Direct Taxation.pdf

INTERMEDIATE : paper -

DIRECT TAXATION study notes

The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016

7

INtERMEDiATE

First Edition : August 2016

Published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in

Copyright of these Study Notes is reserved by the Insitute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.

Paper 7: DIRECT TAXATION

Syllabus

Syllabus Structure

A B C

Income Tax Act Basics Heads of Income and Computation of Total Income and Tax Liability Administrative Procedures and ICDS

10% 70% 20%

C 20% A 10% B 70%

ASSESSMENT STRATEGY There will be written examination paper of three hours. OBJECTIVES To provide an in depth knowledge of the detailed procedures and documentation involved in cost ascertainment systems. To understand the concepts of Financial Management and its application for managerial decision making. Learning Aims The syllabus aims to test the student’s ability to: 

nderstand the cost and management accounting techniques for evaluation, analysis and application in managerial U decision making;



Compare and contrast marginal and absorption costing methods in respect of profit reporting;



Apply marginal and absorption costing approaches in job, batch and process environments;



Prepare and interpret budgets and standard costs and variance statements;



Identify and apply the concepts of Financial Management 

Skill sets required Level B: Requiring the skill levels of knowledge, comprehension, application and analysis. Note: Subjects related to applicable statutes shall be read with amendments made from time to time. Section A : Income Tax Act Basics 1. Introduction to Income Tax Act, 1961 2. Income which do not form part of Total Income (Section 10, 11 to 13A) Section B: Heads of Income and Computation of Total Income and Tax Liability 3. Heads of Income and Computation of Total Income under various heads 4. Clubbing Provisions, Set off and Carry forward of Losses, Deductions 5. Assessment of Income of different persons 6. Corporate Taxation 7. TDS, TCS and Advance Tax Section C: Administrative Procedures and ICDS 8. Administrative Procedures 9. Income computation and disclosure standards - Basic Concepts only

10%

70%

20%

Section A: Income TAx Act basics [10 marks] Introduction to Income Tax Act, 1961:

1.

(a)

Basic Concepts and definitions

(b)

Background, concepts, definitions

(c)

Capital and revenue - receipts, expenditures

(d)

Basis of charge and scope of total income

(e)

Residential Status and Incidence of Tax

Incomes which do not form part of Total Income [Sec. 10 and 11 to 13A]

2.

Section B: heads of income and computation of total income and tax liability [70 marks] 3.

Heads of Income and Computation of Total Income under various heads



(a)

Income from salaries



(b)

Income from House property



(c)

Profits and gains from Business or Profession



(d)

Capital gains



(e)

Income from other sources

4.

Clubbing Provisions, set off and carry forward of Losses, deductions (a)

Income of other persons included in Assessee’s Total Income

(b)

Aggregation of Income and Set off or Carry Forward of Losses

(c)

Deductions in computing Total Income

(d)

Rebates & Reliefs

(e)

Applicable Rates of Tax and Tax Liability

5.

Assessment of Income of different persons (a)

Taxation of Individuals including Non-residents

(b)

Hindu Undivided Family

(c)

Firms, LLP, Association of Persons

(d)

Co-operative societies

(e)

Trusts, Charitable and Religious Institutions

6.

Corporate Taxation (a)

Classification, tax incidence, computation of taxable income and assessment of tax liability

(b)

Dividend Distribution Tax (DDT)

(c)

Minimum Alternate Tax (MAT)

(d)

Other special provisions relating to companies

7.

TDS, TCS and Advance Tax (a)

Tax Deduction at Source

(b)

Tax Collection at Source

(c)

Advance Tax

Section C: administrative procedure and icds [20 marks] 8.

Administrative Procedures (a)

Return Filling and Refund procedures

(b)

Demand, Recovery, Assessm,ent, Appeal, Revision and Settlement

(c)

Special Procedure for Assessment of search cases

(d)

E-Commerce Trandaction and libaility in special cases

(e)

Penalties, fines and prosecution

9.  Income Computation and Disclosure Standards - Basic Concepts only

Contents

SECTION A - income tax act basics Study Note 1 : Basic Concepts

1.1

Meaning and Purpose of Tax

1

1.2

Constitutional Provisions

1

1.3

Tax Structures in India

2

1.4

The Sources of Income - Tax Law in India

2

1.5

Tax Planning, Tax Avoidance and Tax Evasion

3

Study Note 2 : Background, Concepts, Definitions 2.1

Some Important Definitions

4

2.2

Heads of Income

7

2.3

Concept of Agricultural Income and Tax issues in respect of Agricultural Income

8

Study Note 3 : Capital And revenue : Receipts and Expenditures

3.1

Distinction between capital and revenue receipts

13

3.2

Distinction between capital expenditures and revenue expenditures

14

Study Note 4 : Basis of Charge and Scope of Total Income

4.1

Computation of Total Income

15

4.2

Rates of Tax

16

4.3

Special Rates

17

Section – A COST & MANAGEMENT Study Note 5 : Residential Status and Incidence of Tax 5.1

Introduction

18

5.2

Residential Status of an Individual

18

5.3

Residential Status of a Hindu undivided family

20

5.4

Residential Status of firm and association of persons

20

5.5

Residential Status of a Company

21

5.6

Residential Status of every other person

21

5.7

The Scope of Total Income or Incidence of tax of different types of assessees

21

5.8

Some Important Considerations

22

5.9

Residential Status and incidence of taxs at a glance

24

Study Note 6 : Income which do not form Part of Total Income [Section 10, 11 to 13A] 6.1

Incomes exempt from tax

29

6.2

Income of Trusts or Institutions from Contributions

34

6.3

Income of the Political Parties

36

SECTION B - HEADS OF INCOME AND COMPUTATION OF TOTAL INCOME AND TAX LIABILITY Study Note 7 : Income under the Head “Salaries”

7.1

Meaning of Salary

38

7.2

The Elements of Salary

40

7.3

Computation of Pension

43

7.4

Death-Cum-Retirement Gratuity

43

7.5

Profit in lieu of Salary

45

7.6

Leave Salary

45

7.7

Retrenchment Compensation

47

7.8

Allowances

48

7.9

Perquisites

52

7.10

Tax Treatment of Various Perquisites

54

7.11

Valuation of Perquisites Taxable in the hands of Specified Employees

61

7.12

Deduction from Gross Salary

63

Study Note 8 : Income from House Property 8.1

Basis of change

75

8.2

Essential Conditions

75

8.3

Deemed Owner

75

8.4

House Property let out for purposes which is incidental to business

76

8.5

Property hend in as stock-in-trade

76

8.6

House Property situated abroad

76

8.7

Composite Rent

76

8.8

Annual Value of house property

77

8.9

Annual Value how determined

77

8.10

Deductions from annual value

80

8.11

Recovery of arrears of rent and unrealized rent

82

8.12

Treatment of Loss

82

Study Note 9 : Profits and Gains From Business or Profession [Sections 28-44] 9.1

Introduction

94

9.2

Basis of Charge

95

9.3

Business Income excluded from the purview of Sec. 28

95

9.4

General Principles of computation of business income

95

9.5

Method of Accounting

97

9.6

Specific deductions

97

9.7

Inventives for Investment in new plant and machinery

101

9.8

Investment allowance for notified backward areas

102

9.9

Tea development account, coffee development account or rubber development account

102

9.10

Site restoration fund

103

9.11

Expenditure on scientific research

103

9.12

Expenditure for obtaining right to use spectrum for telecommunication services 105

9.13

Expenditure for obtaining licence to operate telecommunication services

106

9.14

Expenditure on eligible projects or schemes

106

9.15

Capital expendiure in respect of specified business

107

9.16

Expenditure on agrinultural extension projects

108

9.17

Expenditure on skill development projects

109

9.18

Amortation of Preliminary expenses

109

9.19

Amortisation of expenditure in case of amalgamation or demerger

110

9.20

Amortisation of expenditure incurred under voluntary retirement scheme

110

9.21

Other Deductions

111

9.22

General Deduction

114

9.23

Specific Disallowance

117

9.24

Deemed profits chargeable to tax

121

9.25

Deemed Income in respect of undisclosed income/investment, etc.

122

9.26

Compulsory maintenance of books by certain persons carrying on profession



or business

122

9.27

Compulsory tax audit of accounts of certain persons

123

9.28

Presumptive Incomes and special provisions for computation of income of the



resident assessees in certain cases

124

Study Note 10 : Capital Gains [Sections 45 - 55A] 10.1

Basis of Charges

138

10.2

Meaning of Capital Asset

138

10.3

Classification of Capital assets

140

10.4

Meaning of transfer of capital asset

140

10.5

Mode of computation of capital gains

144

10.6

Computation of capital gains under certain special circumstances

153

10.7

Capital gains exempt from tax

160

Study Note 11 : Income From Other Soruces [Section 56-59] 11.1 Chargeability

174

11.2

Method of Accunting

174

11.3

Incomes that are taxable under this head

174

11.4

Taxability of cash, Immovable property or other movable property



received without any consideration

175

11.5

Taxability of share premium in excess of the fair market value

177

11.6

Other Incomes which are chargeable under this head

178

11.7

Tax treatment of dividend

178

11.8

Tax treatment of winnings from lotteries, crossword puzzles, horseracing, etc.

179

11.9

Interest on securities

179

11.10

Family pensions

181

11.11

Deductions from Income under the head “Income from other sources” 181

11.12

Expenditure expressly disallowed

182

Study Note 12 : Income of Other Persons included in Assessee’s Total Income 12.1

Introduction

187

12.2

Transfer of Income without transfer of assets

187

12.3

Income of Individual to include income of sopuse, minor child, etc.

188

12.4

Income from assets transferred to spouse 190

12.5

Income from assets transferred to son’s wife

190

12.6

Clubbing of Income when transferred asset is invested in business

190

12.7

Income from assets transferred to other person or AOP for the benefit of spouse 190

12.8

Income from assets transfrred to other person or AOP for the benefit of son’s wife 191

12.9

Income from accretion to property transferred or accumulated income of such property 191

12.10

Clubbing of Income of minor child

191

12.11

Income from self-acquired property converted inot joint family property

192

12.12

Liability of a person in respect of income included in the income of another person 192

Study Note 13 : Set off and Carry Forward of Losses [Sections 70 - 80] 13.1

Introduction

197

13.2

Inter-source adjustments

197

13.3

Inter-head adjustments

198

13.4

Carry forward of loss

201

13.5

Carry forward and set off of loss and depreciation in the case of amalgamation



or demerger

203

13.6

Carry forward and set off of loss and depreciation in the case of demerger

203

13.7

Carry forward and set-off of accumulated loss and unabsorbed depreciation



allowance in case of amalgamation of banking company

13.8

Carry forward and set-off of accumulated loss and unabsorbed depreciation



allowance in business reorganization of co-operative banks

203

13.9

Losses of firms

204

13.10

Carry forward and set off of losses in case of change in constitution of firm



or on succession

13.11

Carry forward and set off of losses in the case of certain companies 204

13.12

Submission of return for losses

203

204 204

Study Note 14 : Deductions From Gross Total Income [Sections 80C - 80U] 14.1

Nature of Deduction 211

14.2

Deduction available to a Non-Corporate Assessee

14.3

Deduction for Specified Savings and Payments 213

211

Study Note 15 : Rates of Tax and Tax Liability, Rebates and Reliefs 15.1

Tax Rates for the Assessment Year 2017 - 2018 243

15.2

Relief

245

Study Note 16 : Assessment of Individuals (Including non-residents) and Computation of Tax Liability 16.1

Introduction

250

16.2

Computation of Total Income

250

16.3

Computation of Gross Tax Liability

251

16.4

Tax Rebate

251

16.5

Surcharge

251

16.6

Education Cess

251

16.7

Relief

251

16.8

Special Provisions for Taxation of Non-Resident Individual Assessees



251

Study Note 17 : Assessment of Hindu Undivided Family 17.1

Meaning of Hindu Undivided Family

260

17.2

Assessment of Hindu Undivided Family

260

17.3

Computation of Income of the HUF

261

17.4

Computation of Tax Liability of a HUF

262

17.5

Assessment after Partition of Hindu Undivided Family

262

Study Note 18 : Assessment of Firms and Association of Persons 18.1

Meaning



265

18.2

Partnership Firms Assessed as Such [PFAS]

265

18.3

Partnership firms assessed as association of persons [PFAAOP]

271

18.4

Assessment of association of persons and body of Individuals

273

Study Note 19 : Assessment of Co-Operative Society 19.1

Introduction

276

19.2

Computation of total Income

276

19.3

Deduction under Section 80P

276

19.4

Tax Rates

277



Study Note 20 : Assessment of Trusts, Charitable and Religious Institutions 20.1

Introduction

278

20.2

Tax treatment of Income of trusts or institutions from contributions 278

Study Note 21 : Corporate Taxation 21.1

Some useful concepts

281

21.2

Computation of total Income of a company assessee

283

21.3

Computation of Tax Liability

283

21.4

Minimum Alternate Tax

284

21.5

Tax credit for MAT

285

21.6

Dividend distribution tax

286

21.7

Other provisions

287

Study Note 22 : Tax Deducted at Source and Tax Collected at Source 22.1

Introduction

290

22.2

Duty of the person deducting tax

296

22.3

Consequence of failure to deduct or pay tax

297

22.4

Common tax deduction and collection account number 298

22.5

Furnishing of statement of tax deducted

298

22.6

Collection of tax at source

298

Study Note 23 : Advance Payment of Tax [Sections 207-211, 218, 219] 23.1

Introduction

303

23.2

Liability for advnace payment of tax and its conditions

303

23.3

Computation of advance tax under different situations

303

23.4

Installments of advance tax and due dates

305

23.5

Assessee deemed to be in default

306

23.6

Credit for advance tax

306

23.7

Consequences of default in payment of advance tax

306

SECTION - C : ADMINISTRATIVE PROCEDURE AND ICDS Study Note 24 : Return Filing 24.1

Return of Income

311

24.2

Obligation for voluntary submission of returns

311

24.3

Due date for filling return of income

312

24.4

Forms for filling return

313

24.5

Mode of submission of return

314

24.6

Consequences of not filling return of Income or filling of return after the due date 315

24.7

Return of loss

315

24.8

Belated return

316

24.9

Revised return

316

24.10

Defective return

316

24.11

Return: By whom to be varified 317

24.12

Permanent account number

318

Study Note 25 : Refund of Tax [Sections 237 - 245] 25.1

Introduction

324

25.2

When claim for refund arises

324

25.3

When a person other than the assessee is entitled to refund

324

25.4

Form of claim and time limit for refund

324

25.5

Refund on appeal

326

25.6

Correctness of assessment not to be questioned

326

25.7

Interest on refunds

326

25.8

Set of for refunds aganist remaining payable

327

Study Note 26 : Assessment Procedure and Notice of Demand 26.1

Introduction

328

26.2

Enquiry before assessment

328

26.3

Summary assessment on the basis of return

329

26.4

Assessment in response to notice under section 143(2)

330

26.5

Best Judgment assessment

331

26.6

Assessment or reassessment of income escaping assessment

332

26.7

Assessment of scientific research association, news agency, etc.

333

26.8

Assessment in case of search or requisition

333

26.9

Rectification of mistake

334

26.10

Notice of demand

335

26.11

Intimation of loss 335

Study Note 27 : Appeal, Revision, Settlement and Demand and Recovery of Taxes Part - A 27.1

Introduction

337

27.2

Appealable orders before the Commissioner (Appeals)

337

27.3

Appellate Tribunal

340

27.4

Appeal to High Court

342

27.5

Appeal to Supreme Court

342

27.6

Special provision for avoiding repetitive appeal

342

27.7

Revision of orders prejudicial to revenue

342

27.8

Revision of other orders

343

Part - B 27.9

Tax Demand

344

27.10

Certificate to tax recovery officer

345

27.11

Validity of certificate 345

27.12

Other modes of recovery

345

Study Note 28 : Penalties, Fines and Prosecution 28.1

Penalties and fines

347

28.2

Prosecution

352

Study Note 29 : E-Commerce Transaction and Liability in Special Cases 29.1

Introduction

356

29.2

What is E-Commerce?

356

29.3

Extent of Digital Economy in the World and its Growth in India

357

29.4

Challenges of Digital Economy

357

29.5

Impact of Taxation

357

29.6

Report of the Committee on Taxation to Examine the Business Models for E-Commerce 359

29.7

Provisions of Equalization levy as per the Finance Act 2016

359

29.8

Collection and Recovery of Levy

360

29.9

Furnishing of Statement

360

29.10

Processing of Statement

360

29.11

Rectification of Mistakes 361

29.12

Interest on Delayed Payment of Equalization Levy

29.13

Penalty for failure to Deduct or Pay Equalization Levy 361

29.14

Penalty for failure to furnish Statement 362

29.15

Punishment for False Statement

29.16

Application of Certain Provisions of Income-tax Act 362

29.17

Exemption for Equalization Levy 362

361

362

Study Note 30 : Income Computation and Disclosure Standards 30.1

Introduction

364

30.2

ICDS issued by Central Government

364

Section A Income Tax Act Basics (Syllabus - 2016)

SECTION A: INCOME-TAX ACT BASICS INTRODUCTION TO INCOME-TAX ACT 1961 STUDY NOTE : 1 BASIC CONCEPTS THIS STUDY NOTE INCLUDES: Meaning and Purpose of Tax 1.1 1.2 Constitutional Provision Tax Structures in India 1.3 1.4 The Sources of Income-Tax law in India 1.5 Tax Planning, Tax Avoidance and Tax Evasion 1.1

MEANING AND PURPOSE OF TAX

Taxation is an indispensable part of the organized society so much so that the late U.S. President Franklin D Roosevelt once famously remarked, ‗‗Taxes, after all, are the due we pay for the privileges of membership in an organised society.‘‘ With the emergence of welfare states and constitutional governments in most part of the world, taxes are seen as a major source of revenue for public expenditure, viz. building schools and hospitals, paying the police and the soldiers, making provisions for critical infrastructure, etc. In public finance theory this is known as ‗public provision of social goods‘. In India, there are clear constitutional provisions regarding taxation. The importance of taxation can be gauged from the recent Budget estimates for the financial year 2016-17, where 82.5% of the total expenditure is expected to be financed by tax revenues. 1.2

CONSTITUTIONAL PROVISIONS

At the very outset, it needs to be made clear that the Constitution of India is the supreme law of the land and all other laws are subservient to it. The basic source of Income-tax law and power to tax, therefore, emanates from the Constitution. Accordingly, in keeping with the federal character of the State, the authority to legislate is divided between the Central Government and the State Governments as under: Seventh Schedule of Article 246 of the Constitution

List I Central or Union List Comprises of Entries over which the Union or the Central Government has exclusive power to legislate

List II State List Comprises of entries over which the State Government has exclusive power to legislate DIRECT TAXATION

List III Concurrent List Concurrent power of legislation to the Central and State Governments

1

1.3

TAX STRUCTURES IN INDIA

Like many developed countries in the world, India has a well-developed and diversified tax structure, with the authority to levy taxes divided between the Central Government and the State Governments. The various types of taxes levied by these Governments are divided into two broad categories: Direct and Indirect taxes. Direct taxes are those, which are collected directly from the tax-payers through levies such as IncomeTax and Wealth-Tax, whereas indirect taxes comprise excise duty, sales tax, customs duty, value added tax, octroi, entry tax, service tax, expenditure tax, etc. The table below gives a list of the major direct and indirect taxes in India and the authorities responsible for administering these laws: Nature of Tax Direct Tax * Income-Tax Wealth-Tax Indirect Tax Central Excise Customs Central Sales Tax State Sales Tax

Governing Act

Act Authority

Income-tax Act, 1961 Wealth-tax Act, 1957

Central Board of Direct Taxes (CBDT)

Central Excise Act, 1944 Customs Act, 1962 Central Sales Tax Act, 1956 Respective State Sales Tax Acts/ Value Added Tax Acts.

Central Board of Customs and (CBEC)

Excise

Central Government Sales Tax Act, 1956 Respective State Governments

* Gift tax and Estate duty – two other direct taxes – have been abolished in 1998 and in the late eighties respectively. 1.4

SOURCES OF INCOME-TAX LAW IN INDIA

The laws relating to Income-tax in India can be found in the following: a. The Income-tax Act, 1961: This Act contains the major provisions relating to Income-tax in India. The Central Board of Direct Taxes (CBDT) is responsible for the administration of this Act and it functions as a part of the Finance Ministry of the Government of India. It enjoys certain powers of delegated legislation and has the power to make Rules for carrying out the implementation of the direct tax laws. b. The Income-tax Rules, 1962: Under Section 295 of the Income-tax Act, the CBDT is empowered to formulate Rules for implementing the provisions of the Act. Income-tax Rules are separate from the Income-tax Act and for that reason the Rules can be amended easily by publishing notifications in the Official Gazette of the Government of India. But, for amending the Income-tax Act, an Amendment Bill has to be placed before Parliament and has to be passed there. However, in the case of any conflict between the Act and the Rules, the provisions of the Act shall be applicable. c. The Finance Act: The purpose of the Finance Act is mainly to prescribe the rate of tax that would be applicable for a given assessment year. However, any desired change in the provisions of the Income-tax Act can also be made by incorporating them in the Finance Bill presented every year before the Parliament. When the Bill is passed, it becomes the Finance Act. d. Circulars issued by the CBDT: The purpose of CBDT circulars is to provide guidance to the Incometax officers and the general public. These circulars are binding on the Income-tax officers. e. Case laws and precedents: Case laws are the decisions of the Tax Tribunals or Courts on disputes relating to any aspect of the Income-tax Law. These case laws serve as precedents. In cases of similar disputes in the future, the decisions of the courts may be used to decide any later disputes.

DIRECT TAXATION

2

1.5

TAX PLANNING, TAX AVOIDANCE AND TAX EVASION

The issue involving the distinction among tax planning, tax avoidance and tax evasion is a contentious one that has resulted into diverse legal judgments in the past. Accordingly, the Income-tax laws in India and elsewhere have undergone many changes to tackle revenue losses for the government(s). The income-tax law provides for a tax-payer to plan his taxes so that his tax liability is minimal. Thus, when a person arranges his financial affairs within the scope of the law in a manner that would give him the maximum benefit of the various exemptions, deductions, rebates and reliefs to reduce his tax liability, it would be called tax planning. Nevertheless, the distinction between tax planning and tax avoidance is extremely thin and can be made only with respect to the intention of the tax-payer. Any device that twists the law or purports to defeat the spirit of the law, may be called tax avoidance. Tax avoidance is illegal. Tax evasion, on the other hand is taking resort to various means such as suppression of facts and figures, furnishing false details, etc., with a clear intention to deceive. It is a crime against society and is punishable under the law. Multiple choice questions: 1.

The first Income-tax Act was enacted in India in A. 1960 B. 1860 C. 1760 D. None of these Ans. (B) 1860. 2.

The present Income-Tax Act became effective from : A. 1-4-1961 B. 1-4-1962 C. 1-4- 1963 D. None of these Ans. (B) 1-4-1962. 3.

The number of direct taxes in India are now: A. 1 B. 2 C. 3 D. None of these Ans. (B) 2 The normal rates of income tax are mentioned in : A. Income tax Act 1961 B. Finance Act C. Income-tax Rules D. None of these Ans. (B) : Finance Act

4.

5.

The charging section of the Income-tax Act is : A. Section 1 B. Section 2 C. Section 3 D. Section 4 Ans. (D) 4

DIRECT TAXATION

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STUDY NOTE : 2 BACKGROUND, CONCEPTS, DEFINITIONS THIS STUDY NOTE INCLUDES: Some important Definitions 2.1 2.2 Heads of Income [Section 14] 2.3 Concept of Agricultural Income and Tax issues in respect of Agricultural Income

2.1 SOME IMPORTANT DEFINITIONS Assessee [Section 2(7)]: An assessee is a person by whom any tax or any other sum of money is payable under the Income-tax Act. The term assessee also includes the following: (a) every person in respect of whom any proceeding under the Income-tax Act has been initiated for the assessment of his income or assessment of fringe benefits or loss or any amount of refund due to him or for the assessment of income, loss or refund of any other person in respect of which he is assessable. (b) every person who is deemed to be an assessee under any provision of the Income-tax Act; (c) every person who is deemed to be an assessee in default under any provision of the Income-tax Act. From the above definition, the following points emerge:  An assessee is a person who is liable to pay tax on his own income.  Even if the said person has no income during the year, he may be called an assessee in respect of any loss that he has incurred or in respect of any amount of refund due from the income-tax authorities.  The said person can be an assessee in respect of income or loss of another person. Examples of this type of assessees are the following: (i) An agent of a non-resident person. (ii) The guardian of a person suffering from incapacity to contract, e.g., a minor, a lunatic or an idiot. (iii) A person responsible for deduction of tax at source. (iv) A trustee. Person [Section 2(31)]: According to the Income-tax Act, 1961, the definition of ―person‖ includes the following seven types of units of assessment: (a) an individual, (b) a Hindu undivided family (HUF), (c) a Company, (d) a Firm, (e) an association of persons or body of individuals, whether incorporated or not. (f) a local authority, and (g) every artificial juridical person, not falling within any of the above categories. With effect from the assessment year 2002-2003, Finance Act, 2002 has inserted an explanation to the existing provisions of Section 2(31). Accordingly, an association of persons or body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such

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person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains. Points to remember: The expression ―individual‖ shall mean only a natural person or human being. Hindu undivided family includes a Jain family and a Sikh family as well. The co-owners of a property, if their shares are not definite and ascertainable, shall be assessed as an association of persons. (d) The expression ―artificial juridical person‖ includes a statutory corporation, Bar Council, an idol or a deity.  (a) (b) (c)

Examples of different types of persons: (a) an individual: Shri G. Patel (b) a Hindu undivided family: A joint family of Mr. K. Roy Chowdhury (c) a company: Tata Motors Limited (d) a firm: A partnership firm of which Amal, Bimal and Kamal are partners/ A Limited Liability Partnership in which Bimal and Kamal are partners (e) an association of persons or body of individuals: East Bengal Club/ Dum Dum Housing Cooperative Society. (f) a local authority: A municipality (g) every artificial juridical person: A deity ( e.g. Lord Jagannath of Puri/ Tirupati ); a Bar Council ; Calcutta University, etc. Assessment year [Section 2(9)]: ―Assessment year‖ means the period of twelve months commencing on the 1st day of April every year and ending on the 31st March of the following year. The scheme of the Income-tax Act is to levy tax for each financial year beginning with the 1st day of April at the rates prescribed in the Finance Act for the year. The year in which tax is paid is thus called the assessment year or ‗Income-tax Year‘, while the year in respect of the income of which the tax is paid is called the previous year or the accounting year. The concepts of assessment year and previous year are thus interrelated. Previous year [Section 3]: ―Previous year‖ means the financial year (1st day of April to 31st of March of following year) immediately preceding the assessment year. However, in the case of a business or profession newly set up, or a source of income newly coming into existence in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the new source of income comes into existence and ending with the said financial year i.e. March 31, XXXX For example, if an assessee starts his business on the 1st day of January, he has to close his books of account on 31st March next following. In this case his first previous year for this business will be for a period of three months only. For example, as in above, the assessee having started his business on 1st of January, winds up his business on the last day of February, his previous year in respect of this business will be for a period of two months only. Some important points regarding previous year: ● Income becoming chargeable to tax in the same previous year: The general rule is that income of the previous year alone shall be charged to tax during the assessment year at the rates prescribed DIRECT TAXATION

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for that assessment year. There are however, five exceptions to this rule. In the following cases, the Assessing Officer need not wait for the normal assessment year to begin: First, in respect of the shipping business of non-residents [Section 172]. Second, in respect of the income of persons leaving India [Section 174]. Third, in respect of the income of an association of persons or a body of individuals or an artificial juridical person, which is likely to be dissolved on completion of a particular event or purpose [Section174A]. Fourth, persons likely to transfer property with a view to avoiding tax [Section 175]. Fifth, in respect of the income of discontinued business [Section 176]. Points to Note: In the cases of undisclosed incomes covered u/s 68, 69, 69A, 69B, 69C and 69D, the previous year shall be the financial year in which these incomes are found. Income 2(24): The expression ―Income" is of utmost importance, because under the Income-tax Act, it is income for which a person is to be charged to tax. Yet the term income has not been defined in the Income-tax Act, except that Section 2(24) enumerates certain things to be considered as income. According to the definition given by Section 2(24), income includes a. profits and gains of business or profession ; b. dividend ; c. voluntary contributions received by a Charitable Trust/Religious Trust or University/Educational Institution or Hospital d. the value of any perquisite of profit in lieu of salary taxable u/s 17 and any special allowance or benefit, specifically granted either to meet personal expenses or for performance of duties of an office or an employment of profit. e. the value of any benefit or perquisite, whether convertible into money or not, received by a director or any of his relatives including the sums paid by the company which otherwise would have been payable by those persons; f. the value of any benefit or perquisite, whether convertible into money or not, obtained by a representative assessee or by any person on whose behalf or for whose benefit any income is received by the representative assessee, including any sum paid by the representative assessee, which would otherwise have been payable by the beneficiary; g. any sum chargeable to income-tax under sub-clauses (ii), (iii), (iiia), (iiib), (iiic), (iv), (v), (va) of Section 28, Section 41 or Section59 ; h. any capital gains chargeable under Section 45 ; i. the profits and gains of business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with Section44 ; j. The profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members; k. any 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 whatsoever ; l. any sum received by the assessee from his employees towards welfare fund contributions such as Provident Fund, Superannuation Fund etc. m. any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. n. any sum referred to in clause (viia) or clause (viib) of Section 56(2). o. any sum of money referred to in clause (ix) of sub-section (2) of section 56. Section 2(56)(2), as inserted by the Finance Act 2014, relates to advance money forfeited when negotiations do not result in transfer of capital assets. p. assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the DIRECT TAXATION

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subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to Section 43(1) (Inserted by the Finance Act 2015,w.e.f. AY2016-17). It may be noted that the above mentioned definition merely describes certain receipts as being income. This does not define the term income itself. Judicial pronouncements, however, have held that the term income is of widest connotation. Therefore, any other receipts that fall within the natural meaning of the term may also be included for this purpose. Some general considerations regarding the concept of income: The following points are worth noting:  Regular and definite source: Income generally denotes monetary return coming in from a source which is regular or expected to be regular. However, regularity and definite source are not the defining characteristics of income. Even a casual and non-recurring receipt like income from lottery may be income  Form of income: Income may be received in cash as well as in kind  Legality of income: Income, even if it is illegal, is taxable under the Income-tax Act  Lump sum receipt: Lump sums received may also be treated as income.  Outside source: Income should be received from outside. A person cannot make a profit or income by dealing with himself.  Nature at the time of receipt: If an amount is not income at the time of receipt, it cannot be treated as income subsequently due to changed circumstances.  Revenue receipt and capital receipt: See unit III.  Dispute as regards title to income: Where title to income is in dispute, the recipient of the income shall be charged to tax although he may have to return the income to the contending party  Personal gifts: Gifts which are purely of a personal nature are not income.  Pin money: Money received by a wife from her husband to meet her personal expenses is not income. Assessing Officer [Section 2(7A)]: Assessing Officer means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under Section 120(1) or 120(2) or any other provision of this Act, and the Additional Commissioner or Additional Joint Director or Joint Commissioner or Joint Director who is directed under Section 120(4)(b) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act. Gross total income [Section 80B(5)] : The total income of an assessee before making any deduction under Sections 80C to 80U is called Gross Total Income. In other words, it is the aggregate of income under the five heads of income mentioned under Section 14 of the Act. Total income [Section 2(45)]: Total income is the back-bone of the Income-tax Act, 1961. It is this income on which an assessee pays tax at the rates prescribed by the Finance Act. Under the Act, it is the gross total income as reduced by permissible deductions under Sections 80C to 80U. 2.2

Heads of income [Section 14]

According to Section 14 of the Income-tax Act, 1961, for the purpose of computation of total income, all income of an assessee shall be classified under the following five heads: (a) Income under the head ―Salaries‖. (b) Income from house property. DIRECT TAXATION

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(c) Profits and gains of business or profession. (d) Capital gains. (e) Income from other sources. Important considerations:  Under the Income-tax Act, 1961, the aforesaid heads of income are exhaustive. There cannot be any other heads.  Section 14 of the Income-tax Act merely classifies income of an assessee under the aforesaid heads. But Sections 15 to 59 of the Act lay down the procedure for computation of income under these heads as follows: (a) Salaries: Sections 15 to 17 (b) Income from house property: Sections 22 to 27. (c) Profits and gains of business or profession: Sections 28 to 44. (d) Capital gains: Sections 45 to 55, and (e) Income from other sources: Sections 56 to 59.  Since the Income-tax Act lays down a specific head for specific income, it must be maintained. For example, rental income from house property held as trading assets cannot be brought under the head profits and gains of business or profession; it must be brought under the head income from house property.

