity involving application of skill, talent, specialized knowledge or
experience of the child, then, the same shall not be clubbed in the hands of the parent.
Tax implications
(i) Income of ₹ 45,000 from Mr. B’s profession shall be taxable in the hands of Mr. B under
the head “Profits and gains of business or profession”.
(ii) Salary of ₹ 26,000 (₹ 76,000 less standard deduction under section 16(ia) of ₹ 50,000)
shall be taxable as “Salaries” in the hands of Mrs. B.
(iii) Income from fixed deposit of ₹ 10,000 arising to the minor son D, shall be clubbed in the
hands of the father, Mr. B as “Income from other sources”, since Mr. B’s income is greater
than income of Mrs. B before including the income of the minor child. As per section 10(32),
income of a minor child which is includible in the income of the parent shall be exempt to
the extent of ₹ 1,500 per child if such parent exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A). The balance income would be
clubbed in the hands of the parent as “Income from other sources”.
(iv) Income of ₹ 95,000 arising to the minor daughter P from sports shall not be included in the
hands of the parent, since such income has arisen to the minor daughter on account of an
activity involving application of her skill.
(v) Income of ₹ 1,95,000 arising to minor son D from lottery shall be included in the hands of
Mr. B as “Income from other sources”, since Mr. B’s income is greater than the income of
Mrs. B before including the income of minor child.
Note – Mr. B can reduce the tax deducted at source from such lottery income while computing his
net tax liability.
PAST EXAM QUESTIONS
Question 15:
Clubbing of Income: Mr. A is an employee of Larsen Limited and has substantial interest in the
company. His salary is 25,000 p.m. Mrs. A also is working in that company at a salary of 10,000
p.m. without any professional qualification. Mr. A also receives ₹30,000 as income from securities,
Mrs. A owns a house property which she has let out. Rent received from such house property is
12,000 p.m. Mr. & Mrs. A have three minor children-two daughters and one son. Income of the
twin daughters is 2,000 p.a. and that of his son is ₹ 1,200 p.a. Compute the income of Mr. and Mrs.
A. (8 Marks, IPCC May 2013)
Solution: Computation of Total Income Mr. & Mrs. A (amount in ₹) –
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Particulars Mr. A Mr. B

Income from salary:
Salary (25,000 × 12) 3,00,000
Less: Standard Deduction u/s 16(ia) 50,000 2,50,000
Salary received by Mrs. A from Larsen Limited [WN] 1,20,000
Less: Standard Deduction u/s 16(ia) 50,000 70,000
Income from let out property:
Rent received 1,44,000
Less: Standard deduction 30% 43,200 1,00,800
Interest on Securities 30,000
Income of Minor Children to be clubbed in Mr. A's income
(Since his total income is greater)
Income of Twin minor daughters
Less: Exempt u/s 10(32) Nil
Income of Minor Son 1,200 Nil
Less: Exempt u/s 10(32) 1,200
Total Income 3,50,000 1,00,800
Working Note: Salary received by Mrs. A from Larsen Limited will be clubbed in Mr. A's income
since Mr. A has substantial interest in the company and Mrs. A do not possess any professional
qualification.
Question 16:
Clubbing of Income: Mr. Mittal has four minor children consisting of three daughters and one
son. The annual income of all the children for the Assessment Year 2025-26 were as follows: (4
Marks, Nov. 2014)
Particulars Amount ₹
First daughter (Including Scholarship received 5,000) 10,000
Second Daughter 8,500
Third Daughter (Suffering from disability specified u/s 80U) 4,500
Son 40,000
Mr. Mittal gifted 2,00,000 to his minor Son who invested the same in the business and derived
income of ₹20,000 which is included above.
Compute the amount of Income earned by Minor Children to be clubbed in the hands of Mr. Mittal
if she has shifted out of the default tax regime.
Solution: Computation of income earned by minor children to be clubbed with the income of
Mr. Mittal: (amt. ₹)
Particulars ₹
i) Income of first daughter 5,000
Less: Income exempt under section 10(32) 1,500
ii) Total (A) 3,500
Income of Second daughter 8,500
Less: Income exempt under section 10(32) 1,500
Total (B) 7,000
iii) Income of Third daughter (It shall not be clubbed in hands of Mittal
since she is suffering from disability under Section 80U)
iv) Income of son 40,000
Less: Income exempt under section 10(32) 1,500
Total (C) 38,500
Total Income to be clubbed as per section 64(1A) (A+B+ C) 49,000

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Working Note: Scholarship received by daughter accrue or arise to her on account of activity
involving application of her skill, talent or specialized knowledge and experience.
Question 17:
Clubbing of Income: Kamal gifted 10 lakhs to his wife, Sulochona on her birthday on, 1st January,
2023. Sulochona lent 5,00,000 out of the gifted amount to Krishna on 1" April, 2024 for 6 months
on which she received interest of 50,000. The said sum of 50,000 was invested in shares of a
listed company on 15th October, 2024, which were sold for 75,000 on 30th December, 2024.
Securities transactions tax was paid on such sale. The balance amount of gift was invested as
capital by Sulochona in a business. She suffered loss of 15,000 in the business in Financial Year
2024-25.
In whose hands the above income and loss shall be included in Assessment Year 2025-26 ? Support
your answer with brief reasons. (5 Marks, Nov. 2017)
Solution: Under section 64(1)(iv), where any asset is transferred directly or indirectly to the
spouse by an individual, otherwise than for adequate consideration or in connection with an
agreement to live apart, the income arising therefrom is included in the hands of the transferor.
The term "income" in this context includes "loss" as well - CITv J.H. Gotla [1985] 156 ITR 323
(SC). Therefore, interest of 50,000 from moneys lent to Krishna shall be clubbed in hands of her
husband Mr. Kamal.
The loss of 15,000 sustained by Sulochona in the business carried on by her with funds gifted by
her husband can be claimed by her husband. Further, gift from husband is not taxable under
section 56(2)(x). When Mrs. Sulochna invested the interest income of 50,000 in shares of listed
company and earned short term capital gains amounting 25,000 therefrom, such capital gains shall
not be clubbed with the income of her husband but shall be taxable in her individual capacity. This
is so because the income from the accretion of the transferred assets is not to be clubbed with
the income of the transferor. CIT v. M.S.S.Rajan [2001] 252 ITR 126 (Mad).
Question 18:
Clubbing of Income: Mr. Madhav made a gift of 2,50,000 to his handicapped son, Master Tapan
who was aged 12 years as on 31 March 2023, which he deposited in a fixed deposit account in a
Nationalised bank at 10% interest p.a. compounded annually. The balance in this account as on 1
April, 2023 was 2,75,000 and the bank credited a sum of 27,500 as interest on 31" March, 2025.
Madhav's father gifted equity shares worth 50,000 of an Indian company (unlisted) to Master
Manan, another son of Mr. Madhav (Date of birth 10th April, 2012) in July 2012 which were
purchased by him on 8th December, 2005 for 80,000. Manan received a dividend of 5,000 on
these shares in October 2024. He sold these shares on 1" November, 2024 for 5,00,000 and
deposited 3,00,000 in a company at 15% interest per annum.
Cost Inflation Index: Financial Year 2005-06 = 113, 2011-12= 167 and 2024-25 = 363.
Mr. Madhav has a taxable income of 3,50,000 from his profession during the financial year 2024-
25.
Compute his Gross Total Income for the A.Y. 2025-26 if she has shifted out of the default tax
regime. (5 Marks, May 2018-NS)
Solution: Computation of Gross Total Income for the A.Y. 2025-26 (amount in :
Particulars ₹ ₹
Taxable Income from Profession 3,50,000
Capital Gains
Full Value of consideration 5,00,000
Less: cost of acquisition [indexation benefit will not be available as 80,000 4,20,000
transfer takes place after 22/7/2024]
Income from Other Sources
Dividend from shares of Indian company [Taxable in hands of 5,000
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share holder] Interest received by Master Tapan (Income cannot be

clubbed in hands of Madhav, since Master Tapan is suffering from
disability specified under Section 80L)
Interest on company deposits invested by Master Manan will be 18,750
clubbed in hands of Madhav[3,00,000 × 15% × 5 ÷12]
Less: Exemption under Section 10(32) -1,500 22,250
Gross Total Income 7,92,250
Question 19:
Clubbing of Income: Mrs. and Mr. Vinod Amin have two minor children M and N. The following are
the receipts in the hands of M and N during the year ended 31-03-2025:
i) M received a gift of 70,000 from her friend's father on the occasion of her birthday.
ii) M won a prize money of ₹ 3,00,000 in National Quiz competition.
iii) This was invested in debentures of a company, from which interest of 19,000 (gross)
accrued during the year.
iv) N won prize in a lottery. The net amount received after deduction of tax at source was
1,05,000.
Vinod Amin's income before considering clubbing provisions is higher than that of his wife. Discuss
how These items will be considered for taxation under the provisions of the Income-tax Act,
1961.Detailed computation of income is not required. (5 Marks, Nov. 2018-NS)
Solution: As per section 64(1A), the income of the minor child is to be included in the total income
of the parent whose total income (excluding the income of minor child to be so clubbed) is greater.
Further, as per Section 10(32), income of a minor child which is includible in the income of the
parent shall be exempt to the extent of 1,500 per child. However, the income earned by the minor
child is on account of any activity involving application of any skill or talent, then, such income of
the minor child shall not be included in the income of the parent, but shall be taxable in the hands
of the minor child. Since the income of Mr. Vinod Amin (before considering the clubbing
provisions) is higher than that of his wife, the income accrued to minor child will be clubbed in his
income. Thus, the treatment of various income of minor child shall be as under:
i) Gift received by M amounting 70,000 from her friend's father on the occasion of her
birthday will be clubbed in hands of Mr. Vinod Amin under the head Income from other
sources.
ii) 3,00,000 earned by M in National Quiz competition shall not be clubbed in hands of her
father as the same has been earned by her application of skill or talent. Interest from
debentures amounting 19,000 is liable to be clubbed even when investment is made out of
income arising from application of special talent.
iii) Income of ₹ 1,50,000 (gross) arising to minor N from lottery shall be included in the hands
of Mr. Vinod Amin as "Income from other sources". From the income so clubbed Mr. Vinod
Amin will be entitled to deduction of 1,500 per child under Section 10(32) of the Act.
Question 20:
Clubbing of Income: Mr. Mahadev, a noted bhajan singer of Rajasthan and his wife Mrs. Dariya
furnish the following information relating to the Assessment Year 2025-26.
Particulars Amount ₹
1. Income of Mr. Mahadev - professional bhajan singer (computed) 5,65,000
2. Salary income of Mrs. Dariya (computed) 3,80,000
3. Loan received by Mrs. Dariya from Ramu & Jay (Pvt.) Ltd. (Mrs. Dariya holds 2,50,000
35% shares of the Co. The Co. has incurred losses since its inception 2 years back)
4. Income of their minor son Golu from winning singing reality show on T.V. 2,50,000
5. Cash gift received by Golu from friend of Mr. Mahadev on winning the show 21,000

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6. Interest income received by minor married daughter Gudia from deposit with 40,000
Ramu &Pvt. Ltd.
Compute total taxable income of Mr. Mahadev & Mrs. Dariya for the Assessment Year 2025-26.
if she has shifted out of the default tax regime (5 Marks, Nov. 2019)
Solution: Computation of total income Mr. Mahadev & Mrs. Dariya for the assessment year 2023-
24 (amounts in ₹)
Particulars Mr. Mahadev Mrs. Dariya
Income from profession/Income from salary 5,65,000 3,80,000
Income from other sources:
Loan received from Mrs. Dariya from Ramu and Jaya (Pvt.) Ltd.
(Shall not be regarded as Income)
Interest Income of minor married daughter received from 40,000
Ramu and Jay Pvt Ltd. [WN-3]
Less: Exemption u/s 10(32) -1,500
Total Income 6,03,500 3,80,000
Working Notes:
i) As per section 64(1A) any income, accruing or arising to a minor child on account of activity
involving application of his skill, talent or specialized knowledge and experience, is not to be
clubbed. Therefore, income of minor son Golu from special talent shall not be clubbed.
ii) Cash Gift received by minor son Golu is not taxable since, as per section 56(2)(x), gift
received from non-relatives is taxable only when the aggregate amount from one or more
person exceeds 50,000.
iii) Income earned by minor married daughter shall be clubbed in hands of his parent whose
other income is greater.
Question 21:
Clubbing of Income: Determine the Gross total income of Shri Ram Kumar and Smt. Ram Kumar
for the assessment year 2025-26 from the following:
i) Salary received by Shri Ram Kumar from a company ₹ 1,80,000 per annum and Smt. Ram
Kumar also doing job in a company and getting salary of 2,40,000 per annum.
ii) Shri Ram Kumar transferred a flat to his wife Smt. Ram Kumar on 1 September, 2024 for
adequate consideration. The rent received from this let-out flat is 9,000 per month.
iii) Shri Ram Kumar and his wife Smt. Ram Kumar both are partners in a firm. Shri Ram Kumar
received 36,000 and Smt. Ram Kumar received 64,000 as interest from the firm and also
had a share of profit of 12,000 and 26,000 respectively.
iv) Smt. Ram Kumar transferred 10% debentures worth 3,00,000 to Shri Ram Kumar. The whole
amount of 3,30,000 invested by Shri Ram Kumar in the similar investments and earned
income of 39,000.
v) Mother of Shri Ram Kumar transferred a property to Master Rohit (son of Shri Ram Kumar)
in the year 2023. Master Rohit (aged 13 years) received 15,000 as income from this
property on 20th February, 2025. if she has not shifted out of the default tax regime
(6 Marks Nov. 2020)
Solution: Computation of Gross Total Income of Shri Ram Kumar and Smt. Ram Kumar for A.Y.
2025-26
Particular Shri Ram Kumar Smt. Ram Kumar
₹ ₹ ₹ ₹
Salary 1,80,000 2,40,000
Less: Standard deduction 75,000 1,05,000 75,000 1,65,000
Income from house property

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Rent received (taken as annual value in the 45,000 63,000

absence of other information)
Less: Deduction u/s 24(a) @ 30% of Annual 13,500 31,500 18,900 44,100
Value
Note: Clubbing provisions are not attracted
since the transfer to spouse is for adequate
consideration. Therefore, the rent for the 5
months upto the date of transfer is taxable in
the hands of Ram Kumar and thereafter, in the
hands of his wife.
Profits and gains of business or profession
Share of profit from firm [Exempt under - -
section 10(2A)]
Interest from firm (assumed that the same is
fully deductible in the hands of the firm) 36,000 36,000 64,000 64,000
Income from other sources
Interest on debentures (interest @ 10% on
debentures transferred to Shri Ram Kumar
without consideration to be included in the
hands of the transferor-spouse, Smt. Ram
Kumar) = 10% of 3 lakh [WN-1] - 30,000
Income from investments [39,000
x3,00,000/3,30,000]
(The clubbing provisions will apply even if the
form of the asset is changed. If the
debentures are redeemed and invested in
similar investments, income from 3 lakh
invested (being the value of debentures
transferred) alone will be included in the hands
of the transferor-spouse, Smt. Ram Kumar.
Income from accretion to such debentures (ie.,
income earned by investing debenture interest
of 30,000 will not be included in the hands of
Smt. Ram Kumar. The same i.e., 3,545, will be
taxable in the hands of the Shri Ram Kumar
himself) [WN-2] 3,545 3,545 35,455 35,455
Total income (before including minor's 1,76,045 3,38,555
income
Income of minor son Rohit to be included in - 15,000
Smt. Ram Kumar's income, since her total
income before including minor's income is
higher than that of her husband. She is eligible
for exemption of 1,500 u/s 10(32) in respect
of the income so included. Therefore, income
to be included in her income is 13,500
(15,0001,500) [WN-2]
Total Income 1,76,045 3,53,555
Working Note:

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(1) In respect of transfer of debentures by Smt. Ram Kumar to Shri Ram Kumar, it is not
mentioned whether the transfer is for adequate consideration or not. Moreover, the date of
transfer is also not given. The above solution is given on the assumption that transfer is for
inadequate consideration. However, if it is assumed that transfer is for adequate
consideration, the clubbing provisions would not be attracted. In such case, the interest on
Debentures of ₹30,000 as well as income from investment of 39,000 will be taxable in the
hands of Shri Ram Kumar.
(2) In respect of property transferred to Rohit, the question simply states 15,000 as the income
from property, without mentioning the nature of income (whether rental income or otherwise)
or nature of property (whether house property or otherwise). Therefore, the said amount
has not been treated as income from house property and deduction u/s 24(a) has not been
provided in the above solution.
However, if such sum is treated as income from house property, the income to be included in Smt.
Ram Kumar's income would be ₹ 10,500 [ 15,000-4,500 (30% of 15,000 allowable as deduction u/s
24(a)], and the same would be included under the head "Income from house property".
Consequently, her total income would be ₹ 3,49,055.
Question 22:
Clubbing of Income: During the previous year 2024-25, following transactions took place in
respect of Mr. Raghav who is 56 years old.
i) Mr. Raghav owns two house properties in Mumbai. The details in respect of these properties
are as under-
House-1 Self- House-2 Let-
occupied out
Rent received per month Not applicable 60,000
Municipal taxes paid 7,500 Nil
Interest on loan (taken for purchase of property) 3,50,000 5,00,000
Principal repayment of loan (taken from HDFC bank) 2,00,000 3,00,000
ii) Mr. Raghav had a house in Delhi. During financial year 2013-14, he had transferred the
house to Ms. Vamika, daughter of his sister without any consideration. House would go back
to Mr. Raghav after the life time of Ms. Vamika. The transfer was made with a condition
that 10% of rental income from such house shall be paid to Mrs. Raghav. Rent received by
Ms. Vamika during the previous year 2024-25 from such house property is 5,50,000.
iii) Mr. Raghav receives following income from M/s. M Pvt. Ltd. during P.Y. 2024-25:
a) Interest on Debentures of 7,50,000; and
b) Salary of 3,75,000. He does not possess the adequate professional qualification
commensurate with the salary received by him.
Shareholding of M/s. M Pvt. Ltd. as on 31-3-2025 is as under
Equity shares Preference shares
Mr. Raghav Nil Nil
Mrs. Raghav 2% 25%
Mr. Jai Kishan (brother of Mrs. Raghav) 98% 75%
iv) Mr. and Mrs. Raghav forms a partnership firm with equal share in profits. Mr. Raghav
transferred a fixed deposit of 1 crore to such firm. Firm had no income or expense other
than the interest of 9,00,000 received from such fixed deposit. Firm distributed the entire
surplus to Mr. and Mrs. Raghav at the end of the year.
v) Mr. Raghav holds preference shares in M/s. K Pvt. Ltd. He instructed the company to pay
dividends to Ms. Geetanshi, daughter of his servant. The transfer is irrevocable for the
life time of Geetanshi. Dividend received by Ms. Geetanshi during the previous year 2024-
25 is 13,00,000.
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vi) Other income of Mr. Raghav includes

a) Interest from saving bank account of 2,00,000
b) Cash gift of 75,000 received from daughter of his sister on his birthday.
Compute the total income of Mr. Raghav for the Assessment Year 2025-26. if she has not shifted
out of the default tax regime (8 Marks, Jan. 2021)
Solution: Computation of Total Income of Mr. Raghav for A.Y. 2025-26 (amount in₹)
Particulars ₹ ₹
Salary [Since Mrs. Raghav along with her brother holds shares Nil
carrying 100% voting power in M/s M Pvt. Ltd., they have a
substantial interest in the company. Since Mr. Raghav is working
in the same company without any professional qualifications
commensurate with his salary, the salary of 3,75,000 received by
him would be included in the hands of Mrs. Raghav.]
Income from house property
House 1 [Self-occupied] Net annual value -
Less: Interest on loan [upto ₹ 2,00,000] 2,00,000 (2,00,000)
House 2 [Let out]
Gross annual value [ 60,000 × 12] [Rent receivable has been taken 7,20,000
as the gross annual value in the absence of other information]
Less: Municipal taxes -
Net annual value 7,20,000
Less: Deductions from Net Annual Value
a) 30% of Net Annual Value 2,16,000
b) Interest on loan 5,00,000 4,000
House in Delhi [Since Mr. Raghav receives direct or indirect
benefit from income arising to his sister's daughter, Ms. Vamika,
from the transfer of house to her without consideration, such
income is to be included in the total income of Mr. Raghav as per
proviso to section 62(1), even though the transfer may not be
revocable during lifetime of Ms. Vamika's]
Gross Annual Value 5,50,000
Less: Municipal taxes -
Net Annual Value 5,50,000
Less: Deductions from Net Annual Value
a) 30% of Net Annual Value 1,65,000
b) Interest on loan - 3,85,000
1,89,000
Profits and gains from business or profession
Share of profit from firm [Exempt u/s 10(2A)] -
Exempt income cannot be clubbed
Income from other sources
Dividend on preference shares [Taxable in the hands of Mr. 13,00,000
Raghav as per section 60, since he transferred the income, i.e.,
dividend, without transferring the asset, i.e., preference shares]
Interest on debentures 7,50,000
Interest from saving bank account 2,00,000
Cash gift [Taxable, since sum of money exceeding 50,000 is
received from his niece, who is not a relative as per section 56(2)] 75,000 23,25,000
Gross Total Income 25,14,000
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Less: Deduction under Chapter VI-A

Deduction u/s 80C [Principal repayment of loan 5 lakh, restricted 1,50,000
to ₹1,50,000]
Deduction u/s 80TTA [Interest from savings bank account] 10,000 1,60,000
Total Income 23,54,000
Question 23
Clubbing of Income: Mr. Dharmesh who is 45 years old and his wife Mrs. Anandi who is 42 years
old
Particulars Amount ₹
i) Salary income (computed) of Mrs. Anandi 9,60,000
ii) Income of minor Son "A" who suffers from disability specified in Section 80U 3,08,000
iii) Income of minor daughter "C" from script writing for Television Serials 1,86,000
iv) Income from garment trading business of Mr. Dharmesh 17,50,000
v) Cash gift received by minor daughter "C" on 02-10-2024 from friend of Mrs. 45,000
Anandi, on winning of a story writing competition
vi) Income of minor son "B" from Scholarship received from his School 1,00,000
vii) Income of minor son "B" from fixed deposit with Punjab National Bank, made 5,000
out of income earned from Scholarship
Compute the total income of Mr. Dharmesh and his wife Mrs. Anandi for Assessment Year 2025-
26 assuming that they have not opted to be taxed under section 115BAC. (5 Marks, July 2021)
Solution: Computation of Total Income of Mr. Dharmesh and Mrs. Anandi (amount in ₹)
Particulars Mr. Mrs.
Dharmesh Anandi
Salary income (computed) 9,60,000
Income from garment trading business 17,50,000
Total Income before including income of minor children 17,50,000 9,60,000
Income of minor son "A"
Total Income before including income of minor children
Income of minor son "A"
Income of 3,08,000 of minor son A who suffers from disability
specified in section 80U [Since minor child A is suffering from
disability specified u/s 80U, hence, his income would not be included
in the income of the parent but would be taxable in the hands of the
minor child]
Income of minor son "B"
Income of ₹ 1,00,000 from scholarship [Exempt u/s 10(16)]
Income from fixed deposit with PNB [Since Mr. Dharmesh's income
is greater than that of Mrs. Anandi, income of minor son B from fixed
deposit would be included in the hands of Mr. Dharmesh. Interest
from bank deposit has to be included in Mr. Dharmesh's income, even
if deposit is made out of income earned from scholarship] 5,000
Less: Exemption under section 10(32) 1,500 3,500
Income of minor daughter "C" Income of 1,86,000 from script
writing for television serials [Income derived by a minor child from
any activity involving application of his/her skill, talent, specialized
knowledge and experience is not to be included in the hands of the
parent]

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Hence, clubbing provisions will not apply in this case/no adjustment Nil
is required.
Cash gifts of 45,000 received from friend of Mrs. Anandi [Gift not
exceeding 50,000 received from a non-relative is not taxable u/s
56(2)(x)]
Hence, clubbing provisions will not apply in this case/no adjustment Nil
is required.
Gross Total Income/Total Income 17,53,500 9,60,000
Note: As per section 10(16), scholarships granted to meet the cost of education is exempt from
tax. The purpose of scholarship received by minor son B is explicitly not mentioned in the question.
However, scholarships given by schools are generally in the form of financial assistance for
meeting the cost of education. Hence, it is logical to assume that the scholarship to B has been
granted to him to meet his cost of education. Based on this assumption, the same has been treated
as exempt from tax u/s 10(16).
Question 24
Clubbing of Income: Details of Income of Mr. R and his wife Mrs. R for the previous year 2024-
25 are as under:
i) Mr. R transferred his self-occupied property without any consideration to the HUF of which
he is a member. During the previous year 2024-25 the HUF earned an income of 50,000
from such property.
ii) Mr. R transferred ₹ 4,00,000 to his wife Mrs. R on 01-04-2006 without any consideration
which was given as a loan by her to Mr. Girish. She earned ₹ 3,50,000 as interest during the
earlier previous years which was also given as a loan to Mr. Girish. During the previous year
2024-25, she earned interest @ 11% per annum.
iii) Mr. R and Mrs. R both hold equity shares of 27% and 25% respectively in AMG Limited.
They are also working as employees in such Company. During the financial year 2024-25
they have withdrawn a salary of 3,20,000 and 2,70,000 respectively.
iv) Mrs. R transferred 5,000 equity shares of RSB Ltd. on 17-09-2013 to Mr. R without any
consideration. The Company issued 3,000 bonus shares to Mr. R in 2016. On 04-03-2025,
Mr. R sold entire share holdings and earned 5,20,000 as capital gains.
Apart from above income, Mr. R has income from commission 4,00,000 and Mrs. R has interest
income of 3,30,000. Compute Gross Total income of Mr. R and Mrs. R for the assessment year
2025-26. assuming that they have not opted to be taxed under section 115BAC.
(4 Marks, Dec. 2021)
Solution: Computation of Gross Total Income of Mr. R and Mrs. R for A.Y. 2025-26:
Particulars Mr. R Mr. R
Amount (₹)
I Income from house property
Income from property transferred to HUF without Consideration
Since Mr. R has transferred his property to his HUF without 50,000
consideration, income of 50,000 from such property would be
included in the total income of Mr. R as per section 64(2).
II Capital Gains
Income from equity shares transferred by Mrs. R to Mr. R
without consideration
Capital gains arising to Mr. R from transfer of equity shares of RSB 3,25,000
Ltd. gifted to him by Mrs. R would be included in the hands of Mrs.
R [ 5,20,000 x 5,000/8,000]

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Capital gains arising to Mr. R from transfer of bonus shares issued

by RSB Ltd. on the basis of holding of the said equity shares would
be included in the income of Mr. R and not Mrs. R, since income
derived from accretion of the transferred asset cannot be clubbed
with the income of transferor of the original asset i.e., Mrs.
R[₹5,20,000 x 3,000/8,000] 1,95,000
III Income from Other Sources
Income from commission 4,00,000
Interest income 3,30,000
Interest income on 4 lakh transferred by Mr. R to Mrs. R
without consideration
Income of 44,000, i.e., 11% of 4,00,000, being the amount
transferred by Mr. R to Mrs. R without any consideration and loaned 44,000
by her to Mr. Girish, would be included in the income of Mr. R
Income of 38,500 i.e., 11% of ₹ 3,50,000, being the interest earned 38,500
by Mrs. R out of amount gifted by Mr. R and thereafter, given by
her as loan to Mr. Girish, would be included in the income of Mrs. R,
as income derived by Mrs. R from accretion of the amount gifted by
Mr. R (i.e., interest income) cannot be included in the income of Mr.
R.
Total income [before considering adjustment on account of item (iii) 6,89,000 6,93,500
i.e., salary income from a company in which both Mr. R and Mrs. R
have substantial interest]
VI Since both Mr. R and Mrs. R have substantial interest in AMG
Ltd. (on account of holding equity shares carrying 20% or more of
voting power) and both are in receipt of income by way of salary
from AMG Ltd., such salary income would be includible in the hands
of that spouse, whose total income, before including such salary
income, is higher. Accordingly, the salary income of both Mr. R and
Mrs. R would be included in the hands of Mrs. R in this case, since
her total income, before including such income, is higher than that
of Mr. R.
Salary income of Mr. R= 3,20,000-50,000 (standard deduction) 2,70,000
Salary income of Mrs. R= 2,70,000-50,000 (standard deduction) 2,20,000
Gross Total Income 6,89,000 11,83,500
Question 25
Computation of total income: From the following transactions compute the total income of Mr.
Raman and his wife Savita for the Assessment year 2025-26 assuming that they have exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
(i) Mr. Raman had a fixed deposit of ₹ 5,00,000 in the bank. He instructed the bank to credit
the interest on deposit @ 6% from 01-04-2024 to 31-03-2025 to the savings account of
his brother’s son for his education.
(ii) Savita is a B.com graduate and working in the ABC Private Limited as an accountant with a
monthly salary of ₹ 25,000. Raman holds 30% equity shares of the ABC Private Limited.
(iii) Raman started proprietary business on 01-04-2001 with a capital of ₹ 10,00,000. He
incurred a loss of ₹ 2,00,000 during the previous year 2023-24. To overcome the financial
position, Savita gifted a sum of ₹ 4,00,000 to him on 01-04-2024 which was immediately
invested in the business by Mr. Raman. He earned a profit of ₹ 3,00,000 during the previous
year 2024-25.
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(iv) Sajan, younger son of Raman, aged 17 years won in a debate competition during the annual
competitions held at his school and received a cash award of ₹ 10,000 and he also earned
interest of ₹ 7,000 on balance maintained in his savings bank account. (4 Marks, Nov.
2022)
SOLUTION Computation of Total Income of Mr. Raman and Mrs. Savita for A.Y. 2024-25
Particulars Mr. Mrs.
Raman Savita
Amount (₹)
(i)Interest on fixed deposits [Income would be included in the hands 30,000
of Raman, since he has transferred income to his brother’s son without
transfer of the asset, being fixed deposit] [₹ 5,00,000 × 6%]
(ii) Salary income [₹ 3,00,000 (₹ 25,000 × 12) less standard deduction 2,50,000
of ₹ 50,000] [Mrs. Savita’s salary would not be included in the income
of Raman, who has substantial interest in the company, since she
possesses the relevant professional qualifications for working as an
accountant]
(iii) Savita gifted ₹ 4,00,000 to Mr. Raman, which Mr. Raman has 2,00,000 1,00,000
invested in the business. In such case, proportionate income (i.e., 1/3 ×
₹ 3,00,000) arising from such investment is to be included in the total
income of Savita.
Mr. Raman’s contribution in capital as on 1-4-2023 = ₹ 8,00,000 [₹
10,00,000 – ₹ 2,00,000]
Mrs. Savita’s contribution on 1-4-2024 = ₹ 4,00,000
₹3,00,000, being the profit for P.Y. 2024-25 to be apportioned on the
basis of capital employed on the first day of the previous year i.e., as
on 1-4-2024 (8:4 or 2:1) 2,30,000 3,50,000
Total income [before considering minor income from interest on
savings account]
(iv) Cash award won in a debate by Sajan, minor son, would not be - -
included in the hands of either parent, since such income arises from
his own skills/talent.
However, interest of ₹ 7,000 on savings bank account (after providing - 5,500
for deduction of ₹ 1,500) is to be included in the hands of Mrs. Savita,
since her income is higher than that of her husband [₹ 7,000 – ₹ 1,500]
Gross Total Income 2,30,000 3,55,500
Less: Deduction under section 80TTA (Interest on savings bank - 5,500
account)
Total Income 2,30,000 3,50,000
Question 26
Computation of total income: Mr. Chaman who is 50 years old and his wife Mrs. Chaman who in
48 years old furnish the following information (all the amount of incomes/gains/losses are
computed as per the provisions of Income-tax Act):
(i) Mr. Chaman's salary income – ₹ 11,00,000
(ii) Mrs. Chaman's income from Kathak performances – ₹ 2,50,000. She is a professional Kathak
dancer and pursue dancing as her profession.
(iii) Mrs. Chaman earned long-term capital gains of ₹ 5,50,000 from sale of shares.
(iv) Mrs. Chaman gifted ₹ 2,00,000 to Mr. Chaman out of her Stridhan on 1-4-2025, Mr. Chaman
invested the entire amount in stock market but suffered a short-term capital loss of ₹
5,10,000
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(v) Miss Naina, their minor daughter, earned ₹ 3,56,000 by performing in various quiz
competitions held online during the year 2024-25. She kept that amount in savings bank
account and earned interest of ₹ 15,000 during the year 2024-25.
(vi) Master Neelabh, their minor son earned ₹ 35,000 from fixed deposit which was made out
of the cash he received on his birthday from his friends and family. Neelabh suffers from
disability as mentioned under section 80U. The medical certificate shows a disability of
upto 75%.
Compute the total income in the hands of Mr. and Mrs. Chaman and their minor children for the
A.Y. 2025-26 if he has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A). (6 Marks, May 2023)
SOLUTION Computation of total income of Mr. Chaman, Mrs. Chaman and their minor children
for the Assessment year 2025-26 :
Particulars Mr. Mrs. Naina, Neelabh,
Chaman Chaman minor minor
daughter son
(₹) (₹) (₹) (₹)
Income under the head “Salaries”
Salaries (computed) 11,00,000
Profits and gains from business or
profession
Income from Kathak performances 2,50,000
Capital Gains
Long term capital gains from sale of 5,50,000
shares
Less: Set off of short-term capital loss 2,00,000
from long term capital gain [Short term
capital loss to the extent of ₹ 2 lakhs
would be included in the income of Mrs.
Chaman, since the shares are purchased
by Mr. Chaman from the amount of ₹ 2
lakhs gifted by Mrs. Chaman out of her
Stridhan. Clubbing provisions would be
attracted even if it is a loss and not
income] [Refer Note 1 and 2 below]
The balance short-term capital loss of ₹ 3,50,000
3,10,000 has to be carried forward by
Mr. Chaman, since it cannot be set-off
against salary income.
Income [before considering income of 11,00,000 6,00,000
minor son and minor daughter]
Income of Naina, minor daughter, from 3,56,000
performances in various quiz
competitions would not be included in the
hands of either parent, since such income
arises from her own skills/talent
However, interest of ₹ 15,000 on saving 13,500
bank account [after providing for
deduction of ₹ 1,500, being exempt under

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 CA VARDHAMAN DAGA

section 10(32)] is to be included in the

hands of Mr. Chaman, since his income is
higher than that of his wife [₹ 15,000 - ₹
1,500]
Income of Neelabh, minor son suffering 35,000
from disability u/s 80U, from fixed
deposits would not be included in the
income
Gross Total Income 11,13,500 6,00,000 3,56,000 35,000
Less: Deductions under Chapter VI-A
Under section 80TTA: In respect of 10,000
interest on saving bank account to the
extent of
Under section 80U: Flat deduction of ₹
75,000 to a person with disability.
However, deduction would be restricted
to gross total income 35,000
Total Income 11,03,500 6,00,000 3,56,000 Nil
Note :
(1) The question mentions that Mrs. Chaman gifted ₹ 2 lakh to Mr. Chaman out of her Stridhan
on 1-4-2024 and that Mr. Chaman invested the entire amount in stock market but suffered
a short-term capital loss of ₹ 5,10,000. It is not possible to invest ₹ 2 lakhs and incur short-
term capital loss of ₹ 5.10 lakhs. Accordingly, in the above solution, it has been assumed that
the remaining ₹ 3,10,000 is invested by Mr. Chaman and hence the same would be a short-
term capital loss to be carried forward by him.
Due to the use of the words “invested the entire amount in the stock market” in the question,
it is possible to take a view that the entire capital loss of ₹ 5,10,000 has to be set off against
long-term capital gains of ₹ 5,50,000 in the hands of Mrs. Chaman. In which case the total
income of Mrs. Chaman would be ₹ 2,90,000 instead of ₹ 6,00,000. Also, there would be no
short-term capital loss in the hands of Mr. Chaman.
(2) Item (iv) mentions that the gift was made by Mrs. Chaman to Mr. Chaman on 1-4-2025, which
falls outside the P.Y. 2024-25. Since the date of gift has been mentioned as 1-4-2025 in the
question, as per the plain reading, such short-term capital loss cannot be set-off against long-
term capital gains of ₹ 5,50,000. In such a case, the total income of Mr. Chaman would be ₹
8,00,000.
Illustration 27
Clubbing of income: Mrs. Kasturi transferred her immovable property to ABC Co. Ltd. subject to
a condition that out of the rental income, a sum of ₹ 36,000 per annum shall be utilised for the
benefit of her son's wife. Mrs. Kasturi claims that the amount of 36,000 (utilized by her son's
wife) should not be included in her total income as she no longer owned the property. State with
reasons whether contention of Mrs. Kasturi is valid in law. (5 Marks, PCC Nov. 2010)
Solution: As per Section 64(1)(viii), the clubbing provisions are attracted in case of transfer of
any asset, directly or indirectly, otherwise than for adequate consideration, to any person to the
extent to which the income from such asset is for the immediate or deferred benefit of son's
wife. Thus, in the given case, the said income of 36,000 shall be clubbed in the total income of
the transferor i.e. Mrs. Kasturi
Note: It is assumed that the transfer is made otherwise than for adequate consideration.
Illustration 28

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 CA VARDHAMAN DAGA

Computation of total income and clubbing: Mr. Dhaval and his wife Mrs. Hetal furnish the
following information:
i) Salary income (Computed) of Mrs. Hetal: ₹ 4,60,000
ii) Income of minor son 'B' who suffers from disability specified in Section 80U: ₹ 1,08,000
iii) Income of minor daughter 'C' from singing: ₹ 86,000
iv) Income from profession of Mr. Dhaval: ₹ 7,50,000
v) Cash gift received by 'C' on 02-10-2024 from friend of Mrs. Hetal on winning of singing
competition: ₹ 48,000
i) Income of minor married daughter 'A' from company deposit: ₹ 30,000
Compute the total income of Mr. Dhaval and Mrs. Hetal. if he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
(8 Marks, PCC May 2008)
Solution: Computation of total income of Mr. Dhaval and Mrs. Hetal (amounts in ₹)
Particulars Mr. Mrs.
Dhaval Hetal
Income from Salaries (Computed) [WN-1] 4,60,000
Income from profession 7,50,000
Add: Deemed income u/s 64(1A): Income of minor married daughter 30,000
"A [WN-2 to 5]
Less: Exemption u/s 10(32) -1,500
Total Income 7,78,500 4,60,000
Working Notes:
(1) Income of minor son 'B' shall not be clubbed since he suffers from disability specified in
Section 80U.
(2) Income of minor daughter 'C' shall not be clubbed since she has earned the same by the
application of her skill &competence.
(3) Cash gift received by minor daughter 'C' is not taxable u/s 56(2)(x) since the amount of gift
doesn't exceed ₹ 50,000.
(4) Income of minor daughter 'A' shall be clubbed in the income of the parent whose income
before such clubbing is higher. Since, in the given question, the income of Mr. Dhaval is
higher, hence, the income from company deposits shall be clubbed in the income of Mr. Dhaval.
Illustration 29
Computation of capital gains and clubbing: On 21-3-2024, Mr. Janak gifted to his wife Mrs.
Thilagam 200 listed shares, which had been bought by him on 19-4-2023 at 2000 per share. On
1-6-2024, bonus shares were allotted in the ratio of 1:1 All these shares were sold by Mrs.
Thilagam as under-
Date of Sale Manner of Sale No. of Shares Net sales
value
21-05-2024 Sold in recognized stock exchange, STT 100 2,50,000
paid
21-07-2023 Private sale, to an outsider All bonus shares 1,25,000
28-02-2024 Private sale to her friend Mrs. Hema 100 1,70,000
(Market valueon this date was 2,10,000)
Briefly state the income-tax consequences in respect of the sale of the shares by Mrs. Thilagam,
showing clearly the person in whose hands the same is chargeable, the quantum and the head of
income in respect of the above transactions. Detailed computation of total income is NOT
required. (5 Marks, IPCC May 2011)

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 CA VARDHAMAN DAGA

Solution: Where an asset has been transferred by an individual to his spouse otherwise than for
adequate consideration, the income arising from the sale of the said asset by the spouse will be
clubbed in the hands of the individual.
Where there is any accretion to the asset transferred, income arising to the transferee from
such accretion will not be clubbed. Hence, the profit from sale of bonus shares allotted to Mrs.
Thilagam will be chargeable to tax in the hands of Mrs. Thilagam.
Therefore, the capital gains arising from the sale of the original shares has to be included in the
hands of Mr. Janak, and the capital gains arising from the sale of bonus shares would be taxable
in the hands of Mrs. Thilagam.
Where an asset received by way of gift has been sold, the period of holding of the previous owner
should be considered for determining whether the capital gain is long term or short term. The
cost to the previous owner has to be taken as the cost of acquisition.
1) Computation of capital gains on the sale of shares (amount in ₹)
Particulars Sale on 21-5-2024 Sale on 28-2-
(100gifted shares) 2025 100 gifted
shares)
Net full value of consideration 2,50,000 1,70,000
Less: Cost of acquisition (No benefit of indexation 2,00,000 2,00,000
is available asper Section 112A) [Private sale to
friend will not be taxable under Section 112A of
the Act but indexation benefit would not be
available as transfer takes place after 22/7/2024]
Long-term Capital Gains 50,000 -30,000
Taxable LTCG in hands of Janak 20,000
Since, Long-term Capital gains is does not exceed 1,25,000, hence no tax shall be levied as per
Section 112A.
2) Computation of capital gains on the sale of bonus shares (amount in ₹)
Particulars Sale on 21-7-2024
(100 Bonus shares)
Net full value of consideration 1,25,000
Less: Cost of acquisition (Nil, in case of bonus shares) Nil
Short-term Capital Gains 1,25,000
Taxable in hands of Mrs. Thilagam (Accretion in income)
ILLUSTRATION 30
Loans advanced to HUF: Dinesh, an individual engaged in the business of finance, advances ₹ 5
lakhs to his HUF on interest at 12% p.a., which is the prevailing market rate. The HUF invests the
amount in its business and earns profit of ₹ 2 lakhs from this money. Can the Assessing Officer
add a sum of ₹ 1,40,000 (i.e. ₹ 2,00,000 – ₹ 60,000) as income of Dinesh u/s 64(2) of the Income-
tax Act? Will it make any difference if Dinesh does not charge any interest?
SOLUTION Section 64(2) shall be applicable only where an individual member of HUF converts
his property into the property of HUF or throws it into the common stock of the HUF without
adequate consideration.
In this case, Dinesh does not transfer money to his HUF but only lends an amount of ` 5 lakhs to
his HUF at an interest of 12%, which is the prevailing market rate. This is a transaction of loan
advancement, there is no transfer of property from Dinesh to the HUF. Therefore, the Assessing
Officer cannot add the profit arising to HUF in the total income of Dinesh by invoking section
64(2).Even if no interest is charged by Dinesh, the nature of transaction will not change. It still
remains as a loan transaction.

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 CA VARDHAMAN DAGA

CHAPTER – 9 AGGREGATION OF INCOME, SET-OFF AND CARRY

FORWARD OF LOSSES
STUDY MATERIAL

ILLUSTRATION 1
Mr. A, aged 35 years, submits the following particulars pertaining to the A.Y.2025-26:
Particulars Amount (₹)
Income from salary (computed) 4,00,000
Loss from let-out property (-) 2,20,000
Business loss (-)1,00,000
Bank interest (FD) received 80,000
Compute the total income of Mr. A for the A.Y.2024-25, assuming that
(i) He has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
(ii) He pays tax under the default tax regime.
SOLUTION (i) Computation of total income of Mr. A for the A.Y.2025-26 under normal
provisions of the Act
Particulars Amount (₹) Amount (₹)
Income from salary 4,00,000
Less: Loss from house property of ₹ 2,20,000 to be restricted
to ₹ 2 lakhs by virtue of section 71(3A) (-) 2,00,000 2,00,000
Balance loss of ₹ 20,000 from house property to be carried
forward to next assessment year
Income from other sources (interest on fixed deposit with 80,000
bank)
Less: Business loss of ₹ 1,00,000 set-off to the extent of ₹ (-) 80,000
80,000
Business loss of ₹ 20,000 to be carried forward for set-off
against business income of the next assessment year
Gross total income [See Note below] 2,00,000
Less: Deduction under Chapter VI-A Nil
Total income 2,00,000
Notes:
(i) Gross Total Income includes salary income of ₹ 2,00,000 after adjusting loss of ₹ 2,00,000
from house property. The balance loss of ₹ 20,000 from house property to be carried
forward to next assessment year for set-off against income from house property of that
year.
(ii) Business loss of ₹ 1,00,000 is set off against bank interest of ₹ 80,000 and remaining
business loss of ₹ 20,000 will be carried forward as it cannot be set off against salary
income.
(ii)Computation of total income of Mr. A for the A.Y.2025-26 under default tax regime
Particulars Amount Amount (₹)
(₹)
Income from salary 4,00,000
Income from other sources (interest on fixed deposit with bank) 80,000
Less: Business loss of ₹ 1,00,000 set-off to the extent of ₹ (-) 80,000
80,000

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 CA VARDHAMAN DAGA

Business loss of ₹ 20,000 to be carried forward for set-off 4,00,000

against business income of the next assessment year
Gross total income/ Total Income
Notes:
(i) Under the default tax regime, loss from house property cannot be set off against income
under any other head. Therefore, the loss of ₹ 2,20,000 from house property to be carried
forward to next assessment year for set-off against income from house property of that
year.
(ii) Business loss of ₹ 1,00,000 is set off against bank interest of ₹ 80,000 and remaining
business loss of ₹ 20,000 will be carried forward as it cannot be set off against salary
income.
ILLUSTRATION 2
Mr. B, a resident individual, furnishes the following particulars for the P.Y.2024-25:
Particulars ₹
Income from salary (computed) 45,000
Income from house property (24,000)
Income from non-speculative business (22,000)
Income from speculative business (4,000)
Short-term capital losses (25,000)
Long-term capital gains taxable u/s 112 19,000
What is the total income chargeable to tax for the A.Y.2025-26, assuming that he pays tax under
section 115BAC?
SOLUTION
Total income of Mr. B for the A.Y. 2024-25
Particulars Amount Amount (₹)
(₹)
Income from salaries 45,000
Income from house property
Loss from house property to be carried forward [Note (i)] -
Profits and gains of business and profession
Business loss to be carried forward [Note (ii)] (22,000)
Speculative loss to be carried forward [Note (iii)] (4,000)
Capital Gains
Long term capital gain taxable u/s 112 19,000
Short term capital loss ₹ 25,000 set off against long-term
capital gains to the extent of ₹ 19,000 [Note (iv)] (19,000)
Nil
Balance short term capital loss of ₹ 6,000 to be carried forward
[Note (iv)]
Taxable income 45,000
Notes:
(i) Since Mr. B is paying tax under the default tax regime u/s 115BAC, loss from house property
cannot be set off against income under any other head. Hence, such loss has to be carried
forward to the next year for set-off against income from house property, if any.
(ii) Business loss cannot be set-off against salary income. Therefore, loss of ₹ 22,000 from the
non-speculative business cannot be set off against the income from salaries. Hence, such
loss has to be carried forward to the next year for set-off against business profits, if any.

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 CA VARDHAMAN DAGA

(iii) Loss of ₹ 4,000 from the speculative business can be set off only against the income from
the speculative business. Hence, such loss has to be carried forward.
(iv) Short term capital loss can be set off against both short term capital gain and long-term
capital gain. Therefore, short term capital loss of ₹ 25,000 can be set-off against long-
term capital gains to the extent of ₹ 19,000. The balance short term capital loss of ₹ 6,000
cannot be set-off against any other income and has to be carried forward to the next year
for set-off against capital gains, if any.
ILLUSTRATION 3
During the P.Y. 2024-24, Mr. C has the following income and the brought forward losses:
Particulars ₹
Short term capital gains on sale of shares 1,50,000
Long term capital loss of A.Y.2023-24 (96,000)
Short term capital loss of A.Y.2024-25 (37,000)
Long term capital gain u/s 112 75,000
What is the capital gain taxable in the hands of Mr. C for the A.Y.2025-26?
SOLUTION
Taxable capital gains of Mr. C for the A.Y. 2025-26
Particulars (₹) (₹)
Short term capital gains on sale of shares 1,50,000
Less: Brought forward short-term capital loss of the A.Y.2023-24 (37,000) 1,13,000
Long term capital gain 75,000
Less: Brought forward long-term capital loss of A.Y.2022-23 ₹ 96,000
set off to the extent of ₹ 75,000 [See Note below] (75,000) Nil
Taxable short-term capital gains 1,13,000
Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the
unadjusted long-term capital loss of A.Y.2022-23 of ₹ 21,000 (i.e. ₹ 96,000 – ₹ 75,000) can be
carried forward to the next year to be set-off against long-term capital gains of that year

ILLUSTRATION 4
Mr. D has the following income for the P.Y.2024-25:
Particulars ₹
Income from the activity of owning and maintaining the race horses Income from 75,000
textile business 85,000
Brought forward textile business loss (relating to A.Y. 2024-25) 50,000
Brought forward loss from the activity of owning and maintaining the race horses 96,000
(relating to A.Y.2022-23)
What is the total income in the hands of Mr. D for the A.Y. 2025-26?
SOLUTION
Total income of Mr. D for the A.Y. 2025-26
Particulars (₹) (₹)
Income from the activity of owning and maintaining race horses 75,000
Less: Brought forward loss of ₹ 96,000 from the activity of owning and 75,000
maintaining race horses set-off to the extent of ₹ 75,000
Nil
Balance loss of ₹ 21,000 (₹ 96,000 – ₹ 75,000) from the activity of owning
and maintaining race horses to be carried forward to A.Y.2025-26
Income from textile business 85,000

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 CA VARDHAMAN DAGA

Less: Brought forward business loss from textile business 50,000 35,000
Total income 35,000
Note: Loss from the activity of owning and maintaining race horses cannot be setoff against any
other source/head of income.
ILLUSTRATION 5
Mr. E has furnished his details for the A.Y.2025-26 as under:
Particulars ₹
Income from salaries (computed) 1,50,000
Income from speculation business 60,000
Loss from non-speculation business (40,000)
Short term capital gain 80,000
Long term capital loss of A.Y.2023-24 (30,000)
Winning from lotteries (Gross) 20,000
Compute the total income of Mr. E for the A.Y.2025-26.
SOLUTION
Computation of total income of Mr. E for the A.Y.2025-26
Particulars (₹) (₹)
Income from salaries 1,50,000
Income from speculation business Less : 60,000
Loss from non-speculation business (40,000) 20,000
Short-term capital gain 80,000
Winnings from lotteries 20,000
Taxable income 2,70,000
Note: Long term capital loss can be set off only against long term capital gain. Therefore, long
term capital loss of ₹ 30,000 has to be carried forward to the next assessment year.

TEST YOUR KNOWLEDGE

ILLUSTRATION - 6.
Compute the gross total income of Mr. F for the A.Y. 2025-26 from the information given below
–
Particulars ₹
Income from house property (computed) 1,25,000
Income from business (before providing for depreciation) 1,35,000
Short term capital gains on sale of unlisted shares 56,000
Long term capital loss from sale of property (brought forward from A.Y. 2024-25) (90,000)
Income from tea business 1,20,000
Dividends from Indian companies carrying on agricultural operations (Gross) 80,000
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)
Ans- Gross Total Income of Mr. F for the A.Y. 2025-26
Particulars ₹ ₹
Income from house property (Computed) 1,25,000
Income from business
Profits before depreciation 1,35,000
Less: Current year depreciation 26,000
Less: Brought forward business loss 45,000

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 CA VARDHAMAN DAGA

64,000
Income from tea business (40% is business income) 48,000 1,12,000
Capital gains
Short-term capital gains 56,000
Income from Other Sources
Dividend income(taxable in the hands of shareholders) 80,000
Gross Total Income 3,73,000
Notes:
(1) Dividend from Indian companies is taxable at normal rates of tax in the hands of resident
shareholders.
(2) 60% of the income from tea business is treated as agricultural income and therefore, exempt
from tax;
(3) Long-term capital loss can be set-off only against long-term capital gains. Therefore, long-
term capital loss of ₹ 90,000 brought forward from A.Y.2023-24 cannot be set-off in the
A.Y.2024-25, since there is no long-term capital gains in that year. It has to be carried
forward for setoff against long-term capital gains, if any, during A.Y.2025-26.
ILLUSTRATION - 7
Mr. Sohan submits the following details of his income for the A.Y.2025-26:
Particulars ₹
Income from salary (computed) 3,00,000
Loss from let out house property (-) 40,000
Income from sugar business 50,000
Loss from iron ore business for P.Y. 2019-20 (discontinued in P.Y. 2020-21) (-) 1,20,000
Short term capital loss (-) 60,000
Long term capital gain 40,000
Dividend 5,000
Income received from lottery winning (Gross) 50,000
Winnings from card games (Gross) 6,000
Agricultural income 20,000
Short-term capital loss under section 111A (-) 10,000
Bank interest on Fixed deposit 5,000
Calculate gross total income and losses to be carried forward, assuming that he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).
Ans- Computation of Gross Total Income of Mr. Sohan for the A.Y.2025-26
Particulars ₹ ₹
Salaries
Income from salary 3,00,000
Less: Loss from house property set-off against salary income as per (40,000) 2,60,000
section 71
Profits and gains of business or profession
Income from sugar business 50,000
Less: Brought forward loss of ₹ 1,20,000 from iron ore business set- (50,000) Nil
off as per section 72(1) to the extent of ₹ 50,000
Balance business loss of ₹ 70,000 of P.Y.2019-20 to be carried
forward to A.Y.2026-27
Capital gains
Long term capital gain 40,000

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 CA VARDHAMAN DAGA

Less: Short term capital loss of ₹ 60,000 set-off to the extent of ₹ (40,000) Nil
40,000
Balance short-term capital loss of ₹ 20,000 to be carried forward
Short-term capital loss of ₹ 10,000 u/s 111A also to be carried
forward
Income from other sources
Dividend (fully taxable in the hands of shareholders) 5,000
Winnings from lottery 50,000
Winnings from card games 6,000
Bank FD interest 5,000 66,000
Gross Total Income 3,26,000
Losses to be carried forward to A.Y.2025-26 70,000
Loss of iron-ore business (₹ 1,20,000 – ₹ 50,000)
Short term capital loss (₹ 20,000 + ₹ 10,000) 30,000
Note: Agricultural income is exempt under section 10(1).

ILLUSTRATION - 8
Mr. Batra furnishes the following details for year ended 31.03.2025:
Particulars ₹
Short term capital gain 1,40,000
Loss from speculative business 60,000
Long term capital gain on sale of land 30,000
Long term capital loss on sale of unlisted shares 1,00,000
Income from business of textile (after allowing current year depreciation) 50,000
Income from activity of owning and maintaining race horses 15,000
Income from salary (computed) 1,00,000
Loss from house property 40,000
Following are the brought forward losses:
(1) Losses from activity of owning and maintaining race horses-pertaining to A.Y.2022-23 - ₹
25,000.
(2) Brought forward loss from business of textile ₹ 60,000 - Loss pertains to A.Y. 2017-18.
Compute gross total income of Mr. Batra for the Assessment Year 2025-26, assuming that he has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
Also determine the losses eligible for carry forward to the A.Y. 2026-27.
Ans-Computation of Gross Total Income of Mr. Batra for the A.Y. 2025-26
Particulars ₹ ₹
Salaries 1,00,000
Less: Current year loss from house property (40,000) 60,000
[Since Mr. Batra has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A)]
Profit and gains of business or profession
Income from textile business 50,000
Less: Loss of ₹ 60,000 from textile business b/f from A.Y. 2017-18 50,000 NIL
set-off to the extent of ₹ 50,000
Income from the activity of owning and maintaining race horses 15,000
Less: Loss of ₹ 25,000 from activity of owning and maintaining race 15,000 NIL
horses b/f from A.Y. 2022-23 setoff to the extent of ₹ 15,000

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Balance loss of ₹ 10,000 to be carried forward to A.Y. 2026-27 [See

Note 2]
Capital Gain
Short term capital gain 1,40,000
Long term capital gain on sale of land 30,000
Less: Long term capital loss of ₹ 1,00,000 on sale of unlisted shares 30,000 NIL
set-off to the extent of ₹ 30,000
Balance loss of ₹ 70,000 to be carried forward to A.Y. 2026-27 [See
Note 3]
Gross Total Income 2,00,000
Losses to be carried forward to A.Y. 2026-27
Particulars
Current year loss from speculative business [See Note-4] 60,000
Current year long term capital loss on sale of unlisted shares 70,000
Loss from activity of owning and maintaining of race horse pertaining to A.Y.2022- 10,000
23
Notes:
(1) As per section 72(3), business loss can be carried forward for a maximum of eight assessment
years immediately succeeding the assessment year for which the loss was first computed.
Since the eight year period for carry forward of business loss of A.Y. 2017-18 expired in the
A.Y. 2025-26, the balance unabsorbed business loss of ` 10,000 cannot be carried forward
to A.Y. 2026-27.
(2) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off
against income from any source other than the activity of owning and maintaining race horses.
Such loss can be carried forward for a maximum period of 4 assessment years.
(3) Long-term capital loss on sale of unlisted shares can be set-off against long-term capital gain
on sale of land. The balance loss of ₹ 70,000 cannot be set-off against short term capital
gain or against any other head of income. The same has to be carried forward for set-off
against long-term capital gain of the subsequent assessment year. Such long-term capital loss
can be carried forward for a maximum of eight assessment years.
(4) Loss from speculation business cannot be set-off against any income other than profit and
gains of another speculation business. Such loss can, however, be carried forward for a
maximum of four years as per section 73(4) to be set-off against income from speculation
business.
ILLUSTRATION - 9.
Mr. A furnishes you the following information for the year ended 31.03.2025:
Particulars ₹
(i) Income from plying of vehicles (computed as per books) (He owned 5 light 3,20,000
goods vehicle throughout the year)
(ii) Income from retail trade of garments (Computed as per books) (Sales 7,50,000
turnover ₹ 1,35,70,000) Mr. A had declared income on presumptive basis
under section 44AD for the first time in A.Y.2025-26. Assume 10% of the
turnover during the P.Y.2024-25 was received in cash and balance through
A/c payee cheque and all the payments in respect of expenditure were also
made through A/c payee cheque or debit card.
(iii) He has brought forward depreciation relating to A.Y. 2023-24 1,00,000

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 CA VARDHAMAN DAGA

Compute taxable income of Mr. A and his tax liability for the A.Y. 2025-26 with reasons for your
computation, assuming that he exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A).
Ans- Computation of total income and tax liability of Mr. A for the A.Y. 2025-26
Particulars ₹
Income from retail trade – as per books (See Note 1 below) 7,50,000
Income from plying of vehicles – as per books (See Note 2 below) 3,20,000
Less: Set off of b/f depreciation relating to A.Y. 2023-24 1,00,000
Total income 9,70,000
Tax liability 1,06,500
Add: Health and Education cess@4% 4,260
Total tax liability 1,10,760
Note:
(1) Income from retail trade: Presumptive business income under section 44AD is ₹ 8,41,340 i.e.,
8% of ₹ 13,57,000, being 10% of the turnover received in cash and 6% of ₹ 1,22,13,000, being
the amount of sales turnover received through A/c payee cheque. However, the income
computed as per books is ₹ 7,50,000 which is to be further reduced by the amount of
unabsorbed depreciation of ₹ 1,00,000. Since the income computed as per books is lower than
the income deemed under section 44AD, the assessee can adopt the income as per books.
However, if he does not declare profits as per presumptive taxation under section 44AD, he
has to get his books of accounts audited under section 44AB, since his turnover exceeds ₹ 1
crore (the enhanced limit of ₹ 10 crore would not be available, since more than 5% of the
turnover is received in cash). Also, his case would be falling under section 44AD(4) and hence,
tax audit is mandatory. It may further be noted that he cannot declare income under
presumptive provisions under section 44AD for next five assessment years, if he does not
declared profits as per presumptive provisions under section 44AD this year.
(2) Income from plying of light goods vehicles: Income calculated under section 44AE(1) would
be ₹ 7,500 x 12 x 5 which is equal to ₹4,50,000. However, the income from plying of vehicles
as per books is ₹ 3,20,000, which is lower than the presumptive income of ₹ 4,50,000
calculated as per section 44AE(1). Hence, the assessee can adopt the income as per books i.e.
₹ 3,20,000, provided he maintains books of account as per section 44AA and gets his accounts
audited and furnishes an audit report as required under section 44AB.
It is to be further noted that in both the above cases, if income is declared under presumptive
provisions, all deductions under sections 30 to 38, including depreciation would have been deemed
to have been given full effect to and no further deduction under those sections would be allowable.
If income is declared as per presumptive provisions, his total income would be as under
Particulars ₹
Income from retail trade under section 44AD [₹ 13,57,000@ 8% plus ₹ 8,41,340
1,22,13,000 @6%]
Income from plying of light goods vehicles under section 44AE [₹ 7,500 x 12 x5] 4,50,000
12,91,340
Less: Set off of brought forward depreciation – not possible as it is deemed Nil
that it has been allowed and set off
Total income 12,91,340
Tax thereon 1,99,902
Add: Health and Education cess @4% 7,996
Total tax liability 2,07,898
Total tax liability (rounded off) 2,07,900

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 CA VARDHAMAN DAGA

ILLUSTRATION - 10
Mr. Aditya furnishes the following details for the year ended 31-03-2025:
Particulars Amount (₹)
Loss from speculative business A 25,000
Income from speculative business B 5,000
Loss from specified business covered under section 35AD 20,000
Income from salary (computed) 3,00,000
Loss from let out house property 2,50,000
Income from trading business 45,000
Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid) 75,000
Long-term capital loss on sale of listed shares in recognized stock exchange 1,02,000
(STT paid at the time of acquisition and sale of shares)
Following are the brought forward losses:
(1) Losses from owning and maintaining of race horses pertaining to A.Y. 2023-24 ₹ 2,000.
(2) Brought forward loss from trading business ₹ 5,000 relating to A.Y.2020-21.
Compute the total income of Mr. Aditya and show the items eligible for carry forward, assuming
that he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
Ans-
Particulars ₹ ₹
Salaries
Income from Salary 3,00,000
Less: Loss from house property set-off against salary income as per 2,00,000 1,00,000
section 71(3A)
Loss from house property to the extent not set off i.e. ₹ 50,000 (₹
2,50,000 – ₹ 2,00,000) to be carried forward to A.Y. 2025-26
Profits and gains of business or profession Income from trading 45,000
business
Less: Brought forward loss from trading business of A.Y. 2020-21 can
be set off against current year income from trading business as per
section 72(1), since the eight year time limit as specified under
section 72(3), within which set-off is permitted, has not expired. 5,000 40,000
Income from speculative business B 5,000
Less: Loss of ₹ 25,000 from speculative business A set-off as per 5,000 Nil
section 73(1) to the extent of ₹ 5,000
Balance loss of ₹ 20,000 from speculative business A to be carried
forward to A.Y.2025-26 as per section 73(2)
Loss of ₹ 20,000 from specified business covered under section 35AD
to be carried forward for setoff against income from specified
business as per section 73A.
Capital Gains
Long term capital gain on sale of urban land 2,00,000
Less: Long term capital loss on sale of shares (STT not paid) set-off as 75,000
per section 74(1)]
Less: Long-term capital loss on sale of listed shares on which STT is 1,02,000 23,000
paid can also be set-off as per section 74(1), since long-term capital
arising on sale of such shares is taxable under section 112A
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 CA VARDHAMAN DAGA

Total Income 1,63,000

Items eligible for carried forward to A.Y.2026-27
Particulars ₹
Loss from House property 50,000
As per section 71(3A), loss from house property can be set-off against any other
head of income to the extent of ₹ 2,00,000 since Mr. Aditya is exercising the option
of shifting out of the default tax regime provided under section 115BAC(1A).
As per section 71B, balance loss not set-off can be carried forward to the next year
for set-off against income from house property of that year. It can be carried
forward for a maximum of eight assessment years i.e., upto A.Y.2033-34, in this case.
Loss from speculative business A 20,000
A Loss from speculative business can be set-off only against profits from any other
speculation business. As per section 73(2), balance loss not set-off can be carried
forward to the next year for set-off against speculative business income of that
year. Such loss can be carried forward for a maximum of four assessment years i.e.,
upto A.Y.2029-30, in this case, as specified under section 73(4).
Loss from specified business
Loss from specified business under section 35AD can be set-off only against profits 20,000
of any other specified business. If loss cannot be so set-off, the same has to be
carried forward to the subsequent year for set off against income from specified
business, if any, in that year. As per section 73A(2), such loss can be carried forward
indefinitely for set-off against profits of any specified business.
Mr. Aditya is entitled to deduction u/s 35AD, since he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A). He can,
accordingly, carry forward loss from such business indefinitely for set off against
profits of any other specified business.
Loss from the activity of owning and maintaining race horses
Losses from the activity of owning and maintaining race horses (current year or 2,000
brought forward) can be set-off only against income from the activity of owning and
maintaining race horses. If it cannot be so set-off, it has to be carried forward to
the next year for set-off against income from the activity of owning and maintaining
race horses, if any, in that year. I cant be carried forward for a maximum of four
assessment years, i.e., upto A.Y.2027-28, in this case, as specified under section
74A(3)

ILLUSTRATION - 11.
Mr. Garg, a resident individual, furnishes the following particulars of his income and other details
for the P.Y. 2024-25.
Particulars ₹
(1) Income from Salary (computed) 15,000
(2) Income from business 66,000
(3) Long term capital gain on sale of land 10,800
(4) Loss on maintenance of race horses 15,000
(5) Loss from gambling 9,100
The other details of unabsorbed depreciation and brought forward losses pertaining to A.Y. 2024-
25 are as follows:
Particulars ₹
(1) Unabsorbed depreciation 11,000

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 CA VARDHAMAN DAGA

(2) Loss from Speculative business 22,000

(3) Short term capital loss 9,800
Compute the Gross total income of Mr. Garg for the A.Y. 2025-26 and the amount of loss, if any
that can be carried forward or not.
Ans- Computation of Gross Total Income of Mr. Garg for the A.Y. 2025-26
Particulars ₹ ₹
(i) Income from salary 15,000
(ii) Profits and gains of business or profession 66,000
Less: Unabsorbed depreciation brought forward from A.Y.2023-24
(Unabsorbed depreciation can be set-off against any head of income other
than salary 11,000 55,000
(iii) Capital gains
Long-term capital gain on sale of land 10,800
Less: Brought forward short-term capital loss [Short-term capital loss can
be set-off against both short-term capital gains and long-term capital gains 9,800 1,000
as per section 74(1)]
Gross Total Income 71,000
Amount of loss to be carried forward to A.Y.2026-27
Particulars ₹
(1) Loss from speculative business [to be carried forward as per section 73] [Loss 22,000
from a speculative business can be set off only against income from another
speculative business. Since there is no income from speculative business in the
current year, the entire loss of ₹ 22,000 brought forward from A.Y.2024-25
has to be carried forward to A.Y. 2026-27 for set-off against income of that
year speculative business It may be noted that speculative business loss can be
carried forward for a maximum of four years as per section 73(4), i.e., upto
A.Y.202-29]
(2) Loss on maintenance of race horses [to be carried forward as per section 74A] 15,000
[As per section 74A(3), the loss incurred in the activity of owning and
maintaining race horses in any assessment year cannot be set-off against income
from any other source other than the activity of owning and maintaining race
horses. Such loss can be carried forward for a maximum of four assessment
years i.e., upto A.Y.2029-30
(3) Loss from gambling can neither be set-off nor be carried forward.
ILLUSTRATION – 12
The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating to the
year ended 31.3.2025:
Particulars ₹
Income from salaries (computed) 2,20,000
Loss from house property 1,90,000
Loss from cloth business 2,40,000
Income from speculation business 30,000
Loss from specified business covered by section 35AD 20,000
Long-term capital gains from sale of urban land 2,50,000
Loss from card games 32,000
Income from betting (Gross 45,000
Life Insurance Premium paid (10% of the capital sum assured) 45,000

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 CA VARDHAMAN DAGA

Compute the total income and show the items eligible for carry forward, assuming that he has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
Ans- Computation of total income of Mr. Srivatsan for the A.Y.2025-26
Particulars ₹ ₹
Salaries
Income from salaries 2,20,000
Less: Loss from house property since Mr. Srivatsan has exercised the
option of shifting out of the default tax regime 115BAC(1A) 1,90,000 30,000
Profits and gains of business or profession
Income from speculation business 30,000
Less: Loss from cloth business of ₹ 2,40,000 set off to the extent of 30,000 Nil
₹ 30,000
Capital gains
Long-term capital gains from sale of urban land 2,50,000
Less: Set-off of balance loss of ₹ 2,10,000 from cloth business 2,10,000 40,000
Income from other sources
Income from betting 45,000
Gross Total Income 1,15,000
Less: Deduction under section 80C (life insurance premium paid) [See 30,000
Note (iv) below]
Total income 85,000
Losses to be carried forward:
Particulars ₹
(1) Loss from cloth business (₹ 2,40,000 – ₹ 30,000 – ₹ 2,10,000) (2) Nil
Loss from specified business covered by section 35AD 20,000
Notes:
(i) Loss from specified business covered by section 35AD can be set-off only against profits
and gains of any other specified business. Therefore, such loss cannot be set off against
any other income. The unabsorbed loss has to be carried forward for set-off against profits
and gains of any specified business in the following year. Mr. Srivatsan is entitled to
deduction u/s 35AD, since he has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A). Therefore, he can carry forward loss of ₹
20,000 from specified business referred u/s 35AD indefinitely for set off against profits
of any specified business.
(ii) Business loss cannot be set off against salary income. However, the balance business loss
of ₹ 2,10,000 (₹ 2,40,000 – ₹ 30,000 set-off against income from speculation business) can
be set-off against long-term capital gains of ₹ 2,50,000 from sale of urban land.
Consequently, the taxable long-term capital gains would be ₹ 40,000.
(iii) Loss from card games can neither be set off against any other income, nor can be carried
forward.
(iv) For providing deduction under Chapter VI-A, gross total income has to be reduced by the
amount of long-term capital gains and casual income. Therefore, the deduction under section
80C in respect of life insurance premium of ₹ 45,000 paid has to be restricted to ₹ 30,000
[i.e., Gross Total Income of ₹ 1,15,000 – ₹ 40,000 (LTCG) – ₹ 45,000 (Casual income)]. Mr.
Srivatsan is entitled to deduction u/s 80C, since he has exercised the option of shifting out
of the default tax regime provided under section 115BAC(1A).

