TAX ASSIGNMENT

On
Computation of taxable income of
individual, HUF and firms

Submitted to:
Mrs Niti Saxena

Prepared by:
Ashish Sahotra
MBA 3rd SEM
 COMPUTATION OF TAXABLE
INCOME OF AN INDIVIDUAL

What is included in income of an individual?

While computing taxable income of an individual, the following
points should be considered—
Nature of income Tax treatment
Income earned by the taxpayer Except the following, all other
incomes shall be included—
a. Income exempt under
sections 10 to 13A;
b. Incomes to be included in
income of others by virtue
of sections 60 to 64.

Share of profit from a HUF It is exempt under section 10(2)

Share of profit from a firm It is exempt under section 10(2A)

assessed as firm

Salary & interest from the These are taxable as business

aforesaid firm income

Share of profit from an If the association/body us taxable

association of persons/body of at the maximum marginal rate,
individuals then share of profit is not taxable
in the hand of recipient

Income earned by others and Such income shall be included in

included in the income of the the income of the taxpayer
taxpayer by virtue of sections 60
to 64
Taxable income – how computed
Taxable income shall be computed as follows:
Step 1 – income under the different heads of income- First find out
income under the five heads of income.
Step 2 – adjustment of losses of the current year and earlier years-
Losses should be set off according to the provisions of sections 70 to
80. The income after adjustment of losses is gross total income.
Step 3 – deduction from gross total income- from the gross total
income, the following deductions are available—
Section Nature of deduction
80C Payment of insurance premium, contribution to provident
fund etc.
80CCC Contribution to certain pension fund
80CCD Contribution to pension scheme of central government
80D Payment of medical insurance premium
80DD Maintenance including medical treatment of a dependent
being a person with disability
80DDB Medical treatment expenditure
80E Repayment of loan taken for higher studies
80G Donations to charitable institutions and funds
80GG Rent paid
80GGA Donations for scientific research or rural development
80GGC Contributions given to political parties
80-IA Profits and gains from industrial undertakings or enterprise
engaged in infrastructure development, etc.
80-IAB Profits and gains by an undertaking or enterprise engaged in
development of special economic zone
80-IB Profits and gains from certain industrial undertakings other
than infrastructure development undertakings
80-IC Profits and gains of certain undertakings in certain special
category of states
80-JJA Profits from the business of collecting and processing of
bio-degradable waste
80QQB Royalty income of authors
80RRB Royalty on patents
80U Income of a person with disability

Step 4 – Rounding off- The balance should be rounded off to the

nearest Rs. 10. It is known as net income or total income or taxable
income.

Tax liability – how calculated

Final tax liability shall be determined as under –
Particulars amount
Tax on net income ............
Less: Tax rebates under section 88E ............
Balance ______
............
Add: Surcharge
............
Tax and surcharge ............
Add: Education cess (2% of tax & surcharge) ______
Total tax ............
Less: Tax rebate or relief under sections 86,89,90,90A & 91 ............
Add: Interest payable under sections 234A,234B & 234C ............
Less: Prepaid tax
............
Tax deducted at source on his own income & on income of
............
others included in his taxable income ______
Tax collected at source ............
Advance tax ______
Tax payable at the time of submission of return of income

Special provisions relating to non-residents [sec.115C to 115-I] –

These provisions are given below:
WHO CAN CLAIM THE BENEFIT OF SPECIAL PROVISIONS –
The benefit of special provisions can be claimed by non-resident
Indians. The following are “non –resident Indians” for this purpose:
a. Citizen of India who is a non-resident; or
b. A person of Indian origin who is a non-resident.
A person shall be deemed to be of Indian origin if he, or either of his
parents or any of his grandparents, were born in undivided India.
INCOMES WHICH ARE QUALIFIED FOR SPECIAL
TREATMENT – The provisions under sections 115C to 115-I are
applicable only in respect of the following incomes derived by a non-
resident Indian:
a. Investment income derived from a “foreign exchange assets”;
b. Long term capital gains on sale or transfer of “foreign exchange
assets”.
Foreign exchange asset: It means those “specified assets” which the
assesse has acquired or purchased with, or subscribed to in,
convertible foreign exchange.
The following are “specified assets” for this purpose:
a. Shares in an Indian company (public or private);
b. Debentures issued by an Indian company which is not a private
company;
c. Deposits with an Indian company which is not a private
company – it may be even deposit with SBI or any other
banking company;
d. Any security of the central government; and
e. Such other assets as the Central Government may specify in this
behalf by notification in the official Gazette

