DTRTI Newsletter Page Aayakar-Sutra

DTRTI Newsletter Page

Aayakar-Sutra DTRTI NEWS LETTER

Issue 113 MAY 2021

CONTENTS

INCORRECT CLAIM OF

DEDUCTION OF EDUCATION

CESS U/S.37(1) & S.40(a)(ii)

Shri K.N. Dhandapani, IRS

Addl. CIT

EVOLUTION OF LAW

RELATING TO ISSUANCE OF

NOTICE U/S.131(1A)

Shri G. Kannan, IRS

Asst. CIT

FINANCIAL STATEMENTS 1

Shri V. Muthusaravanan, ITI

MCQs ON INCOME FROM

OTHER SOURCES

Shri R. Giridharan, ITI

राजभाषा स्कंध

Editorial Board

Chief Patron & Editor-in-chief

Joe Sebastian, IRS, Pr.CIT

Editorial Committee

Ann Mary Baby, IRS, CIT

G. Kannan, IRS, ADIT

V. Nirmala, ITO

G. Suresh Babu, ITI

S. Idaya Benzigar, ITI

INDUCTION COURSE FOR

NEWLY RECRUITED INSPECTORS

The 60 days long Online Induction Course for newly recruited ITIs

commenced during the month of May 2021 and the anti-terrorism

day pledge was taken online by the participants on May 21, 2021

PLEDGE

We, the people of India, having abiding faith in our country’s tra-

dition of non-violence and tolerance, hereby solemnly affirm to

oppose with our strength, all forms of terrorism and violence. We

pledge to uphold and promote peace, social harmony and under-

standing among all fellow human being and fight the forces of

disruption threatening human lives and values.

DTRTI Newsletter Page 2

In the recent whiles there had been an

emergent propensity with regard to the

claim of allowability of Education Cess as

deduction. The Assessing Officers of RFAC

were requested by quite a few assessees to

entertain the allowance as an additional

claim of expenditure on a footing that, when

Education Cess does not partake the

character of tax as defined under section 40

(a)(ii) of the Act, the same has to be allowed

as deduction under section 37 of the

Income tax Act.

2. In support of the above claim,

reliance is being placed predominantly on

the following cases.

a) Decision of Bombay HC in the case of

Sesa Goa Ltd. reported in 2020 117

taxmann.com 96 (Bombay)

b) Decision of the Mumbai ITAT in the

case of Voltas Ltd. in ITA No. 6612/

Mum/2018

c) Decision of the Mumbai ITAT in the

case of Tata Steel Ltd. in ITA No.

5616/Mum/2012

d) Decision of the Rajasthan HC in the

case of Chambal Fertilizers and

Chemicals Ltd. ITA No. 52 of 2018

3. Though the contention of the

assessee is not found to have proper

foothold, the Assessing Officers in a

mechanical manner reject the claim of the

assessee on the solitary ground that such

claim of deduction is not made in the

Return of Income and thus uniformly rely

on the decision of the Supreme Court in the

case of Goetze (India) Ltd. v. CIT [(2006) 284

ITR 323 (SC)]. It needs to be brought on

record that whenever any claim is made

impermissible by invoking the ruling of

Goetze (supra), it postulates an unwritten

imperative that the claim is otherwise in

order and eligible on merits. Further, the

wrong claim is not permanently sealed from

relief, while the Hon’ble Supreme Court has

forbidden the Assessing Officer only in

entertaining certain deductions other than

by way of return of Income and did not

preclude the Appellate Authorities above,

from such action to grant relief. Hence there

is an exigent necessity to make the

Assessing Officers understand the

gradations involved in such claim and equip

them to reject the claim on its merits.

4.1 With due respect to all the

appellate forums which have rendered that

education cess is an allowable expenditure,

the same is found to be out of peripheral

consideration and the reason for

positioning an opposite view is discussed in

the subsequent paragraphs.

4.2 The gist of the observation of the

Hon’ble Bombay High Court in the case of

Sesa Goa (supra) is elucidated below for

easier comprehension:

INCORRECT CLAIM OF DEDUCTION OF

EDUCATION CESS U/S.37(1) & S.40(a)(ii)

Shri K.N. Dhandapani, IRS

Addl. Commissioner


“II. Section 40(a)(ii), read with section 28(i),

of the Income-tax Act, 1961 - Business

disallowance - Taxes (Education cess and

Higher and Secondary education cess) -

Assessment year 2008-09 - Whether

expression 'cess' ought not to be read or

included in expression 'any rate or tax levied'

as appearing in section 40(a)(ii) and

consequently, 'cess' whenever paid in relation

to business, is allowable as deductable

expenditure - Held, yes –

Whether thus, Education Cess and Higher

and Secondary Education Cess are liable for

deduction in computing income chargeable

under head of 'profits and gains of business

or profession' - Held, yes [Paras 27, 28 and

42] [In favour of assessee]

Circulars and Notifications:

Circular No. F. No. 91/58/66-ITJ(19), dated

18-5-1967”

4.3 The reliance placed on Circular

No.91 / 58 / 66 – ITJ (19), dt.18.5.1967, is

totally irrelevant in the present context and

the essential aspect that there was no levy

in the form of ‘cess’ under the Income Tax

Statute at that relevant point of time i.e., the

year 1967 was not brought to the notice of

the Hon’ble Courts.

