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How to select proper ITR to filed Return?

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Details  of various ITR for Income Tax Return

ITR-1 OR SAHAJ
This Return Form is to be used by an individual whose total income for the assessment year 2016-17 includes:-
Income from Salary/ Pension; or
Income from One House Property (excluding cases where loss is brought forward from previous years); or
Income from Other Sources (excluding Winning from Lottery and Income from Race Horses)

Who cannot use this Return Form?
This Return Form cannot be used by any resident having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India.
If you have foreign assets, you cannot use ITR-1.
If you have exempt income which is more than Rs. 5,000, you cannot use ITR-1.



ITR-2A
This tax return form is to be used by:
Taxpayers who have salary income and own more than one house property and DO NOT have any capital gains.
Those who have long-term capital gains from transactions on which Securities Transaction Tax is paid (which are exempt) from tax can still use this form.
NRIs can file ITR-2A, if applicable; however residents who have a foreign asset or foreign income CANNOT file this form.

Who cannot use this Return Form?
This income tax return ITR -2A CANNOT be filed by those who have:
Income from Capital Gains
Income from Business or Profession
Any claim of relief/deduction under section 90, 90A or 91
Any resident having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India
Any resident having income from any source outside India.

ITR-2
This Return Form is to be used by an individual or a Hindu Undivided Family whose total income for the assessment year 2016-17 includes:-
Income from Salary/Pension; or
Income from House Property; or
Income from Capital Gains; or
Income from Other Sources (including Winnings from Lottery and Income from Race Horses).
Further, in a case where the income of another person like one's spouse, child, etc. is to be clubbed with the income of the assesses, this Return Form can be used where such income falls in any of the above categories.
Who cannot use this Return Form
This Return Form should not be used by an individual whose total income for the assessment year 2016-17 includes Income from Business or Profession or if you receive remuneration as a Partner in a Partnership Firm or LLP.
For declaring these types of Income, you may have to use ITR-3 or ITR-4 or ITR-4S.

ITR-3
This Return Form is to be used by an individual or an Hindu Undivided Family who is a partner in a Partnership Firm or LLP and where income chargeable to income-tax under the head “Profits or gains of business or profession” does not include any income except the income by way of any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by him from such firm.
In case a partner in the firm does not have any income from the firm by way of interest, salary, etc. and has only exempt income by way of share in the profit of the firm, he shall use this form only and not Form ITR-2.

Who cannot use this Return Form?
This Return Form should not be used by an individual whose total income for the assessment year 2016-17 includes Income from Business or Profession under any proprietorship.
How to select proper ITR?


ITR-4S OR SUGAM
Income tax Return to be filed by individuals, HUF and small business taxpayers having:
Presumptive Business Income
Salary / Pension
One house property
Income from other sources.
This form cannot be used if, taxpayer
Has more than one house property
Speculative income
Agriculture income more than Rs 5000
Winning from lotteries/races
Capital gains
Losses to be carried forward

ITR-4
For individuals and HUFs having income from a property business or profession.
________________________________________
ITR-5
For firms, LLPs, AOPs (Association of persons) and BOIs (Body of Individuals)
________________________________________
ITR-6
For Companies other than companies claiming exemption under section 11 (Income from property held for charitable or religious purposes)
This return has to be filed electronically only.
________________________________________
ITR-7
For persons including companies required to furnish return under section 139(4A) or section 139(4B) or section 139(4C) or section 139(4D).
Return under section 139(4A) is required to be filed by every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes.
Return under section 139(4B) is required to be filed by a political party if the total income without giving effect to the provisions of section 139A exceeds the maximum amount which is not chargeable to income-tax.
Return under section 139(4C) is required to be filed by every -
o scientific research association;
o news agency ;
o association or institution referred to in section 10(23A);
o institution referred to in section 10(23B);
o Fund or institution or university or other educational institution or any hospital or other medical institution.
Return under section 139(4D) is required to be filed by every university, college or other institution, which is not required to furnish return of income or loss under any other provision of this section.



