Unit 1

Basic Terms

Q1) Define the term “assessee”, “assessment” and “annual value” under Income Tax Act? (5 Marks)

A1) Assessee

"Assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes-

(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

(b) every person who is deemed to be an assessee under any provision of this Act;

(c) every person who is deemed to be an assessee in default under any provision of this Act.

Assessment

Every taxpayer has to furnish the details of his income to the Income-tax Department. These details are to be furnished by filing up his return of income. Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income- Tax department is called as “Assessment”. Assessment also includes re-assessment and best judgment assessment under section 144.

Under the Income-tax Law, there are four major assessments given below:

• Assessment under section 143(1), i.e., Summary assessment without calling the assessee.
• Assessment under section 143(3), i.e., Scrutiny assessment.
• Assessment under section 144, i.e., Best judgment assessment.
• Assessment under section 147, i.e., Income escaping assessment.

Annual value

The annual value of a property is the sum for which a property is reasonably expected to be let from year to year. Hence, the annual value of a property is the amount of notional rent which could have been derived, had the property been let. The annual value of a property plays an important role in Income Tax return filing. In this article, we mention the procedure for calculating the annual value of a property.

Q2) Discuss the provisions related to Assessment under Income Tax Act? (5 Marks)

A2) Every taxpayer has to furnish the details of his income to the Income-tax Department. These details are to be furnished by filing up his return of income. Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income- Tax department is called as “Assessment”. Assessment also includes re-assessment and best judgment assessment under section 144.

Under the Income-tax Law, there are four major assessments given below:

• Assessment under section 143(1), i.e., Summary assessment without calling the assessee.
• Assessment under section 143(3), i.e., Scrutiny assessment.
• Assessment under section 144, i.e., Best judgment assessment.
• Assessment under section 147, i.e., Income escaping assessment.

Assessment in case of search u/s 153A

Under this type of Income Tax Assessment, the Assessing Officer will:

Issue notice to such person requires furnishing within such period, as specified in the notice. Clause (b) referred to the return of income of each assessment year falling within six assessment years and is verified in prescribed form. Setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;

Assessor re-assess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made.

Section 140A – Self Assessment

All persons having taxable income are required to file an income tax return each year. While filing a tax return, the assess computes the income earned and pays tax as per the return filed by him/her. This process of self-calculation of income and payment of tax is called self-assessment. Section 140A of the Income Tax Act deals with self-assessment of income tax. 

Section 143(3) – Scrutiny Assessment

• After filing an income tax return, a tax officer may be assigned by the Income Tax department randomly based on certain criteria to undertake an examination. If a taxpayer is selected for scrutiny assessment, the Assessment Officer would issue an income tax notice to the taxpayer under Section 143(2) informing that the taxpayer has been selected for scrutiny assessment.
• Further, the tax officer would request certain information, documents and book of accounts for undertaking the scrutiny assessment. On producing the information and documents requested, the income tax officer would complete an assessment and compute the amount of income and tax payable by the taxpayer. If there is any mismatch in the amount of taxable income or taxes to be paid, the taxpayer could agree with the order passed by the Officer and pay the demand or accept any amount of refund, or loss as determined by the tax officer.
• The taxpayer can also apply for rectification of income tax return under Section 154 if any clerical error persists. Else, the assessee can also make a revision application to the Commissioner of Income Tax under Section 263 or Section 264.  Finally, if the orders passed in a scrutiny assessment is not acceptable, the taxpayer can move an appeal to the CIT (A), after that to ITAT, thereafter to High Court and then the Supreme Court, if required.

Section 144 – Best Judgement Assessment

Best judgement refers to the computation of income and tax payable is based on the best judgement of the income tax officer undertaking an examination of the taxpayer. Best judgement assessments are performed when the assessee does not cooperate with the Income Tax officer’s request for information or does not file a tax return or does not maintain the necessary books of accounts. Hence, the best judgement proceedings are initiated by an Income Tax officer for the following reasons:

• The taxpayer does not file an income tax return.
• The taxpayer does not comply with an income tax notice issued for filing an income tax return or conduct of an audit of accounts.
• The taxpayer does not comply with the requests for information and documents during a scrutiny assessment.
• The Assessing Officer is not satisfied with the information or documents presented by the assessee.
• Before completing and passing the order, the Income Tax Officer must provide an opportunity for the taxpayer to be heard.