4.4 The levy of additional tax or

Surcharge was introduced for the first time

by the Finance Act of 2004. Chapter II of the

said Act pertains to Rates of Income Tax

and Section 2(11) covers the levy of “cess”

for the first time under the “Chapter: Rates

of Income Tax”. A careful reading of the

same which is reproduced below will

exemplify the fact that the Legislature

intended it to be a Rate of Tax and also as

an additional surcharge:

“(11) The amount of income-tax as specified

in sub-sections (4) to (10) and as increased

by a surcharge for purposes of the Union

calculated in the manner provided therein,

shall be further increased by an additional

surcharge for purposes of the Union, to be

called the "Education Cess on income-tax", so

as to fulfil the commitment of the

Government to provide and finance

universalized quality basic education,

calculated at the rate of two per cent of such

income-tax and surcharge”

When “Cess” in the form of additional

surcharge was contemplated for the first

time by the Finance Act of 2004, solely on

the basis of nomenclature of the word,

equating the “cess” levied at present of

having envisaged in the year 1967 is

preposterous.

4.5 In this regard, in the first place, it

has to be stated that “cess”, as contemplated

in the aforesaid Circular, relates to the cess

which is leviable under some other Statutes

and which is a charge on the profits of the

assessee, as in the case of Jaipuria Samla

Amalgamated Collieries Ltd Vs CIT [(1971)

82 ITR 580 (SC)]. Secondly, the present

education cess has been levied much after

the date of the aforesaid Circular and more

importantly, the education cess, as

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contemplated under the relevant Finance

Act, is nothing but a part of income-tax in

the form of additional surcharge,

chargeable under the provisions of the Act.

Therefore, the aforesaid Circular is not

relevant in the present context.

5.1 On the issue of what would be the

nature of education cess, the principle laid

down by the Constitution Bench of

the Supreme Court in the case of State of

West Bengal vs. Kesoram Industries Ltd. (266

ITR 721) has to be kept in mind. The

Constitution Bench held that the term

“Cess” is commonly employed to connote

tax with a purpose or a tax allocated for a

particular thing. Depending on the context

and purpose of levy, cess may not be tax; it

may be collected even as a fee. Therefore,

keeping in view the above dictum, first the

nature and purpose of the levy of cess,

needs to be appreciated.

5.2 The Hon’ble Bombay High Court in

the case of Sesa Goa Limited [2020] 117

taxmann.com 96 (Bombay), order dated 28

February 2020 while granting relief held as

follows:

“23. If the legislature intended to prohibit the

deduction of amounts paid by a Assessee

towards say, “education cess” or any other

“cess”, then, the legislature could have easily

included reference to “cess” in clause (ii) of

Section 40(a) of the IT Act. The fact that the

legislature has not done so means that the

legislature did not intend to prevent the

deduction of amounts paid by a Assessee

towards the “cess”, when it comes to

computing income chargeable under the

head “profits and gains of business or

profession”.

5.2 A cautious analysis of the contents

of Sec. 2(11) of the Finance Act 2004 would

illustrate that the “cess” levied to garner

funds to provide quality education is

certainly a rate of tax, and is nothing but an

additional surcharge. When it is classified to

be an additional surcharge, the requirement

to include the word “cess” in section 40(a)

(ii) does not arise. It is pertinent to

highlight that even the word “surcharge”

has not been incorporated in section 40(a)

(ii) distinctively. This characteristic appears

to have not been brought to the notice of

the Hon’ble Bombay High Court.

6.1 Hon’ble Supreme Court in the case

of CIT vs. K. Srinivasan (83 ITR

346) elucidated the concept of surcharge

and equated it with an additional tax. The

Court referred to the dictionary meaning of

the word “surcharge” to mean that “to

charge too much or in addition” and also

“additional tax”. The Court, thereafter, held

that income tax is to be charged in four

different ways- basic charge, surcharge,

special surcharge and additional surcharge.

Therefore, even additional charges form

part of income tax and surtax.

6.2 In the backlight of the judgment of

the Hon’ble Supreme Court in the case of K.


Srinivasan, reference is invited to

memorandum of Finance Bill of 2004

wherein it was emphasized that: “An

additional surcharge, to be called the

Education Cess”.

6.3 A logical conclusion on the

combined reading of the memorandum to

Finance Bill, 2004 and the judgement of

Hon’ble Supreme Court that education cess

will ultimately form a part of the Income-

tax and, hence is to be disallowed. The said

ruling of the Apex court and Memorandum

to Finance Bill, 2004 was not taken into

consideration by the Hon’ble Bombay High

Court at the time of pronouncement of

judgement of Sesa Goa Limited, which failed

to note that the present cess is equated to

surcharge.

7.1 The Supreme Court held in Jaipuria

Samla Amalgamated Collieries Ltd Vs CIT

[82 ITR 580] that the expression 'profits or

gains of any business or profession' has

reference only to profits and gains as

determined in accordance with Section 29

of this Act and that any rate or tax levied

upon profits calculated in a manner other

than that provided by section 29 could not

be disallowed under this sub-clause. This

implies that cess paid on other taxes under

Acts other than income-tax viz., service tax,

excise duty, etc., are allowed as business

expenditure while computing the profits or

gains of any business or profession.