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TDS Rates for FY 2016-17 (AY 2017-18) w.e.f. 01-06-2016

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TDS Rates under various sections for payment of Salary income, Epf- premature withdrawal, interest on securities, interest on debentures, divident,interest other than on securities by banks / post office, interest other than on securities by others, winning from lotteries /puzzle /game, winning from horse race, payment of insurance commission, payment in respect of life insurance policy, payment of NSS deposits, commission on sale of lottery tickets, commission or brokerage, rent of land building furniture, rent of plant and machinery, transfer of immovable property, other than agriculture land, interest from infrastructure bond.




Here is detail TDS Rates chart w.e.f. June 1, 2016




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Provident Fund (PF) - Detail PF procedures, forms, maintaining pf books

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PF: Various procedures, pf returns, pf forms, pf related routine work for organization 

1. The Employees Provident Fund Scheme, 1952
2. The Employees Family Pension Scheme, 1971
3. The Employees Deposit-Linked Insurance Scheme, 1976

Calculations: P.F from Basic

Employee: 12% (P.F)
Employer: 3.67% Provident Fund (A/c 1) + 8.33% Pension (A/c 10) + 1.10% Admin Charges on PF (A/c 2) + 0.50% EDLI (A/c 21) + 0.01% Admin Charges on EDLI (A/c 22)
=>13.61% on basic

* Pension (8.33% or 541/- which ever less)


Regular activities:

1. Time of joining: Form 2: Employee should fill, at the time of joining, nomination & Declaration form. Form 2, includes the following

• Name of the employee
• Parent/spouse name
• Date of Birth
• Sex
• Marital Status
• AC No
• Address
• Names, address, relation, Share for each etc

Also for changing nominee names Form 2 is used. His eligibility begins on the date of joining the firm. Submitted along with form-5.

2. Withdrawers/Dead : Form 10c (pension) & 19 PF

Form 19 is used for withdrawing PF amount. Employee and parent/spouse name, name of the establishment, Ac no, Reasons for leaving service, Contribution for current financial year etc. Form 10 is used for pension withdrawal.

Form 19: Employee should fill, all information like Bank a/c, name, DOJ…with signature and then Employer like present year contributions, DOR…for PF Fund – Due date: After 60 Days of Resignation)
Form 10C: Employee should fill, all information like Bank a/c, name, DOJ…with signature and then employer like present year contributions, DOR…for Pension Due date: After 60 Days of Resignation


3. Transfer : Form 13

Form 13 is used for transferring an employee AC from one company to another. Both employer and employee have to specify his name, PF AC no, Position etc and submitted with a covering letter (consolidated list of employees). Photocopy of the above is kept in PF file for transfer.


4. Employee register 3A, 6
5. For advance : Form 31


6. In case of employee expired / dead :

Process details

Form 10 D (For claiming benefits under Pension)

Employee should fill like Expired/late employee name, nomination name, details, Nomination Bank a/c…for monthly Pension

Form 20 (For Claiming EPF Contributions)

Employee should fill like Expired/late employee name, nomination name, details,
Nomination Bank a/c…for withdrawal of PF Fund (Incase of Death of a member

Form 5 IF (For Claiming EDLI benefits, nominee will get benefit)

EDLI for death case, nominee will get benefit.


7. Form 9 (Register of employers - Application for review filed under)


Monthly Remittance / Challans:

1. Challans every month before 15th (4 copies/ quadruplicate)
2. All A/c (A/c Nos-1,2,10,21&22)
3. To Bank
4. both employer & employee contribution

• Account group no eg Ma mu 1246 (state-first two alphabets /city/acc no: of the company)
• Month
• Total number of subscribers
• Total wages due for each account (wages on which calculations are done)
• Each accounts totals (consolidated amount with employer and employee share)
• Name of the establishment and address
• Name and signature of the depositor
• Name of the bank, mode and date of remittance etc
Challan is submitted tp PF office along with form-12A every month.

Monthly returns:

1. Form 12 A, with all information and employees list of contribution before 25th
2. With Form 5 (new joiners list) , form 10 (resigned employees list), challans copy
3. Information about last month employees, new & resigned employees & this month staff.

