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INDEX
1) HISTORY
2) KINDS OF TAXATION
- Difference between Direct and Indirect Tax
- MERITS AND DEMERITS OF DT/IDT
- TAX v. FEE
- Difference between tax, cess and fee.
- OBJECTIVES OF TAX
- DEFINITION OF TAX
- OTHER DEFINITIONS
- DIFFERENCE BETWEEN AY, PY, FY
- DIFFERENCE BETWEEN AY, PY, FY
- TAX BASE
- TYPES OF TAXING SYSTEM
- CONSTITUTIONAL PROVISIONS RELATING TO TAXATION
- CHARGE OF INCOME – SECTION 4:
- SCOPE OF TOTAL INCOME (SECTION 5):
- CHARGE OF INCOME – SECTION 4: a. Resident b. (A)Resident And Ordinarily Resident c. (B)Resident But Not Ordinarily Resident d. Non-Resident e. Residential Status Of A Hindu Undivided Family f. Residential Status of Firm and Association of Persons g. Residential Status of a Company
- AGRICULTURAL INCOME (S. 10)
- (Section 14)
- INCOME FROM SALARY (Section 15 – 17) a. Section 16 – Deductions from salary income b. PERQUISITES - Sec 17(2) i. Valuation of residential accommodation provided by the employer:- ii. Value of Furnished Accommodation- iii. Value of hotel accommodation provided by the employer- iv. Perquisite of motor car provided by the employer– v. Perquisite arising out of supply of gas, electric energy or water: vi. Free/Concessional Educational Facility: Value of the perquisite would be the expenditure incurred by the employer. vii. Free/Concessional journeys provided by an undertaking engaged in carriage of passengers or goods: viii. Provision for sweeper, gardener, watchman or personal attendant: ix. Value of certain other fringe benefits: c. ALLOWANCES i. House Rent Allowance:- ii. Leave Travel Allowance: iii. Certain allowances given by the employer to the employee are exempt u/s 10(14).
- INCOME FROM HOUSE PROPERTY (Sec 22-27) a. DETERMINATION OF ANNUAL VALUE (Section 23)
a. EXCEPTIONS
- CAPITAL GAINS (S. 45 to 55A and 112)
- INCOME FROM OTHER SOURCES (S. 56-59)
- CLUBBING OF INCOME - SECTION 60 - 65) a. Section 60 - Transfer of income from one person to another–
b. Conditions necessary for application: c. Section 61 - Revocable transfer of an asset d. Section 64 - Income of individual to include income of spouse, minor child -
- TAX TREATMENT OF CASH CREDITS (Sec 68-69D)
- SET OFF AND CARRY FORWARD OF LOSSES – SECTION 70 TO 75: a. Losses that cannot be set off or carried forward– b. Maximum period of Carry forward of losses and Manner of set off of losses–
- SET OFF AND CARRY FORWARD OF LOSSES – SECTION 70 TO 75:
- Error: Reference source not found (WITH KINDS) a. ACCELERATED ASSESSMENT
- REPRESENTATIVE ASSESSEE - SECTION 160)
- INCOME TAX AUTHORITY AND ITS POWERS UNDER INCOME TAX ACT a. POWER OF DIRECTOR GENERAL b. POWERS OF INCOME TAX COMMISSIONERS c. POWER TO JOINT COMMISIONNERS d. POWER TO INCOME TAX OFFICERS e. POWER OF INCOME TAX INSPECTOR
- GST a. Constitutional provisions b. CONCEPT c. Salient features of GST d. Input Tax credit e. Definition of Supply under GST
- IOS UNIT a. IOS UNIT b. CIT v VATIKA TOWNSHIP c. Vodafone International Holdings Pvt. Ltd. V. Union of India
HISTORY
Ancient Era In India, the system of direct taxation as it is known today, has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures.Kautilya'sArthasastra deals with the system of taxation in a real elaborate and planned manner. This well known treatise on state crafts written in 300 B.C., when the Mauryan Empire was ruling, is lauded for its deep study of the civilisation of that time and the suggestions given which should guide a king in running the State in a most efficient and fruitful manner. A major portion of Arthasastra is devoted by Kautilya to financial matters including financial administration.
British Era + Modern History The organisational history of the Income-tax Department starts in the year 1922. The Income- tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. The foundation of a proper system of administration was thus laid. In 1924, Central Board of Revenue Act constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act. Commissioners of Income- tax were appointed separately for each province and Assistant Commissioners and Income-tax Officers were provided under their control. In 1963 Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as Central Board of Direct Taxes (CBDT) was constituted under the Central Board of Revenue Act, 1963.