7.2 In Jaipuria’s case (supra), the

Hon’ble Supreme Court allowed cess paid

under the Bengal Cess Act, 1880, and

education cess under the Bengal (Rural

'Primary Education Act, 1930, in relation to

the coal mines which the assessee company

had taken on lease as deductible

expenditure for determining the profits

under the Indian Income Tax Act, 1922.

7.3 Hence, it is a settled principle that

‘cess’ paid under Acts other than Income

Tax Act is allowed as deduction while

computing the profits or gains of any

business or profession under the Income

Tax Act, 1961 and it was for that reason the

Circular was issued in 1967 to clear the

ambiguity.

7.4 More importantly, the Madras High

Court has considered similar issue and the

applicability of section 37 and 40(a)(ii) of

the Income-tax Act, 1961 in the case of

Sundaram Industries Ltd. vs CIT reported in

(1986) 159 ITR 646. The Hon’ble Court

concluded that:

“31. It is true that the word "tax" has been

defined in section 2(43) as already indicated.

But having regard to the purpose and the

context in which that word is used in section

40, it is obvious that the words "any rate or

tax levied" must be read as "any rate or any

tax levied". The word "any" will, therefore,

qualify both "rate" and "tax" and once we

hold that the word "any" will qualify "tax"

also, then "any tax" will necessarily take in

taxes other than the tax under the Income-

tax Act also. It is also true that the

Legislature by a specific amendment brought


in by the Income-tax (Amendment) Act, 1972,

made wealth-tax also non-deductible by

adding a new clause after clause (a) in

section 40 follows : "(iia) any sum paid on

account of wealth-tax....." ("Explanation" is

not relevant for our purpose).

32. This amendment has given rise to an

argument that where the Legislature

contemplated that certain taxes should not

be deducted for the purpose of computation

of total income, which has been specifically

so enacted, and since reference is made only

to wealth-tax, the other taxes, if any, must

necessarily be considered as deductible. The

argument cannot be accepted because we

have to construe section 40(a) and its clauses

harmoniously and if in view of the general

provision in section 40(a)(ii) it would not be

permissible to allow surtax to be deducted,

merely because wealth-tax alone is

mentioned by an amendment, the scope of

the general provision in section 40(a)(ii)

cannot in any way be restricted. Having

considered the arguments of the learned

counsel for both the assessees, we must,

therefore, hold that the amount of surtax

paid or payable by the assessee-company was

not deductible under section 37 and further

that section 40(a)(ii) also prohibited such a

deduction. The question referred to us is,

therefore, answered in the negative and

against the assessee. The assessee will pay

the costs of this reference Rs. 500.

33. T.C. No. 287 of 1979 : The question

referred at the instance of the assessee in this

reference is as follows : "Whether, on the

facts and in the circumstances of the case,

the sum of Rs. 52,765, provision for surtax,

was a proper deduction in computing the

total income under the Income-tax Act, 1961,

for the year under appeal ?"

34. In view of our decision rendered just now

in T.C. No. 636 of 1978 in which we have also

heard the counsel for the assessee, the

question has to be answered in the negative

and against the assessee. Assessee to pay the

costs of this reference - Rs. 500.”

7.5 Therefore, it is abundantly clear,

that though certain levy like surtax, cess etc.

are not incorporated specifically in section

40(a)(ii), the nature and characteristics of

the levy has to been seen, and when

charged on profits and gains, it cannot be

allowable.

7.6 Upholding this finding of the

Hon'ble High Court at Madras and various

other High Courts on this issue the Hon'ble

Supreme Court in the case of Smith Kline &

French (India) Ltd V. CIT reported in [1996]

219 ITR 581 (SC) held that any rate or tax

levied on profits and gains of business is not

allowable u/s 40(a)(ii). The gist of its

pronouncement is captured and provided

below:

“Section 40(a)(ii) of the Income-tax Act, 1961

- Business disallowance - Rate or tax levied

on profits or gains of business - Whether

surtax levied under Surtax Act squarely falls

within mischief of section 40(a)(ii) and as

such, cannot be allowed as deduction while


computing business income of assessee-

company - Held, yes”

The decision of the Hon’ble High Court at

Bombay runs contrary to the decision of the

Hon’ble Supreme Court, and if the principle

laid down by the High Court is followed,

even surtax were not to be disallowed since

section 40(a)(ii) did not include surtax in

exact terms.

7.7 Cess, similar to that of ‘surtax’ is

undoubtedly calculated and levied on

chargeable profits and gains of business and

hence not eligible for deduction. It is neither

allowable u/ss 30 to 39 as it is not

expenditure to earn income but an

application of income. Under the

circumstances the request of the Assessee

to allow deduction of cess may not be

entertained. The assessee is not entitled for

any such relief which is against the tenets

laid down by the Hon'ble Supreme Court in

the case of Smith Kline & French (India) Ltd.

(supra).

8. Conclusion: In the light of the discussion

in the preceding paragraphs, it is clearly

established that –

8.1 Education cess, as contemplated

under the Chapter II of the Finance Act is

nothing but additional surcharge which, in

turn, is nothing but tax chargeable under

the Act.

8.2 The education cess is application of

profits after they have arisen. In other

words, it is not a charge on the profits, but

an allocation or an apportionment which is

made thereafter. They assessee pays cess

only when taxable profits arise and do not,

when it is a loss, despite the business

activity being undertaken.

8.3 The relevant legal precedents

already cited clearly establish that

education cess clearly falls within the

mischief of section 40(a)(ii) of the Act and

therefore, the same is not allowable as a

deduction under section 37(1) of the Act.

