ACCOUNTING AS A SOURCE OF INFORMATION

Accounting as a Source of Information

Accounting is a definite processes of interlinked activities,  that begins with the identification of transactions and ends with the preparation of financial statements. Every step in the process of accounting generates information. Generation of information is not an end in itself. It is a means to facilitate the dissemination of information among different user groups. Such information enables the interested parties to take appropriate decisions. Therefore, dissemination of information is an
essential function of accounting. To be useful, the accounting information should
ensure to:

• provide information for making economic decisions;

• serve the users who rely on financial statements as their principal source of information;

• provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash-flows;

• provide information for judging management’s ability to utilise resources effectively in meeting goals;provide factual and interpretative information by disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction, or estimation; and

• provide information on activities affecting the society.The role of an accountant in generating accounting information is to observe,screen and recognise events and transactions to measure and process them, and thereby compile reports comprising accounting information that are
communicated to the users. 

IDENTIFICATION, MEASUREMENT, RECORDING AND COMMUNICATION

Identification, Measurement, Recording and Communication
Identification : It means determining what transactions to record, i.e., to identity events which are to be recorded. It involves observing activities and selecting those events that are of considered financial character and relate to the organisation. The business transactions and other economic events therefore are evaluated for deciding whether it has to be recorded in books of account.
For example, the value of human resources, changes in managerial policies or appointment of personnel are important but none of these are recorded in books of account. However, when a company makes a sale or purchase, whether on cash or credit, or pays salary it is recorded in the books of account.

Measurement : It means quantification (including estimates) of business transactions into financial terms by using monetary unit, viz. rupees and paise as a measuring unit. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts. That is why
important items like the appointment of a new managing director, signing of contracts or changes in personnel are not shown in the books of accounts.

Recording : Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order. Recording is done in a manner that the necessary financial information is summarised as per well-established practice and is made available as and when required.

Communication : The economic events are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users. The information is regularly communicated through accounting reports. These reports provide information that are useful to a variety of users who have an interest in assessing the financial performance and the position of an enterprise, planning and controlling business activities and making necessary decisions from time to time. The accounting information system should be designed in such a way that the right information is communicated to the
right person at the right time. Reports can be daily, weekly, monthly, or quarterly, depending upon the needs of the users. An important element in the communication process is the accountant’s ability and efficiency in presenting the relevant information.

ECONOMIC EVENTS

Economic Events

Business organisations involves economic events. An economic event is known as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms. For example, purchase of machinery, installing and keeping it ready for manufacturing is an event which comprises number of financial transactions such as buying a machine, transportation of machine, site preparation for installation of a machine, expenditure incurred on its installation and trial runs. Thus, accounting identifies bunch of transactions relating to an economic event. If an event involves transactions between an outsider and an organisation, these
are known as external events.

 The following are the examples of such transactions:
• Sale of merchandise to the customers.

• Rendering services to the customers by ABC Limited.

• Purchase of materials from suppliers.

• Payment of monthly rent to the landlord.

An internal event is an economic event that occurs entirely between the internal wings of an enterprise, e.g., supply of raw material or components by the stores department to the manufacturing department, payment of wages to the employees, etc.

INTRODUCTION TO ACCOUNTING

INTRODUCTION TO ACCOUNTING

Accounting is famously known as the "language of business". Through the financial statements, the end-product reports in accounting, it delivers information to different users.

Meaning of Accounting

• In 1941, The American Institute of Certified Public Accountants (AICPA) had defined accounting as the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof’. With greater economic development resulting in changing role of accounting, its scope, became broader. In 1966, the American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.
• In 1970, the Accounting Principles Board of AICPA also emphasised that the function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.

Accounting can therefore be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information. In order to appreciate the exact nature of accounting, we must

understand the following relevant aspects of the definition:

• Economic Events

• Identification, Measurement, Recording and Communication

• Organisation

• Interested Users of Information

PERQUISITES

Perquisites

The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally due
by way of contract for services rendered. In modern times, the salary package of an employee
normally includes monetary salary and perquisite like housing, car etc.

Perquisite may be provided in cash or in kind.

Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
Perquisite may arise in the course of employment or in the course of profession. If it arises from a
relationship of employer-employee, then the value of the perquisite is taxable as salary. However, if
it arises during the course of profession, the value of such perquisite is chargeable as profits and
gains of business or profession.

Perquisite will become taxable only if it has a legal origin. An unauthorised advantage taken by an
employee without his employer’s sanction cannot be considered as a perquisite under the Act.

LUMPSUM PAYMENT OR OTHERWISE

Lumpsum Payment or otherwiseLumpsum payment or otherwise received by an employee at the time of voluntary retirement would
be taxable as “profits in lieu of salary”.

Exemption of Voluntary Retirement Receipts [Section 10(10C)]

Voluntary retirement receipt would be exempt under section 10(10C), subject to the following
conditions:

Eligible Undertakings - The employee of the following undertakings are eligible for exemption
under this clause:

(i) Public sector company

(ii) Any other company

(iii) An authority established under a Central/State or Provincial Act

(iv) A local authority

(v) A co-operative society

(vi) An University established or incorporated under a Central/State or Provincial Act and an
Institution declared to be an University by the University Grants Commission.

(vii) An Indian Institute of Technology

(viii) Such Institute of Management as the Central Government may, by notification in the Official
Gazette, specify in this behalf

(ix) Any State Government

(x) The Central Government

(xi) An institution, having importance throughout India or in any state or states, as the Central

Government may specify by notification in the Official Gazette.