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 CA VARDHAMAN DAGA

(v) Income from betting is chargeable at a flat rate of 30% under section 115BB and no
expenditure or allowance can be allowed as deduction from such income, nor can any loss be
set-off against such income.
ILLUSTRATION – 13
Mr. Rajat submits the following information for the financial year ending 31st March, 2025. He
decides to pay tax under the default tax regime u/s 115BAC. He desires that you should:
(a) Compute the total income; and
(b) Ascertain the amount of losses that can be carried forward.
Particulars ₹
(i) He has two let out house property:
(a) House No. I – Income after all statutory deductions 72,000
(b) House No. II – Current year loss (30,000)
(ii) He has three proprietary businesses:
(a) Textile Business
(i) Discontinued from 31st October, 2024 – Current year loss 40,000
(ii) Brought forward business loss of A.Y.2020-21 95,000
(b) Chemical Business:
(i) Discontinued from 1st March, 2022 – hence no profit/loss Nil
(ii) Bad debts allowed in earlier years recovered during this year 35,000
(iii) Brought forward business loss of A.Y. 2021-22 50,000
(c)Leather Business: Profit for the current year 1,00,000
(d) Share of profit in a firm in which he is partner since 2009 16,550
(iii) (a) Short-term capital gain 60,000
(b) Long-term capital loss 35,000
(iv) Contribution to LIC towards premium 10,000
Ans- Computation of total income of Mr. Rajat for the A.Y. 2025-26
Particulars ₹ ₹
1. Income from house property
House No.1 72,000
House No.2 (-) 30,000 42,000
2. Profits and gains of business or profession
Profit from leather business 1,00,000
Bad debts recovered taxable under section 41(4) 35,000
1,35,000
Less: Current year loss of textile business (-) 40,000
95,000
Less: Brought forward business loss of textile business for A.Y.2020- 95,000 Nil
21 set off against the business income of current year
3. Capital Gains
Short-term capital gain 60,000
Gross Total Income 1,02,000
Less: Deduction under Chapter VI-A Under section 80C – LIC premium -
paid (not available since he is paying tax under the default tax regime)
Total Income 1,02,000
Statement of losses to be carried forward to A.Y. 2026-27
Particulars ₹

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 CA VARDHAMAN DAGA

Brought forward chemical business loss of A.Y. 2021-22 to be carried forward u/s 50,000
72
Long term capital loss of A.Y. 2025-26 to be carried forward u/s 74 30,000
Notes:
(1) Share of profit from firm of ₹ 16,550 is exempt under section 10(2A).
(2) Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it has
to be carried forward to the next year to be set off against long-term capital gains of that
year.
ILLUSTRATION – 14
Ms. Geeta, a resident individual, provides the following details of her income / losses for the year
ended 31.3.2025:
(i) Salary received as a partner from a partnership firm ₹ 7,50,000. The same was allowed to
the firm.
(ii) Loss on sale of shares listed in BSE ₹ 3,00,000. Shares were held for 15 months and STT
paid on sale and acquisition.
(iii) Long-term capital gain on sale of land ₹ 5,00,000.
(iv) ₹ 51,000 received in cash from friends in party.
(v) ₹ 55,000, being dividend income on listed equity shares of domestic companies.
(vi) Brought forward business loss of A.Y. 2023-24 ₹12,50,000.
Compute gross total income of Ms. Geeta for the A.Y. 2025-26 and ascertain the amount of loss
that can be carried forward.
Ans- Computation of Gross Total Income of Ms. Geeta for the A.Y. 2025-26
Particulars ₹
Profits and gains of business and profession
Salary received as a partner from a partnership firm is taxable under the head 7,50,000
“Profits and gains of business and profession”
Less: B/f business loss of A.Y. 2023-24 ₹ 12,50,000 to be set off to the extent 7,50,000
of ₹ 7,50,000
(Balance b/f business loss of ₹ 5,00,000 can be carried forward to the next year) Nil
Capital Gains
Long term capital gain on sale of land 5,00,000
Less: Long-term capital loss on shares on STT paid
(See Note 2 below) 3,00,000
Income from other sources 2,00,000
Cash gift received from friends - since the value 51,000
of cash gift exceeds ₹ 50,000, the entire sum is taxable
Dividend income from a domestic company is fully Taxable 55,000
in the hands of shareholders 1,06,000
Gross Total Income 3,06,000
Notes:
1. Balance brought forward business loss of assessment year 2023-24 of ₹ 5,00,000 has to be
carried forward to the next year.
2. Long-term capital loss on sale of shares on which STT is paid at the time of acquisition and
sale can be set-off against long-term capital gain on sale of land since long-term capital gain
on sale of shares (STT paid) is taxable under section 112A. Therefore, it can be set-off
against long term capital gain on sale of land as per section 70(3).
ILLUSTRATION – 15

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 CA VARDHAMAN DAGA

Mr. P, a resident individual, furnishes the following particulars of his income and other details for
the previous year 2024-25:
Sl.No. Particulars ₹
i. Income from salary (computed) 18,000
ii. Net annual value of house property 70,000
iii. Income from business 80,000
iv. Income from speculative business 12,000
v. Long term capital gain on sale of land 15,800
vi. Loss on maintenance of race horse 9,000
vii. Loss on gambling 8,000
Depreciation allowable under the Income-tax Act, 1961, comes to ₹ 8,000, for which no treatment
is given above.
The other details of unabsorbed depreciation and brought forward losses (pertaining to A.Y.
2023-24) are:
Sl.No. Particulars ₹
i. Unabsorbed depreciation 9,000
ii. Loss from speculative business 16,000
iii. Short term capital loss 7,800
Compute the gross total income of Mr. P for the A.Y. 2025-26
Ans- Computation of Gross Total Income of Mr. P for the A.Y. 2025-26
Particulars ₹ ₹
(i) Income from salary 18,000
(ii) Income from House Property
Net Annual Value 70,000
Less: Deduction under section 24 (30% of ₹ 70,000) 21,000 49,000
(iii) Income from business and profession
(a) Income from business 80,000
Less: Current year depreciation 8,000
72,000 63,000
Less: Unabsorbed depreciation 9,000
(b) Income from speculative business 12,000
Less: B/f loss of ₹ 16,000 from speculative business s/o to the 12,000 Nil
(Balance loss of ₹ 4,000 (i.e. ₹ 16,000 – ₹ 12,000) can be carried
forward to the next year)
(iv) Income from capital gain
Long-term capital gain on sale of land Less: 15,800
Brought forward short-term capital loss 7,800 8,000
Gross total income 1,38,000
Amount of loss to be carried forward to the next year
Particulars ₹
Loss from speculative business (to be carried forward as per section 73) 4,000
Loss on maintenance of race horses (to be carried forward as per section 74A) 9,000
Notes:
(i) Loss on gambling can neither be set-off nor be carried forward.

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 CA VARDHAMAN DAGA

(ii) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off
against income from any other source other than the activity of owning and maintaining race
horses. Such loss can be carried forward for a maximum period of 4 assessment years.
(iii) Brought forward speculative business loss can be set off only against income from speculative
business of the current year and the balance loss can be carried forward to A.Y. 2026-27.
It may be noted that speculative business loss can be carried forward for a maximum of four
years as per section 73(4).

PAST EXAM QUESTIONS

Illustration 16
Computation of total Income and losses to be carried forward: Mr. Rajat submits the Following
information for the financial year ending 31 March, 2025. He desires that you should:
a) Compute the Total Income assuming that he does not opt to taxed under section 115BAC and
b) Ascertain the amount of losses that can be carried forward.
Particulars ₹
i) He has two houses:
a) House No. 1-Income after all statutory deductions 72,000
b) House No. II-Current year loss (30,000)
ii) He has three proprietary businesses:
a) Textile Business:
• Discontinued from 31" October, 2024-Current year loss 40,000
• Brought forward business loss of the assessment year 2020-21 95,000
b) Chemical Business:
• Discontinued from 1" March, 2024-hence no Profit/Loss Nil
• Bad debts allowed in earlier years recovered during this year 35,000
• Brought forward business loss of the assessment year 2023-24 50,000
c) Leather Business: Profit for the current year 1,00,000
d) Share of Profit in a firm in which he is Partner since 2015 16,550
iii) (a) Short-term Capital Gain 60,000
(b) Long-term Capital Loss 35,000
iv) Contribution to LIC towards Premium 10,000
(10 Marks, IPCC Nov. 2009) (8 Marks, IPCC May 2013)
Solution:(a) Computation of Gross Total Income of Mr. Rajat (amount in ₹)
Particulars ₹ ₹
Income from House Property:
House No. I: Income from house property 72,000
House No. II: Current year's loss (Inter-source set-off u/s 70) (30,000) 42,000
Profits and Gains of Business and Profession:
Profits from leather business 1,00,000
Share in profit from firm [WN-1] Exempt
Recovery of Bad debts deemed to be income u/s 41(4) [WN-2] 35,000
Current year's loss of textile business (Inter-source adjusted) (40,000)
Balance Income 95,000
Brought forward textile business loss of A.Y. 2019-20 (95,000) Nil
Capital Gains:
Short term Capital Gains 60,000
Gross Total Income 1,02,000
Less: Deduction u/s 80C in respect of contribution to LIC 10,000
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 CA VARDHAMAN DAGA

Total Income 92,000

Working Notes:
1) Share in profit is exempt u/s 10(2). It is assumed that the share in profit doesn't represent
any salary, interest or other remuneration.
2) Recovery of bad debts earlier allowed as deduction is taxable under the head Profits and
gains of business or profession in accordance with the provisions of Section 41(4).
Illustration 17
Computation of Total Income: Mr. Rahul an assessee aged 61 years gives the following
information for the previous year 31-03-2025:
Particulars Amount ₹
a) Loss from profession 1,05,000
b) Capital loss on the sale of property-short term 55,000
c) Capital gains on sale of shares-long-term (STT is not paid) 2,05,000
d) Loss in respect of self occupied property) 15,000
e) Loss in respect of self occupied property 30,000
f) Share of loss from firm 1,60,000
g) Income from card games 55,000
h) Winnings from lotteries 1,00,000
i) Loss from horse races in Mumbai 40,000
j) Investment in NABARD bonds 21,000
k) Medical Insurance premium paid by cheque 18,000
Compute the total income of Mr. Rahul for the assessment year 2025-26 assuming that he does
not opt to taxed under section 115BAC. (8 Marks, IPCC Nov. 2012)
Solution: Computation of total income of Mr. Rahul (amount in ₹)
Particulars ₹ ₹
Income from house property
Loss of self occupied property and let out property (₹ 15,000+ ₹ 45,000
30,000)
Profits and gains from business or profession
Loss from profession 1,05,000
Capital Gains
Long-term capital gains on sale of shares (STT is not paid) 2,05,000
Less: Short-term capital loss on sale of property [WN-1] 55,000
Profits and gains from business or profession
Loss from profession 1,05,000
Capital Gains
Long-term capital gains on sale of shares (STT is not paid) 2,05,000
Less: Short-term capital loss on sale of property [WN-1] 55,000
Income under the head "Capital Gains" 1,50,000
Less: Set-off of losses under other heads of income [WN-2]
Loss from profession 1,05,000
Loss under the head "Income from house property" (₹15,000 + 45,000 1,50,000
₹30,000)
Nil
Income from other sources
Income from card games 55,000
Winnings from lotteries 1,00,000 1,55,000
Gross total income 1,55,000
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Less: Deduction under Chapter VI-A[WN-4] Nil

Total Income 1,55,000
Working Notes:
(1) As per Section 74, short term capital loss of 55,000 can be set-off against long-term capital
gains of ₹ 2,05,000 on sale of shares.
(2) Loss of ₹ 1,05,000 from profession and loss of 45,000 from house property (both let out and
self occupied) can beset-off against the net income of ₹ 1,50,000 under the head "Capital
Gains".
(3) Loss from an exempt source cannot be set-off against profit from a taxable source.
Therefore, share of loss from a firm cannot be set-off against any other income, since share
of profit from firm is exempt under section 10(2A).
(4) Since the total income comprises only of income from card games and winnings from lotteries,
deduction under Chapter VI-A is not allowable from such income. Therefore, Mr. Rahul will
not be entitled to claim deduction under section 80C in respect of investment in NABARD
bonds and deduction u/s 80D in respect of medical insurance premium paid by cheque.
(5) Further, loss from horse races can neither be set-off against winnings from lotteries and
income from card games nor can it be carried forward.
Illustration 18
Compute of Total Income: Compute the total income of Mr. Krishna for the assessment year
2025-26 from the following particulars:
Particulars Amount (₹)
Income from business before adjusting the following items: 1,75,000
a) Business loss brought forward from assessment year 2022-23 70,000
b) Current depreciation 40,000
c) unabsorbed depreciation 1,55,000
Income from house property (Gross annual value) 4,32,000
Municipal taxes paid 32,000
Mr. Krishna sold a plot at Noida on 12th Sept., 2024 for a consideration of ₹
6,40,000, which had been purchased by him on 20th Dec. 2022 at a cost of ₹
4,10,000.
Long-term capital loss on sale of shares sold through recognized stock 75,000
exchange (STT paid)
Long-term capital gain on sale of debentures 60,000
Dividend on shares held as stock in trade 22,000
Dividend from a company carrying on agri business 10,000
During the previous year 2024-25, Mr. Krishna has repaid ₹ 1,67,000 towards housing loan from
a scheduled bank. Out of ₹ 1,67,000, ₹ 97,000 was towards payment of interest and rest towards
principal payments. He does not opt to taxed under section 115BAC Cost inflation indices are as
under: F.Y. 2024-2025: 348 and F.Y. 2022-23: 317. (8 Marks, Nov. 2013)
Solution: Computation of Total Income (amount in ₹):
Particulars ₹ ₹
Income from House Property:
Gross Annual Value 4,32,000
Less: Municipal taxes paid 32,000
Net annual Value 4,00,000
Less: Standard deduction @ 30% of NAV 1,20,000
Less: Interest on borrowed capital 97,000 1,83,000
Profits and Gains of Business and Profession:
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 CA VARDHAMAN DAGA

Income from business 1,75,000

Less: Current years depreciation 40,000
Less: Business loss brought forward from assessment year 2020-21 70,000
Less: Unabsorbed depreciation to the extent of remaining income 65,000 Nil
Capital Gains:
Long-term capital gain on sale of debentures 60,000
Less: Long-term capital loss on sale of shares sold through recognized Nil
stock exchange (STT paid) shall be allowed to be adjusted from LTCG.
(Balance loss of 15,000 shall be carried forward to be set-off from
LTCG) Long-term capital gains Nil
Short term capital gains on sale of plot of land at Noida (6,40,000 - 2,30,000
4,10,000)
Less: Unabsorbed depreciation (1,55,000 - 65,000 set-off from 90,000 1,40,000
business income)
Income from other sources:
Dividend on shares held as stock in trade 22,000
Dividend from a company carrying on agriculture business 10,000 32,000
Gross Total Income 3,55,000
Less: Deduction u/s 80C Repayment of housing loan 70,000
Total Income 2,85,000
Illustration 19
Computation of Gross Total Income: Mr. Garg, a resident individual, furnishes the following
particulars of his income and other details for the previous year 2023-24.
Particulars ₹
1)Income from Salary (Computed) 15,000
2) Income from Business (before providing depreciation) 66,000
3) Long term capital gain on sale of Land 10,800
4) Loss on maintenance of Race Horses 15,000
5) Loss from Gambling 9,100
The other details of unabsorbed depreciation and brought forward losses
pertaining to A.Y. 2024-25 are as follows:
1) Unabsorbed depreciation 11,000
2) Loss from Speculative business 22,000
3) Short term capital loss 9,800
Compute the Gross Total Income of Mr. Garg for the Assessment Year 2025-26 (assuming that
he does not opt to taxed under section 115BAC) and the amount of loss, if any, that can be carried
forward, or not. (4 Marks, May 2014)
Solution: Computation of the Gross Total Income of Mr. Garg (amount in:
Particulars ₹ ₹
Income from Salary (Computed) 15,000
Income from Business (before providing depreciation) 66,000
Less: Unabsorbed depreciation 11,000 55,000
Income from Business (before providing depreciation) 66,000
Less: Unabsorbed depreciation 11,000 55,000
Long term capital gain on sale of Land 10,800
Less: Brought forward short term capital loss 9,800 1,000
‘Gross Total Income 71,000

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Notes:
• Loss from Gambling cannot be set off from any head of income.
• Loss from maintenance of race horses cannot be set-off from any head of Income. The same
shall be carried forward for 4 years in accordance with the provisions of Section 74A.
• Loss from a speculative business can be set-off only against income from another speculative
business. Since there is no income from speculative business in the current year, the entire
loss of 22,000 brought forward from A.Y. 2023-24 has to be carried forward to A.Y. 2024-
25 for set-off against speculative business income of that year. It may be noted that
speculative business loss can be carried forward for a maximum of 4 years as per section
73(4).
Illustration 20
Computation of taxable income: Mr. Venus provides the following details for the previous year
ending 31-03-2025:
i) Salary from HNL Ltd. = ₹ 50,000 per month
ii) Interest on FD with SBI for the Financial Year 2024-25 = ₹ 72,000 (Net of TDS)
iii) Determined long term capital loss of AY 2023-24 (to be carried forward) = ₹ 96,000
iv) Long term Capital Gain = ₹ 75,000
v) Loss of minor son ₹ 90,000 computed in accordance with the provisions of Income- tax Act.
Mr. Venus transferred his own house to his minor son without adequate consideration few
years back and minor son let it out and suffered loss.
vi) Loss of his wife's business = ₹(2,00,000) She carried business with funds which Mr. Venus
gifted to her.
You are required to compute taxable income of Mr. Venus for the AY 2024-25 assuming that he
does not opt to taxed under section 115BAC. (8 Marks, Nov. 2015)
Solution: Computation of total income of Mr. Venus for the assessment year 2025-26 (amount
in ₹)
Particulars ₹ ₹
Income from Salary
Salary from HNL Ltd. [50,000 × 12] 6,00,000
Less: Standard deduction u/s 16(ia)50,000 5,50,000
Less: Loss from House property 90,000 4,60,000
Income from house property
Loss from House property transferred to his minor son shall be set off
from Salaries
Profits and gains of business or profession
Loss from his wife's business to be clubbed with Mr. Venus (to be set
off from Capital gains and Income from other sources)[WN-1]
Capital Gains
Long-term capital gains 75,000
Less: Business Loss[WN-2] (75,000)
Income from other sources Nil
Income from fixed deposit (Gross) [ 72,000 × 100/ 90][WN-3] 80,000
Less: Loss from business (80,000) Nil
Gross total income 4,60,000
Less: Deduction under Chapter VIA Nil
Total Income 4,60,000
Working Notes:

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 CA VARDHAMAN DAGA

(1) Loss from business or profession can be set off from any head of income except income from
salaries.
(2) Current year loss will be given priority over set off of brought forward losses. Hence, brought
forward loss of ₹ 96,000 will be carried forward as the current year income after setting
off of business loss is nil.
(3) Rate of TDS on income from fixed deposits is 10%.
(4) Remaining business loss of 45,000 [₹2,00,000- ₹75,000 - ₹80,000] shall be carried forward.
Illustration 21
Computation of Total income: Mr. Jaji is a chartered accountant and his income from profession
for the year 2024-25 is 10,00,000. He provides you with the following information for the year
2024-25.
(1) Income of minor son Biju from company deposit = ₹ 1,50,000
(2) Income of minor daughter Chitra (professional dancer) = ₹ 20,00,000
(3) Interest from SBI received by Chitra on deposit made in 2023 out of her special talent = ₹
20,000
(4) Gift received by Chitra on 30-09-2024 from friends of Mr. Jaji on winning National award =
₹ 45,000
(5) Short term capital loss of Mr. Jaji = ₹ 6,00,000
(6) Long term capital gain of Mr. Jaji = ₹ 4,00,000
(7) Long term capital gains from shares (STT paid) of Mr. Jaji = ₹ 10,00,000
(8) Short term capital loss under section 111A of Mr. Jaji = ₹ 10,00,000
Compute the Total Income of Mr. Jaji for Assessment Year 2025-26 (assuming that he does not
opt to taxed under returns every year before section 115BAC) and the losses to be carried
forward assuming that he files his income tax returns every year before due date. (5 Marks,
May 2018)
Solution: Computation of total income of Mr. Jaji (amount in ₹):
Particulars ₹ ₹
Profits and Gains of Business or profession (Professional Income of 10,00,000
Mr. Jaji)
Capital Gains:
Long term capital gain 4,00,000
Long term capital gains from shares (STT paid) [WN-1] 10,00,000
Less: Short term capital loss shall be set-off to the extent of LTCG 6,00,000
Less: Short term capital loss u/s 111A 8,00,000 Nil
Income from Other Sources:
Income of minor son Biju from company deposit to be clubbed in 1,50,000
Income of Mr. Jaji [WN-2]
Income of minor daughter Chitra (professional dancer)
(income arising out of professional skills cannot be clubbed in hands
of Mr. Jaji) [WN-3] -
Interest from SBI received by Chitra on deposit made in 2023 out 20,000
of her special talent be clubbed in hands of Mr. Jaji since it is not
out of professional skill [WN-3]
Gift received by Chitra on 30-09-2024 from friends of Mr. Jaji on Nil 1,70,000
winning National award (Since the value of gift does not exceed ₹
50,000, the same shall not be taxable.)
Less: Exemption under Section 10(32) [1,500+1,500] [WN-2] (3,000)
Gross Total Income/Total Income 11,67,000

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 CA VARDHAMAN DAGA

Losses to be carried forward to A.Y. 2025-26

Short term capital loss (6,00,000+ 10,00,000 (STCL of section 111A)- 2,00,000
14,00,000 set-off)
Working Notes:
(1) The long term capital gain on equity shares through a recognized stock exchange on which
security transaction tax has been paid is taxable under Section 112A exceeding 1,00,000.
Hence, short term capital loss shall be set off to the extent of long term capital gains and
balance loss shall be carried forward.
(2) As per Section 64(1A), the income of the minor child is to be included in the total income of
the parent whose total income (excluding the income of minor child to be so clubbed) is
greater.
(3) Further, as per Section 10(32), income of a minor child which is includible in the income of
the parent shall be exempt to the extent of ₹ 1,500 per child.
(4) In case the income earned by the minor child is on account of any activity involving application
of any skill or talent, then, such income of the minor child shall not be included in the income
of the parent, but shall be taxable in the hands of the minor child.
(5) Therefore, the income of 20,00,000 derived by Mr. Jaji's minor daughter through activity
involving application of her skill and talent shall not be clubbed in the hands of the parent.
Such income shall be taxable in the hands of the minor daughter. However, income from bank
deposit is liable to be clubbed even when deposit is made out of income arising from
application of special talent.
Illustration 22
Computation of Total income: Ms. Geeta, a resident individual, provides following details of her
income/losses for the year ended 31-03-2025:
Particulars Amount
(₹)
i) Income from salary (computed) 41,20,000
ii) Rent received from house property situated in Delhi 5,00,000
iii) Interest on loan taken for purchase of above property. Loan was taken from 7,50,000
a friend
iv) Rent received from house property situated in Jaipur 3,20,000
v) Interest on loan taken for house property in Mumbai which is self-occupied 1,57,000
Loan was taken from PNB on 01-01-1999 for purchase of this property.
vi) Interest on loan taken for repair of house properties situated in Mumbai 1,50,000
and Delhi. Loan was taken on 01-04-2021 and was utilized in 50:50 ratio for
house properties situated in Mumbai and Delhi, respectively.
vii) Long term capital gains on sale of equity shares computed in accordance with 8,95,000
Section 112A
viii) Interest on fixed deposit 73,000
ix) Loss from textile business 7,50,000
x) Speculation profit 2,30,000
xi) Lottery income 75,000
xii) Loss incurred by the firm in which she is a partner 1,60,000
xiii) Salary received as a partner from partnership firm. The same was allowed 50,000
to Firm
xiv) Brought forward short-term capital loss on sale of gold 2,75,000
xv) Brought forward loss on sale of equity shares of the nature specified u/s 25,000
111A

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 CA VARDHAMAN DAGA

xvi) Life insurance premium paid for her son who is 30 years of age and is 15,000
working in USA
Compute total income of Ms. Geeta for the assessment year 2025-26 assuming that he does not
opt to taxed under section 115BAC and the amount of loss that can be carried forward.
For the above solution, you may assume principal repayment of loan as under:
i) Loan taken for purchase of house property in Delhi - ₹2,50,000
ii) Loan taken for purchase of house property in Mumbai - ₹ 50,000
iii) Loan taken for repair of house properties in Delhi and Mumbai - ₹ 75,000
Working notes should form part of your answer. Wherever necessary, suitable assumption may be
made by the candidates and disclosed by way of note. (10 Marks, May 2019-NS)
Solution: Computation of total income of Ms. Geeta (amount in ₹)
Particulars ₹ ₹ ₹
Income from Salary 41,20,000
Income from House property
Delhi (House):
Rent received being net annual value 5,00,000
Less: Standard deduction (30% of NAV) 1,50,000
Less: Interest on borrowed capital [7,50,000+50% 8,25,000 -4,75,000
of ₹ 1,50,000]
Jaipur (House):
Rent received being net annual value 3,20,000
Less - Standard deduction ( 30% of NAV) 96,000 2,24,000
Self Occupied House (Mumbai):
Annual value nil
Less: Interest on borrowed capital [1,57,000+ 50%
of 1,50,000 but restricted to 30,000 since loan been
taken for acquisition of house prior to 1-4-1999 and
loan taken on 1-4-2021 was for repair of house
property] 30,000 -30,000
(Loss from house property to be set-off from -2,81,000 -2,00,000
salaries to the extent of 2,00,000). Balance loss of
81,000 shall be carried forward to be set-off
from Income from House property.
Profits and Gains of Business and Profession:
Salary received from partnership firm [Salary 50,000
received as a partner from a partnership firm is
taxable under the head "Profits and gains of business
and profession]
Loss incurred by firm, in which she is a partner -
[Share of loss from a partnership firm cannot be set-
off against business income, since share of income of
the firm is exempt under section 10(2A)]
Speculation profit 2,30,000
2,80,000
Less: Loss from textile business ₹ 7,50,000 (set-off 2,80,000 Nil
to the extent of business income i.e. ₹ 2,80,000)
Balance loss (₹7,50,000 - ₹ 2,80,000) i.e. 4,70,000 to
be set-off from Income from other sources to the

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 CA VARDHAMAN DAGA

extent of ₹73,000 and remaining loss from Income

under the head capital gains i.e. ₹3,97,000. Such loss
cannot be set-off from Salaries
Capital Gains:
Long-term Capital Gains on sale of equity shares
computed as per Section 112A 8,95,000
Less: Loss from textile business (Current year loss is 3,97,000
to be given priority over set-off
Less: Brought forward short-term capital loss on sale 2,75,000
of gold
Less: Brought forward loss on sale of equity shares
of the nature specified u/s 111A 25,000 1,98,000
Income from Other Sources:
Winnings from lottery 75,000
Interest on fixed deposit 73,000
Less: Loss from textile business 73,000 75,000
Gross total income 41,93,000
Less: LIC premium paid for her son (Shall qualify for 15,000
deduction u/s 80C even if son is not dependent on
her)
Repayment loan taken for purchase of house property Nil
in Delhi (Not eligible for deduction u/s 80C since loan
is taken from friend)
Repayment of loan taken for purchase of house 50,000
property in Mumbai
Repayment of loan taken for repair of house Nil
properties in Delhi and Mumbai shall not be eligible
for deduction u/s 80C since loan is taken for repair
of house. 65,000
Total income 41,28,000
Illustration 23
Computation of Total income: Following are the details of incomes/losses of Mr. Rishi for the
financial year 2023-24:
(Figures in brackets represents losses) ₹
Taxable salary income (computed) 3,60,000
Taxable income from house property (computed)
• from rented house property X 1,20,000
• from rented house property Y (3,40,000)
Taxable profit from business (computed)
• business P 2,30,000
• business Q (12,000)
• business R (speculative business) 15,000
• business T (speculative business) (25,000)
Taxable Income from other sources:
from card games 16,000
from owning & maintenance of race horses (7,000)
interest on securities 5,000

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 CA VARDHAMAN DAGA

You are required to determine the Gross total income of Mr. Rishi for Assessment Year 2025-26
assuming that he does not opt to taxed under section 115BAC. (5 Marks, Nov. 2019)
Solution: Computation of Gross total income of Mr. Rishi (amount in ₹)

Salaries:
Income from salary (computed) 3,60,000
Less: Loss from house property set-off against salary income as per -2,00,000 1,60,000
section 71
Income from House Property:
Property X 1,20,000
Property Y -3,40,000
Loss from house property -2,20,000
Loss to the extent of 2,00,000 shall be set-off from salary and
balance loss of 20,000 shall be carried forward to be set of from
Income from house property.
Profits and gains of business or profession:
Business P 2,30,000
Business Q -12,000 2,18,000
Speculative business R 15,000
Speculative business T -25,000
Speculative loss to be carried forward to be set off from -10,000
speculative gains
Income from other sources:
Interest on securities 5,000
Winnings from card games 16,000
Loss from owning and maintaining race hoses to be carries forward -7,000 21,000
to be set off from profits of owning and maintaining race horses
Gross Total Income 3,99,000
Illustration 24
Computation of GTI & Amount of losses to be carried forward: Ms. Pooja a resident individual
provides the following information of her income/losses for the year ended on 31st March, 2025:
Particulars Amount ₹
1)Income from salary (Computed) 2,20,000
2) Income from House Property (let out) (Net Annual Value) 1,50,000
3) Share of loss from firm in which she is partner 10,000
4) Loss from specified business covered under section 35AD 20,000
5) Income from textile business before adjusting the following items 3,00,000
a) Current year depreciation 60,000
b) Unabsorbed depreciation of earlier year 2,25,000
c) Brought forward loss of textile business of the A.Y. 2023-24 90,000
6) Long-term capital gain on sale of debentures 75,000
7) Long-term capital gain on sale of equity shares listed in recognized stock 1,00,000
exchange (STT paid at the time of acquisition and sale) 1,50,000
8) Dividend from units of UTI 5,000
During the previous year 2024-25, Ms. Pooja has repaid ₹ 5,25,000 towards housing loan from a
scheduled bank. Out of this 3,16,000 was towards payment of interest and rest towards principal.
Compute the gross total income of Ms. Pooja assuming that she does not opt to taxed under

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 CA VARDHAMAN DAGA

section 115BAC and ascertain the amount of loss that can be carried forward. Ms. Pooja has always
filed her return within the due date specified u/s 139(1) of the Income-tax Act, 1961.
Solution: Computation of gross total income of Ms. Pooja for the A.Y. 2025-26:
Particulars ₹ ₹
Salary Income (computed) 2,20,000
Less: As per sec 71(3A), loss from house property of 2,11,000 can be set-
off, to the extent of 2,00,000 20,000
Income from House Property Nil
Net Annual Value of House Property 1,50,000
Less: Deduction u/s 24
a) 30% of NAV 45,000
b) Interest on housing loan 3,16,000 3,61,000
Loss from house property -2,11,000
Less: loss eligible for set off against salary income restricted to 2,00,000
Loss to be carried forward to A.Y 2025-26 for set-off against income -11,000
from house property, if any, in that year.
Profits and gains of business or profession - Nil
Share of loss from firm [loss from exempt source cannot be setoff
against profit from taxable source. Hence such loss can neither be set-
off nor be carried forward]
Loss from specified business u/s 35AD ₹ 20,000 [Can be set-off only -
against income from any specified business. Hence, it has to be carried
forward to A.Y. 2024-25]
Income from textile business 3,00,000
Less: Current year depreciation 60,000
2,40,000
Less: Brought forward loss of textile business 90,000
1,50,000
Less: Unabsorbed depreciation (2,25,000) set-off to the extent of 1,50,000
Capital Gains 50,000
Long-term capital gains on sale of debentures 75,000
Less: Set-off of Long-term capital loss on sale of equity shares (STT not 75,000
paid)
Long-term capital gains on sale of listed equity shares (STT paid) Nil
Less: Set-off of balance long-term capital loss on sale of equity shares 1,50,000
(STT not paid[₹1,00,000- ₹ 75,000] 25,000
Less: Set-off of balance unabsorbed depreciation 1,25,000
[₹ 2,25,000 - 1,50,000 s/o against business income] 75,000
Long-term capital gains on sale of listed equity shares (No tax is payable
u/s 112A in respect of LTCG of 50,000, since the same is less than ₹
1,00,000)
Income from Other Sources 5,000
Dividend from units of UTI [Taxable in hands of unit-holder]
Gross Total Income 75,000
Losses to be carried forward to A.Y. 2026-27:
Particulars ₹
i) Losses from specified business [can be carried forward indefinitely for set-off 20,000
against income from any specified business]
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 CA VARDHAMAN DAGA

ii) Loss from house property [can be carried forward upto 8 successive assessment 11,000
years for set-off against income from house property]

Illustration 25
Losses set off and Computation of Total Income: Mr. Harsh furnishes the following details for
the year ended on 31-03-2025:
Particulars Amount ₹
Salary received from partnership firm (the same was allowed to the firm) 8,50,000
Loss on sale of shares listed in stock exchange held for 18 months and the STT 6,00,000
paid on the sale and acquisition
Long term capital gain on sale of land 5,00,000
Brought forward business loss of assessment year 2017-18 6,00,000
Loss of the specified business covered in Section 35AD 3,50,000
Loss from house property 2,50,000
Income from betting (gross) 50,000
Loss from card games 35,000
Compute the total income and show the item eligible for carry forward of Mr. Harsh for the
assessment year 2025-26. (4 Marks, May 2022)
Solution: Computation of total income of Mr. Harsh for the A.Y. 2024-25 (amount in ₹)
Particulars ₹ ₹
Profits and gains from business and profession
Salary received from partnership firm (would be fully taxable in 8,50,000
the hands of Mr. Harsh as business income, since the same was
allowed to the firm as deduction)
Less: Loss from house property 2,50,000 (can be set-off against 2,00,000
income from any other head only to the extent of 2 lakh)
6,50,000
Less: Set-off of brought forward business loss of A.Y. 2016-17
(since the eight year time period for set-off has not expired) 6,00,000 50,000
Capital Gains
Long-term capital gain on sale of land 5,00,000
Less: Set-off of long-term capital losses (since held for 18 months 5,00,000 -
i.e., more than 12 months) on sale of STT paid listed shares [Such
set-off is permissible since it is a loss from a source of income
taxable u/s 112A]
Income from Other Sources
Income from betting (gross) [No Loss can be set off against income 50,000
from betting]
Loss of 35,000 from card games can neither be set-off nor be -
carried forward
Total Income 1,00,000
Losses to be carried forward to A.Y. 2026-27 50,000
Loss from house property (₹2,50,000 - ₹ 2,00,000)
Loss from specified business covered u/s 35AD [Entire loss is to 3,50,000
be carried forward, since there is no income from any specified
business for A.Y. 2025-26. Such loss has to be carried forward for
set-off against income from any specified business in A.Y. 2026-
27]

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 CA VARDHAMAN DAGA

Long-term capital loss on sale of listed shares (STT paid) 1,00,000

[₹6,00,000 - ₹5,00,000]
Illustration 26
Unexplained money and tax liability: The assessee is found to be the owner of the gold (market
value of which is ₹ 50,00,000) during the financial year ending 31-03-2025 but he recorded to
have spent ₹ 10,00,000 in acquiring the same. Explain how the Assessing Officer will deal with
the issue. (2 Marks May 2022)
Solution: As per section 69B, if the assessee is found to be the owner of gold (market value of
which is 50 lakhs) during the financial year ending 31-3-2025 but he has recorded to have spent
only 10 lakhs in acquiring it, the Assessing Officer can add the difference of the market value of
such gold and 10 lakhs i.e., 40 lakhs as the income of the assessee for A.Y. 2025-26, if the
assessee offers no satisfactory explanation thereof. Such income would be chargeable to tax @
78% (@60% plus surcharge @ 25% and cess @ 4%).
Illustration 27
Computation of total Income after adjustment of Losses: Simran, engaged in various types of
activities, gives the following particulars of her income for the year ended 31-3-2025 (amt ₹)
Particulars ₹
i) Profit of business of consumer and household products 50,000
ii) Loss of business of ready-made garments 10,000
iii) Brought forward loss of catering business which was closed in A.Y 2024-25 15,000
iv) Short-term loss on sale of securities and shares 15,000
v) Profit of speculative transactions entered into during the year 12,500
vi) Loss of speculative transactions of A.Y. 2018-19 not set off till A.Y. 2024-25 15,000
Compute the total income of Simran if she has not opted for the provisions of Section 115BAC.
Solution: Computation of total income of Simran (amounts in ₹)
Particulars ₹ ₹
Profits of business of consumer and household products 50,000
Less: Loss of business of ready-made garments set-off as per section 10,000
70(1)
Less: Brought forward loss of catering business closed in A.Y. 2022-23
shall be set-off against business income for the year as per section 72(1) 15,000 25,000
Profit of speculative transaction 12,500
Total Income 37,500
Working Notes:
1) Brought-forward speculation loss of A.Y. 2018-19 cannot be set-off as the period of 4 years
as specified under section 73 has expired.
2) Short-term capital loss of the current year can be set-off only against capital gains, hence
the same shall be carried forward.
3) Brought forward loss of catering business can be set-off against business income even after
business is discontinued.
Illustration 28
Computation of total Income after adjustment of Losses: Mr. Rakesh Gupta has derived the
following income/loss, as computed below, for the previous year 2024-25:
Particulars ₹
Loss from let out house property 2,50,000
Loss from non-speculation business 3,20,000
Income from speculation business 12,45,000

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 CA VARDHAMAN DAGA

Loss from specified business covered u/s 35AD 4,10,000

Winnings from lotteries (Gross) 1,50,000
Winnings from bettings 90,000
Loss from card games 3,40,000
You are required to compute the total income of the assessee for the A.Y. 2025-26, showing
clearly the manner of set-off and the items eligible for carry forward. The return of income has
been filed on 30-07-2025. He has not opted for the provisions of Section 115BAC. (5 Marks, Nov.
2018-NS)
Solution: Computation of total income of Mr. Rakesh Gupta (amounts ₹)
Income from House property:
Loss from house property[WN-1]
Profits and gains of business or profession:
Income from speculation business 12,45,000
Less: Loss from non-speculative business set-off as per section 72 (3,20,000)
Less: Loss from house-property subject to maximum of 2,00,000 (2,00,000) 7,25,000
Loss from specified business covered under Section 35AD (to be c/f) 4,10,000
[WN-2]
Income from other sources:
Loss from card games (cannot be allowed to be set off) Nil
Winnings from betting 90,000
Winnings from lotteries (Gross) 1,50,000 2,40,000
Total Income 9,65,000
Losses to be carried forward to A.Y. 2026-27:
Loss from house property[WN-1] 50,000
Loss from specified business covered under Section 35AD 4,10,000
Total amount of losses to be carried forward to A.Y. 2026-27 4,60,000
Working Notes:
1) As per Section 71(3A), Loss from house property can be set-off against any other head of
income to the extent of ₹ 2,00,000 only. As per section 71B, balance loss (₹50,000) not
set-off can be carried forward to the next year for set-off against income from house
property of that year. It can be carried forward for a maximum of eight assessment years.
2) Any loss computed in respect of any specified business referred under section 35AD can
be setoff only against profits of any specified business carried on by the assessee.
ILLUSTRATION 29
Losses set-off and Computation of Total Income : Mr. Joshi, resident Indian, aged about 58
years, furnished the following details of his income for the previous year 2024-25 :
(i) Income from House property (computed) ₹ 2,00,000.
(ii) Income from Proprietary Business ₹ 3,00,000.
(iii) Short Term Capital Gain on sale of Land ₹ 2,00,000.
(iv) Short Term Capital loss on sale of equity shares listed in recognized stock exchange (STT
paid) ₹ 75,000.
(v) Interest on Bank fixed deposit ₹ 50,000 received by his son, aged 21 years, out of money
gifted by Mr. Joshi in 2023.
(vi) Loss from Speculation Business ₹ 40,000.
(vii) Loss from Owning and Maintenance of Race Horses ₹ 50,000.
Following are the brought forward losses :

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 CA VARDHAMAN DAGA

(a) Brought forward House property loss of assessment year 2023-24 ₹ 2,50,000.
(b) Brought forward business loss of Proprietary business from assessment year 2014-15 ₹
50,000.
(c) Unabsorbed Depreciation relating to assessment year 2015-16 ₹ 1,00,000.
(d) Brought forward Long Term Capital Loss from assessment year 2019-20 ₹ 90,000. Return of
income for that year was filed on 31-01-2020, after due date of filing the return.
Compute the total income of Mr. Joshi for the assessment year 2025-26 and show the items
eligible for carry forward, assuming that he exercises the option of shifting out of the default
tax regime provided under Section 115BAC(1A). (6 Marks, May 2024)
SOLUTION Computation of total income of Mr. Joshi for the A.Y. 2025-26 :
Particulars ₹ ₹
Income from house property 2,00,000
Less: Set-off of brought forward loss from house property of 2,00,000 Nil
A.Y. 2023-24 is allowed, since 8 years period not yet lapsed
Profits and gains from business or profession
Income from proprietary business 3,00,000
Less: Set off of brought forward business loss of A.Y. 2013-14 Nil
not allowable as 8 years’ time has already lapsed in the A.Y. 2023-
24
Less: Set off of unabsorbed depreciation of A.Y. 2014-15 1,00,000 2,00,000
[Note – Alternatively, unabsorbed depreciation can be set-off
against short term capital gains]
Capital Gains
Short-term capital gain on sale of land 2,00,000
Less: Set-off of short-term capital loss on sale of listed equity 75,000 1,25,000
shares
Brought forward long-term capital loss is not allowed to be
carried forward and set-off, since return of income for the A.Y.
2019-20 was filed after the due date of filing return of income.
Income from Other Sources
Interest on fixed deposit not includible in the hands of Mr. Joshi Nil
since his son is major
Gross Total Income 3,25,000
Less: Deduction under Chapter VI-A Nil
Total Income 3,25,000
Items eligible for carried forward :
(i) Loss from speculation business of ₹ 40,000 can be set-off against income from speculation
business only. Hence, such loss would be carried forward to subsequent assessment year.
(ii) Loss from owning and maintenance of race horses ₹ 50,000, can be set-off against income
from income from owning and maintenance of race horses only. Thus, such loss would be
carried forward to subsequent assessment year.
(iii) Brought forward loss from house property can be set off only against income of house
property. Hence, remaining loss of ₹ 50,000 has to be carried forward to subsequent
assessment year.

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CHAPTER – 10: DEDUCTION FROM GROSS TOTAL INCOME

STUDY MATERIAL

ILLUSTRATION 1
Examine the following statements with regard to the provisions of the Income-tax Act, 1961:
(a) For grant of deduction under section 80JJAA, filing of audit report in prescribed form
is must for a corporate assessee; filing of return within the due date laid down in section
139(1) is not required.
(b) Filing of belated return under section 139(4) of the Income-tax Act, 1961 will debar an
assessee from claiming deduction under section 80QQB if the assessee exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A) (i.e.,
he pays tax under the optional tax regime).
SOLUTION
(a) The statement is not correct.
(b) The statement is correct.

ILLUSTRATION 2
Compute the eligible deduction under section 80C for A.Y.2025-26 in respect of life insurance
premium paid by Mr. Ganesh during the P.Y.2024-25, the details of which are given hereunder, if
Mr. Ganesh has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A) –
Date of Person insured Actual Insurance premium
issue of capital paid during 2024-
policy sum 25 (₹)
assured
(₹)
(i) 30/3/2012 Self 8,00,000 48,000
(ii) 1/5/2018 Spouse 1,50,000 20,000
(iii) 1/6/2021 Handicapped son (section 80U disability) 4,00,000 80,000
SOLUTION
Date of Person insured Actual Insurance Deduction Remark
issue of capital premium u/s 80C (restricted
policy sum paid for to % of
assured during A.Y.2025- sum
(₹) 2024-25 26 (₹) assured)
(₹) (₹)
(i) 30/3/2012 Self 8,00,000 48,000 48,000 20%
Spouse
Handicapped son
(section 80U
disability)
1/5/2018 Spouse 1,50,000 20,000 15,000 10%
1/6/2021 Handicapped son 4,00,000 80,000 60,000 15%
(section 80U
disability)
Total 1,23,000

ILLUSTRATION 3
What would your answer if Mr. Ganesh pays tax under default tax regime under section 115BAC?

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SOLUTION
If Mr. Ganesh pays tax under default tax regime under section 115BAC, he would not be eligible
for deduction under section 80C.
ILLUSTRATION 4
An individual assessee, resident in India, has made the following deposit/payment during the
previous year 2024-25:
Particulars ₹
Contribution to the public provident fund 1,50,000
Insurance premium paid on the life of the spouse (policy taken on 1.4.2018) 25,000
(Assured value ₹ 2,00,000)
What is the deduction allowable under section 80C for A.Y.2025-26 if the assessee has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A)?
SOLUTION Computation of deduction under section 80C for A.Y.2025-26
Particulars ₹
Deposit in public provident fund 1,50,000
Insurance premium paid on the life of the spouse (Maximum 10% of the assured 20,000
value ₹ 2,00,000, as the policy is taken after 31.3.2012)
Total 1,70,000
However, the maximum permissible deduction u/s 80C is restricted to 1,50,000
ILLUSTRATION 5
The basic salary of Mr. A is ₹ 1,00,000 p.m. He is entitled to dearness allowance, which is 40% of
basic salary. 50% of dearness allowance forms part of pay for retirement benefits. Both Mr. A
and his employer, ABC Ltd., contribute 15% of basic salary to the pension scheme referred to in
section 80CCD. Explain the tax treatment in respect of such contribution in the hands of Mr. A
if he has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A). What would be your answer if Mr. A pays tax under the default tax regime under
section 115BAC?
SOLUTION
(i) Tax treatment in the hands of Mr. A in respect of employer’s and own contribution to
pension scheme referred to in section 80CCD, where Mr. A has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A) [i.e., where Mr.
A pays tax under the normal provisions of the Act]
(a) Employer’s contribution to such pension scheme would be treated as salary since it is
specifically included in the definition of “salary” under section 17(1)(viii). Therefore, ₹ 1,80,000,
being 15% of basic salary of ₹ 12,00,000, will be included in Mr. A’s salary.
(b) Mr. A’s contribution to pension scheme is allowable as deduction under section 80CCD(1).
However, the deduction is restricted to 10% of salary. Salary, for this purpose, means basic pay
plus dearness allowance, if it forms part of pay.
Therefore, “salary” for the purpose of deduction under section 80CCD for Mr. A would be –
Particulars ₹
Basic salary = ₹ 1,00,000 × 12 12,00,000
Dearness allowance = 40% of ₹ 12,00,000 = ₹ 4,80,000 50% of Dearness
Allowance forms part of pay = 50% of ₹ 4,80,000 2,40,000
Salary for the purpose of deduction under section 80CCD 14,40,000
Deduction under section 80CCD(1) is restricted to 10% of ₹ 14,40,000 (as against 1,44,000
actual contribution of ₹ 1,80,000, being 15% of basic salary of ₹ 12,00,000)

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As per section 80CCD(1B), a further deduction of upto ₹ 50,000 is allowable. 36,000

Therefore, deduction under section 80CCD(1B) is ₹ 36,000 (₹ 1,80,000 - ₹
1,44,000).
₹ 1,44,000 is allowable as deduction under section 80CCD(1). This would be taken into
consideration and be subject to the overall limit of ₹ 1,50,000 under section 80CCE. ₹ 36,000
allowable as deduction under section 80CCD(1B) is outside the overall limit of ₹ 1,50,000 under
section 80CCE.
In the alternative, ₹ 50,000 can be claimed as deduction under section 80CCD(1B). The balance ₹
1,30,000 (₹ 1,80,000- ₹ 50,000) can be claimed as deduction under section 80CCD(1).
(c) Employer’s contribution to pension scheme would be allowable as deduction under section
80CCD(2), subject to a maximum of 10% of salary. Therefore, deduction under section 80CCD(2),
would also be restricted to ₹ 1,44,000, even though the entire employer’s contribution of ₹
1,80,000 is included in salary under section 17(1)(viii). However, this deduction of employer’s
contribution of ₹ 1,44,000 to pension scheme would be outside the overall limit of ₹ 1,50,000
under section 80CCE i.e., this deduction would be over and above the other deductions which are
subject to the limit of ₹ 1,50,000.
(ii) Where Mr. A pays tax under the default tax regime under section 115BAC
Mr. A would not be eligible for deduction under section 80CCD(1)/(1B) in respect of his
contribution to pension scheme under the default tax regime under section 115BAC. However,
employer’s contribution to pension scheme would be allowable as deduction under section
80CCD(2), subject to maximum of 14% of salary. Hence, he would be allowed deduction of ₹
201600 (14% of ₹ 14,40,000) or ₹ 1,80,000 (15% of ₹ 12,00,000) whichever is less i.e. ₹ 1,80,000
under section 80CCD(2).
ILLUSTRATION 6
The gross total income of Mr. X for the A.Y.2025-26 is ₹ 8,00,000. He has made the following
investments/payments during the F.Y.2024-25:
Particulars ₹
(1) Contribution to PPF 1,10,000
(2) Payment of tuition fees to Apeejay School, New Delhi, for education of his 45,000
son studying in Class XI
(3) Repayment of housing loan taken from Standard Chartered Bank 25,000
(4) Contribution to approved pension fund of LIC 1,05,000
Compute the eligible deduction under Chapter VI-A for the A.Y.2025-26 if Mr. X exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION Computation of deduction under Chapter VI-A for the A.Y.2025-26
Particulars ₹
Deduction under section 80C
- Contribution to PPF 1,10,000
- Payment of tuition fees to Apeejay School, New Delhi, for education of his son 45,000
studying in Class XI
- Repayment of housing loan 25,000
1,80,000
Restricted to ₹ 1,50,000, being the maximum permissible deduction u/s 80C 1,50,000
Deduction under section 80CCC 1,05,000
- Contribution to approved pension fund of LIC 2,55,000
As per section 80CCE, the aggregate deduction under section 80C, 80CCC and
80CCD(1) has to be restricted to ₹ 1,50,000
Deduction allowable under Chapter VIA for the A.Y. 2024-25 1,50,000

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ILLUSTRATION 7
Mr. A, aged 40 years, paid medical insurance premium of ₹ 20,000 during the P.Y. 2024-25 to
insure his health as well as the health of his spouse. He also paid medical insurance premium of ₹
47,000 during the year to insure the health of his father, aged 63 years, who is not dependent
on him. He contributed ₹ 3,600 to Central Government Health Scheme during the year. He has
incurred ₹ 3,000 in cash on preventive health check-up of himself and his spouse and ₹ 4,000 by
cheque on preventive health check-up of his father. Compute the deduction allowable under
section 80D for the A.Y. 2025-26 if Mr. A has exercised the option of shifting out of the default
tax regime provided under section 115BAC(1A).
SOLUTION
Deduction allowable under section 80D
Particulars Actual Maximum
Payment deduction
₹ allowable
₹
A Premium paid and medical expenditure incurred for self
and spouse
(i) Medical insurance premium paid for self and spouse 20,000 20,000
(ii) Contribution to CGHS 3,600 3,600
(iii) Exp. on preventive health check-up of self & spouse 3,000 1,400
26,600 25,000
B Premium paid or medical expenditure incurred for father,
who is a senior citizen
(i) Mediclaim premium paid for father, who is over 60 years of 47,000 47,000
age
(ii) Expenditure on preventive health check-up of father 4,000 3,000
51,000 50,000
Total deduction under section 80D (₹ 25,000 + ₹ 50,000) 75,000
ILLUSTRATION 8
Mr. Y, aged 40 years, paid medical insurance premium of ₹ 22,000 during the P.Y. 2024-25 to
insure his health as well as the health of his spouse and dependent children. He also paid medical
insurance premium of ₹ 33,000 during the year to insure the health of his mother, aged 67 years,
who is not dependent on him. He incurred medical expenditure of ₹ 20,000 on his father, aged 71
years, who is not covered under mediclaim policy. His father is also not dependent upon him. He
contributed ₹ 6,000 to Central Government Health Scheme during the year. Compute the
deduction allowable under section 80D for the A.Y. 2025-26 if Mr. Y has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Deduction allowable under section 80D for the A.Y.2025-26
Particulars ₹ ₹
Deduction 75,000
ILLUSTRATION 9
Mr. X is a resident individual. He deposits a sum of ₹ 50,000 with Life Insurance Corporation
every year for the maintenance of his disabled grandfather who is wholly dependent upon him.
The disability is one which comes under the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995. A copy of the certificate from the medical
authority is submitted. Compute the amount of deduction available under section 80DD for the

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 CA VARDHAMAN DAGA

A.Y. 2025-26, if Mr. X has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).
SOLUTION Since the amount deposited by Mr. X was for his grandfather, he will not be allowed
any deduction under section 80DD. The deduction is available if the individual assessee incurs any
expense for a “dependant” disabled person. Grandfather does not come within the meaning of
“dependant” as defined under section 80DD.
ILLUSTRATION 10
What will be the deduction if Mr. X had made this deposit for his dependant father?
SOLUTION
Since the expense was incurred for a dependant disabled person, Mr. X will be entitled to claim a
deduction of ₹ 75,000 under section 80DD, irrespective of the amount deposited. In case his
father has severe disability, the deduction would be ₹ 1,25,000.
ILLUSTRATION 11
Mr. B has taken three education loans on April 1, 2024, the details of which are given below:
Loan 1 Loan 2 Loan 3
For whose education loan was taken B Son of B Daughter of B
Purpose of loan MBA B. Sc. B.A.
Amount of loan (₹) 5,00,000 2,00,000 4,00,000
Annual repayment of loan (₹) Annual 1,00,000 40,000 80,000
repayment of interest (₹) 20,000 10,000 18,000
Compute the amount deductible under section 80E for the A.Y.2025-26 if Mr. B has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Therefore, interest repayment in respect of all the above loans would be eligible for deduction.
Deduction under section 80E = ₹ 20,000 + ₹ 10,000 + ₹ 18,000 = ₹ 48,000.