8.4. The judgement of the Apex Court, in the

case of Jaipuria Samla Amalgamated

Collieries Ltd Vs CIT [1971] 82 ITR 580 (SC),

is irrelevant since the cess contemplated in

it was not in the form of Rates of Income

Tax.

8.5. As regards Circular No.91 / 58 / 66 –

ITJ (19), dt.18.5.1967, the same is also

inconsistent since at the time of issuing the

Circular by CBDT, there was no concept of

“cess” under the Rates of Income Tax.

8.6 From the aforesaid discussion, it

may be seen that the underlying idea

relating to the provisions of section 40(a)

(ii) of the Act, is that tax, surcharge or

education cess paid on the profits would be

a payment out of profits, by way of

application thereof, rather than a payment

made in order to earn profits, so as to be a

deductible expenditure. In the light of the

aforesaid reasons, it is clearly established

that education cess is not an allowable

deduction under section 37(1), r.w.s. 40(a)

(ii) of the Act.


1. The Investigation Wing of the

Income tax Department plays a pivotal

role in ensuring conduct of free and fair

elections in the country by carrying out

surveillance work to control flow of

money during elections. The provisions

of Sec. 131(1A) are invoked by the

Department for carrying out swift

actions against violations. In the

following paras, the need and the

evolution of these provisions are

elaborated.

2. Origin: Section 131 of the Income-

tax Act, 1961 enforces attendance of any

person to examine him on oath and this

section is part of divine law or natural

justice principle audi alterem partem,’ (no

one be condemned unheard). Under this

section, the Income-tax authorities have

been given the powers of civil courts for the

proper administration of tax laws and to

conduct inquiry and collect evidences to

conclude proceedings in a fair manner,

The Hon.Calcutta High Court in the case

of UOI v. Gopal Das Gupta, (1974 Tax LR

656) held that the officer of the

Investigation Wing had no power to issue a

notice under section 131 and record a

statement of a person under this section.

To overcome this challenge, Section 131

(1A) was introduced with effect from 1-10-

1975 to empower the officers of the

Investigation Wing to exercise the powers

u/s.131(1).

The Departmental Circular No. 551 dated

23-1-1990 explains the need, scope and

effect of the amendment as under :

“. . . difficulty felt was that an authorized

officer could record a statement on oath only

during the course of search under the

provisions of Section 132(4). Sometimes it

becomes necessary to record a preliminary

statement before the commencement of

search for proper investigation. This was not

possible as the Courts had held that such a

preliminary statement before the search

could not be re-corded under the provisions

of S. 132(4) . . .”

As said, to overcome these difficulties, S.131

(1A) was introduced to extend similar

powers to an ‘authorised officer’ within the

meaning of Sub-Section (1) of Section 132

before conducting search and seizure action

under clauses (i) to (v) of that sub-section.

3. Section 131(1) and Section 131

(1A) - Distinguished

S.131 comprises of two sub-sections

relating to two different classes of officers.

S131(1) empowers the officer to issue

summons during the pendency of

proceedings, whereas S.131(1A) provides

the same powers to the officers of the

investigation wing

Further, power u/s.131(1A) can be

exercised notwithstanding that no

EVOLUTION OF LAW RELATING TO ISSUANCE OF NOTICE U/S.131(1A)

Shri G. Kannan, IRS Asst. Commissioner


proceeding is pending before the

investigation officers and for the purposes

of a preliminary inquiry before carrying out

the search operations.

4. Whether summons u/s 131(1A)

can be issued after conclusion of search

u/s. 132.

To address this issue in hand, S.131(1A)

has to be split into three parts and

analysed :

(i) “If the Principal Director General..,

or the authorised officer referred to in sub-

section (1) of Section 132 before he takes

action under clauses (i) to (v) of that sub-

section,

(ii) has reason to suspect that any

income has been concealed, or is likely to be

concealed…

(iii) notwithstanding that no

proceedings with respect to such person..

are pending before him or any other income

-tax authority.”

A plain reading of the provision would

convey that this provision enables the

officers of the investigation wing to exercise

the powers before search and seizure u/s.

132 . Hence the act of summoning the

person searched u/s. 131(1A) to conduct a

‘post-search inquiry appears not be

permissible.

5. Conflicting Decisions on this

subject.

In Arti Gases v. DIT (Inv.) (2001) 248 ITR

55 the Hon.Gujrat High Court held that

notices u/s 131(1A) can be issued after

completion of search undertaken u/s.132,

as it would be absolutely logical to call for

information so as to have better particulars

or to have complete idea about the material

seized during the search.

Similar liberal view was taken by Hon,

Allahabad High Court in the case of Dr.

Roop V. CIT [2012] 20 taxmann.com 205

(All.) as under:-

“In respect of notice u/s.131 (1A), this Court

observed that it confers powers on the

authorities as mentioned in S.131 (1), if he

has reason to suspect that any income has

been concealed or is likely to be concealed

notwithstanding that no proceedings with

respect to such person, class of persons

pending before him. It is only a enabling

Section and does not in any manner affect

the search and seizure operations carried out

u/s.132 of the Act. S.132 is an independent

code in itself. The Court held in paras 37 and

38 that the exercise of power u/s.131 (1A) is

contemplated in a situation anterior to

exercise of power under Section 132. In other

words before authorising an officer to carry

on search and seizure operation, the officers

referred to in Section 132 (1) would exercise

power under Section 131 (A) of the Act.