Limit: The maximum limit of exemption should not exceed ` 5 lakh.

Such compensation should be at the time of his voluntary retirement or termination of his service, in
accordance with any scheme or schemes of voluntary retirement or, in the case of public sector
company, a scheme of voluntary separation. The exemption will be available even if such
compensation is received in installments.

Guidelines:

The schemes should be framed in accordance with such guidelines, as may be prescribed and
should include the criteria of economic viability.

Rule 2BA prescribes the following guidelines for the purposes of the above clause:

1. It applies to an employee who has completed 10 years of service or completed 40 years of age.
However, this requirement is not applicable in case of an employee of a public sector company
under the scheme of voluntary separation framed by the company.

2. It applies to all employees by whatever name called, including workers and executives of the
company or the authority or a co-operative society except directors of a company or a
cooperative society.

3. The scheme of voluntary retirement or separation must have been drawn to result in overall
reduction in the existing strength of the employees.

4. The vacancy caused by the voluntary retirement or separation must not be filled up.

5. The retiring employee of a company shall not be employed in another company or concern
belonging to the same management.

6. The amount receivable on account of voluntary retirement or separation of the employee must
not exceed the amount equivalent to three months’ salary for each completed year of service
or salary at the time of retirement multiplied by the balance months of service left before the
date of his retirement or superannuation.

Notes –

Where any relief has been allowed to any assessee under section 89 for any assessment year in
respect of any amount received or receivable on his voluntary retirement or termination of service
or voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to
that assessment year or any other assessment year.

Salary for this purpose means basic salary and dearness allowance, if provided in the terms of
employment for retirement benefits, forming part of salary and commission which is expressed as a
fixed percentage of turnover

PROVIDENT FUND

Provident fund

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the employee
are invested in approved securities. Interest earned thereon is also credited to the account of
the employee. Thus, the credit balance in a provident fund account of an employee consists of
the following:

(i) employee’s contribution

(ii) interest on employee’s contribution

(iii) employer’s contribution

(iv) interest on employer’s contribution.

The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs.

The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a
provident fund account.

(1) Recognised Provident Fund (RPF)
Recognised provident fund means a provident fund recognised by the Commissioner of
Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules regarding the following:

(a) Recognition of the fund

(b) Employee’s and employer’s contribution to the fund

(c) Treatment of accumulated balance etc.

A fund constituted under the Employees’ Provident Fund and Miscellaneous Provisions Act,
1952 will also be a Recognised Provident Fund.

(2) Unrecognised Provident Fund (URPF)

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.Statutory Provident Fund (SPF)

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised
educational institutions.

(4) Public Provident Fund (PPF)

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of
the fund is open to every individual though it is ideally suited to self-employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An
individual may contribute to the fund on his own behalf as also on behalf of a minor of whom
he is the guardian.

For getting a deduction under section 80C, a member is required to contribute to the PPF a
minimum of ` 500 in a year. The maximum amount that may qualify for deduction on this
account is ` 1,50,000 as per PPF rules.

A member of PPF may deposit his contribution in as many installments in multiples of ` 500 as
is convenient to him. The amount of contribution may be paid at any of the offices or branch
offices of the State Bank of India or its subsidiaries and specified branches of banks or any
Post Office.

GRATUITY

 Gratuity

Gratuity is a voluntary payment made by an employer in appreciation of services rendered by
the employee. Now-a-days, gratuity has become a normal payment applicable to all employees.

In fact, the Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity.
Almost all employers enter into an agreement with employees to pay gratuity.

Exemption in respect of Gratuity [Section 10(10)]
Its treatment is discussed below:

1. Retirement gratuity received under the Pension Code Regulations applicable to members
of the Defence Service is fully exempt from tax.

2. Central / State Government Employees: Any death cum retirement gratuity is fully exempt from tax.

3. Non-government employees:
(a) Non-government employees covered by the Payment of Gratuity Act, 1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least of the
following:

      (i) ` 10,00,000

      (ii) Gratuity actually received

      (iii) 15 days’ salary based on last drawn salary for each completed year of service or part
            thereof in excess of 6 months

Note: Salary for this purpose means basic salary and dearness allowance. No. of days in a month for this purpose, shall be taken as 26.

(b) Non-government employees not covered by the Payment of Gratuity Act, 1972
Any death cum retirement gratuity is exempt from tax to the extent of least of the
following:

   (i) ` 10,00,000

   (ii) Gratuity actually received

   (iii) Half month’s salary (based on last 10 months’ average salary immediately preceding
        the month of retirement or death) for each completed year of service (fraction to be
        ignored)

Note: Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover.

ANNUITY OR PENSION

Annuity or Pension

Meaning of Annuity
As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in respect of a
particular year. It is a yearly grant. If a person invests some money entitling him to series of
equal annual sums, such annual sums are annuities in the hands of the investor.

• Annuity received from a present employer is to be taxed as salary. It does not matter whether it is paid in pursuance of a contractual obligation or voluntarily.
• Annuity received from a past employer is taxable as profit in lieu of salary.
• Annuity received from person other than an employer is taxable as “Income from other sources”.

Pension

Concise Oxford Dictionary defines ‘pension’ as a periodic payment made especially by
Government or a company or other employers to the employee in consideration of past service
payable after his retirement.