ILLUSTRATION 12
Mr. A purchased a residential house property for self-occupation at a cost of ₹ 45 lakh on
1.4.2017, in respect of which he took a housing loan of ₹ 35 lakh from Bank of India@11% p.a. on
the same date. The loan was sanctioned on 28th March, 2017. Compute the eligible deduction in
respect of interest on housing loan for A.Y.2025-26 if Mr. A has exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A), assuming that the entire loan
was outstanding as on 31.3.2025 and he does not own any other house property.
SOLUTION
Particulars ₹
Interest deduction for A.Y.2025-26
I. Deduction allowable while computing income under the head “Income
from house property”
Deduction under section 24(b) ₹ 3,85,000
Restricted to 2,00,000
II. Deduction under Chapter VI-A from Gross Total Income
Deduction under section 80EE ₹ 1,85,000 (₹ 3,85,000 – ₹ 2,00,000)
Restricted to 50,000
ILLUSTRATION 13
The following are the particulars relating to Mr. A, Mr. B, Mr. C and Mr. D, salaried individuals,
for A.Y. 2025-26 –
Particulars Mr. A Mr. B Mr. C Mr. D

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Amount of loan ₹ 43 lakhs ₹ 45 lakhs ₹ 20 lakhs ₹ 15 lakhs

taken
Loan taken from HFC Deposit taking Deposit taking Public sector
NBFC NBFC bank
Date of sanction 1.4.2021 1.4.2020 1.4.2020 30.3.2019
of loan
Date of 1.5.2021 1.5.2020 1.5.2020 1.5.2019
disbursement of
loan
Purpose of loan Acquisition of Acquisition of Purchase of Purchase of
residential house residential house electric vehicle electric vehicle
property for property for for personal use for personal use
self-occupation Self occupation
Stamp duty value ₹ 45 lakhs ₹ 48 lakhs - -
of house
property
Cost of electric - - ₹ 22 lakhs ₹ 18 lakhs
vehicle
Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.
Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act,
1961 for A.Y.2025-26 in the hands of Mr. A, Mr. B, Mr. C and Mr. D if they have exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A). Assume that
there has been no principal repayment in respect of any of the above loans upto 31.3.2025.
SOLUTION
Particulars ₹
Mr. A
Interest deduction for A.Y.2025-26
(i) Deduction allowable while computing income under the head “Income from
house property
” Deduction u/s 24(b) ₹ 3,87,000 [₹ 43,00,000 × 9%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEA ₹ 1,87,000 (₹ 3,87,000 – ₹ 2,00,000) Restricted to 1,50,000
Mr. B
Interest deduction for A.Y.2025-26
(i) Deduction allowable while computing income under the head “Income from
house property”
Deduction u/s 24(b) ₹ 4,05,000 [₹ 45,00,000 × 9%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEA is not permissible since: Nil
(i) loan is taken from NBFC
(ii) stamp duty value exceeds ₹ 45 lakh.
Deduction under section 80EEA would not be permissible due to either violation
listed above.
Mr. C
Deduction under Chapter VI-A from Gross Total Income
1,50,000

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 CA VARDHAMAN DAGA

Deduction u/s 80EEB for interest payable on loan taken for purchase of electric
vehicle [₹ 20 lakhs x 10% = ₹ 2,00,000, restricted to ₹ 1,50,000, being the
maximum permissible deduction]
Mr. D
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB is not permissible since loan was sanctioned before 1.4.2019. Nil

ILLUSTRATION 14
Mr. Shiva aged 58 years, has gross total income of ₹ 7,75,000 comprising of income from salary
and house property. He has made the following payments and investments:
(i) Premium paid to insure the life of her major daughter (policy taken on 1.4.2018)
(Assured value ₹ 1,80,000) – ₹ 20,000.
(ii) Medical Insurance premium for self – ₹ 12,000; Spouse – ₹ 14,000.
(iii) Donation to a public charitable institution ₹ 50,000 by way of cheque.
(iv) LIC Pension Fund – ₹ 60,000.
(v) Donation to National Children’s Fund - ₹ 25,000 by way of cheque
(vi) Donation to Prime Minister’s Drought Relief Fund - ₹ 25,000 by way of cheque
(vii) Donation to approved institution for promotion of family planning - ₹ 40,000 by way
of cheque
(viii) Deposit in PPF – ₹ 1,00,000
Compute the total income of Mr. Shiva for A.Y. 2025-26 if he exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).
SOLUTION Computation of Total Income of Mr. Shiva for A.Y. 2025-26
Particulars ₹ ₹
Gross Total Income 7,75,000
Less: Deduction under section 80C
Deposit in PPF 1,00,000
Life insurance premium paid for insurance of major daughter (Maximum 18,000
10% of the assured value ₹ 1,80,000, as the policy is taken after
31.3.2012)
1,18,000
Deduction under section 80CCC in respect of LIC pension fund 60,000
1,78,000
As per section 80CCE, deduction under section 80C & 80CCC is 1,50,000
restricted to
Deduction under section 80D
Medical Insurance premium in respect of self and spouse 26,000
Restricted to 25,000
Deduction under section 80G (See Working Note below) 87,500
Total income 5,12,500
Working Note: Computation of deduction under section 80G
Particulars of donation Amount % of deduction Deduction
donated (₹) u/s 80G (₹)
(i) National Children’s Fund 25,000 100% 25,000
Prime Minister’s Drought
(ii) Relief Fund 25,000 50% 12,500
(iii) Approved institution for 40,000 100%, subject to 40,000
promotion planning qualifying limit

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 CA VARDHAMAN DAGA

(iv) Public Charitable Trust of 50,000 50% subject to qualifying 10,000

family limit (See Note below)
87,500
Note - Adjusted total income = Gross Total Income – Amount of deductions under section 80C to
80U except section 80G i.e., ₹ 6,00,000, in this case. ₹ 60,000, being 10% of adjusted total income
is the qualifying limit, in this case. Firstly, donation of ₹ 40,000 to approved institution for family
planning qualifying for 100% deduction subject to qualifying limit, has to be adjusted against this
amount. Thereafter, donation to public charitable trust qualifying for 50% deduction, subject to
qualifying limit is adjusted. Hence, the contribution of ₹ 50,000 to public charitable trust is
restricted to 20,000 (being, ₹ 60,000 ₹ 40,000), 50% of which would be the deduction under
section 80G. Therefore, the deduction under section 80G in respect of donation to public
charitable trust would be ₹ 10,000, which is 50% of ₹ 20,000.
ILLUSTRATION 15
Mr. Ganesh, a businessman, whose total income (before allowing deduction under section 80GG)
for A.Y.2025-26 is ₹ 4,60,000, paid house rent at ₹ 12,000 p.m. in respect of residential
accommodation occupied by him at Mumbai. Compute the deduction allowable to him under section
80GG for A.Y.2025-26 if he has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).
SOLUTION
The deduction under section 80GG will be computed as follows:
(i) Actual rent paid less 10% of total income
₹ 1,44,000 (-) (10×4,60,000) = ₹ 98,000 (A)
100
(ii) 25% of total income 25 × 4,60,000 = ₹ 1,15,000 (B)
100
(iii) Amount calculated at ₹ 5,000 p.m. = ₹ 60,000 (C)

Deduction allowable u/s 80GG [least of (i), (ii) and (iii)] = ₹ 60,000

ILLUSTRATION 16
During the P.Y. 2024-25, ABC Ltd., an Indian company,
(1) contributed a sum of ₹ 2 lakh to an electoral trust; and
(2) incurred expenditure of ₹ 25,000 on advertisement in a brochure of a political party.
Is the company eligible for deduction in respect of such contribution/expenditure, assuming that
the contribution was made by cheque? If so, what is the quantum of deduction? ABC Ltd. does not
opt for section 115BAA/115BAB.
SOLUTION
An Indian company is eligible for deduction under section 80GGB in respect of any sum
contributed by it in the previous year to any political party or an electoral trust. Further, the
word “contribute” in section 80GGB has the meaning assigned to it in section 293A of the
Companies Act, 1956, and accordingly, it includes the amount of expenditure incurred on
advertisement in a brochure of a political party. Therefore, ABC Ltd. is eligible for a deduction
of ₹ 2,25,000 under section 80GGB in respect of sum of ₹ 2 lakh contributed to an electoral trust
and ₹ 25,000 incurred by it on advertisement in a brochure of a political party.
It may be noted that there is a specific disallowance under section 37(2B) in respect of
expenditure incurred on advertisement in a brochure of a political party. Therefore, the
expenditure of ₹ 25,000 would be disallowed while computing business income/gross total income.
However, the said expenditure incurred by an Indian company is allowable as a deduction from
gross total income under section 80GGB.
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ILLUSTRATION 17
Mr. A has commenced the business of manufacture of computers on 1.4.2024. He employed 350
new employees during the P.Y. 2024-25, the details of whom are as follows –
No. of Date of Regular/ Casual Total monthly
employees employment emoluments per employee (₹)
(i) 75 1.4.2024 Regular 24,000
(ii) 125 1.5.2024 Regular 26,000
(iii) 50 1.8.2024 Casual 24,500
(iv) 100 1.9.2024 Regular 24,000
The regular employees participate in recognized provident fund while the casual employees do not.
Compute the deduction, if any, available to Mr. A for A.Y. 2025-26, if the profits and gains derived
from manufacture of computers that year is ₹ 75 lakhs and his total turnover is ₹ 10.16 crores.
What would be your answer if Mr. A has commenced the business of manufacture of footwear on
1.4.2024?
SOLUTION
Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under section
44AB for A.Y. 2025-26 and he has employed “additional employees” during the P.Y. 2023-24.
I If Mr. A is engaged in the business of manufacture of computers
Additional employee cost = ₹ 24,000 × 12 × 75 [See Working Note below] = ₹ 2,16,00,000
Deduction under section 80JJAA = 30% of ₹ 2,16,00,000 = ₹ 64,80,000.
Working Note: Number of additional employees
II If Mr. A is engaged in the business of manufacture of footwear
If Mr. A is engaged in the business of manufacture of footwear, then, he would be entitled to
deduction under section 80JJAA in respect of employee cost of regular employees employed on
1.9.2023, since they have been employed for more than 150 days in the previous year 2024-25.
Additional employee cost = ₹ 2,16,00,000 + ₹ 24,000 × 7 × 100 = ₹ 3,84,00,000
Deduction under section 80JJAA = 30% of ₹ 3,84,00,000 = ₹ 1,15,20,000.
ILLUSTRATION 18
Mr. Aakash earned royalty of ₹ 2,88,000 from a foreign country for a book authored by him,
being a work of literary nature. The rate of royalty is 18% of value of books. The expenditure
incurred by him for earning this royalty was ₹ 40,000. The amount remitted to India till 30th
September, 2025 is ₹ 2,30,000. The remaining amount was not remitted till 31st March, 2026.
Compute the amount includible in the gross total income of Mr. Aakash and the amount of
deduction which he will be eligible for under section 80QQB if he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Particulars ₹
Deduction u/s 80QQB 1,90,000
ILLUSTRATION 19
Mr. A, a resident individual aged 61 years, has earned business income (computed) of ₹ 1,35,000,
lottery income of ₹ 1,20,000 (gross) during the P.Y. 2024-25. He also has interest on Fixed
Deposit of ₹ 30,000 with banks. He invested an amount of ₹ 1,50,000 in Public Provident Fund
account. What is the total income of Mr. A for the A.Y. 2025-26 if he has exercised the option
of shifting out of the default tax regime provided under section 115BAC(1A)?
SOLUTION
Computation of total income of Mr. A for A.Y.2024-25
Particulars ₹ ₹
Total Income 1,20,000

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ILLUSTRATION 20
Mr. Gurnam, aged 42 years, has salary income (computed) of ₹ 5,50,000 for the previous year
ended 31.03.2025. He has earned interest of ₹ 14,500 on the saving bank account with State Bank
of India during the year. Compute the total income of Mr. Gurnam for the assessment year 2025-
26 from the following particulars, assuming he has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A):
(i) Life insurance premium paid to Birla Sunlife Insurance in cash amounting to ₹ 25,000
for insurance of life of his dependent parents. The insurance policy was taken on
15.07.2021 and the sum assured on life of his dependent parents is ₹ 2,00,000.
(ii) Life insurance premium of ₹ 19,500 paid for the insurance of life of his major son who
is not dependent on him. The sum assured on life of his son is ₹ 3,50,000 and the life
insurance policy was taken on 30.3.2012.
(iii) Life insurance premium paid by cheque of ₹ 22,500 for insurance of his life. The
insurance policy was taken on 08.09.2020 and the sum assured is ₹ 2,00,000.
(iv) Premium of ₹ 26,000 paid by cheque for health insurance of self and his wife.
(v) ₹ 1,500 paid in cash for his health check-up and ₹ 4,500 paid in cheque for preventive
health check-up for his parents, who are senior citizens.
(vi) Paid interest of ₹ 6,500 on loan taken from bank for MBA course pursued by his
daughter.
(vii) A sum of ₹ 5,000 donated in cash to an institution approved for purpose of section
80G for promoting family planning.
SOLUTION
Computation of total income of Mr. Gurnam for the Assessment Year 2025-26
Particulars ₹
Total Income 4,79,000
ILLUSTRATION 21
Mr. Y furnishes you the following information for the year ended 31.3.2025:
Particulars ₹ (in lacs)
Total turnover of Unit A located in Special Economic Zone 100
Profit of the business of Unit A 30
Export turnover of Unit A received in India in convertible foreign exchange on 50
or before 30.9.2025
Total turnover of Unit B located in Domestic Tariff Area (DTA) 200
Profit of the business of Unit B 20
Compute deduction under section 10AA for the A.Y. 2025-26, assuming that Mr. Y commenced
operations in SEZ and DTA in the year 2019-20 and Mr. Y has exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A).
SOLUTION
100% of the profit derived from export of articles or things or services is eligible for deduction
under section 10AA, since F.Y. 2023-24 falls within the first five year period commencing from
the year of manufacture or production of articles or things or provision of services by the Unit
in SEZ. As per section 10AA(7), the profit derived from export of articles or things or services
shall be the amount which bears to the profits of the business of the undertaking, being the Unit,
the same proportion as the export turnover in respect of articles or things or services bears to
the total turnover of the business carried on by the undertaking.
Deduction under section 10AA

= Profit of the business of Unit A x Export Turnover of Unit A x 100%

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Total Turnover of Unit A

= ₹ 30 lakhs x 50 x 50% = ₹ 7.5 lakhs
100
Note – No deduction under section 10AA is allowable in respect of profits of business of Unit B
located in DTA.
TEST YOUR KNOWLEDGE

ILLUSTRATION - 22
Examine the following statements with regard to the provisions of the Income tax Act, 1961:
(i) During the financial year 2024-25, Mr. Amit paid interest on loan availed by him for his
son's higher education. His son is already employed in a firm. Mr. Amit will get the deduction
under section 80E.
(ii) Subscription to notified bonds of NABARD would qualify for deduction under section 80C.
(iii) In order to be eligible to claim deduction under section 80C, investment/ contribution/
subscription etc. in eligible or approved modes, should be made from out of income
chargeable to tax.
(iv) Where an individual repays a sum of ₹ 30,000 towards principal and ₹ 14,000 as interest in
respect of loan taken from a bank for pursuing eligible higher studies, the deduction
allowable under section 80E is ₹44,000 irrespective of the tax regime.
(v) Mrs. Sheela, widow of Mr. Satish (who was an employee of M/s. XYZ Ltd.), received ₹ 7
lakhs on 1.5.2024, being amount standing to the credit of Mr. Satish in his NPS Account, in
respect of which deduction has been allowed under section 80CCD to Mr. Satish in the
earlier previous years. Such amount received by her as a nominee on closure of the account
is deemed to be her income for A.Y.2025-26.
(vi) Mr. Vishal, a Central Government employee, contributed ₹ 50,000 towards Tier II account
of NPS. The same would be eligible for deduction under section 80CCD. He has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
Ans-
(i) The statement is correct.
(ii) The statement is correct.
(iii) The statement is not correct.
(iv) The statement is not correct.
(v) The statement is not correct.
(vi) The statement is not correct.
ILLUSTRATION - 23.
Examine the allowability of the following if the assessees have exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A):
(i) Rajan, a resident individual, has to pay to a hospital for treatment ₹ 62,000 and spent
nothing for life insurance or for maintenance of dependent disabled.
(ii) Varun, a resident Indian, has spent nothing for treatment in the previous year and deposited
₹ 25,000 with LIC for maintenance of dependant disabled.
(iii) Hari, a resident individual, has incurred ₹ 20,000 for treatment and ₹ 25,000 was deposited
with LIC for maintenance of dependant disabled.
Ans.
(i) The deduction of ₹ 75,000 under section 80DD is allowable to Rajan, irrespective of the
amount of expenditure incurred or paid by him. If the expenditure is incurred in respect of
a dependant with severe disability, the deduction allowable is ₹ 1,25,000.
(ii) The assessee Varun has deposited ₹ 25,000 for maintenance of dependent disabled. He is,
however, eligible to claim ₹ 75,000 since the deduction of ₹ 75,000 is allowed, irrespective
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 CA VARDHAMAN DAGA

of the amount deposited with LIC. In the case of dependant with severe disability, the
deduction allowable is ₹ 1,25,000.
(iii) Section 80DD allows a deduction of ₹ 75,000 irrespective of the actual amount spent on
maintenance of a dependent disabled and/or actual amount deposited with LIC. Therefore,
the deduction will be ₹ 75,000 even though the total amount incurred/deposited is only ₹
45,000. If the dependant is a person with severe disability the quantum of deduction is ₹
1,25,000.
ILLUSTRATION - 24.
For the A.Y. 2025-26, the Gross total income of Mr. Chaturvedi, a resident in India, was ₹
8,18,240 which includes long-term capital gain of ₹ 2,45,000 taxable under section 112 and Short-
term capital gain of ₹ 58,000. The Gross total income also includes interest income of ₹ 12,000
from savings bank deposits with banks and ₹ 40,000 interest on fixed deposits with banks. Mr.
Chaturvedi has invested in PPF ₹ 1,20,000 and also paid a medical insurance premium ₹ 51,000. Mr.
Chaturvedi also contributed ₹ 50,000 to Public Charitable Trust eligible for deduction under
section 80G by way of an account payee cheque. Compute the total income and tax thereon of Mr.
Chaturvedi, who is 70 years old as on 31.3.2025, in a tax efficient manner.
Ans-
Computation of total income and tax liability of
Mr. Chaturvedi for the A.Y. 2025-26 under default tax regime
Particulars ₹
Total tax liability 65,168
Total tax liability (Rounded off) 65,170

Computation of total income and tax liability of

Mr. Chaturvedi for the A.Y. 2025-26 under the optional tax regime (i.e., the normal
provisions of the Act)
Particulars ₹
Total tax liability 52,810
ILLUSTRATION - 25.
Mr. Rajmohan whose gross total income was ₹ 6,40,000 for the financial year 2024-25, furnishes
you the following information:
(i) Repayment of loan taken from SBI for acquisition of residential house (self-occupied) - ₹
50,000.
(ii) Five year post office time deposit - ₹ 20,000.
(iii) Donation to a recognized charitable trust ₹ 25,000 which is eligible for deduction under
section 80G at the applicable rate.
(iv) Interest on loan taken for higher education of spouse paid during the year - ₹ 10,000.
Compute the total income of Mr. Rajmohan for the A.Y. 2025-26 if he has exercised the option
of shifting out of the default tax regime provided under section 115BAC(1A).
Ans-Computation of total income of Mr. Rajmohan for the A.Y.2025-26
Particulars ₹
Total Income 5,47,500

ILLUSTRATION – 26.
Compute the eligible deduction under Chapter VI-A for the A.Y. 2025-26 of Ms. Roma, aged 40
years, who has a gross total income of ₹ 15,00,000 for the A.Y. 2025-26 and has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A). She provides
the following information about her investments/payments during the P.Y. 2024-25:
Sl.No. Particulars Amount (₹ )

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1. Life Insurance premium paid (Policy taken on 31-03-2012 and sum 35,000
assured is ₹ 4,40,000)
2. Public Provident Fund contribution 1,50,000
3. Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000
4. Payment to L.I.C. Pension Fund 1,40,000
5. Mediclaim Policy taken for self, wife and dependent children, 30,000
premium paid by cheque
6. Medical Insurance premium paid by cheque for parents (Senior 52,000
Citizens)
Ans-
Computation of eligible deduction under Chapter VI-A of Ms. Roma
for A.Y. 2025-26
Particulars ₹
Eligible deduction under Chapter VI-A 2,25,000

ILLUSTRATION - 27.
Mr. Rudra has one unit at Special Economic Zone (SEZ) and other unit at Domestic Tariff Area
(DTA). He provides the following details for the previous year 2024-25.
Particulars Mr. Rudra (₹) Unit in DTA (₹)
Total Sales 6,00,00,000 2,00,00,000
Export Sales 5,60,00,000 1,60,00,000
Net Profit 80,00,000 20,00,000
Proceeds from export sales in SEZ received in convertible foreign exchange by 30.9.2025 is
₹3,00,00,000. He has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A). Calculate the eligible deduction under section 10AA of the Income-tax
Act, 1961, for the Assessment Year 2025-26, in the following situations:
(i) If both the units were set up and start manufacturing from 22-05-2016.
Ans-
Computation of deduction u/s 10AA of the Income-tax Act, 1961
= Profits of Unit in x Export turnover of Unit in x 50%
SEZ SEZ
Total turnover of Unit in SEZ
= 60 lakhs x 300 lakhs x 50% = ₹ 22.50 lakhs
400 lakhs
Export turnover of Unit in SEZ is the export sales in SEZ received in convertible foreign exchange
by 30.9.2024 which is ₹ 3,00,00,000.
(ii) If Unit in SEZ was set up and began manufacturing from 14-05-2019:
Since A.Y. 2024-25 is the 5th assessment year from A.Y. 2020-21, relevant to the previous year
2019-20, in which the SEZ unit began manufacturing of articles or things, it shall be eligible for
deduction of 100% of the profits derived from export of such articles or things, assuming all the
other conditions specified in section 10AA are fulfilled.
= Profits of x Export turnover of U in SEZ x 100%
Unit in SEZ Total turnover of U
= 60 lakhs x 300 Lakhs x 100% = ₹45 lakhs
400 Lakhs
The unit set up in Domestic Tariff Area is not eligible for the benefit of deduction u/s 10AA in
respect of its export profits, in both the situations. Working Note:

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Computation of total sales, export sales and net profit of unit in SEZ
Particulars Rudra Ltd. (₹) Unit in DTA (₹) Unit in SEZ (₹)
Total Sales 6,00,00,000 2,00,00,000 4,00,00,000
Export Sales 4,60,00,000 1,60,00,000 3,00,00,000
Net Profit 80,00,000 20,00,000 60,00,000

PAST EXAM QUESTIONS

ILLUSTRATION 28
Deduction from Total Income: Mr. Ray, a resident individual, aged 37 years gives the following
information with respect to various loans taken by him from scheduled banks for various purposes
–
(i) A housing loan of ₹ 36,00,000/- taken on 15th March, 2022 for the purchase of a house to
be used for self-residence at a cost of ₹ 47,00,000/-. The stamp duty value of the house
was ₹ 42,00,000/- at the time of purchase. Amount of re-payment of loan during P.Y. 2024-
25 was:
(A) towards principal – ₹ 1,25,000/-
(B) towards interest – ₹ 3,65,000/-
This is the (B)first and only residential house owned by Mr. Ray.
(ii) A vehicle loan of ₹ 16,00,000/- taken on 31st Oct 2022 for the purchase of electric vehicle
for personal use. Amount of re-payment of loan during P.Y. 2024-25 was:
(A) towards principal – ₹ 75,000
(B) towards interest – ₹ 1,90,000
(iii) Besides these loans, he has also paid a sum of ₹ 15,000 to a political party as contribution.
The entire amount was paid in cash.
You are required to compute the amount of deduction(s) available to Mr. Ray under various
provisions of Income-tax Act for A.Y. 2025-26 so that he gets the maximum benefits assuming
that he has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A). (4 Marks, May 2023)
SOLUTION Computation of amount of deductions available to Mr. Ray for A.Y. 2025-26
Amount (₹)
(i) Deduction allowable while computing income under the head
“Income from house property”
Deduction under section 24(b) for interest on loan of ₹3,65,000 2,00,000
in respect of self-occupied property restricted to
Deduction under Chapter VI-A from Gross Total Income
(ii) Deduction u/s 80C :
For repayment of loan of ₹ 1,25,000 to bank 1,25,000
Deduction u/s 80EEA :
Since stamp duty value does not exceed ₹ 45 lakhs and Mr. Ray 1,50,000
does not own any residential house, he is eligible for deduction of
upto ₹ 1,50,000 in respect of such interest on loan since loan is
sanctioned between 1-4-2019 and 31-3-2022. ₹ 3,65,000 – ₹
2,00,000 [claimed as deduction u/s 24(b)] = ₹ 1,65,000 restricted
to ₹ 1,50,000, being the maximum permissible deduction
Deduction u/s 80EEB :
Deduction for interest on loan for purchase of electric vehicle of
₹ 1,90,000 restricted to ₹ 1,50,000, being the maximum 1,50,000

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permissible deduction, since loan is sanctioned between 1-4-2019

and 31-3-2023.
No deduction in respect of principal repayment of loan for
purchase of electric vehicle is allowable
Deduction u/s 80GGC
Contribution of ₹ 15,000 to political party not allowable since the Nil
sum is paid in cash
Deduction under Chapter VI-A from Gross Total Income 4,25,000
ILLUSTRATION 29
Deduction u/s 10AA in respect of undertaking located in SEZ: Mr. Suresh has set up an
undertaking in SEZ (Unit A) and another undertaking in DTA (Unit B) in the Financial Year 2018-
19. In the Previous Year 2024-25, total turnover of the unit A is ₹ 180 lacs and total turnover of
Unit B is ₹ 120 lacs. Export turnover of Unit A for the year is ₹ 150 lacs and the profit for the
unit A is ₹ 60 lacs.
Calculate the deduction available, if any, to Mr. Suresh u/s 10AA of the Income-tax Act, 1961,
for the Assessment Year 2025-26, if the manufacturing started in Unit A in the Financial Year
2018-19. (4 Marks, May 2016)
SOLUTION
As per section 10AA, in computing the total income of Mr. Suresh from his unit located in a Special
Economic Zone (SEZ), which begins to manufacture or produce any article or thing on or after 01-
04-2005 but before 1-4-2020, there shall be allowed a deduction of 100% of the profit derived
from export of such article or thing for the first 5 year period commencing from the year of
manufacture or production of articles or things by the Unit in SEZ and 50% of such profits for
further 5 years subject to fulfillment of other conditions specified in section 10AA. The relevant
particulars are as under –
Particulars Unit A In SEZ (₹ in lakhs)
Total turnover 180
Export turnover 150
Net Profit 60
If Unit in SEZ was set up and began manufacturing in F.Y. 2018-19 : Since it is the 6th year of
operation of the eligible unit, it shall be eligible for deduction upto 50% of the profit of such unit
assuming all the other conditions specified in section 10AA are fulfilled.
= Profits of Unit in SEZ × Export turnover of Unit in SEZ x 50%
Total turnover of Unit in SEZ
= ₹ 60 lakhs × ₹ 150 lakhs × 50% = ₹ 25 lakhs
₹ 180 lakhs
Hence, amount of deduction under section 10AA = ₹ 25,00,000.

ILLUSTRATION 30
Deduction u/s 10AA in respect of undertaking located in SEZ: Nathan Aviation Ltd. is running
two industrial undertakings, one in a SEZ (Unit S in 6th year of operation) and another in a normal
area (Unit N). The brief summarized details for the year ended 31-3-2025 are as under –
Particulars (₹ in Lakhs)
S N
Domestic turnover 10 100
Export turnover 120 Nil
Gross profit 20 10
Less: Expenses and depreciation 7 6

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Profits derived from the unit 13 4

The brought forward business loss pertaining to Unit N is ₹ 2 lakhs. Briefly compute the business
income of the assessee. (5 Marks, May 2011)(4 Marks, Nov. 2013)
SOLUTION
Unit S located in Special Economic Zone is eligible for deduction under section 10AA of Act and
such deduction is to be computed undertaking-wise. 100% of the profit derived therefrom will be
eligible as deduction assuming that the previous year falls within the first 5 years commencing
from the year of manufacture or production of articles or things or provisions of services by the
Unit in the SEZ.
Computation of the business income :
Particulars (₹ in lakhs)
Profits of Unit S :
Profits derived 13
Less: Deduction u/s 10AA [WN] 6
Taxable Profits of Unit S 7
Profits of Unit N 4
Set-off of brought forward business loss pertaining to Unit N -2
Income under the head ‘Profits and Gains of Business or Profession’ 9
Working Note:
Deduction eligible u/s 10AA = 50% of Profits × Export turnover of the Undertaking ÷ Total
Turnover of the Undertaking = 50% of [13 × 120 ÷ 130] = ₹ 6 lakhs.
ILLUSTRATION 31
Computation of Total Income and AMT liability: Mr. Bhagat, an individual aged 50 years, set up
a unit in Special Economic Zone (SEZ) in F.Y. 2018-19 for the production of computers. The unit
fulfils all the conditions of section 10AA of the Income-tax Act, 1961. During F.Y. 2023-24, he
set up a hospital in a district of Maharashtra with 110 beds for patients. It fulfils all the
conditions of section 35AD. Capital expenditure in respect of the said hospital amounted to ₹ 65
lakhs (comprising of cost of land ₹ 15 lakhs and the balance was the cost of construction of
building). The hospital became operational with effect from 1 st April, 2024 and the expenditure
of ₹ 65 lakhs was capitalized in the books of accounts on that date
Relevant details for F.Y. 2024-25 are as follows:
Particulars Amount (₹ in
lakhs)
Profit of unit located in SEZ 36
Export sales of SEZ unit 75
Domestic sales of SEZ unit 25
Profit form operation of hospital facility (before considering deduction 90
under Section 35AD)
Compute the income-tax (including AMT under section 115JC and AMT credit, if any, under section
115JEE) payable by Mr. Bhagat for A.Y. 2025-26 under regular provisions of the Income-tax Act
i.e. ignoring the provisions of section 115BAC. Ignore marginal relief, if any. (7 Marks, May 2023)
SOLUTION
Computation of total income and tax payable of Mr. Bhagat for A.Y. 2025-26 (under the regular
provisions of the Income-tax Act, 1961) :
Particulars ₹ ₹
Profits and gains of business or profession
Profit from unit in SEZ 36,00,000
Profit from operation of hospital 90,00,000

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Less: Deduction u/s 35AD 50,00,000

In this case, since the capital expenditure of ₹ 50 lakhs (i.e., ₹ 65
lakhs – ₹ 10 lakhs, being expenditure on acquisition of land) has been
incurred in the F.Y. 2023-24 and capitalized in the books of account
on 1-4-2024, being the date when the hospital became operational,
the said amount would be eligible for deduction u/s 35AD.
Business income from hospital chargeable to tax 40,00,000
Gross Total Income 76,00,000
Less: Deduction u/s 10AA 13,50,000
Profit of SEZ unit x (Export turnover of SEZ unit ÷ Total turnover
of SEZ unit) × 50%
= ₹ 36,00,000 × (₹ 75,00,000 ÷ ₹ 1,00,00,000) × 50% = ₹ 27,00,000
× 50% = ₹ 13,50,000
Deduction would be 50% of eligible profits, since P.Y. 2023-24 is the
6th year of operation
Total Income 62,50,000
Computation of tax payable (under the regular provisions of the
Act)
Tax on ₹ 62,50,000 [₹ 1,12,500 plus 30% of ₹ 52,50,000] 16,87,500
Add: Surcharge @ 10%, since total income exceeds ₹ 50 lakhs but 1,68,750
does not exceed ₹ 1 crore
18,56,250
Add: Health and Education cess @ 4% 74,250
Total tax payable 19,30,500

Computation of adjusted total income of Mr. Bhagat for levy of Alternate Minimum Tax :
Particulars ₹ ₹
Total Income (computed above as per regular provisions of income 62,50,000
tax)
Add: Deduction u/s 10AA 13,50,000
76,00,000
Add: Deduction u/s 35AD 50,00,000
Less: Depreciation u/s 32 - On building @ 10% of ₹ 50 lakhs 5,00,000 45,00,000
Adjusted Total Income 1,21,00,000
Alternate Minimum Tax @ 18.5% 22,38,500
Add: Surcharge @ 15% (since adjusted total income > ₹ 1 crore but 3,35,775
does not exceed ₹ 2 crores) 25,74,275
Add: Health and education cess @ 4% 1,02,971
26,77,246
Tax liability u/s 115JC (rounded off) 26,77,250
Since the regular income-tax payable is less than the alternate
minimum tax payable, the adjusted total income shall be deemed
to be the total income and tax is leviable @ 18.5% thereof plus
surcharge @ 15% and cess @ 4%. Therefore, tax payable as per
section 115JC is ₹ 26,77,250. AMT Credit to be carried forward
under section 115JEE
Tax liability under section 115JC 26,77,250
Less: Tax liability under the regular provisions of the Income-tax 19,30,500
Act, 1961
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Total 7,46,750

ILLUSTRATION 32
Exemption u/s 10AA: Mr. Pranav is running two industrial undertakings, one in a SEZ (Unit A -
6th year of operation) and another in a DTA (Unit B). The brief details for the year ended 31-03-
2024 are as under–
Particulars (₹ in lakhs)
Unit-A Unit-B
Domestic turnover 10 100
Export turnover 120 Nil
Gross Profit 20 10
Less: Expenses and depreciation 7 5
Profits derived from the units 13 5
The brought forward business loss pertaining to assessment year 2017-18 for Unit B is ₹ 10 lakhs.
Briefly compute the business income of the assessee.
SOLUTION Computation of Business Income of Mr. Pranav :
Particulars ₹
Total Profit (A & B) 18,00,000
Less: Brought forward business loss of Unit B 10,00,000
Total Income before deduction u/s 10AA 8,00,000
Less: Deduction u/s 10AA [WN] (₹ 12,00,000 restricted to above) 6,00,000
Taxable Business Income 2,00,000
Working Note: The amount of deduction under section 10AA shall be allowed from the total
income of the assessee computed in accordance with the provisions of this Act, before giving
effect to the provisions of this section and the deduction under this section shall not exceed such
total income of the assessee.
Deduction under Section 10AA – SEZ unit :
Particulars ₹
Domestic turnover 10,00,000
Export turnover 1,20,00,000
Total turnover 1,30,00,000
Profit derived from unit A 13,00,000
Deduction u/s 10AA – 100% of (₹ 13,00,000 × ₹ 1,20,00,000/ ₹ 1,30,00,000) 6,00,000
th
[Since the SEZ unit is in 6 year of operation – 100% of profits from export
business shall be eligible for deduction.]
ILLUSTRATION 33
Computation of total income and tax liability – AMT applicability: Mr. A a resident individual
having a unit located in special economic zone in 6th year of operation furnishes you with the
following information for the year ended 31-3-2025:
Particulars ₹
Profit from unit located in SEZ ₹ 30,00,000
Export turnover of unit located in SEZ ₹ 72,00,000
Total Turnover of unit located in SEZ ₹ 1,00,00,000
Income from other sources ₹ 6,50,000
Investments in public provident fund ₹ 1,00,000
(i) Determine his tax liability for assessment year 2025-26 after taking into account alternate
minimum tax provisions.

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 CA VARDHAMAN DAGA

(ii) What would be your answer if profits derived from unit located in SEZ is ₹ 3,00,000 instead
of ₹ 30,00,000 ?
SOLUTION: (i) Computation of total income of Mr. A for A.Y. 2025-26:
Particulars ₹ ₹
Profits and Gains of Business or Profession :
Profit from unit located in SEZ 30,00,000
Less: Deduction u/s 10AA 50% of (₹ 30,00,000 × ₹ 72,00,000 ÷ ₹ 10,80,000
1,00,00,000) 19,20,000
Income from other sources 6,50,000
Gross Total Income 25,70,000
Less: Deduction u/s 80C (PPF investment) 1,00,000
Total Income 24,70,000
Computation of tax liability as per normal provisions of Act Alternate 5,53,500
minimum tax (18.5% of ATI) i.e. 18.5% of ₹ 35,50,000 [WN] 6,56,750
Since alternate minimum tax is higher than tax as per normal 6,56,750
provisions of the Act, Mr. A shall be liable to be pay alternate
minimum tax as per section 115JC
Add: HEC @ 4% 26,270
Total tax payable (rounded off) 6,83,020
Working Note : Computation of Adjusted Total Income :
Particulars ₹
Total Income 24,70,000
Add: Deduction u/s 10AA 10,80,000
Adjusted Total Income 35,50,000
(ii) If profits derived from unit located in SEZ is ₹ 3,00,000 instead of ₹30,00,000 :

Particulars ₹ ₹
Profits and Gains of Business or Profession:
Profit from unit located in SEZ 3,00,000
Less: Deduction u/s 10AA 50% (₹ 3,00,000 × ₹ 72,00,000 ÷ ₹ 1,08,000 1,92,000
1,00,00,000)
Income from other sources 6,50,000
Gross Total Income 8,42,000
Less: Deduction u/s 80C (PPF investment) 1,00,000
Total Income 7,42,000
Computation of tax liability as per normal provisions of Act 60,900
Add: HEC @ 4% 2,436
Total Tax (rounded off) 63,340
Since the adjusted total income of such person does not exceed ₹ 20 lakhs, hence he is not liable
to pay alternate minimum tax.
ILLUSTRATION 34
Computation of total income and tax liability – Section 35AD and AMT applicability: Mr. X,
carrying on the business of operating a inland container depot, has a Gross total income of ₹ 96
lakh. In computing business income, he had claimed deduction under section 35AD to the extent
of ₹ 75 lakh on investment in building (on 1-4-2024) for operating the inland container depot. He
has made investment of ₹ 1,50,000 on 31-03-2025 in public provident fund. Compute his tax
liability for A.Y. 2025-26. Also determine the amount of AMT credit under Section 115JD.
SOLUTION Computation of Total income of Mr. X for A.Y. 2025-26 :
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 CA VARDHAMAN DAGA

Particulars ₹ ₹
Gross Total Income 96,00,000
Less: Deduction u/s 80C (PPF investment) 1,50,000
Total Income 94,50,000
Computation of tax liability as per normal provisions of Act 26,47,500
Add: Surcharge @ 10% 2,64,750
29,12,250
Add: HEC @ 4% 1,16,490 30,28,740
Tax payable u/s 115JC:
Alternate minimum tax (18.5% of ATI) i.e. 18.5% of ₹ 1,62,00,000
[WN] 29,97,000
Add: Surcharge @ 15% 4,49,550
34,46,550
Add: HEC @ 4% 1,37,862 35,84,412
Total tax payable u/s 115JC (rounded off) 35,84,410
Since the regular income-tax payable is less than the AMT payable, the adjusted total income
of ₹ 1,62,00,000 shall be deemed to be the total income of Mr. X and tax is payable @ 18.5%
thereof plus surcharge @ 15% and health and education cess @ 4%. Therefore, the tax liability
is ₹ 35,84,410.
Computation of Alternate Minimum Tax credit:
Particulars ₹
Total tax payable under Section 115JC 35,84,410
Less: Tax payable as per the normal provisions of the Act 30,28,740
AMT credit to be carried forward 5,55,670
Working Note: Computation of Adjusted Total Income :
Particulars ₹ ₹
Total Income 94,50,000
Add: Deduction u/s 35AD 75,00,000
Less: Depreciation under Section 32 [10% of ₹ 75,00,000] 7,50,000 67,50,000
Adjusted Total Income 1,62,00,000
Illustration 35
Computation of deduction admissible u/s 80C: Compute the eligible deduction u/s 80C for A.Y.
2025-26 in respect of life insurance premium paid by Mr. Balma during the P.Y. 2024-25, the
details of which are given hereunder –
Date of issue Person insured Actual capital Insurance premium
of policy sum assured (₹) paid during 2024-
25 (₹)
i) 15-04-2011 Self 2,50,000 52,000
ii) 10-05-2014 Spouse 1,80,000 18,500
iii) 01-06-2022 Handicapped minor Son
(Section 80U disability) 4,50,000 72,000
Solution: Computation of deduction admissible under section 80C to Mr. Balma (amount in ₹):
Date of Person insured Actual Insurance Deduction Remark
issue of capital sum premium u/s 80C (restricted
policy assured paid during for A.Y. to % of
2024-25 (₹) 2025-26 sum
assured)

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 CA VARDHAMAN DAGA

i) 15-04-2011 Self 2,50,000 52,000 50,000 20%

ii) 10-05-2014 Spouse 1,80,000 18,500 18,000 10%
iii) 01-06-2022 Handicapped 67,500 15%
minor Son 4,50,000 72,000
(Section 80U
disability)
Total 1,35,500
Illustration 36
Deduction under Section 80C and Section 80CCD: The following are the particulars of
investments and payments made by Mr. A, employed with ABC Ltd., during the previous year 2024-
25:
(1) Deposited in Sukanya Samriddhi Yozna in name of his daughter: ₹ 15,000
(2) Deposited 30,000 in public provident fund.
(3) Paid Tuition fees of 24,000 for full time education for his child in India.
(4) Paid life insurance premium of 25,000 on the policy taken on 01-05-2024 to insure his life
(Sum assured 2,00,000).
(5) Contributed 1,80,000, being 15% of his salary, to the NPS of the Central Government. A
matching contribution was made by ABC Ltd.
Compute the deduction available to Mr. A under Chapter VI-A for assessment year 2025-26.
Would your answer be different, if Mr. A contributed 1,20,000 (being, 10% of his salary) towards
NPS of the Central Government?
Solution: (i) Computation of admissible deduction under Chapter VI-A (amount in ₹) :
Particulars ₹
Deductions under Chapter VI A-
(i) Deposit under Sukanya Samriddhi Yozna in name of his daughter. 15,000
[Sec. 80C]
(ii) Life insurance premium (10% of capital sum assured shall qualify for 20,000
deduction) [Sec. 80C]
(iii) Tuition fees for full time education of his child in India [Sec. 80C] 24,000
(iv) Payment to Public provident Fund [Sec. 80C] 30,000
(v) Employee's contribution to Pension Scheme of Central Government
1,80,000 × 10%/15%] [Sec. 80CCD(1)] 1,20,000
Total [WN-2] 2,09,000 1,50,000
(vi) Employee's contribution to Pension Scheme of Central Government
[Sec. 80CCD(1B)] [WN-1] 50,000
(vii) Employer's contribution to Pension Scheme of Central Government
[1,80,000 10%/15% ] [Sec. 80CCD(2)] [WN-3] 1,20,000
Total deduction admissible 3,20,000
Working Notes:
(1) The deduction under section 80CCD(1B) would not be subject to overall limit of 1,50,000
under section 80CCE. Therefore, it is more beneficial for Mr. A to claim deduction under
section 80CCD(1B) first in respect of contribution to NPS. Thereafter, the remaining
amount of 1,30,000 can be claimed as deduction under section 80CCD(1), subject to a
maximum of 10% of salary i.e. 1,20,000.
(2) As per Section 80CCE, the aggregate amount of deduction under section 80C, 80CCC and
80CCD(1) shall not exceed 1,50,000.

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(3) The entire employer's contribution to notified pension scheme has to be first included
under the head "Salaries" while computing gross total income and thereafter, deduction
under section 80CCD(2) would be allowed, subject to a maximum of 10% of salary.
(4) If the contribution towards NPS is 1,20,000, here again, it is beneficial for Mr. A to first
claim deduction of 50,000 under section 80CCD(1B) and the balance of 70,000 can be
claimed under section 80CCD(1), since the deduction available under section 80CCD(1B) is
over and above the aggregate limit of 1,50,000 under section 80CCE. The total deduction
under Chapter VIA would remain the same i.e., 3,20,000.
Illustration 37
Deduction u/s 80C & 80CCD: Determine the eligibility and quantum of deduction under Chapter
VI-A in the following cases:
(1) Subscription to notified long-term infrastructure bonds 30,000 paid by Mr. A, he also
paid life insurance premium of 70,000 during the year. (Sum Assured 3,50,000 policy
issued on 31-03-2011).
(2) Contribution to notified pension scheme (referred to in section 80 CCD) by the employer
40,000 for an employee whose basic salary plus dearness allowance is ₹3,00,000 for the
year. (2 Marks, Nov. 2014)
Solution: Eligibility and quantum of deduction under Chapter VI-A is as under:
(1) Subscription to long term infrastructure bonds shall not be eligible for deduction. Life
insurance premium of 70,000 shall be eligible for deduction under Section 80C. Since the
policy is taken before 01-04-2011, 20% of the capital sum assured will qualify for
deduction under Section 80C.
(2) Deduction in respect of employer's contribution to Pension Scheme of Central Government
referred under Section 80CCD, shall not exceed 10% of salary (Basic salary + DA). Hence,
30,000 shall qualify for deduction under Section 80CCD.
Illustration 38
Deduction in respect of certain payments: Mr. Shyam, a private sector employee, furnishes you
the following information for the previous year 2024-25. Compute his total income if he has
exercised the option of shifting out of the default tax regime.
Particulars ₹
(1) Basic Salary 4,00,000
(2) Dearness Allowance 2,00,000
(3) Servant Allowance 15,000
(4) He has made the following payments in the previous year:
(a) Contribution towards Pension Fund of LIC 1,10,000
(b) Life insurance premium (Policy taken on 01-04-2024 - capital sum 30,000
assured ₹ 2,50,000)
(c) Contribution to Pension Scheme of the Central Government (12% of
Basic and DA). The employer also made an equal contribution 72,000
(d) Medical insurance premium paid by cheque on life of dependant
father (being a senior citizen)47,000 and 25,000 on himself. Further,
5,000 paid in cash for preventive health check up of his father.
(e) Medical treatment of his dependant mother (resident individual of 1,50,000
age 63 years) suffering from prescribed disease and disability (sum
received from insurer 10,000 and sum reimbursed by employer
₹20,000)
(f) Payment to Public Provident Fund 75,000

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 CA VARDHAMAN DAGA

Solution: Computation of total income of Mr. Shyam (amount in ₹)

Particulars ₹ ₹
Basic Salary 4,00,000
Dearness Allowance 2,00,000
Servant Allowance 15,000
Contribution by employer to Pension Scheme of Central Government 72,000
[WN-1]
Gross Salary 6,87,000
Less: Standard Deduction u/s 16(ia) 50,000
Salary Income/Gross Total Income 6,37,000
Less: Deductions under Chapter VI A-
(i) Employee's contribution to Pension Scheme of Central Govt. [Sec. 50,000
80CCD(1B)] [WN-3]
(ii) Life insurance premium (10% of capital sum assured shall qualify
for deduction) [Sec. 80C] 25,000
(iii) Contribution towards Pension Fund of LIC [Sec. 80CCC] 1,10,000
(iv) Employee's contribution to Pension Scheme of Central Govt. [Sec.
80CCD(1)] [WN 3] 22,000
(v) Payment to Public provident Fund [Sec. 80C] Total [WN-2] 75,000
Total [WN-2] 2,32,000 1,50,000
(vi) Employer's contribution to Pension Scheme of Central Government
[Sec. 80CCD(2)] [WN-4] 60,000
(vii) Medical insurance premium [Section 80D] [WN-5] 75,000
(viii) Medical treatment of prescribed disease disabled of dependant
mother [Sec. 80DD] [WN-6] 75,000
(ix) Medical treatment of prescribed disease of dependant mother 70,000
being senior citizen [Section 80DDB] [WN-7]
Total Income 1,57,000
Working Notes:
(1) Contribution by employer to Pension Scheme of Central Government will be deemed to be
income received in India under section 7 and hence taxable.
(2) As per Section 80CCE, the aggregate amount of deduction under section 80C, 80CCC and
80CCD(1) shall not exceed 1,50,000.
(3) The deduction under section 80CCD(1B) would not be subject to overall limit of 1,50,000
under section 80CCE. Therefore, it is more beneficial for Mr. Shyam to claim deduction
of 50,000 under section 80CCD(1B) first in respect of contribution to NPS. Thereafter,
the remaining amount of 22,000 can be claimed as deduction undersection 80CCD(1),
subject to a maximum of 10% of salary.
(4) Deduction in respect of employer's contribution to pension scheme of Central Government,
shall not exceed 10% of salary (Basic salary + DA). Also it is not covered by limit of
1,50,000 specified in section 80CCE.
(5) Deduction in respect of health insurance premium paid shall be restricted to, in case of
himself 25,000, and in case of his father (being a senior citizen) 47,000. Further, the
deduction in respect of amount paid in cash for preventive health check up of his father
shall be allowed to 3,000, since the total amount of deduction in case of senior citizen
cannot be allowed in excess of 50,000. Therefore, total amount of deduction (25,000+
47,000+ 3,000) = 75,000.

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(6) Since assessee has incurred expenditure on medical treatment of dependant mother
suffering from disability, therefore, a fixed deduction of 75,000 irrespective of amount
paid shall be allowed under section 80DD.
(7) Deduction shall be allowed for expenditure incurred on medical treatment of dependant
mother (being a senior citizen) to the extent of lower of following
(a) Sum actually paid i.e. 1,50,000; or
(b) ₹ 1,00,000;
From the amount of deduction (i.e. 1,00,000), the sum received from insurer and employer
shall be reduced. Hence, net amount of deduction (1,00,000-30,000) = ₹ 70,000.
Illustration 39
Deduction in respect of rent paid: HRA v. Rent-free accommodation:
(i) Mr. Khanna, an employee of IOL, New Delhi, a Private Sector Company, received the
following:
Particulars ₹
(1) Basic pay 5,60,000
(2) House rent allowance 1,80,000
(3) Special allowance 70,000
Mr. Khanna was residing at New Delhi and was paying a rent of 15,000 a month. Compute eligible
exemption under Section 10(13A) of Income-tax Act, 1961, in respect of house rent allowance
received.
(ii) If Mr. Khanna opts for rent free accommodation whereby IOL would be paying a rent of
15,000 per month, to the landlord and recovers a sum of 5,000 per month from Mr. Khanna
which was in excess of his entitlement, what will be the perquisite value in respect of such
rent free accommodation?
(iii) Which of the above would be beneficial to Mr. Khanna i.e., House Rent Allowance or rent
free accommodation if he does not opt for the provisions of Section 115BAC?
Solution: The relevant calculations are as follows –
i) Least of the following shall be exempt u/s 10(13A) in respect of HRA received -
Particulars ₹
Actual HRA received 1,80,000
Rent paid - 10% of salary i.e. 1,80,000 - 10% of basic pay 1,24,000
50% of salary i.e. 50% of basic pay 2,80,000
Taxable HRA = HRA Received - HRA Exempt = 1,80,000 - 1,24,000 56,000
ii) Perquisite value in respect of concessional accommodation:
10% of salary or rent paid, whichever is less as reduced by Rent recovered from employee
10% of (5,60,000 + 70,000) or 15,000 × 12, whichever is less - (5,000 × 12)
63,000 - 60,000 i.e. 3,000
iii) Beneficial option: In order to determine beneficial option, the amount of net cash home pay
of the employee is computed as under-
Particulars Case (i) HRA Case (ii)- Rent-free House
Basic pay and Special Allowance 6,30,000 6,30,000
House Rent Allowance 1,80,000 -
Total cash inflows (A) 8,10,000 6,30,000
Rent paid 1,80,000 72,000
Tax liability [WN] 41,290 29,910
Total cash outflows (B) 2,21,290 89,910
Net cash home pay [A - B] 5,88,710 5,26,120

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Since the net cash home pay is higher in case (i), therefore, Mr. Khanna should opt for House rent
allowance.
Computation of tax liability under both cases (amount in ₹) –
Case (i)-HRA Case (ii) - Rent-free House
Basic pay and Special allowance 6,30,000 6,30,000
Taxable HRA/Accommodation 56,000 3,000
6,86,000 6,33,000
Less: Standard Deduction u/s 16(ia) 50,000 50,000
Gross Total Income 6,36,000 5,83,000
Less: Deduction u/s 80GG, being the least of -
(a) 5,000 × 12 i.e. 60,000; or
(b) 25% of 6,07,000 i.e. 1,51,750; or
(c) 60,000 -10% of 5,83,000 i.e. ₹ 1,700 - 1,700
Total Income 6,36,000 5,81,350
Tax liability 39,700 28,760
Add: HEC @ 4% 1,588 1,150
Total Tax (including HEC) (rounded off) 41,290 29,910
Illustration 40
Computation of total income: Mr. Rohan, a resident individual has Gross Total Income of 7,50,000
comprising of Income from Salary and Income from House Property for the assessment year
2025-26. He provides the following information:
(1) Paid 70,000 towards premium on life insurance policy of his Handicapped Son (Section
80U disability). Sum assured ₹ 4,00,000; and date of issue of policy 1-8-2024.
(2) Deposited ₹ 90,000 in tax saver deposit in the name of his major son in State Bank of
India.
(3) Contributed 25,000 to the Clean Ganga Fund, set up by the Central Government.
Compute the Total Income and deduction under Chapter VI-A for the A.Y. 2025-26 assuming
that he does not opt for section 115BAC. (4 Marks, May 2017)
Solution: Computation of Total Income and deduction under Chapter VI-A (amount in ₹):
Particulars ₹ ₹
Gross total income [Income from Salary and Income from House 7,50,000
Property]
Less: Deductions under Chapter VI-A-
Premium on life insurance policy of his handicapped son u/s 80C [WN-1] 60,000
Deposit of 90,000 in tax saver deposit in the name of major son in a
nationalized bank [WN-2]
Contribution to Clean Ganga Fund u/s 80G [WN-3] 25,000 85,000
Total Income 6,65,000
Working Note:
(1) Life insurance premium paid in respect of handicapped child of the individual is eligible
for deduction u/s 80C subject to maximum of 15% of capital sum assured. Hence, 15% of
4,00,000 shall qualify for deduction.
(2) Tax saver deposit in the name of son does not qualify for deduction under section 80C.
(3) Contribution to Clean Ganga Fund is eligible for 100% deduction under section 80G
provided the sum is paid otherwise than by cash exceeding 2,000. It is assumed that
donation is made by cheque, hence 100% of the amount donated i.e. 25,000 shall be eligible
for deduction.

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Illustration 41
Computation of total income: Mr. Raman, aged 62 years, earned professional income (computed)
of 5,50,000 during the year ended 31-03-2025. He has earned interest of 54,500 on the fixed
deposit in bank account with State Bank of India during the year. Compute the total income of
Mr. Raman for the assessment year 2025-26 (assuming that he does not opt for section 115BAC)
from the following particulars:
i) Life insurance premium paid to Birla Sunlife Insurance in cash amounting to 35,000 for
insurance of life of his dependent parents. The insurance policy was taken on 15-07-2024
and the sum assured on life of his dependent parents is 1,55,000.
ii) Life insurance premium of 25,000 paid for the insurance of life of his major son who is
not dependent on him. The sum assured on life of his son is 1,75,000 and the life insurance
policy was taken on 18-04-2011.
iii) Life insurance premium paid by cheque of 32,500 for insurance of his life. The insurance
policy was taken on 08-09-2018 and the sum assured is 2,00,000.
iv) Premium of 46,000 paid by cheque for health insurance of self and his wife.
v) 1,500 paid in cash (for his health check-up and 4,500 paid in cheque for health check-up
for his parents.
vi) Paid interest of 6,500 on loan taken from bank for IIT course pursued by his daughter.
vii) A sum of 15,000 donated in cash to an institution approved for purpose of Section 80G
for promoting family planning.
viii) Contribution 10,500 made in cash to an electoral trust.
Solution: Computation of total income of Mr. Raman (amount in ₹)
Particulars ₹ ₹ ₹
Professional Income (Computed) 5,50,000
Interest on fixed deposit in bank 54,500
Gross Total Income 6,04,500
Less: Deduction under Chapter VIA
Under section 80C:
Life insurance premium paid for life insurance of-
Dependent parents [WN-1] Nil
Major son [WN-2] 25,000
self 32,500 restricted to 10% of 2,00,000 [WN-2] 20,000 45,000
Under section 80D
Premium paid for health insurance of self and wife by cheque 46,000
[WN-3]
Payment made for health check-up: Self 1,500+ His Parents 5,000 51,000
4,500 =6,000restricted to 5,000
Under section 80E
For payment of interest on loan taken from bank for IIT
course of his daughter 6,500
Under section 80G
Donation for family planning [WN-6] NIL
Under section 80GGC
Contribution to electoral trust [WN-4] NIL
Under section 80TTB
Interest on fixed deposit in bank account 54,500 restricted to
[WN-5] 50,000 1,52,500
Total Income 4,52,000

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Working Notes:
(1) As per section 80C, no deduction is allowed in respect of premium paid for life insurance of
parents whether they are dependent or not. Therefore, no deduction is allowable in respect
of 35,000 paid as premium for life insurance of dependent parents of Mr. Raman.
(2) Deduction shall be allowed in respect of premium paid for life insurance only to the extent
of 10% of sum assured in respect of insurance policy issued after 01-04-2012. In case the
insurance policy is issued before 01-04-2012, deduction of premium paid on life insurance
policy shall be allowed up to 20% of sum assured.
Therefore in the present case, deduction of 25,000 is allowable in respect of life
insurance of Mr. Raman's son since the insurance policy was issued before 01-04-2012 and
the premium amount is less than 20% of 1,75,000. However, in respect of premium paid for
life insurance policy of Mr. Raman himself, deduction is allowable only up to 10% of 2,00,000,
since, the policy was issued after 01-04-2012 and the premium amount exceeds 10% of sum
assured.
(3) As per section 80D, in case the premium is paid in respect of health of a person specified
therein and for health check-up of such person who is a senior citizen i.e., aged 60 years or
more, deduction shall be allowed up to 50,000. Further, deduction up to 5,000 in aggregate
shall be allowed in respect of health check-up of self, spouse, children and parents. In order
to claim deduction under section 80D, the payment for health-check up can be made in any
mode including cash. However, the payment for health insurance premium has to be paid in
any mode other than cash.
Therefore, in the present case, deduction of 46,000 is allowed in respect of premium paid
for health insurance of self and wife, since Mr. Raman is a senior citizen and the payment
is made by cheque. Also, the aggregate value of premium paid for health insurance and the
payment for health check-up is 47,500 (46,000+1,500), which is less than 50,000. Further,
deduction up to a maximum of 5,000 is allowable in respect of health check-up of self and
his parents.
This implies that 3,500 is allowable for health check-up of parents which falls within the
additional limit of 50,000 for mediclaim premium and expenditure on preventive health
check-up of parents.
Thus, deduction admissible for self and his parents shall be 51,000 which is within the
overall limit of 1,00,000.
(4) No deduction shall be allowed for contribution to an electoral trust which qualifies for
deduction under section 80GGC in case the contributions are made in cash.
(5) As per Section 80TTB, deduction shall be allowed from the gross total income of an resident
individual being senior citizen in respect of income by way of interest on fixed deposit in
the bank account included in the assessee's gross total income, subject to a maximum of
50,000. Therefore, a deduction of 50,000 is allowable from the gross total income of Mr.
Raman, though the interest fixed deposit in bank account is 54,500.
(6) Cash donation exceeding 2,000 for family planning expenditure will not be allowed as
deduction u/s 80G.
Illustration 42
Computation of Gross Total Income: From the following details furnished by Mr. Dinesh, a
marketing manager of XL Corporation Ltd., Delhi. Compute the gross total income for the A.Y.
2025-26 assuming that he does not opt for section 115BAC.
Particulars ₹
Salary including Dearness Allowance 6,50,000
Conveyance allowance of 900 p.m 10,800
Bonus 50,000
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Salary of servant provided by the employer 48,000

Bills paid by the employer for gas, electricity and water provided free of cost at 82,000
the residence of Mr. Dinesh.
Dinesh purchased a flat in a co-operative housing society in Dwarka, Delhi for self occupation for
35,00,000 in April 2013, which was finance by a loan from Bank of India of 20,00,000 @ 11%
interest and his own savings of 5,00,000 and a deposit of 10,00,000 from Bank of Baroda, to whom
he let out his another house in Rohini, Delhi on lease for ten years. The rent payable by Bank of
Baroda is 35,000 per month. Other relevant particulars are given below:
i) Municipal taxes paid by Dinesh for his flat in Dwarka are 18,000 per annum and for his
house in Rohini are 12,000 per annum.
ii) Principal loan amount outstanding as on 01-04-2024 was 18,50,000.
iii) He also paid ₹ 8,000 towards insurance of both the houses.
iv) In the financial year 2024-25, he had gifted ₹ 40,000 each to his wife and minor son. The
gifted amounts were advanced to Mr. Sandeep, who is paying interest @ 18% per annum.
v) Mr. Dinesh's son is studying in a school run by the employer company throughout the F.Y.
2024-25. The education facility was provided free of cost. The cost of such education in
similar school is 2,500 per month.
vi) Dinesh also received gifts of 45,000 each from his two friends during the F.Y. 2024-25.
Solution: Computation of Gross Total Income of Mr. Dinesh (amounts in :
Particulars ₹ ₹
Income under the head Salary:
Salary including dearness allowance 6,50,000
Conveyance allowance (10,800-10,800) [WN-1] -
Bonus 50,000
Salary of servant provided by the employer (Taxable as Perquisite) 48,000
Bill paid by employer for gas, electricity and water provided free of 82,000
cost at the residence of Dinesh (Taxable as perquisite)
Education facility (2,500 × 12) [WN-2] 30,000
Gross salary 8,60,000
Less: Standard deduction u/s 16(ia) 50,000 8,10,000
Income from House Property:
Flat at Dwarka (Self Occupied)
Annual Value Nil
Less: Interest on borrowed capital (18,50,000 x 11% subject to -2,00,000
maximum of 2,00,000)
House at Rohini (let out)
Gross Annual Value (GAV) (Rent receivable is taken as GAV in the 4,20,000
absence of other information) [35,000 × 12]
Less: Municipal taxes paid 12,000
Net Annual Value (NAV) 4,08,000
Less: Standard Deduction@ 30% of NAV 1,22,400
2,85,600 85,600
Income from Other Sources:
Income on account of interest earned from advancing money gifted
to his minor son is includible in the hands of Dinesh as per Section
64(1A) (40,000 × 18%) = 7,200. However, as per Section 10(32) an
exemption of 1,500 shall be available (7,200 - 1,500) 5,700
Interest income earned from

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 CA VARDHAMAN DAGA

advancing money gifted to wife has to be clubbed with the income of

the assessee as per Section 64(1) (40,000 × 18%) 7,200
Gift from two friends @ 45,000 each Since the aggregate amount
exceeds 50,000,hence, whole of the sum will be taxable u/s 56(2)(x) 90,000 1,02,900
Gross Total Income 9,98,500
Working Notes:
(1) Conveyance Allowance is exempt from tax to the extend expended for official purpose.
Assuming that entire amount is expended the same is claimed as exempt from tax.
(2) In determining the value of perquisite resulting from the provision of free or concessional
educational facilities, from a plain reading of the proviso to Rule 3(5), it is apparent that if
the cost of education per child exceeds ₹ 1,000 per month, the entire cost will be taken as
the value of the perquisite. Accordingly, the full amount of ₹ 2,500 per month is taxable as
perquisite. In such a case, the value of the perquisite would be 30,000 (i.e. 2,500 × 12).
Illustration 43
Computation of Total Income: Mr. X, an employee of the Central Government is posted at New
Delhi. He joined the service on 1st February, 2017. Details of his income for the previous year
2024-25, are as follows:
i) Basic salary: 3,80,000
ii) Dearness allowance: 1,20,000 (40% forms part of pay for retirement benefits)
iii) Both Mr. X and Government contribute 20% of basic salary to the pension scheme
referred to in section 80CCD
iv) Gift received by X's minor son on his birthday from friend: 70,000. (No other gift is
received by him during the previous year 2024-25)
v) During the year 2016-17, Mr. X gifted a sum of 6,00,000 to Mrs. X. She started a
business by introducing such amount as her capital. On 1 April, 2024, her total
investments in business was 10,00,000. During the previous year 2024-25, she has loss
from such business 1,30,000
vi) Mr. X deposited 70,000 in Sukanya Samridhi account on 23-01-2025. He also contributed
40,000 in an approved annuity plan of LIC to claim deduction u/s 80CCC.
vii) He has taken an educational loan for his major son who is pursuing MBA course from
Gujarat University. He has paid 15,000 as interest on such loan which includes 5,000 for
the financial year 2023-24.
Determine the total income of Mr. X for the A.Y. 2025-26. Ignore provisions u/s 115BAC.
(6 Marks, Dec. 2021)
Solution: Computation of Total Income of Mr. X for A.Y. 2024-25 (amount in ₹):
Particulars ₹ ₹
Salaries
Basic Salary 3,80,000
Dearness Allowance 1,20,000
Employer contribution to NPS = 20% of 3,80,000 76,000
Less: Standard deduction [ 50,000 or 5,76,000, whichever is lower] 5,76,000
50,000 5,26,000
Profits and gains of business or profession
Where the amount gifted by Mr. X (6 lakh, in this case) is invested by
Mrs. X in a business as her capital, proportionate share of profit or
loss, as the case may be, computed by taking into account the value of
the investment as on 1-4-2024 to the total investment in the business
-78,000

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 CA VARDHAMAN DAGA

(10 lakh) would be included in the income of Mr. X [loss of 1,30,000 ×

6/10]
Income from other sources
All income of the minor son would be included in the income of the
parent Mr. X, since his income is higher than the income of Mrs. X (loss
of 52,000, based on the information given in the question). Accordingly,
70,000, being amount of gift received by minor son during the P.Y.
2024-25, would be included in the income of Mr. X as the amount of 70,000
gift exceeds 50,000.
Less: Exemption in respect of income of minor child included in Mr. X's
income 1,500
68,500
Less: Business loss of 78,000 set-off to the extent of (Balance
business loss of 9,500 to be carried forward to the next year, since
the same cannot be set-off against salary income) 68,500 Nil
Gross Total Income 5,26,000
Less: Deductions under Chapter VI-A
U/S 80C-deposit in Sukanya Samridhi Account 70,000
U/s 80CCC Contribution to LIC Annuity Plan 40,000
U/s 80CCD(1) Employee contribution to NPS (76,000 - 50,000 26,000
deduction claimed u/s 80CCD(1B)], since it is lower than 42,800, being
10% of salary (3,80,000+ 48,000)
Allowable in full, since less than 1,50,000, being the maximum
permissible deduction u/s 80C, 80CCC & 80CCD(1) 1,36,000
U/s 80CCD(1B) - Employee contribution to NPS 50,000
U/s 80CCD(2) Employer contribution to NPS restricted to 14% 59,920
of basic salary + DA forming part of pay, since employer is Central
Government = 14% x ( 3,80,000 +48,000)
U/s 80E Interest paid on loan taken for higher education 15,000 2,60,920
Total Income 2,65,080
Notes: The following assumptions have been made while solving the question
i) Loan is taken from a financial institution or approved charitable institution, and hence,
interest paid on such loan qualifies for deduction under section 80E.
ii) The question mentions that gift of 6 lakhs is given by Mr. X to Mrs. X during the P.Y.
201617. However, the date of investment in business is not given. It has been assumed
that it was invested between 2-4-2023 to 1-4-2024 for solving the problem, in the
absence of other information in the question.
ILLUSTRATION 44
Deduction in respect of certain payments : Mr. Shyam, a private sector employee, furnishes you
the following information for the previous year 2024-25. Compute his total income if he has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
Particulars ₹
(1) Basic Salary 4,00,000
(2) Dearness Allowance 2,00,000
(3) Servant Allowance 15,000
(4) He has made the following payments in the previous year :
a) Contribution towards Pension Fund of LIC 1,10,000

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b) Life insurance premium (Policy taken on 01-04-2024 - capital sum 30,000

assured ₹ 2,50,000)
c) Contribution to Pension Scheme of the Central Government (12% of
Basic and DA). The employer also made an equal contribution 72,000
d) Medical insurance premium paid by cheque on life of dependant father
(being a senior citizen) ₹ 47,000 and ₹ 25,000 on himself. Further, ₹
5,000 paid in cash for preventive health check up of his father.
e) Medical treatment of his dependant mother (resident individual of age 1,50,000
63 years) suffering from prescribed disease and disability (sum
received from insurer ₹ 10,000 and sum reimbursed by employer ₹
20,000)
f) Payment to Public Provident Fund 75,000
SOLUTION
Computation of total income of Mr. Shyam :
Particulars ₹ ₹
Basic Salary 4,00,000
Dearness Allowance 2,00,000
Servant Allowance 15,000
Contribution by employer to Pension Scheme of Central Government 72,000
[WN-1]
Gross Salary 6,87,000
Less: Standard Deduction u/s 16(ia) 50,000
Salary Income/Gross Total Income 6,37,000
Less: Deductions under Chapter VI A –
(i) Employee’s contribution to Pension Scheme of Central
Government [Section 80CCD(1B)] [WN-3]
(ii) Life insurance premium (10% of capital sum assured shall qualify 25,000
for deduction) [Section 80C]
(iii) Contribution towards Pension Fund of LIC [Section 80CCC] 1,10,000
(iv) Employee’s contribution to Pension Scheme of Central 22,000
Government [Section 80CCD(1)] [WN 3]
(v) Payment to Public provident Fund [Section 80C] 75,000
Total [WN-2] 2,32,000 1,50,000
(vi) Employer’s contribution to Pension Scheme of Central Government 60,000
[Section 80CCD(2)] [WN-4]
(vii) Medical insurance premium [Section 80D] [WN-5] 75,000
(viii) Medical treatment of prescribed disease disabled of dependant 75,000
mother [Section 80DD] [WN-6]
(ix) Medical treatment of prescribed disease of dependant mother 70,000
being senior citizen [Section 80DDB] [WN-7]
Total Income 1,57,000
Working Notes :
(1) Contribution by employer to Pension Scheme of Central Government will be deemed to be
income received in India under section 7 and hence taxable.
(2) As per Section 80CCE, the aggregate amount of deduction under section 80C, 80CCC and
80CCD(1) shall not exceed ₹ 1,50,000.
(3) The deduction under section 80CCD(1B) would not be subject to overall limit of ₹ 1,50,000
under section 80CCE. Therefore, it is more beneficial for Mr. Shyam to claim deduction of ₹
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 CA VARDHAMAN DAGA

50,000 under section 80CCD(1B) first in respect of contribution to NPS. Thereafter, the
remaining amount of ₹ 22,000 can be claimed as deduction u/s 80CCD(1), subject to a
maximum of 10% of salary.
(4) Deduction in respect of employer’s contribution to pension scheme of Central Government,
shall not exceed 10% of salary (Basic salary + DA). Also it is not covered by limit of ₹ 1,50,000
specified in section 80CCE.
(5) Deduction in respect of health insurance premium paid shall be restricted to, in case of
himself ₹ 25,000, and in case of his father (being a senior citizen) ₹ 47,000. Further, the
deduction in respect of amount paid in cash for preventive health check up of his father shall
be allowed to ₹ 3,000, since the total amount of deduction in case of senior citizen cannot be
allowed in excess of ₹ 50,000. Therefore, total amount of deduction = ₹ (25,000 + 47,000 +
3,000) = ₹ 75,000.
(6) Since assessee has incurred expenditure on medical treatment of dependant mother
suffering from disability, therefore, a fixed deduction of ₹ 75,000 irrespective of amount
paid shall be allowed under section 80DD.
(7) Deduction shall be allowed for expenditure incurred on medical treatment of dependant
mother (being a senior citizen) to the extent of lower of following —
(a) Sum actually paid i.e. ₹ 1,50,000; or
(b) ₹ 1,00,000;
From the amount of deduction (i.e. ₹ 1,00,000), the sum received from insurer and employer
shall be reduced. Hence, net amount of deduction = (₹ 1,00,000 – ₹ 30,000) = ₹ 70,000.