Section 131 (1A) operates in different fields

than Section 132. Section 131 (1A) occupies

the field before issuing search and seizure

warrants, while Section 132 comes into play

thereafter, and thus the power under Section

131 (1A) cannot possibly be invoked before

https://taxguru.in/goods-and-service-tax/section-132-no-punishment-gst-assessment-hc.html

https://taxguru.in/income-tax/exercise-power-us1311a-contemplated-situation-anterior-exercise-power-132.html




the power under Section 132 is put into

motion. If power is invoked, it will not affect

the validity of search and seizure

operations.”

However, Hon. Allahabad High Court in case

of Dr. Anita Sahai V. DIT [2004] 136

TAXMAN 247 (ALL.) held that in case a

notice was issued under section 131(1A)

after search and seizure operation under

section 132, it would show that there was

neither reason to believe nor material

before authorizing officer on basis of which

he could issue a warrant under section 132.

Whereas, Hon. Allahabad High Court gave a

contrary decision in case of in case of Dr. V.

S. Chauhan vs. Director of Income-tax,

[2011] 12 taxmann. com 230 as under:-

“A fair reading of the aforesaid sub section

would show that the power conferred on the

Income-tax Authorities mentioned therein

can be exercised–before ordering search and

seizure under section 132. The exercise of

power u/s.131(1A) is contemplated in a

situation anterior to exercise of power

u/s.132. In other words, before authorising

an officer to carry on search and seizure

operation, the Income Tax Authorities i.e. the

Director General or Director or Joint Director

or Assistant Director or Deputy Director or

authorised officer referred to in sub section

(1) to section 132 could exercise the power

u/s.131(1A) of the Act. The Income Tax

Authorities are defined u/s.116 of the Act.

Power has been conferred under the

aforesaid section to be exercised before the

search and seizure operation with a view to

collect the necessary information with

regard to the intended search and seizure

operation. The striking feature of the

provision is that the Income Tax Authorities

mentioned in sub section (1A) have been

empowered to exercise the power

notwithstanding the fact that no proceeding

with respect to such person or class of person

are pending before him or any other Income

Tax Authority. The section is in the nature of

enabling provision conferring the power on

certain Income Tax Authorities. S.131

(1A) operates in a different field than section

132. Section 131(1A) occupies the field

before issuing search and seizure warrant,

while section 132 comes into play thereafter.

The point which we want to bring home is

that after search and seizure operation, the

power u/s.131(1A) cannot possibly be

invoked in view of its plain language and if

the power is invoked, it will not in any

manner affect the validity of the search and

seizure operation.

6. Conclusion:

The foregoing discussion would convey

how the Courts have started resorting to

harmonious interpretation of provisions of

section 131(1A) and section 132 of the

Income tax Act in favour of the Department .

Further law laid down on this subject, is

now clear that issuance of notice under

section 131(1A) of the Act will not in any

manner affect the search operation validly

carried out under section 132 of the

Income tax Act.


FINANCIAL STATEMENTS - I

At the end of the accounting year

every entity prepares financial statements

to know its financial results as well as

financial position. The statement prepared

to know the result is technically known as

Trading and Profit and loss Account/

Income and Expenditure Account and the

statement prepared to know the position is

technically known as Balance Sheet. The

basis for preparing financial statement is

the trial balance and adjustments entries

posted at the end of the accounting year.

The process of preparing financial

statements is diagramed as under:

Object/Purpose:

In the accounting process, the end

results are the preparation of financial

statement which in turn contains the entire

transactions happened in a year in a

simplified way/ presented in a tabulated

manner.

The core purpose of financial

accounting and reporting will be weakened

if there is no financial statement.

We can keep track record for all the

transactions happened in a year with the

help of financial statement

The Profitability and solvency

position of the business is possible with the

help of financial statement.

The core performance (buying and

selling/manufacturing/service sector) and

overall performance of the entity is possible

with the help of the income statement

Helps to compare the current year

performance with previous year and in turn

can able to determine the target for future

period.

Can have a track over how the

profit is distributed i.e. to owner,

employees, shareholders, Government and

lenders.

The financial position i.e. assets

and liabilities prepared in the form of

Balance Sheet gave clear picture about the

financial status of the entity i.e. its solvency

and liquidity position

Like income statement, the position

statement also compared with the previous

year statement and which in turn gave fair

idea amount the sources and application of

funds and its implication.

An analysis of these statements

reveal that how the funds are utilised and

shows as whether the funds are parked in

appropriate way which resulted maximum

return to the entity.

FINANCIAL STATEMENTS –1

Shri V. Muthusaravanan

Inspector

Journal Ledger Trial Balance

Adjustments Financial Statement


Mechanism:

Before preparing the financial

statement, it is necessary to make an

analysis of the different expenditure and

accounts are relevant since the income

statement which is prepared with the object

to know the result(profit/loss) are based on

the revenue items only i.e. revenue

expenditure and revenue income(based on

nominal account rules) whereas the

position statement which shows the assets

and liabilities largely based the capital

expenditure and capital revenue(based on

real and personal account rules).