Form 5

• Name of the establishment and address
• Month
• Code no: of the factory
• A c no:
• Name of new employees
• Fathers or Husband name in case of married women
• Date of birth
• Sex
• Date of joining the fund
• Total period of pervious services as on the date of joining the fund

Form 10

• Name of the establishment and address
• Month
• Code no: of the establishment
• A c no:
• Name of member who is leaving
• Fathers or Husband name in case of married women
• Date of leaving service
• Reasons for leaving service
• Signature of authorized officer and stamp of the establishment
Cross checking the above is done with the salary statement which includes the number and name all current employees.

Form 12 A:

• Name of the establishment and address
• Currency period and month (April yr to march yr)
• Statutory rate of contribution (12%)
• Group code (NA for unexampled establishment. Establishment having more than 1000 have to keep a PF trust and have to specify the group code)
• Total wages due for each account (wages on which calculations are done)
• Amount of contribution and amount remitted (consolidated amount with employer and employee share)
• Date of remittance
• Total number of subscribers for the current month.
• Name and address of the bank in which the amount is remitted.
• Details of subscribers for E.P.F, PF, EDLI
--No of subscribers as per last month
--No of new subscribers (vide Form 5)
--No of subscribers left service (vide Form 10)
--Total no of subscribers (After adding and subtracting the new and retired employees with,
the number should tally with monthly list of employees)

Cross checking the above is done with the salary statement.

Annul returns:

1. Form 3 A (Individual Computation sheet)
2. Form 6 A (Consolidated Annual Contribution Statement)
3. before 30th April every year

Form 6A:

• Currency period and month (April yr to march yr)
• Name of the establishment and address
• Code no: of the establishment
• No: of member voluntary contributing at a higher rate
• AC No of each employee followed by their name, annual salary, annual contribution, employer contribution, refund of advance, rate of voluntary contribution.
• This grand total should tally with all form 12 A and challans totals.

Form 3A: Register

This form is filled up for each employee stating his each monthly salary, contribution, Employer share, Refund of advance, No of days/period of non contributing service, if any (eg. unauthorised leave). If the employee is resigned during that financial year then the date of leaving service and reasons for leaving service should be specified in this form. Using Form 3A, form 6 A is filled up and crosschecking is done with all challans and 12 A forms.


* Muster Roll * Wage Register * Inspection Book * Cash Book, Voucher & Ledger * PF work sheet 

Forms:

Form 3: Contribution Cards - Individual Computation sheet contains all PF amts month-wise.
Form 3 A: Contribution Cards – Form
Form 4: Contribution card for employees other than monthly paid employees - Form
Form 5 A: Return of Ownership to be sent to the Regional Commissioner - Form
Form 6: Return of the Contribution Cards sent to the Commissioner on the expiry of the period
of currency – Form
Form 6 A: Consolidated Annual Contribution Statement - Consolidated Computation Sheet,
contains total employees list, there total half yearly information. Form 6 is top sheet
and 6A is attachments.
Form 9: Register of employees - Application for review filed under.

Register 3: Individual Computation, there Gross salary, Basic, DA, attendance, PF, Pension
Information maintains month-wise. Form 3 is top sheet and 3A is attachments. 

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Budget 2015- Allowance of balance 50% additional depreciation w.e.f. April 1st 2016

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Budget 2015- Allowance of balance 50% additional depreciation
This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

To encourage investment in plant or machinery by the manufacturing and power sector, additional depreciation of 20% of the cost of new plant or machinery acquired and installed is allowed under the existing provisions of section 32(1)(iia) of the Act over and above the general depreciation allowance. On the lines of allowability of general depreciation allowance, the second proviso to section 32(1) inter alia provides that the additional depreciation would be restricted to 50% when the new plant or machinery acquired and installed by the assessee, is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in the previous year. Non-availability of full 100% of additional depreciation for acquisition and installation of new plant or machinery in the second half of the year may motivate the assessee to defer such investment to the next year for availing full 100% of additional depreciation in the next year. To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.


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Tally ERP 9 Ledgers and Groups Creations

Creating Groups and Legers is most important part in Tally ERP 9 implementation, First we have to create Tally Groups then we can create various ledgers under specific groups.  In every implementation of Group wise Tally ledger list prepared first which affects Trading a/c, Profit and loss a/c and Balance sheet. Here is the list of ledger head and respected group of ledgers.