Pension is of two types: commuted and uncommuted.
• Uncommuted Pension: Uncommuted pension refers to pension received periodically. It
is fully taxable in the hands of both government and non-government employees.

• Commuted Pension: Commutation means inter-change. Commuted pension means
lump sum amount taken by commuting the whole or part of the pension. Many persons
convert their future right to receive pension into a lumpsum amount receivable
immediately.

ALLOWANCE WHICH ARE FULLY EXEMPT

Allowances which are fully exempt

(1) Allowances granted to Government employees outside India [Section 10(7)]

Allowances or perquisites paid or allowed as such outside India by the Government to a citizen
of India for services rendered outside India are exempt from tax.

Students may remember that in such cases under section 9(1)(iii), the income chargeable under
the head ‘Salaries’ is deemed to accrue in India. The residential status of the recipient will,
however, not affect this exemption.

(2) Allowance to High Court Judges

Any allowance paid to a Judge of a High Court under section 22A(2) of the High Court Judges
(Conditions of Service) Act, 1954 is not taxable.

(3) Sumptuary allowance granted to High Court or Supreme Court Judges
Sumptuary allowance given to High Court Judges under section 22C of the High Court Judges
(Conditions of Service) Act, 1954 and Supreme Court Judges under section 23B of the
Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable to tax.

(4) Allowance paid by the United Nations Organisation (UNO)
Allowance paid by the UNO to its employees is not taxable by virtue of section 2 of the United
Nations (Privileges and Immunities) Act, 1947.

(5) Compensatory allowance received by a judge

Compensatory allowance received by judge under Article 222(2) of the Constitution is not
taxable since it is neither salary not perquisite—Bishamber Dayalv. CIT [1976] 103 ITR 813
(MP).

Exemption of specified allowances and perquisites paid to Chairman or a retired Chairman or any other member or retired member of the UPSC [Section 10(45)]
(i) Under the Income-tax Act, 1961, perquisites and allowances received by an employee are
taxable under the head “Salaries” unless they are specifically exempted.

(ii) Section 10(45) exempts specified allowances and perquisites received by Chairman or
any other member, including retired Chairman/member, of the Union Public Service
Commission (UPSC).

(iii) The exemption would be available in respect of such allowances and perquisites as may
be notified by the Central Government in this behalf.

(iv) Accordingly, the Central Government has notified the following allowances and
perquisites for serving Chairman and members of UPSC, for the purpose of exemption
under section 10(45) -

  (1) the value of rent free official residence,

  (2) the value of conveyance facilities including transport allowance,

  (3) the sumptuary allowance and

  (4) the value of leave travel concession.

In case of retired Chairman and retired members of UPSC, the following have been notified for exemption under section 10(45):

(i) a sum of maximum ` 14,000 per month for defraying the service of an orderly and for
meeting expenses incurred towards secretarial assistance on contract basis.

(ii) the value of a residential telephone free of cost and the number of free calls to the extent
of ` 1,500 pm (over and above free calls per month allowed by the telephone authorities)

Note – Tax exemption is also available in respect of certain specified perquisites enjoyed by Chief Election Commissioner/Election  Commissioner and judges of Supreme Court on account of the enabling provisions in the respective Acts which govern their service conditions.

SALARY,PERQUISITE AND PROFITS IN LIEU OF SALARY (SECTION 17)

SALARY, PERQUISITE AND PROFITS IN LIEU OF SALARY (SECTION 17)

(1) Meaning of Salary

The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally
understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary
payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities
(e.g. housing accommodation, medical facility, interest free loans etc.).
Section 17(1) defined the term “Salary”. It is an inclusive definition and includes monetary as well
as non-monetary items.

Wages

In common parlance, the term “wages” means fixed regular payment earned for work or
services. The words “wages”, “salary”, “basic salary” are used interchangeably. Moreover, the
payments in the form of Bonus, Allowances etc. made to the employee are also included within
the meaning of salary.

Under the Income-tax Act, there are certain payments made which are fully taxable, partly
taxable and fully exempt. For Example, wages, salary, bonus, dearness allowance etc. are fully
taxable payments. Whereas monetary benefits in the form of allowances such as House Rent
Allowance, conveyance allowance etc. are partially taxable.

 Allowances

Different types of allowances are given to employees by their employers. Generally allowances
are given to employees to meet some particular requirements like house rent, expenses on
uniform, conveyance etc. Under the Income-tax Act, 1961, allowance is taxable on due or
receipt basis, whichever is earlier.

BASIS OF CHARGE (SECTION 15)

BASIS OF CHARGE (SECTION 15)

• Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or
on ‘receipt’ basis, whichever is earlier.

• However, where any salary, paid in advance, is assessed in the year of payment, it cannot be
subsequently brought to tax in the year in which it becomes due.

• If the salary paid in arrears has already been assessed on due basis, the same cannot be
taxed again when it is paid.

(1) Advance Salary

Advance salary is taxable when it is received by the employee irrespective of the fact whether it is
due or not. It may so happen that when advance salary is included and charged in a particular
previous year, the rate of tax at which the employee is assessed may be higher than the normal rate
of tax to which he would have been assessed. Section 89(1) provides for relief in these types of
cases.
(2) Arrears of salary

Normally speaking, salary arrears must be charged on due basis. However, there are circumstances
when it may not be possible to bring the same to charge on due basis.