2.3 Concept of Agricultural Income and Tax issues in respect of Agricultural Income

While Section 2(1A) defines agricultural income, Section 10(1) provides that agricultural income is exempt from tax. Agricultural income is exempt from income-tax because under the Constitution, Parliament has no power to impose tax on agricultural income. By virtue of the provisions contained in entry # 46 of List II (State List) of the Seventh Schedule to the Constitution, only the State Legislature is entitled to impose tax on agriculture. However, in terms of the special provisions made by the Finance Act 1973, agricultural income is to be aggregated with the non-agricultural incomes. This aggregation is only for the purpose of determining the rate of tax that would apply to nonagricultural income. Definition of agricultural income [Section 2(1A)]: The definition of agricultural income given under the Act is broad enough. Under Section 2(1A), the following are treated as agricultural income: (A)Agricultural rent or revenue [Section 2(1A) (a)]: Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Under clause (a) of Section 2(1A), in order to be called agricultural income, the following conditions should be satisfied: (a) The rent or revenue should be derived from land: The following are held to be agricultural income:  Compensation for acquisition of land which is used by the assessee for carrying on agricultural operations has been held to be agricultural income [CIT vs. All India Tea & Trading Co. Ltd.219 ITR 544 (SC).].  Compensation from the insurance company for loss to the assessee‘s tea garden by hail storm would be assessable as agricultural income [CIT vs. B. Gupta (Tea) (P.) Ltd. [1969] 74 ITR 337 (Cal.)]. DIRECT TAXATION

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 

Income from lease of estate is agricultural income [CIT vs. Haroocharai Tea Co. (1978) 111 ITR 495 (Gauhati)]. Where salary was paid to a partner of a firm which grew and sold tea, the salary to the extent of 60 per cent was treated as agricultural income and the remaining 40 per cent alone was taxable in the partner‘s hands [CIT vs. R.M. Chidambaram Pillai (1977) 106 ITR 292 (SC)].

The following are held to be on-agricultural income:  Interest on arrears of rent payable in respect of land used for agricultural purposes is not agricultural income [CIT vs. Raja Bahadur Kamakhya Narayan Singh (1948) 16 ITR 325 (PC)].  Dividend received from company having only agricultural income is not ‗revenue derived from land‘[Mrs. Bacha F. Guzdarvs. CIT (1955) 27 ITR 1 (SC)].  Annuity received in exchange of agricultural lands is not ‗rent or revenue derived from land‘ [Maharajkumar Gopal Saran Narain Singh vs. CIT (1935) 3 ITR 237 (PC).].  Income from letting of garden for film shooting is not agricultural income [B. NagiReddi vs. CIT (2002) 258 ITR 719].  Replanting subsidy received from Rubber Board is not agricultural income [CIT vs. Malayalam Plantations (India) Ltd. (1993) 204 ITR 735 (Ker.)]. (b) The land should be situated in India: (c) The land should be used for any agricultural purpose: (B) Income from agricultural produce and from marketing process [Section 2(1A) (b)]: Agricultural income may also be resulting in any income derived from land situated in India by: (a) agriculture; or (b) the performance of any process employed by a cultivator or the receiver of rent-in-kind to render the produce raised by him fit to be taken to market; or (c) the sale of the produce raised or received by a cultivator or the receiver of rent-in-kind in respect of which no process [other than the one mentioned in (b) above] has been performed. (C) Income from farm buildings [Section 2(1A)(c)]: Any income from farm buildings which satisfies the following conditions shall be agricultural income: (a) the building is on or in the immediate vicinity of the agricultural land ; (b) it is owned or occupied by the receiver of rent or revenue of any such land or occupied by the cultivator or the receiver of rent-in-kind of any and with respect to which, or the produce of which, any process mentioned in para 2.2 above is carried on ; (c) the receiver of rent or revenue, or the cultivator, or the receiver of rent-in-kind should, by reason of his connection with land, require it as a dwelling house or as a store house or other out-building. In addition to the above three conditions, any one of the following conditions should also be satisfied: (a) the land should either be assessed to land revenue in India or subject to a local rate assessed and collected by the officers of the Government as such, or (b) where the land is not so assessed to land revenue in India or subjected to a local rate, it is not situated: (A) within the jurisdiction of a municipality, municipal corporation or cantonment board having a population of not less than ten thousand or (B) in any area within such distance, to be measured aerially, which is not: (i) more than 2 km from the local limits of a municipality or cantonment board as aforesaid, which has a population of more than 10,000 but not exceeding 1 lakh ; (ii) more than 6 km from the local limits of a municipality or cantonment board as aforesaid, which has a population of more than 1lakh but not exceeding 10 lakh; DIRECT TAXATION

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(iii) more than 8 km from the local limits of a municipality or cantonment board as aforesaid, which has a population exceeding 10 lakhs. With effect from the assessment year 2001-2002, Explanation 2 to Section 2(1A) has made it clear that, if the building or land referred to in para 2.3 above, is used for any purpose other than agriculture (e.g., letting out for residential or business purposes), the income shall not be agricultural income. Instances of agricultural income: The following are some examples of incomes which have been held to be agricultural income:  Income from use of land for grazing of cattle required for agricultural pursuit.[CIT vs. Rai Shamsherjung Bahadur (1953) 24 1TR (All)].  Profit on sale of crops after harvest, made by cultivator or receiver of rent-in-kind.  Compensation received from insurance company for damage caused to the crops by hailstorm or flood. [CIT vs. B. Gupta (Tea) P. Ltd. (1969) 74 1TR 337].  Salary, interest on capital, share of profits, etc., received by a partner of a firm having agricultural income. [CIT vs. R.M. Chidambaram Pillai (1977) 106 1TR 292 (SC)].  Income from running a dairy which is purely incidental to agriculture.[CIT vs. Kokine Dairy Rangoon (1938) 6 ITR 502],  Income from growing flowers and creepers.  Income from saplings and seedlings grown in nursery [Explanation 3 to Section 2(1 A) ] Instances of non-agricultural income: The following are some examples of incomes which have been held to be non-agricultural income:  Income from sale of trees, flowers and fruits growing spontaneously in forests. [Rani Tara Kumari Devi vs. CIT (1946) 14 ITR 787].  Profits arising from purchase and sale of standing crops. [CIT vs. Maddi 20 ITR 151].  Remuneration received by a manager as a percentage of profit from a firm having agricultural income. [E.C. Danby vs. CIT [1944] 12 ITR 351 (Pat.)].  Dividends paid by a company from its agricultural incomes. [Bacha F. Guzdar vs. CIT (1955) 27 ITR 1 (S.C.)].  Income from fisheries. [Raja DurgaNarain vs. CIT (1947) 15 ITR 235].  Royalty income from mines. [Shiblal vs. CIT 2 ITC 425].  Poultry farming. [State of Orissa vs. Ram Chandra Choudhury [1962] 46 ITR 246 (Ori)].  Annuity received for transfer of agricultural land.[Gopal vs. CIT 3 ITR 237 (PC)].  Interest on arrears of rent payable in respect of agricultural land. [CIT vs. Raja Bahadur Kamakhya Narayan Singh [1948] 16 ITR 325 (PC)].  Interest received by a money lender in the form of crops. [Cassim vs. CIT 6 ITC 41] Integration of agricultural income with non-agricultural income: Although agricultural income is exempt u/s 10(1), Finance Act, 1973 provided that in the case of individuals, Hindu undivided families, or other associations of persons or bodies of individuals and artificial juridical persons, the net agricultural income would be taken into account for determining the rate of income-tax to be applied to the total income. The provision of such partial integration of agricultural income with non-agricultural income will be applicable if: (a) the net agricultural income of the assessee exceeds ` 5,000 ; and (b) the non-agricultural income of the assessee exceeds ` 2,50,000 (` 3,00,000 for senior citizens below the age of 80 and ` 5,00,000 for senior citizens of the age of 80 or more). 

Computation of tax :

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If both the conditions specified above are fulfilled, the agricultural income shall be integrated with nonagricultural income for the purpose of charging income-tax in respect of the total income as under: Step I: The total income and the net agricultural income shall be aggregated and the amount of income tax shall be determined in respect of the aggregate income at the rates specified in para 11.1 of Unit I, Chapter 1 Step II: The net agricultural income shall be increased by a sum of ` 2,50,000 (` 3,00,000 for senior citizens below the age of 80 and ` 5,00,000 for senior citizens of the age of 80 or more), and the amount of income-tax shall be determined in respect of the net agricultural income as so increased at the rates specified in para 11.1 of Unit I, Chapter 1 Step III: The amount of income-tax determined in accordance with Step I shall be reduced by the amount of income-tax determined in accordance with Step II and the sum so arrived at shall be the income-tax in respect of the total income (i.e., non-agricultural income). Step IV: The amount of tax as in Step III is to be increased by surcharge or decreased by tax rebate as applicable under Section 87A Step V: The amount as in Step IV is to be increased by Education cess@2% and Secondary and higher Education Cess @ 1% to arrive at the amount of tax payable. Example 1: The gross total income of a resident individual, aged about 45, for the financial year 20162017 is ` 5,00,000. Compute the amount of tax payable during the assessment year 2017-2018 he has also agricultural income of: ` 5,000; (b) ` 1,50,000. Computation of tax payable for the assessment year 2017-2018 Case (a) ` Gross total income 5,00,000 Less: Deduction u/s 80C-80U Nil Total income 5,00,000 Computation of tax liability: (i) Tax liability on ` 5,00,000/6,50,000 (Total income + Agricultural 25,000 income) (ii) Tax on ` 2,50,000/4,00,000 (Agricultural income + exemption limit) Nil (iii) Tax attributable to non-agricultural income (i- ii) 25,000 Less: Tax Rebate u/s 87A 5,000 Tax after rebate 20,000 Add: Education cess + SHE (2 +1%) 600 Tax payable 20,600

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Case (a) ` 5,00,000 Nil 5,00,000 55,000 15,000 40,000 5,000 35,000 1,050 36,050

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Multiple Choice Questions: 1.

The term Assessee has been defined in the section: (A) Section 2(5) of Income Tax Act, 1961 (B) Section 2(6) of Income Tax Act, 1961 (C) Section 2(7) of Income Tax Act, 1961 (D) Section 2(8) of Income Tax Act, 1961 Ans: (C) Section 2(7) of Income Tax Act, 1961 2.

The term person has been defined in: (A) Section 2(31) of Income tax Act, 1961 (B) Section 2(32) of Income Tax Act, 1961 (C) Section 2(33) of Income Tax Act, 1961 (D) Section 2(34) of Income Tax Act, 1961 Ans: (A) Section 2(31) of Income tax Act, 1961 3.

The number of identities included in the definition of persons is: (A) Five (B) Six (C) Seven (D) Eight Ans: (C) Seven 4.

The term income has been defined in: (A) 2(22) of Income Tax Act, 1961 (B) 2(23) of Income Tax Act, 1961 (C) 2(24) of Income Tax Act, 1961 (D) 2(25) of Income Tax Act, 1961 Ans: (C) 2(24) of Income Tax Act, 1961 5.

The number of heads of Income under Income Tax Act, 1961 are: (A) Five (B) Six (C) Seven (D) None of these. Ans: (A) Five. 6.

Agricultural Income will be integrated with non- agricultural Income if: (A) Agricultural income exceeds ` 5,000. (B) Non- agricultural income exceeds maximum non-taxable income. (C) Agricultural income exceeds ` 5,000 as well as non- agricultural income exceeds maximum amount which is not taxable. (D) None of these. Ans: (C) Agricultural income exceeds ` 5,000 as well as non- agricultural income exceeds maximum amount which is not taxable. 7.

Dividend received by a shareholder from a company whose entire income is agricultural Income is taxable as: (A) Agricultural income (B) Partly agricultural income (C) Business income (D) Income from other sources. Ans: (D) Income from other sources.

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STUDY NOTE : 3 CAPITAL AND REVENUE: RECEIPTS AND EXPENDITURES THIS STUDY NOTE INCLUDES: Distinction between capital and revenue receipts 3.1 3.2 Distinction between capital expenditures and revenue expenditures

3.1 DISTINCTION BETWEEN CAPITAL AND REVENUE RECEIPTS Since the subject matter of income-tax is ―income‖, as a matter of general rule and except for those which are specifically exempt under the Income-tax Act, all revenue receipts are taxable. A capital receipt is taxable, subject to the other provisions of the Act, if it falls within the purview of Section 45. Although the distinction between capital and income is of fundamental importance in accounting, in the absence of an exhaustive definition of income under the Income-tax Act, such distinction is not easily made. However, based on a number of judicial pronouncements, the following general principles may be relied upon while making a distinction between capital and revenue receipts: (a) Disintegration of single sum into capital and income: Where a composite sum is received, it should be apportioned and the part which is revenue in nature should be charged to tax. (b) Lump sum and periodic sum: An income need not be recurring one. Similarly, a capital receipt need not be a single receipt. In a number of cases it has been held that a single or occasional receipt may be an item of income and an annual receipt recurring over a number of years may be capital receipt. (c) Magnitude of receipt: The magnitude of receipt is not material for deciding its nature. (d) Accounting treatments: The name given to the transaction by the parties involved or its treatment in the books of account may not alter its character as capital or revenue. For example, if a receipt is a trading receipt, its treatment in the books of account otherwise will not prevent the assessing authority from treating it as trading receipt. (e) Income from wasting assets: Profits from capital which is consumed and exhausted in the process of realization, e.g. royalties from mines and quarries, is taxable as income regardless of the consumption of capital involved in the process. (f) Receipt from fixed capital: A receipt is not taxable when it is referable as fixed capital. However, what is capital asset in the hands of one person may be trading asset in the hands of another person and accordingly, the incidence of tax may vary according to the nature of the trade in connection with which it arises. (g) Capital sale and business sale: While a transaction entered into in the ordinary course of business is revenue receipt, profits accruing from the sale of any assets are capital receipt. (h) Transactions in the ordinary course of business: A transaction carried out in the ordinary course of business is normally in the nature of trade. However, there can be a situation when transaction in the ordinary course of business may be regarded as capital in nature. For example, when a moneylender takes over a land from his debtor in satisfaction of a debt and subsequently sells it, it may be regarded as sale of capital investment. However, whether a transaction is in the course of business or an isolated transaction, the onus is on the Income-tax Department to prove it. (i) Shares and securities: The profit or loss on sale of shares held by an ordinary investor would be capital in nature, but when such shares are held as part of the business of the assessee, such profits and losses would be revenue in nature. Instances of transactions which are capital in nature but specifically taxable: 1. Capital gains arising from sale of capital assets defined in section 2(14). [Section 45] 2. Compensation for termination of service or modification in the terms of service [Section 17(3)] 3. Compensation or other payments due to or received by the persons specified u/s 28(ii)/ u/s 28(va). DIRECT TAXATION

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3.2 DISTINCTION BETWEEN CAPITAL EXPENDITURES AND REVENUE EXPENDITURES As with capital receipts and revenue receipts, the distinction between capital expenditure and revenue expenditure is of utmost importance, because the Income-tax Act normally allows revenue expenditure, while capital expenditures are by and large disallowed. The general principles for distinction between capital expenditure and revenue expenditure are more or less the same as those discussed above. For example, lump sum and periodic payment or the magnitude of payment or treatment in the books of account is not the material consideration for distinguishing between capital and revenue expenditures. Similarly, in distinguishing between capital and revenue expenditures, it does not matter whether the amount is paid voluntarily or involuntarily. While we discuss this issue elaborately in Chapter 3 (under the head Profits and gains of business or profession), a few distinguishing tests for capital and revenue expenditures are discussed below: (a) Acquiring asset or advantage of enduring nature: When a expenditure is made for the purpose of bringing into existence an asset or an advantages of enduring nature, such expenditure is to be regarded as capital expenditure. (b) Capital assets belonging to third parties: Even though a expenditure results in the creation of a capital asset, if the capital asset belongs to a third party, such expenses will be treated as revenue expenditure. (c) Expenditure which facilitates assessee‘s business: If a expenditure facilitates the assessee‘s trading operations or helps the assessee to carry out business more efficiently, then irrespective of the consideration that the benefit may be of enduring nature, it will be treated as revenue expenditure. (d) Expenditure related to fixed capital and circulating capital: Any expenditure in relation to fixed capital or capital asset is capital expenditure. Expenditure related to stock-in-trade or circulating capital is revenue in character. (e) Initial expenditure: Expenditure connected with the basic framework of business, or incurred in connection with the extension of business or for substantial replacement of equipment are capital in nature. (f) Expenditure for goodwill, route permits, etc.: Expenditure incurred for acquiring goodwill is capital expenditure. Similarly, amount paid by a transport operator for route permit is also capital expenditure. (g) Payment for know-how, patents and trademarks: On several occasions, the Supreme Court has held that payments made for acquisition of know-how, trademarks and patents to be revenue expenditures. (h) Buying off competition: Any payment made to a competitor so as to prevent them to compete, is a benefit of enduring nature. It is, therefore, capital expenditure. (i) Legal expenses for maintenance of asset: Expenditure incurred by the assessee to maintain the asset in good conditions or legal expenses incurred to defend assessee‘s title to the assets is held to be revenue expenditure. Example 1: B. Ltd., a cement manufacturing company, entered into an agreement with a supplier for purchase of additional cement plant. One of the conditions in the agreement was that if the supplier failed to supply the machinery within the stipulated time, the company would be compensated at 5% of the price of the respective portion of the machinery without proof of actual loss. The company received ` 8.50 lakhs from the supplier by way of liquidated damages on account of his failure to supply the machinery within the stipulated time. What is the nature of liquidated damages received by B Ltd. from the supplier of plant for failure to supply machinery to the company within the stipulated time – a capital receipt or a revenue receipt? [CMA-Inter Dec. 2011] Answer: In terms of the Supreme Court decision in CIT v. Saurashtra Cement Ltd. [325 ITR 422 (SC)], liquidated damages received from a supplier of capital assists in the course of acquisition of a capital asset is a capital receipt. DIRECT TAXATION

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STUDY NOTE : 4 BASIS OF CHARGE AND SCOPE OF TOTAL INCOME THIS STUDY NOTE INCLUDES: Computation of Total Income 4.1 4.2 Rates of Tax 4.3 Special Rates All though Section 14 of the Income-tax Act classifies income under five distinct heads, tax is not imposed on each of the heads separately. Under Section 4, which is the charging section and the backbone of the Act, the charge is on a single tax base called ―total income‖. Section 4 thus provides that: (a) the charge of tax shall arise in respect of the total income of every person defined in Section 2(31); (b) the subject matter of tax is the total income of the previous year; (c) the tax is to be charged at the rate or rates in force; (d) the provisions of section 4 are subject to the other provisions of the Act. 4.1

COMPUTATION OF TOTAL INCOME

Sections 15 to 59 of the Act lay down the procedure of computation of income under all the five heads mentioned in section 14. The sum total of income under all the five heads is known as Gross Total Income. Total income is obtained after subtracting from the GTI the permissible deductions under Chapter VI-A of the Act (Sections 80C -80U). Computation of total income 1. Income under the head "Salaries": Various components of salary defined u/s 17(1)  Pay, wages, pension, annuity, etc.  Taxable allowances  Perquisites  Profits in lieu of salary Gross salary Less : Deductions u/s 16 :  Deduction for entertainment allowance  Deduction for professional tax Taxable salary 2. Income from house property: Gross annual value: Less: Municipal tax Net annual value Less: Deduction u/s 24  Standard deduction u/s 24 (a)  Interest on borrowed capital u/s 24 (b) Income from house property 3. Profits and gains from business or profession: Net profit as per Profit and Loss Account Add: Inadmissible expenses Less: Income credited to the Profit and Loss Account but not taxable under the head or exempt from tax Income from business or profession 4. Capital gains: • Short-term capital gains: Consideration received on transfer of short-term capital asset Less: Expenses incidental to transfer Less : Cost of acquisition/improvement of capital asset DIRECT TAXATION

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Less: Exemptions u/ss 54B, 54D, 54G, 54GA (A) • Long-term capital gains: Consideration received on transfer of long-term capital asset Less: Expenses incidental to transfer Less: Indexed cost of acquisition/improvement of capital asset Less: Exemption u/ss 54,54B, 54D, 54EC, 54F, 54C, 54CA and 54GB (B) Taxable capital gains [A + B] 5. Income from other sources: Gross income Less: Deductions for incidental expenses u/s 57 Income from other sources Gross total income Less : Deduction u/ss 80C - 80U Total income or taxable income Computation of tax liability: Tax on total income [Total income x Rate of tax] Less: Rebate u/s 87A Total tax after rebate Add: Surcharge Tax and surcharge payable Add: Education Cess on income-tax @ 2% of tax and surcharge Add: Secondary and higher education Cess @ 1 % of tax and surcharge Less: Tax relief Tax payable Income of the previous year: The general rule is that only income of the previous year shall be liable to tax during the assessment year. However, there are five exceptions to this general rule which are discussed in para 4, Unit II.

4.2 RATES OF TAX The charge of tax under Section 4 is at the rate or rates in force for the time being. The income tax is charged at the rate or rates prescribed by the Finance Act for that assessment year. The rates mentioned in the Finance Act are the normal rates of tax. The rates of tax are mentioned in the First Schedule of the Finance Act. For example, Finance Act 2016 contains the normal rates of tax in three parts. Part I of the First Schedule contains the normal rates of tax as applicable to the assessment year 2016-17. Part II of the First Schedule contains the normal rates of tax to be deducted at source on certain incomes for the financial year 2016-2017. Part III contains the rates of tax for deducting income tax from income under the head salaries and computing advance tax. The rates mentioned in part III will be same as the rate to be mentioned in Part I of the First Schedule of the Finance Act 2017 and will be applicable for the assessment year 2017-18. Part IV contains the rules for computation of net agricultural income. It is to be noted that, if on the 1 st April every year the new Finance Bill is not placed in the statute book, the provision in force in the preceding year or the provisions proposed in the new Finance Bill, whichever is beneficial to the assessee, shall be applicable until the new provisions become effective (Section 294). The following general rules should be kept in mind: (i) The law to be applied is that is in force in the Assessment Year. (ii) Although tax is paid in respect of the income of the previous year, the tax rate to be applied is that is in force in the assessment year. DIRECT TAXATION

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(iii) The Income-tax Act as it stands amended on 1 st April of a financial year must apply to the assessment for that year. (iv) Any amendment that comes into force after 1 st April of the financial year, would not apply to the assessment for that year, even if the assessment is made after the amendments come into force. 4.3

SPECIAL RATES

Special rates are the rates which are mentioned in the Income-tax Act itself. Chapter XII (Sections 110115BBE) of the Income-tax Act contains the special rates of tax to be applicable in certain cases. For example, u/s 111A, short-term capital gains from securities is to be charged to tax @15%; long-term capital gains are to be charged u/s 112 @20% and lottery income is to be charged u/s 115BB @ 30%.

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STUDY NOTE : 5 RESIDENTIAL STATUS AND INCIDENCE OF TAX THIS STUDY NOTE INCLUDES: 5.1 Introduction 5.2 Residential status of an individual [Section 6(1) and 6(6)(a)] 5.3 Residential status of a Hindu undivided family [Sections 6(2) and 6(6)(b)] 5.4 Residential status of firm and association of persons [Section 6(2)] 5.5 Residential status of a company [Section 6(3)] 5.6 Residential status of every other person [Section 6(4)] 5.7 The Scope of Total Income or Incidence of tax of different types of assessees [Section 5] 5.8 Some important considerations 5.9 Residential status and incidence of tax at a glance 5.1

INTRODUCTION

Section 4 of the Income-tax Act imposes a charge upon the total income of all assessable entities described in Section 2(31), while section 5 defines the scope of such total income based on the residential status of the assessee described in section 6. Different types of residential status: Based on their presence in India, Section 6 contemplates three different types of assessees as under:

Residential Status

Resident

Resident and ordinarily resident

Non-resident

Resident but not ordinarily resident

General considerations: The residential status of an assessee is subject to the following considerations:  Residential status for each previous year: Residential status of an assessee shall be determined for each of the previous years. Accordingly, an assessee may be resident in India in one previous year and non-resident in another previous year.  Same residential status for all sources of income:As provided in Section 6(5), if a person is resident in India in a previous year in respect of one source of income, he shall be deemed to be resident in India in that previous year in respect of his all other sources of income.  Citizenship and residential status and: Citizenship determines a person‘s political domicile. Residential status is necessary for the purpose of determination of the scope of total income only.  Different taxable entities for the purpose of residential status: Under section 6, residential status is determined for the following types of entities: (a) an individual, (b) a Hindu undivided family, (c) a firm or other association of persons, (d) a company, and (e) every other person. Determination of Residential Status of different types of assessees: The rules for determination of residential status of different types of assessees are as follows: 5.2

RESIDENTIAL STATUS OF AN INDIVIDUAL [SECTION 6(1) AND 6(6)(a)]

For any assessment year an individual may enjoy any of the following residential status: (a) Resident and ordinarily resident in India DIRECT TAXATION

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(b) Resident but not ordinarily resident in India (c) Non-resident in India. (a) Resident and ordinarily resident: An individual is said to be resident in India when he fulfils any one of the basic conditions mentioned under section 6(1). However, in order to be resident and ordinarily resident, one must also fulfill both the additional conditions mentioned under section 6(6)(a). 

Basic conditions [Section 6(1)]:An individual is said to be a resident in India in any previous year, if he: (a) is in India in that year for a period or periods amounting in all to 182 days or more [Section 6(1)(a)], or (b) is in India for a period of 365 days or more during the four years preceding the previous year and is also present in India for a period of 60 days or more during the relevant previous year.[Section 6(1)(c)].

Exceptions: In the case of Indian citizens, the aforesaid rules are subject to the following exceptions: (i)

an Indian citizen who leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India, the period of 60 days mentioned in (b) above shall be taken to be 182 days [Explanation (a) to Section 6(1)]; and (ii) an Indian citizen or a person of Indian origin, who being outside India, comes on a visit to India in any previous year, the period of 60 days mentioned in (b) above shall be taken to be 182 days[Explanation (b) to Section 6(1)]. Simply stated, in the circumstances mentioned in (i) and (ii) above, an Indian citizen shall not be treated as resident in India unless he or she stays in India for a minimum period of 182 days during the previous year. Special rule for the members of the crews of an Indian ship: With effect from the assessment year 2016-17, the Finance Act 2015 has inserted Explanation 2 to Section 6(1) to provide that in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed. Accordingly, Income-tax Rule 126 has been inserted [vide the Income-tax (Twelfth Amendment) Rules, 2015, w.e.f. 1-4-2015]to provide that the period or periods of stay in India shall, in respect of an eligible voyage, not include the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage. In simple words, in the Continuous Discharge Certificate the date of joining is recorded as 1st January 2016 and the date of ending the voyage is recorded as 31st January 2016, then the entire period of 31 days shall be excluded from his stay in India. (a) Meaning of Continuous Discharge Certificate: Continuous Discharge Certificate" shall have the meaning assigned to it in the Merchant Shipping (Continuous Discharge Certificate-cumSeafarer's Identity Document) Rules, 2001 made under the Merchant Shipping Act, 1958. (b) Meaning of eligible voyage: "Eligible voyage‖ shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where— (i) for the voyage having originated from any port in India, has as its destination any port outside India; and (ii) for the voyage having originated from any port outside India, has as its destination any port in India.] 

Additional Conditions [Section 6(6)(a)]: The additional conditions mentioned under section 6(6)(a) are:

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(a) the assessee has been a resident in India in at least 2 out of 10 previous years preceding the relevant previous year; and (b) he or she has been in India for a period or periods amounting in all to 730 days or more during the 7 years preceding the relevant previous year. (b) Resident but not ordinarily resident: When an individual fulfils any one of the basic conditions but does not satisfy both the additional conditions, he is said to be a resident but not ordinarily resident. (c) Resident but not ordinarily resident: An individual will be treated as non-resident if he fails to satisfy any one of the basic conditions. Fulfillment of additional conditions is not necessary in this case. Points to note: (a) The assessee need not stay in India at a stretch. It is also not necessary that the stay be in the same place. (b) In computing the assessee‘s stay in India, both the days of entry in, and departure out of, India should be considered. (c) According to the Explanation to Section 115C(e), a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, were born in undivided India. 5.3

RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILY [SECTIONS 6(2) and 6(6)(b)]

The residential status for a Hindu undivided family, are as under: (1) a resident and ordinarily resident, (2) a resident but not ordinarily resident, and (3) non-resident. (1) Resident and ordinarily resident: According to Section 6(2), a Hindu undivided family shall be called a resident in India in any previous year if the control and management of its affairs is wholly or partly situated in India. A Hindu undivided family shall be called a resident and ordinarily resident in India if the manager or karta of the family fulfils the following two additional conditions mentioned under Section 6(6)(b) : (a) the manager or karta has been resident in India at least in 2 out of 10 previous years preceding the relevant previous year, and (b) the manager or karta has been in India for a period of 730 days or more during the 7 previous years preceding the relevant previous year. (2) Resident but not ordinarily resident: A Hindu undivided family is said to be resident but not ordinarily resident in India if the control and management of its affairs during the previous year is wholly or partly situated in India, but the manager or karta of the family does not satisfy both the additional conditions mentioned under Section 6(6)(b). (3) Non-resident: According to Section 6(2), a Hindu undivided family is said to be non-resident in India in any previous year if the control and management of its affairs is situated wholly outside India. 5.4

RESIDENTIAL STATUS OF FIRM AND ASSOCIATION OF PERSONS [SECTION 6(2)]

A firm or an association of person can be either a resident or non-resident. There cannot be residential status like ―ordinary‖ or ―not ordinarily resident‖. (a) Resident: According to Section 6(2), a firm or an association of persons is said to be resident in India if during the previous year the control and management of affairs of the firm or association of persons is wholly or partly situated in India. (b) Non-resident: According to Section 6(2), a firm or an association of persons is said to be nonresident in India if during the previous year the control and management of their affairs are situated wholly outside India. DIRECT TAXATION

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5.5

RESIDENTIAL STATUS OF A COMPANY [SECTION 6(3)]

A company is either a resident or a non-resident. Companies cannot be ―ordinarily‖ or ―not ordinarily‖ residents. (a) Resident: According to Section 6(3), a company is said to be resident in India in any previous year if: (i) it is an Indian company; or, (ii) its place of effective management, in that previous year, is in India. ‗Place of effective management‘ here means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made [Explanation to Section 6(3), (b) Non-resident: An Indian company shall always be a resident in India. Only a foreign company shall be treated as a non-resident in India, if during the previous year the control and management of its affairs is either wholly or partly situated outside India. 5.6

RESIDENTIAL STATUS OF EVERY OTHER PERSON [SECTION 6(4)]

Like a company, firm or association of persons, this type of assessee cannot be ―ordinarily resident‖ or ―not ordinarily resident‖. They are either resident or non-resident. (a) Resident: According to Section 6(4), every other person is said to be resident in India if during the previous year the control and management of his affairs is wholly or partly situated in India. (b) Non-resident: According to Section 6(4), every other person is a non-resident, if during the previous year the control and management of his affairs are situated wholly outside India. 5.7

THE SCOPE OF TOTAL INCOME OR INCIDENCE OF TAX OF DIFFERENT TYPES OF ASSESSEES [SECTION 5]

Section 5 of the Income-tax Act provides the meaning of the term total income with reference to the residential status of an assessee. Accordingly, the scope of total income of different types of assessees will be as under: Scope of total income of resident and ordinarily resident assessee [Section 5(1)]: The incidence of tax or the scope of total income of any previous year of an assessee who is resident and ordinarily resident would, under Section 5(1), consist of: (a) income received or deemed to be received in India during the previous year by or on behalf of such person, or (b) income which accrues or arises or is deemed to accrue or arise to him in India during the previous year, or (c) income which accrues or arises to him outside India during the previous year. Scope of total income of resident but not ordinarily resident assessee [Section 5(1)]: The incidence of tax or the scope of total income of any previous year of an assessee who is resident but not ordinarily resident would, under proviso to Section 5(1), consist of : (a) income received or deemed to be received in India during the previous year by or on behalf of such person ; or (b) income which accrues or arises or is deemed to accrue or arise to him in India during the previous year ; or DIRECT TAXATION

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(c) income which accrues or arises to him during the previous year outside India from a business controlled in or profession set up in India. Scope of total income of non-resident assessee [Section 5(2)]: The incidence of tax or scope of total income of an assessee who is a non-resident, would, under Section5(2), consist of: (a) income which is received or is deemed to be received in India during the previous year by or on behalf of such person ; or (b) income which accrues or arises or is deemed to accrue or arise to him in India during the previous year.

