Chapter 16- Miscellaneous Provisions for Characterization & Quantification

Question 1- Page 154

As per Sec. 31, in case a person or associated person of such person receives any compensation as
follows including that from an Insurance company, the amount so received shall be included in business,
employment or investment income as per the circumstances at the time of receipt of such payment:
Compensation against income or an amount to be included in calculating income of the person from
an employment, business, or investment, which the person expects or expected to derive, or
Compensation against a loss or an amount to be deducted in calculating income of the person from a
business or investment, which the person has incurred or which the person expects or expected to
incur
In the given case, compensation received against the loss of gold chain and diamond ring of Rs. 150,000
does not form part of income as it is not a business asset, nor a Non Business Chargeable Asset, nor a
Trading Stock, nor a Depreciable Asset.
Similarly as the compensation towards loss of stock of Rs. 700,000 is received against a loss or an
amount to be deducted in calculating income of the person from a business, which the person has
incurred or which the person expects or expected to incur; the amount shall be included in business
income of Ms. Thapa.
Likewise, as the compensation towards damage of machinery of Rs. 2,500,000 is received against a loss
or an amount to be deducted in calculating income of the person from a business, which the person has
incurred or which the person expects or expected to incur; the amount shall be included in business
income of Ms. Thapa. This amount shall be considered as disposal proceeds against the actual disposal
of depreciable asset.
Alternatively, as the loss results into involuntary disposal of assets, the provisions of Sec. 46 may be
applied at the option of taxpayer in case Ms. Thapa wishes to acquire trading stock or machinery within
one year of loss of stock or machinery.
Question 2- Page 154
As per Proviso Clause (1) to Sec. 31, In case a Resident natural person receives any compensation in
relation to the physical loss (bodily injury) of such person, the amount of compensation so received shall
not be included in income. As the compensation is not included in income, the amount incurred for the
treatment of such physical part shall not be claimed as Medical Tax Credit.
In the given scenario, the staff of M/s XYZ P. Ltd., a resident natural person receives compensation of Rs.
900,000 against his physical loss (bodily injury). Since the condition of Proviso (1) of Sec. 31 is satisfied,
the amount shall not be taxable in the hand of the staff. The staff cannot claim medical tax credit against
any approved medical expenditure incurred for the treatment of such injury.
Since the amount is not taxable in the hand of recipient, as per Sec. 88 (4), a person is not required to
withhold tax on the amount exempted from tax. As such, XYZ P. Ltd. shall not withhold tax while making
payment of compensation to its employee.
Question 3- Page 154
As per Sec. 30 of the Act, For the purpose of computing income from investment made jointly by a person
with another person, the amount to be included and expenses to be deducted shall be computed on the
basis of proportion of the investment made by such person under joint arrangement.

Chapter 16- Miscellaneous Provisions for Characterization & Quantification

In the given case, since Mr. Ram and Mr. Shyam jointly owned house property contributing certain sum;
the provision of Sec. 30 is inflicted. It requires apportionment of the incomings and outgoings in the
individual persons gain calculation on the basis of proportion of investment held by each individual. The
proportion of investment is 1:4, as given in question.
Particulars

Total

Incomings from the disposal of Joint

Investment
Outgoings for the Asset
(Cost plus brokerage and other incidental cost
on disposal)
Gain

64,000,000
50,700,000

13,300,000

Apportioned to
Mr. Ram
12,800,000
(10/50*64,000,000)
10,140,000
(10/50*50,700,000)

Apportioned to
Mr. Shyam
51,200,000
(40/50*64,000,000)
40,560,000
(40/50*50,700,000)

2,660,000

10,640,000

Question 4- Page 154

As per Sec. 30, for the purpose of computing income from investment made jointly by a person with
another person, the amount to be included and expenses to be deducted shall be computed on the basis
of proportion of the investment made by such person under joint arrangement.
In the given case, Ram and Krishna jointly invested by in land contributing Rs. 20 Laks and Rs. 30 Lakhs
respectively after deriving interest at 18% p.a. for six months from bank. As it is the case of joint
investment, provisions of Sec. 30 are applicable. It means, the incomings and outgoings related to the
investment shall be apportioned in the ratio of 2:3, investment proportion, and the gain shall be calculated
accordingly:
Apportionment of Incomings and Outgoings related to land and calculation of gain on disposal of each
individual:
Particulars

Total

Incomings from the disposal of Joint

Investment
Outgoings for the Asset
(Cost plus brokerage and other incidental cost
on acquiring the asset and on disposal)
Gain

8,600,000
5,600,000

3,000,000

Apportioned to
Mr. Ram
3,440,000
(2/5*8,600,000)
2,240,000
(2/5*5,600,000)

Apportioned to
Mr. Krishna
5,160,000
(3/5*8,600,000)
3,660,000
(3/5*5,600,000)

1,200,000

1,800,000

The interest income is:

18% * 5,000,000*1/2= 450,000
The income will be apportioned to Mr. Ram and Mr. Krishna in the proportion of their investment, i.e. Rs.
180,000 and Rs. 270,000 respectively. Since, the joint investment account cannot be treated as natural
persons interest income to the satisfaction of Sec. 88 (3), the bank needs to withhold tax at 15% on
interest amount, which will be apportioned each of them in their proportion of income and they need to
include interest income while calculating assessable income from investment.

Chapter 16- Miscellaneous Provisions for Characterization & Quantification

Question 5- Page 154

Mr. Govind and the bank is not associated person. When the market liquidity is abundant, the interest rate
on deposit is lesser than the circumstances when there is liquidity crisis. As such, loan interest rate is
determined by market factor and the ability of negotiation of borrower. In the situation of lower cost of
fund, the bank may reduce interest rate of loan. As such, the interests charged by bank to its borrower
are always on arms length. So, the tax officer contention to include the difference of Rs. 100,000 as
interest saving is not justifiable, and is against the normal market practice jeopardizing the right to obtain
competitive rate of interest in borrowing.
Question 6- Page 154
Refer Answer to Question No. 5 of Page 128 (Income from Employment) for the hint and answer.