HOW TO CALCULATE INVESTMENT INCOME – In computing

the investment income of a non-resident Indian, no deduction in
respect of any expenditure or allowance shall be allowed under any
provisions of the act. Moreover, No deductions under sections 80C to
80U shall be allowed in respect of investment income of non-resident
Indians.

HOW TO CALCULATE LONG-TERM CAPITAL GAIN – Long

term capital gain on sale or transfer of foreign exchange assets shall
be calculated subject to the following points:
 1. The benefit of indexation is not available in respect of sale or
transfer of foreign exchange assets.
2. No deduction is permissible in respect of long-term capital gain
under sections 80C to 80U.
3. By investing sale consideration in another asset, the non-
resident Indian can claim exemption under section 115F.

TAX ON INVESTMENT INCOME AND LONG-TERM CAPITAL

GAIN – Non-resident Indian are chargeable to tax on investment
income and long-term capital gain at the rate of 20% and 10%
respectively.

RETURN OF INCOME NOT BE FILLED IN CERTAIN CASES –

In cases where a non-resident Indian has income only from a foreign
exchange asset or income by way of long-term capital gains arising on
transfer of foreign exchange asset, or both, and tax deductible at
source from such income has been deducted, he is not required to file
the return of income under section 139(1).
The income from foreign exchange assets and long-term capital gains
arising on transfer of such assets would be treated as a separate block
and charged to tax at a flat rate as explained above. If the non-resident
Indian has other income in India, such other income is treated as an
altogether separate block and charged to tax in accordance with other
provisions of the act.

BENEFIT AVAILABLE EVEN AFTER THE ASSESSEE

BECOMES RESIDENT – These provisions are given below—
1. A non-resident Indian, in any previous year, becomes assessable
as resident in India in any subsequent year.
2. He may furnish to the assessing officer a declaration in writing
to the effect that the special provisions shall continue to apply to
him in relation to the investment income derived from any
foreign exchange asset.
 3. The foreign exchange assets for this purpose are debentures and
deposit with an Indian public limited company and Central
Government securities.
4. If he does so, the special provisions shall continue to apply to
him in relation to such income for that assessment year until the
transfer or conversion into money of such assets.

COMPUTATION OF TAXABLE
INCOME OF HUF

What is understood by Hindu Undivided

Family?
Under the Income tax Act, a Hindu Undivided Family is treated as a
separate entity for the purpose of assessment. The term “Hindu
Undivided Family” has not been defined under the Income-tax act.
The expression is, however, defined under the Hindu Law, as a family
which consists of all persons lineally descended from a common
ancestor and includes their wives and unmarried daughters. The
relation of a Hindu Undivided Family does not arise from a contract
but arises from status.

What are the basic conditions for assessment

of Hindu Undivided Family?
Income of a joint Hindu Family may be assessed as a Hindu
Undivided Family if the following two conditions are satisfied:
1. There is a coparcener ship. In this connection, it is worthwhile
to mention that once a joint family income is assessed as Hindu
Undivided Family, it continues to be assessed as such in
subsequent assessment years till partition is claimed by its
coparceners.
2. There is a joint family property which is consists of ancestral
property, property acquired with the aid of ancestral property
and property transferred by its members. Ancestral property, in
this connection, may be defined as the property which a man
inherits from any of his three immediate male ancestors, i.e., his
father, grandfather and great-grandfather. Therefore, property
inherited from any other relation is not treated as ancestral
property.

Few instances – In the following cases, income of ancestral property

is taxable as income of the Hindu undivided family:
a. Family consisting of widow mother and sons (maybe minor or
major);
b. Family consisting of husband and wife having no child;
c. Family consisting of two widows of deceased brothers;
d. Family consisting of two or more brothers;
e. Family consisting of uncle and nephew;
f. Family consisting of mother, son and son’s wife;
 g. Family consisting of a male and his late brother’s wife.