5.8 SOME IMPORTANT CONSIDERATIONS Receipt v Remittance: The term ―receipt‖ of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as income, any subsequent remittance to another place does not result in ―receipt‖. Deemed receipt: It is not always essential that the income should be actually received by the assessee in India. In the following cases the Income-tax Act contemplates incomes deemed to be received in India, therefore, it needs to be included in the total income of the assessee: (a) annual accretion in the previous year to the balance at the credit of an employee participating in are cognised provident fund, to the extent provided in Rule 6 of part A of the Fourth Schedule [Section 7(i)] ; (b) the transferred balance in a recognised provident fund, to the extent provided in sub-rule 4 of rule 11 of part A of the Fourth Schedule [Section 7(ii)] ; (c) the contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in Section 80CCD [Section 7(iii)] ; (d) deemed profits under Section 44 [Section 41 (4)] ; (e) income from undisclosed sources like cash credits/unexplained investments/unexplained money/amount of investment not fully disclosed/unexplained expenditure/amount borrowed in hundi [Section 68, 69, 69A, 69B, 69C and 69D]. Income accruing or arising: The words ―accruing‖ and ―arising‖ are almost undistinguishable terms and as such connote the right to receive income. For example, interest on Government Securities is ordinarily payable on specified dates, say on 1st January and 1st July. In all these cases the interest will be said to accrue from 1st July to 31stDecember, though it falls due for payment only on 1 stJanuary. Similarly, salary which is payable on the last day of the month would be said to accrue from the beginning of the month, although it becomes due on the last date when it is to be paid. The term ―accrue‖ thus refers to the right to receive the income while ―due‖ refers to the right to enforce payment of the same. However, it should be noted that income can be said to accrue or arise only in case where the accrual of income is certain and the amount in question is easily determinable. If there is uncertainty in regard to the quantum of income or the assessee‘s right to claim it, income cannot be said to accrue to the assessee and consequently the liability to pay tax on accrual basis does not arise. Income deemed to accrue or arise in India [Section 9]: Under Section 9, certain incomes are deemed to accrue or arise in India, although within its natural meaning the income does not accrue or arise in India. The categories of income which are deemed to accrue or arise in India are as under:

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Income from business connection, property, etc. [Section 9(1)(i)] :In the following cases, any income accruing or arising to an assessee whether directly or indirectly, shall be deemed to arise or accrue in India : (i) income from any business connection in India ; or (ii) income from any property situated in India ; or (iii) income from any asset or source of income in India ; or (iv) income from transfer of any capital asset situated in India. Under the Explanations that follow Section 9(1)(i), in the following cases the income shall not be deemed to arise or accrue in India : (i) In the case of a business where all operations are not carried out in India, only such part of the income as is reasonably attributed to the operations in India shall be deemed to arise or accrue in India [Explanation 1(a)]. (ii) In the case of a non-resident, income from operations confined to the purchase of goods for the purpose of export shall not be deemed to arise or accrue in India [Explanation 1(b)]. (iii) In the case of a non-resident, who is engaged in the business of running a news agency or publishing newspapers or journals, income from activities which are confined to the collection of news and views in India for transmission out of India shall not be deemed to arise or accrue in India [Explanation 1(c)]. (iv) Income arising to a non-resident (an individual who is not a citizen of India, or a firm where none of the partners are citizen of India or resident in India, or a company where none of the shareholders are citizen of India or resident in India), income from operations as is confined to the shooting of cinematograph film in India shall not be deemed to arise or accrue in India [Explanation 1(d)]. (v) in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to the display of uncut and unassorted diamond in any special zone notified by the Central Government in the Official Gazette in this behalf. [Explanation 1(e), inserted by the Finance Act 2016, w.e.f. the assessment year 2016-17]. (vi) With retrospective effect from the assessment year 1962-63, Finance Act 2012 has amended Section 9(1) (i) to widen the meaning and scope of business connection and property by inserting two new Explanations to clarify that the expression ―through‖ as used in that section shall mean and include ―by means of‖, ―in consequence of‖ or ―by reason of‖ [Explanation 3] and that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India [Explanation 4]. (vii) Notwithstanding anything contained in Section 9(1), in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund. [Section9A, Inserted by the Finance Act2015]. Income from salaries [Section 9(1)(ii)] :Income under the head ―Salaries‖, which is earned in India shall be deemed to arise or accrue in India. For the purpose of this section salaries payable for services rendered in India and for the leave period, which is preceded and succeeded by services rendered in India, shall also be treated as income earned in India. Salaries payable by the Government [Section 9(1)(iii)] : Salaries payable by the Government of India to an Indian citizen for services rendered outside India shall be deemed to arise or accrue in India. Dividends [Section 9(1)(iv)] :Dividends paid by an Indian company outside India shall be deemed to arise or accrue in India.

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Interest income [Section 9(1)(v)] :In the following cases interest income shall be treated as deemed to accrue or arise in India : (i) it is payable by the Government; or (ii) it is payable by a resident in India, except where it is payable in respect of any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by such person outside India or for the purpose of earning income from any source outside India; or (iii) it is payable by a non-resident, where the interest is payable in respect of any debt incurred or moneys borrowed and used for the purpose of a business or profession by such person in India. Royalty income [Section 9(1)(vi)] :In the following cases royalty income shall be treated as deemed to accrue or arise in India: (i) it is payable by the Government; or (ii) it is payable by a resident in India, except where it is payable in respect of any right, property or information used or services utilised for the purpose of a business or profession carried on by such person outside India or for the purpose of earning income from any source outside India ; or it is payable by a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purpose of a business or profession carried on by such person in India or for the purpose of earning income from any source in India. Fees for technical services [Section 9(1)(vii)]: In the following cases income by way of fees for technical services shall be deemed to accrue or arise in India: (i) it is payable by the Government; or (ii) it is payable by a person who is resident, except where it is payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (iii) it is payable by a person who is non-resident, except where it is payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. 5.9

RESIDENTIAL STATUS AND INCIDENCE OF TAX AT A GLANCE Income

Income received in India or deemed to be received in India — whether accrued in India or accrued outside India. Income accruing or arising in India or deemed to arise or accrue in India — whether received in India or received outside India. Income accruing or arising outside India from a business or profession set up in or controlled from India. Income accruing or arising outside India from a business controlled from outside India or a profession set up outside India. Income received outside India and subsequently remitted to India — whether taxable at the time of remittance.

Resident and Resident but Nonordinarily not ordinarily Resident resident resident Taxable Taxable Taxable Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Not taxable

Not taxable Not taxable

Not taxable

Non-taxable

Not taxable

Examples on residential status: Example No. 1: B, an engineering graduate, born and brought up in India, got employment in USA on 1st August, 2016. By what date he should leave India, in order to become a non-resident? By that, what tax advantage he will get? [CMA- Inter, June 2015 (Adapted)]

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Answer: In order to be a non-resident in India during the financial year 201-17, B has to stay in India for 181 days or less. As till 1st August 2016 he was in India for a total of 123 Days [ April = 30 days + May 31 days+ June 30 +July 31 days + August 1 day = 92 days], he can stay in India for a maximum of 58 days [ August 30 + September 28] , after which he must leave India. In other words, to be a non-resident, he has to leave India by September 28. Example No. 2: Ms. B, a non-resident, residing in New York since 1992, came back to India on 19-2-2015 for living in India permanently. Explain the residential status of Ms B for the assessment year 2017-18. [CMA- Inter, May 2015 (Adapted)] Answer: Since B came to India permanently during the financial year 2014-15, his presence in India till the previous year 2016-17 are as under: Financial year 2016-17 = 365 days 2015-16 = 365 2014-15 = 10 2013-14 = 0 days

Financial year 2012-13 = 0 days 2011-12 = 0 days 2010-11 = 0 days 2009-10 = 0 days

Financial year 2008-09 = 0 days 2007-08 = 0 days 2006-07 = 0 days

As is evident from the table above, for the current previous year 2016-17, B was present in India for 365 days or more. So, he fulfils one of the basic conditions mentioned under section 6(1). However, he fails to satisfy both the additional conditions mentioned under section 6(6)(a), i.e. resident in 2 out of the 10 previous years preceding the financial year 2016-17, and presence in India for 730 days during 7 years preceding the previous year 2016-17. For the assessment year 2017-18, B is therefore, a resident but not, ordinarily resident in India. Example No. 3: X, a foreign national, comes to India for the first time on June15,2011. During the financial years 2011-2012, 2012-2013, 2013-2014, 2014-2015, 2015-2016 and 2016-2017 he stays in India for 120 days, 115 days, 15 days, 191 days, 124 days and 80 days respectively. Determine his residential status for the assessmentyear2017-2018. Answer: During the relevant previous year 2016-17 X was present in India for 80 days, and as shown below, during the 4 years preceding the previous year 2016-17 he was present in India for 445 days. Therefore, he fulfils one of the basic conditions mentioned in section 6(1). 2012-2013 2013-2014 2014-2015 2015-2016 Total

115 days 15 days 191 days 124 days 445 days

However, a perusal of his presence in India during the 10 years preceding the previous year 2016-17 shows that he was not resident in India for 2 years. Further, he was not resident in India for 730 days or more in aggregate during the 7 years preceding the previous year 2016-17. Therefore, for the assessment year 2017-18 he is a resident but not ordinarily resident in India. Example No. 4: D an Indian citizen, left India on appointment by the Government of Kenya for the first time on September12, 2015 to join his duty. During the financial year 2016-2017 he came to India and stayed for 80 days. State the residential status of D for the assessment years 2016-2017 and 2017-2018. Answer: For the assessment years 2016-2017 and 2017-2018, the relevant previous years are the financial years 2015-2016 and 2016-2017 respectively. DIRECT TAXATION

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During these two previous years D was present in India as under:  Previous year 2015-2016: From 1st April, 2015 to 12th September 2015=165days.  Previous year 2016-2017: 80 days (as given). Since in none of the previous years he was in India for 182 days or more, he fails to satisfy the basic condition required to be fulfilled by an Indian citizen going abroad for the purposes of employment, vide Explanation (a) to Section 6(1). D is, therefore, a non-resident for both the assessment years 20162017 and 2017-2018. Example 5. Mr. David, a citizen of Spain came to India for the first time in previous year 2012-13 and stayed for 100 days in that year. During the previous years 2013-14, 2014-15, 2015-16 and 2016-17 he stayed in India for 120 days, 110 days, 80 days and 90 days respectively. What is the residential status of Mr. David for the Assessment Year 2017-18? [CMA- Inter, Dec. 2015 (Adapted)]. Answer: Mr. David was present in India for 90 days during the previous year 2016-17 and 410 days during the four years preceding the relevant previous year [ 2012-13, 2013-14, 2014-15, 2015-16: 100 + 120 + 110 +80 days]. He therefore fulfils one of the basic conditions mentioned u/s 6(1). However, being in India for the first time in 2012-13, he is unable to satisfy both the additional conditions mentioned u/s 6(6)(a). For the assessment year 2017-18, he is therefore a resident but not ordinarily resident in India. Example 6. D is the karta of a Hindu undivided family, and the control and management of the family is wholly situated in India. On 30th April, 2016 D went to Bangladesh for business purposes and did not return till 31st March, 2017. D did not go out of India any time before. What would be the residential status of the Hindu undivided family for the assessment year 2017-2018? Answer: A Hindu undivided family, as provided under section 6(2), is said to be a resident in India if the control and management of its affairs are wholly or partly situated in India. Further, according to Section 6(6)(b), a Hindu undivided family will be ordinarily resident in India if the karta is resident in India in at least 2 out of 10 previous years preceding the relevant previous year and the karta is present in India for a period of 730 days or more during 7 previous years preceding the relevant previous year. In the present case the Hindu undivided family and its karta are able to fulfill all the conditions mentioned under Sections 6(2) and 6(6)(b). Therefore, for the assessmentyear2017-2018 the Hindu undivided family is a resident and ordinarily resident in India. Example 7. X. Limited is an Indian company. However, it carries on business in USA. All the shareholders are residents of USA. The Board Meetings and Annual General Meetings are held outside India. What is the residential status of X. Limited? [CMA- Inter, Dec. 2015 (Adapted)]. Answer: With effect from the assessment year 2017-18, a company shall be resident in Indian in any previous year if: (i) It is an Indian company; or (ii) Its place of effective management for that year is in India. [Section 6(3)]. Now, in the present case, it appears that the place of effective control is outside India. However, since it fulfils one of the conditions mentioned in clause (i) the company shall be a resident in India for the assessment year 2017-18. DIRECT TAXATION

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Example 8. Y, a foreign citizen (not being the person of Indian origin), comes to India, for the first time in the last thirty years on March 20, 2016. On September 1, 2016, he leaves India for Nepal on a business trip. He comes back on February 26, 2017. Determine his residential status under the Income-tax Act, 1961 for the assessment year 2017-18. [CMA- Inter, Dec 2006 (Adapted)] Answer: During the previous year 2016-17, Y was present in India for 185 days as calculated below: April 2016 30 days July 2016 May 2016 31 days August 2016 June 2016 30 days September 2016 February 2017 March 2017 Total

31 31 01 03 31 185 days

Since Y was present in India for more than 182 days during the previous year, he is able to satisfy one of the basic conditions mentioned u/s 6(1). However, being in India for the first time in 2016, it is also not possible for him to satisfy the additional conditions mentioned u/s 6(6) (a). Therefore, Y is a resident but not ordinarily resident in India for the assessment year 2017-18. Example 9. K was working as a crew member on an India ship plying in foreign waters. During the year ended 31st March 2017, the ship did not touch the Indian coast, except for 180 days. State the residential status of K for the assessment year 2017-18. Answer: During the previous year 2016-17, K was present in India for less than 182 days. Under the Explanation 1(a) to Section 6(1), an individual, being an Indian citizen, who leaves India in any previous year as a member of the crew of an Indian ship, or for the purpose of employment outside India, shall not be treated as resident unless he has stayed in India for 182 days or more. In view of this, for the assessment year 2017-18 K will be a non-resident in India. Example10. Following is the details of income of Mr. S for the financial year 2016-17: Income from property in Sri Lanka remitted by the tenant to the assessee in India through SBI Profit from business in India Loss from business in Sri Lanka (whose control and management of business wholly remained in India) Dividend received from shares in foreign companies received outside India Interest on deposits in Indian companies

` 2,10,000 ` 1,00,000 ` 80,000 ` 60,000 ` 1,20,000

Determine the total income in terms of the Income- tax Act, 1961 in the following situations: (i) Resident and ordinarily resident of India; (ii) Resident but not ordinarily resident of India; (iii) Non-resident. [CMA- Inter, Dec. 2010 (adapted)] Answer: Computation of total income of S for the assessment year 2017-18 relating to the previous year 2016-17: Resident and Resident but NonParticulars ordinarily not ordinarily resident resident (`) resident (`) (`) Income from property in Sri Lanka remitted by the 2,10,000 2,10,000 2,10,000 tenant to the assessee in India through SBI Profit from business in India 1,00,000 1,00,000 1,00,000 Loss from business in Sri Lanka (whose control and (-) 80,000 (-) 80,000 management of business wholly remained in India) Dividend received from shares in foreign companies 60,000 DIRECT TAXATION

27

received outside India Interest on deposits in Indian companies Total

1,20,000 4,10,000

1,20,000 3,50,000

1,20,000 4,30,000

Example11. Following details are furnished by Mr. A for the year ended 31.03.2016 Profit on sale of shares in Indian company, sold in India but proceeds received in France Dividend from a Korean company received in France Rent from property in Sri Lanka deposited in Sri Lanka but latter remitted to India through approved banking channel – Gross Dividend from ABC (P) Ltd.

` 30,000 ` 50,000 ` 1,00,000 ` 20,000 ` 40,000

Income from nursery in Gujarat Compute the total income of Mr. A if he is (i) Resident and ordinarily resident; (ii) Resident but not ordinarily resident; (iii) Non- resident.

[CMA- Inter, June. 2012 (adapted)]

Answer: Computation of total income of A for the assessment year 2017-18 relating to the previous year 2016-17: Particulars

Profit on sale of shares in Indian company, sold in India but proceeds received in France Dividend from a Korean company received in France Rent from property in Sri Lanka deposited in Sri Lanka but latter remitted to India through approved banking channel – Gross (note 1) Dividend from ABC (P) Ltd. [Exempt u/s 10 (34)] Income from nursery in Gujarat [Agricultural income, exempt us 10(1)]

DIRECT TAXATION

Resident and Resident but not Nonordinarily ordinarily resident resident resident ` ` ` 30,000 30,000 30,000 50,000 70,000

-

-

-

-

-

1,50,000

30,000

30,000

28

STUDY NOTE : 6 INCOME WHICH DO NOT FORM PART OF TOTAL INCOME (SECTION 10, 11 TO13A) THIS STUDY NOTE INCLUDES: 6.1 Incomes exempt from tax 6.2 Income of Trusts or Institutions from Contributions [Section 11-13] 6.3 Incomes of the Political Parties [Section 13A] 6.1

INCOMES EXEMPT FROM TAX

Section 4 of the Income-tax Act imposes a charge upon the total income of all assessable entities described in Section 2(31), while section 5 defines the scope Chapter III of the Income-tax Act excludes a number of incomes from the ambit of tax. These are known as exempted incomes. Some of the important items for which exception is granted as under:

10(1)

10(2) 10(2A) 10(5)

10(7)

10(10)

10(10A)

10(10AA)

10(10B)

Nature of Income Agricultural income

Share from income of HUF Share of profit from firm Leave travel concession

Allowances and perquisites received outside India by a government employee who is also an Indian citizen Death-cum-retirement

Commutation of pension

Leave salary at the time of retirement

Retrenchment

Exemption limit Fully exempt. When non-agricultural income exceeds the maximum amount which is not taxable (See Appendix to Unit II) and agricultural income exceeds ` 5,000, it is integrated with non-agricultural income for the purpose of rate of tax that will apply on that non-agricultural income. Fully exempt Fully exempt. Subject to the conditions laid down under Rule 2B, actual fare is exempt in respect of two journeys performed in a block of four calendar years. Fully exempt.

(i) In case of Government employee: Fully exempt; (ii) In other cases: when covered by the Payment of Gratuity Act: subject to a maximum of ` 10,00,000, lower of actual gratuity received and 15 days‘ salary for each year of completed service or part thereof; when not covered by the Payment of Gratuity Act: subject to a maximum of ` 10,00,000, lower of actual gratuity received or 1/2 month‘s salary for each year of completed service. See chapter on Salaries. In case of Government employees: Fully exempt. In other cases: 1/3 of commuted value when the employee is in receipt of gratuity and 1/2 of commuted value when no gratuity is received. See chapter on Salaries. In case of Government employees: Fully exempt. In other cases : Subject to a maximum of ` 3,00,000, lowest of 10 months‘ average salary, leave encashment actually received and cash equivalent of leave calculated @ 30 days‘ leave for each year of completed service. [See chapter on Salaries]. Amount u/s 25F(b) of Industrial Dispute Act, 1947 or `

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29

10(10BB)

10(10BC) 10(10C) 10(10CC) 10(10D)

10(11) 10(12) 10(12A) 10(13)

10(13A)

compensation Compensation received by the victims of Bhopal gas leak disaster Compensation for disaster Compensation for voluntary. retirement Tax on non-monetary perquisite paid by employer Sum received under life insurance policies

Amount received from statutory provident fund Amount received from recognized provident fund Payment from the National Pension System Trust Amount received from approved superannuation fund House rent allowance

5,00,000, whichever is less. See Para 20, Chapter 5. Fully exempt.

Fully exempt. Maximum exemption ` 5,00,000. See chapter on Salaries Fully exempt. Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, is exempt from tax. Exemption under this section does not include the following : ● any sum received under Section 80DD(3) ; ● any sum received under a *Keyman insurance policy ; and ● any sum received under an insurance policy issued on or after 1st April, 2003 but on or before 31st March, 2012, in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured. ● any sum received under an insurance policy issued on or after 1st April, 2012 , in respect of which the premium payable for any of the years during the term of the policy does not exceed 10% of the actual capital sum assured. ● any sum received under an insurance policy issued on or after 1st April , 2013 on the life of a person mentioned below, in respect of which the premium payable for any of the years during the term of the policy does not exceed 15% of the actual capital sum assured: (i) a person with disability or severe disability as mentioned in Section 80U ; (ii) a person who is suffering from any of the disease or ailments specified in the rules made under Section 80 DDB (Diseases mentioned in this section are : neurological diseases; cancers; AIDS, Thalassemia, etc.). However, in all the cases mentioned above, any sum received on the death of a person shall remain exempt. Fully exempt. Fully exempt if certain conditions are fulfilled. See Chapter on Salaries 40% of the sum received on closure or opting out of the scheme is exempt Fully exempt.

Least of the following is exempt: (i) Amount received; (ii) Rent paid less 10% of salary; (iii) 50% of salary when rent is paid in the four metropolises, otherwise 40% of salary. See Chapter on Salaries

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10(14)

Special allowances

10(15)

Interests exempt from tax

10(16) 10(17)

Scholarships Daily allowance of MP and MLA Awards Pension to gallantry award winners or pension received by the family members of such persons Family pension to the widow or children of member of the armed force Annual value of one palace of an ex-Ruler Income of a local authority

10(17A) 10(18)

10(19)

10(19A) 10(20)

10(21) 10 (22B)

Income of scientific research institution Income of News Agency

Exempt if specified conditions are fulfilled. See Chapter on Salaries Interest, premium on redemption of notified bonds issued by the Central Government are exempt, e.g., 12-year National Savings Annuity Certificates, National Defence Gold Bonds 1980, Special Bearer Bonds1991, 5-year Post Office Cash Certificates, Post Office Savings Bank Account, deposit certificates issued under the Gold Monetisation Scheme, 2015 etc. Fully exempt. Fully exempt. Fully exempt. Fully exempt.

Fully exempt

Fully exempt. Income from house property, Capital gains, Income from other sources, including income from trade or business carried on within the local limits are exempt. Fully exempt.

10(23B)

Income of Press Trust of India and United News India are exempt. Any income, other than income chargeable under the head Income from house property or any income received for rendering any specific services or by way of interests or dividends from investment, of any professional institution established in India for the regulation, control or encouragement of the profession of medicine, law, accountancy engineering or architecture or such other profession as the Central Government may notify in this behalf, is exempt from tax. Fully exempt.

10(23D)

Fully exempt. Fully exempt. Any income received by a person on behalf of the following funds and institutions is exempt from tax : (a) the Prime Minister‘s National Relief Fund ; (b) the Prime Minister‘s Fund (Promotion of Folk Art) ; (c) the Prime Minister‘s Aid to Students Fund ; (d) the National Foundation for Communal Harmony ; (e) the Swachh Bharat Kosh ; (f) the Clean Ganga Fund , etc. are exempt. Fully exempt.

10(23A)

Income of professional institutions

Income of charitable trust from khadi and village industries 10(23BB) Income of Khadi and Village 10(23BBA) Income of charitable trust 10(23C) Income of certain educational institutions and hospitals

Income of Mutual Fund

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31

10(23DA)

Income of Securitization Fund 10(23ED) Contribution received by depository investor protection Fund 10 (23FB) Income of venture capital fund or venture capital company 10 (23FBA) Income of investment fund

Fully exempt.

10(23FBB)

Fully exempt

Income of unit holder of investment fund 10 (23FC) Income of business trust by way of interest from a special purpose vehicle 10(23FCA) Income of business trust

10(24)

Fully exempt

Fully exempt

Fully exempt

Income of trade unions

10(26)

Income of a member of a Scheduled Tribe 10(26A) Income of a resident of Ladakh 10(26AAA) Income of a resident of Sikkim 10(30) Subsidy received from Tea Board 10(31) In the case of rubber, coffee, cardamom or other notified commodity, subsidies received from the concerned board. 10(32) Minor‘s income clubbed with individual‘s income 10(33) Capital gains on transfer of Unit 64 10(34) Dividends from Indian companies

10(35)

Fully exempt.

Income from Units of Mutual Funds

With effect from the assessment year 2015-2016, a new Section 10(23FD) has been inserted to provide that any income received by a unit holder from the business trust as referred to in Section 115UA, shall be exempt. Any income under the head ―Income from house property‖ and ―Income from other sources‖ of a trade union, which is registered under the Trade Unions Act, 1926, or an association of such registered unions is exempt from tax. Fully exempt. Fully exempt. Fully exempt. Fully exempt. Fully exempt.

Exempt up to ` 1,500 for each such minor. Fully exempt. Fully exempt. With effect from the AY 2017-18, section 10(34) is subject to the provisions of section 115BBDA. Under the provisions of this section dividend received from a domestic company by an Individual, HUF, or a firm (all resident in India), shall be liable to pay tax @ 10% on dividends received in excess of ` 10 lakh. Dividend for this purpose shall not include deemed dividend u/ 2(22)(e). Fully exempt.

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32

10(35A)

10(36)

10(37)

Income received from distributed income of securitization Fund Long-term capital gains from transfer of equity shares purchased after 1st March, 2003 but before 1st March 2004. Capital gains on compulsory acquisition of urban agricultural land

10(38)

Long-term capital gains on units of equity oriented fund or unit of a business trust

10(39)

Income from an international sporting event Grant received from the parent company for reconstruction or revival business of power generation Capital gains of power sector undertaking

10(40)

10(41)

10(42)

10(43)

10(44) 10(45)

10(46)

10 (47)

Income of a specified body constituted as a result of treaty or agreement between the Central Government and two or more countries Loan received in a transaction of reverse mortgage Income of the New Pension System Trust Allowance and perquisite to the Chairman or member of the Union Public Service Commission Specified income of any Body, Board, Authority, Trust or Commission Notified income of infrastructure debt fund

Fully exempt. No exemption after 1st June 2016.

Fully exempt if such shares are:(i) held for 12 months or more (ii) part of the BSE-500 Index of Mumbai Stock Exchange as on 1st March 2003; (iii) public issue made by a company on or after 1st March 2003; (iii) transacted in a recognised stock exchange in India. Fully exempt if :(i) such land is used by the HUF/individual/parent of the individual during the 2 years immediately preceding the date of transfer and (ii) compensation is received on or after 1st April, 2004. Exempt if such transactions are covered under securities transfer of equity shares or transaction tax. However, w.e.f. AY 2017-18, for claiming exemption on a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre where the consideration for such transaction is paid in foreign currency, no security transaction needs to be paid. Exempt if more than two countries participate in the event. Exempt if receipt of such income is for settlement of dues in connection with reconstruction or revival of an existing of business of power generation.

Any income arising from transfer of a capital asset, being an asset of an undertaking engaged in the business of generation or transmission or distribution of power shall be exempt from tax, provided that such transfer is effected on or before the 31st March, 2006, to the Indian company notified under Section 80-IA (4)(v)(a). Exempt if it is established or constituted not for the purposes of profit and it is notified by the Central Government in the Official Gazette for the purposes of this clause.

Fully exempt.

Fully exempt. Fully exempt.

Fully exempt.

Fully exempt.

DIRECT TAXATION

33

10(48)

10(48A)

10(49) 10(50)

6.2

Income received by the notified foreign companies for selling crude oil in India Income of foreign company from storage in India

Income of National Finance Holdings Company Limited Income arising from specified services (Equalization Levy)

Fully exempt, if the receipt of money is the only activity carried out by such companies in India. Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India is exempt from tax, provided that such income arises pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government. Fully exempt. Fully Exempt

INCOME OF TRUSTS OR INSTITUTIONS FROM CONTRIBUTIONS [SECTIONS 11-13]

Subject to the provisions of sections 60 to 63, the following incomes of the trusts and charitable institutions shall be exempt: (a) Income from property held under trust wholly for charitable or religious purposes [Section 11(1)(a)]: Income from property received by such a trust shall be exempt to the extent to which it is spent in India. Where any such income is accumulated or set apart for application in India, then such income shall also be exempt if such accumulation is not in excess of 15% of the income of such property. (b) Income from property held under trust in part which is applied only for religious or charitable purposes [Section 11(1)(b)]: Income derived from property held under trust in part only for such purposes shall be exempt to the extent it is applied to such purposes in India, provided that the trust is created before1st April, 1962. Where any such income is set apart for application to such purposes in India, exemption shall not be denied, provided that the income so set apart is not in excess of 15% of the income from such property. (c) Income from property held under trust which is applied for charitable purposes outside India [Section 11(1)(c)]: Income derived from property held under trust: (i) created on or after 1st April, 1952 for charitable purpose to promote international welfare in which India is interested, and (ii) created on or after 1st April, 1952 for charitable or religious purposes, shall be exempt to the extent to which such income is applied to such purposes outside India. In both the cases mentioned above, the Board shall, by general or special order, direct that it shall not be included in the total income of the person who is in receipt of the income. (d) Voluntary contribution forming part of the corpus [Section 11(1)(d)]: Income in the form of voluntary contributions made with specific direction that they shall form part of the corpus of the trust or institution shall be fully exempt. Such contributions need not be applied to charitable purposes but may be retained as the corpus of the trust without attracting tax liability. Under Section 2(24)(iia), such income is also exempt from tax. Conditions for exemption: In order to claim exemption under Section 11, the following conditions should be satisfied: (i) The property from which the income is derived should be held under a trust or other legal obligations (Explanation 1 to section 13).

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34

(ii) The property should be so held for charitable or religious purposes, which come into existence for the benefit of the public. Under Section 2(15), ―charitable purpose‖ includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. (iii) The exemption is confined to such portion of the income of the trust or institution as is applied to charitable or religious purposes. Where any such income is accumulated for application to later time, such accumulation does not exceed the limit specified in clause (a) or clause (b) or clause (c) of Section 11(1) or Section 11(2). (iv) Except for the cases mentioned under Section 11(1)(c), no part of the income shall be applied or accumulated for application outside India. (v) Where the property of the trust consists of a business undertaking, the conditions of Sections 11(4) and 11(4A) should be satisfied. (vi) An application for registration of the trust or institution in Form No. 10A to the Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA. However, with effect from 1st June, 2007, the restriction of getting the trust or institution registered within one year shall not be applicable. It is also provided that where an application for registration of the trust or institution is made on or after 1st June, 2007, the provisions of Sections 11 and 12 shall apply in relation to the income of the trust or institution from the assessment year immediately following the financial year in which such application is made. (e) Where the total income of the trust or institution as computed under this Act without giving effect to the provisions of Section 11 and Section 12 exceeds the maximum amount which is not taxable in any previous year, the accounts of the trust or institution for that year should be audited and the audit report should be furnished along with the return of income. (f) The funds of the trust should be invested or deposited in one or more of the forms and modes specified in Section 11(5). Example 1: S Charitable Trust registered under section 12AA of the Income Tax Act is engaged in providing medical assistance to the physically challenged persons. The trust has furnished the following details relating to previous year 2016-17; Particulars Net income from the properties held under trust Voluntary Contribution (including donation ` 1,50,000 received with direction from the donor that it would form part of corpus) Financial assistance to physically challenged persons Purchase of Land for construction of office of the trust Compute tax payable, if any, by the trust for the Assessment Year 2017 – 18.