INTRODUCTION (SALARY)

INTRODUCTION

The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and
17.
Let us now recap the important concepts relating to Salaries.

(1) Employer-employee relationship : Every payment made by an employer to his employee for service rendered would be chargeable to tax as salaries. Before an income can become
chargeable under the head ‘salaries’, it is vital that there should exist between the payer and
the payee, the relationship of an employer and an employee.

(2) Full-time or part-time employment : Once the relationship of employer and employee exists, the income is to be charged under the head “salaries”. It does not matter whether the employee is a full-time employee or a part-time one.
If, for example, an employee works with more than one employer, salaries received from all the
employers should be clubbed and brought to charge for the relevant previous years.

(3) Foregoing of salary : Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable to tax.

(4) Surrender of salary : However, if an employee surrenders his salary to the Central
Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation)
Act, 1961, the salary so surrendered would be exempt while computing his taxable income.

(5) Salary paid tax-free : This, in other words, means that the employer bears the burden of the tax on the salary of the employee. In such a case, the income from salaries in the hands of the
employee will consist of his salary income and also the tax on this salary paid by the employer.
However, as per section 10(10CC), the income-tax paid by the employer on non-monetary perquisites on behalf of the employee would be exempt in the hands of the employee.
(6) Place of accrual of salary: Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if it is paid outside India or it is paid or payable after the contract of employment in India comes to an end.
If an employee gets pension paid abroad in respect of services rendered in India, the same will
be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave earned in
India is deemed to accrue or arise in India.
Now, let us discuss the chargeability section 15, the provisions explaining the meaning of
Salary, Perquisites and Profits in lieu of salary contained in section 17 and the deductions
under section 16.

TAX HOLIDAY FOR NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONES [SECTION 10AA]

TAX HOLIDAY FOR NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONES [SECTION 10AA]
A deduction of profits and gains which are derived by an assessee being an entrepreneur from
the export of articles or things or providing any service, shall be allowed from the total income
of the assessee.

(1) Assessees who are eligible for exemption

Exemption is available to all categories of assessees who derive any profits or gains from an
undertaking being a unit engaged in the export of articles or things or providing any service.
Such assessee should be an entrepreneur referred to in section 2(j) of the SEZ Act, 2005 i.e.,
a person who has been granted a letter of approval by the Development Commissioner under
section 15(9).

(2) Essential conditions to claim exemption

The exemption shall apply to an undertaking which fulfils the following conditions:

(i) It has begun or begins to manufacture or produce articles or things or provide any
service in any SEZ during the previous year relevant to A.Y.2006-07 or any subsequent
assessment year but not later than A.Y.2020-21.

(ii) It should not be formed by splitting up or reconstruction of a business already in
existence (except in circumstances referred to in section 33B) or formed by transfer to a
new business, of plant and machinery previously used for any purpose exceeding 20%
of the total value of machinery and plant used in the business.

Note: Circumstances referred to in section 33B

The undertaking, being the unit, is formed as re-establishment, reconstruction or revival
by the assessee of the business of such undertaking which is discontinued by reason of
extensive damage to or destruction of, any building, machinery, plant or furniture owned
by the assessee and used for the purpose of such business.

Such damage or destruction should be affected as a direct result of flood, typhoon,
hurricane, cyclone, earthquake or other convulsion of nature or riot or civil disturbance or
accidental fire or explosion or action by an enemy or action taken in combating an enemy.

(iii) For this purpose, any machinery or plant which was used outside India by any person
other than the assessee shall not be regarded as machinery or plant previously used for
any purpose if the following conditions are fulfilled:

(a) such machinery or plant was not at any time used in India;

(b) such machinery or plant is imported into India from any country outside India; and

(c) no deduction on account of depreciation has been allowed or allowable under this
Act in respect of such machinery or plant to any person earlier for any prior period.

(iv) The assessee should furnish in the prescribed form, alongwith the return of income, the
report of a chartered accountant certifying that the deduction has been correctly
claimed.

(3) Period for which deduction is available

The unit of an entrepreneur, which begins to manufacture or produce any article or thing or
provide any service in a SEZ on or after 1.4.2005, shall be allowed a deduction of:

(i) 100% of the profits and gains derived from the export, of such articles or things or from
services for a period of 5 consecutive assessment years beginning with the assessment
year relevant to the previous year in which the Unit begins to manufacture or produce
such articles or things or provide services, and

(ii) 50% of such profits and gains for further 5 assessment years.

(iii) A further deduction for next 5 consecutive years shall be so much of the amount not
exceeding 50% of the profit as is debited to the profit and loss account of the previous
year in respect of which the deduction is to be allowed and credited to a reserve account
(to be called the "Special Economic Zone Re-investment Reserve Account") to be
created and utilised in the manner laid down under section 10AA(2).

However, Explanation below section 10AA(1) has been inserted to clarify that amount of
deduction under section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act before giving effect to the provisions of
this section and the deduction under section 10AA shall not exceed such total income of the
assessee.