Productive Creates public consciousness Anti – inflationary
Demerits of DT Painful Tax Evasion Arbitrary Nature Inconvenient Discourage saving and investment Discourage Foreign Investors Sectoral Imbalance Affects capital formation
Conclusion on Direct Taxes DT is an important aspect of modern financial system. In DT, burden of tax cannot be shifted. The disadvantage of direct taxation are mainly due to administrative difficulties and inefficiencies. The extent of direct taxation should depend on the economic state of the country. A rich country has greater scope for direct taxation than a poor country.
Merits of IDT Convenient Wide Coverage Elastic Difficult to evade Diversity Influence on Pattern of Production
Demerits of IDT Increase income inequalities Against canon of economy Inflationary in nature Lack of social consciousness Uncertain revenue
Bad effect on production and employment
Progressive tax A progressive tax is a tax in which the tax rate increases as the taxable base amount increases. The term “progressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. The term can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability- to-pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay.
Regressive tax- sin tax
A regressive tax is a tax imposed in such a manner that the average tax rate decreases as the amount subject to taxation increases. “Regressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate. In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer’s ability to pay as measured by assets, consumption, or income.
Proportional tax A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation. “Proportional” describes a distribution effect on income or expenditure, referring to the way the rate remains consistent (does not progress from “low to high” or “high to low” as income or consumption changes), where the marginal tax rate is equal to the average tax rate.
Degressive tax: A tax is called degressive when the rate of progression in taxation does not increase in the same proportion as the income increases. In this case, the rate of tax increases up to certain limit, after that a uniform rate is charged and becomes constant.
TAX v. FEE It is well settled that the basic difference between a tax and a fee is that a tax is a compulsory exaction of money by the State or a public authority for public purposes, and is not a payment for some specific services rendered. On the other hand, a fee is generally defined to be a charge for a special service rendered by some governmental agency. In other words there has to be quid pro quo in a fee. The SC in the Shrirur Mutt case had to adjudicate whether the compulsory annual payment to be made by religious institutions to government not exceeding 5% of turnover is a tax or a fee. The SC held that the impugned section 76 which states “not exceeding turnover or profit” connotes ability to pay making it a tax. Moreover, there is no special benefit received to those who pay the sum and the collected amount goes to the consolidated fund. That there was no arithmetical co-relationship between the money collected and service and there was no individual quid pro quo, hence the amount is tax and not fee. In Calcutta Municipal Corp v. Liberty Cinema the SC held that the amount charged by the municipality was a levy of tax and was not a fee for rendering services. Whether court fee is a fee or a tax was answered by the SC in Sec of Govt of Madras v. PR Sriramulu. To answer this the court first looked at the history of court fee which was introduced to curb frivolous cases and has become useful to administer justice. With respect to the need of arithmetical co-relation the court held that there is no general benight that is received. The benefit a litigant receives is if they are decree holder then the court fee used to pay to admit a suit is paid back in the form of costs and this is a special benefit. Even though the money goes to the consolidated fund, it is not enough to say that its fee. It was in this case that the court held that a broad and general co- relationship is sufficient and exact arithmetic co-relationship is not required. In furtherance to this the court in Vijaylakshmi Rice Mills v. CTO held that a collective quid pro quo is sufficient for fee.
Hence it can be said that the following are the characters of tax which differentiates it from fee:
- Imposed by a statutory authority under a statute
- A common benefit or incidental benefit is received
- Taxpayer need not give consent
Section 76 Fails –
- Ability to pay used – not quantum of benefit.
- Amounts to consolidated funds of State.
- Absence of correlation between expenses with amount raised.
- No quid pro quo established. Held: So, HC right in upholding tax and not fee and is ultra vires the power of state legislature. The important feature of the fee is that the amounts collected by way of fees are not merged with the consolidated fund and the quid pro quo element is quite strong. On the other hand, in case of tax, the collection goes to the public revenue or to the consolidated fund and the benefit which the tax payer receives is not measurable in terms of the tax paid by them. To differentiate between tax and fee, one has to go to the substance of the legislation and not be merely guided by the nomenclature to it. Government of Madras v. Zenith Lamps – The SC held that if there is no co-relation between the services and the levy or if the levy is so excessive and bears no reasonable relation to the services, then what is levied is a tax and not a fee. Delhi Cloth & General Mills Co. Ltd. V. Chief Commissioner of Delhi – The SC held that if 60% of the amount collected as actually spent on services rendered it would be a fee and not a tax.
