The document discusses various aspects of charitable trusts and donations under the Income Tax Act in India. It defines charitable purpose under section 2(15) and explains the different forms charitable institutions can take such as public charities, societies, non-profit companies, etc. It also outlines the purposes for forming trusts including hospitals, spiritual centers, orphanages, schools and more. The penalties and prosecutions for tax evasion are also summarized.

1. Unit 4
Set off and Carry Forward of Losses
Deductions, Refund and TaxAuthorities
Return of Income andAssessment
Penalty and Prosecution for Tax Evasion
Search and Seizure
Ms. Lavanya Bhagra

2. Introduction
The Income-tax Act, 1961 contains specific provisions (Sections 70 to 80) for the set-off and
carry- forward of losses.
Applicable to both resident and non-resident.

3. Mode of set-off & carry forward
Step 1 – Inter-source adjustment under the same head of income.
Step 2 – Inter head adjustment in the same assessment year. Step 2 is applied only if a loss cannot
be set off under Step 1.
Step 3 - Carry forward of a loss. Step 3 is applied only if a loss cannot be set off under Step 1 &
2.

4. Inter-source adjustment - How made
[Sec. 70]
General rule-If the net result for any assessment year, in respect of any source under any head of
income, is a loss, the assessee is entitled to have the amount of such loss set off against his Income
from any other source under the same head of income for the same assessment year.
Provisions illustrated-
X has two businesses-Business A and Business B. While Business A returns on income of 3.5 lakh,
Business B results in a loss of Rs. 1 lakh. In this case, loss of Rs. 1 lakh from Business can be set
off against income of Rs 3.5 lakh from Business A.

5. Exception to Sec 70
Loss from speculation business-Loss in a speculation business can be set off only against the profit in a
speculation business.
Loss from a specified business-Any loss, computed in respect of any specified business referred to in section
35AD, shall not be set off except against profits and gains, if any, of any other specified business (applicable
from the assessment year 2010-11 onwards).
Long-term capital loss-Long-term capital loss can be set off only against long-term capital gain.
Loss from the activity of owning and maintaining race horses - Loss incurred in the business of owning and
maintaining race horses cannot be set off against any income except income from such business
Loss cannot be set off against winnings from lotteries, crossword puzzles, etc. By virtue of section 58(4), a loss
cannot be set off against winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature.
Loss from purchase and sale of securities

6. Inter-head adjustment - How made [Sec.
71]
General rule - Where the net result of computation made for any assessment year in respect of any
head of income is a loss, the same can be set off against the income from other heads.
Exceptions –
Same as in slide 5, and
Business loss cannot be set off against salary [Sec. 71(24)]- Loss from business or profession
(including unabsorbed depreciation) cannot be set off against income under the head "Salaries".
House property loss exceeding Rs. 2,00,000 (Sec. 71(3A)]-Section 71(3A) has been inserted with
effect from the assessment year 2018-19. It provides that set-off of loss under the head "Income from
house property” against any other head of income shall be restricted to Rs. 2 lakh for any assessment
year.

7. Important points
Before adjusting loss under section 71, one has to set off the loss under section 70.
Barring the aforesaid exceptions, any loss can be set off against income under other heads of income for the
same year. For instance, house property loss can be set off against speculative profit.
No order of priority is given in the Act. One should try to first set off those losses which cannot be carried
forward to the next year.
Barring the exceptions, in all other cases a loss has to first adjusted against available income under other heads
of income. No option is available to assessee to choose if he wants to set off a loss or doesn’t want to set off a
loss.
Where income from a particular source is exempt from tax, e.g. incomes exempt under section 10 loss from
such source cannot be set off against income chargeable to tax. For the purpose of section 71, loss of profits
must be a loss of taxable profits.