Expenditure:

Expenditure may be classified into

A] Capital Expenditure

B] Revenue Expenditure

C] Deferred revenue expenditure

Capital Expenditure:

Capital Expenditures are those

expenditures which are non-recurring in

nature and will give enduring benefits.

Example purchase of assets such as land

and building or making long term

investments, etc. which are based on real

account rule and will appear in the Balance

Sheet or position statement.

Revenue Expenditure:

Revenue Expenditures are those

expenditures which are recurring in nature

and will only give benefit for a short period

of time. For example purchase of goods for

resale, payment of wages, salary, etc. which

are based on nominal account rules and will

appear in the income statement or trading

and profit and loss account.

Deferred revenue expenditure:

DFE are those expenditures which

are neither permanent nor current in

nature. In other words the benefit from

such expenditure will last for more than one

year but not permanently. Example-

advertisement charges, preliminary

expenses, etc. which may be useful to the

entity for more than a year but not

permanently. As the name suggest, the

revenue expenditure deferred for some

year. Expenditure relating to the current

year treated as revenue expenditure and

reflected in income statement and

remaining unabsorbed will be shown in the

balance sheet as fictitious assets.

Income:

Income/ receipts may be classified into two

A] Capital income

B] Revenue income

Capital Receipt:

Capital receipts are those receipts

which have a permanent implication. For

example, capital contributed by the owner

or long term borrowings from banks or

financial institutions, etc. These are based

on real account rule and will appear in the

position statement/ balance sheet.


Revenue receipt:

Revenue receipts are those which

are recurring in nature and have short life.

Example -realizing money on sale of goods,

earning dividend income, commission, rent,

discount, etc. These are based on nominal

account rules and will appear in the income

statement or trading and profit and loss

account.

Adjustment entries:

Normally, the accounts are not

closed exactly on the last day of the

accounting year. It may be closed in

advance. Therefore, to incorporate those

transactions which happened after closing

the ledger account and trial balance but

before preparation of final accounts,

adjustment entries are to be passed.

Further to bring the opening balances and

transfer balance from one account to

another, for example transferring gross

profit from trading account to profit and

loss account and transfer net profit from

profit and loss account to capital account,

adjustment entries are mandatory.

The above process/mechanism is flow

charted as under:

Financial statements of sole proprietary

concern:

In case of sole proprietary concern,

the ownership is with a single person and

the entire result either profit or loss is

transferred to his/her account represented

in the name of capital account. In this case,

the financial statements are

Trading and profit and loss account

Balance Sheet

Manufacturing account (in case

involved in manufacturing activity)

Trading and profit and loss account

(Income Statement):

The trading and profit and loss

account or income statement prepared for

the whole year with the aim to find out the

results of the business. In this account, the

concept adopted was matching as the

expenses are matched with income. If the

incomes are more than expenses profit

otherwise considered as loss. The

accounting rule adopted here is nominal.

This statement has two part, the first

part/segment is trading account. Trading

means buying and selling. The net result of

buying and selling is profit or loss. Trading

account helps to find out the gross profit or

loss on buying and selling in a year in case

of trader. Therefore, in the trading account


all the purchases and sales and other

expenses connected to purchase technically

called direct expenditure happened during

the entire year is recorded in this account.

The result i.e. gross profit or loss

transferred to the second part i.e. profit and

loss account.

The second part or segment is

profit and loss account. The profit and loss

account aimed at finding the profit or loss

after considering all other indirect expenses

and income i.e. operating expenses,

administrative expenses and selling and

distribution expenses and income such as

profit on sale of fixed assets, investments,

dividend income, income from rent,

commission, discount, etc. earned and

expended during the entire accounting year

is tabulated in this account. Therefore, the

trading and profit and loss account is

prepared for the whole year and the

heading of this account will be Trading and

Profit and Loss account of ….for the year

ending …… The result of this account i.e. net

profit or net loss transferred to the owner

of the business which is represented in the

books as capital account. If it is net profit

the same will be added to the capital

account otherwise the net loss will be

subtracted from the capital account.

Manufacturing Account:

If the sole proprietor engaged in

the business of manufacturing any goods,

Trading Account for the year ending...

To Opening Stock

By Sales Less: Return

To Purchase Less: Return

By Closing Stock

To Direct Expense Add: Outstanding

By Abnormal Loss

To Gross Profit

By Gross Loss

P & L Account for the year ending...

To Gross loss By gross Profit

To salary, bonus, etc

By Commission earned

To Depreciation

By Discount

To Bad debts By profit on sale of FA

To Provisions By profit on sale of Inv

To Loss on sale of FA

By Dividend received

To carriage outward

By Interest earned

To Commission By Gross loss

To Discount

To Audit, legal fees

To Travelling exp

To Net profit


he/she is person who is going to fix the

price of the goods manufactured.

Therefore, to find out the cost of goods

manufactured it is necessary to prepare one

more account called manufacturing account

in which all expenses incurred in

connection with manufacturing the goods

are tabulated alongwith the margin for the

manufacturer.

Balance Sheet (Position statement):

Balance sheet is not an account but

only a statement prepared not for the whole

year but on a particular date i.e. at the end

of the accounting year may be 31st

December or 31st March which tabulate

what are the assets and liabilities that the

entity have. In other words, it is the

statement which reveals what are the

sources of funds to the entity and how it is

applied. Here the matching concept is

adopted by matching the assets with

liabilities or sources with application,

therefore, it is necessary that the sources

should match with liabilities. The accounts

followed here are the real and personal

account.