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CHAPTER 11- TDS, TCS & ADVANCE TAX

STUDY MATERIAL

ILLUSTRATION 1
Mr. A, the employer, pays gross salary including allowances and monetary perquisites amounting
to ₹ 7,30,000 to his General Manager. Besides, the employer provides non-monetary perquisites
to him whose value is estimated at ₹ 1,20,000. The General Manager is exercising the option to
shift out of the default tax regime and pay tax under the optional tax regime as per the normal
provisions of the Act. What is the tax implication in the hands of Mr. A, the employer and General
Manager, the employee?
SOLUTION
Particulars ₹
Gross salary, allowances and monetary perquisites 7,30,000
Non-Monetary perquisites 1,20,000
8,50,000
Less: Standard deduction under section 16(ia) 50,000
8,00,000
Tax Liability 75,400
Average rate of tax (₹ 75,400 / ₹ 8,00,000 × 100) 9.425%
Mr. A can deduct ₹ 75,400 at source from the salary of the General Manager at the time of
payment.
Alternatively, Mr. A can pay tax on non-monetary perquisites as under – Tax on non-monetary
perquisites = 9.425% of ₹ 1,20,000 = ₹ 11,310 Balance to be deducted from salary = ₹ 64,090
If Mr. A pays tax of ₹ 11,310 on non-monetary perquisites, the same is not a deductible
expenditure as per section 40(a). The amount of tax paid towards non-monetary perquisite by the
employer, however, is not chargeable to tax in the hands of the employee as per section 10(10CC).
ILLUSTRATION 2
Examine the TDS implications under section 194A in the cases mentioned hereunder–
(i) On 1.10.2024, Mr. Harish made a six-month fixed deposit of ₹ 10 lakh@9% p.a. with ABC
Co-operative Bank. The fixed deposit matures on 31.3.2025.
(ii) On 1.6.2024, Mr. Ganesh made three nine months fixed deposits of ₹ 3 lakh each, carrying
interest@9% p.a. with Dwarka Branch, Janakpuri Branch and Rohini Branch of XYZ Bank, a
bank which has adopted CBS. The fixed deposits mature on 28.2.2025.
(iii) On 1.10.2024, Mr. Rajesh started a six months recurring deposit of ₹ 2,00,000 per
month@8% p.a. with PQR Bank. The recurring deposit matures on 31.3.2025.
SOLUTION
(i) ABC Co-operative Bank has to deduct tax at source@10% on the interest of ₹45,000 (9% ×
₹ 10 lakh × ½) under section 194A. The tax deductible at source under section 194A from
such interest is, therefore, ₹ 4,500.
(ii) XYZ Bank has to deduct tax at source@10% u/s 194A, since the aggregate interest on fixed
deposit with the three branches of the bank is ₹ 60,750 [3,00,000 × 3 × 9% × 9/12], which
exceeds the threshold limit of ₹ 40,000. Since XYZ Bank has adopted CBS, the aggregate
interest credited/paid by all branches has to be considered. Since the aggregate interest
of ₹ 60,750 exceeds the threshold limit of ₹ 40,000, tax has to be deducted@10% u/s
194A.

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(iii) No tax has to be deducted under section 194A by PQR Bank on the interest of ₹ 28,000
falling due on recurring deposit on 31.3.2025 to Mr. Rajesh, since such interest does not
exceed the threshold limit of ₹ 40,000.

ILLUSTRATION 3
ABC Ltd. makes the following payments to Mr. X, a contractor, for contract work during the
P.Y.2024-25 –
₹ 20,000 on 1.5.2024
₹ 25,000 on 1.8.2024
₹ 28,000 on 1.12.2024
On 1.3.2025, a payment of ₹ 30,000 is due to Mr. X on account of a contract work.
Discuss whether ABC Ltd. is liable to deduct tax at source under section 194C from payments
made to Mr. X.
SOLUTION - In this case, the individual contract payments made to Mr. X does not exceed ₹
30,000. However, since the aggregate amount paid to Mr. X during the P.Y. 2024-25 exceeds ₹
1,00,000 (on account of the last payment of ₹ 30,000, due on 1.3.2025, taking the total from ₹
73,000 to ₹ 1,03,000), the TDS provisions under section 194C would get attracted. Tax has to be
deducted @1% on the entire amount of ₹ 1,03,000 from the last payment of ₹ 30,000 and the
balance of ₹ 28,970 (i.e., ₹ 30,000 – ₹ 1,030) has to be paid to Mr. X.
ILLUSTRATION 4
Certain concessions are granted to transport operators in the context of cash payments u/s
40A(3) and deduction of tax at source u/s 194-C. Elucidate.
SOLUTION
Section 40A(3) provides for disallowance of expenditure incurred in respect of which payment or
aggregate of payments made to a person in a day exceeds ₹ 10,000, and such payment or payments
are made otherwise than by account payee cheque or account payee bank draft or use of electronic
clearing system through bank account or through other prescribed electronic mode
However, in case of payment made to transport operators for plying, hiring or leasing goods
carriages, the disallowance will be attracted only if the payment made to a person in a day exceeds
₹35,000. Therefore, payment or aggregate of payments up to ₹35,000 in a day can be made to a
transport operator otherwise than by way of account payee cheque or account payee bank draft
or use of electronic system through bank account or through other prescribed electronic modes,
without attracting disallowance u/s 40A(3). Under section 194C,
tax had to be deducted in respect of payments made to
contractors at the rate of 1%, in case the payment is made to individual or Hindu Undivided Family
or at the rate of 2%, in any other case. However, no deduction is required to be made from any
sum credited or paid or likely to be credited or paid during the previous year to the account of a
contractor, during the course of the business of plying, hiring or leasing goods carriages, if the
following conditions are fulfilled:
(1) He owns ten or less goods carriages at any time during the previous year.
(2) He is engaged in the business of plying, hiring or leasing goods carriages;
(3) He has furnished a declaration to this effect along with his PAN.
ILLUSTRATION 5
Moon TV, a television channel, made payment of ₹ 50 lakhs to a production house for production
of programme for telecasting as per the specifications given by the channel. The copyright of the
programme is also transferred to Moon TV. Would such payment be liable for tax deduction at
source under section 194C? Discuss.

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 CA VARDHAMAN DAGA

Also, examine whether the provisions of tax deduction at source under section 194C would be
attracted if the payment was made by Moon TV for acquisition of telecasting rights of the content
already produced by the production house.
SOLUTION - In this case, since the programme is produced by the production house as per the
specifications given by Moon TV, a television channel, and the copyright is also transferred to the
television channel, the same falls within the scope of definition of the term ‘work’ under section
194C. Therefore, the payment of ₹ 50 lakhs made by Moon TV to the production house would be
subject to tax deduction at source under section 194C.
If, however, the payment was made by Moon TV for acquisition of telecasting rights of the
content already produced by the production house, there is no contract for ‘’carrying out any
work”, as required in section 194C(1). Therefore, such payment would not be liable for tax
deduction at source under section 194C.
ILLUSTRATION 6
XYZ Ltd. pays ₹ 50,000 per month as rent to the Mr. Kishore for a building in which one of its
branches is situated. Discuss whether TDS provisions under section 194-I are attracted.
SOLUTION
Section 194-I, which governs the deduction of tax at source on payment of rent, exceeding ₹
2,40,000 p.a., is applicable to all taxable entities except individuals and HUFs, whose total sales,
gross receipts or turnover from the business or profession carried on by him does not exceed ₹
1 crore in case of business and ₹ 50 lakhs in case of profession during the financial year
immediately preceding financial year in which such rent was credited or paid, is liable to deduct
tax at source.
Since the rent paid by XYZ Ltd. to Mr. Kishore exceeds ₹ 2,40,000, the provisions of section 194-
I for deduction of tax at source attracted.
The rate applicable for deduction at source under section 194-I on rent paid is 10%, assuming
that Mr. Kishore had furnished his PAN to XYZ Ltd. Therefore, the amount of tax to be deducted
at source
= ₹ 6,00,000 x 10% = ₹ 60,000
ILLUSTRATION 7
Mr. X, a salaried individual, pays rent of ₹ 55,000 per month to Mr. Y from June, 2024. Is he
required to deduct tax at source? If so, when is he required to deduct tax? Also, compute the
amount of tax to be deducted at source. Would your answer change if Mr. X vacated the premises
on 31st December, 2024? Also, what would be your answer if Mr. Y does not provide his PAN to
Mr. X?
SOLUTION
Since Mr. X pays rent exceeding ₹ 50,000 per month in the F.Y. 2024-25, he is liable to deduct
tax at source @5% till 30-09-2024 and thereafter @ 2% of such rent. The tax is to be deducted
in last month of P.Y. 2024-25 i.e., March 2025 or in the last month of tenancy, if the property is
vacated the year. Since property is not vacated during the year ₹ 11000 [₹ 55,000 x 2% x 10]
has to be deducted from rent payable for March, 2025.
If Mr. X vacated the premises in December, 2024, then tax of ₹ 7700 [₹ 55,000 x 2% x 7] has
to be deducted from rent payable for December, 2024. In case Mr. Y does not provide his PAN
to Mr. X, tax would be deductible@20%, instead of 5%.
In case 1 above, this would amount to ₹ 1,10,000 [₹ 55,000 x 20% x 10], but the same has to be
restricted to ₹ 55,000, being rent for March, 2025.
In case 2 above, this would amount to ₹ 77,000 [ ₹ 55,000 x 20% x 7], but the same has to be
restricted to ₹ 55,000, being rent for December, 2024.
ILLUSTRATION 8

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XYZ Ltd. makes a payment of ₹ 28,000 to Mr. Ganesh on 2.8.2024 towards fees for professional
services and another payment of ₹ 25,000 to him on the same date towards fees for technical
services. Discuss whether TDS provisions under section 194J are attracted.
SOLUTION
TDS provisions under section 194J would not get attracted, since the limit of ₹ 30,000 is
applicable for fees for professional services and fees for technical services, separately. It is
assumed that there is no other payment to Mr. Ganesh towards fees for professional services and
fees for technical services during the P.Y.2024-25.
ILLUSTRATION 9
Examine whether TDS provisions would be attracted in the following cases, and if so, under which
section. Also specify the rate of TDS applicable in each case. Assume that all payments are made
to residents.

Particulars of the payer Nature of payment Aggregate of

payments made in
the F.Y.2024-25
1. Mr. Ganesh, an individual Contract Payment for repair of ₹ 5 lakhs
carrying on retail business residential house
with turnover of ₹ 2.5 Payment of commission to Mr. ₹ 80,000 in November
crores in the P.Y.2023-24 Vallish for business purposes 2024
2. Mr. Rajesh, a wholesale Contract Payment for ₹ 20 lakhs in
trader whose turnover was ₹ reconstruction of residential January,2025, ₹ 15
95 lakhs in P.Y. 2023-24. house (made during the period lakhs in Feb 2025 and
January - March, 2025) ₹ 20 lakhs in March
2025.
3. Mr. Satish, a salaried Payment of brokerage for buying ₹ 51 lakhs
individual a residential house in March,
2025
4. Mr. Dheeraj, a pensioner Contract payment made during ₹ 48 lakhs
October-November 2024 for
reconstruction of residential
house
SOLUTION

Particulars of the Nature of Aggregate of Whether TDS

payer payment payments in provisions are attracted?
the F.Y.2024-
25
1. Mr. Ganesh, an Contract ₹ 5 lakhs No; TDS under section
individual carrying on Payment for 194C is not attracted
retail business with repair of since the payment is for
turnover of ₹ 2.5 residential house personal purpose. TDS
crores in the under section 194M is not
P.Y.2023-24 attracted as aggregate of
contract payment to the
payee in the P.Y.2024-25
does not exceed ₹ 50 lakh.
Payment of ₹ 80,000 Yes, u/s 194H 2%, since
commission to the payment exceeds ₹

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Mr. Vallish for 15,000, and Mr. Ganesh’s

business turnover exceeds ₹ 1
purposes crore in the P.Y.2023-24.
2. Mr. Rajesh, a Contract ₹ 55 lakhs Yes, u/s 194M @ 2%, since
wholesale trader Payment for the aggregate of
whose turnover was ₹ reconstruction payments (i.e., ₹ 55 lakhs)
95 lakhs in P.Y. 2023- of residential exceed ₹ 50 lakhs. Since,
24 house his turnover does not
exceed 1 crore in the
P.Y.2023-24, TDS
provisions under section
194C are not attracted in
respect of payments made
in the P.Y. 2024-25.
3. Mr. Satish, a salaried Payment of ₹ 51 lakhs Yes, u/s 194M @ 2% ,
individual brokerage for since the payment of ₹ 51
buying lakhs made in March 2025
A residential exceeds the threshold of
house ₹ 50 lakhs. Since Mr.
Satish is a salaried
individual, the provisions
of section 194H are not
applicable in this case.
4. Mr. Dheeraj, a Contract ₹ 48 lakhs TDS provisions under
pensioner payment for section 194C are not
reconstruction attracted since Mr.
of residential Dheeraj since is a
house pensioner. TDS provisions
under section 194M are
also not applicable in this
case, since the payment of
48 lakhs does not exceed
the threshold of ₹ 50
lakhs.

ILLUSTRATION 10
Examine the applicability of the provisions for tax deduction at source under section 194DA in
the following cases
(i) Mr. X, a resident, is due to receive ₹ 4.50 lakhs on 30.06.2024 towards maturity proceeds
of LIC policy taken on 1.7.2021, for which the sum assured is ₹ 4 lakhs and the annual
premium is ₹ 1,25,000.
(ii) Mr. Y, a resident, is due to receive ₹ 3.95 lakhs on 31.12.2024 on LIC policy taken on
31.12.2011, for which the sum assured is ₹ 3.5 lakhs and the annual premium is ₹ 26100.
(iii) Mr. Z, a resident, is due to receive ₹ 95,000 on 1.8.2024 towards maturity proceeds of LIC
policy taken on 1.8.2017 for which the sum assured is ₹ 90,000 and the annual premium was
₹ 10,000.
SOLUTION
(i) Since the annual premium exceeds 10% of sum assured in respect of a policy taken after
31.3.2012, the maturity proceeds of ₹ 4.50 lakhs due on 31.3.2024 are not exempt under
section 10(10D) in the hands of Mr. X. Therefore, tax is required to be deducted@5% under
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 CA VARDHAMAN DAGA

section 194DA on the amount of income comprised therein i.e., on ₹ 75,000 (₹ 4,50,000,
being maturity proceeds - ₹ 3,75,000, being the aggregate amount of insurance premium
paid).
(ii) Since the annual premium is less than 20% of sum assured in respect of a policy taken
before 1.4.2012, the sum of ₹ 3.95 lakhs due to Mr. Y would be exempt under section
10(10D) in his hands. Hence, no tax is required to be deducted at source under section
194DA on such sum payable to Mr. Y.
(iii) Even though the annual premium exceeds 10% of sum assured in respect of a policy taken
after 31.3.2012, and consequently, the maturity proceeds of ₹ 95,000 due on 1.8.2024 would
not be exempt under section 10(10D) in the hands of Mr. Z, the tax deduction provisions
under section 194DA are not attracted since the maturity proceeds are less than ₹ 1 lakh.
ILLUSTRATION 11
Mr. X sold his house property in Bangalore as well as his rural agricultural land for a consideration
of ₹ 60 lakh and ₹ 15 lakh, respectively, to Mr. Y on 1.8.2024. He has purchased the house property
and the land in the year 2023 for ₹ 40 lakh and ₹ 10 lakh, respectively. The stamp duty value on
the date of transfer, i.e., 1.8.2024, is ₹ 85 lakh and ₹ 20 lakh for the house property and rural
agricultural land, respectively. Examine the tax implications in the hands of Mr. X and Mr. Y and
the TDS implications, if any, in the hands of Mr. Y, assuming that both Mr. X and Mr. Y are
resident Indians.
SOLUTION
(i) Tax implications in the hands of Mr. X
As per section 50C, the stamp duty value of house property (i.e. ₹ 85 lakh) would be
deemed to be the full value of consideration arising on transfer of property, since the
stamp duty value exceeds 110% of the consideration received. Therefore, ₹ 45 lakh (i.e.,
₹ 85 lakh – ₹ 40 lakh, being the purchase price) would be taxable as short-term capital
gains in the A.Y.2025-26.
Since rural agricultural land is not a capital asset, the gains arising on sale of such land is
not taxable in the hands of Mr. X.
(ii) Tax implications in the hands of Mr. Y
In case immovable property is received for inadequate consideration, the difference
between the stamp value and actual consideration would be taxable under section
56(2)(x), if such difference exceeds the higher of ₹ 50,000 and 10% of the consideration.
Therefore, in this case ₹ 25 lakh (₹ 85 lakh – ₹ 60 lakh) would be taxable in the hands of
Mr. Y under section 56(2)(x). Since agricultural land is not a capital asset, the provisions
of section 56(2)(x) are not attracted in respect of receipt of agricultural land for
inadequate consideration, since the definition of “property” under section 56(2)(x)
includes only capital assets specified thereunder.
(iii) TDS implications in the hands of Mr. Y
Since the sale consideration of house property or the stamp duty value of house property
exceeds ₹ 50 lakh, Mr. Y is required to deduct tax at source under section 194-IA. The
tax to be deducted under section 194-IA would be ₹ 85,000, being 1% of ₹ 85 lakhs
(higher of ₹ 60 lakhs or ₹ 85 lakhs).
TDS provisions under section 194-IA are not attracted in respect of transfer of rural
agricultural land.

ILLUSTRATION 12
Mr. Sharma, a resident Indian aged 77 years, gets pension of ₹ 52,000 per month from the UP
State Government. The same is credited to his savings account in SBI, Lucknow Branch. In
addition, he gets interest@8% p.a. on fixed deposit of ₹ 20 lakh with the said bank. Out of the
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 CA VARDHAMAN DAGA

deposit of ₹ 20 lakh, ₹ 2 lakh represents five year term deposit made by him on 1.4.2024. Interest
on savings bank credited to his SBI savings account for the P.Y.2024-25 is ₹ 9,500.
(1) From the above facts, compute the total income and tax liability of Mr. Sharma for the A.Y.
2025-26, assuming that he has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).
(2) What would be the amount of tax deductible at source by SBI, assuming that the same is a
specified bank? Is Mr. Sharma required to file his return of income for A.Y.2025-26, if tax
deductible at source has been fully deducted? Examine.
(3) Is Mr. Sharma required to file his return of income for A.Y. 2025-26, if the fixed deposit
of ₹ 20 lakh was with Canara Bank instead of SBI, other facts remaining the same?
SOLUTION (1)Computation of total income of Mr. Sharma for A.Y.2025-26
Particulars ₹ ₹
Salaries
Pension (₹ 52,000 x 12) 6,24,000
Less: Standard deduction u/s 16(ia) II 50,000
5,74,000
Income from Other Sources
Interest on fixed deposit (₹ 20 lakhx8%) 1,60,000 1,69,500
Interest on savings account 9,500
Gross total income 7,43,500
Less: Deductions under Chapter VI-A s
Section 80C Five year term deposit (₹ 2 lakh, restricted to ₹ 1,50,000
1.5 lakh)
Section 80TTB Interest on fixed deposit and savings account,
restricted to 50,000, since Mr. Sharma is a resident Indian of
the age of 77 years. 50,000 2,00,000
Total Income 5,43,500
Computation of tax liability for A.Y.2025-26
Particulars ₹
Tax payable [₹ 43,500 x 20% + ₹ 10,000] 18,700
Add: Health and Education Cess@4% 748
Tax liability 19,448
Tax liability (rounded off) 19,450
(2) SBI, being a specified bank, is required to deduct tax at source u/s 194P and remit the same
to the Central Government. In such a case, Mr. Sharma would not be required to file his return
of income u/s 139.
(3) If the fixed deposit of ₹ 20 lakh is with a bank other than SBI, which is the bank where his
pension is credited, then, Mr. Sharma would not qualify as a “specified senior citizen”. In this
case, Mr. Sharma would have to file his return of income u/s 139, since his total income (without
giving effect to deduction under Chapter VI-A) exceeds the basic exemption limit.
ILLUSTRATION 13
Mr. Gupta, a resident Indian, is in retail business and his turnover for F.Y.2023-24 was ₹ 12
crores. He regularly purchases goods from another resident, Mr. Agarwal, a wholesaler, and the
aggregate payments during the F.Y.2024-25 was ₹ 95 lakh (₹ 20 lakh on 1.6.2024, ₹ 25 lakh on
12.8.2024, ₹ 22 lakh on 23.11.2024 and ₹ 28 lakh on 25.3.2025). Assume that the said amounts
were credited to Mr. Agarwal’s account in the books of Mr. Gupta on the same date. Mr. Agarwal’s
turnover for F.Y.2023-24 was ₹ 15 crores.

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(1) Based on the above facts, examine the TDS/TCS implications, if any, under the Income-tax
Act, 1961.
(2) Would your answer be different if Mr. Gupta’s turnover for F.Y.2023-24 was ₹ 8 crores, all
other facts remaining the same?
(3) Would your answer to (1) and (2) change, if PAN has not been furnished by the buyer or
seller, as required?
SOLUTION
(1) Since Mr. Gupta’s turnover for F.Y.2023-24 exceeds ₹ 10 crores, and payments made by him
to Mr. Agarwal, a resident seller exceed ₹ 50 lakhs in the P.Y.2024-25, he is liable to deduct
[email protected]% of ₹ 45 lakhs (being the sum exceeding ₹ 50 lakhs) in the following manner –
No tax is to be deducted u/s 194Q on the payments made on 1.6.2024 and 12.8.2024, since
the aggregate payments till that date i.e. ₹ 45 lakhs, has not exceeded the threshold of ₹
50 lakhs.
Tax of ₹ 1,700 (i.e., 0.1% of ₹ 17 lakhs) has to be deducted u/s 194Q from the payment/
credit of ₹ 22 lakh on 23.11.2024 [₹ 22 lakh – ₹ 5 lakhs, being the balance unexhausted
threshold limit].
Tax of ₹ 2,800 (i.e., 0.1% of ₹ 28 lakhs) has to be deducted u/s 194Q from the payment/
credit of ₹ 28 lakhs on 25.3.2025.
Note – In this case, since both section 194Q and 206C(1H) applies, tax has to be deducted
u/s 194Q.
(2) If Mr. Gupta’s turnover for the F.Y.2023-24 was only ₹ 8 crores, TDS provisions under
section 194Q would not be attracted. However, TCS provisions under section 206C(1H) would
be attracted in the hands of Mr. Agarwal, since his turnover exceeds ₹ 10 crores in the
F.Y.2023-24 and his receipts from Mr. Gupta exceed ₹ 50 lakhs.
No tax is to be collected u/s 206C(1H) on 1.6.2024 and 12.8.2024, since the aggregate
receipts till that date i.e. ₹ 45 lakhs, has not exceeded the threshold of ₹ 50 lakhs.
Tax of ₹ 1,700 (i.e., 0.1% of ₹ 17 lakhs) has to be collected u/s 206C(1H) on 23.11.2024 (₹ 22
lakh – ₹ 5 lakhs, being the balance unexhausted threshold limit).
Tax of ₹ 2,800 (i.e., 0.1% of ₹ 28 lakhs) has to be collected u/s 206C(1H) on 25.3.2025.
(3) In case (1), if PAN is not furnished by Mr. Agarwal to Mr. Gupta, then, Mr. Gupta has to
deduct tax@5%, instead of 0.1%. Accordingly, tax of ₹ 85,000 (i.e., 5% of ₹ 17 lakhs) and ₹
1,40,000 (5% of ₹ 28 lakhs) has to be deducted by Mr. Gupta u/s 194Q on 23.11.2023 and
25.3.2024, respectively.
In case (2), if PAN is not furnished by Mr. Gupta to Mr. Agarwal, then, Mr. Agarwal has to
collect tax@1% instead of 0.1%. Accordingly, tax of ₹ 17,000 (i.e., 1% of ₹ 17 lakhs) and ₹
28,000 (1% of ₹ 28 lakhs) has to be collected by Mr. Agarwal u/s 206C(1H) on 23.11.2024
and 25.3.2025, respectively.

TEST YOUR KNOWLEDGE

Que-14
Ashwin doing manufacture and wholesale trade furnishes you the following information:
Total turnover for the financial year
Particulars ₹
2023-24 1,05,00,000
2024-25 95,00,000
Examine whether tax deduction at source provisions are attracted for the below said expenses
incurred during the financial year 2024-25:
Particulars ₹
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Interest paid to UCO Bank on 15.8.2024 41,000

Contract payment to Raj (2 contracts of ₹ 12,000 each) on 12.12.2024 24,000
Shop rent paid (one payee) on 21.1.2025 2,50,000
Commission paid to Balu on 15.3.2025 7,000
Ans- As the turnover of business carried on by Ashwin for F.Y. 2023-24, has exceeded ₹ 1 crore,
he has to comply with the tax deduction provisions during the financial year 2024-25, subject to,
the exemptions provided for under the relevant sections for applicability of TDS provisions.
Interest paid to UCO Bank
TDS under section 194A is not attracted in respect of interest paid to a banking company.
Contract payment of ₹ 24,000 to Raj for 2 contracts of ₹ 12,000 each
each TDS provisions under section 194C would not be attracted if the amount paid to a contractor
does not exceed ₹ 30,000 in a single payment or ₹ 1,00,000 in the aggregate during the financial
year. Therefore, TDS provisions under section 194C are not attracted in this case.
Shop Rent paid to one payee – Tax has to be deducted@10% under section 194-I as the annual
rental payment exceeds ₹ 2,40,000.
Commission paid to Balu – No, tax has to be deducted under section 194H in this case as the
commission does not exceed ₹ 15,000.
Que- 15.
Compute the amount of tax deduction at source on the following payments made by M/s S Ltd.
during the financial year 2024-25 as per the provisions of the Income-tax Act, 1961.

S.No. Date Nature of Payment

(i) 1-10-2024 Payment of ₹ 2,00,000 to Mr. R, a transporter who owns 8 goods
carriages throughout the previous year and furnishes a declaration to
this effect alongwith his PAN.
(ii) 1-11-2024 Payment of fee for technical services of ₹ 25,000 and Royalty of ₹
20,000 to Mr. Shyam who is having PAN.
(iii) 30-06-2024 Payment of ₹ 25,000 to M/s X Ltd. for repair of building.
(iv) 01-01-2025 Payment of ₹ 2,00,000 made to Mr. A for purchase of diaries made
according to specifications of M/s S Ltd. However, no material was
supplied for such diaries to Mr. A by M/s S Ltd or its associates.
(v) 01-01-2025 Payment of ₹ 2,30,000 made to Mr. Bharat for compulsory acquisition
of his house as per law of the State Government.
(vi) 01-02-2025 Payment of commission of ₹ 14,000 to Mr. Y.

Ans-
(i) No tax is required to be deducted at source under section 194C by M/s S Ltd. on payment to
transporter Mr. R, since he satisfies the following conditions:
(1) He owns ten or less goods carriages at any time during the previous year.
(2) He is engaged in the business of plying, hiring or leasing goods carriages;
(3) He has furnished a declaration to this effect along with his PAN.
(ii) As per section 194J, liability to deduct tax is attracted only in case the payment made as
fees for technical services and royalty, individually, exceeds ₹ 30,000 during the financial
year. In the given case, since, the individual payments for fee of technical services i.e., ₹
25,000 and royalty ₹ 20,000 is less than ₹ 30,000 each, there is no liability to deduct tax at
source. It is assumed that no other payment towards fees for technical services and royalty
were made during the year to Mr. Shyam.
(iii) Provisions of section 194C are not attracted in this case, since the payment for repair of
building on 30.06.2024 to M/s X Ltd. is less than the threshold limit of ₹ 30,000.
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(iv) According to section 194C, the definition of “work” does not include the manufacturing or
supply of product according to the specification by customer in case the material is
purchased from a person other than the customer or associate of such customer.
Therefore, there is no liability to deduct tax at source in respect of payment of ₹ 2,00,000
to Mr. A, since the contract is a contract for ‘sale’.
(v) As per section 194LA, any person responsible for payment to a resident, any sum in the
nature of compensation or consideration on account of compulsory acquisition under any law,
of any immovable property, is responsible for deduction of tax at source if such payment
or the aggregate amount of such payments to the resident during the financial year exceeds
₹ 2,50,000. In the given case, no liability to deduct tax at source is attracted as the
payment made does not exceed ₹ 2,50,000.
(vi) As per section 194H, tax is deductible at source if the amount of commission or brokerage
or the aggregate of the amounts of commission or brokerage credited or paid during the
financial year exceeds ₹ 15,000.
Since the commission payment made to Mr. Y does not exceed ₹ 15,000, the provisions of
section 194H are not attracted.
Que – 16
Examine the applicability of TDS provisions and TDS amount in the following cases:
(a) Rent paid for hire of machinery by B Ltd. to Mr. Raman ₹ 2,60,000 on 27.9.2024.
(b) Fee paid on 1.12.2024 to Dr. Srivatsan by Sundar (HUF) ₹ 35,000 for surgery performed on
a member of the family.
(c) ABC and Co. Ltd. paid ₹ 19,000 to one of its Directors as sitting fees on 01-01-2025.
Ans –
(a) Since the rent paid for hire of machinery by B. Ltd. to Mr. Raman exceeds ₹ 2,40,000, the
provisions of section 194-I for deduction of tax at source are attracted.
The rate applicable for deduction of tax at source under section 194-I on rent paid for hire
of plant and machinery is 2%, assuming that Mr. Raman had furnished his permanent account
number to B Ltd.
Therefore, the amount of tax to be deducted at source: = ₹ 2,60,000 x 2% = ₹ 5,200.
Note: In case Mr. Raman does not furnish his permanent account number to B Ltd., tax shall
be deducted @ 20% on ₹ 2,60,000, by virtue of provisions of section 206AA.
(b) As per the provisions of section 194J, a Hindu Undivided Family is required to deduct tax at
source on fees paid for professional services only if the total sales, gross receipts or turnover
form the business or profession exceed ₹ 1 crore in case of business or ₹ 50 lakhs in case of
profession, as the case may be, in the financial year preceding the current financial year and
such payment made for professional services is not exclusively for the personal purpose of
any member of Hindu Undivided Family.
Section 194M, provides for deduction of tax at source by a HUF (which is not required to
deduct tax at source under section 194J) in respect of fees for professional service if such
sum or aggregate of such sum exceeds ₹ 50 lakhs during the financial year.
In the given case, the fees for professional service to Dr. Srivatsan is paid on 1.12.2024 for
a personal purpose, therefore, section 194J is not attracted. Section 194M would have been
attracted, if the payment or aggregate of payments exceeded ₹ 50 lakhs in the P.Y.2024-25.
However, since the payment does not exceed ₹ 50 lakh in this case, there is no liability to
deduct tax at source under section 194M also.
(c) Section 194J provides for deduction of tax at source @10% from any sum paid by way of any
remuneration or fees or commission, by whatever name called, to a resident director, which
is not in the nature of salary on which tax is deductible under section 192. The threshold
limit of ₹ 30,000 upto which the provisions of tax deduction at source are not attracted in
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 CA VARDHAMAN DAGA

respect of every other payment covered under section 194J is, however, not applicable in
respect of sum paid to a director.
Therefore, tax@10% has to be deducted at source under section 194J in respect of the sum
of ₹ 19,000 paid by ABC Ltd. to its director.
Therefore, the amount of tax to be deducted at source: = ₹ 19,000 x 10% = ₹ 1,900
Que- 17:
Examine the applicability of tax deduction at source provisions, the rate and amount of tax
deduction in the following cases for the F.Y. 2024-25:
(1) Payment made by a company to Mr. Ram, sub-contractor, ₹ 3,00,000 with outstanding balance
of ₹ 1,20,000 shown in the books as on 31.3.2025.
(2) Winning from horse race ₹ 1,50,000 paid to Mr. Shyam, an Indian resident.
(3) ₹ 2,00,000 paid to Mr. A, a resident individual, on 22-02-2025 by the State of Uttar Pradesh
on compulsory acquisition of his urban land.
Ans –
(1) Provisions of tax deduction at source under section 194C are attracted in respect of payment
by a company to a sub-contractor. Under section 194C, tax is deductible at the time of credit
or payment, whichever is earlier @ 1% in case the payment is made to an individual.
Since the aggregate amount credited or paid during the year is ₹ 4,20,000, tax is deductible
@ 1% on ₹ 4,20,000. Tax to be deducted = ₹ 4,20,000 x 1% = ₹ 4,200
(2) Under section 194BB, tax is to be deducted at source, if the winnings from horse races
exceed ₹ 10,000. The rate of deduction of tax at source is 30%.
Hence, tax to be deducted = ₹ 1,50,000 x 30% = ₹ 45,000.
(3) As per section 194LA, any person responsible for payment to a resident, any sum in the nature
of compensation or consideration on account of compulsory acquisition under any law, of any
immovable property, is required to deduct tax at source, if such payment or the aggregate
amount of such payments to the resident during the financial year exceeds ₹ 2,50,000.
In the given case, there is no liability to deduct tax at source as the payment made to Mr. A
does not exceed ₹ 2,50,000.
Que – 18
Briefly discuss the provisions relating to payment of advance tax on income arising from capital
gains and casual income.
Ans - The proviso to section 234C contains the provisions for payment of advance tax in case of
capital gains and casual income. Advance tax is payable by an assessee on his/its total income,
which includes capital gains and casual income like income from lotteries, crossword puzzles, etc.
Since it is not possible for the assessee to estimate his capital gains, or income from lotteries
etc., it has been provided that if any such income arises after the due date for any instalment,
then, the entire amount of the tax payable (after considering tax deducted at source) on such
capital gains or casual income should be paid in the remaining instalments of advance tax, which
are due.
Where no such instalment is due, the entire tax should be paid by 31st March of the relevant
financial year. No interest liability on late payment would arise if the entire tax liability is so paid.
Note: In case of casual income the entire tax liability is fully deductible at source @30% under
section 194B, 194BA and 194BB. Therefore, advance tax liability would arise only if the
surcharge, if any, and health and education cess@4% in respect thereof, along with tax liability
in respect of other income, if any, is 10,000 or more.

PAST EXAM QUESTIONS

Illustration 19

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TDS Implications: Examine the TDS implications in the following cases along-with reasons
thereof
(i) Ms. Varsha received a sum of 95,000 on 31 December 2024 towards maturity proceeds of
LIC taken on 1st October 2019 for which sum assured was 80,000 and annual premium was
10,000.
(ii) Mr. Deepak transferred a residential house property to Mr. Karan for 45 lacs. The stamp
duty value of such property is 55 lacs-
(iii) XYZ Private Limited pays the following amounts to Mr. Narayan during previous year 2024-
25:
• ₹ 22,000 towards fee for professional services
• ₹ 18,000 towards royalty
(iv) Payment of 1,75,000 made to Mr. Vaibhav for purchase of calendar according to
specifications of M/s. ABC Limited. However, no material was supplied for such calendar by
ABC Limited to Mr. Vaibhav.
(v) Talent Private Limited pays 12,000 to Ms. Sudha, its director, towards sitting fee which is
not taxable u/s 192.
(vi) Radha Limited is engaged for Shyam Limited only in the business of operation of call centre.
On 18-3-2025, the total amount credited by Shyam Limited in the ledger account of Radha
Limited is 70,000 regarding service charges of call centre. The amount is paid through
cheque on 28-03-2025 by Shyam Limited.
Solution: The TDS implications are as under
(i) Even though the annual premium exceeds 10% of sum assured in respect of a policy taken
after 31.3.2012, and consequently, the maturity proceeds of 95,000 would not be exempt
under section 10(10D) in the hands of Ms. Varsha the tax deduction provisions under section
194DA are not attracted since the maturity proceeds are less than 1 lakh.
(ii) Since the stamp duty value of residential house property exceeds 50 lakh, Mr. Karan is
required to deduct tax at source@1% of the stamp duty value i.e. 1% of 55 lakhs 55,000
under section 194-IA.
(iii) TDS provisions under section 194J would not get attracted, since the limit of 30,000 is
applicable for fees for professional services and royalty, separately. It is assumed that
there is no other payment to Mr. Narayan towards fees for professional services and
royalty during the P.Y. 2024-25.
(iv) According to section 194C, the definition of "work" 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 or associate of such customer.
Therefore, there is no liability to deduct tax at source in respect of payment of 1,75,000
to Mr. Vaibhav, since the contract is a contract for 'sale'.
(v) Section 194J provides for deduction of tax at source @ 10% from any sum paid by way of
any remuneration or fees or commission, by whatever name called, to a resident director,
which is not in the nature of salary on which tax is deductible under section 192. The
threshold limit of 30,000 upto which the provisions of tax deduction at source are not
attracted in respect of every payment covered under section 194J is, however, not
applicable in respect of sum paid to a director.
Therefore, tax @ 10% has to be deducted at source under section 194J in respect of the
sum of 12000 paid by Talent Private Limited to its director Ms. Sudha. Amount of TDS =
12,000 × 10% = 1200
(vi) According to Section 194J, in case of a payee, engaged only in the business of operation of
call centre, the tax shall be deducted at source @ 2% if the amount credited to the account

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of the payee exceeds ₹ 30,000. Thus the amount of tax to be deducted at source = 70,000
× 2% = 1,400.
Illustration 20
Liability for TDS: Discuss the liability for tax deduction at source in the following cases
(1) Mr. Anand has been running a sole proprietary business whose accounts are audited under
section 44AB(a) of Income-tax Act, 1961. He pays a monthly rent of 15,000 for the office
premises to Mr. R, an individual who himself has taken the same on rent. Besides, Anand also
pays service charges of 10,000 per month to Mr. R towards the use of furniture, fixtures
and vacant land appurtenant thereto.
(2) XYZ real estate investment trust has given its directly owned property on rent at rate
1,00,000 p.m to PQR Ltd.
(3) By virtue of an agreement with Nationalised Bank, a Catering Organisation [Pvt. Ltd. Co.]
receives 50,000 p.m. towards supply of food, water, snacks, etc. during office hours to the
employees of bank.
Solution: The above mentioned cases have been discussed hereunder
(1) As per Section 194-1, if payer is an individual or HUF whose turnover of business exceed 1
crore in preceding year, then he shall be liable to deduct tax at source. Here, since accounts
of Mr. Anand are audited u/s 44AB(a), his turnover exceeds 1 crore, he is liable to deduct
tax at source @ 10% if rental income exceeds 2,40,000.
Further, Section 194-I provides that rent includes any payment by whatever name called,
for the use of land or building together with furniture, fittings etc,. Therefore, service
charges of 10,000 p.m will also be liable to TDS.
Therefore, total rent = ( 15,000+10,000) x 12 = 3,00,000; TDS=3,00,000 x 10% = 30,000.
(2) As per the provision of section 194-I, no deduction shall be made if the income by way of
rent is credited or paid to a business trust, being a real estate investment trust, in respect
of any real estate asset, referred to in section 10(23FCA), owned directly by such business
trust. Thus PQR Ltd is not liable to deduct tax at source.
(3) Explanation to section 194C provides that catering services are covered under the expression
"work" for the purpose of tax deduction at source under this section and the catering
organisation will have to be treated as contractor. As the payment exceeds 30,000, the
nationalised bank is required to deduct tax at source at 2% on the payments made to catering
organisation under 194C.
Therefore, tax to be deducted at source = (50,000 × 12) × 2% = 12000.

Illustration 21
Liability for TDS: Discuss the applicability of provisions of Tax Deduction at Source, the rate
and amount of tax deduction to be made in the following cases for the financial year 2023-24.
(A) Mr. Bobby, a resident whose turn over during the previous financial year is 205 lakhs and for
the current year 2024-25 it is 80 lakhs.
(i) Shop rent paid to Mr. Rajsekharan, a resident 20,000 per month.
(ii) On 1-11-2024 paid towards fee for technical services ₹ 25,000 and royalty of 20,000 to
Mr. Swamy, a resident who is having PAN. No other payment made to Mr. Swamy.
(iii) On 01-10-2024 payment of 2,00,000 made to Mr. A for purchase of diaries according to
specifications. However, no material was supplied for such diaries.
(iv) Contract payments made to Mr. Satheesan on 01-05-2024 for painting 25,000 and
another contract for interior furnishing on 22-03-2025 for ₹ 20,000.
(B) Mr. Thrilok an individual not assessed to tax pays towards Rent 60,000 per month.
(5 Marks, May 2018)
Solution:

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(A) As the turnover of Bobby for financial year 2023-24, i.e. 205 lakhs, has exceeded the
monetary limit of 100 lakhs, he has to comply with the tax deduction provisions during the
financial year 2024-25, subject to the exemptions provided for under the relevant sections
for applicability of TDS provisions.
(i) Shop rent paid to Mr. Rajsekharan : Tax is to be deducted under section 194-I @ 10%
as the rental payment exceeds 2,40,000. Since the amount of shop rent does not exceed
2,40,000, tax is not required to be deducted at source.
(ii) TDS provisions under section 194J would not get attracted, since the limit of 30,000 is
applicable for fees for professional services and fees for technical services, separately.
Hence, no tax is required to be deducted at source on payment made to Mr. Swamy.
(iii) As per Section 194C, Any person responsible for paying any sum to any resident
contractor for carrying out any work in pursuance of a contract between the contractor
and a contractee shall be liable to deduct tax at source@1% in case payee is individual if
the amount of contract exceeds 30,000.
Work shall include 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.
In this case no material was supplied by Mr. Bobby for diaries, hence, no tax will be
deducted at source.
(iv) TDS provisions under section 194C would not be attracted if the amount paid to a
contractor does not exceed ₹ 30,000 in a single payment or 1,00,000 in the aggregate
during the financial year. Therefore, TDS provisions under section 194C are not
attracted in this case.
(B) Since Mr. Thrilok, an individual, pays rent exceeding 50,000 per month in the F.Y. 2024-25,
he is liable to deduct tax at source @ 2% of such rent for F.Y. 2024-25. Thus, tax of 14,400
[60,000 x 2% x 12] has to be deducted under section 194-IB from rent payable for March,
2025
Illustration 22
Liability for TDS: The following issues arise in connection with the deduction of tax at source
under Chapter XVII-B. Discuss the liability for tax deduction in these cases:
(1) An employee of the Central Government receives arrears of salary for the earlier 3 years.
He inquires whether he is liable for deduction of tax on the entire amount during the current
year.
(2) AT.V. Channel pays 10 lakhs as prize money to the winner of a Quiz Programme.
(3) State bank of India pays 50,000 per month as rent to the Central Government for a building
in which one of its branches is situated.
(4) A television company pays ₹ 50,000 to a cameraman for shooting of a documentary film.
(5) State Government pays 20,000 as commission to one of its agent on sale of lottery tickets.
(6) A Turf Club awards a jack-pot of 5 lakhs to the winner of one of its races.
Solution: The aforesaid cases have been dealt with as follows-
(1) As per Section 192, tax is deductible at source by any person who is responsible for paying
any income chargeable under the head "Salaries". However, under section 192(2A), the
employee will be entitled to relief u/s 89 and consequently he will be required to furnish to
the person responsible for making the payment such particulars in such form and verified in
such manner as may be prescribed and therefore the person responsible for making the
payment shall compute the relief and take it into account while making deduction of tax at
source from salary.
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(2) As per Section 194B, the person responsible for paying by way of winnings from any card
game and other game in an amount exceeding 10,000 shall at the time of payment deduct
tax@ 30%. Hence, TDS = 10,00,000 x 30% = 3,00,000.
(3) As per Section 196, payments made to Central Government are not liable for tax deduction
at source.
(4) If the cameraman is an employee of the T.V. Company, the provisions of Section 192 will apply.
But if he is a professional man, Section 194-J will apply. Herein, it is assumed that he is a
professional person. Since the amount paid exceeds 30,000, therefore tax @ 10% will have
to be deducted at the time of credit of 50,000 or on its payment, whichever is earlier. TDS
= 50,000 x 10% = 5,000.
(5) Under section 194G, the person responsible for paying to any person stocking, distributing,
purchasing or selling lottery tickets, shall at the time of credit of the commission or payment
thereof, whichever is earlier, deduct income-tax @ 2%. Such deduction shall be made only if
the amount of commission exceeds 15,000. Therefore, TDS liability in the given case = 20,000
× 2% = 400.
(6) The payment by way of winnings from any horse race is governed by section 194BB. Under
this section, the person responsible for payment shall, at the time of payment, deduct tax @
30% if the amount exceeds 10,000. Hence, TDS liability in the given case = 5,00,000 × 30%
= 1,50,000.
Illustration 23
Liability for TDS :State in brief the applicability of tax deduction at source provisions, the rate
and amount of tax deduction in the following cases for the financial year 2024-25:
(1) Payment of 27,000 made to Jacques Kallis, a South African cricketer, by an Indian newspaper
agency on 02-07-2024 for contribution of articles in relation to the sport of cricket.
(2) Rent of 1,70,000 paid by a partnership firm for use of plant and machinery.
(3) Winning from horse race ₹ 1,50,000.
(4) ₹ 2,50,000 paid to Mr. A, a resident individual on 22-02-2025 by the State of Uttar Pradesh
on compulsory acquisition of his urban land.
(4 Marks, Nov. 2014)
Solution:
(1) Payment of 27,000 made to Jacques Kallis, a South African cricketer, by an Indian newspaper
agency on 02-07-2024 for contribution of articles in relation to the sport of cricket shall be
liable for deduction at source under Section 194E @ 20.8%. Hence, tax shall be deducted at
source: 27,000 × 20.8% = 5,616.
(2) No deduction shall be made under section 194-I where the amount of rental income credited
or paid or likely to be credited or paid during the financial year to the account of, or to, the
payee, does not exceed 2,40,000. Since Rent of ₹ 1,70,000 was paid by a partnership firm
for use of plant and machinery, therefore no tax shall be deducted at source.
(3) The payment by way of winnings from any horse race is governed by section 194BB. Under
this section, the person responsible for payment shall, at the time of payment, deduct tax @
30% if the amount exceeds 10,000. Hence, TDS liability in the given case = 1,50,000 × 30% =
45,000.
(4) As per section 194-LA, any person responsible for paying to a resident any sum, being in the
nature of compensation or the enhanced compensation or the consideration or the enhanced
consideration on account of compulsory acquisition, under any law for the time being in force,
of any immovable property (other than agricultural land), shall be liable to deduct tax at
source @ 10% if the amount of such payment or, as the case may be, the aggregate amount
of such payments to a resident during the financial year exceeds 2,50,000. Hence, no tax

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shall be required to be deducted at source on 2,50,000 paid to Mr. A, a resident individual

on 22-02-2025 by the State of Uttar Pradesh on compulsory acquisition of his urban land.
Illustration 24
Liability for TDS: State in brief the applicability of provisions of tax deduction at source, the
rate and amount of tax deduction in the following cases for the financial year 2024-25 under
Income-tax Act, 1961. Assume that all payments are made to residents:
(i) Mr. Mahesh has paid ₹ 6,00,000 on 15-10-2024 to M/s. Fresh Cold Storage Pvt. Ltd. for
preservation of fruits and vegetables. He is engaged in the wholesale business of fruits &
vegetable in India having turnover of 3 Crores during the previous year 2023-24.
(ii) Mr. Ramu, a salaried individual, has paid rent of 60,000 per month to Mr. Shiv Kumar from
1st July, 2024 to 31st March, 2025. Mr. Shiv Kumar has not furnished his Permanent
Account Number. (4 Marks, Dec. 2021)
Solution:
(i) The arrangement between Mr. Mahesh, the customer, and M/s. Fresh Cold Storage Pvt.
Ltd., the cold storage owner, is basically contractual in nature and main object of the cold
storage is to preserve perishable goods by mechanical process and storage of such goods is
only incidental. Hence, the provisions of section 194C will be applicable to the amount of 6
lakh paid by Mr. Mahesh to the cold storage company. Accordingly, tax has to be deducted
@ 2% on Rs 6 lakh.
TDS u/s 194C = 2% x 6 lakh = 12,000
(i) Mr. Ramu, being a salaried individual, has to deduct tax at source @ 2% u/s 194-IB on the
annual rent paid by him from the last month's rent (rent of March, 2025), since the rent
paid by him exceeds 50,000 p.m. Since his landlord Mr. Shiv Kumar has not furnished his
PAN to Mr. Ramu, tax has to be deducted @ 20% instead of 2%. However, the same cannot
exceed 60,000, being rent for March, 2025.
TDS u/s 194-IB 5,40,000 (60,000 × 9) x 20% = 1,08,000, but restricted to 60,000, being
rent for March, 2025.
Illustration 25
Liability for TDS: Ashwin a resident Individual carrying on business, furnishes you the following
information:
Turnover during financial ₹
year
2023-24 1,20,00,000
2024-25 98,00,000
State whether tax deduction at source provisions are attracted for the under-mentioned
expenses incurred during the financial year 2024-25:
Particulars ₹
Commission paid to Babloo 22,500
Payment to Vijay for repair of office building 23,000
Payment of fees for technical services, to Vivek 35,000
All payments are made to residents.
If tax has to be deducted at source, state the amount of tax to be deducted at source. (4 Marks,
May 2016)
Solution: Since the turnover of Ashwin for financial year 2023-24, i.e. 120 lakhs, has exceeded
the monetary limit of ₹ 100 lakhs therefore, he has to comply with the tax deduction provisions
during the financial year 2024-25, subject to the exemptions provided for under the relevant
sections for applicability of TDS provisions.

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(1) Commission paid to Babloo: Tax is to be deducted under section 194H @ 2% as the
commission exceeds 15,000. Amount of Tax deducted at source = 2% of 22,500 = 450
(2) Payment of 23,000 to Vijay for repair of office building: TDS provisions under section
194C would not be attracted if the amount paid to a contractor does not exceed 30,000 in a
single payment or 1,00,000 in the aggregate during the financial year. Therefore, TDS
provisions under section 194C are not attracted in this case.
(3) Payment of fees for technical services, to Vivek: Tax is to be deducted under section 194-
J @ 2% as the fees for technical services exceeds 30,000. Amount of Tax deducted at
source = 2% of 35,000 = 700.
Illustration 26
Liability for TDS u/s 194-J: An individual practising as a chartered engineer is in receipt of
fees from a company, which had retained him for purposes of valuation of properties. Total fee
agreed upon between the parties was 50,000 and the engineer was also to be reimbursed of all
expenses incurred by him to visit the various locations where properties are situated. The
engineer was paid following amounts by company:
20th July 2024 10,000 (advance of fees)
25th July 2024 20,000 (towards expenses incurred)
5th August 2024 40,000 (balance of fees on completion of work)
10th August 2024 25,000 (in total settlement of claim for reimbursement of expenses).
Discuss the liability of the company in regard to tax deduction at source on these payments.
Solution: As per Section 194J tax is to be deducted on any sum paid by way of fees for
professional services @ 10%, if the aggregate of such sum exceeds 30,000. It has been clarified
by CBDT, that if the claim of fees and reimbursement of expenses is made in a single bill, then
such reimbursement will come under the ambit of expression 'any sum by way of fees for
professional services'. However, if such claim was made under separate bills, then such
reimbursement will not come under the ambit of said expression.
Thus, total fees=10,000+40,000 = 50,000; TDS=50,000 × 10% = 5,000.

Illustration 27
Liability for TDS and disallowance under section 40(a): M/s. Arora Ltd., submits the following
details of expenditure pertaining to the financial year 2024-25:
(i) Payment of professional fees to Mr. Man 50,000 Tax not deducted at source.
(ii) Interior works done by Mr. Hari for 2,00,000 on a contract basis. Payment made in the
month of March 2024. Tax deducted in March 2025 was paid on 30-06-2025.
(iii) Factory Rent paid to Mrs. Rao 15,00,000. Tax deducted at source and paid on 01-12-2025
(iv) Interest paid on Fixed Deposits 2,00,000. Tax deducted on 31-12-2024 and paid on 28-09-
2025.
(v) Payment made to M/s. Green & Co. towards import of raw materials 25,00,000. No tax was
deducted at source. The supplier Green & Co. is located in London.
Examine the above with reference to allowability of the same in the assessment year 2025-26
under the Income-tax Act, 1961. Your answer must be with reference to Section 40(a) read with
relevant tax deduction at source provisions.
Solution: Allowability of expenses of M/s. Arora Ltd for the assessment year 2025-26:
(i) Payment of professional fees is subject to TDS under section 194], if the amount thereof
exceeds 30,000 during a financial year. Since no tax is deducted at source, 30% of such
expenditure i.e. 15,000 shall be disallowed under section 40(a).
(ii) Since the tax deducted at source was paid on or before the due date of filing the return
(i.e., on or before 31st October, 2025), the expenditure on interior works will be allowed as
deduction. Hence, disallowance u/s 40(a) is not attracted.

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(iii) The maximum time allowable for deposit of tax deducted at source is upto the due date of
filing of return i.e., 31st October, 2025. In this case, since tax deducted under section 194-
I was paid after the due date of filing the return, the expenditure can be claimed only in
the subsequent year i.e., P.Y 2025-26. Hence, for the P.Y. 2024-25 relevant to the
assessment year 2025-26, 30% of such expenditure i.e. 4,50,000 shall be is disallowed
under section 40(a). The same will be allowed in financial year 2025-26.
(iv) Since the tax deducted at source was paid on or before the due date of filing the return
(ie., on or before 31st October, 2025), the expenditure by way of interest on deposit will
be allowed as deduction. Hence, disallowance under section 40(a) is not attracted.
(v) Since payment towards import of raw materials does not attract provisions of TDS, the
expenditure will be allowed as deduction. Hence, no disallowance is attracted under section
40(a).
Illustration 28
Liability for TDS and disallowance under section 40(a): During the financial year 2024-25, the
following payments/expenditure were made/incurred by Mr. Yuvan Raja, a resident individual
(whose turnover during the year ended 31-3-2024 was 99 lakhs):
(i) Interest of 12,000 was paid to Rehman & Co., a resident partnership firm, without deduction
of tax at source;
(ii) Interest of 4,000 was paid as interest to Mr. R.D. Burman, a non-resident, without
deduction of tax at source;
(iii) ₹ 3,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iv) He had sold goods worth 5 lakhs to Mr. Deva. He gave Mr. Deva a cash discount of 12,000
later. Commission of 20,000 was paid to Mr. Vidyasagar on 02-7-2024. In none of these
transactions, tax was deducted at source.
Briefly discuss whether any disallowance arises under the provisions of Section 40(a)(i)/40(a) (ia)
of the Income-tax Act, 1961.
Solution: Disallowance under section 40(a)(i)/40(a) (ia) of the Income-tax Act, 1961 is attracted
where the assessee fails to deduct tax at source as is required under the Act, or having deducted
tax at source, fails to remit the same to the credit of the Central Government within the
stipulated time limit.
The assessee is a resident individual, whose turnover does not exceeded 100 lakhs in the
immediately preceding previous year i.e., previous year 2023-24 (as his turnover is less than 100
lakhs in that year) and the TDS obligations have to be considered bearing this in mind.
(i) The obligation to deduct tax at source from interest paid to a resident arises under section
194A in the case of an individual, only where his turnover exceeded 100 lakhs in the
preceding financial year i.e., previous year 2023-24. From the data given, it is clear that his
turnover from business does not exceed 100 lakh in previous year 2023-24. Hence,
disallowance under section 40(a) (ia) is not attracted in this case.
(ii) In the case of interest paid to a non-resident, there is obligation to deduct tax at source
under section 195, hence non-deduction of tax at source will attract disallowance under
section 40(a)(i).
(iii) Disallowance under section 40(a)(ia) is attracted for failure to deduct tax at source under
section 192 from salaries. Hence, 30% of 3,00,000 i.e. 90,000 shall be disallowed.
(iv) The obligation to deduct tax at source under section 194H from commission paid in excess
of 15,000 to a resident arises in the case of an individual, only where his turnover from
business exceed ₹ 100 lakh in the immediately preceding previous year. From the data given,
it is clear that his turnover did not exceeded 100 lakh in the previous year 2023-24. Hence,
there is no obligation to deduct tax at source under section 194H during the previous year
2024-25. Therefore, disallowance under section 40(a) (ia) is not attracted in this case.
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Illustration 29
Liability for TDS: What are the provisions relating to tax deduction at source in respect of:
(A) ABC and Co. Ltd. paid 19,000 to one of its Directors as sitting fees on 01-01-2025.
(B) Mr. X sold his House to Mr. Y on 01-02-2025 for 60 lacs?
Solution:
(A) As per section 194-J, a company shall be liable to deduct tax at source @ 10% on any
remuneration or fees or commission paid to a director, on which the tax is not deductible
under section 192. The limit of 30,000 under section 194-J is not applicable on any
remuneration or fees or commission payable to director of a company. Tax deductible under
section 194-J= 19,000 × 10% = 1,900.
(B) Since the sale consideration of house property exceeds 50 lacs, Mr. Y is required to deduct
tax at source under section 194-IA at the time of credit of such sum to the account of Mr.
X or at the time of payment, whichever is earlier. Tax@ 1% of the sale consideration or stamp
duty value, whichever is higher, is required to be deducted by Mr. Y under section 194-IA.
Tax deductible under section 194-IA 60 lacs x 1% = 60,000.
Illustration 30
Tax deduction at source: Examine & explain the TDS implications in the following cases along
with reasons thereof, assuming that the deductees are residents and having a PAN which they
have duly furnished to the respective deductors.
(i) Mr. Tandon received a sum of 1,75,000 as per-mature withdrawal from Employees Provident
Fund Scheme before continuous service of 5 years on account of termination of employment
due to ill health.
(ii) A sum of 42,000 has been credited as interest on recurring deposit by a banking company
to the account of Mr. Hasan (aged 63 years).
(iii) Ms. Kaul won a lucky draw prize of 21,000. The lucky draw was organized by M/s. Maximus
Retails Ltd. for its customer.
(iv) Finance Bank Ltd. sanctioned and disbursed a loan of 10 crores to Borrower Ltd. on 31-03-
2025. Borrower Ltd. paid a sum of 1,00,000 as service fee to Finance Bank Ltd. for
processing the loan application.
(v) Mr. Ashok, working in a private company, is on deputation for 3 months (from December,
2024 to February, 2025) at Hyderabad where he pays a monthly house rent of 52,000 for
those three months, totalling to 1,56,000. Rent is paid by him on the first day of the
relevant month. (7 Marks, Nov. 2020)
Solution: The TDS implications are as under
(i) No TDS liability: Section 192A provides for deduction of tax @ 10% on premature taxable
withdrawal from employees provident fund scheme. Accordingly, in a case where the
accumulated balance due to an employee participating in a recognized provident fund is
includible in his total income, tax is to be deducted at source. In given case the amount
received on pre-mature withdrawal from EPF on account of termination of employment due
to ill health of Mr. Tandon is exempt from tax in his hands. Hence no tax is required to be
deducted at source under Section 192A of the Act.
(ii) No TDS liability: As per Section 194A, tax has to be deducted under section 194A @ 10%
of the interest income on recurring deposit as "recurring deposit" is included in the
definition of "time deposit". However, as per the third proviso to section 194A(3), no tax is
required to be deducted at source in the case of senior citizens where the amount of
interest or the aggregate of the amount of interest credited or paid during the financial
year by a banking company, co-operative society engaged in banking business or post office
does not exceed ₹ 50,000.