OBJECTIVES OF TAX a. Raise Revenue b. Regulation of Consumption and Production c. Encouraging Domestic Industries d. Stimulating Investment e. Better distribution of wealth f. Foster Economic Growth g. Development of Backward Regions h. Promote Social Goals
DEFINITION OF TAX
Commissioner H.R & C.E v. Lakshmendra (1954) - Tax is compulsory exaction of money by a public authority for public services enforceable by law and is not a payment for services rendered. Constitution of India does not define the term “tax” but Art. 366(28) says “Taxation includes the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly.” Art 265 prohibits levy or collection of tax except by authority of law. Not only levy but also collection of tax must be sanctioned by law. (ChhotabhaiJethabhai Patel & Co. v. UOI [AIR 1952 Nagpur 139]) A charging section has to be construed strictly. (Commissioner of Wealth Tax, Gujarat III Ahmedabad v. Ellis Bridge Gymkhana [1997 (9) Supreme 24]) Taxes cannot be imposed in vacuum. There should be some machinery for ascertaining rate of taxation and persons or class of persons liable to pay the same – ( State of Mysore v. D.Cawasji& CO. [(1970) 3 SCC 710]).
OTHER DEFINITIONS
S2(14) “capital asset" means— property of any kind held by an assessee, whether or not connected with his business or profession;(b) any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992 but does not include—(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or
profession ;(ii) movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes— (a) jewellery; (b) archaeological collections; (c) drawings (d) paintings (e) sculptures; or (f) any work of art
Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act, 1961. Agricultural income is defined under section 2(1A) of the Income-tax Act.
Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an income under the following three sources: (i) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes (ii) Any income derived from any building owned and occupied by the assessee, receiving rent or revenue from the land, by carrying out agricultural operations (iii) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind or any process ordinarily employed by cultivator or receiver of rent-in-kind so as to render it fit for the market, or sale of such produce.
In order to consider an income as agricultural income, certain points have to be kept in mind: (i) Existence of a land. (ii) Usage of land for agricultural operations (iii) Cultivation of Land is a must (iv) Ownership of Land is not essential
S2(8) "assessment" includes reassessment S2(9) "assessment year" means the period of twelve months commencing on the 1st day of April every year
S2 (31) "person" includes— (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses.
When a person is leaving India before the expiry or shortly after the expiry of the current Assessment Year, and the assessment officer has a reason to believe that the individual does not have the intention to return, then he may be assessed in the same year. E.g. A person leaving for gainful employment, marriage etc.
If an AoP/BoI/Partnership is formed for purpose and their purpose is fulfilled and likely to be dissolved in the next year.
A person, if it appears to the assessment officer, who is likely to transfer the property in an attempt to evade the tax.
If any business or profession is discontinued within the expiry of an Assessment Year. In the above mentioned circumstances, the Assessment Year and the Previous Year will be the same Financial Year.
CANONS OF TAXATION A good tax system should adhere to certain principles which become its characteristics – these principles are known as canons of taxation. Adam Smith – 4 imp. Principles - Canon of Equality, Certainty, Convenience, Economy Other economists who have suggested principles include C.F.Bastable.
Canon of Equality Person to be taxed acc. To their ability to pay taxes. That is why this principle is also known as canon of ability. Equality does not mean equal amount of tax but equality in tax burden. Implies a progressive tax system as per modern economists. Acc. To Adam Smith, it was proportional. Horizontal Equity – persons in similar circumstances should face similar tax burdens. (Tax Slabs)
- Two persons with same income pay same tax. Difficult to be achieved since deductions are allowed in different scenarios. Vertical equity – persons with higher incomes should pay not only more tax but also higher % of their income as tax. (Surcharge – tax on tax) - Regressive tax, Proportional Tax and Progressive Tax– Wealthier individuals are more benefitted so they have to pay more.E.g. People with income of 1 CR, income tax at 10% of Rs 10 L and in addition, 10% of 10 L – 1L as surcharge. Based on Ability to pay principle – pay as per individual capacity – rich pay more while poor pays less. It’s based on the theory that the marginal utility of money decreases as income increases. Canon of Certainty The tax which each individual is required to pay should be certain and not arbitrary. At the time of payment, the manner of payment and the amount to be paid should be clear to every tax payer. The application of this principle is beneficial both to govt. as well as to tax payer. If the tax policies are arbitrary, there will be doubts and confusion and possibility of harassment. Certainty enhances the confidence in tax payers mind. E.g.