(4) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years) [Section 10AA(2)]
Sub-section (2) provides that the deduction under (3)(iii) above shall be allowed only if the
following conditions are fulfilled, namely:-

(i) the amount credited to the Special Economic Zone Re-investment Reserve Account is
utilised-

   (1) for the purposes of acquiring machinery or plant which is first put to use before the
        expiry of a period of three years following the previous year in which the reserve
        was created; and

  (2) until the acquisition of the machinery or plant as aforesaid, for the purposes of the
       business of the undertaking. However, it should not be utilized for

      (i) distribution by way of dividends or profits; or

     (ii) for remittance outside India as profits; or

     (iii) for the creation of any asset outside India;

(ii) the particulars, as may be specified by the CBDT in this behalf, have been furnished by
the assessee in respect of machinery or plant. Such particulars include details of the
new plant/machinery, name and address of the supplier of the new plant/machinery,
date of acquisition and date on which new plant/machinery was first put to use. Such
particulars have to be furnished along with the return of income for the assessment year
relevant to the previous year in which such plant or machinery was first put to use.

(5) Consequences of mis-utilisation / non-utilisation of reserve [Section 10AA(3)]
Where any amount credited to the Special Economic Zone Re-investment Reserve Account -

(i) has been utilised for any purpose other than those referred to in sub-section (2), the
amount so utilized shall be deemed to be the profits in the year in which the amount was
so utilised and charged to tax accordingly; or

(ii) has not been utilised before the expiry of the said period of 3 years, the amount not so
utilised, shall be deemed to be the profits in the year immediately following the said
period of three years and be charged to tax accordingly.

(6) Computation of profit and gains from exports of such undertakings
The profits derived from export of articles or things or services (including computer software) 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 such articles or things or computer software
bears to the total turnover of the business carried on by the undertaking i.e.

INCOME OF INVESTOR PROTECTION FUND

 Income of Investor Protection Fund set up by depositories [Section 10(23ED)]

(i) Under section 10(23EA), income by way of contributions from a recognised stock exchange
received by a Investor Protection Fund set up by the recognised stock exchange is exempt
from taxation.
(ii) In line with section 10(23EA), section 10(23ED) has been inserted to provide that any
income, by way of contribution from a depository, of such Investor Protection Fund set up by
a depository in accordance with the regulations made under the SEBI Act, 1992 and the
Depositories Act, 1996, will not be included while computing the total income of such investor
protection fund.
(iii) The Central Government, would, by way of notification in the Official Gazette, specify such
investor protection funds set up by depositories in accordance with the SEBI and depositories
regulations.
However, where any amount standing to the credit of the fund and not charged to income-tax
during any previous year is shared wholly or partly with a depository, the amount so shared
shall be deemed to be the income of the previous year in which such amount is shared.
Accordingly, such amount would be chargeable to income-tax.
(iv) “Depository” means a company formed and registered under the Companies Act, 1956 and which
has been granted a certificate of registration under section 12(1A) of the SEBI Act, 1992.

EXAMPLES OF AGRICULTURAL INCOME AND NON - AGRICULTURAL INCOME

Examples of Agricultural income and non-agricultural income:
For better understanding of the concept, certain examples of agricultural income and non-
agricultural income are given :

Agricultural income
1. Income derived from the sale of seeds.
2. Income from growing of flowers and creepers.
3. Rent received from land used for grazing of cattle required for agricultural activities.
4. Income from growing of bamboo.
Non-agricultural income
1. Income from breeding of livestock.
2. Income from poultry farming.
3. Income from fisheries.
4. Income from dairy farming.

INDIRECT CONNECTION WITH LAND

Indirect connection with land

We have seen above that agricultural income is exempt, whether it is received by the tiller or
the landlord. However, non-agricultural income does not become agricultural merely on account of its indirect connection with the land. The following examples will illustrate the
above point.

1. A rural society has as its principal business the selling on behalf of its member societies,
butter made by these societies from cream sold to them by farmers. The making of butter was
a factory process separated from the farm.

The butter resulting from the factory operations separated from the farm was not an
agricultural product and the society was, therefore, not entitled to exemption under section
10(1) in respect of such income.

2. X was the managing agent of a company. He was entitled for a commission at the rate of
10% p.a. on the annual net profits of the company. A part of the company’s income was
agricultural income. X claimed that since his remuneration was calculated with reference to
income of the company, part of which was agricultural income, such part of the commission
as was proportionate to the agricultural income was exempt from income tax.

Since, X received remuneration under a contract for personal service calculated on the amount of
profits earned by the company, such remuneration does not constitute agricultural income.
3. Y owned 100 acres of agricultural land, a part of which was used as pasture for cows. The
lands were purely maintained for manuring and other purposes connected with agriculture
and only the surplus milk after satisfying the assessee’s needs was sold. The question arose
whether income from such sale of milk was agricultural income.

The regularity with which the sales of milk were effected and quantity of milk sold showed
that the assessee carried on regular business of producing milk and selling it as a commercial
proposition. Hence, it was not agricultural income.

4. B was a shareholder in certain tea companies, 60% of whose income was exempt from tax as
agricultural income. She claimed that 60% of the dividend received by her on her shares in
those companies was also exempt from tax as agricultural income.

Dividend is derived from the investment made in the shares of the company and is hence, not
an agricultural income.

5. In regard to forest trees of spontaneous growth which grow on the soil unaided by any human
skill and labour there is no cultivation of the soil at all. Even though operations in the nature
of forestry operations performed by the assessee may have the effect of nursing and
fostering the growth of such forest trees, it cannot constitute agricultural operations.

Income from the sale of such forest trees of spontaneous growth do not, therefore, constitute
agricultural income.