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 CA VARDHAMAN DAGA

Since in this case Mr. Hasan is senor citizen and the amount on interest credit to RD account
is 42,000, tax is not required to be deducted at source.
(iii) TDS liability @ 30%: In respect of lucky dip conducted by M/s. Maximus Retails Ltd., the
provisions of Section 194B would apply. As per Section 194B, winning from lottery or
crossword puzzle or card game of any sort exceeding 10,000 payable by any person to any
other person, is subject to tax deduction @ 30%. Since the value of prize is 21,000,
therefore, tax is deductible at source @30% of 21,000 = 6,300
(iv) No TDS Liability: Tax is deducted at source under Section 194A in respect of Interest
other than Interest on securities. As per Section 2(28A) of Income-tax Act, 1961, the
term "interest" means interest payable in any manner in respect of any moneys borrowed
or debt incurred (including a deposit, claim or other similar right or obligation) and includes
any service fee or other charge in respect of the moneys borrowed or debt incurred or in
respect of any credit facility which has not been utilised. Though service fees falls under
the ambit of interest but no tax is to be deducted at source in respect of interest income
credited or paid to, any banking company or any co-operative society engaged in carrying on
the business of banking (including a co-operative land mortgage bank).
Therefore, there is no liability to deduct tax at source in respect of payment of 1,00,000
to Finance Bank Ltd.
(v) Since Mr. Ashok pays rent exceeding 50,000 per month in the F.Y. 2024-25, he is liable to
deduct tax at source @2% of such rent for F.Y. 2024-25 under section 194-IB. Thus, 3,120
[ 52,000 x 2% x 3] has to be deducted from rent payable for February, 2024.
Illustration 31
Tax deduction at source: State in brief the applicability of tax deduction at source provisions,
the rate and amount of tax deduction in the following cases for the financial year 2024-25 under
the Income-tax Act, 1961. Assume that all payments are made to residents:
(i) Sanjay, a resident Indian individual, not deriving any income from business or profession
makes payments of 12 lakh in January, 2025, 20 lakh in February, 2025 and 20 lakh in
March, 2025 to Mohan, a contractor for reconstruction of his residential house.
(ii) ABC Ltd. makes the payment of 1,50,000 to Ramlal, an individual transporter who owned 6
goods carriages throughout the previous year. He does not furnish his PAN.
(iii) Smt. Sarita paid 5,000 on 17th April, 2024 to Smt. Deepa from the deposits in National
Savings Scheme account. (5 Marks, Nov. 2020)
Solution:
(i) On payments made to contractor: Tax is deductible @ 2% under section 194M, since
payments to Mr. Mohan, a contractor, for reconstruction of his residential house exceeds
50 lakhs in aggregate during the F.Y. 2023-24. Amount of tax to be deducted =2% of 52
lakhs = 1,04,000
(ii) Payment to transporter who has not furnished PAN: Under section 194C, no tax is
deductible in respect of payments to a transporter, who owns ten or less goods carriages
at any time during the year and furnishes a declaration to that effect along with his PAN
to the person paying or crediting such sum. However, in this case, this exemption from TDS
would not be available, since Ramlal has not furnished his PAN to ABC Ltd. As per section
206AA, due to non-furnishing of PAN, tax would be deductible at a higher rate of 20% and
not @ 1% provided under section 194C. Amount of tax to be deducted = 1,50,000 x 20% =
30,000
(iii) Payments in respect of deposits under NSS: Tax is deductible at source @ 10% under
section 194EE, on such payment, since the same exceeds 2,500. Amount of tax to be
deducted = 5,000 x 10% = 500
Illustration 32
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Tax deduction at source: Examine TDS/TCS implications in case of following transactions, briefly
explaining provisions involved assuming that all the payees are residents; state the rate and
amount to be deducted, in case TDS/TCS is required to be deducted/collected.
(i) On 1-5-2024, Mr. Brijesh made three fixed deposits of nine months each of 3 lakh each,
carrying interest @ 9% with Mumbai Branch, Delhi Branch and Chandigarh Branch of CBZ
Bank, a bank which had adopted CBS. These Fixed Deposits mature on 31-01-2025.
(ii) Mr. Marwah, aged 80 years, holds 62% Gold Bonds, 1977 of 2,00,000 and 7% Gold Bonds
1980 of 3,00,000. He received yearly interest on these bonds on 28-02-2025.
(iii) M/s. AG Pvt. Ltd. took a loan of 50,00,000 from Mr. Hari das. It credited interest of 79,000
payable to Mr. Haridas during the previous year 2024-25. M/s. AG Pvt. Ltd. is not liable for
tax audit during previous years 2023-24 and 2024-25.
(i) (iv) Mr. Prabhakar is due to receive ₹ 6 lakh on 31-3-2025 towards maturity proceeds of
LIC policy taken on 1-4-2021, for which the sum assured is 5.75 lakhs and the annual
premium is 1,40,000, (8 Marks, Jan. 2021)
Solution:
(i) CBZ Bank has to deduct tax at source @ 7.5% under section 194A, since the aggregate
interest on fixed deposit with the three branches of the bank is 60,750 [3.00.000 x 9% x
3 x 9 / 12] which exceeds the threshold limit of 40,000.
Since CBZ Bank has adopted core banking solution (CBS), the aggregate interest
credited/paid by all branches has to be considered.
Tax to be deducted at source = 60, 750 x 10%= ₹ 6075 [Alternatively, in the absence of
information about p.a., the amount of interest can also be worked out as 81,000 [3,00,000
× 9% x 3] and the tax to be deducted thereon would be81000 x 10%=8100]
(ii) Tax @ 10% under section 193 is to be deducted on interest on 6½ Gold Bonds, 1977 and 7%
Gold Bonds 1980, since the nominal value of the bonds held by Mr. Marwah i.e., 5,00,000
exceed ₹ 10,000.
Interest on 61/2 Gold Bonds, 1977 = 2,00,000 x 6.5% 13,000
Interest on 7% Gold Bonds 1980 = 3,00,000 x 7% = 21,000
Tax to be deducted at source = 34000 x 10%= 3,400
(iii) M/s. AG Pvt. Ltd. has to deduct tax at source @ 10% under section 194A, since the interest
on loan payable is 79,000 which exceeds the threshold limit of 5,000. M/s. AG Pvt. Ltd.,
being a company, has to deduct tax at source irrespective of the fact that it is not liable
to tax audit during P.Y. 2023-24 and 2024-25.
Tax to be deducted at source =79000 x 10%=7,900
(iv) Since the annual premium exceeds 10% of sum assured in respect of a policy taken after
31-3-2012, the maturity proceeds of 6 lakhs due on 31-3-2025 are not exempt under section
10(10D) in the hands of Mr. Prabhakar. Therefore, tax is required to be deducted @ 5%
under section 194DA on the amount of income comprised therein i.e., on 40,000 [6,00,000,
being maturity proceeds5,60,000], being the amount of insurance premium paid. Tax to be
deducted at source = 40000 x 5 %=2,000
Illustration 33
Tax deduction at source: Discuss the liability of tax deduction at source under the Income-tax
Act, 1961 in respect of the following cases with reference to A.Y. 2025-26.
(i) XY a partnership firm is selling its product 'R' through the E-commerce Platform provided
by AB Ltd. (E- commerce Operator). AB Ltd., credited in its books of account, the account
of XY on 28th February, 2025 by sum of 4,90,000 for the sale of product R, made during
the month February, 2025.
Mr. Rai, who purchased product 'R' through the platform provided by AB Ltd. made payment
of 60,000 directly to XY on 21st February, 2025.
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(ii) ABC Ltd is a producer of natural gas. During the year it sold natural gas worth 26,50,000
to M/s. Deep Co., a partnership firm. It also incurred ₹ 1,70,000 as freight for the
transportation of gas. It raised the invoice and clearly segregated the value of gas as well
as the transportation charges.
(iii) ABC LLP paid job charges to XYZ, a partnership firm for doing embroidery work on the
fabric supplied by the ABC LLP during the previous year 2024-25 as under:
Bill No Date Amount ₹
1 30-04-2024 27,000
57 30-06-2024 25,000
105 30-09-2024 28,000
151 30-12-2024 32,000
Solution:
(i) AB Ltd, an e-commerce operator is required to deduct tax @ 1% under section 194-0 on
5,50,000 (i.e., 4,90,000 credited on 28-2-2025 plus deemed payment of 60,000 on 21-2-
2025, being payment directly made by Mr. Rai to the e-commerce participant XY), being the
gross amount of sale of product 'R' of XY, an e-commerce participant, since such sale is
effected in February, 2024 is facilitated by AB Ltd. through its e-commerce platform.
Hence, TDS u/s 1940 1% on 5,50,000 = 5,500
(ii) Since ABC Ltd., being the producer of the natural gas, sells as well as transports the gas to
M/s. Deep Co., the purchaser, till the point of delivery, where the ownership of gas is
simultaneously transferred to M/s. Deep Co, the manner of raising the invoice (whether the
transportation charges are embedded in the cost of gas or shown separately) does not alter
the basic nature of such contract which remains essentially a 'contract for sale' and not a
'works contract' as envisaged in section 194C.
Therefore, in such circumstances, the TDS provisions would not be attracted on 1,70,000,
being the component of gas transportation charges paid by M/s. Deep Co. to ABC Ltd.
(iii) In this case, the individual contract payments (through the bills dated 30-4-2024, 30-6-
2024 and 30-9-2024) made by ABC LLP to XYZ does not exceed 30,000. However, since
the aggregate amount paid to XYZ during the P.Y. 2024-25 exceeds 1,00,000 (on account
of the last payment of 32,000, due on 30-12-2024, taking the total from ₹ 80,000 to
1,12,000), the TDS provisions under section 194C would get attracted on the entire sum of
1,12,000.
Tax has to be deducted @ 2% (since payment is to a firm, XYZ) on the entire amount of
1,12,000, from the last payment of 32,000 on 30-12-2024.
Hence, TDS u/s 194C = ₹ 2,240.
ILLUSTRATION 34
Examine the applicability and the amount of TDS to be deducted in the following cases for
Financial Year 2023-24:
(i)S and Co. Ltd. paid ₹ 25,000 to one of its Directors as sitting fees on 02-02-2025.
(ii) ₹ 2,20,000 paid to Mr. Mohan, a resident individual, on 28-02-2025 by the State of Haryana
on compulsory acquisition of his urban land.
(iii) Mr. Purushotham, a resident Indian, dealing in hardware goods has a turnover of ₹ 12 crores
in the previous year 2022-23. He purchased goods from Mr. Agarwal a resident seller, regularly
in the course of his business. The aggregate purchase made during the previous year 2024-25 on
various dates is ₹ 80 lakhs which are as under –
10-06-2024 ₹ 25,00,000
20-08-2024 ₹ 27,00,000
12-10-2024 ₹ 28,00,000

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He credited Mr. Agarwal's account in the books of accounts on the same date and made the
payment on the 28-02-2025 ₹ 80 lakh. Mr. Agarwal's turnover for the F.Y. 2023-24 is ₹ 20 crores.
(6 Marks, Nov. 2022)
SOLUTION
(i) Tax @ 10% has to be deducted by S and Co. Ltd. under section 194J on directors sitting
fees of ₹ 25,000. The threshold limit of ₹ 30,000 is not applicable in respect of sum paid
to a director.
The amount of tax to be deducted at source = ₹ 25,000 × 10% = ₹ 2,500
(ii) There is no liability to deduct tax at source under section 194LA, since the payment to Mr.
Mohan, a resident, by State of Haryana on compulsory acquisition of his urban land does not
exceed ₹ 2,50,000.
(iii) Since Mr. Purushotham’s turnover for F.Y. 2023-24 exceeds ₹ 10 crores, and value of
goods purchased from Mr. Agarwal, a resident seller, exceeds ₹ 50 lakhs in the P.Y. 2024-
25, he is liable to deduct tax @ 0.1% on ₹ 30 lakhs (being the sum exceeding ₹ 50 lakhs),
at the time of credit or payment, whichever is earlier.
On 10-6-2024= Nil (No tax is to be deducted u/s 194Q on the purchases made on 10-6-
2024 since the purchases made till that date has not exceeded the threshold of ₹ 50
lakhs)
On 20-8-2024 = 0.1% of ₹ 2 lakhs (amount exceeding ₹ 50 lakhs) = ₹ 200
On 12-10-2024 = 0.1% of ₹ 28 lakhs = ₹ 2,800.
ILLUSTRATION 35
TDS Applicability: Answer the following:
(i) Miss Tara, resident individual aged 32 years, is a social media influencer. She makes videos
reviewing various electronic items and posts those videos on social media. On 1 st December
2024 XYZ Ltd., an Indian company manufacturer of electronic cars gave her a brand new
car having fair market value of ₹6 lakhs to promote on her social media page. She used that
car for 7 months for her personal purposes, recorded a video reviewing the car and then
returned the car to the company. You are required to discuss the applicable provisions in
the Income-tax Act regarding the deduction of tax at source in respect of such transaction.
(ii) Ms. Aruna is a Chief Executive Officer of a multi-national company. She hires Mr. Suresh
for supply of her housing staff (like gardener, chefs and drivers etc.) and makes the
following payments to him:
₹25,00,000/- on 10th August, 2024 and ₹ 30,00,000 on 22nd November, 2024.
Determine the amount of tax to be deducted/ collected at source, if any.
Would your answer be different, if Ms. Aruna is a business woman and her books are not
audited in immediately preceding financial year and payment to Mr. Suresh is for business
purposes.
(iii) By virtue of an agreement with Nationalized Bank, M/s ABC Pvt Ltd., a company engaged in
catering business received ₹ 60,000 p.m. towards supply of food, water, snacks, etc. during
office hours to the employees of the bank. Discuss the TDS implication of this
transaction/agreement. (7 Marks, May 2023)
SOLUTION
(i) Under section 194R, the person who is responsible for providing to a resident, any benefit
or perquisite whether convertible into money or not, arising from business or the exercise
of a profession by such resident, has to first ensure deduction of tax @ 10% of the value
of such benefit or perquisite, if the same exceeds ₹ 20,000.
However, in case of benefit or perquisite being a product like car, mobile etc. if the product
is returned to the manufacturing company after using for the purpose of rendering service,
then it will not be treated as a benefit/perquisite for the purposes of section 194R.
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Accordingly, in the present case, since Miss Tara has returned the car to XYZ Ltd., TDS
provisions under section 194R would not apply.
(ii) The provisions of section 194C would not apply in the hands of Ms. Aruna since the amount
paid to Mr. Suresh is for supply of her housing staff. Hence, it is used exclusively for her
personal purposes.
In this case, tax is required to be deducted at source from such amount under section 194M
@ 2%, since the aggregate payment made to Mr. Suresh for the said contract exceeds ₹
50 lakhs during the P.Y. 2024-25.
Accordingly, ₹ 1,10,000, being 2% of ₹ 55,00,000 [₹ 25,00,000+ ₹ 30,00,000], is
required to be deducted at source.
In case Ms. Aruna made payment to Mr. Suresh for business purposes and she is not
required to get her books of account audited [assuming her turnover from such business
does not exceed ₹ 1 crore in P.Y. 2023-24], she is not required to deduct tax at source
under section 194C. In such case also, she is required to deducted tax at source of ₹
2,75,000 under section 194M.
(iii) According to section 194C, the definition of “work” include catering. In the present case,
nationalised bank is required to deduct tax source @ 2% on ₹ 7,20,000 [₹ 60,000 × 12] paid
to ABC Pvt. Ltd. for providing catering services to the bank, since amount of ₹ 60,000 paid
every month exceeds the threshold of ₹ 30,000.
(iv) Therefore, nationalised bank is required to deduct tax at source of ₹1,200 per month
amounting to ₹ 14,400 for the year.
ILLUSTRATION 36
Interest payable u/s 234A, 234B & 234C: Ms. Priya, aged 61 years, has total income of ₹
7,50,000, including income from profession, for A.Y. 2025-26, and has paid advance tax of ₹
10,000 on 13-12-2024. She has filed her return of income on 15-06-2025.
Calculate the self-assessment tax payable and the interest thereon u/s 234A, 234B and 234C, if
any, by Ms. Priya if she has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A). (4 Marks, Nov. 2022)
SOLUTION
Self assessment tax payable ₹
Tax on ₹ 7,50,000
Upto ₹ 3,00,000 Nil
₹ 3,00,001 – ₹ 5,00,000 @ 5% 10,000
₹ 5,00,001 – ₹ 7,50,000 @ 20% 50,000
60,000
Add: Health and education cess @ 4% 2,400
62,400
Less: Advance tax Tax payable 10,000
52,400
Add: Interest under section 234A [Interest u/s 234A would not be attracted, since -
Ms. Priya has furnished her return of income on 15-06-2025 which is before the due
date of filing return of income]
Add: Interest under section 234B would be levied on ₹ 52,400 at 1% for 3 months 1,572
i.e., From April to June. The interest under section 234B amount to ₹ 1,572
Add: Interest under section 234C 2,747

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Date of Specified Amount due and unpaid Period Interest

Instalment %of (rounded off to nearest @ 1%
estimated ₹ 100, ignoring fraction)
15th June 2024 15% 9,300 [15% of ₹ 62,400] 3 months 279
15th September 45% 28,000 [45% of ₹ 3 months 840
2024 75% 62,400] 3 months 1,104
15th December 36,800 [(75% of ₹
2024 100% 62,400) – ₹ 10,000] 1 month 524
15th March 2025 52,400
2,747
Self assessment tax payable and interest thereon 56,719
Self assessment tax payable and interest thereon (rounded off) 56,720
Illustration 37
TDS on Rent: Mr. A owns a building situated at New Delhi which is given on monthly rent of
75,000. to Mr. B w.e.f. 01-06-2024. Rent is paid by Mr. B on first day of every month. Discuss
whether TDS provisions are applicable for the financial year 2024-25 in the following cases
Case 1: Mr. B is carrying on business having annual turnover of business amounting ₹ 2.5 crores
in preceding financial year. However, building is used by him for his residential purposes.
Case 2: Mr. B is carrying on business having annual turnover of business amounting 0.5 crores in
preceding financial year.
Case 3: Mr. B is a salaried employee. He gets house rent allowance from the employer. On the
basis of rent paid to Mr. A, he claims exemption under section 10(13A) pertaining to house rent
allowance.
Solution: The TDS provisions in three independent cases are discussed as under:
Case 1: In this case since the turnover of Mr. B exceed 1 crore, he is liable to deduct tax at
source under Section 194-1 @ 10%. Hence, the amount of tax to be deducted at source = 75,000
x 10 x 10% = 75,000.
Case 2: In this case since the turnover of Mr. B does not exceed 1 crore, he is not liable to deduct
tax at source under Section 194-I. However, Mr. B is required to deduct tax at source under
section 194-IB. Tax is deductible at the time of payment/ credit of rent for the last month during
the financial year 2023-24. The amount of tax deductible on 1 March, 2025 is as under:75,000 ×
10 × 2% = ₹ 15,000
Case 3: The answer will remain same as of case 2.
Illustration 38
Computation of Total income, tax liability and advance tax:
Balamurugan furnishes the following information for the year ended 31-03-2025 (all amounts in ₹):
Particulars ₹
Income from business (1,35,000)
Income from house property (15,000)
Lottery winning (Gross) 3,00,000
Speculation business income 1,00,000
Income by way of salary (Computed) 2,60,000
Long term capital gain 70,000
Compute his total income, tax liability and advance tax obligations. (6 Marks, PCC May 2011)
Solution: Computation of Total income of Balamurugan for the year ended 31-3-2025 (amounts in ₹)
Particulars ₹ ₹
Income from salaries (Computed) 2,60,000
Income from house property: Loss from house property 15,000
Less: Set-off against LTCG [WN-1] 15,000 Nil

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Business Income: Loss from normal business 1,35,000

Less: Income from speculation business 1,00,000
Less: Set off against long-term capital gains [WN-2] 35,000 Nil
Capital gains: Long-term capital gains 70,000
Less: Business loss set-off 35,000
Less: House property loss set-off 15,000 20,000
Income from other sources: Lottery Winnings[WN-3] 3,00,000
Total Income (rounded off) 5,80,000
Computation of tax liability (amounts in ₹)
Particulars ₹
On LTCG of 20,000 @ 20% 4,000
On other Income of 2,60,000 500
On lottery winnings of 3,00,000 @ 30% 90,000
Total Tax 94,500
Add: HEC@4% 3,780
Total tax liability 98,280
Less: TDS ₹ 3,00,000 @ 30% 90,000
Tax payable (rounded off) 8,280
Applicability of Advance Tax: The assessee need not pay advance tax since his tax liability is less than
10,000.
Working Notes:
(1) Long term capital gains are chargeable to tax @ 20% and Chapter VIA deduction are not available
from such gains, hence loss from house property is set off against long term capital gains.
(2) Business loss cannot be set-off against salary income.
(3) No set off is allowed against lottery income. Further, no benefit of basic exemption limit is allowed
from lottery winnings and chargeable to tax@ 30%.
Illustration 39
Computation advance tax installments:
Mr. Barun provides you the following information and requests you to determine the Advance Tax liability
with due dates for the financial year 2024-25.
Estimated tax liability for the financial year 2024-25 = ₹ 65,000
Tax deducted at source for this year = ₹ 5,000
Solution: The assessee has to deposit advance tax of 60,000 i.e. 65,000-5,000.
Instalment Total tax Amount payable Cumulative Net Instalment
date Due ₹ Instalments (₹) Payable (₹)
15-06-2024 60,000 15% of advance tax 9,000 9,000
15-09-2024 60,000 45% of advance tax Less 27,000 18,000
advance tax paid in earlier
installment
15-12-2024 60,000 75% of advance tax Less 45,000 18,000
advance tax paid in earlier
installments
15-03-2024 60,000 100% of advance tax Less 60,000 15,000
advance tax paid in earlier
installments
Illustration 40
Computation of Total income, tax liability and advance tax: Mr. Subramany is engaged in the business of
producing and selling toys. During the previous year 2024-25 his turnover was 1.80 crores (received in cash).
He opted for paying tax as per presumptive taxation scheme laid down in Section 44AD. He has no other
income during the previous year. Is he liable to pay advance tax and if so, what is the minimum amount of
advance tax to be paid and the due date for payment of such advance tax? He has not exercised the option
of shifting out of the default tax regime provided under section 115BAC(1A) (3 Marks, Nov. 2017)

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 CA VARDHAMAN DAGA

Solution: An assessee who declares profits and gains in accordance with the provisions of Section 44AD(1)
shall be liable to pay advance tax. Hence, Mr. Subramanyam will be liable to pay advance tax to the extent
of the whole amount of such advance tax during on or before the 15th March of that financial year.
The tax liability of Mr. Subramanyam and amount of advance tax to be deposited is as under:
Profit & gains of business or profession as per provisions of Sec. 44AD [8% of
1,80,00,000]/ Total income 14,40,000
Tax on total income 1,68,000
Add: HEC@ 4% 6,720
Total tax (including HEC) (Rounded off) i.e. the minimum amount of Advance tax to 1,74,720
be deposited by 15th March, 2023 [Being due date of payment of such advance tax]

Illustration 41
Interest payable u/s 234B: Mr. Sachal, a resident individual aged 54, furnishes income details
as under
(i) Wholesale Cloth business, whose turnover is 150 lakhs, for which accounts are audited u/s
44AB. Income from such business 8,10,000.
(ii) Income from other sources 2,70,000.
(iii) Tax deducted at source 25,000.
(iv) Advance tax paid 1,04,000 on 14-3-2025.
Return of income will be filed on 11-12-2025. The assessee is willing to pay the requisite self-
assessment tax. Calculate the interest payable under section 234B of the Income-tax Act, 1961.
Assume that the return of income would be processed on the same day of filing of return. (4
Marks, May 2017)
Solution: An assessee shall be liable to pay interest u/s 234B(1) where the advance tax paid by
the assessee is less than 90% of the assessed tax. Assessed tax means tax on assessed income -
TDS.
The tax liability shall be computed as under (amount in ₹)
Particulars ₹
Total Income 10,80,000
Tax on total income 1,36,500
Add: HEC@4% 5,460
Tax payable 1,41,960
Less: Tax deducted at source 25,000
Assessed tax 1,16,960
90% of assessed tax 1,05,264
Advance tax deposited 1,04,000
Since advance tax deposited falls short off 90% of assessed tax, assessee shall
be liable to pay interest under Section 234B
Amount on which interest payable = Assessed tax - Advance tax paid 12,960
Period for which interest is to be paid = 01-04-2024 to 11-12-2024 (Number of 9
months)
Rate of interest (per month or part thereof) 1%
Interest payable under Section 234B 1,166
ILLUSTRATION 42
TDS in various cases : Explain in the context of provisions contained in Chapter XVII of the Act
and also work out the amount of tax to be deducted by the payer of income in the following cases
:
(i) Payment of ₹ 5 lacs made by JCP & Co. to Pingu Events Co. Ltd. for organization of a debate
competition on the subject “Preservation of Rural Heritage of Rajasthan”.

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(ii) “Profit Commission” paid by a re-insurance company of ₹ 1 lac to the insurer company after
the expiry of the term of insurance where there was no claim during the treaty.
(iii) KD, a part time director of DAF Pvt. Ltd. was paid an amount of ₹ 2,25,000 as fees which
was actually in the nature of commission on sales for the period 01-04-2024 to 30-06-2024.
SOLUTION
As per the relevant provisions contained in Chapter XVII of the Act, tax to be deducted by the
payer of income in the above stated cases are as under –
(i) Payment of ₹ 5 lacs made by JCP & Co. to Pingu Events Co. Ltd. for organization of a debate
competition on the subject “Preservation of Rural Heritage of Rajasthan” shall be liable for
tax deduction under Section 194C of the Income-tax Act, 1961. The same will not be
covered in Section 194-J. As per Explanation to section 194-J, professional services
includes, inter alia, services rendered by a person in the course of carrying on such other
profession as is notified by the CBDT for the purpose of section 194-J.
Accordingly, the CBDT has, in exercise of the powers conferred by Explanation to section
194-J, notified the services rendered by, event managers in relation to the sports activities
as professional services for the purpose of section 194-J. Since debate competition is not
a sports event the service provided by event managers will not be covered under Section
194-J but will be covered under Section 194C and liable for tax deduction under that
section. Thus, amount of tax to be deducted at source = ₹ 5,00,000 × 2% = ₹ 10,000.
(ii) “Profit Commission” paid by a re-insurance company of ₹ 1 lac to the insurer company after
the expiry of the term of insurance where there was no claim during the treaty will not be
liable for tax deduction at source, since the same does not fall within category of
remuneration or reward for soliciting or procuring insurance business under section 194D
of the Act. Thus, amount of tax to be deducted at source shall be NIL.
(iii) According to Section 194-J of the Act, any remuneration or fees or commission by whatever
name called, other than those on which tax is deductible under section 192, to a director of
a company shall be liable for tax deduction at source @ 10%. Hence, on ₹ 2,25,000 the
company will be liable for tax deduction at source @ 10% i.e. ₹ 22,500.

ILLUSTRATION 43
Advance tax on assessee’s own accord : Mr. Ramesh, 42 years of age resident in India, had the
following particulars during the financial year 2024-25. Compute the advance tax payable by him
and the instalments thereof –
Amount (₹)
Rent per month [TDS @ 10%] 80,000
Income from sale of block rubbers manufactured from rubber plants grown in 5,00,000
India
Brought forward loss of last year of the discontinued business 15,000
Winning from crossword puzzles (Gross) [TDS @ 30%] 44,000
Bank interest [Fixed deposit interest ₹ 50,000 (Gross) + Saving bank interest ₹ 60,000
10,000] [TDS @ 10%]
Dividend from Indian company (Gross) [TDS @ 10%] 1,00,000

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Assume that all incomes given above are in gross amounts, on which relevant tax deductible at
source has been deducted and assessee has shifted out of default tax regime and opted for
normal provisions of the Act.
SOLUTION Computation of Total income of Mr. Ramesh —
Particulars ₹
Income from house property [WN-1] 6,72,000
Income from business [₹ 1,75,000 – ₹ 15,000] [WN-2] 1,60,000
Income from other sources [₹ 44,000 + ₹ 50,000 + ₹ 10,000 + ₹ 1,00,000][WN- 2,04,000
3]
Gross Total Income 10,36,000
Less: Deduction u/s 80TTA (subject to maximum of ₹ 10,000) 10,000
Total Income 10,26,000
Working Notes :
(1) Income from house property = Annual Rent less standard deduction @ 30% = (₹ 80,000 × 12)
– 30% = ₹ 6,72,000.
(2) Out of total income from sale of block rubbers : Business income = 35% of ₹ 5,00,000 = ₹
1,75,000; and agricultural income = 65% of ₹ 5,00,000 = ₹ 3,25,000. Brought forward loss of
business discontinued shall be allowed as set-off from business income.
(3) Dividend from Indian company is taxable.
Computation of advance tax payable :
Particulars ₹ ₹
Total income including agricultural income (₹ 10,26,000 + ₹ 3,25,000) 13,51,000
Tax thereon : On winnings from crossword puzzles (₹ 44,000 @ 13,200
30%)
On balance income (₹ 13,51,000 – ₹ 44,000) 2,04,600 2,17,800
Less: Tax on basic exemption limit + agricultural income (₹ 2,50,000 27,500
+ ₹ 3,25,000)
Balance Tax 1,90,300
Add: HEC @ 4% 7,612
Gross tax liability 1,97,912
Less: Tax deducted at source on –
Rent @ 10% (₹ 9,60,000 × 10%) u/s 194-I 96,000
Winnings from crossword puzzles @ 30% (₹ 44,000 × 30%) u/s 194B 13,200
Dividend from Indian company @ 10% (₹ 1,00,000 × 10%) u/s 194 10,000
Bank interest @ 10% (₹ 50,000 × 10%) u/s 194A 5,000 1,24,200
Amount payable as advance tax (rounded off) 73,710
Computation of amount of instalments (amount in ₹) :
Instalment Date Amount payable Instalment Cumulative
instalments
On or before 15-06-2024 15% of advance tax 11,056.50 11,056.50
On or before 15-09-2024 45% of advance tax less Advance tax 22,113.00 33,169.50
paid in earlier installment
On or before 15-12-2024 75% of advance tax less Advance tax 22,113.00 55,282.50
paid in earlier installments
On or before 15-03-2025 100% of advance tax less Advance 18,427.50 73,710.00
tax paid in earlier installments

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ILLUSTRATION 44
Interest u/s 234C : Mr. X has opted for provisions of Section 44AD for financial year 2024-25.
His turnover for financial year 2024-25 was ₹ 1,80,00,000 (cash sales) and Tax deducted at
source amounted to ₹ 5,535. He has not paid advance tax during financial year 2024-25. Calculate
interest payable under section 234C for assessment year 2025-26 if he has opted out of default
tax regime.
SOLUTION The tax liability of Mr. X for assessment year 2025-26 is as under –
Particulars ₹
Profit & gains of business or profession as per provisions of section 44AD [8% of 14,40,000
₹ 1,80,00,000]/Total income
Tax on total income 2,44,500
Add: HEC @ 4% 9,780
Total tax (including HEC) 2,54,280
Less: TDS 5,535
th
Advance tax to be deposited by 15 March, 2025 2,48,745
Since, Mr. X has not deposited advance tax by 15th March 2025 he will be liable to pay interest
as under –
Computation of interest under section 234C (amount in ₹) :
Date of Total Advance Amount Amount Shortfall Rate Month Interest
instalment tax due tax due payable paid
15th March 2,48,745 100% 2,48,745 Nil 2,48,745 1% 1 2,487
2025
Total interest under section 234C 2,487
ILLUSTRATION 45
TDS & TCS : Examine the applicability of Tax Deduction at Sources (TDS) or Tax Collection at
Source (TCS) as per the Income-tax Act, 1961 for the assessment year 2025-26 in the following
independent situations.
(i) ABC Limited paid rent of ₹ 75,000 + 18% GST per month of Mr. Ram for the office premises
from 01-04-2024 to 31-03-2025. Mr. Ram has furnished his PAN and also filed his return of
income before due date regularly.
(ii) XYZ Pvt. Ltd. sells two cars to Mrs. Anju costing ₹ 4,00,000 and ₹ 12,00,000 respectively on
01-05-2024 and 25-12-2024. Mrs. Anju has furnished her PAN and filed her return of income
regularly before the due date. (4 Marks, May 2024)
SOLUTION
(i) ABC Limited is required to deduct tax at source under section 194-I @ 10% on rent of ₹
75,000 per month exclusive of GST component, since the aggregate rent of ₹ 9,00,000 during
the financial year exceeds the threshold limit of ₹ 2,40,000.
Tax has to be deducted at the time of payment or credit, whichever is earlier.
(ii) XYZ Pvt. Ltd. is not required to collect tax at source on sale of car of ₹ 4,00,000 to Mrs.
Anju since its value does not exceed ₹ 10 lakhs.
However, it is required to collect tax at source u/s 206C(1F) @1% on the total sale
consideration of ₹ 12 lakhs since the value of this car exceeds ₹ 10 lakhs.
Tax has to be collected at the time of receipt of ₹ 12 lakhs.

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CHAPTER – 12: PROVISION FOR FILING OF RETURN

STUDY MATERIAL

ILLUSTRATION 1
Paras aged 55 years is a resident of India. During the F.Y. 2024-25, interest of ₹ 2,88,000 was
credited to his Non-resident (External) Account with SBI. ₹ 30,000, being interest on fixed
deposit with SBI, was credited to his saving bank account during this period. He also earned ₹
3,000 as interest on this saving account. Is Paras required to file return of income?
What will be your answer, if he has incurred ₹ 3 lakhs as travel expenditure of self and spouse to
US to stay with his married daughter for some time?
SOLUTION
An individual is required to furnish a return of income under section 139(1) if his total income,
before giving effect to the deductions under Chapter VI-A or exemption under section or section
54/54B/54D/54EC or 54F, exceeds the maximum amount not chargeable to tax i.e. ₹ 3,00,000
under default tax regime u/s 115BAC and ₹ 2,50,000 if exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A) (for A.Y. 2025-26).
Computation of total income of Mr. Paras for A.Y. 2025-26
Particulars ₹
Income from other sources
Interest earned from Non-resident (External) Account ₹ 2,88,000 [Exempt under NIL
section 10(4)(ii), assuming that Mr. Paras has been permitted by RBI to maintain
the aforesaid account]
Interest on fixed deposit with SBI 30,000
Interest on savings bank account 3,000
Gross Total Income 33,000
Less: Deduction under Chapter VI-A (not available under the default tax regime
under section 115BAC)
Total Income 33,000
In case he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A), he would be eligible for deduction of ₹ 3,000 under section 80TTA. Accordingly, his
total income would be ₹ 30,000. However, in both regimes, total income of ₹ 33,000, before giving
effect to deductions under Chapter VI-A, would be considered.
Since the total income of Mr. Paras for A.Y.2025-26, before giving effect to the deductions
under Chapter VI-A, is less than the basic exemption limit in both regimes, he is not required to
file return of income for A.Y.2025-26.
Note: In the above solution, interest of ₹ 2,88,000 earned from Non-resident (External)
account has been taken as exempt on the assumption that Mr. Paras, a resident, has been
permitted by RBI to maintain the aforesaid account. However, in case he has not been so
permitted, the said interest would be taxable. In such a case, his total income, before giving
effect to, inter alia, the deductions under Chapter VI-A, would be ` 3,21,000 (₹ 30,000 + ₹
2,88,000 + ₹ 3,000), which is higher than the basic exemption limit of ₹ 3,00,000 or ₹ 2,50,000,
as the case may be. Consequently, he would be required to file return of income for A.Y.2025-
26.
If he has incurred expenditure of ₹ 3 lakhs on foreign travel of self and spouse, he has to
mandatorily file his return of income on or before the due date under section 139(1), even if his
income is less than the basic exemption limit.

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ILLUSTRATION 2
Explain with brief reasons whether the return of income can be revised under section 139(5) of
the Income-tax Act, 1961 in the following cases:
(i) Belated return filed under section 139(4).
(ii) Return already revised once under section 139(5).
(iii) Return of loss filed under section 139(3).
SOLUTION
Any person who has furnished a return under section 139(1) or 139(4) can file a revised return at
any time before three months prior to the end of the relevant assessment year or before the
completion of assessment, whichever is earlier, if he discovers any omission or any wrong
statement in the return filed earlier.
Accordingly,
(i) A belated return filed under section 139(4) can be revised.
(ii) A return revised earlier can be revised again as the first revised return replaces the original
return. Therefore, if the assessee discovers any omission or wrong statement in such a
revised return, he can furnish a second revised return within the prescribed time i.e. at any
time before three months prior to the end of the relevant assessment year or before the
completion of assessment, whichever is earlier. It implies that a return of income can be
revised more than once within the prescribed time.
(iii) A return of loss filed under section 139(3) is deemed to be return filed under section 139(1),
and therefore, can be revised under section 139(5).
ILLUSTRATION 3
Mrs. Hetal, an individual engaged in the business of Beauty Parlour, has got her books of account
for the financial year ended on 31st March, 2025 audited under section 44AB. Her total income
for the A.Y. 2025-26 is ₹ 6,35,000. She wants to furnish her return of income for A.Y. 2025-26
through a tax return preparer. Can she do so?
SOLUTION
Section 139B provides a scheme for submission of return of income for any assessment year
through a Tax Return Preparer. However, it is not applicable to persons whose books of account
are required to be audited under section 44AB. Therefore, Mrs. Hetal cannot furnish her return
of income for A.Y.2025-26 through a Tax Return Preparer.

TEST YOUR KNOWLEDGE

Que-4.
State with reasons whether you agree or disagree with the following statements:
(a) Return of income of Limited Liability Partnership (LLP) could be verified by any partner.
(b) Time limit for filing return under section 139(1) in the case of Mr. A
having total turnover of ₹ 160 lakhs (₹ 100 lakhs received in cash) for the year ended 31.03.2025
whether or not declaring presumptive income under section 44AD, is 31st October, 2025.
Ans-(a) Disagree
(b) Disagree

Que-5.
Mr. Vineet exercised the option of shifting out of the default tax regime provided under section
115BAC(1A) and submits his return of income under the optional tax regime (i.e., the normal
provisions of the Act) on 12-09-2025 for A.Y 2025-26 consisting of income under the head
“Salaries”, “Income from house property” and bank interest. On 21-12-2025, he realized that he
had not claimed deduction under section 80TTA in respect of his interest income on the Savings
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 CA VARDHAMAN DAGA

Bank Account. He wants to revise his return of income. Can he do so? Examine. Would your answer
be different if he discovered this omission on 21-03-26?

Ans- Since Mr. Vineet has income only under the heads “Salaries”, “Income from house property”
and “Income from other sources”, he does not fall under the category of a person whose accounts
are required to be audited under the Income-tax Act, 1961 or any other law in force. Therefore,
the due date of filing return for A.Y.2025-26 under section 139(1), in his case, is 31st July, 2025.
Since Mr. Vineet had submitted his return only on 12.9.2025, the said return is a belated return
under section 139(4).
As per section 139(5), a return furnished under section 139(1) or a belated return u/s 139(4) can
be revised. Thus, a belated return under section 139(4) can also be revised. Therefore, Mr. Vineet
can revise the return of income filed by him under section 139(4) in December 2024, to claim
deduction under section 80TTA, since the time limit for filing a revised return is three months
prior to the end of the relevant assessment year, which is 31.12.2025. However, he cannot revise
return had he discovered this omission only on 21-03-2026, since it is beyond 31.12.2025.
Que-6. Examine with reasons, whether the following statements are true or false, with regard to
the provisions of the Income-tax Act, 1961:
(i) The Assessing Officer has the power, inter alia, to allot PAN to any person by whom no tax is
payable.
(ii) Where the Karta of a HUF is absent from India, the return of income can be verified by any
male member of the family.
Ans- (i) True:
(ii) False:
Que- 7. Explain the term “return of loss” under the Income-tax Act, 1961. Can any loss be carried
forward even if return of loss has not been filed as required?
Ans- Discussed in class

Que-8. Mr. Aakash has undertaken certain transactions during the F.Y.2023-24, which
are listed below. You are required to identify the transactions in respect of which quoting
of PAN is mandatory in the related documents –
S. No. Transaction
1. Payment of life insurance premium of ₹ 45,000 in the F.Y.2023-24 by
account payee cheque to LIC for insuring life of self and spouse
2. Payment of ₹ 1,00,000 to a five-star hotel for stay for 5 days with family,
out of which ₹ 60,000 was paid in cash
3. Payment of ₹ 80,000 by ECS through bank account for acquiring the
debentures of A Ltd., an Indian company
4. Payment of ₹ 95,000 by account payee cheque to Thomas Cook Thomas Cook
for travel to Dubai for 3 days to visit relatives
5. Applied to SBI for issue of credit card.
Ans-
Transaction Is quoting of PAN mandatory in
related documents?
1. Payment of life insurance premium of ₹ No
45,000 in the F.Y.2023-24 by account

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payee cheque to LIC for insuring life of

self and spouse
2. Payment of ₹ 1,00,000 to a five-star Yes
hotel for stay for 5 days with family,
out of which ₹ 60,000 was paid in cash
3. Payment of ₹ 80,000, by ECS through Yes
bank account, for acquiring the
debentures of A Ltd., an Indian company
4. Payment of ₹ 95,000 by account payee No
cheque to Thomas Cook for travel to
Dubai for 3 days to visit relatives
5. Applied to SBI for issue of credit card. Yes

PAST EXAM QUESTIONS

Illustration 9
Provisions relating to filing of return of income: In the following cases relating to P.Y. 2024-
25, the total income of the assessee or the total income of any other person in respect of which
he/she is assessable under Income Tax Act does not exceed the basic exemption limit. You are
required to sate with reasons, whether the assessee is still required to file the return of income
or loss for A.Y. 2025-26 in each of the following independent situations:
(1) Manish & Sons (HUF) sold a residential house on which there arose a long term capital gain of
12 lakhs which was invested in Capital Gain Bonds u/s 54EC so that no long term capital gain was
taxable. (1½ Marks, July 2021)
Solution: A HUF whose total income without giving effect to, inter alia, section 54EC, exceeds
the basic exemption limit of 2,50,000, is required to file a return of its income on or before the
due date u/s 139(1). In this case, since the total income without giving effect to exemption u/s
54EC is 12 lakhs, exceeds the basic exemption limit, the HUF is required to file its return of
income for A.Y. 2025-26 on or before the due date u/s 139(1).
(2) Mrs. Archana was born in Germany and married in India. Her residential status u/s 6(6) of the
Income-tax Act, 1961 is 'resident and ordinarily resident'. She owns a car in Germany which she
uses for her personal purposes during her visit to her parents' place in that country. (1.5 Marks,
July 2021)
Solution Every person, being a resident other than not ordinarily resident in India would be
required to file a return of income or loss for the previous year on or before the due date, even
if his or her total income does not exceed the basic exemption limit, if such person, at any time
during the previous year, inter alia, holds any asset located outside India. In this case, though
Mrs. Archana owns a car in Germany, the same does not fall within the ambit. of "capital asset"
as it is a personal effect. Hence, Mrs. Archana is not required to file her return of income for
A.Y. 2025-26 on account of owning a car for personal purposes in Germany
Note: "Asset" for the purpose of the fourth proviso to section 139(1) has not been specifically
defined in the said section or elsewhere in the Act. Schedule FA of the income-tax return forms,
however, requires details of foreign assets for the purpose of filing of return of income under
this provision. The foreign assets listed in the said Schedule does not include car. It, however,
includes "any other capital assets outside India". Car used for personal purposes is not a capital
asset as it is a "personal effect". Hence, it is not included in the meaning of "asset" for the
purpose of the fourth proviso to section 139(1). The above answer is based on the view taken
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regarding the ambit of the term "asset", based on the list of assets detailed in the relevant
schedule of the income-tax return forms.
Alternative view- On the plain reading of the fourth proviso to section 139(1) and the general
meaning attributable to the word "asset", it is possible to take a view that Mrs. Archana is
required to file her return of income as she owns an asset, i.e., a car in Germany. Accordingly, due
credit may also be given to the candidates who have answered on this basis.
(3) Sudhakar has incurred an expenditure of 1,20,000 towards consumption of electricity, the
entire payment of which was made through banking channels. (1 Marks, July 2021)
Solution If an individual has incurred expenditure exceeding 1 lakh towards consumption of
electricity during the previous year, he would be required to file a return of income, even if his
total income does not exceed the basic exemption limit. Since Mr. Sudhakar has incurred
expenditure of 1,20,000 in the P.Y. 2024-25 towards consumption of electricity, he has to file his
return of income for A.Y. 2025-26 on or before the due date under section 139(1).
Illustration 10
Revised Return: Mr. Vineet submits his return of income on 12-09-2025 for AY 2025-26
consisting of income under the head house property and other sources. On 21-12-2025, he realized
that he had not claimed deduction under section 80 TTA in respect of his interest income on the
Savings Bank Account. He wants to revise his return of income, since the assessment year has not
elapsed. Discuss. Would your answer be different if he discovered this omission on 21-01-2026?
(2 Marks, May 2014)
Solution: If any person, having furnished a return under section 139(4) discovers any omission or
any wrong statement therein, then, he may furnish a revised return at any time,
• before 3 months prior to the end of the relevant assessment year; or
• Before the completion of the assessment,
whichever is earlier.
A belated return filed under section 139(4) can be revised. Since Mr. Vineet has filed the return
under section 139(4), such return can be revised under Section 139(5) upto 31-12-2025. However,
he cannot revise return had he discovered this omission only on 21-01-2026, since it is beyond 31-
12-2025, being the last date for furnishing the revised return.
Illustration 11
PAN: State whether quoting of PAN in the following transactions is mandatory or not, as per the
provisions of Income-tax Act, 1961 for A.Y. 2025-26:
(i) Mr. A makes cash payment to a hotel Radisson Blu, Ahmedabad of 50,000 against the bill
raised by the hotel.
(ii) Mr. Abhishek, in a single transactions, makes contract of ₹ 1,20,000 for sale/purchase of
securities (other than shares) as defined in Section 2(h) of the Securities Contracts
(Regulation) Act, 1956.
(i) (iii) Payment to Mutual Funds of 70,000 for purchase of its units. Your answers must be
supported with reasons. (3 Marks, May 2018-NS)
Solution
(i) No, since payment in cash of an amount exceeding 50,000 requires quoting of PAN.
(ii) Yes, since quoting of PAN is necessary for an amount exceeding 1 lakh per transaction.
(iii) Yes, since quoting of PAN is necessary for an amount exceeding 50,000 per transaction.
ILLUSTRATION 12
Mr. A employed with B Pvt. Ltd. residing in Chennai, filed his return of Income on 30 th July.

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He has no other income other than salary. He however has failed to link his Aadhar with PAN as
on return filing date.
(i) What is the consequence for him if he has linked the Aadhar with PAN?
(ii) Are there any exceptions provided under section 139AA from quoting of Aadhar number? (4
Marks, Nov. 2022)
SOLUTION
Since, Mr. A fails to link his Aadhar number with PAN, consequently, at the time of linking his
Aadhaar number with PAN, he would be liable to pay fee of ₹ 1,000 as per section 234H. Yes, the
following are the exceptions –
An individual who does not possess the Aadhar number or Enrolment ID and is:
(i) residing in Assam, Jammu & Kashmir and Meghalaya;
(ii) a non-resident as per Income-tax Act, 1961;
(iii) of the age of 80 years or more at any time during the previous year;
(iv) not a citizen of India.
ILLUSTRATION 13
Updated return: What is the time limit within which an updated return can be filed? Also
enumerate the circumstances in which updated return cannot be furnished. (4 Marks, May 2023)
SOLUTION
Any person may furnish an updated return of his income or the income of any other person in
respect of which he is assessable, for the previous year relevant to the assessment year at any
time within 24 months from the end of the relevant assessment year.
Circumstances in which updated return cannot be furnished :
No updated return can be furnished by any person for the relevant assessment year, where
(a) an updated return has been furnished by him for the relevant assessment year
(b) any proceeding for assessment or reassessment or recomputation or revision of income is
pending or has been completed for the relevant assessment year in his case;
(c) he is such person or belongs to such class of persons, as may be notified by the CBDT.
(d) an updated return is a loss return
(e) the updated return has the effect of decreasing the total tax liability determined on the
basis of return furnished under section 139(1)/(4)/(5) / original or revised return
(f) the updated return results in refund or increases the refund due on the basis of return
furnished under section 139(1)/(4)/(5)/original or revised return.
ILLUSTRATION 14
A person other than a company or a firm who is otherwise not required to furnish the return of
income, needs to furnish return of income provided they fulfil certain conditions prescribed.
Enumerate. (4 Marks, May 2023)
SOLUTION
A person, other than a company or a firm, who is not required to furnish a return under section
139(1), has to furnish their return of income on or before the due date if they fulfill any of the
following conditions –
(i) if his total sales, turnover or gross receipts, as the case may be, in the business > ₹ 60 lakhs
during the previous year; or
(ii) if his total gross receipts in profession > ₹ 10 lakhs during the previous year; or
(iii) if the aggregate of TDS and TCS during the previous year, in the case of the person, is ₹
25,000 or more; or

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However, a resident individual who is of the age of 60 years or more, at any time during the
relevant previous year would be required to file return of income only, if the aggregate of TDS
and TCS during the previous year, in his case, is ₹ 50,000 or more.
(iv) the deposit in one or more savings bank account of the person, in aggregate, is ₹ 50 lakhs
or more during the previous year.
Illustration 15
Belated return and revised return: Mr. Sachin filed return on 30th September, 2025 related to
Assessment Year 2025-26. In the month of October 2024, his tax consultant found that the
interest on fixed deposit was omitted in the tax return.
(i) What is the time limit for filing a belated return?
(ii) Can Mr. Sachin file a revised return?
Justify the above with the relevant provisions under section 139. Assume that the due date for
furnishing return of income was 31 July, 2025 and the assessment was not completed till the
month of October 2024. (5 Marks, Nov. 2017)
Solution
(i) Belated return [Section 139(4)]:Any person who has not furnished a return within the time
allowed to him under Section 139(1), may furnish the return for any previous year at any time
before 3 months prior to the end of the relevant assessment year; or
before the completion of the assessment,
whichever is earlier.
Hence, for A.Y. 2025-26, belated return can be furnished upto 31-12-2025.
(ii) Yes, Mr. Sachin can revise the return. As per Section 139(5), if any person, having furnished
a return u/s 139(1) or 139(4), discovers any omission or any wrong statement therein, he may
furnish a revised return at any time
before 3 months prior to the end of the relevant assessment year;, or
before the completion of the assessment,
whichever is earlier.
Hence, belated return filed u/s 139(4) by Mr. Sachin can be revised u/s 139(5) upto 31-12-
2025.
Illustration 16
Revised Return and its consequences: Mr. Mukesh born on 1-4-1963 furnished his original return
for Assessment Year 2025-26 on 30-07-2024. He has shown salary income of 7.30 lakhs
(computed) and interest from his savings bank of 12,700 and from his fixed deposits of 43,000.
He also claimed deduction under section 80C of ₹ 1.50 lakhs. He had claimed deduction u/s 80D
of 25,000. He also claimed deduction u/s 80TTA of 10,000. His employer had deducted TDS of
33,950 from his salary, which he adjusted fully against tax payable.
He paid health insurance premium of 38,000 by account payee cheque for self and wife. He paid
1,500 in cash for his health check-up and 4,000 by cheque for preventive health check-up of his
parents. He also paid medical insurance premium of 33,000 during the year to insure the health
of his mother, aged 80 years, staying with his younger brother. He further incurred medical
expenditure of 25,000 on his father, aged 81 years, who is staying with him. His father is not
covered under any mediclaim policy.
He seeks your advice about possibility of revising his return and if possible file his revised return.
Analyse the above narrated facts as per applicable provisions of the Income-tax Act, 1961. Does
he need to revise his return and for what reasons? Please advise him suitably and if needed, re-
compute his income and tax payable or refund due for the Assessment Year 2024-25. (9 Marks,
Nov. 2020)
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Solution: Computation of total income of Mr. Mukesh for A.Y. 2025-26 [As per the original return
filed by him
Particulars ₹ ₹
Salaries (Computed) 7,30,000
Income from Other Sources:
• Interest on savings bank account 12,700
• Interest on fixed deposits 43,000 55,700
7,85,700
Less: Deductions under Chapter VI-A
(i) Deduction u/s 80C 1,50,000
(ii) Deduction u/s 80D 25,000
(iii) Deduction u/s 80TTA 10,000 1,85,000
Total Income 6,00,700
Computation of tax liability of Mr. Mukesh for A.Y. 2025-26 (As per original return)
Tax on total income [20% of 1,00,700 (i.e., 6,00,700-5,00,000) + 12,500] 32,640
Add:HEC@4% 1,306
Tax payable on total income 33,946
Tax payable on total income (rounded off) 33,950
Less: Tax deducted at source u/s 192 33,950
Tax Payable Nil
Need for filing revised return - Analysis:
Since Mr. Mukesh's birthday falls on 1-4-2025, he would be treated as having completed 60 years
of age in the P.Y. 2024-25, and hence, he would be eligible for the benefit of higher deduction
u/s 80D, higher deduction of up-to 50,000 u/s 80TTB (instead of 10,000 u/s 80TTA) while
computing his total income as well as for higher basic exemption limit of 3,00,000 in the P.Y.
2024-25 itself while computing his tax liability. Also, he would be entitled to deduction in respect
of medical insurance premium paid to insure the health of his mother and medical expenses
incurred on his father who is not covered under any Mediclaim policy. Accordingly, having
discovered such omissions in the original return, he has to file his revised return of income u/s
139(5) on or before 31-12-2025 to avail these benefits which he has not availed while filing his
original return of income. The computation of total income and tax liability (refund due) as per
the revised return are worked out hereunder
Computation of Total Income of Mr. Mukesh for the A.Y. 2025-26 [As per the Revised Return]
Particulars ₹ ₹
i) Salaries (Computed) 7,30,000
ii) Income from Other Sources
Interest on savings bank account 12,700
Interest on fixed deposits 43,000 55,700
Gross Total Income 7,85,700
Less: Deductions under Chapter VI-A
(i) Deduction u/s 80C 1,50,000
(ii) Deduction u/s 80D
Medical insurance premium for self and spouse 38,000
Preventive health check-up for self 1,500
(allowable even if paid in cash)
Fully allowed as it is within the overall limit of

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₹50,000 for family 39,500

Medical insurance premium for mother 33,000
Medical expenditure for father not covered
under any policy 25,000
Preventive health check-up for parents
(4,000, restricted to 3,500, being 5,000
-1,500 claimed for self and spouse) 3,500
61,500
Restricted to maximum of 50,000 for parents 50,000 89,500
iii) Deduction u/s 80TTB
Interest on savings bank account 12,700
Interest on fixed deposits 43,000
55,700
Restricted to maximum of 50,000 50,000 2,89,500
Total Income 4,96,200
Computation of tax liability of Mr. Mukesh for A.Y. 2025-26 [As per the Revised Return]
Tax on total income [5% of 1,96,200 (ie., 4,96,200-3,00,000 basic exemption limit)] 9,810
Less: Rebate u/s 87A (Since his total income does not exceed 5 lakh) - 12,500 or 9,810
tax on total income whichever is lower
Tax payable on total income Nil
Less: Tax deducted at source u/s 192 33,950
Refund due 33,950
Therefore, Mr. Mukesh has to file a revised return showing the above revised computation of
total income and tax liability on or before 31-12-2025 to claim the enhanced deductions which he
had not claimed in the original return and get refund of the entire income-tax of 33,950 deducted
at source by his employer.
Mr. Kailash, a resident and ordinarily resident in India, could not file his return of Income for the
A.Y. 2025-26 before due date prescribed u/s 139(1). Advise Mr. Kailash as a tax consultant.
ILLUSTRATION 17
Belated return and carry forward of business loss and unabsorbed deprecation : M/s. Shiv
Traders, a partnership firm, sustained business loss of ₹ 2 lakhs, inclusive of admissible
depreciation of ₹ 1.15 lakhs (u/s 32 of the I.T. Act) for the year-ended 31-3-2024. The firm did
not file its return, for that year. The Assessing officer issued a notice u/s 142(1) on 1 st December
2024, in compliance to which the firm filed its return for the said year declaring the loss of ₹ 2
lakhs, and sought carried forward for next year. Is the firm’s claim justified?
SOLUTION
M/s. Shiv Traders failed to file its return of loss within the time allowed under section 139(1) and
the same was filed by it in response to notice issued under section 142(1). The provisions of
Section 80 read with Section 139(3) clearly specify that the return filed by the assessee in
response to notice issued under section 142(1) is a belated return and therefore, the benefit of
carry forward of business loss shall not be available. However, the assessee shall be entitled to
carry forward the unabsorbed depreciation of ₹ 1.15 lakhs as per the provisions of Section 32(2)
of the Act. The unabsorbed depreciation shall be added to the depreciation allowance for the
following previous year and will be deemed to be part of that allowance.
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ILLUSTRATION 18
Belated return and carry forward of loss from house property : An assessee sustained a loss
under the head “Income from house property” in the previous year relevant to the assessment
year 2024-25, which could not be set off against income from any other head in that assessment
year. The assessee did not furnish the return of loss within the time allowed under section 139(1)
in respect of the relevant assessment year. However, the assessee filed the return within the
time allowed under Section 139(4). Can the assessee carry forward such loss for set off against
income from house property of the assessment year 2025-26 ?
SOLUTION
Under section 139(3), there is no reference to loss under the head “Income from house property”.
The assessee, in the instant case, has filed the return showing loss from property within the time
prescribed under section 139(4). The assessee is, therefore, entitled to carry forward such loss
for set off against the income from house property of the assessment year 2025-26.

ILLUSTRATION 19
Return filing requirement: State with reasons whether return of income is to be filed in the
following cases for the assessment year 2025-26 :
(i) Mr. X, an individual aged 80 years has a Gross total income of ₹ 6,50,000 and he is eligible
for deduction of ₹ 1,60,000 under Chapter VI-A.
(ii) ABC, a partnership firm, has a loss of ₹ 10,000 during the previous year 2024-25.
(iii) Mr. Y is an employee of ABC P. Ltd., draws a salary of ₹ 4,90,000 and has income from fixed
deposits with Bank of ₹ 10,000.
(iv) Mr. X, a resident individual aged 80 years has a Gross total income of ₹ 4,95,000 has
incurred expenditure of ₹ 1,20,000 during the financial year 2024-25 on consumption of
electricity.
SOLUTION The above issues are discussed as under –
(i) Yes : As per the provisions of Section 139(1), every person, whose total income without
giving effect to the provisions of Chapter VI-A or Section
54/54B/54D/54EC/54F/54G/54GA/54GB exceeds the maximum amount not chargeable to
tax, is required to furnish the return of income for the relevant assessment year on or
before the due date. The gross total income of Mr. X before deduction under Chapter VI-
A is ₹ 6,50,000, exceeds the basic exemption limit of ₹ 5,00,000 applicable to an individual
aged 80 years or more. Therefore, Mr. X has to furnish his return of income for the
assessment year 2025-26.
(ii) Yes : As per Section 139(1), it is mandatory for a firm to furnish its return of income or
loss on or before the specified due date. Therefore, M/s. ABC has to furnish its return of
loss for the assessment year 2025-26 on or before the due date.
(iii) Yes : As per the provisions of Section 139(1), every person, every person, whose total
income without giving effect to the provisions of Chapter VI-A or Sections
54/54B/54D/54EC/54F/ 54G/54GA/54GB exceeds the maximum amount not chargeable
to tax, is required to furnish the return of income for the relevant assessment year on or
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before the due date. The gross total income of Mr. Y is ₹ 5,00,000 (₹ 4,90,000 + ₹ 10,000)
which exceeds the basic exemption limit of ₹ 2,50,000 applicable to an individual.
Therefore, Mr. Y has to furnish his return of income for the assessment year 2025-26.
(iv) Yes : As per the provisions of Section 139(1), every person, who during the previous year
has incurred expenditure of an amount or aggregate of the amounts exceeding ₹ 1 lakh
towards consumption of electricity is mandatorily required to furnish the return of Income.
Hence, Mr. X will be required to furnish the return of income for assessment year 2025-
26.

ILLUSTRATION 20
Updated return : Mr. X would like to furnish his updated return for the A.Y. 2023-24. In case
he furnished his updated return of income, he would be liable to pay ₹ 2,50,000 towards tax and
₹` 35,000 towards interest after adjusting tax and interest paid at the time filing earlier return.
You are required to examine whether Mr. X can furnish updated return :
(i) as on 31-3-2025
(ii) as on 28-2-2026
(iii) as on 31-5-2026
If yes, compute the amount of additional income-tax payable by Mr. X at the time of filing his
updated return. Would your answer be different with respect to filing of updated return in case
of (ii) above, where he has received a notice under section 147 for the said A.Y. 2023-24 on 23-
7-2025.
SOLUTION
Mr. X may furnish an updated return of his income for A.Y. 2023-24 at any time within 24 months
from the end of the relevant assessment year i.e., 31-3-2026.
Accordingly, Mr. X can furnish updated return for A.Y. 2023-24 as on 31-3-2025 and on 28-2-
2026. However, he can not furnish such return as on 31-5-2026, since such date falls after 31-3-
2026.
Mr. X would be liable to pay additional income-tax :
 @ 25% of tax and interest payable, if updated return is furnished after the expiry of the
time limit available under section 139(4) or 139(5) i.e., 31 st December 2024 and before the
expiry of 12 months from end of relevant assessment year i.e., 31-3-2025
 @ 50% of tax and interest payable, if updated return is furnished after the expiry of 12
months from end of relevant assessment year i.e., 31-3-2024 and before the expiry of 24
months from end of relevant assessment year i.e., 31-3-2026.
Accordingly, Mr. X is liable to pay additional income-tax in case he furnished his updated return
as on –
(i) 31-3-2025 – ₹ 71,250 [25% of 2,85,000, being tax of ₹ 2,50,000 plus interest of ₹ 35,000] (ii)
28-2-2026 of ₹ 1,42,500 [50% of 2,85,000, being tax of ₹ 2,50,000 plus interest of ₹ 35,000]
He cannot furnish updated return where he has received notice u/s 147, since proceeding for
income escaping assessment for the A.Y. 2023-24 are pending.

ILLUSTRATION 21

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Filing of return through tax return preparer : Comment on the allowability of the following
claims made by the assessee : Mrs. H, an individual, engaged in the business of beauty parlour, has
got her books of account for the financial year ended on 31-3-2025, audited under section 44AB.
Her total income for the assessment year 2025-26 is ₹ 2,95,000. She wants to furnish her return
of income for assessment year 2025-26 through a tax return preparer. Can she do so?
SOLUTION
As per Section 139B, the persons whose accounts are required to be audited under section 44AB
or any other law cannot furnish their return of income through tax return preparers. In the given
case, since Mrs. H has got her books of accounts audited under section 44AB, hence she cannot
file her return through tax return preparer.

ILLUSTRATION 22
Penalty for non-payment of self assessment tax : Assessee failed to deposit the amount of
tax under section 140A for ₹ 10,000 but filed return of income in time. Assessing Officer besides
charging of interest as per Section 234B & 234C also issued show cause notice to levy a penalty
of ₹ 2,000. Assessee says that there is no provision in the Act to impose penalty for non-payment
of tax under section 140A.
SOLUTION
The failure on the part of the assessee to pay the whole or any part of the self-assessment tax
under section 140A of the Income-tax Act makes him an assessee in default within the meaning
of section 140A(3). The Assessing Officer can levy a penalty on the assessee in default by virtue
of provisions of Section 221(1) of the Income-tax Act and the maximum penalty which can be
levied upon the assessee is to the extent of the amount of tax remaining unpaid. Therefore, the
issue of show cause notice levying a penalty of ₹ 2,000 on the assessee, for non-payment of self-
assessment tax of ₹ 10,000 under section 140A, is in order.

ILLUSTRATION 23
Self-assessment tax : The tax payable by Mr. Kamal as per his income shown in return of income
is ₹ 2,00,000. On account of delay in furnishing return and payment of advance tax, he is required
to pay interest under section 234A, 234B and 234C of ₹ 10,000, ₹ 20,000 and ₹ 8,000
respectively and fee u/s 234F of ₹ 5,000. He had paid ₹ 40,000 as advance tax and a sum of ₹
60,000 was deducted at source from his income. Mr. Kamal’s total income includes income earned
in a country outside India on which he had paid income tax of ₹ 10,000 in that country. The whole
of sum paid outside India is eligible for double taxation relief in India. Compute amount of self-
assessment tax required to be paid by Mr. Kamal.
What will be the consequences if Mr. Kamal pays self-assessment tax of – (a) ₹ 1,05,000; (b) ₹
35,000.
SOLUTION Computation of self-assessment tax payable by Mr. Kamal :
Particulars ₹
Tax payable on the basis of a return 2,00,000
Less: (a) Advance tax paid 40,000
(b) Tax deducted at source 60,000
(c) Amount of double taxation relief 10,000
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90,000
Add: Fee u/s 234F – ₹ 5,000 and Interest payable u/s 234A, 234B and 234C 43,000
(10,000 + 20,000 + 8,000)
Amount payable as self-assessment tax u/s 140A 1,33,000
Tax consequences : The following are the tax consequences in following cases –
(1) Mr. Kamal pays ₹ 1,05,000 : Out of ₹ 1,05,000, ₹ 5,000 shall be adjusted towards fee
and ₹ 38,000 shall be adjusted towards interest payable u/s 234A/234B/234C and the balance
₹ 62,000 towards tax payable. The balance tax payable ₹ 28,000 shall be recovered along with
interest. Further, Mr. Kamal shall be liable to interest u/s 220 and penalty of upto ₹ 28,000 u/s
221.
(2) Mr. Kamal pays ₹ 35,000 : The whole of ₹ 35,000 shall be adjusted towards fee u/s 234F
of ₹ 5,000 and interest payable under sections 234A/234B/234C. The balance sum payable ₹
98,000 (tax ₹ 90,000 + interest ₹ 8,000) shall be recovered along with interest. Further, Mr.
Kamal shall be liable to interest under section 220 and penalty of upto ₹ 90,000 under section
221 (i.e. upto the amount of “tax” in arrears of ₹ 90,000).

ILLUSTRATION 24
Interest u/s 234A(1) : The due date for filing the return of income for the assessment year
2023-24 was 31-10-2023 for Mr. Salil. However, he did not file his return till the date, hence the
Assessing Officer issued a notice to him u/s 148 on 18-8-2024 requiring him to furnish his return
of income by 20-10-2024. In response to such notice, Mr. Salil furnished the return on 17-12-
2024.
The assessment was completed on 31-3-2025 and tax liability was ascertained at ₹ 1,50,000
(without giving credit of advance tax or TDS).
Mr. Salil had paid advance tax of ₹ 20,000; TDS of ₹ 10,000; and self-assessment tax of ₹ 5,000.
Determine his interest liability under section 234A.
SOLUTION
Period for which interest is to be paid = 1-11-2023 to 17-12-2024 = 14 months. Amount on which
interest payable = ₹ 1,50,000 - ₹ 20,000 - ₹ 10,000 = ₹ 1,20,000. Rate of interest = 1% p.m. or
part thereof. Therefore, interest payable under section 234A = ₹ 1,20,000 × 1% × 14 months = ₹
16,800.
Notes:
(1) Tax paid on self-assessment is not to be deducted from the amount on which interest payable
under section 234A is to be calculated.
(2) Since no regular assessment has been made, hence assessment made under section 147 for
the first time shall be deemed to be regular assessment.

ILLUSTRATION 25
Interest u/s 234B(1) : Mr. X failed to furnish his return of income whose due date of filing the
return for the A.Y. 2023-24 was 31-10-2023. However, he furnished the same on 12-12-2023 and
he also paid the self-assessment tax of ₹ 88,800 (inclusive of interest of ₹ 1,600 u/s 234A; and
₹ 7,200 u/s 234B) on the same date. He had paid an advance tax of ₹ 20,000 and tax of ₹ 30,000
was deducted from his income. The assessment was completed by the Assessing Officer on 3-5-
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2024 in which Mr. X's tax liability was ascertained at ₹ 3,50,000 (without giving credit for
advance tax or TDS or self-assessment tax).
Determine interest leviable on Mr. X u/s 234B(1), ignoring the interest u/s 234A and 234C.
SOLUTION Interest payable u/s 234B will be —
(1) Computation of interest u/s 234B(1) : Here, Mr. X paid self-assessment tax on 12-12-2023,
hence the interest u/s 234B(1) will be calculated as follows—
(a) Interest till 12-12-2023 :
(i) Period for which interest is to be paid = 1-4-2023 to 12-12-2023= 9 months.
(ii) Amount on which interest is payable = ₹ 3,50,000 - ₹ 20,000 - ₹ 30,000 = ₹ 3,00,000.
(iii) Interest payable = ₹ 3,00,000 × 1% × 9 = ₹ 27,000.
(b) Interest after 12-12-2023 :
(i) Period for which interest is to be paid = 1-01-2024 to 3-5-2024 = 5 months.
(ii) Amount on which interest payable = ₹ 3,50,000 - ₹ 20,000 - ₹ 30,000 - ₹ 80,000 = ₹ 2,20,000.
(iii) Interest payable = ₹ 2,20,000 × 1% × 5 = ₹ 11,000.
(Self-assessment tax = ₹ 88,800 - ₹ 1,600 - ₹ 7,200)
Total interest under section 234B(1) = ₹ 27,000 + 11,000 = ₹ 38,000.
ILLUSTRATION 26
Mandatory filing of return of Income : CBDT has vide Notification No. 37/2022 dated 21-04-
2022, inserted Rule 12AB, notified which are all the person other than a company or firm who is
not required to file return of income under section 139(1) must file the return of Income. State
who are required compulsorily to file return of Income. (4 Marks, May 2024)
SOLUTION
The CBDT has, vide Notification No. 37/2022 dated 21.4.2022, inserted Rule 12AB to provide
that a person, other than a company or a firm, who is not required to furnish a return under
section 139(1), and who fulfils any of the following conditions during the previous year has to file
their return of income on or before the due date in the prescribed form and manner –
(i) if his total sales, turnover or gross receipts, as the case may be, in the business > ₹ 60 lakhs
during the previous year; or
(ii) if his total gross receipts in profession > ₹ 10 lakhs during the previous year; or
(iii) if the aggregate of TDS and TCS during the previous year, in the case of the person, is ₹
25,000 or more; or
However, a resident individual who is of the age of 60 years or more, at any time during the
relevant previous year (or senior citizen) would be required to file return of income only, if
the aggregate of TDS and TCS during the previous year, in his case, is ₹ 50,000 or more
(iv) the deposit in one or more savings bank account of the person, in aggregate, is ₹ 50 lakhs or
more during the previous year.
ILLUSTRATION 27
Provisions relating to filing of return of income : State with reason whether the following
persons are required to file their return of income as per the provisions of the Income Tax Act,
1961 for the assessment year 2025-26 :

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(i) Mr. Aneesh aged 31 years, who opted for default tax regime u/s 115BAC(1A) had a total
income of ₹ 2,90,000 for the previous year 2024-25.
(ii) Smt. Patel, aged 65 years, has a TDS credit of ₹ 55,000 during the previous year 2024-
25.
(iii) The gross receipts of Mr. Ajit, aged 45 years, an architect for the previous year 2024-25
was ₹ 12,00,000, but his profit from profession was only ₹ 2,25,000 and he has no other
income. (4 Marks, May 2024)
SOLUTION
(i) In this case, Mr. Aneesh is not required to file return of income, since his total income does
not exceed ₹ 3,00,000, being the basic exemption limit as per the default tax regime u/s
115BAC, assuming Mr. Aneesh has not claimed any deduction u/s 54/54D/54EC or 54F and
deduction allowable under Chapter VI-A.
(ii) In the present case, since Smt. Patel, a senior citizen has a TDS credit of ₹ 55,000, which
exceeds the threshold limit of ₹ 50,000, she is required to file her return of income even if
it is assumed that her total income does not exceed the basic exemption limit.
(iii) In this case, since Mr. Ajit’s gross receipts from the profession of architect was ₹ 12,00,000
for the P.Y. 2024-25, which is in excess of ₹ 10 lakhs, hence, he is required to file his return
of income though his total income is ₹ 2,25,000 which does not exceed the basic exemption
limit.