16,50,000 5,00,000 9,50,000 4,00,000 [CMA-Inter June 2013]

Answer: ` Income from properties held under trust

16,50,000

Voluntary Contribution

5,00,000

Voluntary contribution received with specific direction that it would form part of corpus (corpus donation) exempted under section 11 (1) (d) Total

1,50,000

Amount set apart for future (15%)

`

3,50,000 20,00,000 3,00,000

Amount available for application for charitable purposes DIRECT TAXATION

17,00,000 35

Less: Amount applied for charitable purposes: Financial assistance to physically challenged

9,50,000

Purchase of land for construction of office

4,00,000

Total income

3,50,000

Tax on total income (` 3,50,000- 2,50,000) x 10% Add: Education cess and SHEC (2+1%)

6.3

13,50,000

10,,000 300

10,300

INCOMES OF POLITICAL PARTIES [SECTION 13A]

Under section 13A, the following incomes of a political party are exempt from tax: (a) Income from house property; (b) Income from other sources; (c) Capital gains; (d) Any income by way of voluntary contributions received by a political party from any person. Conditions for exemption: (a) Such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom. (b) In respect of each such voluntary contribution in excess of `20,000, such political party keeps and maintains a record of such contribution and the name and address of the person who has made such contribution; and (c) The accounts of such political party are audited by a chartered accountant. Meaning of political party: ―Political party‖ means an association or body of individual citizens of India registered with the Election Commission of India as a political party under paragraph 3 of the Election Symbols (Reservation and Allotment) Order, 1968, and includes a political party deemed to be registered with that Commission under the proviso to sub-paragraph (2) of that paragraph [ Explanation to section 13A] Multiple Choice Questions: 1.

2.

3.

A registered charitable trust meant for educational purpose has annual aggregate receipt of ` 80,00,000. Its income after expenses is ` 20,00,000. The income liable to income-tax would be (A) ` 80,00,000 (B) ` 60,00,000 (C) ‗Nil‘ (D) ` 30,00,000 Jayant working in a college received ` 2,000 per month as research allowance for pursuing research. The taxable portion of allowance would be (A) ` 2,000 pm. (B) ` ‗Nil‘ (C) ` 1,000 p.m. (D) ` ‗Nil‘ fully exempt Children education allowance received by a salaried employee is exempt up to a maximum of two children of: (A) ` 100 p.m. per child (B) ` 300 p.m. per child (C) ` 500 p.m. per child (D) Fully exempt without limit DIRECT TAXATION

36

4.

Income of minor child includible in the income of his/her parents exempt to the extent such income does not exceed the following amount for each minor child – ` (A) 500 (B) 1,000 (C) 1,500 (D) 2,000 5. A trust shall not be considered as charitable trust when the commercial activities in the previous year exceed ` ………………………….. (A) 10 lakhs (B) 25lakhs (C) 15lakhs (D) 30lakhs 7. Income of securitization trust from the activity of securitization is (A)Exempt (B)Taxable at 20% (C)Taxable at 5% (D)Taxable at the regular rates 8. Amount is received under the notified reverse mortgage scheme is A. Taxable as ‗Income from other sources‘ B. Exempt from tax C.50% taxable D. Taxable as capital 9. Azhar, being an employee in a transport company, received ` 10,000 per month by way of allowance to meet his personal expenses in the course of running such transport system from one place to another. The amount chargeable to tax is: A. ` 3,000 (B) ` 10,000 (C) Nil (D) None of these 10. A religious trust registered under section 12AA received ` 2,00,000 by way of anonymous donation. The total amount of donation received during the year was ` 15,00,000. The amount of anonymous donation chargeable to tax is (A) ` 2,00,000 (B) ` 1,00,000 (C) ` 75,000 (D) Nil. Not taxable

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37

Section B +HDGVof ,QFRPHDQG&RPSXWDWLRQ RI7RWDO,QFRPHDQG7D[/LDELOLW\ (Syllabus - 2016)

SECTION B: HEADS OF INCOME AND COMPUTATION OF INCOME UNDER VARIOUS HEADS STUDY NOTE : 7 INCOME UNDER THE HEAD ―SALARIES‖ THIS STUDY NOTE INCLUDES: Meaning of Salary 7.1 7.2 The elements of Salary [Section 17(1) 7.3 Commutation of pension [Section 10(10A)] Death-Cum-Retirement Gratuity 7.4 7.5 Profit in lieu of Salary [Section 17(3)] 7.6 Leave Salary Retrenchment Compensation 7.7 7.8 Allowances Perquisites 7.9 7.10 Tax treatment of various Perquisites 7.11 Valuation of Perquisites taxable in the hands of Specified employees 7.12 Deduction from Gross Salary 7.1

MEANING OF SALARY

Sections 15 to 17 of the Income-tax Act, 1961 lay down the procedure for computation of Income under the head "Salaries". The term ―Salary‖ has not been defined in the Act, except that section 15 identifies it broadly with certain types of receipt from the employer. Under the Act salary is a generic term which includes wages and all payments received from the employer — past or present. It even includes any amount received from a prospective employer before joining any employment with that person. Point to note: In this unit we shall use the expressions ―Salaries‖ and Income under the head ―Salaries‖ interchangeably. 1. Employer-employee relationship: No payment can be charged to tax under the head "Salaries" unless the relationship of employer and employee exists between the payer and the payee. The relationship of employer and employee or master and servant is, therefore, the primary basis of charge for income under this head. 

Contract of service v. contract for service: It is necessary to make a distinction between income from employment which is taxable under section 15 and income from an office not amounting to employment which is taxable under other sources. In case of income under the head Salaries, there is a ‗contract of service‘ involving an employer-employee relationship, while in case of a ‗contract for service‘ there is a contractor/ service provider – client relationship. Points to Note: The following are the examples of contract for service. These incomes are be charged as Income from other source, not under the head ―Salaries‖:  Monthly amount received by a person from a company as retainer (e.g., a chartered accountant, a tax consultant, or a doctor) when he is not an employee of the company.  Fees received by a director when he is not an employee of the company.  Salary (bonus, commission or whatever) received by a partner from the firm, as these are nothing but part of the total profit of the firm shared under different names.  Remuneration received by a college teacher from the universities (if not his employer) for setting papers or evaluation of answer papers.  Salaries and allowances received by Members of Parliament or State Legislative Assembly, since they are not Government employees. DIRECT TAXATION

38

2. Salary from more than one source: Income-tax Act does not distinguish between part-time salary and full-time salary. In fact, a person can have more than one employer and, therefore, may have more than one source of income under this head. For example, a full-time teacher may have part-time employment in another institution. In this case salary received from both places shall be taxable under the head ''Salaries". 3. Foregoing or surrender of salary: When a person voluntarily foregoes a part of his salary, it will not be excluded from his income. However, salaries surrendered or foregone under the provisions of Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1962, shall be excluded from his income. Points to note: The distinction between foregoing and surrender of salary should be noted. Foregoing of salary is an application of income, while salary surrendered under the foresaid Act is exempt. However, salary foregone before it became due cannot be taxable [ CIT v. Mehar Sing (90 ITR 219)] 4. Voluntary payments and personal gifts: Income-tax Act does not make distinction between voluntary payment and contractual payment. Unless otherwise specified in the Act, all perquisites or any other payments made by the employer to the employee voluntarily shall be taxable. Basis of charge [Section 15]: According to Section 15, the charge under the head "Salaries" arises in respect of: (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. (b) Section 15 contemplates a tax on salaries at the earliest point of time, which is:  in case of (a) above, the date when salaries accrue or become due (even though it is not paid); and  in the case of (b) above, the time of receipt (even though it is not due).  In the case of (c) above, any arrears of salary become taxable on the basis of receipt, if it was not charged to tax in any earlier previous year on accrual basis. Points to note: (i) Where any salary paid in advance is taxed in the year of receipt, it cannot be charged to tax again when it becomes due [Explanation 1 to Section 15]. (ii) When any arrears of salary have been taxed on "due" basis, they cannot be taxed again when paid [Explanation 2 to Section 5], (iii) Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section [Explanation 2 to Section 15]. (iv) Salary in lieu of notice period is taxable in the year of receipt [V. D. Talwarvs. C1T (1963) 49ITR122 SC]. (v) Bonus is taxable in the year in which it is received. 5. Place of accrual of salary: The general rule is that salary is deemed to arise or accrue at the place where the service is rendered. Therefore, salary and pension paid outside India in connection with the service in India shall be deemed to accrue in India. There are, however, two exceptions to this rule: (i) Under Section 9(l)(iii), salary paid to Government servants who are also Indian citizens, for services rendered outside India, shall be deemed to arise or accrue in India. Allowances and perquisites paid to such employees outside India are, by virtue of Section 10(7), exempt from tax.

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(ii) Under Section 9(2), pensions payable outside India to certain categories of Government employees and Judges who permanently reside outside India, shall not be deemed to arise or accrue in India. Example 1: X, an officer in the Indian Embassy in the USA receives $1,00,000 p.a. as salary and the value of perquisite provided by the Government of India amounts to $50,000 p.a. X is an Indian citizen and during the previous year he did not visit India at all. Discuss the taxability of his income. Answer: X is a non-resident for the relevant assessment year and as such income earned by a non-resident from sources outside India is not taxable. However, u/s 9(1)(iii), salary paid to Government servants who are also Indian citizens, for services rendered outside India, shall be deemed to arise or accrue in India. Accordingly, such income shall be taxable in India. However, allowances and perquisites paid to such an employee is exempt u/s 10(7). 7.2

ELEMENTS OF SALARY [SECTION 17(1)]

Although the term ―Salary‖ has not been exhaustively defined in the Act, the statutory definition of the term under section 17(1) includes the following elements: a. wages; b. any annuity or pension; c. any gratuity; d. any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; e. any advance of salary; f. any payment received by an employee in respect of any period of leave not availed of by him; g. the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule; h. the aggregate of all sums that are comprised in the transferred balance as referred to in sub-Rule (2) of rule 11 of part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; i. Contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in Section 80CCD.

Perquisites Allowaces

Pay and incentives

Retirement/ terminal benefits

A Comprehensive view of Salary: Broadly speaking, whatever is received in exercise of an employment comes within the purview of salary. For the ease of computation, the various elements of salaries may be classified as under: 1. Pay and incentives: The following payments may be classified under this category: (a) Basic salary or basic pay: Basic salary or basic pay: It is the amount attached to a post and received by an employee irrespective of any other consideration. This is fully taxable.

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(b) Advance salary: This is the portion of salary becoming due in the following previous year, but received in the current previous year. This is fully taxable on receipt basis. (c) Arrears of salary: This is the portion of salary due in one or more earlier previous years (which could not be charged for the reason of uncertainty or otherwise) but received during the current previous year. This is fully taxable. For both advance salary and arrears of salary which is included in the current year's income, an assessee can claim relief from income-tax under Section 89. (d) Pensions: Pension is a periodic (usually monthly) payment received by a person from his former employer in consideration of past services. It is fully taxable under the head "Salaries". Family pension received by the widow or the legal heirs of the deceased employee is taxable under Section 56 as " Income from other sources. (e) Annuity: Like pension, an annuity is a periodic payment for some past considerations. Annuity received from present or past employer is fully taxable under the head "Salaries". (f) Bonus, commission, fees, etc.: Bonus, commission, fees, etc., are part of the salary or wages and are normally given as incentive to the employees. These are fully taxable. 2.

Retirement or terminal benefits: The benefits in this category usually include the following:  Employer‘s contribution to provident funds  Interest credited to the Provident Fund  Receipt from provident fund  Commutation of pensions  Death-cum-retirement gratuity  Profits in lieu of salary  Leave salary  Compensation for voluntary retirement.

a. Tax treatment of employer‘s contribution to provident fund: A provident fund is a kind of savings tor future benefit of the employee. Contribution to such a fund may be made both by the employee and the employer. When the employee contributes to this fund out of his taxable income, no additional benefit accrues to him. Therefore, nothing is taxable in this respect. The taxability of the employer's contribution to the provident fund, however, depends on the type of provident fund. A provident fund, depending on the types of administration of the fund, may be classified into the following categories:  Statutory provident fund: This is a provident fund to which the Provident Fund Act of 1925 applies. Employees of the Central and State Governments, semi-Government organizations, local authorities, universities, etc. are members of this fund. Employer's contribution to this fund is not taxable.  Recognized provident fund: This is a provident fund which is constituted under the Employees Provident Fund Act of 1952 and which is as such approved by the Commissioner of Income-tax. Employer's contribution to the fund is exempt up to 12% of salary. Any contribution by the employer in excess of 12% of salary is taxable. Salary for this purpose means basic salary and also includes dearness allowance, if such allowance is given under the terms of employment. As per the decision in Gestetner Duplicators (P) Ltd. v. CIT117ITR 1 (SC), commission based on fixed percentage of turnover achieved by the employee shall also be included within salary. 



Unrecognized provident fund: A provident fund which is neither a statutory provident fund nor a recognized provident fund is known as unrecognized provident fund. Employer's contribution to this provident fund is not taxable [See para 15 for further details], Approved superannuation fund: An approved superannuation fund means a superannuation fund which is approved by the Chief Commissioner or Commissioner of Income-tax in accordance with the rules contained in part B of the Fourth Schedule to the Income-tax Act, 1961. Contributions to

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this fund can be made by the employee as well as the employer. Employer's contribution to this fund is not taxable.

•

With effect from the assessment year 2017-2018, employer's contribution to this fund in excess of ` 1,50,000 shall be treated as a perquisite which is taxable at the hands of the employee. Public provident fund: This is a provident fund to which any individual - whether salaried or not - can contribute. Such contribution can be made in multiples of ` 5, subject to a minimum of ` 100 but not exceeding ` 1,50,000 per annum. Employers generally do not contribute to this fund. The question of taxability on account of employer's contribution, therefore, does not arise.

b. Interest credited to the provident fund: The accumulated balance in the provident fund earns some interest on its yearly balance, the benefit of which goes to the employee. Taxability of such interest on the yearly balance is as follows:  Interest credited to statutory provident fund: It is totally exempt from tax.  Interest credited to the recognized provident fund: Interest credited to recognized provident fund is exempt up to 9-5% of the accumulated balance. Any interest in excess of 9-5% is taxable.  Interest credited to the unrecognized provident fund: Yearly interest on the accumulated balance in the unrecognized provident fund is not taxable.  Interest credited to the approved superannuation fund: Yearly interest on the accumulated balance in such fund is exempt from tax.  Interest credited to the public provident fund: Yearly interest on the accumulated balance in the public provident fund is totally exempt from tax. c. Lump sum received from the provident fund: The tax treatment of a lump sum received from the provident fund is as follows:  In the case of statutory provident fund: Lump sum received from the statutory provident fund time of retirement or termination of service is exempt from tax [Section 10(11)].  In the case of recognized provident fund: Amount received from the recognized provident fund at the time of retirement or termination of service is exempt from tax [u/s 10(12)], provided the following conditions are satisfied: a. the employee has rendered continuous service with his employer for a minimum period of 5 years, or b. in case of a shorter period, he has resigned or his services have been terminated due to illness or any other reason beyond his control, or c. on the cessation of employment, the employee has obtained employment with another employer and the accumulated balance of the provident fund in his individual account is transferred to any recognized provident fund maintained by such employer.  In the case of unrecognized provident fund: Lump sum received from the provident fund representing employer's contribution and interest thereon is taxable under the head salaries as "profits in lieu of salary" u/s 17(3). Amount representing interest on employee's contribution is taxable under the head "Income from other sources" and so much of the amount as representing employee's own contribution is, however, not taxable.  In the case of balance of unrecognized provident fund transferred to a recognized provident fund: Subject to the fulfillment of certain conditions, the Commissioner of Income-tax may accord recognition to an unrecognized provident fund. The accumulated balance in the unrecognized provident fund in such a case may be either withdrawn by the employee or it may be transferred to the recognized provident fund. 



In the ease of approved superannuation fund: Amount received from the approved superannuation fund is exempt from tax [u/s 10(13)], provided that conditions laid down under Rule 2, Part B of Schedule IV of the Income-tax Act are fulfilled. In the case of public provident fund: Amount received from the public provident fund is fully exempt.

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Example 2: X is a member of an unrecognized provident fund to which he and his employers contributes equally. At the time of his retirement, he receives from the provident fund a sum of ` 1,50,000, out of which ` 30,000 is accounted for the interest. Discuss the taxability of the receipt at the hands of X. Answer: Since the contribution is made equally by the employer and the employee, the principal amount of contribution by the employer and the employee shall be `60,000 each [`(150,000 – 30,000)/2 = ` 60,000]. Similarly, the interest on employer‘s contribution and the employee‘s contribution are in equal portion i.e. ` 30,000/ 2 = ` 15,000 each. Under section 17(3), employer‘s contribution plus interest thereon (` 60,000 + 15,000) shall be taxable under the head ―Salaries‖ as profits in-lieu of salary, while the interest on employee‘s contribution (` 15,000) shall be taxable as Income from other sources. Employee‘s contribution is not taxable as it was paid out of his taxable income. 7.3

COMMUTATION OF PENSION [SECTION 10(10A)]

While monthly pension is fully taxable, the commuted value of pension (lump sum payment in lieu of monthly pension) is exempt u/s 10(10A), subject to the following conditions: • In the case of Government employee: Commuted value of pension received by a Government employee is fully exempt u/s 10(10A) (i). • In the case of non-government employees: Under Section 10(10A) (ii), commuted value of pension received by any non-Government employee is exempt subject to the following: (i) When a non-Government employee also receives gratuity: When in addition to the commuted pension the non-Government employee also received gratuity, l/3rd of the full commuted value of pension is exempt from tax. (ii) When a non-Government employee does not receive gratuity: A non-Government employee who does not receive any gratuity is eligible to claim 1/2 of the commuted value of pension as exemption. Example 3. B is an employee of BPC P Ltd. On 1st May 2017, he retired from service with a monthly pension of `20,000. He commuted 60% of the pension and received `12, 40,000. He was not in receipt of any gratuity. Determine the amount which is taxable for the assessment year 2017-2018. Answer: Computation of taxable amount of commuted value of pension for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Amount received on commutation of pension 12,40,000 Less: Exempt u/s 10(10A)(ii): one-half of the full Commuted value of pension (Note) 10,33,333 Amount taxable 2,06,667 Notes: Full commuted value of pension Therefore, one-half of the full commuted value is 7.4

`=12,40,000 x100/60 = `20,66,667 x ½

` =20,66,667 = ` 10,33,333

DEATH-CUM-RETIREMENT GRATUITY

Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Gratuity received while in service is fully taxable under the head ―Salaries‖. Gratuity received by the employee at the time of retirement is also taxable under the head "Salaries". However, section 10(10) provides for certain exemptions to the employees or the legal heirs of the employees as under. DIRECT TAXATION

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1. Gratuity received by Government employees: Gratuity received by the employees of the Central Government or State Governments or local authorities is, by virtue of Section 10(10) (i), fully exempt. 2. Gratuity received by the employees who are covered under the Payment of Gratuity Act, 1972: Under Section 10(10) (ii), gratuity received by an employee who is covered under the Payment of Gratuity Act, 1972, is exempt to the extent of the least of the following: (a) (a)Amount actually received as gratuity; (b) based on last drawn salary, 15 days salary for each year of completed service or part thereof in excess of 6 months; (c) Statutory limit: ` 10,00,000 Meaning of salary: Salary for this purpose means Basic + D.A. and 15 days salary shall he computed by taking 26 days as the maximum number of days in a month. In the case of a seasonal establishment, 15 days as mentioned in (b) above shall be taken to be 7 days. 3. Gratuity received by other employees: Under Section 10(10) (iii), gratuity received by the other employees (i.e. a person who is neither a Government employee nor covered by the Payment of Gratuity Act 1972.) is exempt to the extent of the least of the following: (a) Amount actually received as gratuity; (b) One-half month's average salary for each year of completed service (any fraction of service period being ignored); (c) Statutory limit: ` 10,00,000. Meaning of salary: Salary for this purpose means Basic + D.A. (if terms of employment so provide) + commission based on fixed percentage of turnover. Average salary for this purpose means average salary for the last 10 months preceding the month of retirement. Points to note: 1. In the event of death of the employee it is given to the legal heirs of the deceased employee. Gratuity received by the legal heirs of the deceased employee is taxable under the head "Income from other sources". 2. In case the employee receives gratuity from two or more employers, the sum total of exemption shall not exceed ` 10,00,000. 3. Where total income of an employee includes gratuity in respect of which no exemption has been given, the employee is entitled to claim relief u/s 89. Example 4: Gratuity of ` 1,20,000 is received in August, 2016 by M, a legal heir of R aged 45 who died on June 28, 2016. Is it taxable? [CMA-Inter, Dec. 2008] Answer: Gratuity received by the legal heirs of a deceased employee is taxable as Income from other sources. Example 5: V retires on 1st Feb., 2017 after serving for 30 years and 5 months. He gets ` 10, 70,000 as gratuity. His salary details are as under: FY 2016-17 salary `1,00,000 p.m. D.A. 50% of salary. 50% thereof taken for retirement benefits. FY 2015-16 Salary `90,000 p.m. D.A. 50% of salary. 50% thereof forms part of retirement benefits. Compute the taxable amount of gratuity in his hands in the following situations: (i) She retires from government service; (ii) She retires from a private sector company to which the Payment of Gratuity Act does not apply; (iii) She retires from seasonal factory in a private sector, covered under Payment of Gratuity Act, 1972. [CMA-Inter, June 2011 (Adapted)]

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Answer: Computation of taxable amount of gratuity for the assessment year 2017-18 relating to the previous year 2016-17 Case (i) Case (ii) Case (iii) Gratuity received 10,70,000 10, 70,000 10,70,000 Less: Exemption u/s 10(10) [See notes] 10,70,000 10,00,000 10,00,000 Taxable gratuity

Nil

70,000

70,000

Note 1: U/s 10(10)(i), in the case of Government employees, the exemption for gratuity is 100%. Note 2: U/s 10(10)(iii), exemption in case of case (ii) when the employee is not covered by the Payment Gratuity Act, 1972, being the least of the following: ` (a) (b) (c)

Amount actually received One-half month‘s salary for each year of completed service Statutory limit

10,70,000 18,75,000 10,00,000

[Salary from April 2016 to January 2017 being 10 months‘ salary preceding the month of retirement = (Basic + portion of DA that goes into retirement benefit= ` 1,00,000 + (1,00,000 x 50%x ½)= ` 1,25,000. Therefore, one- half months salary for each year of completed service = ` 1,25,000 x ½ x 30 = ` 18,75,000 Note 3: U/s 10(10)(ii), exemption in case of case (iii) when the employee is covered by the Payment Gratuity Act, 1972, being the least of the following: ` (a) (b) (c)

Amount actually received 7 days‘ salary for each year of completed service Statutory limit

10,70,000 12,11,538 10,00,000

7 days‘ salary (Basic + DA) for each year of completed service or part thereof in excess of 6 months: ` 1,50,000 x 7/26 x 30 = ` 12,11,538. Profits in lieu ofIN salary 7.5 PROFITS LIEU OF SALARY Under Section 17(3), profits in lieu of salary is taxable and includes the following: a. Any compensation received or due to be received from the employer or any former employer in connection with termination of service. b. Any compensation received or due to be received from the employer or any former employer in connection with modification of terms of employment. c. Any payment due or received from the employer except those which are specifically exempt under any clause of Section 10. d. Payment from any unrecognized provident fund to the extent it does not consist of employee's own contribution and interest thereon. e. Any sum received under any Keyman insurance policy. "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person [Explanation to Section 10(10D)]. 7.6

LEAVE SALARY

Leave salary is the cash equivalent received by an employee for leave not availed of. While encashment of leave during continuation of service is fully taxable, exemption u/s 10 (10AA) is available in respect leave salary received at the time of retirement as under:

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1. Encashment of leave salary by Government employees: Leave encashment by the employees of the Central Government or the State Governments at the time of retirement is fully exempt u/s 10(10AA) (i). 2. Encashment of leave salary by non-Government employees U/s 10(10AA) (ii): leave encashment by the non-Government employees (including employees of local authority or public sector undertakings) at the time of retirement are exempt to the extent of the least of the following: (a) Cash equivalent of leave salary in respect of accumulated leave to the credit of the employee; such leave entitlement shall not exceed 30 days for each year of completed service. • Meaning of salary? Meaning of salary: "Salary" means basic salary and includes dearness allowance if terms of employment so provide. It also includes commission based on turnover achieved by an employee as per terms of contract of employment, but excludes all other allowances and perquisites. (b) 10 months average salary. (c) Leave encashment actually received. (d) Statutory limit: ` 3,00,000. Meaning of Salary: For this purpose, Salary means Basic pay + D.A (if given as per the terms of employment) + Commission based on fixed percentage of turnover achieved by the employee during the previous year. Further, 10 months average salary shall be computed on the basis of average salary during the 10 months preceding his retirement. For example, if the employee retires on 15th June, 2016, 10 months average salary shall be computed on the basis of salary drawn from 14th September, 2015 to 15th June, 2016. Points to note: 1. In the case of an employee who receives leave salary from more than one employer, exemption u/s 10(l0AA) (ii) for the subsequent time shall not exceed the overall limit of ` 3,00,000. 2. Where the total income of an employee includes leave salary for which no exemption has been enjoyed, the employee can claim relief u/s 89. 3. Leave salary received by the members of the family of the Government employee, who dies in harness, is not taxable in the hands of the recipient [Circular No. 309 dated 3.7.1981]. 4. Leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary. It is an ex gratia payment on compassionate grounds in the nature of gift [Letter: No. 35/1/65-IT (B), dated 5.11.1965]. Example 6: S, an employee of XY Ltd., received ` 8 lakhs as leave salary on his retirement on 28.02.2016. Average salary drawn during last 10 months was ` 35,000. Last drawn salary is ` 40,000. He rendered service of 24 years and 7 months. Leave taken while in service was 9 months. Leave entitlement as per employer‘s rules is 1.5 months for each completed year of service. Calculate the taxable leave salary for the assessment year 2016-17. [CMA-Inter, Dec. 2015] Answer: Computation of taxable amount of gratuity for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Leave salary received Less: Exemption u/s 10 (10AA) (ii) Taxable leave salary

8,00,000 3,00,000 5,00,000

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Exemption u/s 10(10AA) (ii) being least of the following: (i) Amount of leave salary actually received (ii) Cash equivalent of leave salary in respect of accumulated Leave to the credit of the employee [Maximum 30 days for each year of completed service] (iii) 10 months' average salary (iv) Statutory limit

` 8,00,000 ` 6,30,000 ` 3,50,000 ` 3,00,000

[Leave entitlement @ 30 days = 24 months; Less, leave taken 9 months; Leave to the credit = 15 months: @ `35,000 p.m. = `5,25,000. 10 months‘ average salary = 10 x 35000 = `3,50,000] 7.7

RETRENCHMENT COMPENSATION

Under section 10(10B), retrenchment compensation given to a workman (workman as defined in the Industrial Disputes Act, 1947) is exempt to the extent of the least of the following: (a) Amount calculated u/s 25F(b) of the Industrial Disputes Act, 1974, (which shall not exceed 15 days average pay for each year of completed service or part thereof in excess of six months). (b) Amount actually received as compensation. (c) ` 5,00,000. Example 7: M was retrenched from service of ABC Limited. He received retrenchment compensation amounting to ` 8,80,000. Amount of compensation determined under the Industrial Disputes Act, 1948 is ` 4, 80,000. The scheme of retrenchment is not approved by the Central Government. Compute the taxable retrenchment compensation. [CMA-Inter, Dec. 2014 (Adapted)] Answer: Where the retrenchment is not in accordance with any scheme approved by the Central Government, then, under section 10 (10B), the exemption for retrenchment compensation shall be lower of the following: (a) Amount calculated u/s 25F(b) of the Industrial Disputes Act, 1974 (b) Amount actually received (c) Statutory limit ` 5,00,000 In the present case the amount of exemption shall be ` 4,80,000 being the amount determined under the Industrial Disputes Act. Compensation received at the time of voluntary retirement Subject to the conditions laid down under Rule 2BA, Section 10(10C) grants exemption on lump sum payments received or receivable by an employee of specified institutions at the time of his voluntary retirement or termination of service.  Conditions specified under Rule 2BA: Exemption under Section 10(10C) is available only if the payments are received by employees at the time of their voluntary retirement/ separation from service in accordance with a scheme or schemes of voluntary retirement/separation, and such a scheme or schemes must have been framed by the employers in accordance with the prescribed guidelines (including inter alia the criterion of economic viability). The guidelines laid down in Rule 2BA stipulates that the scheme framed by the employer should be in accordance with the following requirements: (i) It applies to an employee who has completed 10 years of service or completed 40 years of age. [This condition is not applicable in the case of amount received by an employee of a public sector company under a scheme of voluntary separation framed by such public sector company]. (ii) Excepting the directors of a company or of a co-operative society, it applies to all employees (by whatever name called), including workers and executives.