8. Carry forward of loss
If a loss cannot be set off either under the same head or under the different heads because of absence or
inadequacy of the income of the same year, it may be carried forward and set off against the income of the
subsequent year.
Under the Act, the following losses can be carried forward;
a. a loss und under the head "Income from house property" [sec. 71B]
b. a loss under the head "Profits and gains of business or profession" (i.e, loss from speculative or non
speculative business) [secs. 72 and 73].
c. a loss under the head "Capital gains" (i.e, short-term or long-term capital loss) [sec. 74]
d. loss from the activity of owning and maintaining race horses [sec. 74A]
Other remaining losses cannot be carried forward.

9. Carry forward and set off of business loss
other than speculation loss
[Sec. 72]
SUCH LOSS CAN BE SET OFF ONLY AGAINST BUSINESS INCOME-
1. It is not necessary that business loss of year one should be set off against income from the same business in year
two. In other words, loss of Business A of year one can be set off against profit of business A or some other
business in year two.
2. A loss under the head “Profits and gains of business or profession” can be set off against Profits of any business
in the subsequent year. For this purpose, business profits would also include profits derived from a business
activity but assessable under a head other than "Profits and gains of business or profession". For instance, where
shares in companies are held by an assessee as a part of his trading assets, dividend on such shares would form
part of business income and, consequently, he will be entitled to claim set off of business los brought forward
from earlier years against dividend of the current year-Western States Trading Co. (P.) Lad v. CIT [1971180 ITR
21 (SC).
3. Section 64 v. Section 72- Business income of wife or minor child, clubbed under provision of section 64, with
the income of assessee can be set off against any loss brought forward by assessee in respect of a business
carried on by him-CIT v. J.H. Gotla [1985] 156 ITR 323 (SC).
4. Loss from a specified business-Brought forward loss of a business referred to in section 35AD can be set off in
a subsequent year only against income from the business referred to in section 35AD

10. Income-tax Authorities
and their powers

11. Introduction
The provisions of the Income-tax Act contained in Sections 116 to 136 specify income tax
authorities, the procedure relating to the appointment of the various income-tax authorities, their
powers, functions, jurisdiction and control.
For all purposes of the Income-tax Act, the Income Tax authorities are vested with the various
powers which are vested in a Court of Law under the Code of Civil Procedure while trying a suit in
respect of any case.
More particularly, the provisions of the Code of Civil Procedure and the powers granted to the tax
authorities under the code are in respect of : Issuing commissions and summons --Discovery and
inspection -- Enforcing the attendance, including any officer of a bank and examining him on oath --
Compelling the production of books of accounts and the documents -- Collecting certain information
[Section 133B]

12. Every income-tax authority shall be deemed to be a Civil Court for the purposes of Section 195 and
Chapter XXVI of the Code of Criminal Procedure, 1973.
The powers granted are generally quasi-judicial. In particular, the powers of income-tax authorities
relate to discovery, production of evidence etc., searches and seizures, application of retained assets,
power to call for information from various parties, authorities and bodies, powers of survey, powers
relating to the inspection of the registers of companies etc.
Further, all proceedings under the Income-tax Act before any income-tax authority must be deemed
to be judicial proceedings within the meaning of Sections 193 and 228 and for purposes of Section
196 of the Indian Penal Code.

13. INCOME-TAX AUTHORITIES
The following are the income-tax authorities who are statutorily empowered to administer the law of Income-
tax :
(i) The Central Board of Direct Taxes, constituted under the Central Boards of Revenue Act, 1963;
Principal Director General of Income-tax or Principal Chief Commissioners of Income-tax
(ii) Directors-General of Income-tax or Chief Commissioners of Income-tax Principal Director of Income-tax or
Principal Commissioners of Income-tax
(iii) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals);
Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners
of Income-tax (Appeals); Joint Directors of Income tax or Joint Commissioners of Income-tax.
(iv) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of
Income-tax (Appeals);
(v) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax;
(vi) Income-tax Officers;
(vii) Tax Recovery Officers;
(viii) Inspectors of Income-tax.