INCOME NOT INCLUDED IN TOTAL INCOME

INCOMES NOT INCLUDED IN TOTAL INCOME

[SECTION 10]

Let us now have a look at the various incomes which are exempt from tax and the conditions to be
satisfied in order avail such exemption.

(1) Agricultural income [Section 10(1)]
Section 10(1) provides that agricultural income is not to be included in the total income of the
assessee. The reason for totally exempting agricultural income from the scope of central income-
tax is that under the Constitution, the Central Government has no power to levy a tax on

agricultural income.

Definition of agricultural income [Section 2(1A)]

This definition is very wide and covers the income of not only the cultivators but also the land
holders who might have rented out the lands. Agricultural income may be received in cash or in
kind.

Agricultural income may arise in any one of the following three ways:-
(i) It may be rent or revenue derived from land situated in India and used for agricultural
purposes.

(ii) It may be income derived from such land

     (a) through agriculture or

     (b) the performance of a process ordinarily employed by a cultivator or receiver of rent in
      kind to render the produce fit to be taken to the market or

      (c) through the sale of such agricultural produce in the market.

(iii) Lastly, agricultural income may be derived from any farm building required for agricultural
operations.

Now let us take a critical look at the following aspects:

(i) Rent or revenue derived from land situated in India and used for agricultural purposes:

The following three conditions have to be satisfied for income to be treated as agricultural income:

(a) Rent or revenue should be derived from land;

(b) Land has to be situated in India (If agricultural land is situated in a foreign country, the entire income would be taxable); and

(c) land should be used for agricultural purposes.

The amount received in money or in kind, by one person from another for right to use land is
termed as Rent. The rent can either be received by the owner of the land or by the originaltenant from the sub-tenant. It implies that ownership of land is not necessary. Thus, the rent received by the original tenant from sub-tenant would also be agricultural income subject the other conditions mentioned above.

The scope of the term “Revenue” is much broader than rent. It includes income other than
rent. For example, fees received for renewal for grant of land on lease would be revenue
derived from land.

(ii) Income derived from such land

(a) through Agriculture: The term “Agriculture” has not been defined in the Act. However,
cultivation of a field involving human skill and labour on the land can be broadly termed as
agriculture.

“Agriculture” means tilling of the land, sowing of the seeds and similar operations. It involves basic operations and subsequent operations.
“Agriculture” comprises within its scope the basic as well as the subsidiary operations
regardless of the nature of the produce raised on the land. These produce may be grain,
fruits or vegetables necessary for sustenance of human beings including plantation and groves or grass or pasture for consumption of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco or commercial crops like cotton flax, jute hemp and indigo. The term comprises of products of land having some utility either for consumption or for trade and commerce and would include forest products such as sal, tendu leaves etc.

INTRODUCTION (EXEMPTION)

INTRODUCTION

(1) Exemption under section 10 vis-a-vis Deduction under Chapter VI-A
The various items of income referred to in the different clauses of section 10 are excluded
from the total income of an assessee. These incomes are known as exempted incomes.
Consequently, such income shall not enter into the computation of taxable income.
Moreover, there are certain other incomes which are included in total income but are wholly or
partly allowed as deductions in computation of total income .

(2) Exemptions which are discussed under the relevant chapters:

In this chapter, we are going to study the provisions of section 10 which enumerate the
various categories of income that are exempt from tax.

DEEMED OWNERSHIP (SECTION 27)

DEEMED OWNERSHIP [SECTION 27]

As per section 27, the following persons, though not legal owners of a property, are deemed
to be the owners for the purposes of section 22 to 26.

Transfer to a spouse [Section 27(i)] – 

In case of transfer of house property by an individual to his or her spouse otherwise than for adequate consideration, the transferor is deemed to be the owner of the transferred property.

Exception– In case of transfer to spouse in connection with an agreement to live apart, the
transferor will not be deemed to be the owner. The transferee will be the owner of the house
property.

(2) Transfer to a minor child [Section 27(i)] – In case of transfer of house property by an individual to his or her minor child otherwise than for adequate consideration, the transferor would be deemed to be owner of the house property transferred.

Exception– In case of transfer to a minor married daughter, the transferor is not deemed to
be the owner.

Note - Where cash is transferred to spouse/minor child and the transferee acquires property
out of such cash, then the transferor shall not be treated as deemed owner of the house
property. However, clubbing provisions will be attracted.

(3) Holder of an impartible estate [Section 27(ii)] – The impartible estate is a property which is not legally divisible. The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate.

After enactment of the Hindu Succession Act, 1956, all the properties comprised in an
impartible estate by custom is to be assessed in the status of a HUF. However, section 27(ii)
will continue to be applicable in relation to impartible estates by grant or covenant.

(4) Member of a co-operative society etc. [Section 27(iii)] – A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him although the co-operative
society/company/ association is the legal owner of that building.

(5) Person in possession of a property [Section 27(iiia)] – A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be the deemed owner of that house property. This would include cases where the –

(i) possession of property has been handed over to the buyer

(ii) sale consideration has been paid or promised to be paid to the seller by the buyer

(iii) sale deed has not been executed in favour of the buyer, although certain other
documents like power of attorney/agreement to sell/will etc. have been executed.

In all the above cases, the buyer would be deemed to be the owner of the property although it
is not registered in his name.

(6) Person having right in a property for a period not less than 12 years [Section 27(iiib)] –

A person who acquires any rights in or with respect to any building or part thereof, by virtue
of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not
less than 12 years, shall be deemed to be the owner of that building or part thereof.