Canon of Convenience The mode and timings of tax payment should be convenient to tax payer. This principle is also known as the pay as you earn method. The taxes should be imposed in such a manner and at the time which is most convenient for the tax payer. TDS, TCS, advance tax payment are based on this canon only. E.g. TDS – Section 190 – 206 AA, S.25 – Tax exemptions or deductions in case loan has been taken from a person residing abroad and having no business in India at all. Canon of Economy Every tax has a cost of collection. The cost of tax collection should be minimum. There should be a balance b/w amount collected and amount involved in collection. As added by Modern Economists – Canon of Elasticity Taxation should be elastic in nature in the sense that more revenue is automatically fetched when income of people rises. This means that taxation must have in-built flexibility. Flexibility allows easier change in tax rates in case of needs and changing times. E.g. During emergencies Canon of Productivity A tax must yield sufficient revenue and not adversely affect production in the economy. Few tax which brings large revenue is better than many taxes which yield small revenue. Canon of Simplicity Tax rates and systems ought to be simple and comprehensible and not to be complex and beyond understanding of layman. Canon of Expediency A tax should be determined on the ground of its economic, social and political expediency. E.g. a tax on agricultural income lacks social, political or administrative expediency in India and that is why agricultural income is exempt from tax. Canon of Diversity There should be a multiple tax system of diverse nature rather than having a single tax system. It does not mean there should be too many taxes but there shall be fairly good number of taxes producing the required amount of revenue. Canon of Coordination Coordination B/w State, Centre & local govt. Canon of Neutrality Tax system should not have any adverse effect. It should not create any inflationary or deflationary effect on the economy.
Taxes can be classified into various types on the basis of form, nature, aim and method of taxation. The most common classification is direct and indirect taxes.
Direct Taxes Tax whose burden is borne by same person on whom it is levied. The ultimate burden of taxation falls on the person on whom the tax is levied. It is based on income and property of persons. E.g. Income tax, Securities Transaction Tax, Dividend Distribution Tax. Abolished direct taxes – Wealth Tax, Gift Tax, Banking Cash Transaction Tax, and Fringe Benefit Tax. Section 56(2) – Gift taxed as income from other sources.
Indirect Taxes Tax which is initially paid by one individual but the burden of which is passed over to some other individual who ultimately bears it. It is levied on the expenditure of a person. As opposed to the direct taxes, such a tax in the nation is generally levied on some specified services or some particular goods. An indirect tax is not levied on any particular organization or an individual. Almost all the activities which fall within the scope of the indirect taxation are included in the range starting from manufacturing goods and delivery of services to those that are meant forconsumption. Apart from these, the varied activities and services, which are related to import, trading etc. are also included in its scope. E.g. Excise duty, Custom Duty, GST (VAT, Sales Tax, Central Sales Tax, Service Tax) FY 20- DT – 13.19 L crore IDT – 10.97 L crore
CONSTITUTIONAL PROVISIONS RELATING TO TAXATION
Constitution is the foundation and source of powers to legislate all laws in India. Parliament, as well as State Legislatures gets the power to legislate various laws from the Constitution only and therefore every law has to be within the scope of Constitution. Articles 14, 19(1)(g), 245, 246, 248, 265, 268A, 269, 270, 276, 285, 286, 300A, 303, 304, 348, 366(28), 366(29A), 110, 117 Basic provisions relating to taxation including the powers of Parliament and State Legislatures to legislate regarding levy and collection of tax. The restrictions imposed by our Constitution on such powers. Entries concerning taxation in Central List, List I and State List, List 2 of VII Schedule. To understand any complicated provision of law, refer to the object of the law for which it has been legislated and also the power of the parliament of state legislature under the constitution to legislate such law for better understanding of the subject. Chottabhai v UOI Art. 265 is applicable not only for levy but also for the collection of taxes and the expression “assessment” within its compass covers both aspects carried out by executive functionary. S. Gopalan v State of Madras
Explained law in relation to taxation – an act of the legislature but it should be within the legislative competence of the legislature. – Art. 27, 276, 286 and 301 KT Moopil Nair v State of Kerala (1961) Tax levied Travancore – Kochi Land Tax Act, 1955 – violates Art. 14, 19(1)(g) BinoyViswam v UOI (2017) S.139AA of IT Act makes it compulsory for all persons who are income tax assessees to obtain aadhaar card and to quote aadhaar number to the prescribed income tax authority. The court held that this is within the legislative competence of the parliament and does not violate any fundamental right of the Constitution. Further, the court held that S.139 AA cannot be read retrospectively but only prospectively. Additional Commissioner of Income Tax v Bharat V. Patel (2018) Circulars cannot be used to introduce new tax provisions.
