Unit – 4
Computation of
Total Income and Tax Liability
Income of other persons
included in Assessee’s total income;
Aggregation of income and set-off and carry forward of losses; Deduction from
gross total income; Rebates and reliefs; Computation of total income of
individuals and firms; Tax liability of an individual and a firm; Five leading
cases decided by the Supreme Court.
Income of other persons
included in Assessee’s total income;
1. Clubbing of Income:
Under Income-tax Act, 1961, an assessee is generally taxed in
respect of his own income. However, there are certain cases where as assessee
has to pay tax in respect of income of another person. The provisions for the
same are contained in sections 60 to 65 of the Act. These provisions have been enacted
to counteract the tendency on the part of the tax-payers to dispose of their
property or transfer their income in such a way that their tax liability can be
avoided or reduced.
For example, in the case of individuals, income-tax is levied on a
slab system on the total income. The tax system is progressive i.e. as the
income increases, the applicable rate of tax increases. Some taxpayers in the
higher income bracket have a tendency to divert some portion of their income to
their spouse, minor child etc. to minimize their tax burden. In order to
prevent such tax avoidance, clubbing provisions have been incorporated in the
Act, under which income arising to certain persons (like spouse, minor child
etc.) have to be included in the income of the person who has diverted his
income for the purpose of computing tax liability.
2. Clubbing of Income
arising to Spouse:
Income by way of
remuneration from a concern in which the individual has substantial interest
[section 64(1)(ii)]:
1. In computing the total income of any individual, all such income
which arises, directly or indirectly, to the spouse of such individual by way
of salary, commission, fees or any other form of remuneration, whether in cash
or in kind, from a concern in which such individual has a substantial interest
shall be included.
2. However, this provision does not apply where the spouse of the
said individual possesses technical or professional qualifications and the
income to the spouse is solely attributable to the application of his / her technical
or professional knowledge or experience. In such an event, the income arising
to such spouse is to be assessed in his / her hands.
3. Where both husband and wife have substantial interest in a
concern and both are in receipt of income by way of salary etc. from the said
concern, such income will be includible in the hands of that spouse, whose
total income, excluding such income is higher.
4. Where any such income is once included in the total income of
either spouse, income arising in the succeeding year shall not be included in
the total income of the other spouse unless the Assessing Officer is satisfied,
after giving that spouse an opportunity of being heard, that it is necessary to
do so.
Income arising to the
spouse from an asset transferred without adequate consideration [section
64(1)(iv)]:
1. Where there is a transfer of an asset (other than house
property), directly or indirectly, from one spouse to the other, otherwise than
for adequate consideration or in connection with an agreement to live apart,
any income arising to the transferee from the transferred asset, either
directly or indirectly, shall be included in the total income of the
transferor.
2. In the case of transferor of house property, the provisions are
contained in section 27. If an individual transfers a house property to his
spouse, without adequate consideration or otherwise than in connection with an
agreement to live apart, the transferor shall be deemed to be the owner of the
house property and its annual value will be taxed in his hands.
3. It may be noted that any income from the accretion of the
transferred asset is not to be clubbed with the income of the transferor.
4. The income arising on transferred assets alone have to be
clubbed. However, income earned by investing such income (arising from
transferred asset) cannot be clubbed.
5. It is also to be noted that natural love and affection do not
constitute adequate consideration. Therefore, where an asset is transferred
without adequate consideration, the income from such asset will be clubbed in
the hands of the transferor.
6. Where the assets transferred, directly or indirectly, by an
individual to his spouse are invested by the transferee in the business,
proportionate income arising from such investment is to be included in the
total income of the transferor. If the investment is in the nature of
contribution of capital, proportionate interest on capital will be clubbed with
the income of the transferor.
Such proportion has to be computed by taking into account the value
of the aforesaid investment as on the first day of the previous year to the
total investment in the business by the transferee as on that day.
3. Clubbing of Minor’s
Income [section 64 (1A)]:
1. All income of a minor is to be included in the income of his
parent.