14. Assessment
Please refer the document ‘Various Assessments’

15. Search and Seizure
‘Search and survey operations’ are conducted by the Income Tax Department, also called as raids,
when they suspect an individual or business to have hoarded illegal money.
Ss.132, 132A, 132B

16. Circumstances in which search and
seizure can be conducted [Sec. 132(1)]
The Director General or Director or the Chief Commissioner or Commissioner or Additional Director or
Additional Commissioner or Joint Director or Joint Commissioner, has in his possession any information
through which he has reason to believe that
a. a person to whom a summon under section 131(1) or a notice under section 142(1) has been served to
produce books of account (or other documents) has failed (or omitted to produce or cause to be produced)
the said books of account (or other documents); or
b. a person to whom a summon under section 131(1) or notice under section 142(1) has been (or might be)
issued is not likely to produce (or cause to be produced) any books of account or other document which
will be useful for (or relevant to) any proceedings under the Act; or
c. a person is in possession of money, bullion, jewellery or other valuable article or thing and such property
represents wholly or partly income or property which has not been disclosed or would not be disclosed.

17. The powers of Search and Seizure
1. To enter and search any place, vessel, vehicle, aircraft or building, where there is a reasonable suspicion
that such books of accounts, money, bullion, jewellery, documents, or other valuable article or thing are
kept.
2. To break open the lock of any of the door, box, locker, safe, almirah or another receptacle for exercising the
powers which are conferred by clause (i) above where the keys thereof are not available.
3. Search any person who (a) has got out of, or (b) is about to get into, or (c) is in the building, place, vessel,
vehicle or aircraft, if the authorized officer thus has a reason to suspect that such person has secreted about
his person any such books of account, other documents, money, bullion, jewellery or other valuable article
or thing.
4. Require any person who is however found to be in possession or in control of any books of account or any
other document which is maintained in the form of electronic records, to afford the necessary facility to the
authorized officer in order to inspect all such books of account or other documents.
5. Placemarks of identification on any of the books of account or any other documents or make or cause to be
made extracts or copies therefrom.
6. Make a note or an inventory of any such money, bullion, jewellery or any other valuable article or a thing.

18. Assets that can be seized
The authorized officials can seize the following types of assets:
Undeclared cash, jewellery
Books of accounts, challan, diaries, etc.
Computer chips and other data storage devices
Documents relating to property, deed of conveyances, etc.

19. Assets that cannot be seized
The authorized officials cannot seize the following types of assets:
Stock-in-trade (except cash) of a business
Assets or cash which are disclosed before the Income Tax and Wealth Tax Department
Assets declared in books of account
Cash which are duly explained
Jewellery provided in wealth tax return
Gold up to 500 gm for each married lady and 250 gm for each unmarried woman and 100gm per
male member

20. PENALTY
Penalty levied over and above the amount of any tax or interest payable by the assessee and thus,
penalty is distinct and different from the tax payable.
Penalty proceedings, however, are a part of the assessment proceedings. The authority concerned is
entitled to levy penalty only if satisfied in the course of any proceedings under the Act that a person
has been found guilty of any default in complying with the provisions of the Act.
If the order of the penalty is set aside in appeal on the ground the assessee was not given a
reasonable opportunity of being heard, the Assessing Officer would be entitled to levy a penalty
again after rectifying the mistake in proceedings.
The penalty to be levied on an assessee is to be based upon law as it stood at the time the default was
committed and not the law as it stands in the financial year for which the assessment is made.