What is the basis of computation of taxable

income of HUF?
First ascertain income under different heads of income, ignoring
incomes exempted under sections 10 to 13A. While computing
income one should keep in mind the following additional points:
1. If funds of a Hindu undivided family are invested in a company
or firm, fees or remuneration received by the member as a
director or a partner in the company or firm may be treated as
income of the family, if the fees or remuneration is earned
essentially as a result of investment of fund.
2. If any remuneration is paid by the Hindu undivided family to the
Karta for services rendered by him in conducting family’s
business, the remuneration is deductible if remuneration is:

a) Paid under a valid and bona fide agreement;

b) In the interest of, and expedient for, the business of family;
and
c) Genuine and not excessive – jugal Kishore baldeo sahai v.
CIT [1967] 63 ITR 238 (SC).
3. The following incomes are not taxed as income of Hindu
undivided family:
a) If a member has converted (or transferred without adequate
consideration) after December 31, 1969, his self-acquired
property into joint family property, income from such
property is not taxable in the hands of the family.
b) Income from impartial estate is taxable in the hands of the
holder of the estate and not in the hands of Hindu undivided
family. Though the impartible estate belongs to the family,
income arising therefrom belongs to the holder of the estate
who is the senior most male member of the family. Income
from impartial estate is taxable in the hands of the holder of
the estate.
 c) Personal income of the member cannot be treated as income
of Hindu undivided family.
d) As stridhan is an absolute property of a woman, income
therefrom is not taxable as income of Hindu undivided
family.
e) Under the Dayabhaga school of law, no son has any right in
the ancestral property during the lifetime if his father. If,
therefore, the father does not have any brother as a
coparcener, income arising from ancestral property is taxable
as his individual income.

Clubbing and adjustment of losses – In this regard the following

points should be noted –
1. Under sections 60 to 63, income belonging to some other
person, may be taxable as income of a Hindu undivided family.
For instance, if a Hindu undivided family transfers income
without transferring the asset, such income is taxable under
section 60 in the hands of the family. Likewise, if an asset is
transferred under “revocable transfer” by the family, its income
is taxable in the hands of the family.
2. Losses of the current year as well as preceding years will be set
off under sections 70 to 80
After the aforesaid adjustments, the total of the five heads of income
is gross total income.

Deductions from gross total income:

Section Nature of deduction
80C Payment of life insurance premium, contribution to
provident fund, etc.
80D Payment in respect of medical insurance premium.
80DD Maintenance including medical treatment of a dependent
being a person with disability.
80DDB Expenditure in respect of medical treatment, etc.
80G Donations to charitable institutions and funds
80GGA Donations to charitable institutions and funds
80GGC Contributions given to political parties
80-IA Profits and gains from industrial undertakings or enterprise
engaged in infrastructure development, etc.
80-IAB Profits and gains by an undertaking or enterprise engaged in
development of special economic zone
80-IB Profits and gains from certain industrial undertakings other
than infrastructure development undertakings
80-IC Profits and gains of certain undertakings in certain special
category of states
80-JJA Profits from the business of collecting and processing of
bio-degradable waste.

Tax liability – how calculated

First determine net income and tax payable thereon at the prescribed
rates. If the Hindu undivided family has agricultural income, then
give due consideration to the rules so as to arrive at tax on non-
agricultural income. From the amount of tax so determined, deduct
the rebate under section 88E.
To the balance add surcharge and add education cess and then, deduct
rebate under sections 86, 90,90A and 91.
From the balancing amount, prepaid tax (like advance tax, tax
deducted or collected at source, etc.) shall be deducted to find out the
amount of tax payable.

How to find out income of a firm

First find out the taxable income of firm under the following steps:
 1. Find out under the different heads of income (viz., “income
from house property”, “profits and gains of business or
profession”, “capital gains” and “income from other sources”)
excluding incomes exempt under sections 10 to 13A. The
payment of remuneration and interest to partners is deductible if
conditions of section 184 and section 40(b) are satisfied.
2. Make adjustments on account of brought forward
losses/disallowances. The total income under the aforesaid
heads is gross total income.
3. From the “gross total income” make the following deductions
and the balancing amount is net income of the firm.