Section 147 – Income Escaping Assessment

The Income Tax department has powers to open an assessment upto 6 years. Hence, if a tax officer believes that the income of an assessee has escaped assessment, it is possible to reopen the assessment and complete it as per the newly available information and documents. To begin an income escaping assessment, the tax officer must issue a notice under Section 148 to the taxpayer.

Q3) What is Annual value? What are the factors determining annual value? (8 Marks) (2019)

A3) The annual value of a property is the sum for which a property is reasonably expected to be let from year to year. Hence, the annual value of a property is the amount of notional rent which could have been derived, had the property been let. The annual value of a property plays an important role in Income Tax return filing. In this article, we mention the procedure for calculating the annual value of a property.

Factors Determining Annual Value of Property

The following four factors play an important role in determining the annual value of a property:

Actual Rent Received

Actual rent received or receivable is an important factor in determining the annual value of a property. The actual rent received could be dependent on various considerations. If the owner of the property agrees to bear certain obligations like water or electricity bill, the rent will be calculated by reducing the rent received by the amount spent by the owner on meeting such obligatory expenses. On the other hand, if the obligatory expenses to be borne by the owner is met by the tenant, then the rent will be computed by increasing the rent paid by the amount spent by the tenant on meeting the obligations of the owner.

Municipal Value

Municipal value is determined by the municipal authorities for levying municipal taxes on house property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual letting value of such house property, which is determined by it based upon many considerations.

Fair Rent

Fair rent is the rent which is a similar property can fetch in the same or similar locality if it is let for a year. Fair rent can be easily ascertained for apartments based on prevailing rentals.

Standard Rent

Standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent fixed under the Rent Control Act. Therefore, standard rent plays an important factor in determining the annual value of the property.

Q4) Define Business as per Income Tax Act. (5 Marks)

A4) Business [Sec. 2(13)]

Business includes –

• Any trade, commerce or manufacture; or
• Any adventure or concern in the nature of trade, commerce or manufacture.

Generally, business means recurring economic activity, but for income tax purpose an isolated activity may be termed as business depending upon facts and circumstances. Following elements shall be considered to judge a transaction as business transaction:

• Nature of Commodity.
• Intention of the party.
• Efforts applied in transaction.
• Periodicity of transaction.
• Nature of transaction (whether incidental to a business or not).

Q5) What are capital assets as per Income Tax Act? (12 Marks) (2018)

A5) Capital asset means –

• Any kind of property held by an assessee, whether or not in connection with his business or profession;
• Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992

Note: Capital asset may be movable or immovable or tangible (furniture, jewellery, etc.) or intangible (goodwill, tenancy right, copy right, etc

- but does not include the following:

1. Stock in trade

Stock in trade, consumable stores or raw materials held for business or profession.

However, any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 shall not be treated as stock-in-trade.

Treatment of profit on sale of stock

Such profit shall be taxable under the head “Profits & gains of business or profession”

2.  Personal effect

Personal effect means any movable property held for personal use of the assessee or for any dependent member of his family but excludes the following:

1. Jewellery**
2. Archaeological collections,
3. Drawings,
4. Paintings,
5. Sculptures; or
6. Any work of art.

Tax point:

• An immovable property and aforesaid assets held for personal use are not personal effect and hence are capital assets. E.g., a house property even though used for personal purpose cannot be treated as personal effect and shall fall within the definition of capital assets.
• Securities are not personal effect.
• Personal effect includes wearing apparel, furniture, car, cycle, scooter used by the assessee for personal purpose.
• Intangible asset does not have personal effect.

**Jewellery includes –

• Ornaments made of gold, silver, platinum, any other precious metal or any alloy containing one or more of such precious metals. It is immaterial whether or not such ornaments contain any precious or semi-precious stones and whether or not such ornaments are worked or sewn into any wearing apparel;
• Precious or semi precious stones whether or not set in any furniture utensil or other article or worked or sewn in any wearing apparel. E.g., loose diamond shall be treated as jewellery.

Treatment of profit on sale of personal effect

Any income on transfer of personal effect shall not be treated as capital gain. Such income is in the nature of capital receipt and hence shall not be taxed under any head.