The assets which are classified as

fixed (tangible/intangible) assets, current

assets, liquid assets, fictitious assets and

Balance Sheet of as on

LIABILITIES ASSETS `

Capital Fixed assets Land etc.

Add: Additional capital

Investments

Add: Interest on capital

Current assets

Add: Net profit Cash and bank balance

Less: Drawings Outstanding income

Less: Interest on drawings

Expenses paid in adv.

Loan from banks FI

Sundry creditors

Outstanding liability

Income received in adv.

Manufacturing Account for the year ending

To opening WIP By Sale of scrap

To Raw material By Closing WIP

Opening stock By Trading a/c

Add: Purchase (Balancing fig)

Less: closing stock

To Wages

To Fuel

To Power, elec-tricity

To salary to FM

To Factory rent

To General ex-penses


sometime contingent assets. Fixed assets

are those assets which are permanent in

nature or it is difficult to convert into cash

quickly. Current assets are those assets

which can be converted into cash quickly, if

no time frame is given normally twelve

months. If any assets which can be

receivable/convertible into cash within a

period of twelve months are normally

treated as current assets. These assets are

marshaled or positioned in the balance

sheet either in the order permanency

(solvency) or liquidity.

Trading Account Vs P & L Account:

ACCOUNTING EQUATION

The above process of preparing

financial statements can also be equated

with accounting equation. Instead of

preparing the trading and profit and loss

account and balance sheet, the details are

found with the help of accounting equation.

Trading account (Gross Profit)

Net sales – Cost of goods sold

Net Sales Gross Sales – Sales return/return inward

Cost of goods sold

Opening stock+ Net Purchase+ Direct Expenses – Closing stock

Net purchase Gross Purchase – Purchase return/return outward

Direct expenses

All expenses relating to purchase of goods

Gross Profit ratio

Gross Profit /Sales X 100

P & L Account (Net Profit)

Gross profit/gross loss + indirect Incomes – Indirect expenses

Net Profit Ratio

Net Profit/Sales X 100

Balance Sheet Liabilities + Capital = Assets Capital = Assets -

Liabilities

Trading account

Profit and Loss Account

First part of financial statement

Second part of financial statement

To know the gross profit

To know the net profit`

No opening balances

Gross profit or loss as opening balance

Gross profit/loss transferred to profit and loss account

Net profit/loss adjusted in the capital account in the balance sheet

Helps to assess the market strength of the business

Help to assess internal management position and its effectiveness

Can control the cost of goods sold

Can control all other cost, operating, administrative, selling and distribution

Surplus of sales over cost of goods sold considered as gross profit

Surplus of indirect

income over indirect

expenses based on

gross profit considered

as net profit


1. As per S.50C and w.e.f. 01.04.2020,

the difference between the Stamp Duty

Value and the consideration shall be

taxable, at ______ % of the consideration, if

such difference is greater than Rs.50,000/-

a) 2.5% b) 5%

c) 8% d) 10%

2. As per S.50C and w.e.f. 01.04.2017,

when the date of agreement fixing the

consideration and the date of registration

for transfer of capital asset are not the

same, the value adopted or assessed or

assessable by the Stamp Valuation

Authority on date of ______ may be taken for

computing the full value of consideration.

a) Date of Registration

b) Date of Agreement

c) Date of consideration received

d) As per the choice of the assessee

3. As per Sec.50C and w.e.f.

01.04.2020, which of the following modes

are permissible for payment of

consideration in respect of transfer of

capital asset.

a) Debit & Credit Cards

b) NEFT / RTGS / BHIM

c) Account Payee Cheque

d) All of the above

4. As per Sec.57 and w.e.f. 01.04.2021,

except for the following expense, no other

deduction is allowed in respect of Dividend

Income.

a) Commission expenses

b) Interest expenses

c) Remuneration expenses

d) None of the above

5. As per Sec.57, the following

deduction is applicable to the assessees in

respect of family pension.

a) 25% or Rs.50,000/-, whichever is less

b) 7.5% or Rs.10,000/-, whichever is less

c) 33.33% or Rs.15,000, whichever is less

d) Fully exempted.

6. While assessing the income on

letting out of Plant and Machinery u/s

Sec.56 i.e. Income from Other Sources, the

following is allowed as deduction u/s

Sec.57.

a) Insurance Expenses

b) Current Repairs

c) Depreciation

d) All of the above

7. Mr.Mahesh received Rs.3,00,000/-

from his friends on the occasion of his

marriage. He also received Rs.3,50,000 on

account of his will of his grandfather. What

MCQs ON INCOME FROM OTHER SOURCES

Shri R. Giridharan

Inspector


will be amount chargeable to tax under the

head “Income from Other Sources”.

a) Rs.6,50,000/- b) Rs.3,00,000/-

c) Nil d) Rs.3,50,000/-

8. Mr.Kumar received 53 inch LG

Television valued Rs.75,000/- as Gift from

his on the occasion of his birthday. He also

received Rs.25,000/- from the local

authority. What will the amount chargeable

to tax under the head “Income from Other

Sources”.

a) Rs.75,000/- b) Nil

c) Rs.25,000 d) Rs.1,00,000/-

9. Mr. Rajat has taken a life insurance

policy on 2-10-2012 for Rs.5,00,000/- (sum

assured) which got matured on 02.10.2020.