Exception – In case the person acquiring any rights by way of lease from month to month or
for a period not exceeding one year, such person will not be deemed to be the owner.

TREATMENT OF INCOME FROM CO-OWNED PROPERTY (SECTION-26)

TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]

(1) Where property is owned by two or more persons, whose shares are definite and ascertainable,
then the income from such property cannot be taxed as income of an AOP.

(2) The share income of each such co-owner should be determined in accordance with sections
22 to 25 and included in his individual assessment.

(3) Where the house property owned by co-owners is self-occupied by each of the co-owners,
the annual value of the property of each co-owner will be Nil and each co-owner shall be
entitled to a deduction of ` 30,000 / ` 2,00,000, as the case may be, under section 24(b) on
account of interest on borrowed capital.

(4) Where the house property owned by co-owners is let out, the income from such property shall
be computed as if the property is owned by one owner and thereafter the income so
computed shall be apportioned amongst each co-owner as per their specific share.

INADMISSIBLE DEDUCTIONS (SECTION 25)

INADMISSIBLE DEDUCTIONS [SECTION 25]

Interest chargeable under this Act which is payable outside India shall not be deducted if –

(a) tax has not been paid or deducted from such interest and

(b) there is no person in India who may be treated as an agent under section 163.

PROVISIONS FOR ARREARS OF RENT AND UNREALIZED RENT RECEIVED SUBSEQUENTLY

PROVISION FOR ARREARS OF RENT AND UNREALIZED RENT RECEIVED SUBSEQUENTLY

[SECTION 25A]

(1) As per section 25A(1), the amount of rent received in arrears from a tenant or the amount of
unrealised rent realised subsequently from a tenant by an assessee shall be deemed to be
income from house property in the financial year in which such rent is received or realised,
and shall be included in the total income of the assessee under the head “Income from house
property”, whether the assessee is the owner of the property or not in that financial year.

(2) Section 25A(2) provides a deduction of 30% of arrears of rent or unrealised rent realised
subsequently by the assessee.

(3) Summary: Section 25A

Arrears of Rent / Unrealised Rent

(i) Taxable in the year of receipt/realisation

(ii) Deduction@30% of rent received/realised

(iii) Taxable even if assessee is not the owner of the property in the financial year of
receipt/realisation.

DEDUCTION FROM ANNUAL VALUE SECTION (24)

DEDUCTIONS FROM ANNUAL VALUE [SECTION 24]

(1) There are two deductions from annual value. They are –

(a) 30% of NAV; and

(b) Interest on borrowed capital 

30% of NAV is allowed as deduction under section 24(a)

(a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred.

(b) The assessee will not be entitled to deduction of 30%, in the following cases, as the
annual value itself is nil.

(i) In case of self-occupied property or

(ii) In case of property held as stock-in-trade and the whole or any part of the property
is not let out during the whole or any part of the previous year, upto 1 year from the
end of the financial year in which certificate of completion of construction of the
property is obtained from the competent authority.

Interest on borrowed capital is allowed as deduction under section 24(b)

Interest payable on loans borrowed for the purpose of acquisition, construction, repairs,
renewal or reconstruction can be claimed as deduction.
Interest payable on a fresh loan taken to repay the original loan raised earlier for the
aforesaid purposes is also admissible as a deduction.

Interest for pre-construction period:

Pre-construction period is the period prior to the previous year in which property is acquired
or construction is completed.

Interest payable on borrowed capital for the period prior to the previous year in which the
property has been acquired or constructed (Pre-construction interest), 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.

Interest for the year in which construction is completed:

Interest relating to the year of completion of construction can be fully claimed in that year
irrespective of the date of completion.

DETERMINATION OF ANNUAL INCOME

(1) Determination of annual value for different types of house properties

(i) Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]

Where the property is let out for the whole year, then the GAV would be the higher of –

(a) Expected Rent (ER) and

(b) Actual rent received or receivable during the year

(ii) Where let out property is vacant for part of the year [Section 23(1)(c)]

Where let out property is vacant for part of the year and owing to vacancy, the actual rent is
lower than the ER, then the actual rent received or receivable will be the GAV of the property.

(iii) In case of self-occupied property or unoccupied property [Section 23(2)]
(a) Where the property is self-occupied for own residence or unoccupied throughout the
previous year, its Annual Value will be Nil, provided no other benefit is derived by the
owner from such property.

(b) The benefit of exemption of one self-occupied house is available only to an
individual/HUF.

(c ) No deduction for municipal taxes is allowed in respect of such property.

(iv) Where a house property is let-out for part of the year and self-occupied for part of the year [Section 23(3)]

(a) If a single unit of a property is self-occupied for part of the year and let-out for the
remaining part of the year, then the ER for the whole year shall be taken into account for
determining the GAV.

(b) The ER for the whole year shall be compared with the actual rent for the let out period

and whichever is higher shall be adopted as the GAV.

(c) However, municipal tax for the whole year is allowed as deduction provided it is paid by
the owner during the previous year.

(v) In case of deemed to be let out property [Section 23(4)]

(a) Where the assessee owns more than one property for self-occupation, then the income
from any one such property, at the option of the assessee, shall be computed under the
self-occupied property category and its annual value will be nil.

(b) The other self-occupied/unoccupied properties shall be treated as “deemed let out
properties”.

(c) This option can be changed year after year in a manner beneficial to the assessee.