3.  Agricultural land in rural area

Agricultural land in India is not a capital asset except the following –

1. Land which is situated within the jurisdiction of any Municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or Cantonment Board having population of 10,000 or more; or
2. In any area within the distance, measured aerially-

Notes:

1. Population, according to the last preceding census of which the relevant figures have been published before the first day of the previous year, shall be considered.
2. If such land is not agricultural land, it will be treated as capital asset irrespective of its location.
3. If agricultural land is located outside India, it will be treated as capital asset.

Summary

4.  Gold Bonds

Following gold bonds issued by the Central Government are not capital asset:

● 6.5% Gold Bond, 1977 ● 7% Gold Bonds, 1980; and ● National Defense Gold Bond, 1980.

5.  Special Bearer Bond

Special Bearer Bond, 1991 issued by the Central Government are not capital asset.

Note: It is not necessary that the assessee should be the initial subscriber.

6.  Gold Deposit Bonds

Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government are not capital asset.

Note: Interest on aforesaid bonds or deposits are exempt [Sec. 10(15)].

Q6) Explain the concept of ‘Income’. Name the various heads of income. (5 Marks) (2018)

A6) Income concept -

While the Income Tax Act does not define the term income, Section 2 (24) of the Act describes the various receipts contained under the income range.

• Profits and profits.
• Dividends.
• Voluntary donations received by charitable trusts.
• The value of any perks or benefit in place of salary.
• Any capital gains.
• Any winnings from the lottery,
• Crossword puzzles and more.
• Charging unit.

Section 4 of the Income Tax Act, 1961, is the charging section of the law. Therefore, in this section:

1. The rate is prescribed under financial law for all valuation years. Income tax for the previous year should be charged according to the rate given.
2. Taxable income is for the previous year, not the valuation year.
3. Total income, calculated in accordance with the provisions of the law, can be levied.
4. TDs or advance tax will be charged wherever applicable.

Head of income

Income falls under 5 major heads under Section 14 of the act

1. Income from salary

An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary.

2.  Income from home property

Tax on Income from House Property is the tax on rental income which is being earned from the House Property. However, in case the property is not being rented out, tax would be levied on the expected rent that would have been received if this property was rented out. Income from House Property is perhaps the only income that is charged to tax on a notional basis. Tax under this head does not only include Income from letting out of House Property but also includes Income from letting out of Commercial Properties and all types of properties.

3.  Capital gains income.

Any profits or gains arising from the transfer of a capital asset effected in the financial year shall be chargeable to Income Tax under the head ‘Capital Gains’ and shall be deemed to be the income of the year in which the transfer took place unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

4.  Profit and profit from business and profession.

Any income earned from any trade/commerce/manufacture/profession shall be chargeable under this head of income after deducting specified expenses.

5.  Other sources of income.

Any Income which is not chargeable to tax under the above mentioned 4 heads of income shall be chargeable under this head of income provided that income is not exempt from the computation of total income.

Q7) Define ‘person’ as per Income Tax Act. (8 Marks) (2019)

A7) Person [Section 2(31)]: Definition under Tax-

Person includes:

• An Individual;
• A Hindu Undivided Family (HUF);
• A Company;
• A Firm;
• An association of persons or a body of individuals, whether incorporated or not;
• A local authority; and
• Every artificial juridical person not falling within any of the preceding sub-clauses.
• Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons shall be deemed to be a person whether or not, such persons are formed or established or incorporated with the object of deriving profits or gains or income.

The word person is a very wide term and embraces in itself the following:

Individual: It refers to a natural human being whether male or female, minor or major.

Hindu Undivided Family: It is a relationship created due to operation of Hindu Law. The manager of HUF is called “Karta” and its members are called ‘Coparceners’.

Company: It is an artificial person registered under Indian Companies Act 1956 or any other law.

Firm: It is an entity which comes into existence as a result of partnership agreement between persons to share profits of the business carried on by all or any one of them. Though, a partnership firm does not have a separate legal entity, yet it has been regarded as a separate entity under Income Tax Act. Under Income Tax Act, 1961, a partnership firm can be of the following two types

• A firm which fulfil the conditions prescribed u/s 184.
• A firm which does not fulfil the conditions prescribed u/s 184.

Association of Persons or Body of Individuals, Co-operative societies, MARKFED, NAFED etc. are the examples of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an association of persons. Receiving income jointly is not the only feature of an association of persons. There must be common purpose, and common action to achieve common purpose i.e., to earn income. An AOP.can have firms, companies, associations and individuals as its members.