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(iii) The scheme of voluntary retirement or voluntary separation has been drawn to result in overall reduction in the existing strength of the employees. (iv) The vacancy caused by voluntary retirement or voluntary separation is not to be filled up. (v) The retiring employee is not to be employed in another company or concern belonging to the same management. (vi) The amount receivable on account of voluntary retirement/separation of the employees does not exceed the amount equivalent to three months' salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. The maximum amount, however, shall not exceed ` 5 lakhs in case of each employee. Example 8: H, working in a public sector company, opted for voluntary retirement scheme and received ` 7 lakh as VRS compensation. She claimed ` 5 lakhs as exemption under section 10(10C) and in respect of the balance amount of ` 2 lakh, he claimed relief under section 89. Advise H as to the correctness of the aforesaid tax treatment. [CMA-Inter, June 2010 (Adapted)] Answer: Amount received under an approved voluntary retirement scheme is eligible for exemption under section 10(10C) to the extent of ` 5,00,000. However, exemption under section 10(10C) and relief under section 89 are mutually exclusive. As a result, if H avails of the benefit of section 10(10C), he will not be eligible to claim relief under section 89. Alternatively, he can claim relief under section 89, but in that case he has to forgo the benefit of section 10(10C). 7.8

ALLOWANCES

Allowances are monetary benefits, usually payable in cash, to meet specific expenses of the employees. Some common examples of allowances are: Examples of allowances Examples of allowances  Dearness allowance/ dearness pay  Servant allowance 

House rent allowance



Lunch and Tiffin allowance



Medical allowance



Car allowance



City compensatory allowance



Transport allowance



Children education allowance



Entertainment allowance



Hostel allowance



Any other allowance

Tax treatment of various allowances While allowances paid to an employee wholly and exclusively for performing official duties are exempt from tax, other allowances are generally taxable unless specific exemption is provided under any provision of the Act. a. Allowances which are fully taxable: The following allowances are fully taxable: 1. Dearness allowance/ Dearness pay: Dearness allowance is an allowance which is given to an employee to meet extra cost of living due to price level change. It is fully taxable. Sometimes, employees are also given dearness pay (D.P). D.P. is similar to D.A. and is fully taxable. When D.A. or D.P. is given as per the terms of employment or is taken into computation of retirement benefit of the employee, it takes on the character of pay and, therefore, has to be considered for computation of the value of other allowances or perquisites given at a certain percentage of salary. 2. Medical allowance: Fixed medical allowance given to the employees is, irrespective of the actual amount spent, fully taxable. 3. City compensatory allowance: City compensatory allowance is given to the employees to meet the increased cost of living in a particular city. For example, Mumbai is a costlier place than Kolkata. Therefore, if an employee is transferred from Kolkata to Mumbai, he may be compensated by city DIRECT TAXATION

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compensatory allowance for such increased cost of living. City compensatory allowance is fully taxable. 4. Servant allowance: Fully taxable 5. Lunch and Tiffin allowance: Fully taxable 6. Miscellaneous taxable allowances: Examples of such allowances which are fully taxable include: Marriage allowance, project allowance, overtime allowance, warden allowance, family allowance on-practicing allowance, winter allowance, etc. b. Allowances which are exempt from tax: The following allowances are either partially exempt or fully exempt: House rent allowance: House rent allowance is given to an employee to meet his expenses in connection with the rented accommodation of the employee. Under Section 10(13A) and Rule 2A, house rent allowance is exempt to the extent of the least of the following: (a) actual amount received as house rent allowance in respect of the period during which the rented accommodation is occupied by the employee, or (b) the excess of house rent actually paid over 10% of salary during the relevant period, or (c) 50% of salary in case the rented accommodation is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where the rented accommodation is situated at other places. Meaning of salary: For this purpose, salary means basic salary and includes D.A. or D.P. if given as per terms of employment. As per the decision in Gestetner Duplicators Pvt. Ltd. vs. CIT [117 ITR 1 (SC)], it also includes commission based on fixed percentage of turnover achieved by the employee. Points to note:  No deduction u/s 10(13A) shall be allowed if the accommodation occupied by the assessee is owned by him or the assessee has not actually paid any rent for the accommodation [Explanation to Section 10(13A)].  Where the rented accommodation is occupied by the assessee for part of the year, the exemption shall be based on salary of this period only. For example, if the assessee lives in a rented accommodation for six months and thereafter lives in his own house or in a rent-free accommodation provided by the employer, exemption u/s 10(13A) shall be based on salary of the period during which the assessee stays in the rented accommodation. Example 9: X, a resident of Bengaluru, receives ` 20,00,000 as basic salary. In addition, he gets ` 6 lakhs as dearness allowance (forming part of basic salary), 3.5% commission on sales made by him (sale made by X during the previous year in ` 80,00,000); ` 2,40,000 is paid to him as house rent allowance. He however pays ` 2,80,000 as house rent. Determine the quantum of HRA exempt from tax as well as the amount taxable. [CMA-Inter, June 2013] Answer: Computation of exemption u/s 10(13A), Rule 2A for the assessment year 2017-18 ` Amount received as HRA Less: Exemption u/s 10(13A) , Rule 2A being the least of the following:

(a) Amount received as HRA (b) Rent paid Less 10% of salary [ ` 2,80,000 –2,85,000] (c) 40% of Salary

` 2,40,000

2,40,000 Nil 11,40,000 Nil

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Note: Salary for the purpose of section 10(13A), Rule 2A= Basic + DA (if given under the terms of employment) + Commission given as a fixed percentage of salary [ 20,00,000 + 6,00,000 + 2,80,000 = ` 28,50,000] Example 10. X, who resides in Kanpur, receives ` 78,000 as basic pay during the financial year 2015-16. He stays in his father‘s house up to August 31, 2015 for which he does not pay any rent, and thereafter in an accommodation taken on monthly rent of ` 3,000. The employer, however, pays ` 700 per month as house rent allowance throughout the previous year. Calculate the HRA taxable in hands of X for the assessment year 2016-17. [CMA-Inter, Dec.2007] Answer: Computation of taxable amount of house rent allowance for the assessment year 2016-17 relating to the previous year 2015-16 ` ` House rent allowance received [ `700 x 12]

8,400

Less: Exemption u/s 10(13A), Rule 2A being the least of the following: (a) HRA received [` 700 x 12] (b) Rent paid less 10% of salary of the relevant period (Note) (c) 40% of salary [ ` 21,000 x 40%] Taxable HRA

8,400 2,800 8,400

2,800 5,600

Note: Since the assessee lives in rented house for 7 months, exemption for HRA shall be available for that period only. Salary for that period is: ` 78,000 x 7/12 = 45,500. Rent paid for 7 months = ` 3,000 x 7 = ` 21,000. Therefore, rent paid less 10% of salary = (` 700 x 7) ` 4,900 – (` 21,000 x 10%)= ` 2,800

Special Allowances which are exempt u/s 10(14): Section 10(14) specifies certain allowances, which are exempt from tax. These allowances may be categorized under the following two groups: (i) Allowances which are exempt up to the amount actually spent. (ii) Allowances which are exempt up to the prescribed amount.  Allowances which are exempt up to the amount actually spent [Section 10(14)(i), Rule 2BB(1)] : Under Section 10(14(i), exemption is granted in respect of allowances which are prescribed in Rule 2BB (1), and which are : (i) not in the nature of perquisite within the meaning of Section 17(2); (ii) granted to the employee to meet his expenses, which are spent wholly and exclusively in the performance of official duties. Rule 2BB (1) specifies the following special allowances, which are exempt to the extent they are actually spent for the specified purposes: 1. Transfer allowance: Any allowance granted to meet the cost of travel on tour or transfer, including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer is exempt to the extent of allowance received or amount actually spent, whichever is lower. 2. Daily allowance: Daily allowance received on tour or for the period of journey in connection with transfer is exempt to the extent the amount is actually spent for the purpose. 3. Conveyance allowance: DIRECT TAXATION

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Any conveyance allowance received by the employee, which is actually spent for the performance of official duties, is exempt. No exemption shall be granted if the employer provides free conveyance. 4. Helper allowance: Any allowance granted to meet the expenditure incurred on a helper, where such helper is engaged for the performance of official duties, is exempt. 5. Academic allowance: Any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions is exempt. 6. Uniform allowance: Any allowance granted to meet expenditure incurred on the purchase or maintenance of uniform for official purposes is exempt.  Allowances which are exempt up to the prescribed amount [Section 10(14)(ii), Rule2BB(2)] : Section 10(14)(ii) covers the prescribed allowances, which are granted to the employee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living. Such allowances, which are prescribed in Rule 2BB (2), are exempt to the extent specified in that rule. The provisions of Rule 2BB (2) are broadly as under: 7. Children education allowance: Any allowance received by an employee to meet the cost of education on his children is exempt up to ` 100 p.m. per child or the actual amount received, whichever is lower. Such exemption is available up to a maximum of two children. 8. Hostel allowance: Any allowance received by the employee to meet the hostel expenditure on his children is exempt up to ` 300 p.m. or the actual amount received, whichever is lower. Such exemption is granted up to a maximum of two children. 9. Transport allowance: Transport allowance received by an employee to meet his expenditure for the purpose of commuting between his residence and place of duty is exempt up to ` 1,600 p.m. (Vide I.T. 6th Amdt.) Rules 2015, w.e.f. with retrospective effect from the 2015-2016) or the actual amount of allowance received, whichever is lower. In the case of an employee, who is blind or physically handicapped, the exemption shall be to the extent of ` 3,200 p.m. (Vide I.T. 6th Amdt.) Rules 2015, w.r.e.f. 2015-16). or the actual amount of allowance received, whichever is lower. 10. Allowance received by transport employees: Allowance received by an employee, who is working in any transport system, to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another is exempt to the extent of 70% of such allowance or ` 10,000 p.m., whichever is lower [vide IT(Eighth Amdt.) Rules 2010]. Such exemption can be claimed only if the employee is not in receipt of daily allowance. 11. Hill area or high altitude or uncongenial climate allowance: Exemption for such allowances varies between ` 300 and ` 800 p.m. In the case of Siachen area of Jammu and Kashmir, the exemption is limited to ` 7,000 p.m. [See Appendix IV]. 12. Border Area Allowance or Remote Locality Allowance or Difficult Area Allowance or Disturbed Area Allowance: Exemption for such allowances varies between `200 p.m. and `1,300 p.m. [See Appendix IV]. 13. Tribal area allowance: Any special compensatory allowance in the nature of Tribal areas/Scheduled areas/Agency areas allowance in the State of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar and Orissa is exempt to the extent of ` 200 p.m. or the amount of allowance received, whichever is lower. 14. Compensatory field area allowance: DIRECT TAXATION

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Any compensatory field area allowance granted in the specified areas of Arunachal Pradesh, Sikkim, Himachal Pradesh, Uttar Pradesh, Jammu and Kashmir and throughout Manipur and Nagaland is exempt to the extent of ` 2,600 p.m. or the amount of allowance received, whichever is lower. 15. Compensatory modified field area allowance: Compensatory modified field area allowance in the specified areas of Punjab and Rajasthan, Haryana, Himachal Pradesh, Arunachal Pradesh and Assam, Sikkim and West Bengal, Uttar Pradesh, Jammu and Kashmir and throughout Mizoram and Tripura is exempt to the extent of ` 1,000 p.m. or the amount of allowance received, whichever is lower [See Appendix IV]. 16 Counter-insurgency allowance: Counter-insurgency allowance granted to the members of the armed forces operating in areas away from their permanent locations for a period of more than 30 days is exempt to the extent of ` 3,900 p.m. or the amount of allowance received, whichever is lower. 17. Underground allowance: Underground allowance granted to an employee who is working in uncongenial, unnatural climate in underground coal mines is exempt to the extent of ` 800 p.m. or the amount of allowance received, whichever is lower. 18. High altitude allowance: High altitude (uncongenial climate) allowance granted to the member of the armed forces operating in high areas is exempt to the extent of ` 1,060 p.m. for an area situated in the altitude of 9000 - 15000 feet, ` 1,600 for an area situated in the altitude above 15000 feet, or the amount of allowance received, whichever is lower. 19. Special compensatory highly active field area allowance: Such an allowance granted to the members of the armed forces is exempt to the extent of ` 4,200 p.m. or the amount of allowance received, whichever is lower. 20. Island allowance: Any special allowance granted to the members of the armed forces in the nature of Island (duty) allowance in Andaman & Nicobar and Lakshadweep group of Islands is exempt to the extent of `3,250 p.m. or the amount of allowance received, whichever is lower. Other exempted allowances:  Allowances to Government employees paid outside India: Allowances paid to a Government employee, who is an Indian citizen, for services rendered outside India are exempt from tax.  Allowances to High Court Judges: Allowances paid to High Court judges under Section 22A (2) of the High Court Judges (Consolidation of Service) Act, 1954 are exempt from tax.  Sumptuary allowances: Sumptuary allowance to the judges of the Supreme Court and High Courts is exempt from tax.  Allowances from UNO: Allowances received from the United Nations Organisation are exempt from tax vide Section 2 of UN (Privileges and Immunities) Act, 1974. 7.9

PERQUISITES

The term perquisite has been defined in the Oxford English Dictionary as ‗any casual emolument, fee or profit, attached to an office or position in addition to salary or wages. Perquisites, being personal benefits attached to a post, may be given in cash or in kind. The legal definition of perquisites u/s 17(2) includes the following: (i) the value of rent-free accommodation provided to the assessee by the employer [Section 17(2)(i)]; (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by the employer [Section 17(2)(ii)]; (iii) the value of any benefit or amenity granted or provided free of cost or at a concessional rate in any one of the following cases [Section 17(2)(iii)]: (a) by a company to an employee who is a director; (b) by a company to an employee who has substantial interest in the company; DIRECT TAXATION

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(i) (ii)

(iii)

(iv) (v)

(c) by any employer (including a company) to an employee (other than employees mentioned in (a) and (b) above whose income under the head ―Salaries‖ exclusive of the value of all benefits or amenities not provided by way of monetary payment exceeds fifty thousand rupees; any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee [Section 17(2)(iv)]; any sum payable by the employer whether directly or through a fund, other than recognised provident fund or an approved superannuation fund or deposit linked insurance fund, to effect an insurance on the life of the assessee or to effect a contract for an annuity [Section 17(2)(v)];and the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee [Section17(2)(vi)]; the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees [Section 17(2)(vii)]; and the value of any other fringe benefit or amenity as may be prescribed [Section 17(2)(viii)].

 When perquisites become taxable: The year of taxability of perquisites is as under: Description of Year of taxability perquisites Sections: 17(2)(i); Perquisites which are provided or granted to the employee are taxable in the 17(2)(ii); 17(2)(iii) year in which the provisions are made provision is made Section 17(2)(iv) Taxable in the previous year in which the payment is actually made. Section :17(2)(v) Taxable in the previous year in which payment falls due. 

Examples of perquisites: As shown below, all the perquisites u/s 17(2) may be classified as under:

Perquisites

Tax-free

Taxable

Taxable to all employees

Taxable at the hands of specified employees Perquisites at a glance

Taxable perquisites (A) Taxable in all cases: 1. Rent-free accommodation u/s 17(2) (i) 2. Accommodation provided at concessional rent u/s 17(2)(ii) 3. Obligations of the employee met by the employer which otherwise would have been payable by him u/s 17(2)(iv), e.g.: (a) payment of employee's loan (b) payment of personal gas and electricity bill (c) Income-tax and profession tax paid by the employer (d) domestic servant paid by the employer when such servants are appointed by the

Tax-free perquisites 1. Accommodation in remote areas 2. Accommodation on transfer of employees 3. Reimbursement of car expenses when employee owns the car 4. Educational facilities for employee's children up to ` 1,000 p.m. per child, when school is owned or maintained by the employer 5. Interest-free loan up to ` 20,000 6. Loan for medical treatment 7. Tea and snacks provided during office hours or meals during the office hours at office premise or through non- transferable

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4.

5. 6.

7.

employee (e) payment of education bill of the employee's children by the employer, including reimbursement of fees Life insurance premium or deferred insurance premium of the employee paid by the employer, u/s 17(2)(v) Specified security or sweat equity u/s 17(2) (vi) Employer's contribution to the approved superannuation fund in excess of ` one lakh u/s 17(2) (vii) Other fringe benefit or amenity u/s 17(2) (viii) e.g., (a) Interest-free loan or loan at concessional rate (b) Travelling, tour, holiday home at the cost of the employer (c) Free meals (d) Gift or gift voucher in lieu of gifts (e) Credit card facility (f) Club facility (g) Use of any movable assets (other than laptop and computers) (h) Benefits arising from transfer of other movable assets of the employer (i) Any other benefit or amenity, service, right or privilege but excluding telephones facilities

B. Taxable in the hands of specified employees [Section 17(2)(iii)]:

paid vouchers usable at outside eating joints up to ` 50 per meal 8. Gift or gift voucher up to ` 5,000 during the year 9. Club facility enjoyed under corporate membership 10. Free telephone including mobile phone 11. Medical facilities 12. Health club, sports and similar facilities provided uniformly to all employees 13. Laptops and computers provided by employer 14. Car facilities between residence and office or workplace 15. Amount spent on training or refreshers course for employees 16. Perquisites to an Indian citizen who is a Government servant and rendering service outside India 17. Rent-free residence to Judges of High Court and Supreme Court 18. Rent-free official residence to an official of Parliament or Union Minister or Leader of the Opposition in Parliament 19. Leave travel concessions 20. Tax on non-monetary perquisites paid by the employer 21. Provision of personal/private journey free of cost or at concessional fare by the employer to the employees of an airline or the Railways

(1) Free service of sweeper, gardener, watchman, etc.

(2) Free educational facility at employer's school (3) Provision of personal journey by employer engaged in carrying passengers or goods

7.10 TAX TREATMENT OF VARIOUS PERQUISITES 1. Valuation of rent-free accommodation or accommodation provided at concessional rent [Rule 3 (1) and Explanations 1 and 2 to Section 17(2)(ii)]: The value of rent-free accommodation provided to the Government as well as the non-government employees shall be as under: a. Accommodation provided to Government employees: For the purpose of Rule 3(1), Government employee means an employee of the State Government or the Central Government only. An employee serving with any undertaking of the State or Central Government on deputation, or semi-Government employees or employees of a foreign Government do not fall within the category of Government employees; They are to be treated as non-government employees.

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The value of rent-free accommodation provided to a Government employee as aforesaid shall be determined as under:  If the accommodation is unfurnished: The value of accommodation shall be equal to the licence fee determined by the Central or State Government in accordance with the Service Rules.  If the accommodation is furnished: With the amount determined as above for unfurnished accommodation, 10% p.a. of the cost of furniture (including television, radio, refrigerators, other household appliances, air conditioning plant or equipment) is to be added. If, however, such furniture is hired by the employer from a third party, the actual hiring charges payable for the same is to be added.  If the accommodation is provided at concessional rate: With the amount determined for furnished or unfurnished accommodation as above, the amount actually payable by the employee in respect of accommodation or furniture, as the case may be, shall be deducted. [Explanations 1 and 2 to Section 17(2)(ii)]. b. Accommodation provided to non-Government employees: The value of accommodation provided to non-Government employees shall be determined as under:  If the accommodation is unfurnished: The value of an unfurnished accommodation shall be as under: Location Valuation Where the accommodation is owned by the 15% of salary in respect of the period during employer and it is: which the accommodation is occupied by the  situated in a city having population employee. exceeding 25 lakhs as per 2001 census 10% of salary in respect of the period during  situated in a city having population which the accommodation is occupied by the exceeding 10 lakhs but not exceeding 25 employee. lakhs as per 2001 census 7·5% of salary in respect of the period during  situated in any other cities which the accommodation is occupied by the employee. Where the accommodation is taken by the Actual rent paid by the employer or 15% of employer on rent or lease and it is: salary, whichever is lower. situated anywhere in India 







If the accommodation is furnished: With the amount determined as above for unfurnished accommodation, 10% of the cost of furniture (including radio, television, and all other household appliances) shall be added. But if furniture is hired by the employer from third party, the actual hiring charges are to be added. If the accommodation is provided at concessional rate: With the amount determined as above for furnished or unfurnished accommodation, the amount actually payable by the employee in respect of either accommodation or furniture, or both, shall be deducted. [Explanations 1 and 2 to Section17(2)(ii)]. Accommodation provided in a hotel: The value of accommodation provided in a hotel to a Government employee or non-Government employee shall be determined as follows: (i) When the accommodation is provided in a hotel on the transfer of the employee from one place to another and the period of stay in the hotel does not exceed 15 days, the value of accommodation shall be nil. (ii) When accommodation in the hotel exceeds 15 days, the value of the accommodation shall be 24% of salary for the period for which accommodation in hotel is provided or the actual hotel charge, whichever is lower. Employee retaining more than one accommodation: When on account of transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, then for a period not exceeding 90 days the value of the perquisite shall be determined with DIRECT TAXATION

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reference to only one such accommodation which has the lower value. Beyond 90 days the value of the perquisite shall be charged for both such accommodations. 

Temporary accommodation or accommodation at a remote area: Where the accommodation is provided to an employee working at a mining site or an off-shore oil exploration site or a dam site or a power generation site or an off-shore site, the value of the accommodation shall be nil, if either of the following conditions are fulfilled: (i) the accommodation is located in a remote area; or (ii) where it is not located in a ―remote area‖, the accommodation should be of a temporary nature having plinth area of not more than 800 square feet and should not be located within 8 kilometres of the local limits of any municipality or cantonment board.

A ―project execution site‖ for the aforesaid purposes means a site of project up to the stage of its commissioning. A "remote area" means an area located at least 40 kilometres away from a town having a population not exceeding 20,000 as per the latest published all-India census. Off-shore sites of similar nature do not have to meet any requirement of distance. Meaning of salary for valuation of rent-free accommodation: For the purpose of valuation of perquisite in respect of accommodation, the term salary includes the following: (i) Basic; (ii) Dearness allowance, if paid in terms of employment; (iii) Bonus; (iv) Commission; (v) Fees (vi) All other taxable allowances; (vii) Any other monetary payment (by whatever name called). Salary for this purpose does not include the following: (a) Dearness allowance, if terms of employment do not provide for it. (b) Employer‘s contribution to the provident fund. (c) Allowances which are exempt from tax. (d) Value of perquisite specified in Section 17(2). Example 11: S is offered an employment by B. Co Ltd., Chennai on a basic salary of ` 20,000 p.m. Other allowances are: Dearness allowance not forming part of salary for retirement benefits ` 8,000 p.m., medical allowance ` 800 p.m. and bonus equal to one month‘s basic salary. The company gives an option to S either to take a rent-free accommodation in Chennai of the fair rental value of ` 8,000p.m. or to accept a cash house rent allowance and take a house in Chennai at a rent of ` 8,000 p.m. Which offer is beneficial to S? Answer: Comparative analyses between House rent allowance and rent free accommodation ` (a) When house rent allowance is accepted: House rent allowance received Less: Exemption u/s 10(13A), Rule 2A being least of the following 1. House rent allowance received 2. Rent paid less 10% of salary (` 96,000 -24,000) 3. 50% of salary Taxable amount of house rent allowance (b) When rent-free accommodation is accepted: Value of rent-free accommodation which is taxable as perquisite [u/s 17(2)(i), Rule 3(1)]: 15% of salary, as the house is owned by the employer and it is situated at a place having more than 25 lakhs population as per 2001 census

96,000 96,000 72,000 1,20,000

72,000 24,000 40,440

Since the taxable amount when HRA is accepted is lower, it is beneficial for S. Note: Meaning of salary

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Particulars Basic salary (20,000 X 12) D. A (not forming part of retirement benefit) Medical allowance Bonus Total

For the purpose of exemption from house rent allowance u/s 10(13A) 2,40,000 Nil

For the purpose of rentfreeaccommodation. 2,40,000 Nil

Nil Nil 2,40,000

9,600 20,000 2,69,600

Example 12: Mrs. Anjum, an employee of BKC Ltd., has been transferred from Mumbai office to Chennai and was provided rent-free accommodation in a hotel for one month. Hotel bill of ` 23,000 was paid by his employer. During the previous year 2016-2017 Mrs. Anjum drew cash emoluments of ` 3, 30,000. You are required to determine the value of perquisite in respect of the accommodation. Answer: Computation of value of perquisite in respect of accommodation in hotel of Mrs Anjum, a resident individual, for the assessment year 2017-2018 relating to the previous year 2016-2017. Under Rule 3(1), the value of perquisite in respect of accommodation in hotel for a period exceeding 15 days shall be the lower of the following: (a) Amount paid by the employer as hotel charge for 15 days ` 33,000 x 1/2 (b) 24% of salary for the relevant period (` 3,30,000 x 15/365x 24/100] Value of perquisite [alternative (b) being lower]

16,500 3,255 3,255

Example13: Smt. M is a non-Government employee. He furnishes the following particulars of her income during the previous year 2016-2017: (a) Basic salary @ ` 15,000 p.m. (b) Dearness allowance as per terms of employment @ 25%. (c) Special allowance for performing official duties @ 1,000 p.m. His employer also provides her the following benefits: (i) Rent-free furnished accommodation at New Delhi. The house is owned by the employer and furniture provided was worth ` 1,00,000. (ii) Electricity bill for her house ` 1,000 p.m. on average. (iii) A motor car with driver, for both personal and official purposes. (iv) Free education facility for her son in a school maintained by the employer. Cost of education in similar institution comes to around ` 1,000 p.m. (v) Compute gross salary of M for the assessment year 2017-2018. Answer: Computation of gross salary of M for the assessment year 2017-2018 relating to the previous year 20162017: ` ` Basic salary 1,80,000 Add : Dearness allowance 45,000 2,25,000 Special allowance 12,000 Less: Exemption u/s 10(14), Rule 2BB (1) 12,000 Nil Add: Perquisites u/s 17(2): Rent-free furnished accommodation (Note 1) [u/s 17(2)(i), Rule 3(1)] 43,750 Personal electricity bill [u/s 17(2)(iv), Rule 3(4)] 12,000 Motor car [u/s 17(2)(iii), Rule 3(2) (Note 2)] 32,400 Free education facility [u/s 17(2)(iii), proviso to) Rule 3(5)] Nil Gross salary (Subject to deduction u/s 16) 313,150

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Notes: 1. Valuation of rent-free accommodation: ` Value of rent-free accommodation [15% of ` Basic+ DA] 33,750 Add: 10% of the cost of furniture 10,000 Total 43,750 2. Assumed that for motor car all expenses including the cost of driver are paid by the employer. 2. Valuation of perquisite in respect of obligation of the employee paid by the Employer [Section 17 (2) (iv)]: The value of perquisite in respect of the personal obligation of the employee paid by the employer [See Table for examples] shall be the actual amount paid by the employer for this purpose. These perquisites will be taxable in the hands of all employees. 3. Valuation of perquisite in respect of life insurance premium or deferred annuity premium paid by the employer [Section 17(2)(v)]: The value of the perquisite is the actual amount payable by the employer. 4. Specified security or sweat equity [Section 17(2) (vi), Rules 3(8), 3(9)]: The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee shall be treated as taxable perquisite at the hands of all employees. The value of the aforesaid specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares. Example 14: X Ltd. allotted 150 sweat equities of ` 10 each to M. The fair market value of the shares computed in accordance with the Income-tax Act was ` 500 per share, whereas it as allotted at ` 300 per share. What is the perquisite value of sweat equity shares allotted to M? In case M transfers these shares subsequently, what would be their cost of acquisition for the purpose of determination of capital gains? [CMA-Inter, Dec. 2012 (Adapted)] Answer: Under the Explanation (c) to Section 17(2)(vi), the perquisite value of any sweat equity issued to an employee shall be the fair market value of those shares on the date on which the option is exercised by the assessee as reduced by the mount actually paid or recovered from the employee in respect of those shares. In the present case, therefore, the value of perquisite shall be ` 30,000 as computed below: (a) Computation of value of perquisite in respect of sweat equities ` ` Fair market value [ 150 x ` 500] Less: Amount recovered [ 150 x ` 300]

75,000 45,000

Value of perquisite u/s 17(2)(vi)

30,000

(b) If the equities are transferred, depending on the period of holding these shares by the assessee, it will be treated as short-term or long-term capital gains and for that purpose the cost of the shares shall be, in accordance with section 49(2AA), shall be the value that was taken for the purpose of determination of the value off perquisite under section 17(2)(vi), i.e. ` ` 45,000. 5. Contribution to an approved superannuation fund by the employer [Section 17(2)(vii)]: Any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds ` 1,00,000, shall be treated as a perquisite, which is taxable at the hands of all employees.

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6. Valuation of perquisite in respect of fringe benefits [Section 17(2)(viii), Rule 3(7)] : The value of the fringe benefits shall be as under: a. Interest-free loan or loan at a concessional rate [Rule 3(7)(i)] : The value of interest-free loan or loan given at a concessional rate to an employee shall be as follows : (i) For any loan not exceeding ` 20,000, the perquisite value is nil. (ii) In respect of any loan taken for medical treatment of diseases specified in Rule 3A, the perquisite value shall be nil. However, where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme. (iii) In respect of the loan taken for any other purposes, the value of the perquisite shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India as on the first day of the previous year in respect of the loan for the same purposes advanced by it. The amount of interest shall be calculated on the maximum outstanding monthly balance. Any amount recovered by the employer in respect of interest shall be deducted to arrive at the net value of perquisite in respect of such interest. SBI Interest Rate as on 1st April 2016 (Assessment year 2017-2018) Purpose Amount Type of assessee Housing loan Any amount Women Others Education loan Up to ` 75 lakh (0.50 lower for girls) Above 75 lakhs Car loan Any amount Women Others Loan for Scooter/Two-wheeler Any amount Personal loan (Saral) Any amount Gold loan Any amount

Rate of Interest (p.a.) 9.40% 9.45% 11.20% 10.90% 9.75% 9.80% 12.20% 17.70% 16.50%

b. Value of travelling, touring, accommodation and other expenses [Rule 3(7)(ii)]: The perquisite value in respect of any travelling, touring, accommodation for any holiday (other than those covered under Rule 2B in respect of leave travel concession) availed of by the employee or any member of his household shall be determined as follows: (i) Where such facilities are not maintained by the employer, the value of the perquisite shall be the actual amount incurred by the employer. (ii) Where such a facility is maintained by the employer, and it is not available uniformly to all employees, the value of the perquisite will be equal to such amount as other agencies charge to the public. (iii) Where the employee is on official tour and expenses are incurred for any member of the household accompanying him, the actual amount of expenditure incurred in respect of any member of the household shall be the value of the perquisite. (iv) Where any official tour is extended as a vacation, the value of the perquisite shall be limited to the expenses incurred in relation to such extended period of vacation. In all cases mentioned above, the value of the perquisite so determined shall be reduced by the sum, if any, recovered from the employee. c. Free meals, tea, snacks, etc., [Rule 3(7)(iii)]: The value of perquisite in respect of free meals, tea, snacks, etc. shall be determined as follows: Condition Value of perquisite (i) Tea or snacks provided during office hours. Nil (ii) Free meals provided during office hours in remote Nil area or on offshore installation. (iii) Free meals provided during office hours either at Nil, if value per meal in either case does not office premises or through non-transferable paid exceed ` 50. DIRECT TAXATION

59

vouchers and usable only at eating joints. (iv) In other cases

Actual amount incurred or paid by the employer as reduced by the amount recovered from the employee.

d. Gift or gift voucher in lieu of gift [Rule 3(7)(iv)] : The value of perquisite in respect of any gift voucher or token in lieu of gifts received by the employee or any member of his household on ceremonial occasions or otherwise shall be determined as the sum equal to the amount of such gift. However, in respect of any gift, the value of which does not exceed ` 5,000 in aggregate during the previous year, the value of perquisite shall be nil. e. Credit card facilities [Rule 3(7)(v)]: Where the expenses are incurred wholly and exclusively for official purposes, the value of the perquisite in respect of the credit card shall be nil. Expenses incurred for personal purposes shall be valued at actual cost. f. Club facilities [Rule 3(7)(vi)]:The value of perquisite in respect of club facilities paid or reimbursed to the employee or to any member of his household shall be determined as follows: (i) Where expenses are incurred wholly and exclusively for business purposes or where the facility relates to the use of health club, sports and similar facilities provided uniformly to all employees by the employer or where the initial fee of corporate membership paid by the employer: The value of the perquisite shall be nil. (ii) In any other cases: The value of the perquisite shall be taken at actual cost of the employer. g. Use of any movable assets [Rule 3(7)(vii)] : The value of a perquisite in respect of use by the employee or any member of his household of any movable assets (other than laptops and computers) belonging to the employer or hired by him, shall be determined at 10% p.a. of the actual cost of such assets or the amount of rent paid or payable by the employer. The value of perquisite so determined shall be reduced by the amount, if any, recovered from the employee for such use. h. Transfer of any movable assets [Rule 3(7)(viii)]: The value of a perquisite in respect of transfer of any movable assets belonging to the employer directly or indirectly to the employee or any member of his household shall be determined as follows: Name of assets (i) Computers and electronic items (ii) Motor car (iii) Any other asset

Value of perquisite Actual cost of asset to the employer as reduced by normal wear and tear @ 50% (on reducing balance method) of the cost of the asset for each completed year during which the asset was put to use by the employer, and further reduced by any amount recovered from the employee as consideration for such transfer. Same as above, except that depreciation rate will be @ 20% on reducing balance method. Same as (i) above except that depreciation rate will be @ 10% on straight line method.

i. Any other benefit or amenity, service, right or privilege but excluding telephone [Rule 3(7)(ix)]:In addition to those mentioned above, the value of any other perquisites shall be taken at the market value or the actual cost incurred by the employers. Any amount recovered from the employee shall be deducted from the aforesaid amount. Example 16: From the following particulars find out the taxable value of perquisite in the case of X to whom the following assets held by the company were sold on 13th June 2016: DIRECT TAXATION

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Car ` 8,72,000 5,15,000

Cost of purchase on May 2014 Sales

Laptop ` 1,22,500 25,000

Furniture ` 35,000 10,000

The assets were put to use by the company from the day these were purchased. Answer: Computation of taxable value of perquisite for the assessment year 2017-18 Car Cost of the asset on May 2014 8,72,000 Less : Cost of normal wear and tear for the year ending on May 1,74,400 2015 [@ 20%, 50% and 10% respectively] Balance at the beginning of the second year 6,97,600

Laptop 1,22,500 61,250

Furniture 35.000 3,500

61,250

31,500

Less : Cost of normal wear and tear for the year ending on May 2016

1,39,520

30,625

3,500

Book value of asset transferred

5,58,080

30,625

28,000

Less : Amount recovered from the employee Value of perquisite taxable in the hands of X

5,15,000 43,080

25,000 5,625

10,000 18,000

7.11 VALUATION OF PERQUISITES WHICH ARE TAXABLE IN THE HANDS OF SPECIFIED EMPLOYEES Under Section 17(2)(iii), the term specified employee includes the following : (a) an employee who is a director of the company; (b) an employee who has substantial interest in the company. According to Section 2(32), a person is said to have substantial interest in a company when he is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting rights; (c) an employee whose income under the head ―Salaries‖ (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds ` 50,000. The aforesaid limit of ` 50,000 shall be computed excluding the value of all non-monetary benefits or perquisites. It shall also exclude/deduct the following: (a) Entertainment allowance to the extent deductible u/s 16(ii). (b) Professional tax u/s 16 (iii). The following perquisites are taxable at the hands of the specified employees: 1. Motor car and other vehicle [Rule 3(2)] : The valuation of perquisites in respect of motor car is subject to the following conditions:  Motor car and other vehicle provided by the employer is a perquisite which is taxable in the hands of a specified employee.  When the car is owned by the employee but the employer reimburses the expenses, it is a perquisite taxable in the hands of all employees. Conveyance facility provided to the employee for journey between employee‘s residence and office or place of work is not a perquisite, therefore, not taxable. DIRECT TAXATION

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SL Circumstances No. 1. Where the motor car is owned or hired by the employer and (a) is used exclusively for official purposes (b) is used exclusively for private or personal purposes of the employee or any member of his household and running and maintenance expenses are met or reimbursed by the employer 2.