TRADING ACCOUNT
Ledger NameTally HeadLedger NameTally Head
PUR.RETURNSPURCHASESALE RETURNSALES
PURCHASEPURCHASESALESSALES
CARRIEGEDIRECT EXPENSES
FACTORY LIGHTINGDIRECT EXPENSES
FRIEGHT & CARTAGEDIRECT EXPENSES
IMPORT DUTYDIRECT EXPENSES
RENT (DR)DIRECT EXPENSES
ROYALITYDIRECT EXPENSES
WAGESDIRECT EXPENSES

PROFIT & LOSS ACCOUNT
Ledger NameTally HeadLedger NameTally Head
ADVERTISEMENTINDIRECT EXPENSESBAD DEBITOR RECOVEREDINDIRECT INCOME
BANK CHARGESINDIRECT EXPENSESCOMMISSION RECEIVEDINDIRECT INCOME
BILL DRAWNINDIRECT EXPENSESDISCOUNT RECEIVEDINDIRECT INCOME
CARRIAGEINDIRECT EXPENSESINTREST ON DRAWINGINDIRECT INCOME
COMMISSION ALLOWEDINDIRECT EXPENSESINTREST ON INVESTMENTINDIRECT INCOME
DISCOUNT ALLOWEDINDIRECT EXPENSES
DONATION & CHARITYINDIRECT EXPENSES
FREE SAMPLEINDIRECT EXPENSES
INSURANCE PREMIUMINDIRECT EXPENSES
INTEREST ON LOANINDIRECT EXPENSES
LEAGAL CHARGEINDIRECT EXPENSES
LOSS BY FIREINDIRECT EXPENSES
OFFICE LIGHTINGINDIRECT EXPENSES
PETTY CASHIERINDIRECT EXPENSES
POSTAGE & COURIERINDIRECT EXPENSES
PRINTING & STATIONERYINDIRECT EXPENSES
RENT (CR)INDIRECT EXPENSES
REPAIR CHARGEINDIRECT EXPENSES
SALARY INDIRECT EXPENSES
SALE TAXINDIRECT EXPENSES
SEPRECIATIONINDIRECT EXPENSES
TAXI FIREINDIRECT EXPENSES
TELEPHONE CHARGEINDIRECT EXPENSES
TRADE ACCOUNTINDIRECT EXPENSES
TRAVELLING EXPENSESINDIRECT EXPENSES
SUSPANSESUSPANSE
MISSCELLANEOUS EXP.MISSCELLANEOUS EXP.
DEPRICIATIONINDIRECT EXPENSES

BALANCE SHEET
Ledger NameTally HeadLedger NameTally Head
CAPITALCAPITALFURNITUREFIXED ASSET
DRAWINGCAPITALGOODSFIXED ASSET
INCOME TAXCAPITALLAND & BUILDINGFIXED ASSET
LIFE INSURANCE CAPITALLONG TERM INVESTMENTFIXED ASSET
RESERVES & SURPLUSRESERVES & SURPLUSMACHINARY & PLANTFIXED ASSET
ADVANCECURRENT LIBILITIESBANK CASH AT BANK
BANK OVERDRAFTCURRENT LIBILITIESCASHCASH IN HAND
BILL PAYABLECURRENT LIBILITIESSTOCKSTOCK IN HAND
OUTSTANDING EXPENSESCURRENT LIBILITIESDEBITOR NAMESUNDRY DEBITOR
SALARY PAYABLECURRENT LIBILITIESBAD DEBITOR SUNDRY DEBITOR
CREDITOR NAMESUNDRY CREDITORBILL RECEIVABLECURRENT ASSETS
LOANLOAN LIABILITIESGOOD WILLCURRENT ASSETS
BRANCH IN DIVISIONBRANCH IN DIVISIONNATIONAL PLANTCURRENT ASSETS
ACCRUED EXPENSESCURRENT LIBILITIESPREPAID EXPENSESCURRENT ASSETS
SHORTTERM INVESTMENTCURRENT ASSETS
PREPAID RENTMISC. EXP.- Asset
LOSS ON THEFTSTOCK IN HAND
ACCRUED INCOMECURRENT ASSETS

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Real Estate Developer's Business Income Computation

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COMPUTATION OF BUSINESS INCOME OF REAL ESTATE DEVELOPERS

real estate developer's business income computation
 Real estate sector is the fastest growing sector in the country; it provides employments to lakhs of people and has contributed a lot in the exchequer of the Government. Real Estate activity may consist of development of Townships, Residential Complexes, Commercial or Industrial Complexes etc. Real Estate projects are of long term projects, takes years to be completed.  