A body of individuals (BOl) cannot have non-individuals as its members. Only natural human beings can be members of a body of individuals. Whether a particular group is AOP or BOl is a question of fact to be decided in each case separately.

Local Authority, Municipality, Panchayat, Cantonment Board, Port Trust etc. are called local authorities.

Artificial Juridical Person, A public corporation established under special Act of legislature and a body having juristic personality of its own are known to be Artificial Juridical Persons. Universities are an important example of this category.

Q8) Define ‘Stock in trade’, ‘Assessment year’ and ‘Previous year’. (5 Marks) (2018, 2019)

A8) Stock in trade

Stock in trade, consumable stores or raw materials held for business or profession.

However, any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 shall not be treated as stock-in-trade.

Treatment of profit on sale of stock

Such profit shall be taxable under the head “Profits & gains of business or profession”

Personal effect

Personal effect means any movable property held for personal use of the assessee or for any dependent member of his family but excludes the following:

1. Jewellery**
2. Archaeological collections,
3. Drawings,
4. Paintings,
5. Sculptures; or
6. Any work of art.

Tax point:

• An immovable property and aforesaid assets held for personal use are not personal effect and hence are capital assets. E.g., a house property even though used for personal purpose cannot be treated as personal effect and shall fall within the definition of capital assets.
• Securities are not personal effect.
• Personal effect includes wearing apparel, furniture, car, cycle, scooter used by the assessee for personal purpose.
• Intangible asset does not have personal effect.

‘Assessment Year’ is the year in which one file income tax returns of the year prior to it (i.e., Financial Year). It is the year in which the income that one has earned in the financial year that is just ended is evaluated.

E.g., For Financial Year 2019-20 the Assessment Year will be 2020-21.

As per the Income Tax law the income earned in current year is taxable in the next year. The year in which income is earned is known as the ‘previous year’.

In layman language the current financial year is known as the ‘previous year’. The financial year starts from 1st April and end on 31st March of the next year.

For Instance, for the salary income earned from 1 April 2017 - 31st March 2018. The previous year would be 2017-18.

All the assessee’s are required to follow the financial year (April 1 to March 31) as previous year for all types of incomes. In case, of a newly set-up business/profession or first job then your first previous year may be less than 12 months. Though from subsequent years your previous year will always be your financial year.

Q9) Explain ‘Transfer’ as per Income Tax Act. (12 Marks)

A9) Transfer in relation to a capital asset includes:

1. Sale, Exchange & Relinquishment of the asset;
2. Extinguishment of any right in an asset;
3. Compulsory acquisition of an asset under any law;
4. Conversion of asset into stock-in-trade by the owner;
5. Any transaction of immovable property u/s 53A of the Transfer of Property Act, 1882;
6. Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property.
7. Maturity or redemption of a zero coupon bond.

Tax point:

1. Above definition is indicative and not exhaustive
2. Above definition is applicable only in relation to capital assets and not otherwise
3. It also includes

• Disposing of or parting with an asset or any interest therein, or
• Creating any interest in any asset in any manner whatsoever,

Directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

Exchange

Exchange includes barter which means mutual transfer of ownership of one thing for the ownership of another.

Notes: In case of exchange though there is only one transaction the tax liability arises on both the parties. The sale consideration shall be taken as the fair market value of assets received.

Relinquishment of the asset

Relinquish literally means 'to withdraw from' or 'to abandon' or 'to give up any thing or any right' or 'to cease to hold' or 'to surrender'. Hence, relinquishment means act of surrendering. In other words, it means interest of a person in a property is either given up, abandoned, or surrendered but the property in which right is relinquished continues to exist.

Tax point:

• Right of the assessee in the asset is given up or abandoned;
• Asset itself continues to exist after such relinquishment and becomes the property of someone else.
• There must be mutual consent of the parties. A unilateral action of writing off the claim in the books of account cannot be treated as relinquishment.

Extinguishment of any right in an asset

Extinguishment literally means ‘to put a total end to’ or ‘total destruction’ or ‘blot out of existence’ or ‘annihilation’. Extinguishment does not mean extinguishment of asset itself but to extinguishment of holder’s right to the asset and such right cannot be held by someone else.