3.

(c) is used partly for official purposes and partly for private purposes of employee or any member of his household— (i) if expenses are met or reimbursed by the employer ii) if expenses on running and maintenance for such private use is fully met by the employee. If employee owns the motor car, but expenses for running and maintenance are met or reimbursed by the employer. (i) if the reimbursement is wholly and exclusively for official purposes (ii) if the reimbursement is both for official and private purposes. Where the employee owns any other automotive conveyance but actual running and maintenance expenses are paid or reimbursed by the employer and — (i) if reimbursement is exclusively for official purposes. (ii) if reimbursement is both for private and official purposes. * Amount recovered from the employee is not deductible.

When the cubic capacity of the car does not exceed 1.6 litres

When the cubic capacity of the car exceeds 1.6 litres

Not a perquisite

Not a perquisite

Actual amount of expenditure incurred by the employer on running and maintenance plus cost of driver plus normal wear and tear @ 10% of the actual cost of motor car less amount recovered from the employee.

Actual amount of expenditure incurred by the employer on running and maintenance plus cost of driver plus normal wear and tear @ 10% of the actual cost of motor car less amount recovered from the employee.

*` 1,800 (plus ` 900 for driver, if provided by the employer) ` 600 (plus ` 900 for driver, if provided by the employer)

*` 2,400 (plus ` 900 for driver, if provided by the employer) ` 900 (plus ` 900 for driver, if provided by the employer)

No value

No value

Actual amount of expenditure Actual amount of incurred by the employer less expenditure incurred by the ` 1,800 (plus ` employer less ` 2,400 (plus ` 900 if driver is provided by the employer), subject to the maintenance of proper documents regarding use of the car.

900 if driver is provided by the employer), subject to the maintenance of proper documents regarding use of the car.

No Value Actual amount of expenditure Not applicable incurred by the employer as reduced by ` 900.

Where one or more motor cars are owned or hired by the employer and the employee or any member of his family is allowed to use such motor cars (otherwise than wholly and exclusively for official purposes), the value of the perquisite shall be the amount calculated in respect of one car in accordance with item (1)(c)(i) [i.e., ` 1,800 p.m. or ` 2,400 p.m. as the case may be plus for driver, if any, @ ` 900 p.m.] of the aforesaid table as if the employee had been provided one motor car both for private and official purposes and the amount calculated in respect of the other car or cars in DIRECT TAXATION

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accordance with item (1)(b) of the aforesaid table as if he had been provided with such car or cars exclusively for his private or personal purposes. 2. Valuation of perquisite in respect of sweeper, gardener, watchman or personal attendant [Rule 3(3)]: When the employer appoints these servants and meets the expenses in respect of them, it is a perquisite taxable in the hands of the specified employees only. Otherwise, it would be taxable in all cases. The value of the perquisite in both cases is the actual amount spent or incurred by the employer, as reduced by the amount recovered from the employees for such services. 3. Valuation of perquisite in respect of supply of gas, electricity and water for household consumption [Rule 3(4)]: When gas, electricity or water connection is in the name of the employer and the employer bears the cost, it is a perquisite taxable in the hands of the specified employees. But if such connection is in the name of the employee, but expenses are paid by the employer, it is a perquisite taxable in the hands of all employees. 4. Valuation of perquisite in respect of educational facilities [Rule 3(5)]: Where educational facilities are provided in the institution owned and maintained by the employer or such facilities are allowed in other educational institutions by reason of his being in the employment of that employer, it is a perquisite taxable in the hands of the specified employees. The value of a perquisite in this case shall be equal to the cost of education in a similar institution, as reduced by any amount recovered from the employee. However, the value of the perquisite in this respect shall be taken to be nil if the cost of such education per child does not exceed ` 1,000 p.m. When the cost of education in such institutions exceed ` 1,000 p.m. the entire sum will be taxable.  

The payment of education bill or any reimbursement is a perquisite which is taxable to all employees. Exemption for education allowance u/s 10 (14) is available for the assessee‘s children only and the maximum number of children for whom the exemption is available must not exceed two. But the benefit under Rule 3(5) applies to any member of the assessee‘s household without any restrictions as to their number.

5. Value of perquisite in respect of provision of personal journey by an undertaking engaged in carrying passengers or goods [Rule 3(6)]: However, in the case of an employee of an airline or the Railways, such benefits are tax-free. In any other case, the perquisite value of such benefits provided to the employee or any member of his household shall be taken to be the value at which such benefit or amenity is offered by such undertaking to the public, as reduced by any amount recovered from the employee. 6. Valuation of perquisites in respect of medical facilities:  Fixed medical allowance is taxable irrespective of actual expenditure incurred by the employee.  Medical facility in the employer‘s hospital is exempt from tax.  Reimbursement of medical expenses in Government hospital and cost of medical treatment of prescribed diseases in approved hospitals/nursing homes are exempt from tax.  Medical facility in private or unapproved hospital is exempt up to ` 15,000. Medical treatment outside India, including cost of stay abroad is exempt up to an amount approved by the RBI. Cost of travel of the employee or his member of family or attendant is exempt if employee‘s gross total income does not exceed ` 2,00,000. 7.12 DEDUCTIONS FROM GROSS SALARY The sum total of the all taxable receipts from the employer is called gross salary. Income under the head ―Salaries‖ is obtained only after deduction from the gross salary the following:

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1. Deduction for entertainment allowance [Section 16(ii)]: Entertainment allowance received by an employee is to be first included in the gross salary. From the gross salary, deduction for entertainment allowance shall be allowed to a Government employee only @20% of basic salary or ` 5,000, whichever is lower. 2. Deduction for professional tax on employment [Section 16(iii)]: professional tax actually paid during the previous year is fully deductible. A standard pro forma for computation of income under the head ―Salaries‖ Basic salary Advance salary Arrears of salary Bonus, commission or fees Pension Employer's contribution to RPF in excess of 12% of salary Employer's contribution to pension fund specified u/s 80CCD Interest credited to RPF in excess of 9-5% Commuted value of pension Commuted value of pension Less: Exemption u/s 10(10A) Gratuity Less: Exemption u/s 10(10A) Leave salary Less: Exemption u/s 10(10AA) Any other receipts taxable as profits-in-lieu of salary u/s 17(3) Add: Taxable allowances: Dearness allowance/ Dearness pay Medical allowances House rent allowance Less: Exemption u/s 10(13A) Rule 2A City compensatory allowance Car allowance/ Transport allowance Less: Exemption u/s 10(14) Children education allowance/Hostel allowance Less: Exemption u/s 10(14) Lunch and Tiffin allowance Entertainment allowance Any other allowances Add: Perquisites u/s 17(2): A. Taxable in all cases : Rent-free accommodation [u/s 17(2))]/Accommodation at concessional rent u/s 17(2)] Any obligation of the employee met by the employer [u/s 17(2)(iv)] Life insurance premium paid by the employer [u/s 17(2)(v)] Specified security or sweat equity [u/s 17(2) (vi)] Employer's contribution to approved superannuation fund in excess of ` 1 lakh [u/s 17(2) (vii)] Any other fringe benefits or amenity [u/s 17(2)(viii)] B. Taxable at the hands of specified employees: Taxable in the hands of specified employees: DIRECT TAXATION

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Motor car/Any other vehicle Gas, electricity/ water Sweeper, gardener, watchman, etc. Free educational facility for employee's children in a school run by the employer Gross Salary Less: (i) Deduction for entertainment allowance u/s 16(ii) (iii) Deduction for professional tax u/s 16(iii Income under the head "Salaries" Example 17: A, finance manager in B. Ltd. gives you the following information: (I) A rent-free accommodation is provided by the employer at Bangalore by taking the accommodation on lease basis whose rent was ` 20,000 per month. (II) He is provided with a motor car (cubic capacity of engine more than 1.6 litres) both for official and personal use. The expenses on running and maintenance are met by the employee. Assume annual salary for the purpose of perquisite valuation as ` 6,00,000. You are requested to compute the perquisite value in the hands of A. [CMA-Inter, June 2015] Computation of taxable value of perquisites for the assessment year 2017-18 relating to the previous year 2016-17 ` (a) Taxable value of rent-free accommodation [ Section 17(2)(i), Rule 3(1)]: Since the accommodation is taken on lease by the employer, its value will be actual rent paid or 15% of salary, whichever is lower

90,000

(b) Taxable value of motor car [ Section 17(2)(iii), Rule 3(2)]: Since the motor car is used both for private and personal use and expenses of running and maintaining the car is fully met by the employee, the value of perquisite shall be ` 900 p.m. 10,800 Total taxable value of perquisite 1,00,200 Example 18. H, who is employed in G Ltd., furnishes you the following information for the year ended 31.03.2017: (i) Basic salary up to 31.12.2016 ` 60,000 per month. (ii) Basic salary from 01.01.2017 ` 70,000 per month. (Note: Salary is due and paid on the last day of every month.) (iii) Dearness Allowance @40% of basic salary. (iv) Bonus equal to one month‘s salary paid in February, 2017 on basic salary and D.A. applicable for that month. (v) Employer‘s contribution to provident Fund account of the employee at 15% of basic salary. (vi) Profession tax paid ` 5,000 of which ` 2,000 was paid by employer. (vii) Facility of laptop and computer was provided to H both for official and personal use. Cost of laptop ` 35,000 and computer ` 25,000 acquired by the company on 01.01.2017 (viii) A motor car owned by the employer is provided to employee meant for both official and personal use from 01.12.2016. Running expenses fully met by the employer which amounts to ` 35,000. The motor car (cubic capacity of engine exceeds 1.6 litres) was self-driven by H Compute the salary income chargeable to tax in the hands of H for the assessment year 2017-18. [CMA-Inter, Dec. 2015 (Adapted)] Answer: Computation of Income under the head Salaries of H for the assessment year 2017-17 relating to the previous year 2016-17 Basic salary [(` 60,000 x 9) + (` 70,000 x 3)] Dearness allowance @40% of basic Employer‘s contribution to RPF in excess of 12% of salary Bonus [equivalent to the Basic + DA of February] DIRECT TAXATION

7,50,000 3,00,000

10,50,000 31,500 98,000 65

Add: Perquisites: (a) Professional tax paid by the employer (b) Facility of laptop computer [Tax-free perquisite: Rule 3(7) (ii)] (c) Motor car for both private and official use [ ` 2,400 x 12] (Note) Gross Salary Less : Deduction u/s 16(iii) for professional tax paid Income under the head Salaries

2,000 Nil 28,800

30,800 12,03,100 5,000 11,98,100

Note: (1). Under Rule 3(2) the perquisite value of motor car used both for private and official purposes is fixed at ` 2,400 pm, where expenses are paid by the employer and the cubic capacity of the engine of the car is more than 1.6 litres. Further, amount recovered from the employee will not be deductible. 2. DA is assumed to be paid under the terms of employment. Example 19: R joined a company at Chennai on 01.07.2016 and was paid the following emoluments: 1) Basic salary ` 50,000 per month 2) Dearness allowance 50% of basic salary (eligible for retirement benefits). 3) Furnished accommodation owned by company was provided at Chennai. 4) Value of furniture in the accommodation ` 2,00,000 (cost). 5) Motor car owned by the employer (with engine capacity less than 1.6 litres) given for exclusive personal use. Self-driven by Raghu. Expenses incurred by employer on its running and maintenance ` 55,950. 6) Educational facility for two children provided free of cost. The school is owned by the company. Tuition fee per month ` 600 and ` 1,200 respectively. 7) Annual membership fee for Gymkhana Club paid by the employer ` 20,000. Compute the income from salary of Mr. Raghu for the assessment year 2016-17. [CMA – Inter, June 2014 (Adapted)] Ans. Computation of Income under the head Salaries of R for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Basic salary [` 50,000 x 9] 4,50,000 Dearness allowance [@50% of basic] 2,25,000 6,75,000 Add: Perquisites: (a) Rent-free furnished accommodation (See Note No. 1) 1,16,250 (b) Motor car for private uses 55,950 (c) Educational facility at the school of the employer (See Note No. 2) 10,800 (d) Club membership 20,000 2,03,000 Gross Salary 8,78,000 Less: Deduction u/s 16: Nil Income under the head Salaries 8,78,000 Notes: 1. Value of rent-free furnished accommodation: Since the accommodation is owned by the employers and it is situated at Chennai, the value of the rent free unfurnished accommodation shall be 15% of salary (basic + DA here) = ` 1,01,250 Add: 10% of the original cost of furniture for 9 months = ` 15,000 Total value of rent-free furnished accommodation = ` 1,16,250 2.

Perquisite value of educational facility at the school of the employer: Under Rule 3(5), the value of perquisite for educational facilities at the school of the employer is nil, if the cost of education does not exceed ` 1,000 per child per month. However, where the cost exceeds ` 1,000 p.m., the entire amount will be taxable. Such a conclusion follows form the language of Rule 3(5) as well as from a number of judicial decisions. DIRECT TAXATION

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Example 20: D is an area manager of KYC Ltd. During the financial year 2016-17 he furnishes the following particulars of his income and benefits: (a) Basic salary: from 1.4. 2016 to 31.8.2016 @ ` 20,000 p.m.; from 1.9. 2016 onwards ` 25,000 p.m. (b) Dearness allowance @40% paid under the terms of employment (c) Transport allowance @ ` 2,500 p.m. (d) Contribution to RPF @ 15% of basic plus D.A. (e) Children education allowance @ ` 1,000 p.m. for 2 children (f) City compensatory allowance @ ` 500 p.m. (g) Hostel allowance @ 400 p.m. for each of the 2 children (h) Tiffin allowance ` 5,000 p.m. (Actual allowance ` 4,000) (i) Tax on employment paid by the employer ` 3,000. Compute taxable salary of the assessee for the assessment year 2017-18. Answer: Computation of Income under the head Salaries of D for the assessment year 2017-18 relating to the previous year 2016-17 Basic salary [ (` 20,000 x 5) + (` 25,000 x 7)]

2,75,000

Add: Dearness allowance @ 40%

1,10,000

Employer‘s contribution to RPF in excess 12% of salary

11,550

Add: Other allowances: Transport allowances [ ` 2,500 x 12]

30,000

Less: Exemption u/s 10 (14), Rule 2BB (2) @ ` 1,600 p.m. Children education allowance @ ` 1,000 p.m. x 12] Less: Exemption u/s 10(14), Rule 2BB (2) [ ` 100 x 12x 2]

19,200 12,000 2,400

City compensatory allowance @ ` 500 p.m. Hostel allowance @ 400 p.m. per child [ ` 400 x 12x2] Less: Exemption u/s 10(14), Rule 2BB (2) @ ` 300 p.m. per child Tiffin allowance Add: Perquisites: Professional tax paid by employer

3,85,000

10,800 9,600

9,600 7,200 6,000 2,400 5,000 3,000

Gross Salary

4,30,550

Less: Deduction u/s 16(iii) for professional tax paid Income under the head Salaries

3,000 4,25,550

Example 21: As a placement officer of a private educational institution during the previous year ended 31st March, 2017, K received a consolidated pay of ` 24,000 p.m. He was, however, provided with the following facilities free of cost: (i) A rent-free furnished accommodation in Kolkata. The accommodation is owned by the employer and cost of furniture supplied by the employer was ` 50,000. (ii) Car facility for journey between home and place of work. Estimated cost of the employer for this purpose was ` 8,000 p.a. (iii) Service of a cook appointed by the company @ ` 1,000 p.m. (iv) Free supply of gas worth ` 2000 p.a. The gas connection is in the name of K. (v) Life insurance premium ` 2,000 p.a. Compute gross salary of K for the assessment year 2017-2018

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Answer: Computation of gross salary of K for the assessment year 2016-2017 relating to the previous year 20152016: ` ` Consolidated pay [` 24,000 X 12] 2,88,000 Add: Perquisites u/s 17(2): 48,200 Rent-free furnished accommodation [u/s 17(2)(i), Rule 3(1)] (Note 1) Free service 12,000 of cook [u/s 17(2)(viii), Rule 3(7)(ix) 2,000 Free gas [u/s 17(2)(iv), Rule 3(4)] 2000 Life insurance premium paid by employer [u/s 17(2)(v)] Gross salary [subject to deductions u/s 16] 3,50,200

Notes : 1. Value of rent-free furnished accommodation : 15% of salary (as the house is in Kolkata) Add : 10% of the cost of furniture Total 2. Car facility between home and place of work is, however, tax-free in all cases.

` 43,200 5,000 48,200

Example 22: P is a regular employee of a Delhi-based private sector company where he was appointed on 1.1.2015 in the scale of ` 20,000-1,500-30,000. Under the terms of employment, he is paid 10% of DA and also bonus equivalent to one month‘s pay as on the last month of the financial. His employer and he himself contributes 15% of basic and DA towards recognized provident fund. He is provided with free housing facility which has been taken on rent by the employer on rent for ` 10,000 p.m. Besides, he is provided with the following facilities: (a) Facility of laptop costing ` 40,000; (b) Company reimbursed the medical treatment bill of his brother for ` 25,000. The brother is dependent on him. (c) The monthly salary of ` 1,200 of a housekeeper is reimbursed by the company. (d) A gift voucher of ` 10,000 on the occasion of his marriage anniversary. (e) Conveyance allowance of ` 1,000 per month is given by the company towards actual reimbursement. (f) He is provided with a personal accident policy for which premium of ` 5,000 is paid by the company. (g) He is getting telephone allowance @` 500 p.m. (h) The company pays medical insurance premium of his family of ` 10,000. Compute the assessee‘s taxable income from Salaries for the assessment year 2017-18. Answer: Computation of Income under the head Salaries of D for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Basic salary [ (` 21,500 x 9) + (` 23,000 x 3)] Dearness allowance @10% of basic

DIRECT TAXATION

2,62,500 26,250

2,88,750

68

Employer‘s contribution to RPF in excess 12% of salary Bonus [Equivalent basic + DA of March] Add: Other allowances: Conveyance allowance Less: Exemption u/s 10(14), Rule 2(BB)(1) Telephone allowance [ ` 500 x 12] Add: Perquisites: (a) Rent-free accommodation (Note 1) (b) Facility of using laptop (not a perquisite) (c) Reimbursement of medical bill for brother (Note 2) (d) Reimbursement of salary of housekeeper (e) Gift voucher [` 10,000- 5,000] (f) Premium paid by the employer for personal accident policy ( not a perquisite) (g) Medical insurance premium paid by the company See note) Gross Salary Less: Deduction u/s 16(iii) : Income under the head Salaries

8,663 25,300 12,000 12,000

Nil 6,000 47,108 10,000 14,400 5,000 Nil Nil 4,05,221 Nil 4,05,221

Notes: 1. Basic salary for the financial year 2016-17: Basic as on 1. 1.2015 : ` 20,000 Basic as on 1.1.2016: ` 21,500 Basic as on 1.1.17 : ` 23,000 Therefore, Basic from 1.4.2016 to 31.12. 2016 = 21,500 x 9 = ` 1,93,500 Basic from 1.1.17 to 31.3.17 = 23,000 x 3 = ` 69,000 2. Valuation of rent-free accommodation: Since the accommodation is taken on rent by the employer, the value of perquisite shall be actual rent paid (10,000 x 12 = 1,20,000) or 15% of salary (Basic+ DA+ Bonus = 3,14,050 x 15% = ` 47,108), whichever is lower. 2. Personal accident policy and medical insurance premium paid by the employer are not taxable perquisite as these are neither covered u/s 17(2) (iv) or Section 17(2(v). These payments have been held to be paid by the employer for his own interest [CIT v. Sridhar 84 ITR 192] Example 23: P, an executive of ABS Ltd, Mumbai, furnishes the following particulars of his income for the assessment year 2017-2018 : (a) Basic salary @ ` 20,000 p.m. (b) Dearness allowance @ 20% of basic salary. (c) House rent allowance @ 20% of basic salary. (d) Leave salary ` 10,000. His employer also provides him the following benefits and amenities: (i) Contribution to unrecognised provident fund @ 15%. (ii) Mobile phone bill amounting ` 5,000 during the year. (iii) Cost of medical treatment of his wife in a private nursing home, ` 12,000. (iv) House building loan at a concessional rate of 6% p.a. ` 2,00,000 (Loan was taken on 1.4.2016 and is repayable in 15 years). (v) He was also provided free journey from office to house in the employer‘s car. Approximate cost of such journey is ` 5,000 p.a. P pays ` 4,000 for a rented house in Kolkata. You are requested to compute gross salary of P for the assessment year 2017-2018. DIRECT TAXATION

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Answer: Computation of gross salary of P, for the assessment year 2017-2018 relating to the previous year 20162017: ` ` ` Basic salary Dearness allowance Leave salary House rent allowance Less: Exemption u/s 10(13A), Rule 2A being least of the following: (a) House rent allowance received (b)Rent paid less 10% of salary: ` (48,000-24,000) (c) 50% of salary Actual exemption [alternative (b) being least] Add : Perquisites u/s 17(2): Value of perquisite in respect of house building loan @ 9.45% of ` 2,00,000 [u/s I7(2)(viii), Rule 3(7)(i)] Less: Amount charged by the employer @ 6% of `2,00,000 Gross salary [Subject to deductions u/s 16]

2,40,000 48,000 10,000 48,000

48,000 24,000 1,20,000 24,000 18,900 12,000

24,000 6,900 3,28,900

Notes: 1. Annual contribution by the employer to unrecognized provident fund is taxable when the amount is received in hand. 2. It I assumed that D.A. does not enter into retirement benefit. 3. Mobile phone bill, cost of medical treatment in private nursing home up to ` 15,000 and free journey between residence and office are tax-free perquisites in all cases. 4. The value of perquisite in respect of house building loan shall be the rate of interest charged by the SBI for similar purpose. The interest rate of SBI for this purpose as on 1.4.2016 is 9.45%. Example 24: Mr. X was employed in a Central Government concern and retired on 30th June, 2016. His salary from 1st April, 2016 till retirement was ` 30,000 p.m. On his retirement he received ` 2, 80,000 from the provident fund, ` 3, 00,000 from gratuity and ` 2, 40,000 towards encashment of his 8 months‘ earned leave. He received Pension @ ` 15,000 p.m. from 1st July, 2016. Mr. X, after his retirement, joined a private company in Pune on and from 1st November, 2016 at a salary of ` 18,000 p.m. He was provided with a rent-free unfurnished accommodation and a self-driven car (1·6 litre engine capacity) for which all expenses are borne by the company. During the previous year, Mr. X paid life insurance premium of ` 7,000 (on a policy of ` 50,000 in the name of his married daughter). He earned accrued interest on NSC VIII Issue ` 6,000 and deposited ` 12,000 under Life Insurance Corporation‘s Pension Fund. He also earned interest ` 5,000 from deposits with public limited companies. From the above particulars compute gross total income of Mr. X for the assessment year 2017-2018. Answer: Computation of total income of Mr. X‘ a resident individual, for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Salary from the Government [` 30,000 x 3] Salary from private company [` 18,000 x 5] Pension [July, 2016 to March, 2017 @ ` 15,000 p.m.] Receipt from provident fund [Exempt u/s 10(11)] Gratuity [Exempt u/s 10(10) (i)] Leave encashment [Exempt u/s 10(AA)(i)]

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90,000 90,000 1,35,000 Nil Nil Nil 13,500 70

Add: Perquisites u/s 17(2): Rent-free unfurnished accommodation (Note 1) [u/s 27(2)(i), Rule 3(1)] Motor car [` 1,800 x 12] Gross salary Less: Deduction u/s 16: Income under the head "Salaries" Income from other sources: Accrued interest on NSC VIII Issue Interest on deposit with public company Gross total income

21,600 3,50,100 Nil 3,50,100 11,000 3,61,100

Note: Rent-free furnished accommodation: Assuming that the accommodation is owned by the employer and it is situated in Pune, a place having more than 25 lakh population as per 2001 census, the value of rent-free unfurnished accommodation shall be 15% of the salary of the relevant period, i.e., 15% of ` 90,000 or ` 13,500. Example 25: S aged 45 years, gives the following particulars of his income received from LS Ltd. for the year ended 31st March. 2017: 1) Salary after deduction of income-tax at source and own contribution to recognized provident fund ` 9,00,000 2) Income-tax deducted at source ` 80,000 3) Own contribution to recognized provident fund ` 1,45,000 4) Employer's contribution to the provident fund ` 1,40,000 5) Interest credited to provident fund @11% per annum ` 2,89,000 6) House rent allowance (actual rent paid by S for the house in Delhi was ` 1,08,000) in addition to salary of ` 9,00,000 as given above ` 1,20,000 He is given free use of 1200 CC car by the employer for domestic as well as official purposes (with effect from 1st November, 2016) and all expenses including driver's salary being met by the employer. He is also provided free services of a watchman (with effect from 1 st May, 2016) and a sweeper (with effect from 1st December, 2016). Salary (` 2,675 per month per person) is paid by the employer. During the year S pays professional tax ` 3,000 Compute total income and tax liability of S for the assessment year 2017-18. Answer: Computation of Income under the head ―Salaries‖ of S for the assessment year 2017-18 ` Net salary received Add: Deductions from salary: Own contribution to RPF Income-tax deducted Basic/ cash emoluments excluding allowances

`

9,00,000 1,45,000 80,000 11,25,000 5,000

Employer‘s contrition to RPF in excess of 12% of salary [` 1,40,000 – 12% of 11,25,000]

Interest credited to RPF in excess of 9.5% (2,89,000 ×1.5 ÷ 11) Add: Allowances: House rent allowance received Less: Exemption u/s 10(13A), Rule 2A (See Note) Add: Perquisites: Motor car [ 5 x 1,800] Watchman [ 11 x 2,675] Sweeper [ 4 x 2,675] Gross salary Less: Deduction u/s 16(iii) for professional tax paid Income under the head Salaries DIRECT TAXATION

1,20,000 Nil

39,409 1,20,000 9,000 29,425 10,700

13,38,534 3,000 13,35,534 71

Note: Exemption for house rent allowance u/s 10(13A) Rule 2A being least of the following: ` (a) HRA received 1,20,000 (b) Rent paid less 10% of salary [ ` 1,08,000- 1,12,500] Nil (c) 50% of salary of ` 11,25,000 5,62,500 Example 26: Q was an employee of a private sector organisation. The following particulars are available regarding his income for the year ended on 31st March, 2017: (a) Salary @ ` 32,000 p.m. (b) Dearness allowance @ ` 8,000 p.m. (c) He retired from service on 1.1.17 after 24 years of completed service and received a pension of ` 16,000 p.m. and gratuity of ` 6,00,000 (He is covered under the payment of Gratuity Act). (d) He also received ` 4,00,000 from the unrecognised provident fund (50% of this represents employer‘s contribution and interest). (e) He received ` 8,000 as passage money from his employer for proceeding to his home town. You are required to compute Q‘s income under the head Salaries for the assessment year 2017- 2018.

Computation of income under the head ―Salaries‖ of P, for the assessment year 2017-2018 relating to the previous year 2016-2017. ` ` Salary (@ ` 32,000 p.m. for 9 months) 2,88,000 72,000 Dearness allowance (@ ` 8,000 p.m. for 9 months) 48,000 Pension @ ` 16,000 p.m. for 3 months) 8,000 Passage money 8,000 Less: Exemption u/s 10(5), Rule 2B Gratuity Nil Less: Exemption u/s 10(10) (Note 1) 6,00,000 46,154 Add: Profits in lieu of salary u/s 17(3): 5,53,846 Lump sum received from unrecognized provident fund (to the extent of employer's contribution and interest thereon (Note 2) Gross salary Less: Deductions u/s 16: Income under the head "Salaries". Notes: 1. Exemption for gratuity u/s 10(10)(ii) being least of the following : (a) Amount received (b)15 days salary for each year of completed service (See below) (c)Maximum amount specified under the Act Actual exemption [alternative (b) being least]

2,00,000 6,54,154 Nil 6,54,154

` 6,00,000 5,53,846 10,00,000 5,53,846

15 days' salary has been calculated as follows: (a) Last drawn pay + D.A. =` (32,000 + 8,000) 40,000 (b) 15 days‘ salary based on last drawn salary: 15/26 x ` 40,000 or ` 23,076.92 (approx.) (maximum working days in a month being 26) (c) 15 days' salary for each year of completed Service = 24 X ` 23,076.92 or ` 5,53,846 2. Out of the lump sum received from the unrecognized provident fund, only the sum representing employer's contribution and interest thereon is taxable under the head "Salaries". Interest on employee's contribution is taxable as income from other sources.

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Multiple Choice Questions: 1.

Remuneration received by a teacher of a college from the University for checking answer scripts is taxable as: a) Salaries b) Income from other sources c) Profits or Gains of Business of Profession d) Income from speculative business

2.

Interest-free loan received from the employer is tax-free perquisite if the amount of loan does not exceed : a) ` 10,000 b) `15,000 c) ` 20,000 d) ` 25,000

3.

Reimbursement of any medical bill for treatment is a private hospital is exempt up to---a) ` 15000 b) ` 10000 c) ` 5000 d) None of these

4.

The maximum amount of compensation received at the time of voluntary retirement exempt from tax is: a) ` 200000 b) ` 500000 c) ` 100000 d) The actual amount received as compensation

(5) Motor car with more than 1.6 litters cubic capacity is given to the employee both for official and personal use with expenditure on running and maintenance met by the employer. The car was self driven by the employee. The perquisite value shall be A. `1,200 p.m. B.` 1,800 p.m. C.` 2,400 p.m. D. Nil (6) X received ` 100,000 from the prospective employer before joining duty in order to resign from the present employer. Subsequently, he joined the new employer. The amount received is: (a) Taxable as income from business (b) Taxable as salary income (c) Exempt from tax u/s 10 (d) Exempt being capital receipt (7) For non-Government employee governed by Payment to Gratuity Act, 1972, the monetary limit for exemption is: (a) ` 5,00,000 (b) ` 3,50,000 (c) ` 10,00,000 (d) Limitless (8) Sums received as transport allowance is exempt up to: (a) ` 1,000 p.m. (b) ` 200 p.m. (c) ` 1600 p.m. (d) ` ‗Nil‘ fully taxable (9) A was provided accommodation in a hotel by the employer for 10 days consequent to his transfer from Kolkata Hyderabad. The cost of accommodation was ` 30,000 to the employer. The value of perquisite is (a) ` Nil (b) ` 30,000 (c) ` 15,000 (d) ` 20,000

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(10) Payment received by employee in respect of encashment of earned leave during service is : (A) Taxable as salary (B) Taxable as income from other sources (C) 50% is exempt and balance taxable as salary (D) Fully exempt under section 10 (11) Commuted pension received by a State Government employee is exempt up to ` …… (A) 3 lakhs (B) 5 lakhs (C) 10 lakhs (D) Fully exempt (12)The maximum amount of leave salary not chargeable to tax as specified by the Government in case of a non-government employee is : a) ` 75600 b) ` 80000 c) ` 2,40,000 d) ` 3, 00,000

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STUDY NOTE : 8 INCOME FROM HOUSE PROPERTY THIS STUDY NOTE INCLUDES: Basis of charge [Section 22] 8.1 8.2 Essential Conditions 8.3 Deemed Owner House Property let out for purposes which is incidental to business 8.4 8.5 Property held in as stock-in-trade 8.6 House Property situated abroad Composite Rent 8.7 8.8 Annual Value of house property Annual Value how determined [Section 23] 8.9 8.10 Deductions from annual value [Section 24] 8.11 Recovery of arrears of rent and unrealized rent [Section 25A] 8.12 Treatment of Loss

8.1 BASIS OF CHARGE [SECTION 22] The charge under this head arises from the provisions contained in section 22, which provides that the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner and which is not used by the assessee for the purpose of any business or profession carried on by the assessee, shall be chargeable to income-tax under the head ―Income from house property.‖ Thus, although rental income from properties is brought to tax under the head ―Income from house property,‖ the basis of charge under Section 22 is not the rent itself, but the annual value of the property.