The real estate activities are spread over many years at or its takes more than one year to complete a project, thus it involves complex issue, while calculating business income of real estate projects.
The Income Tax Act, 1961 does not provide any specific provisions for revenue recognition of real estate business. The ICAI has issued Accounting Standard -09 related to revenue recognition and Guidance Note on Recognition of Revenue by Real Estate Developers in 2006( Revised in 2012).  


The ICAI has issued Accounting Standard -07 and related Guidance Note for accounting of real estate contracts.
The provisions of Sections 28 to 44DB are applicable in case of real estate activity along with other provisions and rules of the Act.  
Section 145 of the Income Tax Act, 1961 related to method of accounting is also relevant for calculating revenue of real estate business.

METHOD OF ACCOUNTING FOR REVENUE RECOGNITION FOR REAL ESTATE DEVELOPER

(I) COMPLETED CONTRACT METHOD ;( CCM)
According to Accounting Standard -09, revenue relating to any, sales transaction is recognised when significance risks and rewards of ownership of goods are transferred. 
In case of real estate business, the sale of immovable property, the ownership of the property is transferred as per Transfer of Property Act, 1882 when legal title of ownership is transferred. According to the provisions of Transfer of Property Act, 1882 an immovable  property  is transferred by way of registered sale deed or according to provisions of Section 53A of Transfer of Property Act, 1882. 
In case of Completed Contract Method, the revenue is recognised, when ownership in property is transferred. Since real estate project is a long term project and the property will be transferred, when it will be completed. In this case no revenue is recognised in the years when project is under development and revenue is recognised, when project is physically completed, possession is handed over and ownership is transferred.  
MAIN FEATURES OF COMPLETED CONTRACT METHOD (CCM);
1. The Revenue is recognised in the financial statements only on completion of project;

2. The consistency of income in the financial statement of developer will not be same;

3. The income will be recognised on actual basic;

4. No taxable income will be generated during the year ,when project is under development;

5. The builder or developer may use this method to defer his/its tax liabilities;

6. The real estate developer may lose benefit of Set off Depreciation or Carry Forward Losses due to long period of project and revenue recognition;

7. The benefit of Section 80-IB and other incentive provisions and benefit therein may lapse due to long period of project and revenue recognition;

8. The tax authorities do not prefer this method of accounting due to deferment of taxes.
(ii) PERCENTAGE OF COMPLETION METHOD (PCM);
Under this method the revenue is recognised as per the stage of completion of project on year to year basis during the development of the projects.
The underlying principal for adoption of Percentage of Completion Method for revenue recognition is that in case of real estate project, generally, significant risks and rewards of ownership of property are transferred to the buyer at the time of entering into binding sale agreement. Once sale agreement is entered, the developer effectively acts for the buyer in the capacity as contractor.
MAIN FEATURES OF PERCENTAGE OF COMPLETION METHOD (PCM);
1. Revenue is recognised in the financial statements on year to year basis on the stage of completion of the project at the end of each year.
2. The profit in the financial statement of developer will be reflected consistently year to year.
3. The revenue is recognised before the property come into existence and physical possession of property is handed over by developer to the buyer.
4. The income is calculated on estimated basis, considering total project revenue to be earned and total project expenses to be earned in future. 