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 CA VARDHAMAN DAGA

CHAPTER – 13: COMPUTATION OF TOTAL INCOME

STUDY MATERIAL
ILLUSTRATION 1
Mr. A, aged 32 years, is employed with XYZ (P) Ltd. on a basic salary of ₹ 50,000 p.m. He has
received transport allowance of ₹ 15,000 p.m. and house rent allowance of ₹ 20,000 p.m. from the
company for the P.Y. 2024-25. He has paid rent of ₹ 25,000 p.m. for an accommodation in Delhi.
Mr. A has paid interest of ₹ 2,10,000 for housing loan taken for the construction of his house in
Mumbai. The construction of the house is completed in March, 2025 and his parents live in that
house.
Other Information
Contribution to PPF - ₹ 1,50,000
Contribution to pension scheme referred to in section 80CCD - ₹ 50,000
Payment of medical insurance premium for father, who is of the age of 65 - ₹ 55,000
Payment of medical insurance premium for self and spouse - ₹ 32,000
Compute the total income and tax liability of Mr. A for the A.Y. 2025-26 in the most beneficial
manner.
SOLUTION
Computation of total income and tax liability of Mr. A for A.Y. 2025-26 under default tax
regime under section 115BAC
Particulars ₹
Salaries
Basic Salary [₹ 50,000 x 12] 6,00,000
Transport allowance [₹ 15,000 x 12] 1,80,000
HRA received [₹ 20,000 x 12] 2,40,000
Gross salary 10,20,000
Less: Standard deduction u/s 16(ia) (75,000)
Income from house property 9,70,000
Interest on housing loan -

Gross Total Income 9,45,000

Less: Deductions under Chapter VI- A
Section 80C
Contribution in PPF -
Section 80CCD
Contribution to pension scheme -
Section 80D
Mediclaim insurance premium for self and parents -
Total Income 9,45,000
Tax liability
Tax @5% on ₹ 4,00,000 [₹ 7,00,000 - ₹ 3,00,000] 20,000
Tax @10% on ₹ 2,45,000 [₹ 9,45,000 - ₹ 7,00,000] 24,500 45,500
Add: Health & Education cess @ 4% 2,220
Total Tax Liability 57,720

Computation of total income and tax liability of Mr. A for A.Y. 2025-26 under normal
provisions of the Act
Particulars ₹

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 CA VARDHAMAN DAGA

Salaries
Basic Salary [₹ 50,000 x 12] 6,00,000
Transport allowance [₹ 15,000 x 12] 1,80,000
HRA received (₹ 20,0000 x 12) 2,40,000
Less: Least of the following exempt u/s 10(13A) 2,40,000 -
HRA Received 2,40,000
Actual rent paid – 10% of salary 2,40,000
[₹ 3,00,000 – ₹ 60,000]
50% of salary 3,00,000
Gross salary 7,80,000
Less: Standard deduction u/s 16(ia) (50,000)
7,30,000
Income from house property
[Annual Value is Nil. Deduction u/s 24(b) for interest on housing loan would be
restricted to ₹ 2,00,000, in case of self-occupied property, which would
represent loss from house property] (2,00,000)
Gross Total Income 5,30,000
Less: Deductions under Chapter VI-A
Section 80C
Contribution to PPF 1,50,000
Section 80CCD(1B)
Own contribution to pension scheme 50,000
Section 80D
Mediclaim insurance premium
For self and spouse, restricted to 25,000
For father, who is a senior citizen, restricted to 50,000 75,000
Total Income 2,55,000
Tax liability
Tax @ 5% on₹ 5,000 [₹ 2,55,000 - ₹ 2,50,000] 250
Less: Rebate u/s 87A 250
Total Tax Liability -
Since tax liability as per the normal provisions of the Act is lower than the tax liability under the
default tax regime under section 115BAC, it would be beneficial for Mr. A to shift out of the
default tax regime under section 115BAC for A.Y. 2024-25.
Note: In this case, Mr. A is entitled to exemption u/s 10(13A), benefit of interest on housing loan
in respect of self-occupied property and Chapter VI-A deductions, owing to which his total income
is reduced by ₹ 7,15,000. His total income under the regular provisions of the Act is less than ₹
5,00,000, owing to which he becomes entitled to rebate u/s 87A. Hence, in this case, it is
beneficial for Mr. A to shift out of the default tax regime under section 115BAC for A.Y. 2025-
26.
ILLUSTRATION 2
Mr. Kadam is entitled to a salary of ₹ 41,000 per month. He is given an option by his employer
either to take house rent allowance or a rent-free accommodation which is owned by the company.
The HRA amount payable was ₹ 7,000 per month. The rent for the hired accommodation was ₹
6,000 per month at New Delhi. Advice Mr. Kadam whether it would be beneficial for him to avail
HRA or Rent Free Accommodation. Give your advice on the basis of “Net Take Home Cash
benefits”. Assume Mr. Kadam exercises the option to shift out of the default tax regime under
section 115BAC.

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 CA VARDHAMAN DAGA

SOLUTION Computation of tax liability of Kadam under both the options

Particulars Option I – Option II –
HRA (₹) RFA (₹)
Basic Salary (₹ 41,000 x 12 Months) 4,92,000 4,92,000
Perquisite value of rent-free accommodation (10% of ₹ N.A. N.A.
4,92,000)
House rent Allowance (₹ 7,000 x 12 Months) ₹ 84,000
Less: Exempt u/s 10(13A) – least of the following –
- 50% of Basic Salary ₹ 2,46,000
- Actual HRA received ₹ 84,000
- Rent paid less 10% of salary ₹ 22,800 ₹ 22,800 61,200
Gross Salary 5,53,200 5,41,200
Less: Standard deduction u/s 16(ia) 50,000 50,000
Net Salary 5,03,200 4,91,200
Less: Deduction under Chapter VI-A - -
Total Income 5,03,200 4,91,200
Tax on total income 13,140 12,060
Less: Rebate under section 87A
- Lower of ₹ 12,500 or income-tax of ₹ 12,000, since total
income does not exceed ₹ 5,00,000 Nil 12,060
13,140 Nil
Add: Health and Education cess@4% 526 Nil
Tax liability 13,666 Nil
Tax liability (Rounded off) 13,670 Nil

Cash Flow Statement

Particulars Option I – Option II –
HRA RFA
Inflow: Salary 5,76,000 4,92,000
Less: Outflow: Rent paid Tax on total income (72,000) -
(13,670) Nil
Net Inflow 4,92,330 4,92,000
Since the net cash inflow under option II (HRA) is higher than in Option I (RFA), it is beneficial
for Mr. Kadam to avail Option II, i.e., House Rent Allowance.

TEST YOUR KNOWLEDGE

Que- 4.
Compute the tax liability of Mr. Gupta (aged 61) under default tax regime, having total income of
₹ 1,02,00,000 for the A.Y.2025-26. Assume that his total income comprises of salary income,
income from house property and interest on fixed deposit.
Ans- Computation of tax liability of Mr. Gupta for the A.Y.2025-26 under default tax
regime
(A) Income-tax (including surcharge) computed on total income
of ₹ 1,02,00,000
Tax liability (including cess) ₹ 32,85,360
(F) Marginal Relief (A – D) ₹ 3,500

Que - 6.

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 CA VARDHAMAN DAGA

Miss Charlie, an American national, got married to Mr. Radhey of India in USA on 2.03.2024 and
came to India for the first time on 16.03.2024. She left for USA on 19.9.2024. She returned to
India again on 27.03.2025. While in India, she had purchased a show room in Mumbai on
30.04.2024, which was leased out to a company on a rent of ₹ 25,000 p.m. from 1.05.2024. She
had taken loan from a bank for purchase of this show room on which bank had charged interest
of ₹ 97,500 upto 31.03.2025. She had received the following cash gifts from her relatives and
friends during 1.4.2024 to 31.3.2025:
• From parents of husband ₹ 51,000
• From married sister of husband ₹ 11,000
• From two very close friends of her husband (₹ 1,51,000 and ₹ 21,000)
(a) Determine her residential status and compute the total income chargeable to tax along with
the amount of tax liability on such income for the A.Y. 2025-26 if she opts out of the default tax
regime under section 115BAC.
(b) Would her residential status undergo any change, assuming that she is a person of Indian origin
and her total income from Indian sources is ₹ 18,00,000 and she is not liable to tax in USA?
Ans- The total stay of the assessee during the previous year in India was less than 182 days and
during the four years preceding this year was for 16 days. Therefore, due to non-fulfillment of
any of the two conditions for a resident, she would be treated as non-resident for the A.Y.2025-
26.
Computation of total income of Miss Charlie for the A.Y. 2025-26
Particulars ₹ ₹
Total income 2,67,000
Computation of tax liability by Miss Charlie for the A.Y. 2024-25 under normal provisions
of the Act
Particulars ₹
Total tax liability 884
Total tax liability(rounded off) 880
(b)
Further, since she is not a citizen of India, the provisions of section 6(1A) deeming an individual
to be a citizen of India would not get attracted in her case, even though she is a person of Indian
origin and her total income from Indian sources exceeds ₹ 15,00,000 and she is not liable to pay
tax in USA. Therefore, her residential status would be non-resident in India for the previous year
2023-24.
Que -7.
Dr. Niranjana, a resident individual, aged 60 years is running a clinic in Surat. Her Income and
Expenditure Account for the year ending March 31st, 2025 is as under:
Expenditure ₹ Income ₹
To Medicine consumed 35,38,400 By Consultation and medical 58,85,850
charges
To Staff salary 13,80,000 By Income-tax refund (principal ₹ 5,450
5,000, interest ₹ 450)
To Clinic consumables 1,10,000 By Dividend from units of UTI
(Gross) 10,500
To Rent paid 90,000 By Winning from game show on 35,000
T.V. (net of TDS of ₹ 15,000)
To Administrative expenses 2,55,000 By Rent 27,000

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 CA VARDHAMAN DAGA

To Amount paid to scientific 1,50,000

research association
approved u/s 35
To Net profit 4,40,400
59,63,800 59,63,800
(i) Rent paid includes ₹ 30,000 paid by cheque towards rent for her residential house in Surat.
(ii) Clinic equipments are:
1. 1.4.2024 Opening W.D.V. - ₹ 5,00,000
2. 7.12.2024 Acquired (cost) by cheque - ₹ 2,00,000
(iii) Rent received relates to residential house property situated at Surat. Gross Annual Value
₹ 27,000. The municipal tax of ₹ 2,000, paid in December, 2024, has been included in
"administrative expenses".
(iv) She received salary of ₹ 7,500 p.m. from "Full Cure Hospital" which has not been included
in the "consultation and medical charges".
(v) Dr. Niranjana availed a loan of ₹ 5,50,000 from a bank for higher education of her daughter.
She repaid principal of ₹ 1,00,000, and interest thereon ₹ 55,000 during the previous year
2024-25.
(vi) She paid ₹ 1,00,000 as tuition fee (not in the nature of development fees/donation) to the
university for full time education of her daughter.
(vii) An amount of ₹ 28,000 has also been paid by cheque on 27th March, 2025 for her medical
insurance premium.
From the above, compute the total income of Dr. Smt. Niranjana for the A.Y. 2025-26 under the
default tax regime and optional tax regime as per the normal provisions of the Act.
Ans-Computation of total income of Dr. Niranjana for A.Y. 2025-26 under default tax
regime
Particulars ₹ ₹ ₹
Total income 5,72,900
Computation of total income of Dr. Niranjana for A.Y. 2025-26 under
normal provisions of the Act
Particulars ₹ ₹
Total income 2,39,900
Que- 8.
Ms. Purvi, aged 55 years, is a Chartered Accountant in practice. She maintains her accounts on
cash basis. Her Income and Expenditure account for the year ended March 31, 2024 reads as
follows:
Expenditure (₹) Income (₹) (₹)
Salary to staff 15,50,000 Fees earned:
Stipend to articled Assistants 1,37,000 Audit 27,88,000
Incentive to articled 13,000 Taxation services 15,40,300
Assistants
Office rent Consultancy 12,70,000 55,98,300
Printing and stationery 12,24,000 Dividend on shares 10,524
of X Ltd., an Indian
company (Gross)
Meeting, seminar and 12,22,000 Income from UTI 7,600
(Gross)

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 CA VARDHAMAN DAGA

conference 31,600 Honorarium received 15,800

from various
institutions for
valuation of answer
papers
Purchase of car (for official 80,000 Rent receive from
use) Residential flat let
out 85,600
Repair, maintenance and petrol 4,000
of car
Travelling expenses 5,25,000
Municipal tax paid in respect 3,000
of house property
Net Profit 9,28,224
57,17,824 57,17,824
Other Information:
(i) Allowable rate of depreciation on motor car is 15%.
(ii) Value of benefits received from clients during the course of profession is ₹ 10,500.
(iii) Incentives to articled assistants represent amount paid to two articled assistants for
passing CA Intermediate Examination at first attempt.
(iv) Repairs and maintenance of car include ₹ 2,000 for the period from 1-10-2024 to 30-09-
2025.
(v) Salary includes ₹ 30,000 to a computer specialist in cash for assisting Ms. Purvi in one
professional assignment.
(vi) The travelling expenses include expenditure incurred on foreign tour of ₹ 32,000 which was
within the RBI norms.
(vii) Medical Insurance Premium on the health of dependent brother and major son dependent
on her amounts to ₹ 5,000 and ₹ 10,000, respectively, paid in cash.
(viii) She invested an amount of ` 10,000 in National Saving Certificate.
(ix) She has paid ₹ 70,000 towards advance tax during the P.Y. 2024-25.
Compute the total income and tax payable by Ms. Purvi for the A.Y. 2025-26 in a most beneficial
manner.
Ans- Computation of total income and tax payable by Ms. Purvi for the A.Y. 2025-26
under default tax regime under section 115BAC
Particulars ₹ ₹
Income from house property (See Working Note 1) 57,820
Profit and gains of business or profession (See Working Note 2) 9,20,200
Income from other sources (See Working Note 3) 33,924
Gross Total Income 10,11,944
Less: Deductions under Chapter VI-A [not allowable under default tax -
regime]
Total Income 10,11,944
Total Income (rounded off) 10,11,940
Tax on total income
Upto ₹ 3,00,000 Nil
3,00,001 - ₹ 7,00,000 @5% 20,000
₹ 7,00,001 - ₹ 10,00,000 @10% 30,000
₹ 10,00,001 - ₹ 10,11,940 @ 15% 1,791

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51,791
Add: Health and Education cess @ 4% 2,072
Total tax liability 53,863
Less: Advance tax paid 70,000
Less: Tax deducted at source on dividend income from an Indian 1,052
company u/s 194
Tax deducted at source on income from UTI u/s 194K 760 1,812
Tax Payable/ (Refundable) (17,949)
Tax Payable/ (Refundable) (rounded off) (17,950)
Computation of total income and tax payable under normal provisions of the Act
Particulars ₹ ₹
Gross Total Income 10,11,944
[Income under the “Income from house property” “Profits and gains
from business or profession” and “Income from other sources” would
remain the same even if Ms. Purvi opts out of the default tax regime
under section 115BAC]
Less: Deductions under Chapter VI-A (See Working Note 4) 10,000
Total Income 10,01,944
Total Income (rounded off) 10,01,940
Tax on total income
Upto ₹ 2,50,000 Nil
₹ 2,50,001 – ₹ 5,00,000 @5%
₹ 5,00,000 - ₹ 10,00,000 @20% 12,500
₹10,00,000 – ₹ 10,01,940 @ 30% 1,00,000
Add: Health and Education cess @ 4% 582
1,13,082
4,523
Total tax liability 1,17,605
Less: Advance tax paid 70,000
Less: TDS u/s 194 on dividend TDS u/s 194K on 1,052
income from UTI 760 1,812
Tax Payable 45,793
Tax Payable (rounded off) 45,790
Since there is tax refundable under default tax regime under section 115BAC and tax payable
under the regular provisions of the Income-tax Act, 1961, it would be beneficial for Ms. Purvi to
pay tax under default tax regime under section 115BAC.
Working Notes:
(1) Income from House Property
Particulars ₹ ₹
Gross Annual Value under section 23(1) 85,600
Less: Municipal taxes paid 3,000
Net Annual Value (NAV) 82,600
Less: Deduction u/s 24@30% of NAV 24,780 57,820
Note - Rent received has been taken as the Gross Annual Value in the absence of other
information relating to Municipal Value, Fair Rent and Standard Rent.
(2) Income under the head “Profits & Gains of Business or Profession”
Particulars ₹ ₹

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Net profit as per Income and Expenditure account 9,28,224

Add: Expenses debited but not allowable
(i) Salary paid to computer specialist in cash disallowed u/s 40A(3), since 30,000
such cash payment exceeds ₹ 10,000
(ii) Amount paid for purchase of car is not allowable under section 37(1) 80,000
since it is a capital expenditure
(iii) Municipal taxes paid in respect of residential flat let out 3,000 1,13,000
10,41,224
Add: Value of benefit received from clients during the course of
profession [taxable as business income under section 28(iv)] 10,500
10,51,724
Less: Income credited but not taxable under this head:
(i) Dividend on shares of X Ltd., an Indian company (taxable under the 10,524
head “Income from other sources")
(ii) Income from UTI (taxable under the head “Income from other 7,600
sources")
(iii) Honorarium for valuation of answer papers 15,800
(iv) Rent received from letting out of residential flat 85,600 1,19,524
9,32,200
Less: Depreciation on motor car @15% (See Note (i) below) 12,000
9,20,200
Notes:
(i) It has been assumed that the motor car was put to use for more than 180 days during the
previous year and hence, full section depreciation @ 15% has been provided for under
32(1)(ii).
Note: Alternatively, the question can be solved by assuming that motor car has been put to
use for less than 180 days and accordingly, only 50% of depreciation would be allowable as
per the second proviso below section 32(1)(ii).
(ii) Incentive to articled assistants for passing CA Intermediate examination in their first
attempt is deductible under section 37(1).
(iii) Repairs and maintenance paid in advance for the period 1.4.2024 to 30.9.2024 i.e. for 6
months amounting to ₹ 1,000 is allowable since Ms. Purvi is following the cash system of
accounting.
(iv) ₹ 32,000 expended on foreign tour is allowable as deduction assuming that it was incurred
in connection with her professional work. Since it has already been debited to income and
expenditure account, no further adjustment is required.s
(3) Income from other sources
Particulars ₹
Dividend on shares of X Ltd., an Indian company (taxable in the hands of 10,524
shareholders)
Income from UTI (taxable in the hands of unit holders) 7,600
Honorarium for valuation of answer papers 15,800
33,924
(4) Deduction under Chapter VI-A :
Particulars ₹
Deduction under section 80C (Investment in NSC) 10,000
Deduction under section 80D (See Notes (i) & (ii) below) Nil
Total deduction under Chapter VI-A 10,000

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Notes:
(i) Premium paid to insure the health of brother is not eligible for deduction under section 80D,
even though he is a dependent, since brother is not included in the definition of “family”
under section 80D.
(ii) Premium paid to insure the health of major son is not eligible for deduction, even though he
is a dependent, since payment is made in cash.
Que - 9.
Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year ended
31-3-2025 revealed the following information:
(1) The net profit was ₹ 11,20,000.
(2) The following incomes were credited in the profit and loss account:
(a) Income from UTI ₹ 22,000 (Gross)
(b) Interest on debentures ₹ 17,500 (Gross)
(c) Winnings from horse races ₹ 15,000 (Gross)
(3) It was found that some stocks were omitted to be included in both the opening and closing
stocks, the value of which were:
Opening stock ₹ 8,000.
Closing stock ₹ 12,000.
(4) ₹1,00,000 was debited in the profit and loss account, being contribution to a University
approved and notified under section 35(1)(ii).
(5) Salary includes ₹ 20,000 paid to his brother which is unreasonable to the extent of ₹ 2,500.
(6) Advertisement expenses include 15 gift packets of dry fruits costing ₹ 1,000 per packet
presented to important customers.
(7) Total expenses on car was ₹ 78,000. The car was used both for business and personal
purposes. ¾th is for business purposes.
(8) Miscellaneous expenses included ₹ 30,000 paid to A & Co., a goods transport operator in cash
on 31-1-2025 for distribution of the company’s product to the warehouses.
(9) Depreciation debited in the books was ₹ 55,000. Depreciation allowed as per Income-tax
Rules, 1962 was ₹ 50,000.
(10)Drawings of ₹ 10,000 debited in the books.
(11) Investment in NSC ₹ 15,000 debited in the books.
Compute the total income of Mr. Y for the assessment year 2025-26 under optional tax regime
as per normal provisions of the Act.
Ans- Computation of total income of Mr. Y for the A.Y. 2025-26
Particulars ₹
Profits and gains of business or profession (See Working Note 1 below) 11,21,500
Income from other sources (See Working Note 2 below) 54,500
Gross Total Income 11,76,000
Less: Deduction under section 80C (Investment in NSC) 15,000
Total Income 11,61,000
Que – 10
Balamurugan furnishes the following information for the year ended 31-03-2025:
Particulars ₹
Income from textile business (1,35,000)
Income from house property (15,000)
Lottery winning (Gross) 5,00,000
Speculation business income 1,00,000
Income by way of salary (Computed) 2,70,000
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Long term capital gain u/s 112 70,000

Compute his total income, tax liability and advance tax obligations under default tax regime under
section 115BAC.
Ans- Computation of total income of Balamurugan for the year ended 31.03.2025
Particulars ₹ ₹
Total Income 8,05,000
Computation of tax liability for A.Y.2025-26
Particulars ₹
Total tax liability 1,57,040
Que- 11.
Mr. Rajiv, aged 50 years, a resident individual and practicing Chartered Accountant, furnishes you
the receipts and payments account for the financial year 2024-25.
Receipts and Payments Account
Receipts ₹ Payments ₹
Opening balance (1.4.2024) 12,000 Staff salary, bonus and stipend 21,50,000
Cash on hand and at Bank to articled clerks
Fee from professional services 59,38,000 Other administrative expenses 11,48,000
(Gross)
Rent 50,000 Office rent 30,000
Motor car loan from Canara 2,50,000 Housing loan repaid to SBI 1,88,000
Bank (@ 9% p.a.) (includes interest of ₹ 88,000)
Life insurance premium (10% of 24,000
sum assured)
Motor car (acquired in Jan. 4,25,000
2025 by A/c payee cheque)
Medical insurance premium (for 18,000
self and wife) (paid by A/c
Payee cheque)
Books bought on 1.07.2024 20,000
(annual publications by A/c
payee cheque)
Computer acquired on 1.11.2024 30,000
by A/c payee cheque (for
professional use)
Domestic drawings 2,72,000
Public provident fund 20,000
subscription
Motor car maintenance 10,000
Closing balance (31.3.2025) 19,15,000
Cash on hand and at Bank
62,50,000 62,50,000
Following further information is given to you:
(1) He occupies 50% of the building for own residence and let out the balance for residential use
at a monthly rent of ₹ 5,000. The building was constructed during the year 2005-06, when
the housing loan was taken.
(2) Motor car was put to use both for official and personal purpose. One fifth of the motor car
use is for personal purpose. No car loan interest was paid during the year.

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(3) The written down value of assets as on 1-4-2024 are given below:
Furniture & Fittings ₹ 60,000
Plant & Machinery ₹ 80,000
(Air-conditioners, Photocopiers, etc.)
Computers ₹ 50,000
Note: Mr. Rajiv follows regularly the cash system of accounting. Compute the total income of Mr.
Rajiv for the A.Y. 2025-26 assuming that he has shifted out of the default tax regime under
section 115BAC.
Ans- Computation of total income of Mr. Rajiv for the A.Y.2025-26
Particulars ₹ ₹ ₹
Total income 23,30,500
Que - 12.
From the following details, compute the total income and tax liability of Siddhant, aged 31 years,
of Delhi both as per section 115BAC and as per the regular provisions of the Income-tax Act,
1961 for the A.Y.2025-26. Advise Mr. Siddhant whether he should opt for section 115BAC:
Particulars ₹
Salary including dearness allowance 4,35,000
Bonus 15,000
Salary of servant provided by the employer 12,000
Rent paid by Siddhant for his accommodation 49,600
Salary of servant provided by the employer Rent paid by Siddhant for his 11,000
accommodation
Siddhant purchased a flat in a co-operative housing society in Delhi for ₹ 4,75,000 in April, 2016,
which was financed by a loan from Life Insurance Corporation of India of ₹ 1,60,000@15%
interest, his own savings of ₹ 65,000 and a deposit from a nationalized bank for ₹ 2,50,000 to
whom this flat was given on lease for ten years. The rent payable by the bank was ₹ 3,500 per
month. The following particulars are relevant:
(a) Municipal taxes paid by Mr. Siddhant ₹ 4,300 (per annum)
(b) House Insurance ₹ 860
(c) He earned ₹ 2,700 in share speculation business and lost ₹ 4,200 in cotton speculation
business.
(d) In the year 2021-22, he had gifted ₹ 30,000 to his wife and ₹ 20,000 to his son who was
aged 11. The gifted amounts were advanced to Mr. Rajesh, who was paying interest@19%
per annum.
(e) Siddhant received a gift of ₹ 30,000 each from four friends.
(f) He contributed ₹ 50,000 to Public Provident Fund.
Ans- Computation of total income and tax liability of Siddhant under default tax regime
under section 115BAC for the A.Y. 2025-26
Particulars ₹ ₹
Salary Income
Salary including dearness allowance 4,35,000
Bonus 15,000
Value of perquisites:
(i) Salary of servant 12,000
(ii) Free gas, electricity and water 11,000 23,000
4,73,000
Less: Standard deduction under section 16(ia) 75,000
3,98,000

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 CA VARDHAMAN DAGA

Income from house property

Gross Annual Value (GAV) (Rent receivable is taken as GAV in the 42,000
absence of other information) (₹ 3,500 × 12)
Less: Municipal taxes paid 4,300
Net Annual Value (NAV) 37,700
Less: Deductions under section 24
(i)30% of NAV ₹ 11,310
(ii) Interest on loan from LIC @15%
of ₹ 1,60,000 [See Note 2] ₹ 24,000 35,310 2,390
Income from speculative business 2,700
Income from share speculation business
Less: Loss of ₹ 4,200 from cotton speculation business set-off to 2,700
the extent of ₹ 2,700 Nil
Balance loss of ₹ 1,500 from cotton speculation business has to be
carried forward to the next year as it cannot be set off against any
other head of income.
Income from Other Sources
(i) Income on account of interest earned from advancing money gifted 3,800
to his minor son is includible in the hands of Siddhant as per section
64(1A) [Exemption under section 10(32) would not be available]
(ii) Interest income earned from advancing money gifted to wife has 5,700
to be clubbed with the income of the assessee as per section 64(1)
(iii) Gift received from four friends (taxable under section 56(2)(x) 1,20,000 1,29,500
as the aggregate amount received during the year exceeds ₹ 50,000)
Gross Total Income 5,29,890
Deduction under section 80C [No deduction under Chapter VI-A Nil
would be allowed as per section 115BAC(2)]
Total Income 5,29,890
INCOME TAX LIABILITY – COMPUTATION AND OPTIMISATION
Particulars ₹
Tax on total income [5% of ₹ 2,29,890 (₹ 5,29,890 - ₹ 3,00,000] 11,495
Less: Rebate u/s 87A, since total income does not exceed ₹ 7,00,000 11,495
Tax liability Nil
Computation of total income and tax liability of Siddhant for the A.Y. 2024-25 under
normal provisions of the Act
Particulars ₹ ₹
Gross total income (as per default scheme) 5,29,890
Add: standard deduction [ RS 25,000 being excess amount allowed under 25,000
section 115BAC]
Less: Exemption u/s 10(32) in respect of interest income of minor son 1,500
included in the hands of Siddhant
Gross total income (under the normal provisions of the Act) 5,53,390
Less: Deductions under Chapter VI-A 50,000
Under section 80C [Contribution to PPF]
Total Income 5,03,390

Particulars ₹

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 CA VARDHAMAN DAGA

Tax on total income [5% of ₹ 2,50,000 + 20% of ₹3,390] 13,178

Add: HEC @4% 527
Tax liability 13,705
Tax liability (Rounded off) 13,710
Since his total income as per the normal provisions of the Act exceeds ₹ 5,00,000, he would not
be eligible for rebate under section 87A.
S ince Mr. Siddhant is not liable to pay any tax under default tax regime under section 115BAC,
it would be beneficial for him to not to exercise the option of shift out of the default tax regime
for A.Y.2025-26.
Notes:
(1) It is assumed that the entire loan of ₹ 1,60,000 is outstanding as on 31.3.2025;
(2) Since Siddhant’s own flat in a co-operative housing society, which he has rented out to a
nationalized bank, is also in Delhi, he is not eligible for deduction under section 80GG in
respect of rent paid by him for his accommodation in Delhi, since one of the conditions to be
satisfied for claiming deduction under 12. section 80GG is that the assessee should not own
any residential accommodation in the same place.
Que - 13.
Ramdin, aged 33 years, working as Manager (Sales) with Frozen Foods Ltd., provides the following
information for the year ended 31.03.2025:
✓ Basic Salary ₹ 15,000 p.m
✓ DA (50% of it is meant for retirement benefits) ₹ 12,000 p.m
✓ Commission as a percentage of turnover of the Company 0.5%
✓ Turnover of the Company ₹ 50 lacs
✓ Bonus ₹ 50,000
✓ Gratuity ₹ 30,000
✓ Own Contribution to R.P.F. ₹ 30,000
✓ Employer’s contribution to R.P.F. 20% of basic salary
✓ Interest credited in the R.P.F. account @ 15% p.a ₹ 15,000
✓ Gold Ring worth ₹ 10,000 was given by employer on his 25th wedding anniversary.
✓ Music System purchased on 01.04.2024 by the company for ₹ 85,000 and was given to him
for personal use.
✓ Two old light goods vehicles owned by him were leased to a transport company against the
fixed charges of ₹ 6,500 p.m. Books of account are not maintained.
✓ Received interest of ₹ 5,860 on bank FDRs on 24.4.2024 and interest of ₹ 6,786 (Net) from
the debentures of Indian Companies on 5.5.2024.
✓ Made payment by cheques of ₹ 15,370 towards premium on Life Insurance policies and ₹
22,500 for Mediclaim Insurance policy for self and spouse.
✓ Invested in NSC ₹ 30,000 and in FDR of SBI for 5 years ₹ 50,000.
✓ Donations of ₹ 11,000 to an institution approved u/s 80G and of ₹ 5,100 to Prime Minister’s
National Relief Fund were given during the year by way of cheque.
Compute his total income and tax payable thereon for the A.Y. 2025-26. Assume that Mr. Ramdin
has exercised the option to shift out of the default tax regime under section 115BAC.
Ans- Computation of Total Income of Mr. Ramdin for the A.Y.2025-26 under normal
provisions of the Act
Particulars ₹ ₹
Income from Salaries

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 CA VARDHAMAN DAGA

Basic Salary (₹ 15,000 x 12) 1,80,000

Dearness Allowance (₹ 12,000 x12) 1,44,000
Commission on Turnover (0.5% of ₹ 50 lacs) 25,000
Bonus 50,000
Gratuity (See Note 1) 30,000
Employer’s contribution to recognized provident 36,000
fund Actual contribution [20% of ₹ 1,80,000]
Less: Exempt (See Note 2) 33,240 2,760
Interest credited in recognized provident account @15% p.a. 15,000
Less: Exempt upto 9.5% p.a. 9,500 5,500
Gift of gold ring worth ₹ 10,000 on 25th wedding anniversary by
employer (See Note 3) 10,000
Perquisite value of music system given for personal use (being 10% of 8,500
actual cost) i.e. 10% of ₹ 85,000
4,55,760
Less: Standard deduction under section 16(ia) 50,000
4,05,760
Profits and Gains of Business or Profession
Lease of 2 light goods vehicles on contract basis against fixed charges 1,80,000
of ₹ 6,500 p.m. In this case, presumptive tax provisions of section 44AE
will apply i.e. ₹ 7,500 p.m. for each of the two light goods vehicle (₹ 7,500
x 2 x 12). He cannot claim lower profits and gains since he has not
maintained books of account.
Income from Other Sources
Interest on bank FDRs 5,860
Interest on debentures (₹ 6786 x 100/90) 7,540 13,400
Gross total Income 5,99,160
Less: Deductions under Chapter VI-A
Section 80C
Premium on life insurance policy 15,370
Investment in NSC 30,000
FDR of SBI for 5 years 50,000
Employee’s contribution to recognized provident fund 30,000 1,25,370
Section 80D – Mediclaim Insurance 22,500
Section 80G (See Note 4) 10,600
Total Income 4,40,690
Tax on total income
Income-tax [5% of ₹ 1,90,690 (i.e., ₹ 4,40,690 – ₹ 2,50,000) 9,535
Less: Rebate u/s 87A, since total income does not exceed ₹ 5,00,000 9,535
Tax liability Nil
Less: Tax deducted at source (₹ 7,540 – ₹ 6,786) 754
Net tax refundable 754
Tax refundable (rounded off) 750
Notes:
1. Gratuity received during service is fully taxable.
2. Employer’s contribution in the recognized provident fund is exempt up to 12% of the salary
i.e. 12% of (Basic Salary + DA for retirement benefits + Commission based on turnover)
= 12% of (₹ 1,80,000+ (50% of ₹ 1,44,000)+ ₹ 25,000)
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CONTACT NO. FOR CLASSES - 9039600091 pg. 330
 CA VARDHAMAN DAGA

= 12% of 2,77,000 = ₹ 33,240

3. An alternate view possible is that only the sum in excess of ₹ 5,000 is taxable
in view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto₹ 5,000
in the aggregate per annum would be exempt, beyond which it would be taxed as a perquisite.
As per this view, the value of perquisite would be ₹ 5,000. In such a case the Income from
Salaries would be ₹ 4,00,760.
4. Deduction under section 80G is computed as under:
Particulars ₹
Donation to PM National Relief Fund (100%) 5,100
Donation to institution approved under section 80G (50% of ₹ 11,000) (amount
contributed ₹ 11,000 or 10% of Adjusted i.e. ₹ 45,129, whichever is lower) 5,500
Total Income 10,600
Adjusted Total Income = Gross Total Income − Deductions under section 80C and 80D = ₹
5,99,160 − ₹ 1,47,870 = ₹ 4,51,290.
Que- 14.
From the following particulars furnished by Mr. X for the year ended 31.3.2025, you are
requested to compute his total income and tax payable for the assessment year 2025-26,
assuming that he opts out of the default tax regime under section 115BAC.
(a) Mr. X retired on 31.12.2024 at the age of 58, after putting in 26 years and 1 month of service,
from a private company at Mumbai.
(b) He was paid a salary of ₹ 25,000 p.m. and house rent allowance of ₹ 6,000 p.m. He paid rent
of ₹ 6,500 p.m. during his tenure of service.
(c) On retirement, he was paid a gratuity of ₹ 3,50,000. He was covered by the payment of
Gratuity Act. Mr. X had not received any other gratuity at any point of time earlier, other
than this gratuity.
(d) He had accumulated leave of 15 days per annum during the period of his service; this was
encashed by Mr. X at the time of his retirement. A sum of ₹ 3,15,000 was received by him in
this regard. His average salary for last 10 months may be taken as ₹ 24,500. Employer allowed
30 days leave per annum.
(e) After retirement, he ventured into textile business and incurred a loss of ₹ 80,000 for the
period upto 31.3.2025.
(f) Mr. X has deposited ₹ 1,00,000 in public provident fund.
Ans- Computation of total income of Mr. X for A.Y.2025-26
Particulars ₹ ₹
Income from Salaries
Basic salary (₹ 25,000 x 9 months) 2,25,000
House rent allowance:
Actual amount received (₹ 6,000 x 9 months) 54,000
Less : Exemption under section 10(13A) (Note 1) 36,000 18,000
Gratuity:
Actual amount received 3,50,000
Less: Exemption under section 10(10)(ii) (Note 2) 3,50,000 -
Leave encashment:
Actual amount received 3,15,000
Less : Exemption under section 10(10AA) (Note 3) 2,45,000 70,000
Gross Salary 3,13,000
Less: Standard deduction under section 16(ia) 50,000
2,63,000

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 CA VARDHAMAN DAGA

Profits and gains of business or profession

Business loss of ₹ 80,000 to be carried forward as the same cannot
be set off against salary income Nil
Gross Total income 2,63,000
Less : Deduction under section 80C
Deposit in Public Provident Fund 1,00,000
Total income 1,63,000
Tax on total income(Nil, since it is lower than the basic exemption Nil
limit of ₹ 2,50,000)
Notes:
(1) As per section 10(13A), house rent allowance will be exempt to the extent of least of the
following three amounts:
particulars ₹
(i) HRA actually received (₹ 6,000 x 9) 54,000
(ii) Rent paid in excess of 10% of salary (₹ 6,500 – ₹ 2,500) x 9 months 36,000
(iii) 50% of salary 1,12,500
(2) Gratuity of ₹ 3,50,000 is exempt under section 10(10)(ii), being the minimum of the following
amounts:
particulars ₹
(i) Actual amount received 3,50,000
(ii) Half month salary for each year of completed service [(₹ 25,000 x 15/26) x 3,75,000
26 years]
(iii) Statutory limit 20,00,000
(3) Leave encashment is exempt upto the least of the following:

particulars ₹
(i) Actual amount received 3,15,000
(ii) 10 months average salary (₹ 24,500 x 10) 2,45,000
(iii) Cash equivalent of unavailed leave calculated on the basis of maximum 30 days 3,18,500
for every year of actual service
rendered to the employer service he retired (See Note 4 below)
(iv) Statutory limit 25,00,000
(4) Since the leave entitlement of Mr. X as per his employer’s rules is 30 days credit for each
year of service and he had accumulated 15 days per annum during the period of his service, he
would have availed/taken the balance 15 days leave every year.
Leave entitlement of Mr. X on the basis of 30 days for
every year of actual service rendered by him to the = 30 days/year x 26 = 780 days
employer
Less: Leave taken /availed by Mr. X during the period of
his service = 15 days/year x 26 = 390 days
Earned leave to the credit of Mr. X at the time of his 390 days
retirement
Cash equivalent of earned leave to the credit of Mr. X at =390 x ₹ 24,500/30 = ₹ 3,18,500
the time of his retirement

Que-15.

YOUTUBE & TELEGRAM – ARHAM INSTITUTE,

CONTACT NO. FOR CLASSES - 9039600091 pg. 332
 CA VARDHAMAN DAGA

Rosy and Mary are sisters, born and brought up at Mumbai. Rosy got married in 1982 and settled
at Canada since 1982. Mary got married and settled in Mumbai. Both of them are below 60 years.
The following are the details of their income for the previous year ended 31.3.2025:
S. Particulars Rosy ₹ Mary ₹
No.
1 Pension received from State Government --- 60,000
2 Pension received from Canadian Government 20,000 ---
3 Long-term capital gain on sale of land at Mumbai 1,00,000 1,00,000
4 Short-term capital gain on sale of shares of Indian listed 20,000 2,50,000
companies in respect of which STT was paid
5 LIC premium paid 10,000
6 Premium paid to Canadian Life Insurance Corporation at Canada 40,000 ---
7 Mediclaim policy premium paid by A/c Payee Cheque 25,000
8 Deposit in PPF 20,000
9 Rent received in respect of house property a Mumbai 30,000
Compute the total income and tax liability of Mrs. Rosy and Mrs. Mary for the A.Y. 2025-26 and
tax thereon assuming both exercised the option to shift out of the default tax regime.
Ans-Computation of total income of Mrs. Rosy and Mrs. Mary for
the A.Y.2025-26
S. Particulars Mrs. Mrs.
No. Rosy Mary
(Non (ROR)
resident)
₹ ₹
I Salaries
Pension received from State Govt. ₹ 60,000
Less: Standard deduction u/s 16(ia) ₹ 50,000 - 10,000
Pension received from Canadian Government is not taxable in -
the case of a non-resident since it is earned and receive
outside India
- 10,000
II Income from house property
Rent received from house property at 60,000 30,000
Mumbai (assumed to be the annual value in the absence of
other information i.e. municipal value, fair rent and standard
rent)
Less: Deduction u/s 24(a)@30% 18,000 9,000
42,000 21,000
Capital gains
III Long-term capital gain on sale of land at Mumbai 1,00,000 1,00,000
Short term capital gain on sale of shares of Indian listed
companies in respect of which STT was paid 20,000 2,50,000
1,20,000 3,50,000
(A) Gross Total Income [(I)+(II)+(III)] 1,62,000 3,81,000
Less: Deductions under Chapter VIA
1 1. Deduction u/s 80C
1. LIC Premium paid - 10,000
2. Premium paid to Canadian Life Insurance Corporation 40,000 -
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CONTACT NO. FOR CLASSES - 9039600091 pg. 333
 CA VARDHAMAN DAGA

3. Deposit in PPF - 20,000

40,000 30,000
2 Deduction u/s 80D – Mediclaim premium paid - 25,000
40,000 50,000
(B) Total deduction under Chapter VI-A is restricted to income
other than capital gains taxable under sections 111A & 112 40,000 31,000
(C) Total income (A-B) 1,22,000 3,50,000
Tax liability of Mrs. Rosy for A.Y.2025-26
Tax on long-term capital gains @20% of ₹ 1,00,000 20,000
Tax on short-term capital gains @15% of ₹ 20,000 3,000
Tax on balance income of ₹ 2,000 Nil
23,000
Tax liability of Mrs. Mary for A.Y.2025-26
Tax on STCG @15% of ₹1,00,000 [i.e., ₹ 2,50,000 less ₹ 15,000
1,50,000, being the unexhausted basic exemption limit as per
proviso to section 111A] [See Notes 3 & 4 below]
Less: Rebate u/s 87A would be lower of ₹ 12,500 or tax liability, 12,500
since total income does not exceed ₹ 5,00,000
2,500
Add: Health and Education cess@4% 920 100
Total tax liability 23,920 2,600
Notes:
(1) Long-term capital gains on sale of land is chargeable to tax@20% as per section 112.
(2) Short-term capital gains on transfer of equity shares in respect of which securities
transaction tax is paid is subject to tax@15% as per section 111A.
(3) In case of resident individuals, if the basic exemption limit is not fully exhausted against
other income, then, the long-term capital gains u/s 112/short-term capital gains u/s 111A will
be reduced by the unexhausted basic exemption limit and only the balance will be taxed at
20%/15%, respectively. However, this benefit is not available to non-residents. Therefore,
while Mrs. Mary can adjust unexhausted basic exemption limit against long-term capital gains
taxable under section 112 and short-term capital gains taxable under section 111A, Mrs. Rosy
cannot do so.
(4) Since long-term capital gains is taxable at the rate of 20% and short-term capital gains is
taxable at the rate of 15%, it is more beneficial for Mrs. Mary to first exhaust her basic
exemption limit of ₹ 2,50,000 against long-term capital gains of ₹ 100,000 and the balance
limit of ₹ 1,50,000 (i.e., ₹ 2,50,000 – ₹ 1,50,000) against short-term capital gains.
(5) Rebate under section 87A would not be available to Mrs. Rosy even though her total income
does not exceed ₹ 5,00,000, since she is nonresident for the A.Y. 2025-26.
Que-16.
Mr. X, an individual set up a unit in Special Economic Zone (SEZ) in the financial year 2019-20 for
production of washing machines. The unit fulfills all the conditions of section 10AA of the Income-
tax Act, 1961. During the financial year 2023-24, he has also set up a warehousing facility in a
district of Tamil Nadu for storage of agricultural produce. It fulfills all the conditions of section
35AD. Capital expenditure in respect of warehouse amounted to ₹ 75 lakhs (including cost of land
₹ 10 lakhs). The warehouse became operational with effect from 1st April, 2024 and the
expenditure of ₹ 75 lakhs was capitalized in the books on that date.
Relevant details for the F.Y. 2024-25 are as follows:
Particulars ₹

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 CA VARDHAMAN DAGA

Profit of unit located in SEZ 40,00,000

Export turnover received in India in convertible foreign exchange on or before 80,00,000
30.9.2025
Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before considering deduction 1,05,00,000
under Section 35AD)
Compute income-tax (including AMT under Section 115JC) liability of Mr. X for A.Y. 2025-26 both
as per section 115BAC and as per regular provisions of the Income-tax Act, 1961 for A.Y. 2025-
26. Advise Mr. X whether he should pay tax under default tax regime or normal provisions of the
Act.
Ans- Computation of total income and tax liability of Mr. X for A.Y.2025-26 (under
default tax regime under section 115BAC)
Particulars ₹ ₹
Profits and gains of business or profession
Profit from unit in SEZ 40,00,000
Profit from operation of warehousing facility Less: Depreciation 1,05,00,000
under section 32
On building @10% of ₹ 65 lakhs4 (normal depreciation under
section 32 is allowable) 6,50,000 98,50,000
Total Income 1,38,50,000
Computation of tax liability as per section 115BAC
Tax on ₹ 1,38,50,000 38,45,000
Add: Surcharge@15% 5,76,750
44,21,750
Add: Health and Education cess@4% 1,76,870
Total tax liability 45,98,620
Notes:
(1) Deductions u/s 10AA and 35AD are not allowable as per section 115BAC(2). However, normal
depreciation u/s 32 is allowable.
(2) Mr. X is not liable to alternate minimum tax u/s 115JC under default tax regime under section
115BAC.
Computation of total income and tax liability of Mr. X for A.Y.2025-26 (under the regular
provisions of the Income-tax Act, 1961)
Particulars ₹ ₹
Profits and gains of business or profession 40,00,000
Profit from unit in SEZ
Less: Deduction u/s 10AA [See Note (1) below ] 16,00,000
Business income of SEZ unit chargeable to tax 24,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Deduction u/s 35AD [See Note (2) below] 65,00,000
Business income of warehousing facility chargeable to tax 40,00,000
Total Income 64,00,000
Computation of tax liability (under the normal/ regular provisions) 17,32,500
Tax on ₹ 64,00,000 69,300
Total tax liability 18,01,800
Computation of adjusted total income of Mr. X for levy of Alternate Minimum Tax
Particulars ₹ ₹
Total Income (computed above as per 64,00,000
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CONTACT NO. FOR CLASSES - 9039600091 pg. 335
 CA VARDHAMAN DAGA

regular provisions of income tax)

Add: Deduction under section 10AA 16,00,000
80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32
On building @10% of ₹65 lakhs 65,00,00 58,50,000
Adjusted Total Income 1,38,50,000
Alternate Minimum [email protected]% 25,62,250
Add: Surcharge@15% (since adjusted total income > ₹ 1 crore) 3,84,338
29,46,588
Add: Health and Education cess@4% 1,17,863
30,64,451
Tax liability u/s 115JC (rounded off) 30,64,450
Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @18.5% thereof plus
surcharge@15% and cess@4%. Therefore, tax liability as per section 115JC is ₹30,64,450.
Since the tax liability of Mr. X under section 115JC is lower than the tax liability as computed u/s
115BAC, it would be beneficial for him to opt out of the default tax regime under section 115BAC
for A.Y. 2024-25. Moreover, benefit of alternate minimum tax credit is also available to the
extent of tax paid in excess over regular tax.
AMT Credit to be carried forward under section 115JEE
₹
Tax liability under section 115JC 30,64,450
Less: Tax liability under the regular provisions of the Incometax Act, 1961 18,01,800
12,62,650
Notes: (1) Deduction under section 10AA in respect of Unit in SEZ =
Profit of the Unit in SEZ x Export turnover of the Unit in SEZ
Total turnover of the Unit in SEZ
₹40,00,000 x ₹80,00,000 * 50%
₹1,00,00,000 = ₹ 16,00,000
(2) Deduction@100% of the capital expenditure is available under section 35AD for A.Y.2025-26
in respect of specified business of setting up and operating a warehousing facility for storage of
agricultural produce which commences operation on or after 01.04.2009.
Further, the expenditure incurred, wholly and exclusively, for the purposes of such specified
business, shall be allowed as deduction during the previous year in which he commences operations
of his specified business if the expenditure is incurred prior to the commencement of its
operations and the amount is capitalized in the books of account of the assessee on the date of
commencement of its operations. Deduction under section 35AD would, however, not be available
on expenditure incurred on acquisition of land.
In this case, since the capital expenditure of ₹ 65 lakhs (i.e., ₹ 75 lakhs – ₹ 10 lakhs, being
expenditure on acquisition of land) has been incurred in the F.Y.2023-24 and capitalized in the
books of account on 1.4.2024, being the date when the warehouse became operational, ₹
65,00,000, being 100% of ₹ 65 lakhs would qualify for deduction under section 35AD.

PAST EXAMS QUESTIONS

Illustration 17

YOUTUBE & TELEGRAM – ARHAM INSTITUTE,

CONTACT NO. FOR CLASSES - 9039600091 pg. 336
 CA VARDHAMAN DAGA

Computation of Total Income and tax liability: Mr. Ashish, a resident individual, aged 43 years,
provides professional services in the field of interior decoration. His Income & Expenditure A/c
for the year ended 31st March, 2025 is as under-
Expenditure ₹ Income ₹
To Employees' Remuneration & 13,66,000 By Consultancy Charges 58,80,000
Benefits
To Office & Administrative By Interest on Public Provident
Expenses 3,14,000 Fund
To General Expenses 75,000 (PPF) Account 60,000
To Electricity Expenses 65,000 By Interest on Saving Bank 20,000
Account
To Medical Expenses 80,000 By Interest on National Savings
Certificates VIII Issue (for 21,000
3rd year)
To Purchase of Furniture 48,000
To Depreciation 90,000
To Excess of income over
Expenses 39,43,000
59,81,000 59,81,000
The following other information relates to financial year 2024-25:
(i) The expenses on Employees' Remuneration & Benefits includes:
a. Family Planning expenditure of 20,000 incurred for the employees which was revenue in
nature. The same was paid through account payee cheque.
b. Payment of salary of 25,000 per month to sister-in-law of Mr. Ashish, who was in-charge
of the Accounts & Receivables department. However, in comparison to similar work
profile, the reasonable salary at market rates is 20,000 per month.
(ii) Amount received by Mr. Ashish as Employees' Contribution to EPF for the month of February,
2025 - 10,000 was also deposited after the due date under the relevant Act relating to EPF.
(iii) Medical Expenses of 80,000 as appearing in the Income & Expenditure A/c was expensed for
the treatment of father of Mr. Ashish. His father was 72 years old and was not covered by
any health insurance policy. The said payment of 80,000 was made through account payee
cheque.
(iv) General expenses as appearing in the Income & Expenditure A/c, includes a sum of 25,000
paid to Ms. Anjaleen on 5th January, 2025 as commission for securing work from new clients.
This payment was made to her without deduction of tax at source.
(v) Written down value of the depreciable assets as on 1st April, 2025 were as follows:
• Professional books = ₹ 90,000
• Computers = ₹ 35,000
(vi) The new Furniture as appearing in the Income & Expenditure A/c. was purchased on 31st
August, 2024 and was put to use on the same day. The payment was made as under:
• ₹ 18,000 paid in cash at the time of purchase of new furniture on 31-08-2024.
• ₹ 19,000 paid by account payee cheque on 05-09-2024 as balance cost of new furniture
and
• ₹ 11,000 paid in cash on 31-08-2024 to the transporter as freight charges for the new
furniture.
(vii) Mr. Ashish purchased a car on 02-04-2023 for 3,35,000 for personal use. However, on 30-
042024 he brought the said car for use in his profession. The fair market value of the car
as on 30-04-2024 was 2,50,000.

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 CA VARDHAMAN DAGA

(viii) Mr. Ashish made a contribution of 1,00,000 in his PPF A/c on 31-01-2025.
(ix) The Gross Professional Receipts of Mr. Ashish for P.Y. 2023-24 was 52,00,000.
Compute the total income and tax liability of Mr. Ashish for A.Y. 2025-26, assuming that he has
not opted for payment of tax under section 115BAC. Ignore provisions relating to AMT and under
section 14A relating to disallowance of expenditure incurred in relation to income not includible
in total income. (14 Marks, July 2021)
Solution: Computation of total income of Mr. Ashish (amount in ₹)
Particulars ₹ ₹ ₹
I Income from business or profession
Excess of income over expenditure 39,43,000
Add: Items debited but not allowable while
computing business income
- Family planning expenditure incurred for 20,000
employees [not allowable as deduction since
expenditure on family planning for
employees is allowed only to a company
assessee /not allowed in case of individuals.
Since the amount is debited to Income and
Expenditure Account, the same has to be
added back for computing business income]
- Salary payment to sister-in-law in excess Nil
of market rate [Any expenditure incurred
for which payment is made to a relative, to
the extent it is considered unreasonable is
disallowed. However, sister-in-law is not
included in the definition of "relative" for
the purpose of section 40A(2) Therefore,
no adjustment is required for excess salary
paid to Mr. Ashish's sister- in-law]
- Employees' Contribution to EPF [Sum 10,000
received by the assessee from his
employees as contribution to EPF is income
of the employer. Deduction in respect of
such sum is allowed only if such amount is
credited to the employee's account on or
before due date under the relevant Act.
Since, the employees contribution to EPF
for February 2025 is deposited after the
due date under the relevant Act, deduction
would not be available]
- Medical expenses for the treatment of 80,000
father [Not allowed as deduction since it is
a personal expenditure/not an expenditure
incurred for the purpose of business of Mr.
Ashish. Since the amount is debited to
Income and Expenditure Account, the same
has to be added back for computing
business income]

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 CA VARDHAMAN DAGA

- Commission to Ms. Anjaleen without 75,000

deduction of tax at source - [Mr. Ashish
would be liable to deduct tax at source on
commission since his gross receipts from
profession exceeded 50 lakhs during F.Y.
2023-24. Since commission has been paid
without deduction of tax at source, hence
30% of 25,000, being commission paid
without deducting tax at source, would be
disallowed u/s 40(a)(ia) while computing
the business income of A.Y. 2025-26]
- Depreciation as per books of account 90,000
- Purchase of Furniture [not allowable, since 48,000 2,55,500
it is a capital expenditure]
41,98,500
Less: Depreciation as per Income-tax Rules
- On Professional Books [90,000 × 40%] 36,000
− On Computers [35,000 × 40% ] 14,000
- On Furniture [19,000 x 10%, since it has 1,900
been put to use for more than 180 days
during the year] [Any expenditure for
acquisition of any asset in respect of which
payment or aggregate of payment made to
a person, otherwise than by an a/c payee
cheque/ bank draft or use of ECS or
through prescribed electronic mode,
exceeds 10,000 in a day, such expenditure
would not form part of actual cost of such
asset. Hence, 18,000 and 11,000 paid on 31-
8-2024 in cash would not be included in the
actual cost of furniture]
- On Car [3,35,000 × 15% ] [Actual cost of 50,250 1,02,150
car would be the purchase price of the car
to Mr. Ashish, i.e., 3,35,000]
40,96,350
Less: Items of income credited but not taxable or
taxable under any other head of income
- Interest on Public Provident Fund 60,000
[Exempt]
- Interest on savings bank account [Taxable 20,000
under the head "Income from other
sources"]
- Interest on National Savings Certificates 21,000 1,01,000 39,95,350
VIII Issue (3rd Year) [Taxable under the
head "Income from other sources"]
II Income from other sources 20,000
Interest on savings bank account
Interest on National Savings Certificates VIII 21,000 41,000
Issue (3rd Year)
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 CA VARDHAMAN DAGA

Gross Total Income 40,36,350

Less: Deduction under Chapter VI-A
Deduction u/s 80C:
Contribution to PPF 1,00,000
Interest on NSC (3rd Year) (Reinvested) 21,000 1,21,000
Deduction u/s 80D:
Medical expenses for the treatment of father 50,000
[Since Mr. Ashish's father is a senior citizen and
not covered by any health insurance policy,
payment for medical expenditure by a mode other
than cash would be allowed as deduction to the
extent of 50,000]
Deduction u/s 80TTA:
Interest on savings bank account to the extent 10,000 1,81,000
of 10,000
Total Income 38,55,350

Computation of tax liability of Mr. Ashish :

Particulars ₹ ₹
Tax on total income of 38,55,350
Upto₹ 2,50,000 Nil
₹ 2,50,001 - ₹ 5,00,000 [@ 5% of 2.50 lakh] 12,500
₹ 5,00,001- ₹ 10,00,000 [@ 20% of 5 lakh] 1,00,000
₹ 10,00,001- ₹ 38,55,350 [@ 30% of 28,55,350] 8,56,605 9,69,105
Add: Health and education cess @ 4% 38,764
Tax liability (rounded off) 10,07,870
Illustration 18
Determination of Residential status and Tax liability: Mrs. Rohini, aged 62 years, was born and
brought up in New Delhi. She got married in Russia in 1998 and settled there since then. Since
her marriage, she visits India for 60 days each year during her summer break. The following are
the details of her income for the previous year ended 31-03-2025:
Particulars ₹
1. Pension received from Russian Government 65,000
2. Long-term capital gain on sale of land at New Delhi (computed) 3,00,000
3. Short-term capital gain on sale of shares of Indian listed companies in
respect of which STT was paid both at the time of acquisition as well as at the
time of sale (computed) 60,000
4. Premium paid to Russian Life Insurance Corporation at Russia 75,000
5. Rent received (equivalent to Annual Value) in respect of house property in 90,000
New Delhi
You are required to ascertain the residential status of Mrs. Rohini and compute her total income
and tax liability in India for Assessment Year 2025-26. Assessee has not opted for provisions of
Section 115BAC. (6 Marks, July 2021)
Solution: An Indian citizen or a person of Indian origin who, being outside India, comes on a visit
to India (and whose total income, other than from foreign sources, does not exceed 15,00,000)
would be resident in India only if he or she stays in India for a period of 182 days or more during
the previous year

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 CA VARDHAMAN DAGA

Since Mrs. Rohini is a person of Indian origin who comes on a visit to India only for 60 days in the
P.Y. 2024-25 and her income other than from foreign sources does not exceed 15,00,000, she is
nonresident for the A.Y. 2025-26. [Even if her total income exceeds 15 lakh, still, she would be
nonresident since the minimum period of stay required in the current year for being a resident is
120 days.]
A non-resident is chargeable to tax in respect of income received or deemed to be received in
India and income which accrues or arises or is deemed to accrue or arise to her in India.
Accordingly, her total income and tax liability would be determined in the following manner:
Computation of total income and tax liability of Mrs. Rohini (amount in ₹)
Particulars ₹
Salaries
Pension received from Russian Government [Not taxable, since it neither accrues
or arises in India nor is it received in India] Nil
Income from House Property
Annual Value [Rental Income from house property in New 90,000
Delhi is taxable, since it is deemed to accrue or arise in
India, as it accrues or arises from a property situated in India]
Less: Deduction u/s 24(a) @ 30% 27,000 63,000
Capital Gains
Long-term capital gains on sale of land at New Delhi [Taxable, since it is deemed to 3,00,000
accrue or arise in India as it is arising from transfer of land situated in India]
Short-term capital gains on sale of shares of Indian listed companies in respect of 60,000
which STT was paid [Taxable, since it is deemed to accrue or arise in India, as such
income arises on transfer of shares of Indian listed companies]
Gross Total Income 4,23,000
Less: Deduction under Chapter VI-A
Deduction u/s 80C: Life insurance premium of 75,000 [Premium paid to 63,000
Russian LIC allowable as deduction. However, the same has to be restricted to gross
total income excluding LTCG and STCG, as Chapter VI-A deductions are not
allowable against such income chargeable to tax u/s 112 and 111A, respectively]
Total Income 3,60,000
Computation of Tax Liability:
Long-term capital gains taxable @ 12.5% u/s 112 [3,00,000 × 12.5%] 37,560
Short-term capital gains taxable @ 20% u/s 111A [ 60,000 × 20%] 12,000
49,560
Add: Health and Education Cess @ 4% 1,982
Tax Liability 51,542
Note: The benefit of adjustment of unexhausted basic exemption limit against long-term capital
gains taxable u/s 112 and short-term capital gains taxable u/s 111A is not available in case of non-
resident. Further, rebate u/s 87A is not allowable to a non-resident, even if his income does not
exceed 5 lakh.
Illustration 19
Computation of total income and tax liability: Mrs. Mitual, a resident individual, aged 63 years,
is a qualified medical practitioner. She runs her own clinic. Income & Expenditure A/c of Mrs.
Mitual for the year ending March 31st 2025 is as under:
Expenditure ₹ Income ₹
To Salary to Staff 1,20,000 By Consultation Fees 12,00,000

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 CA VARDHAMAN DAGA

To Administrative Exp. 2,90,000 By Salary received from 1,80,000

True Care Hospitals (P) Ltd.
To Conveyance 24,000 By Rental Income from 78,000
House Property
To Power & Fuel 24,000 By Dividend from Foreign 10,000
Companies
To Interest on Housing Loan 1,00,000
To Interest on Education Loan for 26,000
son
To Amount paid to scientific 25,000
research association approved &
Notified u/s 35
To net profit 8,59,000
Total 14,68,000 Total 14,68,000
Explanatory Information:
(i) She is working part-time with True Care Hospitals (P) Ltd. Her salary details are as under:
Basic Pay 13,000 p.m.
Transport Allowance 2,000 p.m.
Total 15,000 p.m.
Further, during P.Y. 2024-25, her son had undergone a medical treatment in True Care Hospitals
(P) Ltd, free of cost. The hospital would have charged a sum of 60,000 for a similar treatment to
unrelated patients.
(ii) She owns a residential house. Ground floor of the house is self-occupied by her while first
floor has been rented out since 01-10-2024. The reconstruction of the house was started
on 01-04-2024 and was completed on 30-09-2024. The monthly rent is 10,000. The tenant
also pays ₹3,000 p.m. as power back-up charges. She took a housing loan of 12 lakhs on 01-
04-2024. Interest on housing loan for the period 01-04-2024 to 30-09-2024 was 60,000
and for the period 01-10-2024 to 31-032025 was 40,000. During the year, she also paid
municipal taxes for the F.Y. 2023-24 5,000 and for F.Y. 2024-25 5,000.
(iii) Other information:
(a) Conveyance expenses include a sum of 12,000 incurred for conveyance from house to True
Care Hospitals (P) Ltd. and vice-versa in relation to her employment.
(b) Power & fuel expenses include a sum of ₹ 6,000 incurred for generator fuel for providing
power back-up to the tenant.
(c) Administrative expenses include a sum of 10,000 paid as Municipal Taxes for her house.
(d) Clinic equipments' details are: Opening W.D.V. Of clinic equipments as on 01-04-2024 was
1,00,000 and fresh purchase made on 28-08-2024 is 25,000 which was paid in cash.
(e) She also paid tuition fee of 40,000 for her grand-daughter, which has been debited to
her Capital A/C.
(f) She availed a loan of ₹ 8,00,000 from bank for higher education of her son. She repaid
principal of ₹ 50,000 and interest of 26,000 during P.Y. 2024-25.
You are required to compute her total income and tax liability for Assessment Year 2025-26 if
he has not opted for the provisions of Section 115BAC. (14 Marks, Nov. 2019-NS)
Solution: Computation of total income and tax liability of Mrs. Mitul (amount in ₹)
Particulars ₹ ₹ ₹
Income from salaries:
Basic pay (13,000 × 12) 1,56,000
Transport allowance (2,000 × 12) [Fully taxable] 24,000

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 CA VARDHAMAN DAGA

Medical facility [Exempt from tax since provided in Exempt

employers hospital]
Gross Salary 1,80,000
Less: Standard Deduction u/s 16(ia) 50,000 1,30,000
Income from House Property:
Self occupied portion [Ground Floor]
Annual value Nil
Less: Interest on borrowed capital [1,00,000/2] =
50,000 [Deduction shall be allowed subject to 30,000 -30,000
maximum of ₹ 30,000]
Let out property [First Floor]
Actual rent being Gross Annual Value [10000 x6 ] 60,000
Less: Municipal taxes paid [Taxes paid during FY
2022-23 shall be allowed as deduction on actual 5,000
payment basis relating to let out portion] [10000/2]
Net Annual Value 55,000 55,000
Less: Deductions under section 24-
(a) Statutory Deduction@ 30% of NAV 16,500 16,500
(b) Interest on loans relating to let out portion to be
allowed on due basis [1,00,000/2] 50,000 -11,500 -41,500
Profits and gains from business or profession:
Net Profit as per Income and Expenditure account 8,59,000
Add: Items debited to Income & Expenditure a/c to
be disallowed/considered separately-
Conveyance expenses incurred in relation to 12,000
employment
Power & Fuel expenses for providing power back up to 6,000
tenant
Interest on housing loan 1,00,000
Interest on education loan on son (being personal in 26,000
nature)
Municipal tax of house property 10,000
10,13,000
Less: Items credited to Income & Expenditure a/c to
be disallowed/considered separately-
Salary received from True Care Hospital (P) Ltd 1,80,000
Rental Income from House property 78,000
Dividend from shares of foreign company 10,000
Depreciation on clinic equipments u/s 32 [15% of 1 15,000 7,30,000
lakh]
Income from other sources:
Dividend from shares of foreign companies 10,000
Power Back up charges recovered from tenant [3,000 18,000
× 6] [WN-2]
Less: Expenses 6,000 12,000 22,000
Gross Total Income 8,40,500
Less: Deduction u/s 80E (Interest on loan for higher 26,000
education of his son)
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 CA VARDHAMAN DAGA