8.2 ESSENTIAL CONDITIONS The charge under section 22 is subject to the following essential conditions and propositions:

(a) The property should consist of buildings and lands appurtenant thereto. Income from vacant land (where there is no building upon it) shall be charged as Income from other sources or as Profits and gains of business or profession.

(b) The assessee should be the owner of such property. Ownership here means ownership of the superstructure, and not necessarily ownership of the land.

(c) The property is not used by the owner for the purpose of any business or profession carried on by him, the income of which is chargeable to tax.

8.3 DEEMED OWNER In the following cases, the assessee, though not the legal owner of the property, is deemed to be the owner under Section 27 of the Act: (a) An individual who transfers otherwise than for adequate considerations any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child, not being a married daughter, shall be deemed to be the owner of the house property. (b) The holder of an imparitable estate shall be deemed to be the individual owner of the house property so transferred. (c) A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof. DIRECT TAXATION

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(d) A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882, shall be deemed to be the owner of that building or part thereof. (e) A person who acquires any rights by way of long-term lease of the property shall be deemed to be the owner of the property. Under section 269UA(f), long-term lease means a lease for a period of not less than 12 years.

8.4 HOUSE PROPERTY LET OUT FOR PURPOSES WHICH IS INCIDENTAL TO BUSINESS As already mentioned, house property used for the purposes of the business of the owner is not taxable under this head; it is altogether exempt. However, income from property let out by the assessee for purposes which are incidental to or beneficial to the business, shall be charged under the head Profits and gains of business or profession. Some instances of this type of letting are: residential quarters constructed by the assessee for, and let out to, his employees; industrial sheds let out to manufacturers components required for the assessee‘s business or premises let out to Government authorities for providing accommodation for a branch of a nationalised bank, post office, police station, etc.

8.5 PROPERTY HELD IN AS STOCK-IN-TRADE House owning, however profitable, is not a business within the meaning of the Income-tax act. Therefore, even if a company is incorporated with the sole object of promoting and developing markets, it‘s income will be assessable under the head Income from house property. Some examples where business endeavour leading to ownership of house property has been charged to tax under section 22 are: (i) business of acquiring property and letting the further; (ii) Income from property acquired in the course of money lending business; (iii) Rental income of unsold apartments of a builder; (iv) Income from a commercial complex let out for business.

8.6 HOUSE PROPERTY SITUATED ABROAD Income from house property situated in a foreign country is taxable in the hands of a resident and ordinarily resident in India. In the case of not ordinarily residents and non-residents, income from such house property is taxable only if the income is received in India during the previous year. If income from any such property becomes taxable in India, its annual value shall be computed as if the property is situated in India.

8.7 COMPOSITE RENT When the owner of a house property derives rent for use of the property as well as for other assets and services made available to the tenants, such rent is called composite rent. The tax-treatment of such composite rent shall be as follows:

(a) If the composite rent is received on account of rent of the property and for services like lift, water, electricity, watchmen, air-conditioning, etc., the rent received for use of the house property shall be separated from those received for other services. The rent attributable to the use of the house property shall be charged to tax under the head Income from house property, while those received for other services shall be charged to tax as Income from other sources or as Profits and gains of business or profession, as the case may be [CIT vs. Kanak Investments P. Ltd. 95 ITR 419]. DIRECT TAXATION

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(b) If the composite rent is received for the use of the house property as well as for the use of machinery, plant, furniture, etc., and if the rent can be separated between use of house property and other purposes, then the amount attributable to the use of the house property shall be charged to tax under the head Income from house property and the remaining amount shall be charged to tax as Profits and gains of business or profession or Income from other sources. Where, however, the amount is inseparable, the entire rent would be brought under the head Profits and gains of business or profession, or Income from other sources.

8.8 ANNUAL VALUE OF HOUSE PROPERTY The basis of charge under Section 22 is not the rent, but the annual value of the property. The annual value of a property under the Income-Tax Act is the sum for which the property might reasonably be expected to let from year to year. It is the inherent capacity of a property to yield profit [Lallmal vs. CIT 4 ITR 250(FB)]. In determining this inherent capacity of the property to earn profit or income, several factors are to be considered. These are: (i) Rent received or receivable: For a property, which is actually let out, rent received by the owner from the tenant serves as a good evidence to judge the earning potential of the property in question. Rent received for this purpose means the de facto rent. Sometimes, the owner may receive a rent which includes compensation for other services provided (e.g. electricity, water, watchman, etc., provided to the tenant). In such cases, the amount attributable to such services shall be deducted from the amount of rent so received. Rent received from the tenant is, however, just a prima facie evidence, not a conclusive proof of the earning potential of the property. (ii) Municipal value: For the purpose of levying tax on the householders, the municipal authorities make independent assessment to determine the letable value or municipal value of a house property, and based on such assessment, they charge municipal taxes as a certain percentage of the letable value. In some metropolis like Mumbai, Delhi, Kolkata and Chennai the municipal authorities charge the tax on property after allowing 10% rebate on the municipal value to provide for repairs and maintenance of the property. For the purpose of income-tax, however, such rebates are to be added back to determine the gross municipal value. (iii) Fair rent: Fair rent is the rent which a similar property may fetch in a similar locality. The Income-tax Department may in fact consider transactions entered into by other property holders to judge the earning potential of a particular property [Lallmal vs. CIT 4 ITR 250]. (iv) Standard rent: In case a property is covered under the Rent Control Act, the reasonable rent that an owner may get from the property cannot exceed the rent as determined under the Rent Control Act [Sheila Kaushish vs. CIT 131 ITR 435]. It is the maximum amount that a landlord can legally get from the tenant. The standard rent is, therefore, an important factor to determine the annual value of a property.

8.9 ANNUAL VALUE HOW DETERMINED [SECTION 23] Section 23 of the Income-tax Act lays down the procedure for determination of annual value of a house Property. This section divides, and contemplates, determination of the annual value of house properties as under: Let-out house property Self-occupied house property  Property which is let out throughout the  Self-occupied house property and used as previous year such throughout the year  House property which is let out but remains  Self-occupied house property which remains DIRECT TAXATION

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vacant for part of the year/whole of the year  Let out for part of the year and self-occupied for part of the year

vacant whole of the year or part of the previous year  More than one self-occupied property

1. Property which is let out throughout the previous year [Section 23(1(a); 23(1)b]: 

Computation of annual value when there is no unrealised rent :

Step1. Find out the reasonable expected rent of the property, according to Section 23(1)(a), which is the higher of the following:

(a) Gross municipal value, (b) Fair rent. However, in case the property is covered under the Rent Control Act, the reasonable rent determined in Step 1 cannot exceed the Standard rent under the Rent Control Act [Shiela Kaushish vs. CIT (1981) 131 ITR. 589(SC)]. Step 2. Find out the rent received or receivable [Section 23(1)(b)]. The higher of the amounts in Step 1 and Step 2 shall be the gross annual value. Step3. Deduct the municipal tax actually paid by the owner during the previous year. The remaining amount shall be the net annual value of the let out property. Municipal tax is generally charged on the gross municipal value. But in the big cities like Mumbai, Kolkata, Chennai and Delhi, such taxes are usually charged on the net municipal value or rateable value, which is the amount remaining after allowing 10% rebate for repairs, and service taxes (e.g., water tax, sewerage taxes). Therefore, when net municipal value or rateable value is given, this amount has to be increased by 1/9th to arrive at the figure for gross municipal value. When there are other service taxes like water tax and sewerage tax, then the net municipal value has to be first increased by the amount of service taxes and then 1/9th is to be added to arrive at the figure for gross municipal value.  Computation of annual value when there is unrealised rent : In the case of a property which is let out throughout the previous year and there is no vacancy, but during the previous year the full rent could not be realised, then, subject to the conditions laid down under Rule 4, the unrealised rent shall be excluded from the actual rent received or receivable under Section 23(1)(b) or Section 23(1)(c). The annual value in such a case shall be determined as follows: Step1. Find out the reasonable expected rent u/s 23(1)(a), which is the higher of gross municipal value and fair rent, but subject to the maximum of the Standard rent. Step2. Find out the rent received or receivable excluding the unrealised rent. If Step 2 is higher than Step 1, then the amount determined in Step 2 shall be the gross annual value. But if Step 2 is less than Step 1, the amount determined in Step 1 shall be the gross annual value. In other words, unrealised rent cannot decrease the gross annual value determined in Step 1. Step3. Deduct municipal tax actually paid by the owner during the previous year. The remaining amount after Step 3 shall be taken to be the net annual value of the let out property.

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When unrealised rent is allowed to be deducted from the rent received or receivable [Rule 4]: Under Rule 4, the unrealised rent for the current previous year shall be deducted from rent receivable if the following conditions are satisfied: (a) the tenancy is bona fide; (b) the defaulting tenant has vacated or steps have been taken to compel him to vacate the property; (c) the defaulting tenant is not in occupation of any other property of the assessee; (d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless 2. House property is let out, but it remains vacant for any part or whole of the previous year: According to Section 23(1), the annual value of a property, which is let out but remains vacant for part or whole of the previous years, shall be deemed to be:

(a) the expected reasonable rent of the property [u/s 23(1)(a)], or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Section 23(1)(a), the amount so received or receivable [Section 23(1)(b)] ; or

(c) Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to Section 23(1)(a), the amount so received [Section23(1)(c)]. To put it in other words, the gross annual value of house property is the higher of reasonable expected rent u/s 23(1)(a) or rent received u/s 23(1)(b). But if owing to vacancy the actual rent received or receivable is lower than the reasonable rent [under Section23(1)(a)], then actual rent received shall be the gross annual value in terms of Section 23(1)(c). In a practical situation one may face the following cases:  Where rent received is higher than the reasonable expected rent:  Where rent received is less than the reasonable expected rent:  The property remains vacant for some time and there is unrealised rent In a situation like this, the following general formula may be used: Step1. Find out the reasonable expected rent (higher of municipal value and fair rent, but subject to a maximum of Standard rent). Step2. Find out the annual rent (i.e. if the property is let out throughout the previous year) excluding unrealised rent, if any. Step3. Select the higher of Step 1 and Step 2. Step4. From the amount determined in Step 3, deduct rent for the vacancy period. The amount so determined in Step 4 is the gross annual value of the property. 3. Computation of annual value of house property which is self-occupied but let out for part of the year [Section 23(3)]: Where a self-occupied house property is let out for any part of the year, its annual value shall be determined under the provisions of Section 23(1) as if the property has been let out throughout the previous year. In this case the reasonable expected rent under Section 23(1)(a) shall be computed as usual, but rent received or receivable under Section 23(1)(b) shall be taken only for the period during which the property is actually let out. The gross annual value will be the higher of reasonable expected rent and rent actually received. DIRECT TAXATION

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4. Computation of annual value of self-occupied property which is used throughout the previous year for residence of the owner [Section 23(2)(a)]: Subject to the fulfillment of the following conditions, under Section 23 (2)(a), where the property consists of one house or part of the house, which is in the occupation of the owner for his own residence, the annual value in respect of this house or part thereof shall be nil:

(a) the property is not actually let during any part of the previous year; and (b) no other benefit is derived from such house. 5. Computation of annual value of a self-occupied residential house which remains vacant during the whole or any part of the previous year [Section 23(2)(b)]: Where the property consists of one house or part thereof which is in the occupation of the owner for his own residence but could not be occupied by him because of his employment, business or profession carried on at any other place, and he has to reside at that other place in a house not belonging to him, the annual value of such house or part of the house shall be taken to be nil. The owner of such property should, however, satisfy the following conditions:

(a) The owner could not occupy the house due to his business or profession carried on in another place.

(b) The house (or part of the house) remains vacant. (c) No other benefits are derived from the house. If the house remains vacant for purposes other than (a) above, the benefit under Section 23(2)(b) cannot be claimed. 6. Computation of annual value in the case of more than one self-occupied residential house [Section 23(4)]: When the owner occupies more than one house for his own residence, then at the option of the assessee, the annual value of one such house only shall be taken as nil. The other houses shall be deemed to be let out and the annual value of such houses shall be computed u/s 23(1)(a), as in para 9.1. Points to note:  Since the owner can exercise his option regarding choice of one self-occupied house, to reduce his tax burden, he may choose the house property which has the maximum annual value.  The option regarding choice of a self-occupied house may be changed from year to year.  In the case of a self-occupied house property which has more than one unit and all the units are occupied by the owner, the annual value of all these units shall be taken to be nil.

8.10 DEDUCTIONS FROM ANNUAL VALUE [SECTION 24] The following deductions are available from the annual value of the house property: 1. Deductions from annual values in case of let out and deemed to be let out properties: The following deductions are available from the annual value of the let out or deemed to be let out properties: 1. Standard deduction [Section 24(a)]:30% of the net annual value is deductible. This deduction is fixed and is allowed irrespective of actual expenditure incurred by the owner. 2. Interest on borrowed capital [Section 24(b)]: Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on DIRECT TAXATION

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such capital is to be deducted. Interest on borrowed capital, which is utilised for any other purpose, cannot be claimed as deduction.  Interest on borrowed capital prior to completion or acquisition of property: Interest on borrowed capital is generally allowed as deduction on accrual basis. But in case the money is borrowed earlier and the acquisition or completion of the property takes place in a subsequent year, the assessee cannot claim deduction on account of interest as and when it becomes payable. This is so because the source of income (i.e., house property) is yet to come into existence. By virtue of the Explanation to Section 24, the accumulated interest for such pre-construction period can be deducted in five equal installments starting from the previous year in which the property has been acquired or completed. For this purpose, pre-construction period means the period beginning from the date on which the money was borrowed and ending on 31st March immediately prior to the date of completion of construction (or acquisition) of property or the date of repayment of loan, whichever is earlier. Points to note:  Since interest is allowed as deduction on an accrual basis, interest for the previous year can be deducted even if it is not actually paid.  Interest on unpaid interest is not deductible.  Brokerage, commission, etc., paid for raising loan is not deductible.  Where any interest is paid outside India for which no tax has been paid or deducted at source or in respect of which there is no person in India who may be treated as an agent, cannot be allowed as deduction (Section 25).  Interest on fresh loan taken to repay the original loan is allowable as deduction  Interest on loan is allowed as deduction only to the person who has constructed/purchased/undertaken repairs with the borrowed fund. Such interest is not allowable to the successor of the property, unless he has utilised the fund for the above purposes.  An arrangement between the buyer and the seller to pay the purchase consideration of the property in instalment shall be regarded as capital borrowed for the purpose of acquiring the house, and interest thereon is allowable as deduction u/s 24. 2. Deduction u/s 24 in case of self-occupied property: In the case of a house property, the annual value of which has been taken as nil under the provision of Section 23(2)(a) or Section 23(2)(b), only interest on borrowed capital can be allowed as deduction under the provision of Section 24(b). The deduction of interest on borrowed capital is, however, subject to the following conditions:

(a) The amount of interest will include interest for the current previous year as well as 1/5th of the accumulated interest for the pre-construction period.

(b) The maximum amount of interest which will be allowed as deduction is as follows: Date of borrowing Before 1.4.1999 On or after 1.4.1999

Purpose

*Maximum amount allowed ` 30,000 Any purpose related to the house, i.e., acquisition, construction, repairs, renewal, etc. ` 30,000  Repairs, renewal or re-construction ` 2,00,000  Acquisition or construction ` 30,000  Acquisition or construction but completion of acquisition or construction takes more than 5 years from the end of the financial year in which the fund is borrowed

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8.11 RECOVERY OF ARREARS OF RENT AND UNREALIZED RENT [SECTION 25A] With effect from the assessment year 2017-2018, Sections 25A/ 25AA and 25B relating to unrealized rent and arrears of rent respectively, have been merged into a new section 25A to provide as under: (i) If any amount of arrears of rent received from a tenant or the unrealised rent is realized subsequently from a tenant, it shall be deemed to be the income from house property in respect of the financial year in which such rent is received or realised. (ii) The amount so realized or recovered shall be included in the total income of the assessee under the head ―Income from house property‖. (iii) A sum equal to thirty per cent of the arrears of rent or the unrealised rent as mentioned above shall be allowed as deduction. 8.12 TREATMENT OF LOSS A loss under the head Income from house property may arise under the following cases: (i) Owing to the deduction of interest a loss up to ` 2,00,000 may arise in respect of a self-occupied property. (ii) In the case of let out property or deemed to be let out property, it can show a loss if : (i) the municipal tax paid during the year is more than the gross annual value and/or (ii) if the total deductions under section 24 exceeds the net annual value. Such loss may be set off, first, from the income against other houses and then against income under other heads (not against lottery income) in the same previous year. The remaining loss not so set off, shall be carried forward up to a maximum of eight assessment year and set off against Income from house property only. Example 1: A is the owner of a house in Chennai. He lets out this house to a tenant for ` 4,000 p.m. The municipal value of the house is ` 40,000 p.a. During the year, he pays municipal tax of ` 4,000. Find out the annual value of the house for the assessment year 2017-2018. Answer: Computation of annual value of the let out house property of A for the assessment year 2017-18 relating to the previous year 2016-2017. ` ` Gross annual value being the higher of : (a) Gross municipal value [being reasonable expected rent u/s 23(l)(a)] (b) Rent received [u/s 23(l)(b)] Gross annual value [alternative (b) being higher] Less : Municipal tax paid by the owner Net Annual Value

40,000 48,000

48,000 4,000 44,000

Example 2: B is the owner of a house in Kolkata. He lets out the house to his cousin for ` 4,000 p.m. similar house in the locality can fetch a rent of ` 5,000 p.m. and the net municipal value of the house is ` 36,000 p.a. Municipal tax paid during the year was 10%. Compute the annual value of the house property for the assessment year 2017-2018. Answer: Computation of annual value of the let out house property of A for the assessment year 2017-18 relating to the previous year 2016-2017.

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Step 1: Reasonable expected rent u/s 23(l)(a) being higher of the following: (a) Gross Municipal value [36,000 x 100/90] (b) Fair Rent [` 5,000 X 12] Step 2: Rent received [` 4,000 x 12] Gross annual value [being higher of step 1 and 2] Less : Municipal tax paid by the owner (Note 1) Net Annual Value

`

`

40,000 60,000

60,000 48,000

`

60,000 3,600

56,400

Note: When net municipal value is given, municipal tax is to be computed on net municipal value. Example 3: X is the owner of a house in Mumbai. The particulars regarding the house is as follows:

(a) (b) (c) (d) (e)

Gross municipal value ` 3,00,000 p.a. Fair rent ` 3,50,000 p.a. Standard rent ` 2,80,000 p.a. Rent actually received ` 2,40,000.

Municipal tax paid @ 10%. Compute the annual value of the house for the assessment year 2016-2017. Answer: Computation of annual value of annual value for the assessment year 2017-18 relating to the previous year 2016-17 ` Step 1. Reasonable expected rent u/s 23(l)(a) being the higher of Municipal value and Fair rent, but subject to the maximum of Standard rent Step 2. Actual rent received Gross annual value being higher of the amount in Step 1 and Step 2 Less : Municipal tax (Note 1) Net Annual Value

2,80,000 2,40,000

`

2,80,000 27,000 2,53,000

In Delhi, Mumbai, Chennai and Kolkata, municipal authorities usually allow 10% rebate on the gross municipal value. Municipal tax therefore has to be charged on the net municipal value as under: ` 3,00,000 x 90/100 x 10/100 = ` 27,000 Alternatively, Net Municipal Value = ` 3,00,000 x 90/100 = ` 2,70,000 Municipal tax= ` 2,70,000 x 10/100 = ` 27,000 Example 4: A is the owner of 5 houses in different parts of India. From the following particulars compute the gross annual value of the houses: House I House II House III House IV House V ` ` ` ` ` Municipal value (gross) Rent received Fair rent Standard rent

20,000 24,000 23,000 22,000

36,000 27,000 30,000 33,000

15,000 18,000 16,000 20,000

45,000 48,000 42,000 N/A

32,000 40,000 44,000 N/A

Answer: Computation of Gross annual value for the assessment year DIRECT TAXATION

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Step I: Reasonable expected rent u/s 23(1)(a): Higher of Gross municipal value and Fair rent, but subject to the maximum of Standard rent Step II: Rent actually received: Gross annual value being the higher of Step I and Step II

Hi `

Hii `

Hiii `

Hiv `

Hv `

22,000

33,000

16,000

45,000

44,000

24,000

27,000

18,000

48,000

40,000

24,000

33,000

18,000

48,000

44,000

Example 5: K is the owner of a house in Hyderabad. The house is let out to a tenant for ` 1,20,000 p.a. The other particulars regarding the house are as follows: (a) Municipal value ` 80,000 p.a. (b) Fair rent ` 1,20,000 p.a. (c) Municipal tax 10% (d) The tenant has left the house without paying the rent for February and March, 2017. Compute annual value of the house property for the assessment year 2017-2018. Answer: Computation of annual value of let out house property for the assessment year 2017-2018 relating to the previous year 2016-2017. ` Step 1. Reasonable expected rent being higher of Gross municipal value and Fair rent Step 2. Rent received excluding unrealized rent (` 1,20,000 x 10/12) Gross annual value (since Step 1 is higher than Step 2) Less: Municipal tax [10% of ` 80,000] Net Annual Value

`

1,20,000 1,00,000

1,20,000 8,000 1,12,000

Example 6: A has a house in Bhubaneshwar, which is let out throughout the previous year for `1,60,000 p.a. The particulars regarding the house are as follows:

(a) (b) (c) (d)

Gross municipal value `1,00,000 p.a. Fair rent `1,10,000 p.a. Standard rent under the Rent Control Act, `1,20,000 Total municipal tax during the year was `16,000, of which `16,000 was paid by the tenant and the balance was paid by A.

(e) Two months‘ rent for the previous year could not be realised from the tenant. The tenant is occupying another house of Shri Prasad for which he is paying the rent regularly. Shri Prasad has not taken any legal steps against the tenant so far. Compute the annual value of the house property for the assessment year 2017-2018. Answer: Computation of annual value of let out house property of Shri B. Prasad, a resident individual, for the assessment year 2017-2018 relating to the previous year 2016-2017 ` Step 1. Reasonable expected rent being higher of Gross municipal value and Fair rent (Not 1) Step 2. Rent received (Note 2) DIRECT TAXATION

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1,10,000 1,60,000 84

Gross annual value (since Step 1 is higher than Step 2) Less: Municipal tax paid by the owner Net Annual Value

1,60,000 10,000 1,50,000

Note 1: Since Standard rent is higher than municipal value or fair rent, it has been ignored. In case Standard rent is lower than municipal value or fair rent, it is to be considered. Note 2: Since A does not fulfill the conditions laid down under Rule 4, unrealised rent cannot be deducted from rent receivable. Example 7: X is the owner of three houses in New Delhi, which are all let out and covered by the Rent Control Act. From the following particulars find out the annual value of the properties: H1 H2 H3 Municipal value 30,000 26,000 3,000 Annual rent 4,000 36,000 30,000 Fair rent 3,000 2, 000 30,000 Standard rent 30,000 35,000 36,000 2,500 Unrealized rent 7,000 9,000 3months 15% Vacancy period 1 month 10% 2months 10% Municipal tax paid Compute annual value of the properties for the assessment year 2017-2018. Answer: Computation of annual values of let out house properties of X for the assessment year 2017-2018 relating to the previous year 2016-2017 H1 H2 H3 Step 1. Reasonable expected rent(Higher of Gross municipal value and 30,000 28,000 35,000 Fair rent, but subject to a maximum of Standard rent) Step 2. Annual rent excluding unrealized rent 35,000 27,000 27,500 Step 3. Higher of Step 1 and Step 2 35,000 28,000 35,000 Step 4. Step 3 minus rent for vacancy period (Note 1) Gross annual value 31,500 22,000 27,500 as in Step 4 31,500 22,000 27,500 Less: Municipal tax paid (Note 2) 2,700 2,340 4,725 Net Annual Value 28,800 19,660 22,775 Notes: 1. Step 3 minus rent for the vacancy period: House 1: ` 35,000 – ` 42,000 x 1/12 = ` 31,500 House 2: ` 28,000 – ` 36,000 x 2/12 = ` 22,000 House 3: ` 35,000 – ` 30,000 x 3/12 = ` 27,500 2. Municipal tax: Since the properties are situated in Kolkata, municipal taxes have been calculated on the ratable values as follows: House 1: ` 30,000 X 90/100 x 10/100 = ` 2,700 House 2: ` 26,000 X 9/100 x 10/100 = ` 2,340 House 3: ` 35,000 X 90/100 x 15/100 = 4,725 Self-occupied house property let out for part of the year:

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Example 8: S has a house property in Coimbatore which he uses for his own residence. But during the previous year he was transferred to Chennai and for that reason he let out the house from 1st July, 2016 to a tenant for ` 16,000 p.m. The other particulars of the house are as follows : Municipal value ` 80,000 Fair Rent ` 1,20,000 Standard rent under the Rent Control Act ` 1,00,000 During the year S pays ` 8,000 as municipal tax. Compute annual value of the house for the assessment year 2017-2018. Answer: Computation of annual value of house property of S, for the assessment year 2017-2018 relating to the previous year 2016-2017 ` Step 1. Reasonable expected rent being higher of the following but not exceeding Standard rent: (a) Municipal value (b) Fair rent (c) Standard rent Step 2. Rent received (` 16,000 x 9) Gross annual value (being higher of Step 1 and Step 2) Less: Municipal tax paid Net Annual Value

` 80,000 1,20,000 1,00,000

`

1,00,000 1,44,000 1,44,000 8,000 1,36,000

Self-occupied property remained vacant for part of the year Example 9: C is the owner of a house in North Delhi. He uses the house throughout the previous year for his own residence. The gross municipal value of the house is ` 60,000 and C pays ` 5,000 as municipal tax during the previous year. Compute annual value of the house property for the assessment year 2017-2018. Answer: Computation of annual value of self-occupied residential house of C for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` u/s 23(2)(a) the annual value of one self-occupied residential house is nil. Less : Municipal tax Net Annual Value

Nil Nil Nil

More than one self-occupied property Example 10: A is the owner of two houses. He uses both the houses for his residential purposes. The particulars regarding the houses are as follows: H1 H2 ` ` Municipal value 80,000 1,20,000 Fair rent 90,000 1,40,000 Municipal tax paid 8,000 12,000 Compute annual value of the houses for the assessment year 2017-18.

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Answer: Computation of annual value of self-occupied residential house of A, for the assessment year 2017-2018 relating to the previous year 2016-2017 H1 Self-occupied H2: let out Option A: Gross annual value (For the let out house higher of Nil 1,40,000 municipal value and fair rent ) Less: Municipal tax Nil 12,000 Net Annual Value Nil 1,28,000 Option B: H1 let out H2 Self-occupied Gross annual value (For the let out house higher of municipal value and fair rent) 90,000 Nil Less: Municipal tax paid 8,000 Nil Net Annual Value 82,000 Nil Net Annual Value: Option A: ` Nil + ` 1,28,000 = ` 1,28,000 Option B: ` 82,000 + Nil = ` 82,000. Since option B results into a lower net annual, house 1 should be treated as Let out and House 2 selfoccupied. Example 11: B owns a house property which is let-out for ` 6,500 per month. The fair rent of the property is ` 90,000. Municipal taxes paid during the year for each half-year is ` 3,200. The tenant has spent ` 10,000 towards repairs of the property during the year. Compute the income from the house property for the assessment year 2017-18. [CMA- Inter, Dec. 2008] Answer: Computation of annual value of self-occupied residential house of B, for the assessment year 2017-2018 relating to the previous year 2016-2017 Gross annual value being higher of : (a) Fair rent (b) Rent received [` 6,500 x 12] Less: Municipal tax paid [` 3,200 x2] Net Annual Value

90,000 78,000

90,000 6,400 83,600

Example 12: X and Y are co-owners of two houses with equal share of both the houses. While the first house is used by them for their residence, the second house is let to a tenant at a monthly rent of ` 2,500. The other relevant particulars of the houses for the year 2016-17 are as follows: First house Second house Construction completed on 30.06.2005 31.03.2007 ` 2,000 ` 2,500 Municipal Tax @ 10% ` 2,500 ` 2,500 Insurance Premium ` 10,000 ` 9,000 Interest on loan Compute income from house property of X and Y for the relevant assessment year. [CMA-Inter- Dec. 2009 (adapted)] Answer: Computation of annual value of house properties of A and B for the assessment year 2017-2018 relating to the previous year 2016-2017

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First house (Self-occupied): Gross annual value Less: Municipal tax paid Net Annual Value Less: Deduction u/s 24(b) for interest on loan Income from self-occupied house Second house (let out): Gross annual value being higher of: (a) Municipal value [ ` 2,500 x 100/10] (b) Rent received [` 2,500 x 12] Less: Municipal tax paid Net Annual Value Less: Deduction u/s 24: (a) Standard deduction u/s 24(a)@ 30% (b) Interest on loan u/s 24(b): Income from let out property Income from house property

Nil Nil Nil 10,000

25,000 30,000

8,250 9,000

30,000 2,500 27,500

(-) 10,000

10,250

17,250 250

Note: Under section 26, when the house property is owned by co-owners and the share of each of the owners is ascertainable, the shares of such income shall be assessed at the hands of the respective owners. Accordingly, the share of X and Y into the income from the property shall be ` 125 each. Example 13: (a) K, owner of a property, gives it on a rent of ` 11,000 per month to a bank. Municipal value of the property is ` 1,30,000, fair rent is ` 1,40,000 and standard rent is ` 1,34,000. Municipal tax paid by K is ` 26,000 on March 3, 2016 and ` 30,000 on May 10, 2016. On May 1, 2016, the rent is increased from ` 11,000 per month to ` 15,000 per month with retrospective effect from April 1, 2015. Arrears of increased rent are paid on May 1, 2016. Find out the income chargeable to tax for the assessment year 2017-18. [CMA- Inter, Dec. 2007 (adapted)]. Answer: Computation of annual value of self-occupied residential house of K, for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Gross annual value (being the higher of Municipal value and Fair rent, but subject to the maximum of Standard rent 1,34,000 Rent received [ ` 15,000 x 12] 180,000 1,80,000 30,000 Less: Municipal tax actually paid during the year (Note) Net Annual Value (NAV) 1,50,000 Less: Standard deduction u/s 24(a) @ 30 of NAV 45,000 1,05,000 Add: Arrears of rent for the financial year 2015-16 received during 48,000 the year [ ` 4,000 x 12] 33,600 Less: Standard deduction u/s 25A[ w.e.f. AY 2017-18] @30% 14,400 1,38,600 Income from house property Notes: (1) Municipal tax is allowed to be deducted if it is actually paid during the year. Hence ` 26,000 paid on 3March shall be allowed as deduction during the previous year 2015-16. (2) With effect from AY 2017-18, section 25A is inserted by the Finance Act 2016 to provide that arrears of rent or unrealized rent as recovered subsequently shall be treated as income of the financial year during which it is received. A deduction @30% of the amount received shall also be allowed. Example 14: R owns a house in Hyderabad. Its Municipal valuation is ` 24,000. He incurred the following expenditure in respect of the house property: DIRECT TAXATION