21. PROSECUTION
Section 275A provides for prosecution in the case of contravention of any of the relevant provisions
by the taxpayers.
Rigorous Imprisonment and Fine imposed.
POWER OF COMMISSIONER TO GRANT IMMUNITY FROM PROSECUTION [SEC 273AB]
A person may make an application to the Principal Commissioner or Commissioner for granting
immunity from prosecution, if he has made an application for settlement u/s 245C and the
proceedings for settlement have abated u/s 245HA.
The Principal Commissioner or Commissioner may, subject to such conditions as he may think fit to
impose, grant to the person immunity from prosecution for any offence under this Act, if he is
satisfied that the person has, after the abatement, co-operated with the income-tax authority in the
proceedings before him and has made a full and true disclosure of his income and the manner in
which such income has been derived

22. Charity & Donations

23. Charitable Trusts
1. Purpose Behind Formation of Trusts
Commonly Charitable institutions / trusts ate formed to create and maintain the following
establishments in public interest.
Hospitals and other health-care institutions
Spirituality centres like yoga centres, meditation centres etc
Orphanages and destitute homes
Schools. colleges & other educational institutions, libraries, leading rooms. etc.

24. 2. Forms of Charitable and Religious Institutions:
Main forms of charitable and religious institutions are Public Charities, Societies, Non-Profit
Companies, Research Institutes, and Cultural Associations. These are constituted in any one of
the following forms;
Company: An association may be registered under Section 8 of the Companies Act -formed as a
limited company for promoting art. science, religion, charity or any other useful object and it
intends to apply its profits if any, or other income in promoting its objects and to prohibit the
payment of any dividend to its members

25. Societies:
Section 20 of the Societies Registration Act. 1860 lays down that charitable societies and societies
established for the promotion of science, literature or the fine arts may be registered under that Act.
Public Charitable Trusts:
Public Trust is a trust for public, religious or charitable purposes and includes a temple, mosque,
church and a society for a religious or charitable purpose. Society may have religious and charitable
object but if it is not a trust then it will not be ’public trust’.
Muslim Wakf:
Trusts under the Mohammedan Law are called Wakfs. Wakf signifies dedication of property either in
express terms or by necessary implication for any charitable or religious object or to secure any
benefit to human being.

26. What is ‘Charitable Purpose’ for Income
Tax Purposes ?[Section 2(15)]
Relief to the poor, education, (with effect from the assessment year 2016-17) yoga, medical relief,
preservation of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest, and the advancement of any other
object of general public utility.
Promotion of sports and games is considered to be a charitable purpose within the meaning of
section 2(15).
Advancement of any other Object of general Public Utility – From the assessment year 2009-10,
“advancement of any other object of general public utility” shall not be a charitable purpose, if it
involves the carrying on of any activity in the nature of trade, commerce or business, or any activity
of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other
consideration. This restriction is further qualified from AY 2016-17 - if the total receipts from any
activity in the nature of trade, commerce or business, or any activity of rendering any service in
relation to any trade, commerce or business does not exceed the limits of 20 % of total receipts of the
relevant previous year of the trust undertaking such activities.

27. Laws Applicable to Charitable
Institutions/Trusts
Indian Trusts Act, 1882, Charitable & Religious Act, 1920, Wakf Act,1954, Sikh Gurudwara
Act, 1925, Indian Trustees Act, 1866, Religious Endowment Act, 1863, Trustees’ & Mortgagees’
Powers Act, 1866, Society Registration Act, 1860, Companies Act, 2013, for trusts registered as
companies u/s. 8 of the Act
Allied Laws:
Transfer of Property Act, 1882, Indian Registration Act, 1908, Income Tax Act, 1961, Foreign
Contribution (Regulation) Act, 1976

28. Provisions Relating to Anonymous
Donations & Gifts [ Section 115BBC ]
For the purposes of this section, ‘anonymous donation’ means any voluntary contribution referred
to in section 2(24)(iia), where a person receiving such contribution does not maintain a record of
the identity indicating the name and address of the person making such contribution and such
other particulars as may be prescribed. [Section 11 5BBC(3)]
Any income by way of anonymous donations received by a trust, fund, institution, etc. referred to
in that section shall be included in the total income of the assessee, being the person in receipt of
such income on behalf of the trust, fund, institution, etc. and shall be chargeable to tax at
maximum marginal rate.
Note: Read provisions of Section 80G-Ref. Document “Deuctions under section 80C- 80U