Since Income Tax Act, 1961 does not provide any specific method for calculation of income of real estate developer, so normal provisions related to head business or profession i.e. Section 28 to 44DB are applicable after considering Accounting Standards 7 & 9, read with “Guidance Note on Accounting for Real Estate Transactions (Revised 2012), issued by ICAI applicable for accounting year commencing on or after 01.04.2012.
The Court has allowed to real estate developers to choose any one of the methods for accounting and recognition of their revenue. They are free to choose CCM or PCM related to old Accounting Standard-07. After 1.04.2003 the Accounting Standard-07 has been revised and ICAI has issued guidance note for calculation and accounting of real estate projects. 
In following cases , which are relating to period prior to 1.04.2003 when as per old Accounting Standard-07 applicable in such period the option are available for assesessee to adopt any one of CCM or PCM, still courts held that the real estate developers should follow PCM method;
Greater Ashoka Land & Development Company Private Limited V. Asstt. CIT (2001)79 ITD 595(Delhi) (2004)89 TTJ (Delhi) 281, Assessment Year 1988-89, the assessee argued that it has followed one venture of accounting and accordingly, profit in respect of such venture would be determined only in the year in which venture is completed. The Tribunal held that Income accruing one year cannot be deferred to future years by adopting incorrect method of accounting , with a view to postpone tax liability. 
Asstt.CIT V. Prerna Premises (P.) Limited (2006) 7 SOT 288(Mumbai), Assessment years 1988-89, the assessee is a real estate developer followed project completion method of accounting. the assesssee did not recognised revenue on the ground that the construction of the project was not completed. Tribunal held that Period of Completion of project cannot be allowed to be stretched at the whims of assessee. Since 80% of the constructed area had been sold and occupied by the buyer, hence the project was deemed to be completed. 

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Business Transactions Vs Investment Transactions

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BUSINESS TRANSACTIONS vs. INVESTMENT TRANSACTIONS
The income arising from Sale of Shares/Debentures or other securities and real estate business will be determined and taxed on the basis, whether they are Capital Asset or Business Asset. It is important to determine, whether the income is generated from Capital Assets or from Business Assets and be determined as Capital Gain or Income from business.
It is important to determine the nature of income because the rate of tax will be different in case of Capital Gain or Business Income. 


There is no parameter prescribed under the Income Tax Act, 1961 to characterised on the basis of which, a transaction can be classified as business transaction or as transaction of investment. 
If a transaction emerges on sale/purchase of an asset kept as an investment, then it is in the nature of Capital Asset and income arises from the same will be taxed as Capital Gain or otherwise it is a Business Income.
Section 2(13) of the Income Tax Act, 1961 defines “Business” to “include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”
Section 2(14) of the Income Tax Act, 1961 defines “Capital Asset” as “Property of any kind held by the assesses, whether or not connected with other his business or profession, but specifically excludes “Stock in trade” and other kind of specified assets.
Note: Any kind of property except except those falling in the excluded category is a Capital Asset.
Let us consider some Judicial Decisions in this respect;
CIT vs. Ahmedbhai Umarbhai & Co. (1950)18ITR 472(SC) the Supreme Court has defined business to mean every continued activity of person, which yields profits and which is in the nature of trade, commerce or manufacture.
Barendra Prasad Roy Vs. CIT(1981)129ITR 295(SC) the Supreme Court held that business income mean as activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning an income.
Thus the main ingredients of a Business are;
1. It should be an occupation or profession which occupies the time, attention and labour of a person,
2. The object is primarily of making profit.
CIT Vs. Associated Industrial Development Co. (P) Limited (1971) 82 ITR 586/1972 CTR(SC) 239(SC) , the Supreme Court held that “ Whether a particular holding is by way of investment or forms part of the Stock in trade is a matter which is within the knowledge of the assesses, who hold the shares and it should , in normal circumstances, be in a position to produce evidence from its record as to whether it has maintained any distinction between those shares which are its stock in trade and those which are held by way of investment.”
Fidelity North star Fund, In re(2007) 288 ITR 641,  Authority for Advance Rulings (AAR) held that “ ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment ( by sale of shares) will yield capital gain and not revenue receipt.” 
Premji Bhimji vs. CIT (1971)81ITR 179(Cal.); it has been held that “In deciding whether a venture is in nature of trade no rigid formula can be applied. The total impression must be gathered from all the relevant facts and circumstances. In a transaction of purchase and re-sale, whether the purchase is made solely and exclusively with the intention to re-sell at a profit and the purchaser has no intention of holding the property for himself or otherwise using it, the presence of such an intention is a relevant fact and unless offset raises a strong presumption that the adventure is in the nature of trade.”
Bhogilal H. Patel Vs. CIT (1969) 74 ITR 692( Bom.) it has been held that “ a person is undertaking a trade or business , or entering into an adventure in the nature of trade, it is essential that the particular transactions under scrutiny should have been entered into with the intention of earning a profit on the other hand if a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a case of capital accretion and not profit derived from an adventure in the nature of trade. So intention of the person at the time of entering into transaction will be important to decide whether it is a transaction in the nature of trade or an investment.
Khan Bahadur Ahmed Alladin & Sons. Vs. CIT (1968) 68 ITR 573(SC) it was held that the answer to the question does not depend upon merely counting the number of facts and circumstances and pro and con or upon one particular fact such as original intention of the assessee or upon the application of any abstract rule, principal or formula but must depend upon the total impression and effect of all the relevant facts and circumstances established in a particular case. 
Supreme Court of India in case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594(SC) enumerate some tests to decide nature of transaction as;
1. Was the purchase a trade and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it?
2. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold?