Less: Tution fee of her grand-daughter [Not eligible

for deduction u/s 80C] Nil
Total Income (rounded off) 8,14,500
Income taxable at normal rates [Since senior citizen] 72,900
Add: HEC@4%
2,916
Total tax liability (rounded off) 75,820
Working Notes:
(1) Where an assessee incurs any expenditure for acquisition of any asset or part thereof in
respect of which a payment or aggregate of 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 or through such other prescribed
electronic mode, exceeds 10,000, such expenditure shall not form part of actual cost of such
asset. Hence, Cash purchase of 25,000 on 28-08-2023 shall not from part of the actual cost,
since cash payment exceeds 10,000.
(2) Where composite rent includes rent of building and charges for different services (power
etc.), the composite rent is has to be split up in the following manner-
(a) the sum attributable to use of property is to be assessed under section 22 as income from
house property;
(b) the sum attributable to use of services is to be charged to tax under the head "Income
from other sources", as the case may be. Hence, the power backup charges recovered
from tenant is taxable under income from other sources.
(3) 100% deduction is allowed in respect of payment to approved scientific research association.
Since the expenditure is already debited to Profit and loss Account, hence no adjustment is
required.
Illustration 20
Computation of Total Income: Mr. Jagdish, aged 61 years, has set-up his business in Thailand and
is residing in Thailand since last 20 years. He owns a house property in Bangkok, half of which is
used as his residence and half is given on rent (such rent received, converted in INR is 6,00,000).
The annual value of the house in Thailand is ₹ 50,00,000 i.e. converted value in INR.
He purchased a flat in Pune during F.Y. 2019-20, which has been given on monthly rent of 27,500
since 01-07-2023. The annual property tax of Pune flat is 40,000 which is paid by Mr. Jagdish
whenever he comes to India. Mr. Jagdish last visited India in July 2023. He has taken a loan from
Union Bank of India for purchase of the Pune flat amounting to 15,00,000. The interest on such
loan for the F.Y. 2024-25 was 84,000. However, interest for March 2025 quarter has not yet
been paid by Mr. Jagdish.
He had a house in Jaipur which was sold in May 2019. In respect of this house he received arrears
of rent of 96,000 in February 2025 (not taxed earlier).
He also derived some other incomes during F.Y. 2024-25 which are as follows:
Profit from business in Thailand 2,75,000
Interest on bonds of a Japanese Co. 45,000 out of which 50% was received in India.
Income from Apple Orchid in Nepal given of contract and the yearly contract fee of 5,00,000,
for F.Y. 2024-25 was deposited directly by the contractor in Kathmandu branch of Union Bank of
India in Mr. Jagdish's bank account maintained with Union Bank of India's Pune Branch.
Compute the total income of Mr. Jagdish for A.Y. 2024-25 chargeable to income tax in India.
Assessee has not opted for provisions of Section 115BAC.
(7 Marks, Nov. 2019-NS)
Solution: Under section 6(1), an individual is said to be resident in India in any previous year, if
he satisfies any one of the following conditions:
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 CA VARDHAMAN DAGA

(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and has been in India for at least 60 days in the previous year.
If an individual satisfies any one of the conditions mentioned above, he is a resident. If both the
above conditions are not satisfied, the individual is a non-resident.
Since Mr. Jagdish do not satisfy any of the above condition, he is non resident in Financial year
2024-25. In case of non resident, income which is received in India or deemed to be received in
India and income which accrues in India or deemed to accrue or arise in India is chargeable to
tax.
Computation of total income of Mr. Jagdish (amount in ₹):
Particulars ₹ ₹ ₹
Income from House Property:
House Property in Bangkok (Let out portion) [Income from Nil
house property at Bangkok neither accrues or arises in
India, nor is it deemed to accrue or arise in India; and it is
also not stated to be received in India. Hence, it is not
taxable in India, since he is a non- resident]
Let out property in Pune
Actual rent receivable being gross annual value [27,500 × 3,30,000
12]
Less: Municipal taxes paid during the year Nil
Net annual value 3,30,000
Less: Deduction under Section 24 99,000
Standard deduction [30% of NAV]
Interest on borrowed capital [to be allowed as deduction
on due basis] 84,000 1,47,000
Arrears of rent received in Jaipur [Section 25A] 96,000
Less: Deduction 30% 28,800 67,200 2,14,200
Profits from business in Thailand
[Since the same accrues and received outside India, hence Nil
it will not be taxable in India]
Income from other sources:
Interest on bonds of Japanese Company [50% received in 22,500
India is taxable]
Income from Apple Orchid in Nepal [Income is received in 5,00,000 5,22,500
India] [Since it is directly credited in Indian branch of
Bank, it is received in India, hence taxable]
Total Income 7,36,700
Illustration 20
Computation of Total income: Mrs. Babu, working as Journalist with ABC Limited provides the
following information from the year ended 31-3-2025.
Particulars ₹
Basic salary p.m 25,000
DA (50% of it is meant for retirement benefits) 50% Basic Pay
Own contribution to Recognized Provident Fund (R.P.F.) 30,000
Employer's contribution to R.P.F 20% of basic salary
Interest credited in the R.P.F. Account @ 15% p.a. 15,000
Arrears of rent received from ABC Limited 69,000
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 CA VARDHAMAN DAGA

Received interest ₹10,000 from Axis Bank Savings account during the year, and interest of ₹
12,040 from the debentures of M/s. Coal India Ltd.
She made payment through cheque 12,500 for Mediclaim Insurance Policy for her major daughter.
She had contributed ₹ 1,196 pm towards Atal Pension Yojana and 5,000 pm towards Sukanya
Samridhi account.
M/s. ABC Limited has taken residential house of Mrs. Babu as Company's guest house and later
purchased from her in the year 2023 at market value for 75 lakhs. Purchase cost was only 10
lakhs in April, 2004.
During August, 2024 Mrs. Babu had lost her gold chain and a diamond ring which she had purchased
in April, 2004 for ₹ 1,13,000 and market value of these two items were 2,50,000 and she has
received insurance compensation of ₹ 3,80,000 during February, 2025.
Compute Total Income for the Assessment Year 2025-26. Assessee has not opted for provisions
of Section 115BAC. [CII for 2004-05 = 113 and 2024-25=363] (10 Marks, May 2018)
Solution: Computation of total income of Mrs. Babu (amounts in ₹)
Particulars ₹ ₹
Income from salaries:
Basic salary (25,000 × 12) 3,00,000
Dearness allowance (50% of basic pay) 1,50,000
Employers contribution to RPF in excess of 12% of Salary [20% of 1,5,000
3,00,000 - 12%(3,00,000+ 75,000)[WN-1]
Interest credited to RPF in excess of 9.5% p.a. [ 15,000 - 15,000 × 5,500
9.5% ÷ 15% ][WN-2]
Gross Salary 4,70,500
Less: Standard Deduction u/s 16(ia) 50,000 4,20,500
Income from House Property:
Arrears of rent received under Section 25A[WN-3] 69,000
Less: Standard deduction @ 30% 20,700 48,300
Long-term capital gains:
Gold Chain and Diamond Ring
Insurance compensation received being Full value of
Consideration[WN-4] 3,80,000
Less: cost of acquisition [since transfer takes place after 1,13,000 2,67,000
22/7/2024, no benefit of indexation shall be available]
Income from other sources:
Debenture Interest (assumed to be gross) 12,040
Saving bank interest 10,000 22,040
Gross Total Income 7,57,840
Less: Deduction u/s 80C (Own contribution to RPF 30,000+ Sukanya
Samridhi A/c 60,000) 90,000
Less: Deduction u/s 80CCD - Atal Pension Yojna (1,196 x 12) 14,352 1,04,352
Less: Deduction u/s 80D for medical insurance premium paid
(Assumed to be dependant on her) 12,500
Less: Deduction u/s 80TTA- Interest on savings bank account. 10,000
However, deduction cannot exceed 10,000.
Total Income (rounded off) 6,30,990
Working Notes:

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 CA VARDHAMAN DAGA

(1) Employer's contribution to recognized provident fund is exempt upto 12% of salary. (Salary
means Basic Salary + DA, if the terms of employment so provide + % wise fixed commission
on turnover). Taxable amount = 20% of 3,00,000-12% of (3,00,000+ 75,000).
(2) Interest credited to recognised provident fund is exempt upto 9.5% p.a. Hence, interest @
5.5% [15% - 9.5%] is taxable.
(3) Arrears of rent received is chargeable to tax under the head Income from house property
after allowing deduction of 30% of such arrears rent as per provisions of Section 25A of the
Income tax Act, 1961.
(4) As per Section 45(1A), if insurance compensation is received on loss of capital asset, the
amount so received is treated as full value of consideration for computing Capital Gains.
(5) Employees contribution to RPF and contribution to Sukanya Samridhi account qualifies for
deduction under Section 80C and contribution to Atal pension Yojna qualifies for deduction
under Section 80CCD.
(6) Since the house has been sold in 2023, no capital gain will arise in the financial year 2024-
25.
Illustration 21 –
Computation of tax liability: Mr. Rajat Saini, aged 32 years, furnishes the following details of
his total income for the A.Y. 2025-26:
Particulars ₹
Income from Salaries (computed) 27,88,000
Income from House Property (Computed) 15,80,000
Interest Income from FDR's 7,22,000
He has not claimed any deduction under chapter VI-A. You are required to compute tax liability
of Mr. Rajat Saini as per the provisions of Income-tax Act, 1961. He has opted for provisions of
Section 115BAC. (5 Marks, Nov. 2018-NS)
Solution: Computation of tax liability of Mr. Rajat Saini (amount in ₹)
Particulars ₹
Total Income 50,90,000
Tax on Total Income 12,17,000
Add: Surcharge @ 10% [Since Total Income exceeds 50,00,000] 1,12,700
Tax including surcharge 13,38,700
Less: Marginal Relief 58,700
Tax payable after marginal relief 12,80,000
Add: HEC@ 4% 51,200
Total tax payable 13,31,200
Note: Marginal relief is available in case total income exceeds 50 lakhs. The additional amount of
income-tax payable (together with surcharge) on the excess of income over 50 lakhs should not
be more than the amount of income exceeding 50 lakhs.
Illustration 22
Computation of total income and tax liability: Mr. Hari, aged 55 years, a resident individual and
practicing Chartered Accountant, furnishes you the receipts and payments account for the
financial year 2024-25.
Receipts and Payments Account
Receipts ₹ Payments ₹
Opening Balances (01- Staff salary, bonus and stipend to 20,50,000
04-2024) Cash & Bank 20,000 articled clerks

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 CA VARDHAMAN DAGA

Fee from professional 39,60,000 Other general and administrative 12,00,000

services expenses

Motor car loan from SBI 2,00,000 Office rent 48,000

@ 10% interest per
annum
Life Insurance Premium 23,000
Motor car (Acquired in January 2025 by
way of online payment) 4,00,000
Books bought (annual publication by 22,000
credit card)
Computer acquired on 01-11-2024 for 25,000
professional use
Domestic drawings 2,50,000
Motor car maintenance 12,000
Public Provident Fund subscription 1,40,000
Closing balances (31-03-2025) Cash & 10,000
Bank
41,80,000 41,80,000
Other Information:
(i) Motor car was put to use for both official and personal purposes. 1/4th of the motor car is
for personal purpose. No interest on car loan was paid during the year.
(ii) Mr. Hari purchased a flat in Jaipur for 15,00,000 in July 2014 cost of which was partly
financed by a loan from State Bank of India of 10,00,000 @ 10% interest, his own savings
1,00,000 and a deposit from Bank of Baroda for 4,00,000. The flat was given to Bank of
Baroda on lease for 10 years @40,000 per month. The following particulars are relevant :
(a) Municipal taxes paid by Mr. Hari = ₹ 4,200 per annum
(b) House insurance = ₹ 1,000
(iii) He earned ₹ 1,00,000 in share speculation business and lost 1,50,000 in commodity
speculation business.
(iv) Mr. Hari received a gift of ₹ 40,000 each from four of his family friends.
(v) He contributed 1,11,000 to Prime Minister's Drought Relief Fund by way of bank draft.
(vi) He donated to a registered political party 3,00,000 by way of cheque.
Compute the total income of Mr. Hari and the tax payable for the Assessment Year 2025-26.
Assessee has not opted for provisions of Section 115BAC. (10 Marks, May 2018-NS)
Solution: Since Mr. Hari follows cash system of accounting, only those income and expenses would
be considered for computation of professional income, which have actually been received or paid,
as the case may be. Accordingly, the computation is as follows, (amount in ₹)-
Particulars ₹ ₹ ₹
Income from House Property:
Let out portion: Actual Rent received/receivable
[40,000 × 12] (GAV) 4,80,000
Less: Municipal Taxes paid by the assessee -4,200
Net Annual value 4,75,800
Less: Deduction u/s 24:
(i) Standard Deduction @ 30% of NAV 1,42,740
(ii) Interest on borrowed capital [10% of 10,00,000] -1,00,000 2,33,060
Profits & Gains of Business or Profession:

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 CA VARDHAMAN DAGA

Fee from professional services 39,60,000

Less: Expenses allowable as deduction-
Staff salary, bonus and stipend 20,50,000
Other administrative expenses 12,00,000
Office rent 48,000
Motor Car Maintenance [ 12,000 x 3/4th towards 9,000
professional use]
Car loan interest [Not allowable, as not paid during the - 33,07,000
year]
Less: Deprecation
Motor Car 4,00,000 x 15% x 50% as used for less than 22,500
180 days during the previous year x 3/4th relating to
professional use]
Books bought of annual publications [40% of 22,000] 8,800
Computers [50% of 40% of 25,000 since put to use 5,000
for less than 180 days] 36,300 6,16,700
Speculation business Gains (Shares) 1,00,000
Speculation business loss (Commodity) 1,50,000
Balance speculation business loss to be carried -50,000
forward since it cannot be set-off from general
business profits.
Income from Other Sources:
Gift received from friends [ 40,000 × 4] 1,60,000
Gross Total Income 10,09,760
Less: Deduction u/s 80C
Life Insurance Premium 23,000
Public Provident Fund [Subject to maximum of 1,40,000 -1,50,000
1,50,000]
Deduction u/s 80GGC
Donation to registered Political party [100% of -3,00,000
3,00,000]
Deduction u/s 80G:
Donation to Prime Minister's Drought Relief Fund
[50% of ₹ 1,11,000] -55,500 -5,05,500
Total Income (rounded off) 5,04,260
Tax on Income at normal rates 13,352
Add: HEC@ 4% 534
Tax payable 13,890
Illustration 23
Computation of total income and tax liability: Mr. Pandey, a resident individual, aged 45 years,
is a Chartered Accountant in practice. He maintains his accounts on cash basis. His Profit & Loss
Account for the year ended 31 March, 2025 is as follows:
Profit & Loss Account for the year ending March 31, 2025
Expenditure ₹ Income ₹
Staff Salary 18,25,000 Fees earned 23,00,000
Rent of the office premises 6,00,000 Audit 14,50,000
Administrative expenses 5,75,000 Taxation
Stipend to Articled clerks 1,85,000
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 CA VARDHAMAN DAGA

Meeting, seminars and 36,500 Consultancy services relating to

conferences syndication of loan from financial
Institution 10,00,000
Depreciation 55,000 47,50,000
Printing and Stationery 8,75,000
Net profit 19,13,500 Gifts 1,00,000
Dividends from Indian companies 12,00,000
Interest on deposit 15,000
60,65,000 60,65,000
Other information:
(1) Depreciation allowable under Income-tax Act ₹ 1,25,000.
(2) Administrative expenses include ₹ 55,000 paid to a tax consultant in cash for assisting Mr.
Pandey in one of the professional assignments.
(3) Gifts represent fair market value of a LED TV which was given by one of the clients for
successful presentation of case in the Income Tax Appellate Tribunal.
(4) Last month's rent of 50,000 was paid without deduction of tax at source.
(5) Mr. Pandey had taken a loan of 32,00,000 for the purchase of a house property stamp duty
value 46,00,000 from a recognized financial institution on 1" May, 2024. He repaid 1,50,000
on 31 March, 2025 out of which 1,00,000 is towards principal payment and the balance is for
interest on loan. The possession of the property will be handed over to him in October 2025.
(6) Mr. Pandey paid medical insurance premium of his parents (senior citizens and not dependent
on him) by cheque amounting to 27,000. He also paid 8,500 by cash towards preventive health
checkup for himself and his spouse.
Compute the total income of Mr. Pandey and tax payable by him for Assessment Year 2025-26,
assuming that Mr. Pandey does not want to opt for presumptive taxation scheme under section
44ADA. Assessee has not opted for provisions of Section 115BAC. (10 Marks, Nov. 2017)
Solution: Computation of Total income and Tax payable (amounts in ₹)
Particulars ₹ ₹
Income under the head Profits & Gains of Business and Profession 19,13,500
Net profit as per Profit and Loss Account
Add: Expenses debited but not allowable-
Depreciation debited in Profit and loss Account[WN-1] 55,000
Payment to tax consultant in cash is disallowed u/s 40A(3), since 55,000
such cash payment is in excess of 10,000 in a day
Payment of rent of office premises without deducting tax at source
[30% of 50,000][WN-2] 15,000
Gifts from client[WN-3] Nil
Less: Income credited but not taxable under this head -
Dividend on shares of Indian Companies not to be taxed under this 12,00,000
head
Interest on deposit Certificates issued under Gold Monetization
Scheme, 2015 is exempt u/s 10(15) 15,000
Depreciation allowable under Income-tax Act[WN-1] 1,25,000 6,98,500
Income from other sources:
Dividend from shares of Indian company [Fully taxable in hands of 12,00,000
shareholder]
Interest on deposit Certificates issued under Gold Monetization -
Scheme, 2015 is exempt u/s 10(15) 12,00,000

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 CA VARDHAMAN DAGA

Gross total income - 18,98,500

Less: Deduction u/s 80C (Repayment of loan taken for purchase of
house)[WN-4] Nil
Deduction u/s 80D (Health Insurance Premium)[WN-5] 32,000 32,000
Total Income (rounded off to nearest ₹10) 18,66,500
Tax on total income 3,72,450
Add: HEC@ 4% 14,898
Tax liability (rounded off to nearest 10) 3,87,350
Working Notes:
(1) Depreciation debited to profit and loss account will be added back and allowable depreciation
as per Income tax Act, shall be reduced.
(2) An individual is liable to deduct tax at source on rent payments if his turnover in preceding
financial year exceeds 1crore. Presuming that turnover Mr. Pandey in preceding financial year
exceeded ₹ 1 crore, he was liable to deduct tax at source. Since he has not deducted tax at
source, 30% of rent payments shall be disallowed under Section 40(a)(ia) of the Act.
(3) Gifts given by one of the clients for successful presentation of case in the Income Tax
Appellate Tribunal is value of benefit received from clients during the course of profession
is taxable under section 28(iv) under the head Profits and gains from business or profession.
Since the same has already been credited to profit and loss account, hence no adjustment is
required.
(4) Interest on borrowed capital is allowed as deduction under section 24. Interest payable on
loans borrowed for the purpose of acquisition, construction, repairs, renewal or
reconstruction of house property can be claimed as deduction under section 24. Further,
Interest payable on borrowed capital for the period prior to the previous year in which the
property has been acquired or constructed, can be claimed as deduction over a period of 5
years in equal annual installments commencing from the year of acquisition or completion of
construction. It is stated that the possession of property will be handed over in October,
2024. Hence, deduction under Section 24 in respect of interest on housing loan cannot be
claimed in the assessment year 2024-25.
Section 80C is attracted where there is any payment for the purpose of purchase or
construction of a residential house property, the income from which is chargeable to tax
under the head 'Income from house property'. However, deduction is prima facie eligible only
if the income from such property is chargeable to tax under the head "Income from House
Property". During the assessment year 2024-25, there is no such income chargeable under
this head, hence, deduction under section 80C cannot be claimed for assessment year 2024-
25.
(5) (a) Premium paid to insure the health of his parents being senior citizen is eligible for
deduction u/s 80D upto 30,000, even though they are not dependent.
(b) Expenditure on preventive health check up for himself and spouse is eligible for deduction
upto ₹ 5,000 even if payment is made in cash.
Illustration 24
Computation of Total Income: Mr. Vinod Kumar, resident, aged 62, furnishes the following
information pertaining to the year ended 31-3-2025:
Particulars ₹
i) Pension received (Net of TDS) 6,27,000
ii) Short-term capital gains (from sale of listed shares) i 65,000
iii) Long-term capital gains (from sale of listed shares) 1,24,000
iv) Interest on fixed deposit from bank 1,60,000

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 CA VARDHAMAN DAGA

v) Pertaining to consultancy services provided by him:

Gross receipts 12,60,000
Expenses:
Rent for premises 1,44,000
Salary of P.A. 1,20,000
Stenographer's salary 1,00,000
Business Development expenditure 91,000
Conveyance 3,00,000
vi) Contribution to PPF 1,10,000
vii) Premium on life insurance policy taken on 10-1-2025 (sum assured 60,000
5,00,000)
viii) Medi-claim Insurance Premium for self (paid otherwise than by cash) 47,000
Preventive health checkup expenses (in cash) 6,000
ix) Donation given in cash to a charitable trust registered under section 14,000
12AB (eligible for deduction u/s 80G) of the Income-tax Act, 1961
x) Interest received from Post Office Saving A/c. 18,000
Additional information:
TDS from pension 25,000
1/4th of conveyance expenses is estimated for personal use.
Compute the total income of the assessee for the assessment year 2025-26 under proper heads
of income. Listed share were sold in recognized stock exchange. Ignore the provisions of Section
44ADA. Assessee has not opted for provisions of Section 115BAC. (Modified, 10 Marks, May
2016)
Solution: Computation of total income of Mr. Vinod Kumar for A.Y. 2025-26 (amounts in ₹)
Particulars ₹ ₹
Income under the head Salary:
Pension received (Net of TDS) 6,27,000
Add: TDS from pension 25,000
Gross salary 6,52,000
Less: Standard deduction u/s 16(ia) 50,000 6,02,000
Profits and gains of business or profession:
Gross receipts 12,60,000
Less: Rent for premises 1,44,000
Salary of P.A. 1,20,000
Stenographer's salary 1,00,000
Business Development expenditure 91,000
Conveyance[WN-1] 2,25,000 5,80,000
Capital Gains:
Short-term capital gains (from sale of listed shares) 65,000
Long-term capital gains (from sale of listed shares) 1,24,000 1,89,000
Income from Other Sources:
Interest on fixed deposit from bank 1,60,000
Interest received from Post Office Saving A/c. [18,000 - ₹3,500] 14,500 1,74,500
[WN-3]
Gross Total Income 15,45,500
Less: Deduction u/s 80C
Contribution to PPF 1,10,000
Premium on life insurance policy taken on 10-1-2025 (sum assured 50,000
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 CA VARDHAMAN DAGA

₹ 5,00,000) [WN-4]
Amount of deduction under Section 80C cannot exceed 1,50,000 1,60,000 1,50,000
Deduction u/s 80D:
Mediclaim Insurance Premium for self (paid otherwise than by 47,000
cash)
Preventive health checkup expenses (in cash)[WN-5] 5,000
52,000 50,000
Deduction u/s 80TTB (Interest on fixed deposit from bank)[WN- 50,000
6]
Deduction u/s 80G (Donation in cash exceeding 2,000 is not eligible Nil
for deduction)
Total Income (rounded off) 12,95,500
Working Notes:
(1) Since 1/4th of the conveyance expenses is estimated for personal use, hence, the same shall
not be allowed under Section 37(1). Therefore, allowable conveyance expenses is 3/4th of
3,00,000 = ₹ 2,25,000.
(2) Long-term capital gain on sale of shares on which STT is paid both at the time of acquisition
& sale is exempt upto ₹ 1.25 lakh as per section 112A.
(3) Interest from post office saving bank account is exempt from tax u/s 10(15) upto 3,500.
(4) Deduction shall be allowed in respect of premium paid for life insurance only to the extent
of 10% of sum assured in respect of insurance policy issued after 01-04-2013. Thus, 10% of
5,00,000 = ₹ 50,000 shall be eligible for deduction u/s 80C.
(5) As per section 80D, in case the premium is paid in respect of health of a person specified
therein and for health check-up of such person who is a senior citizen i.e., aged 60 years or
more, deduction shall be allowed up to 50,000. Further, deduction up to 5,000 in aggregate
(within the monetary limits of 50,000) shall be allowed in respect of health check-up of self,
spouse, children and parents. In order to claim deduction under section 80D, the payment for
health-check up can be made in any mode including cash. However, the payment for health
insurance premium has to be paid in any mode other than cash. Hence, maximum 50,000 shall
be eligible in the above case.
(6) In case of resident individuals of the age of 60 years or more, interest on bank fixed deposits
qualifies for deduction upto 50,000 under section 80TTB.
Illustration 25
Computation of total income and tax liability: Mrs. Ann provides the following information for
the Financial year ending 31-03-2025. Compute her total income and tax payable thereon for
assessment year 2025-26 as per Income-tax Act, 1961 if he has exercised the option of shifting
out of default tax regime.
→ Income/Receipts
(1) Salary from M/s. Prominent Technologies, - 60,000 per month (Joined from 1st March, 2024).
(2) She is in receipt of HRA. 15,000 per month and also educational allowance of 1,500 per
month for all the three of her children.
(2) She bought a light goods vehicle on 01-08-2024 and has been letting it on hire. She does not
maintain books of account for this business. But she declares for income tax purpose, that
she is earning net income of 11,000 per month from this business.
(3) She received 8,500 as interest on Post Office Savings Bank Account.
(4) She received 25,000 as interest from Company Deposits.
(5) Amounts withdrawn from National Savings Scheme (Principal ₹ 10,000 & Interest ₹ 25,000)
→ Expenses/Payments:
(1) Interest payable to bank 1,000 per month on loan for the purchase of truck.
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 CA VARDHAMAN DAGA

(2) Total interest paid to bank for loan borrowed for investing in company deposits is 5,000.
(3) Rent paid for residence is 18,000 per month.
(4) Tuition fees paid for the year 2024-25 for her three children is 50,000, 30,000 and 20,000
respectively, to educational institution situated in India.
(5) Medical insurance premium for her and for her husband is 30,000 (paid by cheque) and 25,000
(paid by cash) respectively.
(6) She has deposited during the year, in 5 year Post office Recurring Deposit Scheme 20,000.
Solution: Computation of total income and tax liability of Mrs. Ann (amount in ₹)
Particulars ₹ ₹
Basic Salary (60000 x12 ) 7,20,000
HRA (15000 x12 ) 1,80,000
Less: Exempt u/s 10(13A) [WN-1] 1,44,000 36,000
Education Allowance (1,500x12 ) 18,000
Less: Exempt u/s 10(14) (100 x 12 x 2) 2,400 15,600
Gross Salary 7,71,600
Less: Standard Deduction u/s 16(ia) 50,000
Income from Salary 7,21,600
Profits and gains from business or profession :
Income from the business of letting on hire of light goods vehicle 88,000
[WN-2]
Income from Other Sources:
Interest on Post office Saving bank account 8,500
Less: Exemption u/s 10(15)(i) 3,500
Balance Interest 5,000
Interest from National Savings scheme 25,000
Interest on Company deposit 25,000
55,000
Less: Deduction u/s 57 (Interest paid for making investment in
company deposit) 5,000 50,000
Gross Total Income 8,59,600
Less: Deductions under Chapter VI-A
Deduction u/s 80C[WN-3] 80,000
Deduction u/s 80D[WN-3] 25,000
Deduction u/s 80TTA [Interest on Post office saving bank account
subject to maximum of10,000] 5,000 1,10,000
Total Income 7,49,600
Tax on total income 62,420
Add: Health and Education cess @ 4% 2,497
Tax payable (rounded off) 64,920
Working Notes:
(1) HRA is exempt to the extent of the least of the following under section 10(13A)
(a) 50% of salary (assumed to be in Mumbai) i.e. 50% of 7,20,000 = 3,60,000;
(b) Excess of rent paid over 10% of salary = 2,16,000-72,000 = 1,44,000;
(c) Actual HRA received = 15,000 x 12 = 1,80,000.
Least of the above i.e. 1,44,000 is exempt under section 10(13A).
(2) In the case of a person owning not more than 10 vehicles at any time during the previous year,
estimated income from each light goods vehicle will be deemed to be 7,500 for every month
or part of the month during which the vehicle is owned by the assessee during the previous

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 CA VARDHAMAN DAGA

year. If, however, the assessee declares a higher amount, such amount will be considered as
income. Also, interest is not deductible, since under section 44AE, all deductions under
sections 30 to 38 are deemed to have been allowed from such declared income. [Section
44AE]
Actual income = 11,000 × 8 = 88,000.
(3) Deductions u/s 80C and Section 80D:
Tuition fees paid for two of his children (most favourable to Mrs. Ann) [5 year 80,000
Post office recurring deposit do not qualify for deduction u/s 80C].
Medical Insurance Premium for self paid in cheque qualifies for deduction 25,000
subject to maximum of25,000. [Health insurance premium paid for her husband
in cash do not qualify for deduction u/s 80D]
Illustration 26
Computation of total income and tax liability: Mr. Devansh an Indian Resident aged 38 years
carries on his own business. He has prepared following Profit & Loss A/c for the year ending 31-
03-2025:
Particulars ₹ Particulars ₹
Salary 48,000 Gross Profit 4,30,400
Advertisement 24,000 Cash Gift (on the occasion of 1,20,000
Marriage)
Sundry Expenses 54,500 Interest on Debentures 7,200
(Listed in recognised stock
Exchange) Net of Taxes
Fire Insurance (10,000 relates to 30,000
House Property)
Income Tax and Wealth Tax 27,000
Household expenses 42,500
Depreciation(Allowable) 23,800
Contribution to an University 1,00,000
approved andnotified u/s 35(1)(ii)
Municipal taxes paid for House 36,000
property
Printing & Stationary 12,000
Repairs & Maintenance 24,000
Net Profit 1,35,800
5,57,600 5,57,600
Other information:
(i) Mr. Devansh owns a House Property which is being used by him for the following purposes:
25% of the property for own business
25% of the property for self-residence
50% let out for Residential purpose
(ii) Rent received from 50% let out portion during the year was 1,65,000.
(iii) On 01-12-2024 he acquired a vacant site from his friend for 1,05,000. The State Stamp
Valuation Authority fixed the value of the site at 2,80,000 for stamp duty purpose.
(iv) He received interest on Post Office Savings bank Account amounting to 500.
(v) Cash gift on the occasion of marriage includes gift of 20,000 from Non-relatives.
(vi) LIC premium paid (Policy value 3,00,000 taken on 01-06-2015) 60,000 for his handicapped
son. (Section 80U disability)

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 CA VARDHAMAN DAGA

(vii) He purchased 10,000 shares of X Company Ltd. on 01-01-2014 for 1,00,000 and received a
1:1 bonus on 1-1-2016. He sold 5,000 bonus shares in September 2024 for 2,20,000. Shares
are not listed and STT not paid).
Compute Total Income and Net Tax payable by Mr. Devansh for the Assessment Year 2025-26.
Assessee has not opted for provisions of Section 115BAC. (10 Marks, Nov. 2014)
Solution: Computation of total income and tax payable (amounts in ₹)
Particulars ₹ ₹
Income from house property:
Actual Rent Received [Being Gross Annual Value u/s 23(1)] 1,65,000
Less: Municipal taxes paid 18,000
Net Annual Value (NAV) 1,47,000
Less: Standard deduction u/s 24 @ 30% of NAV 44,100 1,02,900
Income under the head Profits & Gains of Business and
Profession
Net profit as per Profit and Loss Account 1,35,800
Add: Expenses debited but not allowable
Municipal Taxes of house property not relatable to Business [75% 27,000
of 36,000] [WN-1]
Fire Insurance of house property not relatable to Business [75% 7,500
of 10,000] [WN-1]
House hold expenses [WN-3] 42,500
Income tax and wealth tax[WN-2] 27,000
2,39,800
Less: Income credited but not taxable under this head -Cash Gift
(on the occasion of Marriage) 1,20,000
Interest on Debentures (Listed in recognised stock Exchange) 7,200
Net of Taxes 1,27,200 1,12,600
Capital Gains (Long Term)
Sale of Bonus Shares 2,20,000
Less: Cost of Acquisition Nil 2,20,000
Income from other sources:
Cash gift on occasion of marriage is not taxable -
Interest on Post Office Savings bank Account [In case of -
individual account, a sum upto 3,500is exempt u/s 10(15)]
Interest on debentures [Gross amount will be taxable i.e. 7,200 × 8,000
100/90]
Purchase of immovable property for inadequate consideration 1,75,000 1,83,000
[WN-4]
Gross Total Income 6,18,500
Less: Deduction u/s 80C (LIC Premium - Actual amt. or 15% 45,000
of capital sum assured, whichever is less)
Total Income (rounded off to nearest ₹10) 5,73,500
Tax on total income:
Tax on long term capital gains: 12.5% of ₹ 2,20,000 27,500
Tax on balance income 5,175
32,675
Less: Tax rebate u/s 87A [Not available since total income Nil
exceeds 5,00,000]

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 CA VARDHAMAN DAGA

Balance Tax 32,675

Add: Health and Education cess @ 4% 1,307
Tax liability (rounded off to nearest ₹10) 33,980
Less: TDS on interest on debentures 800
Tax payable 33,180
Working Notes:
(1) Since 25% of the house property is used by Mr. Devansh for his own residence and 50% of
the property is let out for residential purposes, therefore expenditure relatable for the said
portion shall not be allowed while computing business income. Thus following expenses shall
be disallowed
(a) 75% of Municipal taxes paid for the property i.e. 75% of 36,000 = ₹ 27,000
(b) 75% of Fire Insurance of House Property i.e. 75% of 10,000 = ₹ 7,500
(2) Income tax and Wealth tax are disallowed under Section 40(a).
(3) House hold expenses are specifically disallowed under Section 37(1).
(4) Since Mr. Devansh purchased immovable property for inadequate consideration, the
difference between the stamp duty value of 2,80,000 and the actual consideration of
1,05,000 paid is taxable u/s 56(2)(x) as Income from other sources, since the difference
exceeds 50,000 being,the higher of 50,000 and 10% of consideration i.e.₹ 10,500.
(5) Contribution to an University approved and notified u/s 35(1)(ii) is eligible for 100%
deduction. Since the expenditure is already debited to Profit and loss account, no adjustment
shall be required.
Illustration 27
Computation of Total Income and Tax Liability: Mrs. Rani a resident aged 50 years is running
an acupuncture clinic. Her Income and Expenditure Account and other relevant information for
the year ending 31st March, 2025 are given below:
Expenditure ₹ Income ₹
To Staff Salary 52,40,000 By Fees receipts 61,45,000
To Clinic rent 1,20,000 By Dividend from Indian 10,500
Companies (Gross)
To Medicines and needles 1,05,000 By Winning from Lotteries net 14,000
of TDS (TDS 6,000)
To Depreciation 81,000 By Income-tax Refund 1,750
To Administrative expenses 1,52,000
To Donation to Prime Minister's 20,000
National Relief Fund
To Excess of Income over 4,53,250
Expenditure
61,71,250 61,71,250
(i) Depreciation in respect of all assets has been ascertained at 60,000 as per Income-tax
rules. (ii) Medicines & needles of 22,000 have been used for her family.
(ii) Fees Receipts include 24,000 being honorarium for valuing acupuncture examination answer
books.
(iii) She has also received 57,860 on maturity of one LIC Policy, not included in the above Income
and Expenditure Account.
(iv) She has paid an LIC premium of 12,000 for self (Sum Assured ₹ 50,000).
(v) She has paid 2,500 for purchase of lottery tickets.
Compute the total Income and tax payable thereon of Mrs. Rani for the A.Y. 2025-26. Assessee
has not opted for provisions of Section 115BAC. (10 Marks, IPCC May 2013)

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 CA VARDHAMAN DAGA

Solution: Computation of Total income and Tax liability of Mrs. Rani (amount in ₹)
Particulars ₹ ₹
Profits and Gains of Business or Profession:
Net Profits as per Income and Expenditure A/c 4,53,250
Less: Income tax refund 1,750
Dividend from Indian companies 10,500
Winnings from lottery (net of TDS) 14,000
Honorarium for valuing acupuncture examination answer books. 24,000
Allowable depreciation as per Income tax rules 60,000
3,43,000
Add: Expenditure debited but not allowable
Donation to Prime Minister's National Relief Fund 20,000
Deprecation 81,000
Cost of medicines and needles for self use 22,000 4,66,000
Income from other sources:
Honorarium for valuing acupuncture examination answer books 24,000
Gross Winnings from lottery [WN-1] 20,000
Dividend from Indian company (Taxable) 10,500 54,500
Gross Total Income 5,20,500
Less: Deduction u/s 80C [LIC premium of 12,000 for self (Sum
Assured 50,000) shall be allowed subject to 10% of capital sum
assured assuming that the policy is issued on or after 0104-2013] 5,000
Deduction u/s 80G (Donation to Prime Minister's National Relief
Fund)[WN-3] 20,000 25,000
Total Income (rounded off) 4,95,500
Tax on Lottery Winnings [20,000 × 30%] 6,000
on Balance Income (4,95,500 - 20,000 - 2,50,000) 11,275
Total tax 17,275
Less: Tax rebate under Section 87A [100% of tax or 12,500 12,500
whichever is less]
Total Income-tax 4,775
Less: TDS on dividends (10,500 × 10%) 1,050
Less: TDS on lottery winnings 6,000
Tax payable (rounded off -2,280
Working Notes:
(1) Winnings from lottery should be grossed up for the chargeability under the head "Income
from other sources". Hence, taxable amount is (14,000+ 6,000) = 20,000. Further cost of
lottery tickets is not allowed as deduction.
(2) ₹ 57,860 received on maturity of one LIC Policy, is exempt from tax under section 10(10D).
(3) Donation to Prime Minister's National Relief Fund is eligible for 100% deduction.
(4) Income tax refund shall not be taxable but interest on IT refund is taxable.
Illustration 28
Computation of Total Income: The following is the Profit and Loss Account of Mr. Aditya, aged
58 years, a resident, for the year ended 31-03-2025:
Particulars ₹ Particulars ₹
Rent 60,000 Gross Profit 1,85,000
Repair of car 3,000 Gift of cash from a friend 25,000
(received on 15-9-2024)
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 CA VARDHAMAN DAGA

Wealth tax 5,000 Sale of car 17,000

Medical expenses 4,500 Interest on income-tax refund 3,000
Salary 18,000
Depreciation on car 3,000
Advance income-tax 1,500
Net Prof 1,35,000
2,30,000 2,30,000
Other information:
(1) Aditya bought a car during the year for 20,000. He charged depreciation @ 15% on the value
of the car. The above car was sold during the year for 17,000. The use of the car was
3/4thfor business and 1/4th for personal use.
(2) Medical expenses were incurred for the treatment of Nikita, his wife.
(3) Salary had been paid on account of car driver.
(4) Rent includes arrears of rent from April 2022 to October 2024 @5,000 p.m., paid in cash on
01-11-2024.
(5) Mr. Aditya had also let out a house property at a monthly rent of 25,000. The annual letting
value is considered to be 2,50,000. The municipal taxes are 6,000, out of which 3,000 are
paid by the tenant and 3,000 are yet to be paid by Mr. Aditya. Interest on loan taken for the
house property is 20,000.
(6) Mr. Aditya's minor daughter received 75,000 from stage acting. Interest on company
deposits of Mr. Aditya's daughter (deposit was made out of income from stage acting) was
10,000.
(7) Aditya incurred an expense of 50,000 on the medical treatment of his dependant son, who
has disability of more than 80%.
(8) Aditya had taken a loan during the year 2024-25 for the education of his son, who is pursuing
B. Com. in Delhi University. Interest paid on the same during the year was 10,000.
Compute the total income of Mr. Aditya. Assessee has not opted for provisions of Section 115BAC.
(10 Marks, Nov.2013)
Solution: Computation of Total Income of Mr. Aditya (amounts in ₹)
Particulars ₹ ₹
Income from house property:
Gross Annual Value [Actual Rent Receivable ( 25,000 x 12) or 3,00,000
Annual letting value2,50,000 which ever is higher]
Less: Municipal taxes[WN-1] Nil
Net annual Value (NAV) 3,00,000
Less: Standard deduction (@ 30% of NAV) 90,000
Less: Interest on borrowed capital 20,000 1,90,000
Profits and gains of business profession:
Net profit as per P&L A/c 1,35,000
Gift of cash from a friend (received on 15-09-2022) -25,000
Sale of car -17,000
Interest on income-tax refund -3,000
Add: Items debited to profit and loss account to be disallowed/
considered separately
Advance Income Tax [Not allowable as deduction u/s 40(a)] 1,500
Car expenses disallowed @ 25% for personal use [3,000 × 25%] 750

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 CA VARDHAMAN DAGA

Depreciation on car [ 3,000, Since, the car is sold in the year of

purchase, hence block does not exist at year end, hence no
depreciation shall be admissible] 3,000
Wealth tax [Disallowed under Section 40(a)] 5,000
Salary of car driver for personal use [ 18,000 × 25%] 4,500
Arrears of rent paid in cash [Since, it exceeds 10,000, the 35,000
same shall be disallowed under section 40A(3)] (5,000 × 7)
Medical expenses [Personal expenses, hence disallowed under 4,500 1,44,250
Section 37(1)]
Capital Gains:
Original cost of car 20,000
Sale proceeds of car 17,000
Short term capital loss [Short term capital loss cannot be set off
from any other head of Income and hence the same shall be carried
forward] -3,000 Nil
Income from other sources:
Interest on income tax refund 3,000
Gift of cash from a friend [Not taxable u/s 56(2)(x), since it does Nil
not exceed ₹ 50,000]
Interest on company deposits of Mr. Aditya's daughter will be 8,500 11,500
clubbed with Aditya's Income and exemption of 1,500 u/s 10(32)
shall be allowed. (10,000 - 1,500)
Gross Total Income 3,45,750
Less: Deduction under section
Section 80DD: Medical treatment of dependent disabled suffering
from severe disability [Fixed sum shall be allowed as deduction,
irrespective of expenditure incurred] 1,25,000
Section 80E: Interest on loan taken for higher education of son 10,000 1,35,000
Total Income (rounded off) 2,10,750
Working Note:
(1) Municipal taxes of ₹ 3,000 yet to be paid by Mr. Aditya., shall not be allowed as deduction,
since Municipal taxes paid during the previous year is allowed as deduction. Municipal taxes
paid by tenant (3,000) are also not eligible for deduction.
(2) Income of 75,000 received by Mr. Aditya's minor daughter from stage acting will not be
clubbed in hands of Aditya.
Illustration 29
Computation of Total Income and tax liability: From the following details compute the total
income of Kamal, A resident individual aged 54 years for the year ended 31-3-2025. Tax payable
need not be calculated.
Particulars ₹
i) Salary including Dearness Allowance 5,00,000
ii) Bonus 15,000
iii) Salary to servant provided by Employer 12,000
iv) Bill paid by Employer for Gas, Electricity and water provided free of cost 14,500
at his flat
v) Cost of Laptop provided by the employer (Used both for official and 40,000
personal purposes)
Following additional information is provided:
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 CA VARDHAMAN DAGA

(1) Kamal purchased a flat in a Co-operative Housing Society in Delhi for 10,75,000 in April, 2015
by taking loan from State Bank of India amounting to 5,00,000 @ 15% per annum interest,
65,000 from his own savings and deposit from a Nationalized Bank to whom this flat was given
on lease for 10 years at a monthly lease rental of 5,500. The outstanding amount of loan is
₹1,60,000.
(2) Municipal Taxes paid by Kamal 4,500 p.a.
(3) Insurance in respect of the said flat ₹ 1,275
(4) Kamal earned a profit of ₹ 15,000 in shares speculation business and incurred a loss of 20,200
in speculation business of cotton.
(5) In the year 2017-18, he had gifted 50,000 to his wife and 30,000 to his son who was aged 11
years then. These amounts were advanced to Mr. Mohan @ 15% per annum interest.
(6) Kamal received a gift of *25,000 each from his four friends on the occasion of his birthday.
(7) He contributed 10,500 to Public Provident Fund and 6,000 to Unit Linked Insurance plan.
(8) He deposited 60,000 in tax saver deposit with a Nationalised Bank in the name of his
married son.
(1) (9) He has taken a policy on life for his married daughter on 1-4-2024 and paid a premium of
25,000. The sum assured for policy is ₹ 2,00,000. Assessee has not opted for provisions of
Section 115BAC. (10 Marks, May 2014)
Solution: Computation of total income and tax liability of Mr. Kamal (amounts in ₹)
Particulars ₹ ₹
Income under the head Salary:
Salary including dearness allowance 5,00,000
Bonus 15,000
Salary of servant provided by the employer (Taxable as perquisite) 12,000
Bill paid by employer for gas, electricity and water provided free of
cost at the residence of Kamal (Taxable as perquisite 14,500
Laptop for official and personal use Exempt
Gross Salary 5,41,500
Less: Standard deduction u/s 16(ia) 50,000 4,91,500
Income from House Property:
Gross Annual Value (GAV) (Rent receivable is taken as GAV in the
absence of other information) [5,500 × 12] 66,000
Less: Municipal Taxes paid 4,500
Net Annual Value (NAV) 61,500
Less: Standard Deduction @30% of NAV 18,450
Less: Interest on loan from SBI [ 1,60,000 × 15% x 1] 24,000 19,050
Profits and gains of business or profession:
Profit in Share speculation business 15,000
Loss in Cotton speculation business -20,200
Net loss from speculative business has to be carried forward as -5,200
it cannot be set off against any other head of income.
Income on account of interest earned from advancing money gifted to 3,000
his minor son is includible in the hands of Kamal as per Section 64(1A).
However, as per section 10(32) an exemption of 1,500 shall be
available (4,500-1,500)
Interest income earned from advancing money gifted to wife has to 7,500
be clubbed with the income of the assessee as per section 64(1)
(`50,000 × 15%)

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 CA VARDHAMAN DAGA

Gift from four friends @ 25,000 each - Since the aggregate amount 1,00,000 1,10,500
exceeds 50,000, hence, whole of the sum will be taxable u/s 56(2)(x)
Gross Total Income 6,21,050
Less: Deduction u/s 80C
Contribution to Public Provident Fund 10,500
Tax saver deposit with a Nationalised Bank in the name of his married
son[WN-1] Nil
LIC premium in respect of policy taken in name of married 20,000
daughter[WN -2]
Unit Linked Insurance Plan 6,000 36,500
Total Income (rounded off) 5,84,550
Tax on total income 29,410
Add: Health and Education cess @ 4% 1,176
Total Tax (rounded off) 30,590
Working Notes:
(1) Tax saver deposit in the name of married son does not qualify for deduction under section
80C.
(2) Premium paid for insurance on the life of any child of the individual, whether married or not,
qualifies for deduction u/s 80C. Therefore, the life insurance premium paid for insurance
policy of married daughter is allowed as deduction. However, the same cannot exceed 10% of
capital sum assured since the policy is taken after 31-03-2012.
(3) It has been assumed that Kamal own flat in a co-operative housing society, which he has
rented out to a nationalised bank, is also in Delhi. Therefore, he is not eligible for deduction
under section 80GG in respect of rent paid by him for his accommodation in Delhi, since one
of the conditions to be satisfied for claiming deduction under section 80GG is that the
assessee should not own any residential accommodation in the same place.
Illustration 30
Computation of Total Income: Mr. Raghuveer, a resident individual aged 35 years, furnished the
following information from his Profit and Loss Account for the year ended 31 March, 2025:
(i) The net profit was 6,50,000.
(ii) The following incomes were credited in the Profit & Loss Account :
(1) Divident from a foreign company ₹ 18,000
(2) Interest on government securities ₹ 25,000
(3) Gold coins worth 55,000 received as gift from his father.
(iii) Depreciation debited in the books of account was 85,000. Depreciation allowed as per
Income tax Act, 1961 was 96,000.
(iv) Interest on loan amounting to 68,000 was paid in respect of capital borrowed for the
purchase of the new asset which has not been put to use till 31 March, 2025.
(v) General expenses included:
(4) An expenditure of 20,500 which was paid by a bearer cheque.
(5) Compensation of ₹4,500 paid to an employee while terminating his services in business
unit.
(vi) He contributed the following amounts by cheque:
(6) 45,000 in Sukanya Samridhi Scheme in the name of his minor daughter Alpa.
(7) 20,000 to the Swachh Bharat Kosh set up by the Central Government.
(8) 28,000 towards premium for health insurance and 2,500 on account of preventive
health checkup for self and his wife.

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 CA VARDHAMAN DAGA

(9) 35,000 on account of medical expenses of his father aged 82 years (no insurance
scheme had been availed on the health of his father).
You are required to compute the total income of Mr. Raghuveer for the Assessment Year 2025-
26. Assessee has not opted for provisions of Section 115BAC. (10 Marks, Nov. 2016)
Solution: Computation of total income of Mr. Raghuveer (amount in ₹)
Particulars ₹ ₹
Profits and Gains of Business or Profession
Net profit as per profit and loss account 6,50,000
Add: Expenses debited to P&L A/c but not allowable as
deduction
Interest on loan amounting to was paid in respect of capital 68,000
borrowed of the new asset which has not been put to use till 31-3-
2023[WN-1]
Expenditure which was paid by a bearer cheque.[WN-2] 20,500
Depreciation debited in the books of account 85,000
Compensation paid to an employee while terminating his services in -
business unit. [WN-3]
8,23,500
Less: Incomes credited to P&L A/c but not taxable as business
income
Interest on government securities 25,000
Dividend from a foreign company 18,000
Gold coins received as gift from his father 55,000
Depreciation allowable under the Income-tax Rules, 1962 96,000 6,29,500
Income from Other sources
Interest on government securities 25,000
Dividend from a foreign company[WN-4] 18,000
Gold coins received as gift from his father[WN-5] - 43,000
Gross Total Income 6,72,500
Less: Deduction under Chapter VI-A
U/s 80C: Sukanya Samridhi Scheme 45,000
U/S 80D: Insurance premium[WN-6] 25,000
Medical Expenses of Father (82 Yrs)[WN-6] 35,000
U/s 80G: Contribution to Swachh Bharat Kosh[WN-7] 20,000
Total Income 5,47,500
Working Note:
(1) As per Section 36(1)(iii), interest on capital borrowed for the purchase of asset, paid from
the date on which the capital was borrowed upto the date such asset was first put to use,
shall not be allowed as a deduction.
(2) As per Section 40A(3), expenditure in respect of which aggregate payments made to a person
in a day, in excess of 10,000, made otherwise than by way of account payee cheque/demand
draft is disallowed in full.
(3) Compensation of 4,500 paid to an employee while terminating his services in business unit is
allowed as deduction under section 37.
(4) Dividend from Foreign Company is Taxable under the Head "Income from Other Sources".
(5) As per Section 56(2)(x), gift received from a relative (father) is exempt from tax.
(6) Deduction in respect of health insurance premium paid on the health of himself and
preventive health check up for self and his wife shall be allowed subject to maximum of

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 CA VARDHAMAN DAGA

25,000. Deduction under section 80D in respect of medical expenditure of his father who is
a senior citizen shall be allowed of 35,000.
(7) 100% deduction under section 80G for contribution to Swachh Bharat Kosh set up by the
Central Government shall be allowed without any restriction.
Illustration 31
Computation of total income: Ms. Rekha, a resident individual aged 50, provides the following
information for the financial year 2024-25:
(i) She is a partner in AK & Co. and received the following amount from the firm :
Share of profit from the firm = ₹ 35,000
Interest on capital @ 15% p.a = ₹ 3,00,000
Salary as working partner = ₹ 1,00,000
(fully allowed in the hands of the firm)
(ii) She is running a rice mill as proprietor. The Net profit as per Profit & Loss Account is ₹
4,50,000. The following items are debited to Profit and Loss account:
a. Advance Income-tax paid 1,00,000
b. Personal drawings = 50,000
The Following items are credited to Profit and Loss Account:
c. Interest on savings bank account with SBI ₹ 12,000
d. Interest on savings account with post office ₹5,000
e. Dividend from listed Indian Company ₹ 80,000
(iii) She owned a house property in Mumbai which was sold in January, 2023. She received ₹
90,000 by way of arrear rent in respect of the said property in October, 2024.
(iv) She made the following investments:
Life insurance premium on a policy in the name of her married daughter ₹ 60,000. (The
policy was taken on 01-10-2024 and the sum assured being ₹ 5,00,000).
Health insurance premium on a policy covering her mother aged 75. She is not dependent on
Ms. Rekha. Premium paid by cheque 55,000.
Compute the Total Income and the tax liability of Ms. Rekha for the Assessment Year 2025-26.
Assessee has not opted for provisions of Section 115BAC. (10 Marks, May 2017)
Solution: Computation of total income and tax payable by Ms. Rekha (amounts in ₹)
Particulars ₹ ₹
Income from house property:
Arrears of Rent received in respect of the Mumbai house taxable u/s
25A 90,000
Less:30% deduction u/s 25A -27,000 63,000
Profits and gains of business profession:
Net profit as per P&L A/c 4,50,000
Less: Items credited to profit and loss account not treated as business
income
Interest on savings bank account with -12,000
SBI Interest on savings account with post office -5,000
Dividend from listed Indian Company -80,000
Add: Items debited to profit and loss account to be
disallowed/considered separately
Advance Tax (not allowable as deduction u/s 40(a) 1,00,000
Personal drawings 50,000
Income from Rice Mill 5,03,000
Share of profit from firm is exempt from tax under Section 10(2A) -

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 CA VARDHAMAN DAGA

Salary as working partner in partnership firm (Taxable as profits and

gains of business or profession u/s 28) 1,00,000
Interest on capital (As per section 28(v), chargeable in the hands of
the partner only to the extent allowable as deduction in the firm's hand 2,40,000 8,43,000
i.e. @ 12%) [3,00,000 × 12% ÷ 15% ]
Income from other sources:
Interest on savings bank account with SBI 12,000
Interest on savings account with post office [ 5,000-3,500] [WN] 1,500
Dividend from listed Indian Company (Taxable in hands of 80,000
shareholder - assumed to be Gross) 93,500
Gross Total Income 9,99,500
Less: Deduction under section
80C: Life insurance premium for policy in the name of her married 50,000
daughter, restricted to 10% of sum assured i.e. 10% of 5,00,000.
80D: Medical Insurance Premium on life of parent, being a senior 50,000
citizen (i.e. of age exceeding 60 years) - Qualifies for deduction, even
though the mother is not dependent on the assessee. However,
deduction cannot exceed 50,000.
80TTA: Interest on savings bank account with SBI and post office 10,000
(12,000+ 1,500). However, deduction cannot exceed 10,000. [WN] 1,10,000
Total Income 8,89,500
Tax on total Income 90,400
Add: Health and Education cess @ 4% 3,616
94,016
Less: Advance Tax 1,00,000
Less: TDS on dividend income [ 80,000 × 10%] 8,000 -
1,08,000
Net tax refundable (rounded off) -13,980
Working Note:
Interest on Post Office Saving Bank Account is exempt from tax u/s 10(15) upto 3,500. As per
Section 80TTA, deduction shall be allowed from the gross total income of an individual or Hindu
Undivided Family in respect of income by way of interest on deposit in the savings account included
in the assessee's gross total income, subject to a maximum of 10,000. Therefore, a deduction of
10,000 is allowable from the gross total income of Ms. Rekha, though the interest from savings
bank account after exemption u/s 10(15) is 13,500.
Illustration 32
Computation of Total Income and tax liability: From the following particulars of Shri Jagdish
(Aged 59 years) for the Assessment Year 2025-26, you are required to find out his taxable
income and net tax liability. Assessee has not opted for provisions of Section 115BAC:
(i) Basic Salary @ 51,000 per month, Dearness allowance @ 10,000 per month (Part of salary
for retirement benefits). House rent allowance ₹ 4,000 per month and rent paid for house
in Mumbai is 7,000 per month.
(ii) He owns a commercial building at New Delhi, which is let out on 01-07-2024 at a monthly
rent of 46,000. He paid for municipal taxes of 27,000 and 25,000 for the financial year
2023-24 and 2024-25 on 31-03-2025 and 20-04-2025 respectively.
(iii) He deals in shares. During financial year 2024-25 he earned 1,70,000 from his share
business and paid 30,000 as security transaction tax.