29. Tax Planning &
Avoidance

30. Tax planning
Tax Planning means reducing tax liability by taking advantage of the legitimate concessions and
exemptions provided in the tax law.
It involves the process of arranging business operations in such a way that reduces tax liability.
Example:-
1. Investments Under Section 80C i.e. payment related deductions ,
2. Under Section 80CCD i.e. contribution to Pension Fund of LIC or other insurance
company
3. Reinvestment Under Section 54, 54EC etc.

31. It comprises arrangement by which tax laws are fully complied:
◦ All legal obligations and transactions (both individually and as a whole) are met.
◦ Transaction do not take the form of colourable devices
◦ There is no intention to deceit the legal spirit behind the tax laws.
Tax Planning with reference to setting up of new business
◦ Location of new business
◦ Nature of new business
◦ Form of Organisation

32. Tax planning with reference to management decision
◦ Capital structure
◦ Dividend Policy
◦ Capital acquisition and deployment
◦ Make or buy
◦ Own or lease
◦ Purchase by instalment v. hire-purchase
◦ Repair or replace
◦ Employee renumeration

33. Tax evasion
Tax Evasion is using illegal means to avoid paying taxes.
Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non-payment of
taxes. Fraud can be defined as “an act of deceiving or misrepresenting,”
Example:-
1. Bogus Expense
2. Hiding, misrepresenting or Underreporting of Income
3. Inflating deductions without proof
4. Hiding or not reporting cash transactions, or hiding money in offshore accounts
etc.

34. Tax avoidance
Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting mistake for reducing
tax liability and thus avoiding payment of tax which is lawfully payable.
Tax avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by finding
new ways to avoid the payment of taxes while being within the limits of the law.
Generally, it is done by twisting or interpreting the provision of law and avoiding payment of tax.
Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of
tax rules.
Tax avoidance is lawful but in some cases it could come in the category of crime.
Example:-
1. Taking legitimate tax deductions to minimize business expenses and lower your
business tax bill.
2. Taking tax credits for spending money for legitimate purposes etc.

35. Tax - planning, avoidance & evasion
Features and differences between Tax evasion, Tax avoidance and Tax Planning:
1. Nature: Tax planning is legal whereas Tax evasion is illegal.
2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and objectionable.
3. Motive: Tax planning is the method of saving tax. However tax avoidance is dodging of tax. Tax evasion is
an act of concealing tax.
4. Consequences: Tax avoidance may subject to penalty or imprisonment if it violates the tax regulations while
tax liabilities deferred, where outcome is subject to Court’s decision. Tax evasion is subject to penalty and other
kinds of punishment.
5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script of law whereas Tax
evasion is done to reduce tax liability by exercising unfair means. Tax planning is done to reduce the liability of
tax by applying the provision and moral of law.

36. Deductions- Section 80C- 80U
Please refer to document ‘Tax Deductions’
Ms. Lavanya Bhagra

37. Section 10AA – Deduction available to
units in SPECIAL ECONOMIC ZONE
The following are the essential conditions to be fulfilled for claiming deduction under Section 10AA:
The assessee shall be an entrepreneur as referred to in Section 2(j) of the Special Economic Zones Act,
2005.
The SEZ unit has begun to manufacture articles or things or provides any service during the year
relevant to the assessment year commencing on or after 1.4.2006 but before 1.4.2021.
The SEZ unit is not formed by any splitting up, or the reconstruction of business that is already in
existence. However, such a condition shall not apply to a unit formed as a result of the re-
establishment, reconstruction or revival by the assessee of the business of any undertaking as referred
to in Section 33B.
The SEZ unit is not formed by any transfer of plant and machinery, previously used for any purpose to
a new business.