Section Nature of deduction

80G Donations to charitable institutions and funds
80GGA Donations to charitable institutions and funds
80GGC Contributions given to political parties
80-IA Profits and gains from industrial undertakings or enterprise
engaged in infrastructure development, etc.
80-IAB Profits and gains by an undertaking or enterprise engaged
in development of special economic zone
80-IB Profits and gains from certain industrial undertakings other
than infrastructure development undertakings
80-IC Profits and gains of certain undertakings in certain special
category of states
80-JJA Profits from the business of collecting and processing of
bio-degradable waste.

Other points – The following other points one should also keep in
mind –
 1. Where at the time of assessment, it is found that a change has
occurred in the constitution of a firm; only one assessment shall
be made in respect of the entire previous year in which change
in the constitution has occurred.
A change in the constitution of a firm is said to take place:
a. If one or more of the partners cease to be partners or one or
more new partners are admitted, provided that at least one of the
partners of the firm before the change continues as partner after
the change; or
b. Where all the partners continue with a change in their respective
shares or a change in the share of some of them.

2. Where a firm carrying on a business/profession is succeeded by

another firm and the case is not covered by the aforesaid
provision, separate assessments shall be made on the
predecessor firm and the successor firm.
3. Every person who was, during the previous year, a partner of a
firm, and the legal representative of any such person who is
deceased, shall be jointly and severally liable along with the
firm for the amount of tax, penalty or other sum payable by the
firm for the assessment year.
4. Section 167C has been inserted with effect from the assessment
year 2010-11. It is applicable in the two cases—
Case1- Where any tax is due from a limited liability partnership
in respect of any income of any previous year.
Case2- Where any tax is due from any other person in respect of
any income of any previous year during which such other person
was a limited liability partnership.
5. If conditions of section 184 and/or 40(b) are not satisfied, then
salary and interest paid by a firm to partners are not deductible.

How to find out tax liability of firm

 1. Find out income-tax—
Tax rate
Short term capital gain under section 111A 15%
Long-term capital gain (sec. 112) 20%
Winnings from lottery, races, etc. 30%
Income (not being income which is subject to special 30%
tax rate)

2. Add: Education cess @ 2% of (1)

3. Add: Secondary and higher education cess @ 1% of (1).
4. Tax liability is (1) + (2) + (3).

How to find out taxable income of partners

of a firm
These provisions are given below—
Share of profit- Section 10(2A) provides that in case of a partner
(including a minor admitted for the benefit of the firm) of a firm, his
share in the total income of the firm shall be exempt from tax.

Remuneration or interest- If condition of section 184 and section

40(b) are satisfied then interest, salary, bonus, commission or
remuneration paid/payable by the firm to partners is taxable in the
hands of partners (to the extent these are allowed as deduction in the
hands of the firm).
The following points one should note—
1. Remuneration is not taxable under the head “salaries” –
Remuneration is not taxable in the hands of partners under
section 15 under the head “salaries”. It is taxable as business
income.
2. Expenses are deductible under sections 30 to 37- Any
expenditure incurred in order to earn salary/interest income can
 be claimed as deductions under sections 30 to 37 from such
income. For instance, if a partner borrows money to make his
capital contributions to the firm and he has received interest on
his capital contribution, the amount of such interest will be
taxed under the head “profits and gains of business or
profession”, but the interest paid by him on the borrowed money
will have to be allowed as a deduction.
3. Consequences when remuneration/interest is disallowed in
firm’s hands- if salary/interest is disallowed in the hands of firm
under section 40(b) and/or section 184, and then the same is not
taxable in the hands of the partners. Likewise if part of
salary/interest is not allowed as deduction in the hands of the
firm, that part of the salary/interest, is not taxable in the hands of
the partners. The cumulative impact of the aforesaid provision is
that in the hands of partners the entire remuneration/interest
(excluding the amount disallowed in the assessment of partners)
is chargeable to tax.