Incidences of extinguishments-

1. Cancellation of licenses: Abandonment of a project and termination of industrial license, shall be treated as transfer.
2. Reduction of share capital: When a part of the share capital is paid to the shareholder by a company, such reduction of share capital shall be treated as extinguishment of proportionate right in the shares and such shareholder shall be liable to capital gain.

When there is a reduction of capital by a company and amounts are distributed to shareholder, such amount has two components –

• Distribution attributable to accumulated profits i.e., chargeable as deemed dividend u/s 2(22)(d);
• Distribution attributable to capital i.e., subject to tax u/s 45.

c. Forfeiture of share: Forfeiture or surrender of shares indicates extinguishment or relinquishment of right of shareholder in such shares, which have been forfeited by the company. As in CIT vsVania Silk Mills Pvt. Ltd it was held that the term extinguishment includes all possible transactions which results in the destruction, annihilation, termination, cessation or cancellation of any right in an asset whether corporeal or incorporeal. Though there is no consideration in case of share forfeiture or surrender, still such transaction shall be treated as transfer and liable to capital gain.

Compulsory acquisition of an asset under any law

Normally, sale means a mutual will full agreement between two or more parties. But for the purpose of sec. 2(47), transfer includes compulsory acquisition of any property under any law in force.

Conversion of asset into stock in trade by the owner

Generally, a transfer requires two or more parties, but in Income tax Act even one party’s involvement may constitute transfer. As per sec. 2(47)(iv) where an asset is converted by the owner into or treated by him as ‘stock in trade’ of the business carried on by him, such conversion or treatment shall constitute transfer.

Any transaction of immovable property u/s 53A of the Transfer of Property Act

Any transaction of immovable property in which possession is allowed against part performance of the contract shall be treated as transfer [Sec. 53A of the Transfer of Property Act, 1882].

Any transaction which has enabled the enjoyment of any immovable property

Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner, is treated as transfer.

Property held by a member of a company, co-operative society or other association of persons to whom a building or a part thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed owner of that building or a part thereof.

Under the scheme of owning flats in co-operative housing societies, the legal ownership in the flats can be said to vest in the individual members themselves and not in the co-operative societies. Therefore, for all purposes including attachment and recovery of tax, etc. the individual member should be regarded as the legal owner.

Tax point

• Assessee is a member of a company, co-operative society or other AOP.
• He has been allotted or leased a building on account of such membership.

Q10) Explain relinquishment of an asset and extinguishment of any right in an asset. (5 marks)

A10) Relinquishment of the asset

Relinquish literally means 'to withdraw from' or 'to abandon' or 'to give up any thing or any right' or 'to cease to hold' or 'to surrender'. Hence, relinquishment means act of surrendering. In other words, it means interest of a person in a property is either given up, abandoned, or surrendered but the property in which right is relinquished continues to exist.

Tax point:

• Right of the assessee in the asset is given up or abandoned;
• Asset itself continues to exist after such relinquishment and becomes the property of someone else.
• There must be mutual consent of the parties. A unilateral action of writing off the claim in the books of account cannot be treated as relinquishment.

Extinguishment of any right in an asset

Extinguishment literally means ‘to put a total end to’ or ‘total destruction’ or ‘blot out of existence’ or ‘annihilation’. Extinguishment does not mean extinguishment of asset itself but to extinguishment of holder’s right to the asset and such right cannot be held by someone else.

Incidences of extinguishments-

a. Cancellation of licenses: Abandonment of a project and termination of industrial license, shall be treated as transfer.

b. Reduction of share capital: When a part of the share capital is paid to the shareholder by a company, such reduction of share capital shall be treated as extinguishment of proportionate right in the shares and such shareholder shall be liable to capital gain.

When there is a reduction of capital by a company and amounts are distributed to shareholder, such amount has two components –

• Distribution attributable to accumulated profits i.e., chargeable as deemed dividend u/s 2(22)(d);
• Distribution attributable to capital i.e., subject to tax u/s 45.

c. Forfeiture of share: Forfeiture or surrender of shares indicates extinguishment or relinquishment of right of shareholder in such shares, which have been forfeited by the company. As in CIT vsVania Silk Mills Pvt. Ltd it was held that the term extinguishment includes all possible transactions which results in the destruction, annihilation, termination, cessation or cancellation of any right in an asset whether corporeal or incorporeal. Though there is no consideration in case of share forfeiture or surrender, still such transaction shall be treated as transfer and liable to capital gain.