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(iv) He purchased 4,000 unlisted shares of Shyam Limited on 16-01-2008 for 80,000. Company
declared bonus in the ratio of 1:1 on 1st February, 2008. Shri Jagdish sold 3000 Bonus
Shares on 28-12-2024 for 2,00000 to his friend Mr. Mehul through unrecognized stock
exchange. (Cost Inflation Index:2007-08: 129, 2024-25:363)
(v) He received net dividend of 11,70,000 as dividend income from listed domestic company.
Interest from saving bank account deposits with IDBI Bank 15,000 and lottery winnings
(Net of TDS @ 30% ) is 21,000.
He paid the following amount out of his taxable income:
(a) Deposits in Public Provident Fund 2,00,000.
(b) Medical insurance premium paid for health of his wife 19,000 and for health of dependent son
₹ 12,000 through cheque. (Modified 14 Marks, May 2020-NS)
Solution: Computation of total income and tax liability of Mr. Jagdish (amount in ₹)
Particulars ₹ ₹
Income from salaries :
Basic salary ( 51,000 × 12) 6,12,000
Dearness allowance (10,000 × 12) 1,20,000
House Rent Allowance [WN-1] 37,200
Gross Salary 7,69,200
Less: Standard Deduction u/s 16(ia) 50,000 7,19,200
Income from House Property:
Actual rent being Gross Annual Value [ 46,000 × 9] 4,14,000
Less: Municipal taxes paid [taxes paid during FY 2022-23 shall be
allowed as deduction on actual payment basis] 27,000
Net Annual Value 3,87,000
Less: Deductions under section 24
(a) Statutory Deduction @ 30% of NAV 1,16,100
(b) Interest on loans Nil 2,70,900
Profits and gains from business or profession:
Income from business in dealing in shares 1,70,000
Less: Security transaction tax [Same is allowed as deduction as
per provisions of Sec. 36(1)(xv)] 30,000 1,40,000
Capital gains
Sale consideration on sale of bonus shares 2,00,000
Less: Indexed cost of acquisition[WN-2] Nil 2,00,000
Income from other sources:
Dividend from shares of Indian company [WN-4] 13,00,000
Gross Winnings from lottery[WN-3] 30,000
Saving bank interest 15,000 13,45,000
Gross Total Income 26,75,100
Less: Deduction u/s 80C (PPF subject to maximum of 1,50,000) 1,50,000
Less: Deduction u/s 80D for medical insurance premium paid 25,000
[(Wife 19,000 and dependent son 12,000) subject to maximum of
25,000]
Less: Deduction u/s 80TTA - Interest on savings bank account.
However, deduction cannot exceed 10,000. 10,000 1,85,000
Total Income (rounded off) 24,90,100
Long term capital gains taxable u/s 112 @ 12.5% (2,00,000 × 12.5%) 25,000
Winnings from lottery taxable u/s 115BB @ 30% ( 30,000 × 30% ) 9,000

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Balance Income taxable at normal rates (24,90,100-30,000 4,90,500

2,00,000) i.e.₹ 22,60,100
Tax payable 5,24,500
Add:HEC@4% 20,980
Total tax liability (rounded off) 5,45,480
Less: TDS on dividends (13,00,000 × 10%) 1,30,000
Less: TDS on lottery winnings (30,000 × 30%) 9,000
Tax payable 4,06,480
Working Notes: (1) HRA is exempt to the extent least of the following (amount in ₹)-
i) Actual HRA received [4,000 × 12] 48,000
ii) Rent paid - 10% of salary [7,000 × 12-10% of (6,12,000+ 1,20,000)] 10,800
iii) 50% of the salary [50% of (6,12,000+1,20,000)] 3,66,000
Exempted HRA 10,800
Taxable HRA 37,200
(2) Cost of acquisition of bonus shares is Nil as per section 55. Since the bonus shares were
allotted on 1-2-2008, the period of holding of bonus shares exceeds 2 years, therefore, it is
a long-term capital asset.
(3) Winnings from lottery should be grossed up for the changeability under the head "Income
from other sources". Hence, taxable amount is (21,000 x 100 ÷ 70) = 30,000
(4) Dividend from shares of Indian company in taxable in hands of shareholder at normal rate.
Company is liable to deduct tax at source @ 10% under Section 194. Hence, it should be
grossed up for the changeability under the head "Income from other sources". Hence,
taxable amount is (11,70,000 x 100 ÷ 90) = 13,00,000.
Illustration 33
Computation of Total Income: Mr. Madhvan is a finance manager is Star Private Limited. He gets
a salary of 30,000 per month. He owns two houses, one of which has been let out to his employer
and which is in-turn provided to him as rent free accommodation. Following details (annual) are
furnished in respect of two house properties for the Financial Year 2024-25.
House 1 House 2
Fair rent 75,000 1,95,000
Actual rent 65,000 2,85,000
Municipal Valuation 74,000 1,90,000
Municipal taxes paid 18,000 70,000
Repairs 15,000 35,000
Insurance premium on building 12,000 17,000
Ground rent 7,000 9,000
Nature of occupation Let-out to Star Pvt Ltd Let-out to Ms. Puja
₹ 17,000 were paid as Interest on loan taken by mortgaging House 1 for construction of House 2.
During the previous year 2024-25, Mr. Madhavan purchased a rural agricultural land for 2,50,000.
Stamp valuation of such property is 3,00,000 Determine the taxable income of Mr. Madhvan for
the assessment year 2025-26. All workings should form part of your answer. Assessee has not
opted for provisions of Section 115BAC. (8 Marks, May 2020-NS)
Solution: Computation of taxable income of Mr. Madhvan (amount in ₹)
Particulars ₹ ₹
Income from Salary:
Basic salary (30,000 × 12) 3,60,000

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 CA VARDHAMAN DAGA

Rent free accommodation (10% of salary i.e. 36,000 or Lease rent 36,000
paid i.e. 65,000 whichever is less shall be taxable value of rent free
accommodation)
Gross Salary 3,96,000
Less: Standard deduction u/s 16(ia) 50,000 3,46,000
Income from House Property:
House I [WN-1] 39,900
House II [WN-1] 1,33,500 1,73,400
Income from Other Sources:
Purchase of Rural Agricultural land for inadequate consideration -
[WN-2]
Gross Total Income 519400
Working Notes:
(1) Income from House property:
Particulars House I House II
Gross Annual value:
Expected rent or actual rent whichever is higher 75,000 2,85,000
Less: Municipal taxes paid 18,000 70,000
Net Annual value 57,000 2,15,000
Less: Deduction u/s 24 17,100 64,500
Standard deduction (30% of NAV) - 17,000
Interest on borrowed capital 39,900 1,33,500
(2) Since agricultural land is not a capital asset, the provisions of section 56(2)(x) are not
attracted in respect of receipt of agricultural land for inadequate consideration, since the
definition of "property" under section 56(2)(x) includes only capital assets specified thereunder.
Illustration 34
Computation of Total Income and Tax liability: Miss Sakshitha, a resident individual, aged 32
years, furnishes the following particulars relating to the year ended 31-3-2025:
Particulars ₹
a) Analysis of her bank account in her ledger reveals the under-mentioned data:
(i) Winnings from a TV Game show (Net) 70,000
(ii) Gift received from mother's father 80,000
(iii) Gift received from Ramya, her close friend 60,000
(iv) Interest on capital received from Vidyut & Co., a partnership firm in which 3,00,000
she is a partner (@ 15%p.a.)
(v) Rent received for a vacant plot of land 2,00,000
(vi) Amount received from Sharks Pvt. Ltd., for a house at Salem for 1,50,000
which she had been in negotiation for enhanced rent three years back. This
has not been taxed in any earlier year. The house was, however, sold off in
March, 2023.
(vii) Amount received under Key-man Insurance Policy 2,20,000
(viii) Amount forfeited by a buyer of her vacant plot, since the buyer could 3,10,000
not finalize the deal as per agreement
b) Donation given in cash to a charitable trust registered u/s 12AA 12,000
c) She owns agricultural lands at Colombo, Sri Lanka, She has derived 1,80,000
agricultural income therefrom.
d) (i) Public Provident Fund paid in the name of her minor daughter 75,000

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 CA VARDHAMAN DAGA

(ii) Interest credited in the said PPF account during the year 8,900
e) Share of profits received from Vidyut & Co. 1,90,000
You are required to compute the total income of the assessee and the tax payable for the
assessment year 2025-26 if has not opted for default tax regime. Computation should be made
under proper heads of income. (10 Marks, Nov. 2018-NS)
Solution: Computation of Total income and Tax payable (amounts in ₹)
Particulars ₹ ₹
Income from House Property:
Arrears of rent received under Section 25A 1,50,000
Less: Standard deduction@ 30%[WN-1] 45,000 1,05,000
Profits and gains of business or profession:
Share of profit from Vidyut & Co. amounting 1,90,000 is exempt -
from tax u/s 10(2A)
Amount received under Key-man Insurance Policy 2,20,000
Interest on capital received from Vidyut & Co., a partnership firm
in which she is a partner (As per section 28(v), chargeable in the
hands of the partner only to the extent allowable as deduction in 2,40,000 4,60,000
the firm's hand i.e. @ 12%) 3,00,000 × 12% ÷ 15%]
Income from other sources:
Winnings from a TV Game show (Gross)[WN-2] 1,00,000
Gift received from mother's father [Gift received from mother's 80,000
father has been brought to tax u/s 56(2)(x) on the basis of the
view that maternal grandparents are not "lineal ascendants" and
hence, do not fall within the definition of 'relative' given there
under, However, there is an alternate view that maternal
grandparents are lineal ascendants and hence, fall under the
definition of relative u/s 56(2). If this view is considered, gift of
80,000 from mother's father would not be taxable.]
Gift received from Ramya, her close friend [Taxable u/s 60,000
56(2)(x), since it exceeds 50,000]
Amount forfeited by a buyer of her vacant plot, since the buyer 3,10,000
could not finalize the deal as per agreement[WN-3]
Interest credited in PPF account [Exempt from tax] Nil
Agricultural Income from land situated in Colombo 1,80,000
Rent received for a vacant plot of land 2,00,000 9,30,000
Gross Total Income 14,95,000
Less: Deduction u/s chapter VI-A
U/s 80C: Contribution to Public Provident Fund in name of minor 75,000
daughter [Contribution made in name of any child of the Individual
qualifies for deduction u/s 80C]
U/S 80G: Donation given in cash to a charitable trust registered
u/s 12AA [No deduction shall be allowed u/s 80G in respect of
donation of any sum exceeding 2,000 unless such sum is paid by any
mode other than cash.] Nil 75,000
Total Income (rounded off) 14,20,000
Computation of tax liability:
Winnings from TV Game show under Section 115BB @ 30% 30,000
(1,00,000 × 30%)

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 CA VARDHAMAN DAGA

Balance Income taxable at normal rates (14,20,000 - 1,00,000) i.e. 2,08,500

13,20,000
Total Tax 2,38,500
Add: HEC 4% 9,540
Total tax liability 2,48,040
Less: TDS on lottery winnings 30,000
Tax payable 2,18,040
Working Notes:
(1) According to Section 25A, recovery of arrears of rent received is taxable as "Income from
House Property" whether the assessee is owner of the house or not. Hence, in the given case,
the amount of 1,50,000 received by Miss Sakshitha from Sharks Pvt. Ltd. by way of arrears
of rent after giving deduction of 30%, shall be taxable as her income for the previous year
2024-25 even if she ceases to be the owner of the house property during the previous year.
(2) Winnings from TV game show should be grossed up for the chargeability under the head
"Income from other sources" since tax is deducted at source @ 30% under Section 194B as
amount of winnings exceeds 10,000. Hence, taxable amount is (70,000 x 100 ÷ 70)= ₹
1,00,000.
(3) Any sum of money received as an advance or otherwise in the course of negotiations for
transfer of a capital asset, if, such sum is forfeited and the negotiations do not result in
transfer of such capital asset shall be chargeable to tax under Section 56(2)(ix) as Income
from other Sources.
Illustration 35
Computation of Total Income, AMT & Tax liability: From the following particulars furnished by
Mr. Ganesh, aged 58 years, a resident Indian for the previous year ended 31-03-2025, you are
requested to compute his total income and tax liability under normal as well as special provisions
(AMT), if any, applicable to him for the Assessment Year 2025-26.
(i) He occupies ground floor of his residential building and has let out first floor for residential
use at an annual rent of 2,28,000. He has paid municipal taxes of 60,000 for the current
financial year.
(ii) He owns an industrial undertaking established in a SEZ and which had commenced operation
during the financial year 2019-20. Total turnover of the undertaking was 200 lakhs, which
includes 140 lakhs from export turnover. This industrial undertaking fulfills all the
conditions of section 10AA of the Income-tax Act,1961. Profit from this industry is 25
lakhs.
(iii) He received royalty of 2,88,000 from abroad for a book authored by him on the nature of
artistic. The rate of royalty as 18% of value of books and expenditure made for earning
this royalty was 40,000. The amount remitted to India till 30th September, 2024 is
2,30,000.
(iv) Received, 40,000 as interest on saving bank deposits.
(v) Received ₹ 47,000 as share of profit from an AOP where all the members are individual and
which had paid the tax by normal rates of income tax.
(vi) He also sold his vacant land on 10-11-2024 for 10 lakhs. The stamp duty value of land at the
time of transfer was 14.68 lakhs. The FMV of the land as on 1 April, 2001 was 4 lakhs. This
land was acquired by him on 05- 08-1995 for ₹ 1.80 lakhs. He had incurred registration
expenses of 10,000 at that time. The cost of inflation index for the year 2024-25 and
2001-02 are 363 and 100 respectively.
(vii) He paid the following amounts, out of his taxable income:
(a) Insurance premium of 39,000 paid on life insurance policy of son, who is not dependent
on him.
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 CA VARDHAMAN DAGA

(b) Insurance premium of ₹ 48,000 on policy of his dependent father,

(c) Tuition fees of 42,000 for his three children to a school. The fees being 14,000 p.a. per
child. (14 Marks, Nov. 2020-NS)
Solution: Computation of total income of Mr. Ganesh for A.Y. 2024-25 (amount in ₹):
Particulars ₹ ₹ ₹
I Income from house property
Let out portion [First floor]
Gross Annual Value [Rent received is taken as GAV, 2,28,000
in the absence of other information]
Less: Municipal taxes paid by him during the PY
pertaining to let out portion 60,000/2] 30,000
Net Annual Value (NAV) 1,98,000
Less: Deduction u/s 24 59,400
Standard Deduction - 30% of 1,98,000
1,38,600
Self-occupied portion [Ground Floor]
Annual Value [No deduction is allowable in respect of
municipal taxes paid] Nil 1,38,600
II Profits and gains of business or profession
Income from SEZ unit 25,00,000
Share income from AOP (since AOP has paid tax at
normal rates, share income from AOP will be included
in computation of total income of a member as per
section 86) 47,000 25,47,000
III Capital Gains
Long-term capital gains on sale of land (since held for
more than 24 months) full Value of Consideration
[Higher of stamp duty value of 14.68 lakhs and Actual 14,68,000
consideration of 10 lakhs, since stamp duty value
exceeds actual consideration by more than 10%]

Less: Indexed Cost of acquisition [4,00,000 14,52,000 16,000

363/100]
Cost of acquisition:
Higher of
• Actual cost 1.80 lakhs +0.10 lakhs=1.90 lakhs; and
• Fair Market Value (FMV) as on 1-4-2001 4 lakhs
IV) Income from Other Sources
Royalty from artistic book 2,88,000
Less: Expenses incurred for earning royalty 40,000
2,48,000
Interest on savings bank deposits 40,000
2,88,000
Gross Total Income 28,89,600
Less: Deduction u/s 10AA [Since the industrial 8,75,000
undertaking is established in SEZ, it is entitled to
deduction u/s 10AA @ 100% of export profits, since
P.Y. 2024-25 being the 6th year of operations]

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[Profits of the SEZ Export Turnover/Total

Turnover] × 50% [25 lakhs x 140 lakhs/ 200 lakhs ×
100%]
Less: Deduction under Chapter VI-A
Deduction under section 80C
Tuition fee paid for maximum of two children is 28,000
allowable (14,000 × 2)
Life Insurance premium paid on policy of son 39,000
allowable, even though not dependent on Mr. Ganesh
Insurance premium paid on life insurance policy of - 67,000
father not allowable, even though father is
dependent on Mr. Ganesh
Deduction under section 80QQB
Royalty [2,88,000 × 15/18 = 2,40,000, restricted to 1,90,000
amount brought into India in convertible foreign
exchange 2,30,000 minus 40,000 expenses already
allowed as deduction while computing royalty income]
Deduction under section 80TTA
Interest on savings bank account, restricted to
10,000 10,000
2,67,000
Total income 18,47,600
Computation of tax liability of Mr. Ganesh for A.Y. 2025-26 under the normal provisions of
the Act:

Tax on total income of 18,47,600

Tax on LTCG of 16,000 @ 20% 3,200
Tax on remaining total income of 18,31,600 3,61,980
3,65,180
Add: Health and education cess @ 4% 14,607
Total tax liability 3,79,790
Computation of tax liability of Mr. Ganesh for A.Y. 2025-26 under the special provisions of
the Act:
Computation of adjusted total income
Total income as per the normal provisions of the Act 18,47,600
Add: Deduction u/s 10AA 8,75,000
Deduction u/s 80QQB 1,90,000
Adjusted Total Income 29,12,600
AMT @ 18.5% 5,38,831
Add: HEC@ 4% 21,553
AMT liability (rounded off) 5,60,380
Since the regular income tax payable is less than the AMT, the adjusted total income of 29,12,600
would be deemed to be the total income and tax would be payable @ 18.5% plus HEC @ 4%. The
total tax liability would be ₹ 5,60,380.
Illustration 36

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CONTACT NO. FOR CLASSES - 9039600091 pg. 372
 CA VARDHAMAN DAGA

Computation of Total Income& Tax liability: Mr. Krishna (aged 65 years), a furniture
manufacturer, reported a profit of ₹ 5,64,44,700 for the previous year 2024-25 after
debiting/crediting the following items:
Debits:
(1) 20,000 paid to a Gurudwara registered u/s 80G of the Income-tax Act, in cash where no
cheques are accepted.
(2) 48,000 contributed to a university approved and notified u/s 35(1)(ii) to be used for
scientific research.
(3) Interest paid 1,67,000 on loan taken for purchase of E-vehicle on 15-05-2024 from a bank.
The E-vehicle was purchased for the personal use of his wife.
(4) His firm has purchased timber under a forest lease of 20,00,000 for the purpose of business.
Credits:
(1) Income of 4,00,000 from royalty on patent registered under the Patent Act received from
different resident clients. No TDS was needed to be deducted by any of the clients.
(2) He received 3,00,000 from a debtor which was written off as bad in the year 2019-20.
Amount due from the debtor (which was written off as bad) was 5,00,000, out of which tax
officer had only allowed ₹ 3,00,000 as deduction in computing the total income for
assessment year 2021-22.
(3) He sold some furniture to his brother for 7,00,000. The fair market value of such furniture
was 9,00,000.
Other information:
(1) Depreciation in books of accounts is computed by applying the rates prescribed under the
Income tax laws.
(2) Mr. Krishna purchased a new car of 12,00,000 on 1 September, 2024 and the same was put
to use in the business on the same day. No depreciation for the same has been taken on car
in the books of account.
(3) Mr. Krishna had sold a house on 30th March, 2022 and deposited the long term capital gains
of 25,00,000 in capital gain account scheme by the due date of filing return of income for
that year. On 1st March, 2025, he sold another house property in which he resided for ₹ 1
crore. He earned a long term capital gain of 50,00,000 on sale of this property. On 25th
March, 2025, he withdrew money out of his capital gain account and invested 1 crore on
construction of one house.
(4) Mr. Krishna also made the following payments during the previous year 2024-25.
• Lump-sum premium of 30,000 paid on 30th March, 2025 for the medical policy taken for
self and spouse. The policy shall be effective for five years i.e. from 30th March, 2025 to
29th March, 2029.
• 8,000 paid in cash for preventive health check-up of self and spouse
Compute the total income and tax payable by Mr. Krishna for the assessment year 2025-26 if he
has not opted for the provisions of Section 115BAC. (14 Marks, Jan. 2021)
Solution: Computation of total income of Mr. Krishna for A.Y. 2025-26
Particulars ₹ ₹ ₹
I Income from business or profession
Net profit as per profit and loss account 5,64,44,700
Add: Items of expenditure debited but not
allowable while computing business income
1. Donation to Gurudwara in cash [not
allowable as deduction since it is not
incurred wholly and exclusively for business
purpose. Since the amount is already

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 CA VARDHAMAN DAGA

debited, the same has to be added back

while computing business income] 20,000
2. Interest on loan taken for purchase of e-
vehicle [Interest on loan for purchase of e-
vehicle for personal purpose is not allowed
as deduction from business income since the
same is not incurred wholly and exclusively
for business purpose. Since it is already
debited, the same has to be added back 1,67,000
while computing business income]
3. Contribution to a university approved and -
notified u/s 35(1)(ii) for scientific research
[Eligible for deduction @ 100%. Since, 100%
of the expenditure is already debited to
profit and loss account, hence no adjustment
will be required
4. Sale of furniture to brother at less than -
FMV [The provisions of section 40A(2) are
not applicable in case of sale transaction,
even if the same is to a related party.
Therefore, no adjustment is necessary in
respect of difference of 2 lakh] 1,87,000
5,66,31,700
Less: Items of income credited but not
taxable or taxable under any other head
of income
5. Royalty on patent [Not taxable as
business income since Mr. Krishna is engaged
in manufacturing business. Since the amount
is already credited to profit and loss
account, the same has to be reduced while
computing business income] 4,00,000
6. Bad debt recovered [Actual bad debt is 2
lakhs i.e., 5 lakhs less 3 lakh, being the
amount of bad debt recovered. Bad debt
written off is 3 lakhs. Bad debt recovered
to the extent of 1 lakh being excess of bad
debt recovered over actual bad debt would
be deemed to be business income. Since the 2,00,000 6,00,000
entire 3 lakhs is credited to the profit and
loss account, 2 lakhs has to be reduced]
5,60,31,700
Less: Allowable expenditure
7. Depreciation on car [Rate of depreciation
on car is 15%, since the car is put to use for
more than 180 days, hence depreciation will
be admissible at full rate [12 lakh × 15%] 1,80,000 5,58,51,700
II Capital Gain

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 CA VARDHAMAN DAGA

Long term capital gain on sale of house 50,00,000

property
Less: Exemption u/s 54 [Since whole amount
of long term capital gain is invested in
construction of house within the stipulated
time limit.]
[Capital gain of 25 lakhs in capital gain
account scheme is not taxable in P.Y. 2024-
25, since the same is withdrawn and invested 50,00,000
in construction of house within the
stipulated time limit. The remaining amount
of 75 lakhs invested in construction of house
is eligible for exemption u/s 54, subject to
a maximum of 50 lakhs being long-term
capital gain on sale of house property during
the P.Y. 2024-25]
III Income from Other Sources
Royalty on patent [Taxable as "income from
other sources", since he is engaged in
business of manufacturing furniture] 4,00,000
Gross Total Income 5,62,51,700
Less: Deduction under Chapter VI-A
Deduction u/s 80D:
• Mediclaim premium for self and spouse 5,000
[In case of lump sum premium for
medical policy, deduction is allowed for
equally for each relevant previous years.
[30,000/6 years, being relevant previous
years in which the insurance is in force]
• Preventive health check up of self and
spouse [Preventive health check up paid
in cash allowed to the extent of ₹5,000] 5,000 10,000
Deduction u/s 80G [Donation of 20,000
to Gurudwara not allowable as deduction
since amount exceeding 2,000 paid in
cash]
Deduction u/s 80RRB [Deduction in
respect of royalty on patent registered
under the Patent Act subject to a
maximum of 3 lakh] 3,00,000 3,10,000
Total income 5,59,41,700
Computation of tax liability of Mr. Krishna for A.Y. 2025-26:
Particulars ₹ ₹
Tax on total income of 5,59,41,700
Upto ₹ 3,00,000 Nil
3,00,001 5,00,000 [@ 5% of 2 lakh] 10,000
5,00,001 - 10,00,000 [@ 20% of 5,00,000] 1,00,000
10,00,001-5,49,41,700 [@ 30% of 5,49,41,700] 1,64,82,510 1,65,92,510

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 CA VARDHAMAN DAGA

Add: Surcharge @ 37%, since total income exceeds 5,00,00,000 61,39,229

2,27,31,739
Add: Health and education cess @ 4% 9,09,270
Total tax liability 2,36,41,008
Less: TCS u/s 206C (1) @ 2.5% on 20 lakh i.e., timber 50,000
TCS u/s 206C(1F) @ 1% of 12 lakh i.e., sale of motor car where
consideration exceeds ₹ 10 lakh 12,000
TDS u/s 194-IA @ 1% of 1 crore i.e., sale of immovable property 1,00,000 1,62,000
where consideration is ₹ 50 lakh or more
Tax payable (rounded off) 2,34,79,010
Illustration 37
Computation of Total Income & Tax liability: Rajesh was employed in Axis Ltd., Mumbai. He
received a salary of 45,000 p.m. From 01-04-2024 to 20-09-2024. He resigned and left for Dubai
for the first time on 28- 09-2024 and got monthly salary of rupee equivalent of 90,000 from 1-
10-2024 to 31-03-2025. His salary for October to December was credited in his Mumbai bank
account directly and the salary for January to March 2025 was credited in his Dubai bank account.
The cost of his air tickets to Dubai costing 1,50,000 was funded by her sister staying in London.
The cost of his initial stay at Dubai costing 40,000 was funded by one of his friends staying in
Delhi.
He further received interest of 10,500 on his fixed deposits and ₹ 7,500 on his savings a/c with
his Mumbai bank. He also paid LIC Premiums of ₹ 15,000 for self, ₹ 10,000 for spouse and 25,000
for dependent mother aged 71 years.
Compute taxable income of Mr. Rajesh for the Assessment Year 2025-26 if he has shifted out
of the default tax regime. (7 Marks, Jan. 2021)
Solution: In case of an Indian citizen leaving India for employment during the relevant previous
year, the period of their stay during that previous year for being treated as a resident of India
must be 182 days or more.
During the previous year 2023-24, Mr. Rajesh, an Indian citizen, was in India for 181 days only
(ie., 30+31 +30 +31 + 31 + 28 days). Thereafter, he left India for employment purposes.
Since he does not satisfy the minimum criteria of 182 days, he is a non-resident for the A.Y.
2025-26.
A non-resident is chargeable to tax in respect of income received or deemed to be received in
India and income which accrues or arises or is deemed to accrue or arise to him in India. Hence,
salary for January to March 2024, which was credited in his Dubai bank account for services
rendered in Dubai, would not be taxable in the hands of Mr. Rajesh.
Computation of taxable income of Mr. Rajesh for A.Y. 2025-26:
Particulars ₹ ₹
Salary
Salary from 1-4-2024 to 20-9-2024 [ 45,000 × 5+45,000 × 20/30] 2,55,000
Salary from 1-10-2024 to 31-12-2024 [90,000 × 3] 2,70,000
Gross Salary 5,25,000
Less: Standard deduction u/s 16(ia) 50,000
Net Salary 4,75,000
Income from Other Sources
Interest on fixed deposits 10,500
Interest on Savings account 7,500 18,000
Gross Total Income 4,93,000
Less: Deduction under Chapter VI-A

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 CA VARDHAMAN DAGA

• Deduction u/s 80C LIC premium for self and spouse [LIC 25,000
premium for mother is not allowed for deduction]
Deduction u/s 80TTA [Interest on savings account with Mumbai 7,500
bank]
Total Income 4,60,500
Working Notes:
(1) Cost of his air tickets to Dubai costing 1,50,000 funded by his sister is not taxable u/s
56(2)(x) in the hands of Mr. Rajesh, since "sister" is a relative.
(2) Cost of initial stay at Dubai costing 40,000 funded by his friend is also not taxable u/s
56(2)(x), since the amount does not exceed 50,000.
Illustration 38
Computation of Total Income & Tax liability: Mr. Shivansh, a resident and ordinarily resident
aged 61 years, is engaged in the business of manufacturing of motor parts. He is subject to tax
audit under section 44AB of Income-tax Act, 1961. He has provided following information:
Profit & Loss account for the year ended 31" March, 2025
Expenditure ₹ Income ₹
To Administrative expenses 4,30,000 By Gross Profit 58,30,000
To Salaries & wages 20,00,000 By Profit on sale of asset of 2,00,000
scientific research
To Interest on loans 7,50,000 By Winning from lottery (Net of 31,500
TDS @ 30%)
To Depreciation 6,17,000
To Professional fees 2,70,000
To Rent, rates & taxes 2,80,000
To Travelling & conveyance 1,40,000
To Net Profit 15,74,500
Total 60,61,500 Total 60,61,500
Explanatory information:
(i) Opening and closing stock of finished goods were undervalued by 10%. Opening stock of
4,50,000 and Closing stock of 5,58,000 was shown.
(ii) Salaries & wages include following items:
(a) Contributed 20% of basic salary in National Pension Scheme referred in section 80CCD
regarding salary paid to an employee Mr. Ganesh who has withdrawn basic salary of ₹
3,00,000 and Dearness allowance is 40% of basic salary. 50% of Dearness allowance
forms part of the salary.
(b) Some of the employees opted for retirement under the voluntary retirement scheme;
a sum of 2,40,000 was paid to them on 1 January, 2025.
(iii) Interest on loan includes interest paid @ 15% per annum on loan of 12,00,000 which was
taken from State Bank of India on 01-05-2022 for purchase of new electric car of
15,00,000. The car is used for personal purpose.
(iv) Depreciation allowable as per Income-tax Rules, 1962 is 4,50,000 but during the calculation
of such depreciation following addition was not considered:
Motor car purchased for 3,00,000 for supply of finished goods to dealers on 25-08-2024.
(v) An asset was purchased for 6,00,000 on 17-11-2023 for conducting scientific research and
the deduction was claimed under section 35 of the Income-tax Act, 1961. This asset was
sold on 05-09-2024 for a consideration of 8,00,000.
Other information:

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 CA VARDHAMAN DAGA

A plot of Industrial land which was used by Mr. Shivansh for business purpose for last 10 years
was compulsorily acquired by Central Government on 07-05-2024. The compensation of 12,00,000
was received on 27-02-2025. Such property was purchased by him on 08-08-2005 for 2,00,000.
He has purchased another plot of industrial land on 21-04-2025 for 6,00,000. Government has
also paid 54,000 as interest on such compensation on 28-03-2025.
Cost Inflation Indices: FY 2023-24: 348, FY 2005-06: 117
Compute the total income and tax liability of Mr. Shivansh for the assessment year 2025-26
assuming that he has not opted for the provisions of section 115BAC. Ignore Provisions relating
to AMT. (14 Marks, Dec. 2021)
Solution: Computation of total income of Mr. Shivansh for A.Y. 2025-26:
Particulars ₹ ₹
I Income from business or profession
Net Profit 15,74,500
Add: Items debited but not allowable/item not credited but
taxable while computing business income
• Employer's contribution to NPS in excess of 10% of salary 9,600
Employer's contribution to the extent of 10% of salary i.e.,
basic salary plus dearness allowance forming part of salary
would be allowed as deduction. Thus, excess contribution
i.e., 9,600 [60,000, being 20% of 3,00,000 less 36,000
being 14% of 3,60,000 (3,00,000+ 20% of 3,00,000] has to
be added back.
• VRS expenditure 1/5th of expenditure on voluntary 1,92,000
retirement scheme is allowable over a period of five years
u/s 35DDA. Since whole amount of expenditure is debited
to Profit and Loss A/c, 4/5th has to be added back [
2,40,000 × 4/5].
• Interest on loan taken for purchase of electric car used 1,65,000
for personal purpose not allowable as deduction while
computing business income as being expense of personal
nature. Thus, 1,65,000 [12,00,000 15% x 11/12] has to be
added back, since the same forms part of interest on loan
debited to profit and loss account
• Sale proceeds of asset acquired for conducting scientific
research taxable as business income u/s 41(3) in the year
of sale to the extent of lower of 6,00,000 (being the
deduction allowed u/s 35) and 8,00,000 being the excess
of sale proceeds and deduction allowed u/s 35 ie.,
(8,00,000+ 6,00,000) over the capital expenditure
incurred of 6,00,000
• Undervaluation of stock [( 5,58,000 - 4,50,000) 10/90] 12,000
Note: Alternatively, undervaluation of closing stock i.e.,
62,000 can be added back and under valuation of opening
stock i.e., 50,000 can be reduced from net profits.
• Depreciation as per books of A/c 6,17,000 15,95,600
31,70,100
Less: Depreciation as per Income-tax Rules 4,50,000
Depreciation on Motor car purchased for supply of finished
goods 3,00,000 15%] 45,000 4,95,000
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 CA VARDHAMAN DAGA

26,75,100
Less: Items of income credited to profit and loss account
but not taxable or taxable under any other head of income
• Profit on sale of asset of scientific research [Taxable 2,00,000
under the head "Capital Gains"]
• Winning from lottery [Taxable under the head "Income 31,500
from other sources"] 24,43,600
Capital Gain
II Short-term capital gains:
Sale of asset acquired for conducting scientific
Research
Sales consideration 8,00,000
Less: Cost of acquisition 6,00,000
Short-term capital gain 2,00,000
Long-term capital gains:
Compulsory acquisition of industrial plot by the
Central Government taxable as per section
45(5)
Compensation received 12,00,000
Less: Indexed cost of acquisition [2,00,000 x 6,20,513
363/117]
Long-term capital gain [since such plot is held for 6,29,487
more than 24 months]
Less: Exemption u/s 54D - Acquisition of 6,00,000 29,487 2,29,487
industrial plot
III Income from other sources
Winning from lottery [31,500 x 100/70] 45,000
Interest on enhanced compensation 54,000
Less: 50% of enhanced compensation 27,000 27,000 72,000
Gross Total Income 27,45,087
Less: Deduction under Chapter VI-A Deduction
u/s 80EEB: Interest on loan taken for purchase of
electric vehicle allowable as deduction to the
extent of 1,50,000
Total Income (rounded-off) 25,95,090
Computation of tax liability of Mr. Shivansh for A.Y.2025-26 (amount in ₹)
Tax on long-term capital gains @ 20% of ₹ 29,490 5,898
Tax on winning from lottery @ 30% of ₹ 45,000 13,500
Tax on total income (excluding LTCG and winning from lottery) of 25,20,600 [since 5,66,180
Mr. Shivansh, a senior citizen, he is eligible for higher exemption limit ₹ 3,00,000]
Total Tax 5,85,578
Add: Health and education cess @ 4% 23,423
Tax liability 6,09,002
Tax liability (rounded off) 6,09,000
Illustration 39
Computation of Total Income & Tax liability: Mrs. Nisha, a resident individual aged 54 years, is
carrying on business of manufacturing of textile fabrics, as a proprietor. The turnover in the

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 CA VARDHAMAN DAGA

previous year 2023-24 was 250 lakhs and in the current previous year 2024-25, it is 600 lakhs.
The net profit as per the profit and loss account as on 31-03-2025 is 5,61,000. She provides the
following additional information those were not considered while making the profit and loss
account for the previous year 2024-25.
(i) Depreciation has not been debited to profit and loss account. The details of the plant &
machinery employed in the business are given as under:
Date Particulars ₹
01-04-2024 Opening written down value of machinery used for 4,75,000
manufacturing purpose
03-07-2024 New machinery purchased during the year, payment 7,25,000
made by an account pay cheque.
10-03-2025 Sold one of the old machine 75,000
She does not have any other fixed assets employed in the business.
(ii) Received subsidy of 20% on new machine purchased on 03-07-2024 during the previous year
under technology upgradation fund Scheme from the Central Government.
(iii) She paid a job charges for the value addition on the fabrics 90,000 without deduction of
tax to job worker by an account payee cheque.
(iv) Commission paid to one agent allowed as deduction in earlier assessment year amounting
50,000, has now been received back during previous year 2024-25, from the agent due to
settlement with commission agent.
(v) 25,000 paid to creditor for goods in cash.
(vi) Incurred loss of 1,17,500 from an eligible transaction carried out in respect of trading in
derivatives in a recognised stock exchange.
(vii) Interest received amounting 2,00,000, duly authorised by partnership deed of M/s Ramji
textiles @ 15% p.a. on the capital employed. She is sleeping partner in the Ramji textiles.
(viii) She Received 60,000 by pre-mature withdrawals from deposit including interest 5,000, in
post office time deposit, eligible for deduction under Section 80C.
(ix) She sold her gold bracelet (jewellery), used by her for personal purposes, on 01-05-2024
for 5,00,000, which was acquired for 40,000 on 01-03-2005. A diamond was embedded onto
bracelet on 01-05-2007 of 50,000. (cost inflation index 2004-05:113, 2007-08:129 and
2024-25:363)
(x) She received a gold coin (bullion) worth 55,000 (FMV) from her cousin (daughter of uncle)
during the previous year 2024-25.
(xi) She incurred long term loss from sale of share of the Indian company. (The STT is paid on
the sale and purchase of the shares) 75,000.
(xii) She deposited a sum of 50,000 with life insurance Corporation of India every year for the
maintenance of her mother aged 70 years depended upon him and suffering from severe
disability.
(xiii) She purchased the new residential house during the previous year and paid stamp duty and
registration fee 1,55,000 to get transfer the property in her name.
You are required to compute the total income and tax payable by Mrs. Nisha for the assessment
year 2025-26. (Ignore the provisions of Section 115BAC). Give brief note wherever necessary (14
Marks, May 2022)
Solution: Computation of total income of Mrs. Nisha for A.Y. 2025-26:
Particulars ₹ ₹ ₹
Income from business or profession
Net Profit as per profit and loss account 5,61,000
Add: Items not credited but taxable while
computing business income
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 CA VARDHAMAN DAGA

− Commission from agent on settlement [Since 50,000

deduction was allowed in respect of commission in
earlier year and during the P.Y. 2024-25 Mrs.
Nisha received back such amount due to
settlement, the same would be deemed as her
income]
Interest on capital from partnership firm 1,60,000
[2,00,000 x 12% +15% ] [ Since interest on capital
from M/s Ramji textiles is authorized by
partnership deed, interest @ 12% p.a. would be
allowed as deduction in the hands of firm u/s
40(b). Consequently, interest @ 12% p.a. would be
the business income of Mrs. Nisha u/s 28. For
allowability of interest in the hands of the firm,
there is no requirement that the partner should be
a working partner] 2,10,000
7,71,000
Less: Items not debited but allowable while
computing business income
− Job charges without deduction of tax [90,000 63,000
30% of 90,000] [Mrs. Nisha's turnover for the
P.Y. 2022-23 exceeds 1 crore, hence, she is liable
to deduct tax at source u/s 194C on Job charges
of 90,000. Since Mrs. Nisha has not deducted tax
at source on 90,000, 30% would be disallowed
under section: 40(a)(ia). Remaining job charges
paid would be allowable as deduction while
computing business income]
− Payment to creditor in cash [Payment to creditor -
in cash is not allowable as business expenditure,
since such amount exceeds 10,000 and paid in cash
by virtue of section 40A(3)]
63,000
7,08,000

Less: Depreciation as per Income-

tax Rules
Opening WDV of machinery 4,75,000
Add: Purchase of machinery for 5,80,000
7,25,000 during the P.Y. 2024-25 by
A/c payee cheque. Subsidy of
1,45,000, being 20% of cost,
received from Central Government
on new machinery is to be reduced
from actual cost (7,25,000 - ₹
1,45,000).
10,55,000
Less: Sale proceeds 75,000
WDV as on 31-3-2025 before 9,80,000
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 CA VARDHAMAN DAGA

depreciation for P.Y. 2024-25

Depreciation @ 15% on ₹ 9,80,000 1,47,000
Additional Depreciation @ 20% on 1,16,000
5,80,000
(As new machinery is used in
manufacturing business and put to
use for more than 180 days in the P.Y.
2024-25, depreciation and additional
depreciation will be allowed in full) 2,63,000
4,45,000
Less: Loss from eligible transaction carried out in 1,17,500
respect of trading in derivatives in a recognized
stock exchange is not a speculative business and
hence, the same is allowed to be set off from
textile business income as per section 70.
3,27,500
II Capital Gains
Long term capital gain on sale of gold bracelet
since it is held for more than 36 months
Sales consideration 5,00,000
Less: Cost of acquisition (40,000 × 363/113) 1,28,496
Less: Cost of improvement (50,000 × 363/129) 1,40,698
Long-term capital gain on sale of gold bracelet 2,30,807
Note: In the additional information (xiii), it is
mentioned that Mrs. Nisha has purchased a new
residential house during the previous year. In such
a case, she would be eligible for exemption u/s 54F
in respect of amount invested in purchase of new
residential house from long term capital gain on
sale of gold bracelet. However, the cost of new
residential house is not provided in the question
but only stamp duty and registration fee is given
which would also be the part of cost of house. In
such case exemption u/s 54F would be ₹ 2,54,537
× 1,55,000/5,00,000 = 78,906. Accordingly, long
term capital gain would be1,00,631 (instead of
1,79,537). In such a case, Rebate u/s 87A would
be 3620 (instead of 12,500) and tax liability of
Mrs. Nisha would be Nil (instead of 7,180).
Less: Long term capital loss from sale of STT paid 75,000
shares of an Indian company allowed to be set off
from long term capital gain on sale of gold bracelet
as per section 70.
1,55,807
III Income from Other Sources
Fair market value of gold coin received from 55,000
cousin [Taxable u/s 56(2)(x), since cousin is not a
relative and the fair market value exceeds
50,000]
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 CA VARDHAMAN DAGA

Pre-mature withdrawal from post office time 60,000

deposit [Amount including interest received on
pre-mature withdrawal from post office time
deposit, in respect of which deduction u/s 80C was
claimed, would be deemed to be the income of Mrs.
Nisha] 1,15,000
Gross Total Income 5,98,307
Less: Deduction under Chapter VI-A
Deduction u/s 80C: Stamp duty and registration 1,50,000
fee of 1,55,000 for the purpose of transfer of
house property, restricted to
Deduction u/s 80DD: Sum deposited with LIC for 1,25,000
the maintenance of her dependent mother and
suffering from severe disability [Eligible for
higher deduction 1,25,000 in case of severe
disability irrespective of amount deposited with
LIC] 2,75,000
Total Income 3,23,310

Computation of tax liability of Mrs. Nisha for A.Y. 2025-26 (amount in ₹)

Tax on long-term capital gains @ 20% on 73,307 [1,55,807 - 82,500, being 14,662
unexhausted basic exemption limit (2,50,000 - 1,67,500)]
Tax on other income of 1,67,500 [3,34,430 - 1,66,930, being LTCG], being lower Nil
than the basic exemption limit
14,662
Less: Rebate u/s 87A [Tax payable or 12,500, whichever is less] 12,500
2,162
Add: Health and education cess @ 4% 86
Tax liability 2,248
Tax liability (rounded off) 2,250
ILLUSTRATION 40
Computation of Total income & Tax liability : Dr. Rohan, 82 years old resident surgeon, having
his Nursing Home in Mumbai, gives the following particulars for the year ended on 31.03.2025.
Receipts ₹ Payment ₹
Opening Balance b/d 1,25,000 Salary to Staff 3,50,000
Fees from visits to other 5,85,000 Taxes & Insurance 26,000
hospitals (net)
Fees for March, 2024 received Entertainment Expenses 1,10,000
in April, 2024
IPD 40,000 85,000 Purchase of Television 48,000
OPD 45,000 Gift to daughter-in law 60,000
Dividend from shares (net) 18,900 Interest on loan for repairs to 65,000
property
Fees received during the year 10,25,000 Personal medical expenses 70,000
Gifts received from relatives of 45,000 Deposits in PPF A/c 55,000
patients
Honorarium for painting services 22,500 Nursing Home expenses 3,75,000
in Jai Hind Art School (net)

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 CA VARDHAMAN DAGA

Income-tax Refund (Including 12,100 Prof. fees paid for consulting 1,20,000
interest ₹ 1,500) services
Purchase of furniture at home 1,35,000
Personal Expenses 3,00,000
Balance c/f 2,04,500
19,18,500 19,18,500
Other Information:
(a) He keeps his books of accounts on cash basis and has not opted for the provisions of section
44ADA.
(b) Salary includes ₹ 60,000 paid to his sister who is a qualified nurse paid in cash.
(c) Entertainment expenses include ₹ 25,000 for dinner to doctors in a five star hotel.
(d) Interest on loan for repairs to property includes ₹ 40,000 for his residential property.
(e) His daughter in law earned income of ₹ 10,000 from the amount received as gift.
(f) Fixed Assets values as on 01-04-2024 are as under :
(g) Nursing Home Equipment's ₹ 2,20,000, Medical Books (incl. annual publications ₹ 10,000) ₹
35,000, Laptop ₹ 40,000.
(h) Television purchased for nursing home purpose on 21-09-2024 is put to use on 03-10-2024.
(i) He has donated ₹ 10,000 towards PM CARES Fund on 15-08-2024.
You are required to –
(iii) Compute the total income and tax payable by him for AY 2025-26 as per the regular provisions
of the Income-tax Act, 1961 if he has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A)
(iv) What will be his total income and tax payable, if he opts for the provisions of section 44ADA?
Will it be more beneficial for him to adopt 44ADA? (14 Marks, Nov. 2022)
SOLUTION
(i) Computation of total income and tax payable by Dr. Rohan for A.Y. 2025-26 as per the
regular provisions of the Act :
Particulars ₹ ₹ ₹
I Income from house property
Annual value [Assuming residential property is Nil
self occupied]
Less: Deduction under section 24(b)
Interest on loan for repairs to property, ₹ 30,000
40,000 restricted to -30,000
Loss from self-occupied property [can be set-
off against Profits and gains of business or
profession or Income from other sources]
II Profits and gains from business and profession
Gross Receipts
Fees from visits to other hospitals 6,50,000
[5,85,000/90%]
Fees for March 2024 received in April 2024
[Fees for March 2024 is chargeable to tax 85,000
during P.Y. 2024-25, since Dr. Rohan is following
cash system of accounting] [₹ 40,000 + ₹
45,000]
Fees received during the year 10,25,000
Gifts received from relatives of patients 45,000
[taxable as business income] 18,05,000
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 CA VARDHAMAN DAGA

Less: Permissible deductions

Salary to staff [Salary paid to his sister who is 2,90,000
a qualified nurse in cash disallowed under
section 40A(3), since such cash payment
exceeds ₹ 10,000] [₹ 3,50,000 - ₹ 60,000]
Taxes and insurance 26,000
Entertainment expenses, including dinner to 1,10,000
doctors [Assuming that the entire sum was
incurred wholly and exclusively for business
purpose]
Interest on loan for repair to property [to the 25,000
extent relating to business] = ₹ 65,000 – ₹
40,000, relating to residential property
Nursing home expenses 3,75,000
Professional fees paid for consulting services 1,20,000 9,46,000
8,59,000
Less: Depreciation under section 32
Nursing home equipment’s [₹ 2,20,000 × 15%] 33,000
Note: Nursing home equipment would be eligible
for depreciation @ 15%, being the general rate
for plant and machinery. The main solution has,
accordingly, been worked out applying 15%.
However, if such equipment are in the nature of
life saving medical equipment, they would be
eligible for higher depreciation @ 40%. If 40%
rate is applied, depreciation would be ₹ 88,000
Medical books [₹ 35,000 × 40%] 14,000
Laptop [₹ 40,000 × 40%] 16,000
Television [₹ 48,000 × 15%, since the television 7,200
is put to use for 180 days during the P.Y. 2024-
25] 70,200 7,88,800
Note: television would be eligible for
depreciation @ 15%. However, television
connected to laptop or other medical equipment
and used by Doctor may be classified as plant
and machinery eligible for depreciation @ 40%.
If 40% rate is applied, depreciation for TV
would be ₹ 19,200.
Also, it is possible to take a view that Television
is furniture and fixtures qualifying for
depreciation @ 10%. If 10% rate is applied,
depreciation for TV would be ₹ 4,800
III Income from Other Sources
Dividend from shares [18,900/90%] 21,000
Honorarium for painting services in Jai Hind Art 25,000
School [₹ 22,500/90%]
Honorarium (Alternative without TDS) – ₹
22,500

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 CA VARDHAMAN DAGA

Note : In the question, it is mentioned that Dr.

Rohan has received Honorarium for painting
services in Jai Hind Art School (Net) of ₹
22,500. Since the threshold limit for deducting
tax at source under section 194J is ₹ 30,000,
there is no requirement to deduct tax at source
on such income. Accordingly, question can be
answered without grossing up the amount of
honorarium of ₹ 22,500.
Interest on income-tax refund 1,500
Income earned from gift to daughter in law 10,000
[Income earned by daughter in law from asset
gifted without consideration to her by Dr.
Rohan is includible in the hands of Dr. Rohan] 57,500
Gross Total Income 8,16,300
Less: Deduction under Chapter VI-A
U/s 80C - Deposits in PPF 55,000
U/s 80D - Medical expenses to the extent of ₹ 50,000
50,000 since Dr. Rohan is a senior citizen
(assuming he has not taken any medical
insurance policy)
U/s 80G - Donation towards PM CARES Fund 10,000 1,15,000
Total Income 7,01,300
Tax Payable :
Upto ₹ 5,00,000 [since Dr. Rohan is aged 80
years or above] Nil
₹ 5,00,001 to ₹ 7,01,300 [₹ 2,01,300 @ 20%] 40,260 40,260
Add: HEC @ 4% 1,610
Tax liability : 41,870
Less: TDS on fees from visits to other hospitals 65,000
TDS on dividend from shares 2,100
TDS on honorarium for painting services in Jai 2,500
Hind art School 69,600
Tax Refundable -27,730
(ii) Computation of total income and tax payable by Dr. Rohan for A.Y. 2025-26 if he opts for
section 44ADA :
Particulars ₹ ₹ ₹
I Income from house property -30,000
Loss from self occupied property
II Income from business or profession
Income from profession [` 18,05,000 × 50%] 9,02,500
[No other expenditure or depreciation is
allowed]
III Income from Other Sources 57,500
Gross Total Income 9,30,000
Less: Deduction under Chapter VI-A 1,15,000
Total Income 8,15,000
Upto ₹ 5,00,000

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 CA VARDHAMAN DAGA

₹ 5,00,001 to ₹ 8,15,000 [₹ 3,15,000 @ 20%] Nil

63,000 63,000
Less: HEC @ 4% 2,520
Tax liability 65,520
Less: TDS 69,600
Tax Refundable -4,080
Since tax refundable in case Dr. Rohan opts for the provisions of section 44ADA is lower
than the regular provisions of the Act, it would be beneficial for him not to opt for
section 44ADA and get his books of account audited and declare income under the
regular provisions.
ILLUSTRATION 41
Computation of Total income & Tax liability: Mr. Bhasin, a resident individual, aged 52 years,
provides management consultancy services to various corporate and non-corporate clients. His
Income & Expenditure A/c for the year ended 31st March, 2025 is as under:
Expenditure ₹ Income ₹
To Employees’ Remuneration 15,00,000 By Gross Receipts from 60,60,000
Profession (last year ₹
75,00,000) (No TDS was
deducted from any of the
receipts)
To Office & Administrative 5,00,000 By Interest on Savings Bank 25,000
Expenses Account
To Rates and Taxes 15,000 By Winnings from Lottery (Net 99,500
of cost of lottery tickets of ₹
500)
To Interest Expenses 80,000 By Rent Received 2,40,000
To Office Rent 2,40,000
To Insurance Premium 72,000
To Professional Fees 2,00,000
To Depreciation on Computers 1,20,000
To Excess of Income over 36,97,500
Expenditure
64,24,500 64,24,500
The following details relates to F.Y. 2024-25 :
(i) Employees’ Remuneration includes a sum of ₹ 3,00,000 paid to his wife, Mrs. Beena who is
working as a manager in his office. She does not have any technical or professional
qualification or experience required for the job. The payment of salary was as per market
rates in comparison to similar work profile.
(ii) Mr. Bhasin owns a big house with 2 independent units. Unit-1 (with 50% floor area) has been
let our for residential purposes at a monthly rent of ₹ 20,000 for the entire year. Unit-2
(with the balance 50% of the floor area) is used by Mr. Bhasin as his residence-cum-office.
Other particulars of the house are:
(a) Municipal Valuation – ₹ 3,60,000 p.a.
(b) Fair Rent – ₹ 4,20,000 p.a.
(c) Standard Rent under Rent Control Act – ₹ 4,00,000 p.a.
(iii) Rates and taxes include a sum of ₹ 10,000 paid as municipal taxes of the house.

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 CA VARDHAMAN DAGA

(iv) Interest expenses represent interest on capital borrowed from a nationalised bank for the
construction of the house. The construction was completed in F.Y. 2011-12. Neither the loan
nor the interest was paid till the due date of filing the return of income.
(v) Based on the actual rent received for Unit-1, Mr. Bhasin has debited ₹ 2,40,000 as notional
rent for Unit-2 which is used for his profession.
(vi) The expense on insurance premium of ₹72,000 represents lump-sum health insurance
premium paid by Mr. Bhasin for 3 years effective from 1st July, 2024 to 30th June, 2026 for
himself, his spouse and two dependent children. The said insurance premium was paid through
account payee cheque.
(vii) The expenses on professional fees paid includes a sum of ₹ 1,00,000 paid to Mr. Raunak, an
Indian resident on which no tax was deducted at source.
(viii) There was only one block containing computers which came into existence only on 2nd
April, 2024 when new laptops (for ₹ 1,60,000), printers and scanners (for ₹ 40,000) were
purchased. He charged depreciation @ 60% in the entire cost of ₹ 2,00,000 and debited the
amount to Income & Expenditure A/c.
(ix) Mr. Bhasin has also taken a loan of ₹ 5,00,000 from a nationalised bank for higher education
of his son. During F.Y. 2024-25, he repaid principal of ₹ 75,000 along with interest of ₹
40,000. This amount is not reflected in Income and Expenditure Account.
You are required to compute the total income under proper heads of income of Mr. Bhasin for A.Y.
2025-26 under regular provisions of Income-tax Act 1961, assuming that he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A) Also calculate
the total tax payable by him. (14 Marks, May 2023)
SOLUTION Computation of total income and tax payable by Mr. Bhasin for A.Y. 2024-25
Particulars ₹ ₹ ₹
I Income from Salaries
Salary of Mrs. Beena [Remuneration paid by 3,00,000
Mr. Bhasin to his wife Mrs. Beena who is
employed as a manager in his office would be
included in his hands, since Mrs. Beena does not
have any technical or professional qualification
or experience required for the job]
Less: Standard deduction u/s 16(ia) 50,000 2,50,000
II Income from house property
Let out portion (Unit 1 – 50% area) Gross
Annual Value [Higher of expected rent of ₹ 2,40,000
2,00,000 and actual rent of ₹ 2,40,000 (₹
20,000 × 12)] [Expected rent is higher of
municipal value of ₹ 1,80,000 (3,60,000 × 50%)
and fair rent of ₹ 2,10,000 (₹ 4,20,000 × 50%),
restricted to standard rent of ₹ 2,00,000 (₹
4,00,000 × 50%)]
Less: Municipal taxes paid for let out portion 5,000
(₹ 10,000×50%)
Net Annual Value (NAV 2,35,000
Less: Deduction under section 24
(c) 30% of NAV 70,500
(d) Interest on capital borrowed for 40,000
construction of house relating to let out

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 CA VARDHAMAN DAGA

portion (80,000 × 50%) (allowed on accrual

basis)
Income from let out portion 1,24,500
Self-occupied (Unit 2 – 25%) [Since Unit 2
representing 50% of the floor area is used for
residence as well as business purpose, it is
assumed that it is equally used for residence
and business purpose]
Gross Annual Value Nil
Less: Municipal taxes [not allowed for self- Nil
occupied property]
Net Annual Value Nil
Less: Deduction under section 24(b)
Interest on loan for construction of house, ₹ 20,000
80,000 × 50% × 1/2 (allowable on accrual basis)
Loss from self-occupied portion
[Loss from self-occupied portion can be set off -20,000
against income from let out portion] 1,04,500
III Profits and gains from business and
profession
Excess of income over expenditure 36,97,500
Add: Expenses debited to Income &
Expenditure A/c but not allowable as
deduction
Remuneration paid to his wife Mrs. Beena[As -
per section 40A(2) remuneration paid to Mrs.
Beena is allowed, since it is as per market
rates]
Municipal taxes attributable to let out and 7,500
self-occupied portions not allowable [₹10,000 ×
75%]
Interest on capital borrowed for 60,000
construction of house attributable to let out
and self-occupied portion not allowable [₹
80,000 × 75%]
Interest on capital borrowed from bank for 20,000
construction of house attributable to business
portion i.e., 25% of ₹ 80,000 [not allowable,
since it is not paid on or before due date of
filing return of income by virtue of section
43B]
Notional rent for Unit 2 used for business or 2,40,000
profession [not allowable under section 30,
since Mr. Bhasin himself is the owner of the
property]
Insurance premium [Personal expenditure not 72,000
allowable]
Professional fees to Mr. Raunak without 30,000
deducting TDS [₹ 1,00,000 × 30%] [Mr. Bhasin
YOUTUBE & TELEGRAM – ARHAM INSTITUTE,
CONTACT NO. FOR CLASSES - 9039600091 pg. 389
 CA VARDHAMAN DAGA

is required to deduct TDS on professional fees

payment to Mr. Raunak since his gross receipts
from profession exceeds ` 50 lakhs during the
P.Y. 2023-24. 30% of the sum paid to Mr.
Raunak, resident without deducting tax to be
disallowed in P.Y. 2024-25]
Depreciation as per books 1,20,000 5,49,500
42,47,000
Interest on savings bank account [taxable 25,000
under the head “Income from other sources”]
Winnings from lottery [taxable under the head
“Income from other sources”] 99,500
Rent received [taxable under the head “Income 2,40,000 3,64,500
from house property”]
38,82,500
Less: Depreciation allowable [2,00,000 (₹
1,60,000, being new laptops + ₹ 40,000, being 80,000
printers) × 40%, i.e., 64,000 + 16,000 as it was
put to use for more than 180 days in the P.Y.
2024-25. Printers and scanners for ₹ 40,000
are eligible for higher depreciation of 40%]
38,02,500
IV Income from Other Sources
Interest on savings bank account 25,000
Winnings from Lottery [No expenditure or 1,00,000
allowance is allowed from lottery income] 1,25,000
42,82,000
Gross Total Income
Less: Deduction under Chapter VI-A
Deduction u/s 80D
Medical insurance premium [₹ 72,000 × 1/4, 18,000
being the previous years in which insurance
would be in force] [allowable for self, spouse
and dependent children
Deduction u/s 80E :
Interest on loan taken from a nationalised bank 40,000
for higher education of son
Deduction u/s 80TTA : Interest on saving 68,000
bank account to the extent of 10,000
Total Income 42,14,000
Tax Payable
On lottery income [30% of ₹ 1,00,000] 30,000
On other income of ₹ 41,14,000 10,46,700 10,76,700
Add: HEC @ 4% 43,068
Tax liability 11,19,768
Less: TDS on lottery winnings @ 30% u/s 194B 30,000
Tax payable (rounded off) 10,89,770

Illustration 42
YOUTUBE & TELEGRAM – ARHAM INSTITUTE,
CONTACT NO. FOR CLASSES - 9039600091 pg. 390
 CA VARDHAMAN DAGA

Computation of tax liability: Mr. Xavier, an Indian resident individual, set up an unit in Special
Economic Zone (SEZ) in the F.Y. 2019-20 for production of Mobile Phones. The unit fulfills all the
conditions of section 10AA of the Income-tax Act, 1961.
During the financial year 2024-25, he has also set up a warehousing facility in a district of Tamil
Nadu for storage of agricultural produce. It fulfills all the conditions of section 35AD.
Capital expenditure in respect of warehouse amounted to 93 lakhs (including cost of land 13 lakhs).
The warehouse became operational w.e.f. 1st April, 2024 and the expenditure of 63 lakhs was
capitalized in the books on that date.
Further details relevant for the financial year 2024-25 are as follows:
Particulars Amount ₹
Profit from operation of warehousing facility before claiming deduction 1,10,00,000
under section 35AD
Net Profit of SEZ (Mobile Phone) Unit 50,00,000
Export sales of SEZ (Mobile Phone) Unit 90,00,000
Domestic Sales of SEZ (Mobile Phone) Unit 60,00,000
Compute income tax (including AMT under 115JC) payable by Mr. Xavier for A.Y. 2025-26. (6
Marks, Jan. 2021)
Solution: Computation of total income and tax liability of Mr. Xavier for A.Y. 2025-26 (under the
regular provisions of the Act)
Particulars ₹ ₹
Profits and gains of business or profession Profit from unit in 50,00,000
SEZ
Less: Deduction u/s 10AA [₹50,00,000 x ₹ 90,00,000/₹1,50,00,000
× 50%, since it is 6th year of manufacturing] 15,00,000
Business income of SEZ unit chargeable to tax 35,00,000
Profit from operation of warehousing facility 1,10,00,000
Less: Deduction u/s 35AD [Deduction@100% in respect of the
expenditure incurred prior to the commencement of its operations
and capitalized in the books of account on 1-42022. Deduction is not
available on expenditure incurred on acquisition of land] [ 63 lakhs -
13 lakhs] 50,00,000
Business income of warehousing facility chargeable to tax 60,00,000
Total Income 95,00,000
Computation of tax liability:
Tax on 95,00,000 26,62,500
Add: Surcharge @10% [Since the total income exceeds 50 lakhs but 2,66,250
does not exceed 1 crore]
29,28,750
Add: Health and Education cess @ 4% 1,17,150
Total tax liability 30,45,900
Computation of adjusted total income and AMT of Mr. Xavier for A.Y. 2025-26:
Particulars ₹ ₹
Total Income (as computed above) 95,00,000
Add: Deduction under section 10AA 15,00,000
1,10,00,000
Add: Deduction under section 35AD 50,00,000

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CONTACT NO. FOR CLASSES - 9039600091 pg. 391
 CA VARDHAMAN DAGA

Less: Depreciation u/s 32 [On building @ 10% of 50 lakhs

(Assuming the capital expenditure of 50 lakhs is incurred entirely 5,00,000 45,00,000
on building)]
Adjusted Total Income 1,55,00,000
Alternate Minimum Tax @ 18.5% 28,67,500
Add: Surcharge @ 15% (since adjusted total income >1 crore) 4,30,125
32,97,625
Add: Health and Education cess @ 4% 1,31,905
Tax Liability (Rounded off) 34,29,530
Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @ 18.5% thereof plus
surcharge @ 15% and cess @ 4%. Therefore, the tax liability is 34,29,530.
AMT Credit to be carried forward under section 115JEE
Tax liability under section 115JC 34,29,530
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 30,45,900
AMT Credit to be carried forward 3,83,630
Illustration 43
Computation of tax liability: From the following particulars furnished by Mr. Suresh, aged 53
years, a resident Indian for the previous year ended March 31, 2025, you are requested to
compute his total income and tax payable for the Assessment Year 2025-26. (Assuming he does
not opt for the Section 115BAC):
(i) He sold his vacant land on 09-12-2024 for 15 lakhs. The Stamp Duty Value (SDV) of land
at the time of transfer was 19 lakhs. The fair market value of the land as on 1" April, 2001
was 6 lakhs (SDV is ₹ 5,00,000). This land was acquired by him on 05-08-1996 for 3.40
lakhs. He had incurred registration expenses of 15,000 at that time. The cost of inflation
index for the year 2024-25 and 2001-02 are 363 and 100, respectively.
(ii) He owns an industrial undertaking established in a Special Economic Zone (SEZ) and which
had commenced operation during the financial year 2019-20. Total turnover of the
undertaking was 300 lakhs, which includes 120 lakhs from export turnover. This industrial
undertaking fulfils all the conditions of Section 10AA of the Income-tax Act, 1961. Profit
from this industrial undertaking is 30 lakhs.
(iii) He has income of 10,000 from crossword puzzles and ₹ 15,000 gross interest from bank
fixed deposit.
(iv) Tuition fees of 36,000 for his three children to a school. The fees being 12,000 p.a. per
child.
Solution: Computation of Total Income and Tax Payable by Mr. Suresh for A.Y. 2025-26
(amount in ₹):
Particulars ₹ ₹
Profits and gains from business or profession
Profit from SEZ. Undertaking 30,00,000
Capital Gains
Long term capital gain on sale of vacant land [since land held for a
period of more than 24 months, it is long-term capital asset] As per
section 50C, Full value of consideration would be stamp duty value 19,00,000
since it exceeds 110% of actual sale consideration
Less: Indexed cost of acquisition [ 5,00,000 x 363/100] 18,15,000
Cost of acquisition, being higher of 85,000
-Actual cost (3,40,000+15,000) ₹3,55,000
YOUTUBE & TELEGRAM – ARHAM INSTITUTE,
CONTACT NO. FOR CLASSES - 9039600091 pg. 392
 CA VARDHAMAN DAGA

- lower of FMV of 6,00,000 and stamp duty

value of
₹ 5,00,000 as on 1-4-2001 5,00,000
Income from other sources
Income from crossword puzzles 10,000
Interest on fixed deposit 15,000 25,000
Gross Total Income 31,85,000
Less: Deductions under Chapter VI-A Under section 80C - Tuition 24,000
fees of two children
Less: Deduction u/s 10AA (30,00,000 × 120 lakhs/300 lakhs) × 50%,
being 6th year of operation 6,00,000
Total Income 24,86,000
Computation of Tax payable on total income under the regular
provisions of the Income- tax Act, 1961
Tax on LTCG @ 20% of 85,000 17,000
Tax on income from crossword puzzles @ 30% of 10,000 3,000
Tax on remaining amount of 23,91,000 [4,17,300 (30% of 7,91,000) + 5,29,800
₹1,12,500]
5,49,800
Add: Health and education cess @ 4% 21,992
Tax Payable under the regular provisions of the Act (rounded off) 5,71,790
Computation of Adjusted Total Income and Alternate Minimum Tax (AMT) payable (amount
in ₹):
Total Income computed under the regular provisions of the Act 24,86,000
Add: Deduction u/s 10AA 6,00,000
Adjusted Total Income 30,86,000
Since Adjusted Total Income exceeds ₹ 20 lakhs, the provisions of Alternate 5,70,910
Minimum Tax (AMT) are attracted in this case Alternate Minimum Tax @ 18.5%
Add: Health and Education cess @ 4% 22,836
AMT (rounded off) 5,93,750
Since the regular income-tax payable is less than the AMT payable, the adjusted total income of
30,86,000 shall be deemed as the total income and tax is leviable @ 18.5% thereof plus cess @
4%. Therefore, his tax liability would be ₹ 5,93,750. However, he would be entitled to AMT credit
of 21,960 ( 5,93,750 – 5,71,790)

ILLUSTRATION 44
Computation of Total income & Tax liability : Mr. Sahil, resident Indian aged 40 years, a
Manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss Account
for the year ended 31-03-2025.
Manufacturing, Trading and Profit & Loss Account for the year ended 31-03-2025 :
Particulars ₹ Particulars ₹
To Opening Stock 71,000 By Sales 43,50,000
To Purchase of Raw Materials 17,20,500 By Closing Stock 2,00,000
To Manufacturing Wages & 5,80,500
Expenses
To Gross Profit 21,78,000
45,50,000 45,50,000
To Administrative Charges 2,90,000 By Gross Profit 21,78,000
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 CA VARDHAMAN DAGA

To SGST Penalty Paid (It is not 7,000 By Dividend From Domestic 15,000
compensatory nature) Companies
To GST Paid 1,10,000 By Winning from Lotteries (Net 10,500
of TDS) (TDS 4,500)
To General Expenses 55,000 By Profit on Sale of Shares 45,000
To Miscellaneous Expenses 1,50,500
To Loss on Sale of Shares 20,000
To Interest to Bank (on 60,000
machinery term loan)
To Depreciation 2,00,000
To Net Profit 13,56,000
22,48,500 22,48,500
Following are the further information relating to Financial Year 2024-25 :
(i) Administrative Charges include ₹ 46,000 paid as commission to brother of assesse. The
Commission amount at the market rate is ₹ 36,000.
(ii) The assessee paid ₹ 33,000 in cash to a Transport Carrier on 26-12-2024. This amount is
included in Manufacturing Expenses. (Assume that the provisions relating to TDS are not
applicable on this payment.)
(iii) A sum of ₹ 4,000 per month was paid as salary to a staff throughout the year and this has
not been recorded in books of account.
(iv) Bank Term Loan Interest actually paid upto 31-03-2025 was ₹ 20,000 and the balance was
paid in October 2025.
(v) Miscellaneous Expenses include ₹ 10,000 contributed to Prime Minister's Relief Fund.
(vi) Loss on Sale of Shares represents shares sold within a period of 6 months from the date of
purchase.
(vii) Profit on Sale of Shares represents shares held for 2 years & Securities Transaction Tax
was paid on it.
(viii) Housing Loan Principal repaid during the year was ₹ 50,000 and it relates to residential
property occupied by him. Interest on Housing Loan was ₹ 2,60,000. Housing Loan was taken
from Canara Bank. (Value of house property is ₹ 45 Lakhs, loan value ₹ 25 Lakhs and sanction
date 31-03-2017). These amounts were not dealt with in the Profit and Loss Account given
above. (Assume this housing loan is eligible for 80EE deduction).
(ix) Deprecation allowable under the act to be computed on the basis of following information :
Plant & Machinery (Depreciation Rate @ 15%) ₹
Opening WDV (as on 01-04-2024 12,00,000
Additions During the year (Used for more than 180 Days) 2,00,000
Total Additions during the year 4,00,000
Note : Ignore Additional Depreciation u/s 32(iia)
Compute the total income and tax liability of Mr. Sahil for the A.Y. 2025-26 if he has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
(15 Marks, May 2024)

SOLUTION Computation of total income and tax liability of Mr. Sahil for A.Y. 2025-26

Particulars ₹ ₹
I Income from house property
Annual value of self-occupied property Nil
Less: Deduction under section 24(b)

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CONTACT NO. FOR CLASSES - 9039600091 pg. 394
 CA VARDHAMAN DAGA

Interest on housing loan of ₹ 2,60,000 restricted to ₹ 2,00,000

2,00,000
-2,00,000
II Profits and gains of business or profession
Net Profit 13,56,000
Add: Expenses debited to Profit and loss A/c but not
allowable as deduction or to be considered under other head
- Commission paid to brother [Commission paid to a related 10,000
person/ relative to the extent it is excessive to market
rate is disallowed under section 40A(2)]
- Cash payment to a Transport Carrier [Not disallowed Nil
under section 40A(3) since the limit for one time cash
payment is ₹ 35,000 in respect of payment to transport
operators]
- Interest to bank on term loan [Interest paid to bank after 40,000
the due date of filing of return u/s 139(1) is disallowed as
per section 43B]
- Contribution to Prime Minister’s Relief Fund [Not allowable 10,000
since the same is not incurred wholly and exclusively for
business purpose]
- SGST Penalty paid [SGST penalty paid is not compensatory 7,000
in nature and therefore, not allowable]
- Loss on sale of shares 20,000
- Depreciation as per books of account 2,00,000
- 16,43,000
Less: Incomes credited to profit and loss account but not
taxable as business income
- Dividend from Domestic Companies 15,000
- Winnings from lotteries 10,500
- Profit on sale of shares 45,000
- 15,72,500
Less: Depreciation allowable as per Income-tax Rules,1962
- On Plant & Machinery [@ 15% on ₹ 14,00,000, being 2,25,000
opening WDV of ₹ 12 lakhs and additions put to use for
more than 180 days of ₹ 2 lakhs + @ 7.5% on ₹ 2,00,000,
being additions put to use for less than 180 days]
- 13,47,500
[8% of sales i.e. ₹ 43,50,000 × 8% assuming entire amount of 3,48,000
sales are not received by A/c payee cheque or A/c payee draft
or ECS or other electronic prescribed modes]
Business Income
[As per section 44AD, in case of Mr. Sahil, being an eligible
assessee, a sum equal to ₹ 3,48,000 (8% of total turnover i.e.,
₹ 43,50,000) or as the case may be, a sum higher than the
aforesaid sum claimed to have been earned by him would be
deemed to be the business income. In this case, since Mr.
Sahil has maintained books of account, he can claim the higher
sum actually earned ₹ 13,47,500 as his income from business.] 2,00,000

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CONTACT NO. FOR CLASSES - 9039600091 pg. 395
 CA VARDHAMAN DAGA

Less: Set off of loss from house property as per section 11,47,500
71(3A)
Add: Salary paid to staff not recorded in the books
[Assuming the expenditure is in the nature of unexplained
expenditure, the same is deemed to be income as per section
69C of Mr. Sahil. No deduction would be allowed in respect of
such expenditure.]
Alternatively, it is possible to assume that the salary not 48,000 11,95,500
recorded in the books of account was an erroneous omission
and the assessee has offered satisfactory explanation about
the source of such expenditure. In such a case, it would not
be considered as deemed income and the same would be
allowed as deduction while computing business income on the
basis of books of accounts. In such a case, business income,
total income and tax liability (rounded off) would be ₹
10,99,500, ₹ 10,44,500 and ₹ 1,23,080.
II Capital Gains
Long term capital gains taxable u/s 112A [Since shares are 45,000
held for 2 years and STT has been paid]
Less: Set off of short term capital loss as per section 70(2) 20,000 25,000
III Income from Other Sources
Dividend from Domestic Companies 15,000
Winning from lotteries (₹ 10,500 + ₹ 4,500) 15,000 30,000
Gross Total Income 12,50,500
Less: Deduction under Chapter VI-A
Deduction u/s 80C : Principal repayment of housing loan 50,000
Deduction u/s 80EE : Interest on housing loan of ₹ 60,000 [ 50,000
₹ 2,60,000 – ₹ 2,00,000, allowed u/s 24(b)] allowable u/s
80EE upto ₹ 50,000
Deduction u/s 80G : Contribution to Prime Minister’s Relief 10,000 1,10,000
Fund
Total Income 11,40,500
Tax Liability
Tax on LTCG of ₹ 25,000 u/s 112A [Exempt upto ₹ 1.25 lakh] Nil
Tax on winning from lotteries of ₹ 15,000 @ 30% 4,500
Tax on unexplained expenditure of ₹ 48,000 @ 60% 28,800
Tax on balance income of ₹ 10,52,500 at slab rate
Upto ₹ 2,50,000 Nil
From ₹ 2,50,001 to ₹ 5,00,000 @ 5% 12,500
From ₹ 5,00,001 to ₹ 10,00,000 @ 20% 1,00,000
From ₹ 10,00,001 to ₹ 10,52,500 @ 30% 15,750 1,28,250
1,61,550
Add: Surcharge @ 25% on tax on unexplained expenditure of 7,200
₹ 28,800
1,68,750
Add: Health and education cess @4% 6,750
Tax Liability 1,75,500

YOUTUBE & TELEGRAM – ARHAM INSTITUTE,

CONTACT NO. FOR CLASSES - 9039600091 pg. 396