He was paying Rs.24,000/- as annual

premium every year. On 02.10.2020, he

received Rs.8,50,000/- as maturity value. In

this case, What will the amount chargeable

to tax under the head “Income from Other

Sources”.

a) 8,50,000/-

b) 6,50,000/- after claiming basic deduction

of Rs.2,50,000/-

c) 3,50,000/-

d) Fully exempt since insurance premium

does not exceed 10% on sum assured on

any financial year.

10. As per Section 115BBDA, Dividend

received from Domestic Companies up to

_____ will be exempt from Tax and then any

amount received above will be taxed at _____

a) Rs.5 Lakhs and 5%

b) Rs.10 Lakhs and 10%

c) Rs.7.5 Lakhs and 7.5%

d) Rs.15 Lakhs and 2.5%

Solutions:

Explanatory Notes :-

8. Television is not included in the

term “specified property”. Hence not

chargeable to tax. Similarly, money received

from Local Authority is also exempted from

tax.

9. Tax treatment in respect of

insurance policies taken after 1.4.2012 is as

follows.

Fully exempt in the event of death

of the insurer. In case of maturity, if the

annual premium of any financial year does

not exceed 10% of the sum assured, the

entire amount received on maturity is

exempt to tax. In this case, the premium

paid less than 10% of the sum assured in

any financial year.

1 d 6 d

2 b 7 c

3 d 8 b

4 b 9 d

5 c 10 b


राजभाषा स्कंध

Recovery The employee has requested that the recovery of the HBA may be made

from his salary in 120 equal monthly installments.

वसूली कर्मचारी ने अनुरोध ककया है कक उनके वेतन से गृह कनर्ामण अकिर् की वसूली

120 सर्ान र्ाकसक ककस्ोों र्ें की जा सकती है ।

Quality Decision on rate, quality and specifications of goods to be

purchased will be taken by the purchase committee.

गुणवत्ता क्रय की जाने वाली वसु्ओों की दर, गुणवत्ता और कवकिष्टताओों पर कनणमय क्रय

सकर्कत द्वारा कलया जाएगा ।

Imprest amount A permanent imprest amount is kept in every office to meet the

exigencies in the office.

अिदाय राकि प्रते्यक कायामलय र्ें आकस्मिक जरूरतोों को पूरा करने के कलए स्थायी

अिदाय राकि रखी जाती है।

Child care leave The lady employee has been granted child care leave to take care

of her minor child.

सोंतान देखभाल छुट्टी र्कहला कर्मचारी को अपने छोटे बचे्च की देखभाल करने के कलए सोंतान

देखभाल छुट्टी प्रदान की गई है।

Show cause A show cause notice was served to the official for indiscipline in

office.

कारण बताओ कायामलय र्ें अनुिासनहीनता के कलए कर्मचारी को कारण बताओ नोकटस

कदया गया।

Entitled Level 6 to 11 officials will be entitled to travel by air in economy

class or train in AC-II class for official tour or training.

हकदार लेवल 6 से 11 के अकधकारी सरकारी दौरे या प्रकिक्षण पर जाने के कलए

इकॉनॉर्ी क्लास र्ें हवाई यात्रा या एसी-।। र्ें रेल यात्रा करने के हकदार होोंगे

Nomination Nomination in prescribed form should be obtained from the

Government servant and pasted in the Service book.

नार्ाोंकन सरकारी कर्मचारी से कनधामररत प्रपत्र र्ें नार्ाोंकन प्राप्त ककया जाना चाकहए और

सेवा पुस्मस्का र्ें कचपकाया जाना चाकहए।


DISCLAIMER: Articles published herein reflect the author’s own point of view, for guidance only and should

not be construed as authoritative and may be supplemented with additional reading/research. While all due

efforts have been taken to check the veracity/authenticity of the contents published, any inadvertent

mistake/error therein may kindly be brought to the notice of DTRTI for corrective action.

APPEAL : his magazine is an endeavor to publish articles relevant to tax policy and legal issues authored by

fellow officers and officials posted in the department. The sole objective of this magazine is to provide a

platform for publishing well-researched articles which would assist in broadening the vision as well as

developing keen insight on tax issues. With above objective in mind, an earnest appeal is being made for

making contribution to the magazine by way of articles. The same may be sent by e-mail on

[email protected].

[Published by: Team DTRTI, Chennai]

Wellness sessions were conducted by MSTU, Chennai on “Coping with Covid 19”. Ms.Rashmi, Yoga Acharya,

Dr. N.Ramakrishnan Director of Critical Care Services, Apollo Hospitals, Chennai & Founder, Nithra Institute

of Sleep Sciences, Dr.Nileena NKM, Consultant, Nithra Institute of Sleep Sciences and Ms.Hema Deenadayalan

Consultant Dietitian, Nithra Institute of Sleep Sciences handled the sessions during the course

திருவள்ளுவரின் திருக்குறள்

அன்பறிவு ஆராய்ந்த ச ால்வன்மை தூதுமரப்பார்க்கு இன்றி யமையாத மூன்று - குறள் 682

Love, wisdom and sagacious speech are three qualities essential for an envoy

அன்பு, அறிவு, ததர்ந்சதடுத்த வார்த்மதகமை உமரக்கும் திறன், இமவகள் தூது உமரப்பார்க்கு முக்கியைான மூன்று

mailto:[email protected]

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