2. However, the income derived by the minor from manual work or from
any activity involving his skill, talent or specialized knowledge or experience
will not be included in the income of his parent.
3. The income of the minor will be included in the income of that
parent, whose total income is greater.
4. Once clubbing of minor’s income is done with that of one parent,
it will continue to be clubbed with that parent only, in subsequent years. The
Assessing Officer, may, however, club the minor’s income with that of the other
parent, if, after giving the other parent an opportunity to be heard, he is
satisfied that it is necessary to do so.
5. Where the marriage of the parents does not subsist, the income of
the minor will be includible in the income of that parent who maintains the
minor child in the relevant previous year.
6. However, the income of a minor child suffering from any
disability of the nature specified in section 80U shall not be included in the
hands of the parent but shall be assessed in the hands of the child.
7. It may be noted that the clubbing provisions are attracted even
in respect of income of minor married daughter.
Exemption in respect of
clubbed income of minor [section 10(32)]:
In case the income
of an individual (i.e. the parent) includes the income of his minor child in
terms of section 64(1A), such parent shall be entitled to exemption of Rs. 1500
in respect of each minor child. However, if income of any minor so includible
is less than Rs. 1500, then the entire income shall be exempt.
Aggregation of income and
set-off and carry forward of losses
Income-tax is levied on the total income of any assessee of a
previous year. Total income is calculated by aggregating the income of the
assessee under different sources of income falling under one head of income and
then all heads of income are put together to find out the net result in the
shape of total income. It is not necessary that every source shall result into
a profit every year. There may be loss under one source and profit under
another source. So when the income of different sources is put together the
loss of one source is to be adjusted against the income of another source. When
the income of all heads is aggregated, the loss under one head is set-off against
the income of another head and if at all the total result is a loss, the same
is carried forward over future years for setting off. Sections 70-79 of the
Income tax Act, 1961 deal with the provisions regarding set-off losses and
carry forward and set-off losses.
Set-off losses:
A. Set-off losses from one
source against income from another source within the same head of income:
The income under one head is computed by adding together the incomes
from different sources which fall under the same head. Section 70 says that the
loss of one source is adjusted against the income of another source falling
under the same head of income. Suppose the assessee is running two-three
different businesses and the income of the head is calculated by combining
different sources. So it is automatic that if there is loss under one source,
the same is adjusted or set-off against the available income under other
sources in the same head of income.
There are some exceptions to this rule that a loss can be set-off
against any other income under the same head:-
a. Speculation loss [section 73(1)]
Any loss computed in respect of speculation business carried on by
assessee shall not be set-off except against profits and gains, if any, of
another speculation business.
However, losses from other business can be adjusted against profits
from speculation business.
b. Long term capital loss [section 70(3)]
Long term capital loss from the transfer of a capital asset shall be
allowed to be set-off only out of the long-term capital gain from the transfer
of another capital asset. However short term capital loss shall be allowed to
be adjusted out of long term as well as short term capital gain.
c. Loss from running and maintenance of race horses [section 74A(3)]
Loss from owning and maintenance of horses shall be set-off only out
of the income from owning and maintenance of horses. This means that loss from
the activity of owning and maintaining race horses cannot be set-off against
any other income.
d. Losses from specified business [section 73A(1)]
A loss in any specified
business referred in section 35AD can be set-off only against any other
specified business.
However, losses from other business can be set-off against profits
from specified business.
e. Loss from an exempted source of income
If a person has loss from a source of income which is exempt under
any provision of this Act, such loss cannot be set-off against the income of
any other source which is taxable.