Q11) Define annual value. Explain the factors that determine the annual value of a house property. (5 marks)

A11) The annual value of a property is the sum for which a property is reasonably expected to be let from year to year. Hence, the annual value of a property is the amount of notional rent which could have been derived, had the property been let. The annual value of a property plays an important role in Income Tax return filing. In this article, we mention the procedure for calculating the annual value of a property.

Factors Determining Annual Value of Property

The following four factors play an important role in determining the annual value of a property:

Actual Rent Received

Actual rent received or receivable is an important factor in determining the annual value of a property. The actual rent received could be dependent on various considerations. If the owner of the property agrees to bear certain obligations like water or electricity bill, the rent will be calculated by reducing the rent received by the amount spent by the owner on meeting such obligatory expenses. On the other hand, if the obligatory expenses to be borne by the owner is met by the tenant, then the rent will be computed by increasing the rent paid by the amount spent by the tenant on meeting the obligations of the owner.

Municipal Value

Municipal value is determined by the municipal authorities for levying municipal taxes on house property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual letting value of such house property, which is determined by it based upon many considerations.

Fair Rent

Fair rent is the rent which is a similar property can fetch in the same or similar locality if it is let for a year. Fair rent can be easily ascertained for apartments based on prevailing rentals.

Standard Rent

Standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent fixed under the Rent Control Act. Therefore, standard rent plays an important factor in determining the annual value of the property.

Q12) What are the things not included under capital assets? (5 marks) (2018)

A12) Capital asset may be movable or immovable or tangible (furniture, jewellery, etc.) or intangible (goodwill, tenancy right, copy right, etc

- but does not include the following:

Stock in trade

Stock in trade, consumable stores or raw materials held for business or profession.

However, any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 shall not be treated as stock-in-trade.

Treatment of profit on sale of stock

Such profit shall be taxable under the head “Profits & gains of business or profession”

Personal effect

Personal effect means any movable property held for personal use of the assessee or for any dependent member of his family but excludes the following:

1. Jewellery**
2. Archaeological collections,
3. Drawings,
4. Paintings,
5. Sculptures; or
6. Any work of art.

Tax point:

• An immovable property and aforesaid assets held for personal use are not personal effect and hence are capital assets. E.g., a house property even though used for personal purpose cannot be treated as personal effect and shall fall within the definition of capital assets.
• Securities are not personal effect.
• Personal effect includes wearing apparel, furniture, car, cycle, scooter used by the assessee for personal purpose.
• Intangible asset does not have personal effect.

**Jewellery includes –

• Ornaments made of gold, silver, platinum, any other precious metal or any alloy containing one or more of such precious metals. It is immaterial whether or not such ornaments contain any precious or semi-precious stones and whether or not such ornaments are worked or sewn into any wearing apparel;
• Precious or semi precious stones whether or not set in any furniture utensil or other article or worked or sewn in any wearing apparel. E.g., loose diamond shall be treated as jewellery.

Treatment of profit on sale of personal effect

Any income on transfer of personal effect shall not be treated as capital gain. Such income is in the nature of capital receipt and hence shall not be taxed under any head.

Agricultural land in rural area

Agricultural land in India is not a capital asset except the following –

1. Land which is situated within the jurisdiction of any Municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or Cantonment Board having population of 10,000 or more; or
2. In any area within the distance, measured aerially-

Notes:

1. Population, according to the last preceding census of which the relevant figures have been published before the first day of the previous year, shall be considered.
2. If such land is not agricultural land, it will be treated as capital asset irrespective of its location.
3. If agricultural land is located outside India, it will be treated as capital asset.

Summary

Gold Bonds

Following gold bonds issued by the Central Government are not capital asset:

● 6.5% Gold Bond, 1977 ● 7% Gold Bonds, 1980; and ● National Defense Gold Bond, 1980.

Special Bearer Bond

Special Bearer Bond, 1991 issued by the Central Government are not capital asset.

Note: It is not necessary that the assessee should be the initial subscriber.

Gold Deposit Bonds

Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government are not capital asset.

Note: Interest on aforesaid bonds or deposits are exempt [Sec. 10(15)].