CHARGE OF INCOME – SECTION 4: Section 4 of the Act is the charging section, which imposes a charge and provides rules for working out the charge so imposed.Section 4 of the Act imposes a charge of tax on the total or taxable income of the assessee. The meaning and scope of the expression of total income is contained in Section 5. The total income of an assessee cannot be determined unless we know the residential status in India during the previous year.The scope of total income and consequently the liability to income-tax also depends upon the following facts: Whether the income accrues or is received in India or outside, The exact place and point of time at which the accrual or receipt of income takes place, and The residential status of the assessee. Section 4 is very compact and it applies to “every person”. CIT v. Hariprasad& Co. Ltd. (1975) Income includes negative income as well. Section 4 is a charging provision, which concludes that words such are profits or gain should be understood as inclusive of losses as well so both must enter into computation wherever it becomes relevant material, of the taxable income of the assessees.
SCOPE OF TOTAL INCOME (SECTION 5):
Resident and ordinarily resident: Total income of an assessee who is resident and ordinarily resident includes: (a) any income received or deemed to be received in India during the previous year by or on behalf of the assessee ; or (b)any income accrues or arises or deemed to accrue or arise to him in India during the previous year ; or (c) any income accrues or arises to him outside India during such year.
Resident but not ordinarily resident : (a) any income received or deemed to be received in India during the previous year by or on behalf of the assessee ; or
He is in India in the previous year for a period of 182 days or more OR He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.
Note : In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India
(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship. (b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).
Additional Conditions : (i) He has been resident in India in at least 2 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year. AND (ii) He has been in India for a period of 730 days or more during 7 years immediately preceeding the relevant previous year.
Resident An individual is said to be resident in India if he satisfies any one of the basic conditions.
(A)Resident And Ordinarily Resident An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions. (B)Resident But Not Ordinarily Resident An individual is said to be resident but not ordinarily resident in India if he satisfies any one of the basic conditions but not satisfies both of the additional conditions.
Non-Resident An individual is a non-resident in India if he satisfies none of the basic conditions.
Residential Status Of A Hindu Undivided Family As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
HUF: Resident or Non-Resident A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India. A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (including successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b).
Additional condition (1) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in immediately preceding the relevant previous year)
(2) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year. If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
Subbaya Chettiar v. CIT – Laid down 6 conditions for HUF = R.
- HUF always presumed to be R unless otherwise proved.
- Control and management of affairs of HUF – every small transaction In India
- Seat of HUF and the control and management if outside India but occasional transactions and casual visits by Karta and members in India
- Seat of HUF in India but control and management in UK – Can have dual residential status.
- Karta’s stay/absence in India – irrelevant
- Whether the defacto control and management lies in India or not is a question of fact.
San Paulo Railway Co. V. Carter – The control and management in India but trade carried outside = Resident
Residential Status of Firm and Association of Persons As per section 6(2), a partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.
Residential Status of a Company As per section 6(3), an Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.
AGRICULTURAL INCOME (S. 10) Exempt from Tax. Defined under S. 2 (1A).
Reason for exemption is that Constitution gives exclusive power to make laws with respect to taxes on agricultural income to State Legislatures. Sources –
- Any rent or revenue received from land which is used for agricultural purpose.
- Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market or sale of such produce.
- Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc.
EXAMPLES
AGRICULTURAL INCOMES
- Income from sale of replanted trees.
- Rent received for agricultural land.
- Income from growing flowers and creepers.
- Share of profit of a partner from a firm engaged in agricultural operations.
Section 16 – Deductions from salary income The income chargeable under the head “Salaries” is computed after making the following deductions under Section 16 :
- Standard Deduction ;
- Entertainment Allowance Deduction ; and
- Professional Tax. 1. Standard Deduction [Sec. 16(i)/(ia)] - Standard deduction is Rs. 50,000 ; or
the Amount of Salary,
whichever is Lower.
2. Entertainment Allowance [Sec. 16(ii)]- Entertainment allowance is first included in salary income under the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following paragraphs:
(A). In the case of a Government employee (i.e., a Central Government or a State Government employee), the least of the following is Deductible: a. Rs. 5,000;
b. 20 % of Basic Salary; or
c. Amount of Entertainment Allowance granted during the previous year.
In order to determine amount of entertainment allowance deductible from salary, the following points need consideration:
- For this purpose “salary” excludes any allowance, benefit or other perquisites.
- Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.
(B). In the case of a Non-Government Employee (including employees of Statutory Corporation and Local Authority), : Entertainment Allowance is NOT deductible.
3. Professional Tax or Tax on Employment [Sec. 16(iii)] - Professional Tax or Tax on Employment, levied by a State under Article 276 of the Constitution, is Allowed as Deduction.
The following points should be kept in view —
- Deduction is available only in the year in which professional tax is paid.
- If the professional tax is paid by the employer on behalf of an employee, it is first included