B. Set-off loss of one head against the income
of another head in the same assessment year i.e., inter-heads set-off:
A loss which could not be set-off within the same head of income
shall be allowed to be set-off out of income of any other head in the same
assessment year. However, the following points should be considered:
a. Where the net result of the computation under any head of income
(other than ‘capital gain’) is a loss, the assessee can set-off such loss
against his income assessable for that assessment year under any other head,
including ‘capital gains’.
b. Where the net result of the computation under the head ‘profits
and gains of business or profession’ is a loss, such loss cannot be set off
against income under the head ‘salaries’.
c. Where the net result of computation under the head ‘capital
gains’ is a loss, such capital loss cannot be set –off against income under any
other head.
d. Where the net result of the computation under the head ‘Income
from house property’ a loss and the assessee has income assessable under any
other head of income, the amount of such loss exceeding Rs 2 lakhs would not be
allowable to be set-off against income under the other head. In other words,
the maximum loss from house property which can be set-off against income from
any other head is Rs 2 lakhs.
e. Speculation loss, loss from the activity of owning and
maintaining race horses and losses from specified business referred to in
section 35AD cannot be set off against income under any other head.
Carry forward and set-off
losses:
Where in any assessment year, the loss under any head is not
adjusted as per rules; the same shall be carry forward and set-off against the
income of subsequent years.
1. Carry forward and
set-off losses from House property [section 71B]:
i. In any assessment year, if there is a loss under the head “income
from house property”, such loss will first be set off against income from any
other head to the extent of Rs 200000 during the same year.
ii. The unabsorbed loss will be carried forward to the following
assessment year to be set-off against income under the head “Income from house
property”.
iii. The loss under this head is allowed to be carried forward up to
8 assessment years immediately succeeding year in which the loss was first
computed.
Iv. It is remembered that once a particular loss is carried forward,
it can be set only against the income from the same head in the forthcoming
assessment years.
2. Carry forward and
set-off Business losses [section 72 & 80]:
Under this Act, the assessee has the right to carry forward the loss
from the business and profession in cases where such loss cannot be set-off due
to the absence or inadequacy of income under any other head in the same year.
The loss so carried forward can be set-off against the profits of subsequent
previous years.
Section 72 covers the carry forward and set-off losses arising from
a business or profession.
The assessee’s right to carry forward business losses under this
section is, however, subject to the following conditions:-
i. The loss should have been incurred in business, profession or
vocation.
ii. The loss should not be in the nature of a loss in the business
of speculation.
iii. The loss may be carry forward and set-off against the income
from business or profession though not necessarily against the profits and
gains of the same business or profession in which the loss was incurred.
However, a loss carried forward cannot, under any circumstances, be
set-off against the income from any head other than “profits and gains of
business or profession”.
iv. The loss can be carried forward and set-off only against the
profits of the assessee who incurred loss. That is, only the person who has
incurred the loss is entitled to carry forward or set off the same.
Consequently, the successor of a business cannot carry forward or set-off
losses of his predecessor except in the case of succession by inheritance.
v. A business loss can be carried forward for a maximum period of 8
assessment years immediately succeeding the assessment year in which the loss
was incurred.
vi. As per section 80, the assessee must have filed a return of loss
under section 139(3) in order to carry forward and set-off a loss. In other
words, the non-filing of a return of loss disentitles the assessee from
carrying forward the loss sustained by him. Such a return should be filed within
the time allowed under section 139(1).
3. Loss of speculation
business [section 73]:
Where for any assessment year the loss under speculation business
has not been wholly set-off against the income of another speculation business,
such part of speculation loss shall be carried forward to the following
assessment year and set-off only against the profits of any speculation
business carried on by the assessee and assessable during those assessment
years. The unabsorbed speculation business loss is eligible for carry forward
up to 4(four) assessment years immediately succeeding the assessment year for
which the loss was computed.
4. Carry forward and
set-off losses by Specified businesses [section 73A]:
i. Any loss computed in respect of the specified business referred
to in section 35AD shall be set-off only against profits and gains, if any, of
any other specified business.
ii. The unabsorbed loss, if any, will be carried forward for set-off
against profits and gains of any specified business in the following assessment
year and so on.
iii. There is no time limit specified for carry forward and set-off
and therefore, such loss can be carried forward indefinitely for set-off
against income from specified business.
iv. However, return of loss has to be filed on or before the due
date of filing of return under section 139(1) for carry forward of loss from
specified business.