(d) In case of deemed let-out property, the ER shall be taken as the GAV.

(e) The question of considering actual rent received/receivable does not arise.

Consequently, no adjustment is necessary on account of property remaining vacant or
unrealized rent.

(f) Municipal taxes actually paid by the owner during the previous year, in respect of the
deemed let out properties, can be claimed as deduction.

(vi) In case of a house property held as stock-in-trade [Section 23(5)]

(a) In some cases, property consisting of any building or land appurtenant thereto may be
held as stock-in-trade, and the whole or any part of the property may not be let out
during the whole or any part of the previous year.

(b) In such cases, the annual value of such property or part of the property shall be NIL.

(c) This benefit would be available for the period upto one year from the end of the financial
year in which certificate of completion of construction of the property is obtained from
the competent authority.

(vii) In case of a house property, a portion let out and a portion self-occupied
(a) Income from any portion or part of a property which is let out shall be computed
separately under the “let out property” category and the other portion or part which is
self-occupied shall be computed under the “self-occupied property” category.

(b) There is no need to treat the whole property as a single unit for computation of income
from house property.

(c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned
between the let-out portion and self-occupied portion either on plinth area or built-up
floor space or on such other reasonable basis.

(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each
portion or floor or on a reasonable basis.

INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

(1) In case of a resident in India (resident and ordinarily resident in case of individuals and HUF),
income from property situated outside India is taxable, whether such income is brought into
India or not.

(2) In case of a non-resident or resident but not ordinarily resident in India, income from a
property situated outside India is taxable only if it is received in India.

COMPOSITE RENT

COMPOSITE RENT

(1) Meaning of composite rent: The owner of a property may sometimes receive rent in respect of building as well as –

(i) other assets like say, furniture, plant and machinery.

(ii) for different services provided in the building, for e.g. –

(a) Lifts;

(b) Security;

(c) Power backup;

The amount so received is known as “composite rent”.

(2) Tax treatment of composite rent
Where composite rent includes rent of building and charges for different services (lifts,
security etc.), the composite rent is has to be split up in the following manner -

(i) the sum attributable to use of property is to be assessed under section 22 as income
from house property;

(ii) the sum attributable to use of services is to charged to tax under the head “Profits and
gains of business or profession” or under the head “Income from other sources”, as the
case may be.

(3) Manner of splitting up

If let out building and other assets are inseparable

Where composite rent is received from letting out of building and other assets (like furniture)
and the two lettings are not separable i.e. the other party does not accept letting out of
buildings without other assets, then the rent is taxable either as business income or income
from other sources, the case may be.
This is applicable even if sum receivable for the two lettings is fixed separately.

If let out building and other assets are separable
Where composite rent is received from letting out of buildings and other assets and the two
lettings are separable i.e. letting out of one is acceptable to the other party without letting out
of the other, then

(a) income from letting out of building is taxable under “Income from house property”;

(b) Income from letting out of other assets is taxable under the head “Profits and gains from
business or profession” or “Income from other sources”, as the case may be.

This is applicable even if a composite rent is received by the assessee from his tenant for the
two lettings.

CONDITION FOR CHARGEABILITY

CONDITIONS FOR CHARGEABILITY

(1) Property should consist of any building or land appurtenant thereto.

(i) Buildings include not only residential buildings, but also factory buildings, offices, shops,
godowns and other commercial premises.

(ii) Land appurtenant means land connected with the building like garden, garage etc.
It may be noted that Income from letting out of vacant land is, however, taxable under the
head “Income from other sources”.

(2) Assessee must be the owner of the property

(i) Owner is the person who is entitled to receive income from the property in his own right.

(ii) The requirement of registration of the sale deed is not warranted.

(iii) Ownership includes both free-hold and lease-hold rights.

(iv) Ownership includes deemed ownership (discussed later in para 5.11)

(v) The person who owns the building need not also be the owner of the land upon which it
stands.

(vi) The assessee must be the owner of the house property during the previous year. It is
not material whether he is the owner in the assessment year.

(vii) If the title of the ownership of the property is under dispute in a court of law, the decision
as to who will be the owner chargeable to income-tax under section 22 will be of the
Income-tax Department till the court gives its decision to the suit filed in respect of such
property.

(3) The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is
chargeable to tax.

The income earned by an assessee engaged in the business of letting out of properties on
rent would also be taxable as business income and not as income from house property
[Rayala Corporation (P) Ltd. v. Asstt. CIT (SC) (2016) 386 ITR 500].

(4) Property held as stock-in-trade etc.
Annual value of house property will be charged under the head “Income from house
property”, where it is held by the assessee as stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as NIL
for a period of one year from the end of the financial year in which certificate of completion of
construction of the property is obtained from the competent authority, if such property is not
let-out during such period [Section 23(5)].

CHARGEABILITY SECTION (22)

CHARGEABILITY [SECTION 22]

(1) The process of computation of income under the head “Income from house property” starts
with the determination of annual value of the property. The concept of annual value and the
method of determination is laid down in section 23.

(2) The annual value of any property comprising of building or land appurtenant thereto, of which the
assessee is the owner, is chargeable to tax under the head “Income from house property”.

However, where the property is occupied for the purpose of any business or profession carried
on by him, the profit of which is chargeable to tax as profits or gains from business or
profession, the annual value of such property would not be chargeable to tax under the head
“Income from house property”.