3. Did the purchaser, by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily resalable?

4. What were the incidents associated with the purchase and resale?

5. Were they similar to the operations usually associated with the trade or business?

6. Are the transactions of purchase and sales repeated?

7. In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture?

8. Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assesses or whether they represent borrowed money?
The above points considered by the Supreme Court are not a conclusive to determine the nature of business or trade. All relevant points should be considered for deciding nature of transaction.
Gujarat High Court in case of CIT Vs. Rewashanker A. Kothari (2006) 283 ITR 338   held that in order to determine ,whether profit arising from sale is business income, following tests can be applied;
1. The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item or with the view to finding an investment;

2. The second test is why and how for what purpose the sale was effected subsequently;

3. The third test is as to how the assessee dealt with the subject matter of transition during the time the asset was with the assessee & whether the assessee treated the asset as stock in trade or has been shown in the books of account as investment;

4. The fourth test is how the assessee himself has returned the income from such activities and how the department has dealt with the same in the course of preceding and succeeding assessment;

5. The fifth test ( normally applied in the case of firm or company) is in what manner the deed of Partnership or MOA as the case may be authorised the transaction;
6. The final and most important test is as to the volume, frequency, continuity and regularity of transaction of purchase and sale of goods concerned.
SUMMARY OF TESTS TO DETERMINE THE TRANSACTION AS BUSINESS INCOME OR CAPITAL GAIN:
While going through above judicial proceedings and considering other factors , it is essential to determine the nature of transaction by judging the intention of parties at the time of purchase or sale of assets;
The intention of person can be gathered from a number of factors;
(A) Intention behind investment; if the investment is made as an organised activity , such as by establishment of office, deployment of staff to undertake various activities , etc., and with the intention to earn profit by sale or purchase of asset , the activity will be in nature of business.
(B) Frequency and volume of transactions; more the frequency of transactions, more will be presumption that it is business transaction. If transactions are entered into regularly and continuously, then it is more likely to be treated as a business activity. The period of asset held by person, will also be considered to determined nature of transaction. If a person not regularly enters into transaction or he holds assets for a longer period and sale thereafter than the nature of transaction will raise Capital Gain.
(C) Normal Business of the assessee;  if purchase and sale of asset is allied to the assessee’s usual trade or business or are incidental to it, it will be treated as business transaction. On the other hand if a purchase and sale is an independent activity than business of the assessee, then it in nature of investment.
(D) Intention behind sale of asset; if asset is sold in the normal course of business of the assessee or it is a routine matter for assessee then it is a business transaction. On the other hand if asset is sold to generate a fund to meet some liability then it will be treated as an investment transaction.
(E) Mode of acquisition of asset;   if an asset has been acquired by way of partition of HUF, gift or under a will and subsequent sale of asset will result Capital Gain.
(F) Accounting treatment in books of accounts; if an asset is shown as an Investment in the books of accounts of the assessee, and then its sale will raise Capital Gain.
(G) Other Factors;  there are some other factors, which will affect the nature of transaction such as ratio of sales or purchase and holding, the time devoted to the activity, the extent to which it is the means of livelihood and stated in the MOA in case of a Company , which have to be considered while d determining  the nature of transaction.
Thus most important factor for characterisation of transaction as trading or investment is the intention behind it. Other factors are ancillary but there has to be a scrutiny of either all or most of all the factors and the combined effect of all of them have to be considered to characterise the transaction as business or investment. The facts of each case have also to be taken into consideration.

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