5. Losses under the head
‘Capital Gains’ [section 74]:
Section 74 provides that where for any assessment year, the net
result under the head ‘capital gains’ is short-term capital loss or long-term
capital loss, the loss shall be carried forward to the following assessment
year to be set-off in the following manner:
i. Where the loss so carried forward is a short-term capital loss,
it shall be set-off against any capital gains, short-term or long-term, arising
in that year.
ii. Where the loss so carried forward is a long term capital loss,
it shall be set-off only against long term capital gain arising in that year.
iii. Net loss under the head capital gains cannot be set-off against
income under any other hand.
iv. Any unabsorbed loss shall be carried forward to the following
assessment year up to a maximum of 8 assessment years immediately succeeding
the assessment year for which the loss was first computed.
6. Losses from the
activity of owning and maintaining race horses [section 74A(3)]:
i. According to provisions of section 74A(3), the losses incurred by
an assessee from the activity of owning and maintaining race horses cannot be
set-off against the income from any other source other than the activity of
owning and maintaining race horses.
ii. Such loss can be carried forward for a maximum period of 4
assessment years for being set-off against the income from the activity of
owning and maintaining race horses in the subsequent years.
Unabsorbed Depreciation
[section 32(2)]:
With effect from assessment year 2003-04 depreciation which remains
unadjusted as either there is no income or less income in the relevant previous
year, it can be carried forward till it is fully adjusted from any income
during the succeeding previous years. It shall be treated as depreciation of
the succeeding previous year. In case there is carry forward business loss as
well as carry forward unabsorbed depreciation, then following order should be
followed for set-off.
i. Firstly current depreciation.
ii. Secondly brought forward business loss.
iii. Thirdly brought forward / unabsorbed depreciation.
Order of set-off losses:
As per the provisions of section 72(2), brought forward business
loss is to be set-off before setting off unabsorbed depreciation. Therefore,
the order in which set-off will be effected is as follows –
a. Current year depreciation / current year capital expenditure on
scientific research and current year expenditure on family planning, to the
extent allowed.
b. Brought forward loss from business / profession [section 72(1)]
c. Unabsorbed depreciation [section 32(2)]
d. Unabsorbed capital expenditure on scientific research [section
35(4)]
e. Unabsorbed expenditure on family planning [section 36(1)(ix)]
Computation of total Income and Tax liability of Individuals:
Income-tax is levied on an assessee’s total income. Total income has
to be computed as per the provisions contained in the Income-tax Act, 191. The
following steps have to be followed for computing the total income of an
assessee:
Step 1 – Determination of
residential status
a. Resident
- Resident and
ordinarily resident
- Resident but
not ordinarily resident
b. Non-resident
Step 2 – Classification of
income under different heads
a. Income from salaries
b. Income from house property
c. Income from profit and gains of business or profession
d. Income from capital gains
e. Income from other sources
Step 3 – Computation of
income under each head
Income under each head – exemptions – deductions
Step 4 – Clubbing of
income of spouse, minor child etc.
Step 5 – Set-off losses
and Carry forward and set-off losses
a. Inter-source set-off losses
b. Inter-heads set-off losses
c. Carry forward and set-off losses
Step 6 – Computation of Gross total income
Step 7 – Deductions from Gross total income
a. Deductions in respect of expenditure
b. Deductions in respect of income
c. Deductions in respect of other income
d. Other deductions
Step 8 – Computation of
total income
a. Gross total income – Deduction under chapter VI-A
b. Rounded off to the nearest multiple of Rs. 10
Step 9 – Application of
rates of tax on total income in case of an individual
Step 10 – Surcharge and Rebate
Surcharge:
Individual / HUF / AOP /
BOI / Artificial juridical person
Rebate under section 87A:
Step 11 – “Education Cess” and “Secondary and Higher Education Cess” on Income-Tax:
Step 13 – Tax payable /
Tax refundable
a. Net tax liability should be rounded off to the nearest multiple
of Rs. 10.
b. The assessee has to pay the amount of tax payable (called
self-assessment tax) at the time of filing the return.
c. If any refund is due, assessee will get the same after filing the
return of income.