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(i) Municipal Tax at 20%; (ii) Fire insurance premium ` 2,000; and (iii) Land revenue ` 2,400. He had taken bank loan of ` 25,000 at 16% per annum on April 1, 2014; the whole amount is still unpaid. The house was completed on April 1, 2016. Find the income from house property for the assessment year 2017-18 for the following situations: (i) If the assessee uses house for self-occupation throughout the previous year, and (ii) If the house is let-out for residential purpose on monthly rent of ` 2,500 from April 1, 2016 to December 31, 2016 and self-occupied for the remaining period. [CMA-Inter, Dec. 2010] Answer: Computation of Income from house property for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Situation I: The house is self-occupied throughout the year: Gross annual value Nil Less: Municipal tax Nil Net Annual Value Nil Less: Deduction u/s 24(b) for interest on loan (See note) 5,600 Income from house property (-) 5,600 Situation II: The house is let out for part of the year: Gross annual value u/s 23(3) being the higher of: A. Reasonable expected rent u/ 23(1), which is higher of: (a) Municipal value ` 24,000 (b) Annual rent [ ` 2,500 x 12] ` 30,000 30,000 B. Rent received [` 2,500 x 9] 22,500 Gross annual value [(A)being higher] 30,000 Less: Municipal tax paid @20% 4,800 Net Annual Value Less: Deduction u/s 24: 25,200 (a) Standard deduction u/s 24(a) @ 30% of Net annual value 7,560 (b) Interest on loan 5,600 13,160 Income from house property 12,040 Note: Interest on borrowed capital: (a) Interest during the pre-construction period: [ 1.4.2014 to 31.3.2016] @ 16% = 1/5th of the interest for the pre-construction period [ ` 8,000 x 1/5] = Add: Interest for the current period = Total interest allowable during the financial year 2016-17

` 8,000 ` 1,600 ` 4,000 ` 5,600

Example15: V commenced construction of house meant for residential purpose on 01.11.2014. She raised a loan of ` 10 lakhs @ 11% per annum from a bank. Finding that there was over run in the cost of construction, he raised a further loan of ` 5 lakhs from her friend at 15% rate of interest per annum on 1.10.2016. The construction was completed by February, 2017. Compute the amount of interest allowable exemption under section 24 of the income-tax Act, 1961 in the following cases: (i) The house was meant for self-occupation from 01.03.2017 (ii) The house was to be let out from 01.03.2017 Is there any deduction available u/s 80C towards principal repayment in respect of above loans? [CMA-Inter - June 2011] Computation of interest allowable u/s 24 DIRECT TAXATION

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` (a) Preconstruction period: From 1.11.2014 to 31.3.2016 (b) Amount of loan eligible for deduction of interest: Total interest for 17 months 1/5th of the interest for pre-construction period =

17 months 10 lakhs ` 1,55,833 ` 31,167

(I) Interest allowable u/s 24(b) when the house is self-occupied: i. Interest on loan from Bank for the current financial year ii. Interest on loan from friend [ 1.10.2016 – 31.3.2017] iii. 1/5th of interest for pre-construction period Total

` 1,10,000 ` 37,500 ` 31,167

(I) Interest allowable u/s 24(b) when the house is let out:

1,78,667 1,78,667

Note: In the case of self-occupied property, maximum interest that can be allowed is ` 2,00,000 Example 15: N completed construction of a residential house on 01.04.2015. Interest paid on loans borrowed for the purpose of construction during the 30 months prior to completion was ` 60,000 The house was let-out on a monthly rent of ` 18,000. Annual corporation tax paid is ` 35,000 Interest paid during the year is ` 25,000 Amount spent on repairs is ` 6,000. Fire insurance premium paid ` 3,000 per annum The property was vacant for 4 months. Annual letting value as per municipal records is ` 1,50,000. He had also received arrears of rent of ` 36,000 during the year, which had not been charged to tax in the earlier year. Compute the income under the head ―Income form house Property‖ for the assessment year 2017-18. [CMA-Inter, Dec. 2012] Answer: Computation of Income from house property of N for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Gross annual value : Step 1: Reasonable expected rent (being higher of municipal value and fair rent) 1,50,000 Step 2: Annual rent [ ` 18,000 x 12] 2,16,000 Step 3: Higher of step 1 and step 2: 2,16,000 Step 4: Deduct loss for vacancy [ ` 18,000 x4] 72,000 Gross annual value 1,44,000 Less: Municipal tax 35,000 1,09,000 Net Annual Value Less: Deduction u/s 24: (-) 69,700 (a)Standard deduction u/s 24(a) @30% of NAV 32,700 (b) Interest on borrowed capital (See Note) 37,000 25,200 Arrears of rent u/s 25A 36,000 Less: Standard deduction @30% 10,800 Income from house property 64,500 Note: Interest on borrowed capital: Current interest + 1//5th of interest for pre-construction period [` 25,000 + 1/5th of ` 60,000 ] = ` 37,000. Example 16: S constructed his house on a plot of land acquired by him in Kolkata. The house has two floors of equal size. He started construction of the house on 1st April, 2015 and completed construction DIRECT TAXATION

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on 30th June, 2016. He occupied the ground floor on 1 st July, 2016 and let out the first floor at a rent of ` 20,000 per month on the same date. However, the tenant vacated the first floor on 31st January, 2017 and S occupied the entire house from 1st February, 2017 to 31st march, 2017. Other information Fair rent of each floor ` 1,20,000 per annum Municipal value of each floor ` 80,000 per annum Municipal tax paid ` 10,000 Repair expenses ` 5,000 S obtained a housing loan of ` 15 lacs at interest of 10% per annum on 1 st July 2015.He did not repay any part of the loan till 31st March, 2017 [CMA-Inter , June 2013] Answer: Computation of Income from house property of S for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Ground floor (Self-occupied): Gross Annual Value Nil Less: Municipal tax Nil Net Annual Value Nil Less: Deduction u/s 24(b) for interest on borrowed capital (-)86,250 86,250 First floor (let out): Gross annual value for 9 months: Step 1: Reasonable expected rent being higher of : 60,000 (a) Municipal value for 9 months: [80,000 x 9/12] 90,000 90,000 (b) Fair rent for 9 months [ ` 1,20,000 x 9/12] 1,80,00 Step 2: Annual rent [20,000 x 9] 40,000 1,40,000 Less: Loss for vacancy [2 months x 20,000] 1,40,000 Gross annual value being higher of Step 1 and Step 2 5,000 Less : Municipal tax paid 1,35,000 Net Annul Value 40,500 Less: Deduction u/s 24: 86,250 1,26,750 (a) Standard deduction u/s 24(a) 8,250 (b) Interest on borrowed capital u/s 24(b) Income from house property (loss) (-) 78,000 Note: Interest on borrowed capital: (a) Interest for pre-construction period [1.7.2015 to 31.3.16 = 9months @10%] = 1,12,500 1/5th of the interest for pre-construction period ` 22,500 Add: Interest for the current year : ` 1,50,000 Total Interest allowable ` 1,72,500 Share of each floor (` 1,72,500/2) ` 86,250 Example 17: N owns two houses, both of which are occupied by him for residential purpose. The details are given below: House-I House-II ` 7,20,000 ` 6,30,000 Fair rent ` 5,00,000 ` 5,00,000 Municipal value ` 6,00,000 Standard rent 6,00,000 Date of completion 01.01.2002 01.07.2008 Municipal tax paid 10% 12% Date of loan 01.07.1998 01.05.2005 Interest on loan for the financial year 2016-17 1,10,000 1,70,000 Compute his income from house property and advise which house should be opted by him as selfoccupied. [CMA-Inter, June 2014] DIRECT TAXATION

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Answer: Under section 23(4), where both the houses are self-occupied, then, at the option of the assessee, any one of the houses shall be treated as self-occupied and the other house/houses shall be deemed to be let out. For the purpose of tax planning, the assessee should select the house as self-occupied in such a way that it minimizes the tax burden of the assessee. H1 Self-occupied H2: let out Option A: Gross annual value (For the let out house higher of municipal Nil 6,00,000 value and fair rent but not exceeding Standard rent) Nil 60,000 Less: Municipal tax Net Annual Value Nil 5,40,000 Less: Deduction u/s 24: (a) Standard deduction @ 30% Nil (-)1,62,000 (b) Interest on borrowed capital (Note 1) (-) 30,000 (-) 1,70,000 Income from house property (-) 30,000 (+)208,000 Option B: Gross annual value (For the let out house higher of municipal H1 let out H2 Selfvalue and fair rent but not exceeding Standard rent) occupied Less: Municipal tax paid 6,00,000 Nil Net Annual Value 50,000 Nil Less: Deduction u/s 24: 5,50,000 Nil (a) Standard deduction @ 30% (-) 1,65,000 Nil (b) Interest on borrowed capital (-) 1,10,000 (-) 1,70,000 Income from house property 2,75,000 (-) 1,70,000 Income from house property: Option A: [(-) 30,000 + 2,08,000] Option B: [(+) 2,75,000 (-) 1,70,000]

1,78,000 1,05,000

Since option B results in a lower income from house property, it would also result in lower tax burden. The assessee should therefore treat the first house as let out and the second house as self-occupied. Objective questions: 1. Annual value of the house property located outside India is – a) Taxable in hands of all assessee b) Taxable in hands of non-resident assessee c) Exempted from tax in India d) Taxable in hands of resident and ordinarily resident assessee Ans. (d) : Taxable in hands of resident and ordinarily resident assessee 2.

Deduction u/s 24(a) is: a) 30% of net annual value of the house property b) 30% of gross annual value of house property c) 30% of actual rent received d) Actual interest incurred during the previous year Ans. (a):30% of net annual value of the house property 3.

Interest relating to pre-construction period is allowablea) In 5 equal installments from the year in which it was incurred b) In the year in which it was incurred c) In the year in which house property was constructed d) In 5 equal installments from the year in which property is constructed Ans. (d) In 5 equal installments from the year in which property is constructed

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4.

For the purpose of claiming higher deduction u/s 24(b) while computing income of a self-occupied property assessee is required to take— a) Loan on or before 01-04-1999 b) Loan on or after 01-04-1999 c) Loan after 01-04-1999 d) Loan on 01-04-1999 e) Ans. (b)Loan on or after 01-04-1999 5.

Deduction available under section 24(a) is ______________ of NAV a) 30% b) 50% c) 15% d) 70% Ans. (a) 30% (6) Unrealised rent of ` 50,000 was received in June, 2011. The property was sold before April,2011. How much of unrealized rent is taxable? (a) ` 50,000 (b) ` 35,000 (c) ` 30,000 (d) Not taxable Ans. (b) ` 35,000 (7) Quantum of deduction by way of interest on moneys borrowed for construction of self-occupied house property is (a) ` 1,50,000 (b) ` 30,000 (c) `2,00,000 (d) ` 1,00,000 Ans. (c) ` 2,00,000

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STUDY NOTE : 9 PROFITS AND GAINS FROM BUSINESS OR PROFESSION [SECTIONS 28-44] THIS STUDY NOTE INCLUDES: Introduction 9.1 9.2 Basis of Charge 9.3 Business income excluded from the purview of Sec. 28 General principles of computation of business income 9.4 9.5 Method of Accounting [Section 145] 9.6 Specific deductions Incentives for investment in new plant and machinery [Section 32AC] 9.7 9.8 Investment allowance for notified backward areas [Section 32AD] Tea development account, coffee development account or rubber development account 9.9 [Section 33AB] 9.10 Site restoration fund [Section 33ABA] 9.11 Expenditure on scientific research [Section 35] 9.12 Expenditure for obtaining right to use spectrum for telecommunication services [ Section 35ABA] 9.13 Expenditure for obtaining licence to operate telecommunication services [Section 35ABB] 9.14 Expenditure on eligible projects or schemes [Section 35AC] 9.15 Capital expenditure in respect of specified business [Section 35AD] 9.16 Expenditure on agricultural extension project [Section 35CCC] 9.17 Expenditure on skill development projects [Section 35CCD] 9.18 Amortisation of preliminary expenses (Sec. 35D) 9.19 Amortisation of expenditure in case of amalgamation or demerger [Section 35DD] 9.20 Amortisation of expenditure incurred under voluntary retirement scheme [Section 35DDA] 9.21 Other deductions u/s 36 9.22 General deduction (Sec. 37) 9.23 Specific disallowance 9.24 Deemed profits chargeable to tax [Section 41] 9.25 Deemed income in respect of undisclosed income/ investment, etc. 9.26 Compulsory maintenance of books by certain persons carrying on profession or business [Section 44AA; Rule 6F] 9.27 Compulsory tax audit of accounts of certain persons [Section 44AB] 9.28 Presumptive incomes and special provisions for computation of income of the resident assessees in certain cases [Sections 44AD, 44ADA, 44AE, 44B12423434]

9.1

INTRODUCTION

With the four distinct elements – Business‖, ―Profession‖, ―Profits‖ and ―Gains ―– the ambit of this head of income is broad enough to subsume a large number of things under one head, i.e. Profits and gains of business or profession. Section 2(13) of the Income-tax Act, 1961, defines business as including ―any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture‘. The term ―profession‖ has not been defined in the Income-tax Act, except that Section 2(36) defines ―profession‖ as including vocation. According to the Webster‘s Third International Dictionary, a profession is ―a calling requiring specialised knowledge and often long and intensive preparation including instruction in skills and methods as well as the scientific, historical, or scholarly principles underlying such skills and methods.‖ Similarly, the terms ―profits‖ and ―gains‖ have also not been defined exhaustively in the Act except that, u/s 2(24), income includes inter alia profits and gains. The term ―gains‖ has been held to be equivalent to ―profits‖ [Mersey vs. Lucas 2 TC 25, 29 (HL)]. The profit of

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a business or trade is the excess of receipts from business or trade over the expenditure necessary for the purpose of earning those receipts [Russel vs. Aberdeen Bank 2 TC 321, 327 (HL)].

9.2

BASIS OF CHARGE

According to Sec. 28, the following are to be charged to tax under this head:  Profits and gains of any business or profession.  Any compensation received or due to be received by persons specified u/s 28(i) or u/s 28(ii).  Income of any trade or professional association from services rendered for its members.  The value of any benefits or perquisites received in exercise of any profession.  Export incentives granted to the exporters.  Duty drawbacks.  The value of any benefit or perquisite from the exercise of any business or profession.  Interest, bonus, commission, salary received by the partners from the firm.  Sums received under a Keyman insurance policy.  Any sum, whether received in cash or kind under an agreement for not carrying out any activity in relation to any business or profession or sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.  Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under Section 35AD.  Profits and gains of managing agency.  Income from any speculative transactions.

9.3

BUSINESS INCOME EXCLUDED FROM THE PURVIEW OF SEC. 28

In the following cases, even if the property or asset is held in as stock-in-trade, the income or profit shall not be charged under this head:  Rental income from house property is charged to tax under the head Income from house property. However, where, such letting is incidental or subservient to business, e.g., residential quarters let out to the employees or house property let out to post office, bank, Railways on the ground of business expediency, it shall be charged under this head.  Dividends on shares.  Winnings from lotteries.  Interest earned before setting up of business.  Income from leasing of commercial assets.

9.4

GENERAL PRINCIPLES OF COMPUTATION OF BUSINESS INCOME

Sections 30-44 provide the mode of computation of income under this head. However, the following general principles need to be taken into consideration: (a) Legality of the business: Under the Income-tax law, legality of the income is not at all an important factor for chargeability to tax; and as such, even the profits of illegal business shall also be charged to tax. However, as regards the expenses of such business, only those expenses as would have been necessary for legal business shall be allowed as deduction. Since infringement of law is opposed to public policy, any penalty that might result from such breach of law, shall not be allowed as deduction. DIRECT TAXATION

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(b) The scheme of deductions under this head involves those deductions, which are:  Revenue in character,  Relates to the previous year,  In relation to the assessee‘s business carried on during the previous year,  Does not relate to the expenditure incurred before the setting up of business. General examples of losses / expenses deductible under this head:  Loss of stock-in-trade: (i) Loss of stock in transit (ii) Loss of stock by fire (iii) Loss of stock by ravages of white ants (iv) Loss of stock by an act of God or enemy action during war (v) Loss of stock due to theft or robbery  Loss of cash: (i) Loss of cash due to dishonesty or negligence of the employees (ii) Loss of cash due to embezzlement by the assessee‘s employee or agent (iii) Loss of cash from office premises after office hours, due to theft or burglary (iv) Loss by a banking company due to deficit of cash and securities after the banking hours (v) Shortage in cash in a money lending business found on making up the accounts of the day (vi) Loss of cash-in-transit through highway robbery (vii) Loss due to confiscation of cash from a smuggler by the customs authorities  Loss of securities /deposits: (i) Loss due to forfeiture of security deposits given at the time of submitting tenders or for failure to supply goods (ii) Loss due to non-recovery of advances made in course of business (iii) Loss due to sale of securities held in the ordinary course of business (iv) Loss due to non-realisation of loan advanced to an importer (v) Loss due to non-realisation of loan advanced to employees or agents  Loss on currency exchange/devaluation: (i) Loss due to exchange rate fluctuations of foreign currency held on revenue account (ii) Loss due to devaluation of rupee  Miscellaneous losses: (i) Loss due to non-realisation of advances given to Employee‘s Welfare Co-operative Society (ii) Loss due to assessee‘s failure to lift stipulated quota of liquor as per contract. (iii) Loss due to breach of contract for delivery of goods (iv) Loss of precious stones of a dealer while bringing them from business premises to his house (v) Loss due to sale of bonds and securities which were purchased to secure an order (vi) Loss due to guarantee entered into in the ordinary course of business or professional practice  Instances of losses not deductible under this head: (i) Loss due to advances made, which is not in the ordinary course of business of the assessee (ii) Loss for providing guarantee in favour of another person, which is not in the course of business (iii) Loss due to the non-recovery of tax paid by a commission agent on behalf of a non-resident assessee (iv) Loss due to purchase of shares in a company with a view to providing the company with finances (v) Loss from sale of land which was received in satisfaction of a loan kept for several years as capital stock (vi) Loss arising to a firm from non-recovery of debt due from a retired partner (vii) Anticipated future loss (viii) Loss due to devaluation or fluctuation in exchange rate, where such loss is incurred on capital account, e.g., for paying purchase price of capital asset.

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9.5

METHOD OF ACCOUNTING [SECTION 145]

Income under this head can be computed either on cash basis or accrual basis. But, the chosen method should be used consistently. However, in exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961, the Central Government has notified [vide Notification No. 32/2015, F. No. 134/48/2010 TPL, dt. 31.3. 2015] the income computation and disclosure standards to be followed by all assessees [Discussed in separate chapter]

9.6

SPECIFIC DEDUCTIONS

Sec. 30 to 37 deals with the deductions of expenses and losses, which are expressly allowed in computing income under this head. 1. Rent, rates, taxes, repairs and insurance for buildings, which are used for the purpose of business (Sec. 30): Expenses which are allowable, includes: (a) Where the premises are occupied by the assessee — (i) as a tenant, the rent paid for such premises and if he has undertaken to bear the cost of repairs to the premises, the amount paid for such repairs; (ii) if the assessee is not a tenant, the amount paid by him on account of current repairs to the premises. (b) Any sum paid on account of land revenue, local rates or municipal taxes; (c) The amount of any premium paid in respect of insurance against risk of damage or destruction of the premises. 2. Repairs and insurance of machinery, plant and furniture (31): In respect of the plant, machinery or furniture used for the purpose of the business, the following are deductible: (a) the amount paid on account of current repairs ; (b) the amount of any premium paid in respect of insurance against risk of damage or destruction. 3. Depreciation (Sec. 32): a. General conditions: Depreciation is allowed on tangible assets such as building, machinery, plant (which also covers ships, vehicles and books) or furniture. Depreciation on intangible assets, e.g., know-how, trademarks, licence, franchise, etc. which are acquired after 31st March 1998 are also allowed.  Depreciation shall be allowed on eligible assets, which are owned by the assessee and are used at least for some time during the previous year for the purpose of the business. If in the year of acquisition, the asset is used for less than 180days, depreciation shall be allowed @ 50% of the normal depreciation. In the subsequent year the assessee can, however, claim full depreciation, even though the asset is used for less than 180 days. Provision illustrated Year of Year in which No. of days for which acquisition put to use asset is used in that year 2016-17 2016-17 180 days or more 2016-17 2016-17 Less than 180 days 2016-17

2017-18

Less than 180 days

Eligibility for depreciation Depreciation at full rate in the year 2016-17 Depreciation eligible in 2016-17 @50% of the prescribed rate No depreciation in 2016-17; Full depreciation in 2017-18

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 Additional depreciation: Subject to the fulfillment of the conditions below additional depreciation @ 20% of the actual cost of the eligible assets shall be allowed. However, where an assessee sets up an undertaking or enterprise on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, the rate of additional depreciation shall be @35%. Where the asset is acquired during the previous year and is put to use for the purpose of business or profession of the assessee for less than 180 days in that previous year, additional depreciation shall be allowed @ 50% of the aforesaid rate, i.e., 10% (17.5% in the case of backward areas) of the actual cost of the asset. Deduction for the balance fifty per cent of the amount shall be allowed in the immediately succeeding previous year in respect of such asset [Third proviso, w.e.f. A.Y. 2016-17]. Conditions for additional depreciation: Additional depreciation at the prescribed rate shall be allowed if the following conditions are satisfied: (a) The assessee is engaged in the business of manufacture or production of any article or thing or in the business of generation or distribution of power. (b) The assessee has acquired and installed after 31st March 2005 any new machinery or plant (other than ships or aircraft). Where the undertaking is set up in the aforesaid backward area, such assets are acquired and installed in between 1st April 2015 and 31st March 2020. Assets eligible for additional depreciation: For the purpose of additional depreciation, eligible assets mean new machinery and plant which satisfies the following conditions: a. such machinery or plant, before its installation by the assessee, was not used either in India or outside India by any other person; or b. such machinery or plant is not installed in any office premises or any residential accommodation or a guest house; or c. it is not an office appliance or road transport vehicles; or the whole of such plant or machinery or plant is not allowed as a deduction (by way of depreciation or otherwise) in computing the income chargeable under the head ―Profits and gains of business or profession‖ of any previous year. Points to note: (a) Additional depreciation is allowed in the previous year in which the machinery or plant is first put to use. Where the additional depreciation is not claimed in its entirety, the balance of the additional depreciation may be claimed in the immediately succeeding previous year. (b) Additional depreciation is allowed on the actual cost of the asset, not on the written down value. However, where the written down value of the machinery or plant is nil, no additional depreciation shall be allowed. ● Depreciation on assets not owned by the assessee: A lessee of a building can charge depreciation on the capital expenditure of any construction or renovation of the property. For assets purchased on hire-purchase basis, depreciation shall be allowed on the cash down price of the assets. b.

Method of computation of depreciation: Sec. 32 makes depreciation a function of the block of assets, the actual cost of the assets and the written down value (WDV) of the assets.  Block of assets: Unlike the accounting procedure, depreciation under the income-tax law is computed not in respect of each and every piece of assets separately, but with respect to a group of assets, called the Block of assets. u/s 2(11) Block of assets means a group of assets with in a class of assets comprising:  tangible assets, being buildings, machinery, plant or furniture,  intangible assets, being know-how, patents, copyrights, trademarks, license, franchise or similar assets, in respect of which the same rate of depreciation has been prescribed. DIRECT TAXATION

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Actual cost: u/s 43(1) actual cost means capital cost of assets minus any cash subsidy or grants received from the government in respect of the assets.  The WDV of the asset as on the last day of the previous year: It will be computed as follows: Step 1: Find out the WDV of the asset as on the beginning of the previous year. In case *** of newly acquired block of asset, its actual cost is to be taken. Step 2: Add: cost of assets falling within the block of asset acquired during the year. *** Step 3: Deduct: money received during the previous year in respect of asset, which is sold, discarded or demolished together with the scrap value, if any. *** The balance (if positive) is the WDV of the block of asset, on which depreciation at the prescribed rate shall be allowed. *** 

The following points, however, deserve special consideration:  Depreciation shall be allowed if no asset is sold during the previous year and the block has a WDV or,  As a result of sale the block does not become empty and it has a WDV.  If as a result of sale the block becomes empty or it has no WDV, the difference between Step 2 and Step 3 shall be either short-term capital loss or short-term capital gains. To sum up:  If the block is not empty and the beginning WDV + addition are > sales price, depreciation shall be allowed on the balance at the prescribed rates.  If the block is not empty and the beginning WDV + additions are < sales price, no depreciation is allowed, the balance is short-term capital gain u/s 50(1) If the block is empty and the beginning, WDV + additions are > sales price, no depreciation is allowed, the balance is short term capital loss.  If the block is empty and the beginning WDV + additions are < sales price, no depreciation is allowed, the balance is short-term capital gains. Example 1: Depreciated value of the: Block of assets (consisting of plants A, B and C) on 1st April, 2016 Additions of plant D made on September 1, 2016 (it is put to use on September 8, 2016) Cost of plant E purchased on December 24, 2016 Sale proceeds of plant A (sold on March 3, 2017 and was originally purchased on 1st April, 2012 for ` 240,000)

` 29,60,000 3,20,000 6,20,000 32,60,000

Assuming that the rate of depreciation is 30%, find out the admissibility of depreciation for the assessment year 2017-2018. Answer: Computation of depreciation allowance for the assessment year 2017-2018 relating to the previous year 2016-2017. ` ` Plant (Block 1, Rate of Depreciation 30%): W.D.V. of plants A, B and C on 1.4.2016 Add: Cost of plant D (put to use on 8.9.2016) Add: Cost of plant E (put to use on 24.12.2016) Less: Sale Proceeds of plant A W.D.V. of the block of plants

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29,60,000 3,20,000 6,20,000 39,00,000 32,60,000 6,40,000

99

Depreciation allowance: Plant E (used for less than 180 days during the previous year) [`6,20,000 × 30/100x1/2] Remaining W.D.V. of block of assets i.e., ` (6,40,000 - 6,20,000) or ` 20,000 @ 30% Total depreciation for the previous year 2016-2017

93,000 3,000 99,000

Example 2: V Ltd., engaged in manufacture of PVC pipes, purchased a machinery on 25.09.2016 for ` 2,00,000 and put it to use after two weeks. There is no other asset in the block. What is the WDV of the block as on 31.03.2017. The normal rate of depreciation may be assumed to be 15%. [CMA-Inter, Dec. 2008] Answer: Computation of written down for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Plant (Block 1, Rate of depreciation 15%) WDV as on 1.4. 216 Add: Cost of plant acquired on 25.9.2016

Nil 2,00,000

Total

2,00,000

Less: Normal depreciation [` 2,00,000 x 15%x1/2]

15,000 20,000

Less: Additional depreciation @20% [2,00,000 x 20% x ½] WDV as on 1.4. 2017

35,000 1,65,000

No mention of additional depreciation in the question. Note: Since the plant was used for less than 180 days during the previous year, normal depreciation and additional depreciation shall be allowed at half the eligible rates. Example 3: N Textiles Ltd. purchased a machinery from Germany for Euro 1,00,000 on 3.09.2015 through a term loan from Fortune Bank Ltd. The exchange rate on the date of acquisition was `65. The assessee took a forward exchange rate on 05.10.2016 when the rate specified in the contract was `67 per Euro. Compute depreciation for the assessment years 2016-17 and 2017-18. Ignore additional depreciation and assume normal depreciation @15%. [CMA-Inter- Dec. 2010] Answer: Computation of depreciation for the assessment years 2016-17 and 2017-18 ` Assessment year 2016-17: Cost of the asset [€1,00,000 x ` 65] Less: Depreciation @15% WDV as on 1.4.2016 Add: Exchange rate difference u/s 43A [€1,00,000 x ` 2] WDV as on 31.3.1016 Depreciation @15% WDV as on 1.4.2017

65,00,000 9,75,000 55,25,000 2,00,000 57,25,000 8,58,750 48,66,250

Deprecation `

9,75,000

8,58,750

Example 4: X is a manufacturer of plastic goods in India. The following particulars are available in respect of his business: (a) Written down of plant and machinery as on 1st April, 2016 `8,00,000 (b) Additions to plant and machinery during the previous year 2016-2017 `1,00,000 (c) One machine was destroyed in an accident for which compensation received from the insurance company `40,000 DIRECT TAXATION

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(d) During the year X sold some machinery Find out the depreciation allowance or capital gains for the assessment year 2017-2018, if the sale price of the machinery is (i) `5,00,000 (ii) `9,00,000. Rate of depreciation in respect of all the machines is 30%. Answer: Computation of depreciation and capital gains for the assessment year 2017-2018 relating to the previous year 2016-2017. Case(i) ` Case(ii) ` Plant and machinery: (Block1,Rate of depreciation 30%): W.D.V.of the block of plant and machinery as 8,00,000 8,00,000 on 1st April, 2016 1,00,000 1,00,000 Add: Purchase during the year 9,00,000 9,00,000 Less: Moneys payable in respect of machinery sold, destroyed or demolished 5,40,000 9,0,000 during the year 3,60,000 Nil W.D.V.of the block of plant and machinery as on 31st March, 2017 1,28,000 Nil Depreciation allowance(Note1) Nil 40,000 Short-term capital gains Notes : (1) Depreciation has been worked out as under : Normal depreciation : @ 30% of ` 3,60,000 Additional depreciation : @ 20% of ` 1,00,000 Total

`1,08,000 `20,000 `1,28,000

(2) In the case of (ii), moneys payable in respect of assets sold and destroyed being higher than the W.D.V. of the block of assets, neither normal depreciation nor additional depreciation has been allowed. On the other hand, the excess of the sale proceeds over the W.D.V. has been treated as short-term capital gains u/s 50(1). (3) `40,000, being insurance claim received, has been added in both cases with the sale proceeds of machines.

9.7

INCENTIVES FOR INVESTMENT IN NEW PLANT AND MACHINERY [SECTION 32AC]

Effective from the assessment year 2014-15, deduction under this section is available to a corporate assessee who invested a minimum of `100 crores during the period beginning from 1st April 2013 and ending on 31st March 2015. The quantum of deduction was 15% of the actual cost of new assets acquired and installed during the said financial years. (2013-14 -and 2014-15). However, in consequence of amendment of this section, [vide clause (1A)], for the assessment year 2016-17 and 2017-18, the same deduction will be continued, subject to the fulfilment of the following conditions: (a) the cost of the new plant and machinery acquired is more than `100 crores; (b) the installation of such plant and machinery is completed on or before 31 st March 2017. (c) The deduction will be available in the year of acquisition of new plant and machinery. (d) where the installation of the new plant and machinery is in a year other than the year of acquisition, the deduction under this section will be allowed in the year in which the new plant and machinery is installed.

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9.8

INVESTMENT ALLOWANCE FOR NOTIFIED BACKWARD AREAS [SECTION 32AD]

Section 32AD accords additional investment allowance amount equal to 15% of the cost of new asset acquired on or after 1st April 2015. The deduction under this section is subject to the flowing conditions: (a) the assessee sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any notified backward areas in the State of Andhra Pradesh and the State of Telangana; and (b) the new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from the 1st April, 2015 to 31st March, 2020. Meaning of new assets: For this purpose, ―new asset‖ means any new plant or machinery (other than a ship or aircraft) but does not include: (a) any plant or machinery, which before its installation by the assessee, was used either within or outside India by any other person; (b) any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; (c) any office appliances including computers or computer software; (d) any vehicle; or (e) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head ―Profits and gains of business or profession‖ of any previous year. Consequence of disposal of the new assets : If any new asset acquired and installed by the assessee is sold or otherwise transferred, except in connection with the amalgamation or demerger or reorganization of business referred to in Section 47, within a period of five years from the date of its installation then , in addition to taxability of capital gains, the amount of deduction allowed under in respect of such new asset shall be deemed to be the income of the assessee chargeable under the head "Profits and gains of business or profession" of the previous year in which such new asset is sold or otherwise transferred.

9.9

TEA DEVELOPMENT ACCOUNT, COFFEE DEVELOPMENT ACCOUNT OR RUBBER DEVELOPMENT ACCOUNT [SECTION 33AB]

Deduction under this section is allowed to an assessee who is carrying on the business of growing and manufacturing tea or coffee or rubber in India, can claim deduction under this section in respect of: (a) any amount deposited in the special account of the National Bank for Agriculture and Rural Development (NABARD) maintained by the assessee in accordance with a scheme approved by the Tea Board or the Coffee Board or the Rubber Board, or (b) any amount deposited in the Deposit Account opened in accordance with a scheme approved by the Tea Board or the Coffee Board or the Rubber Board, as the case may be, with the previous approval of the Central Government. Such amount is to be deposited before the expiry of six months from the end of the previous year or before the due date of furnishing return of income, whichever is earlier. Actual deduction: If the specified conditions are fulfilled, the amount of deduction will be the lower of the following sum: (i) The aggregate of the amounts deposited under (a) and (b) above, (ii) 40% of profits of such business before making any deduction under this section and before making any adjustment of brought forward loss. DIRECT TAXATION

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9.10 SITE RESTORATION FUND [SECTION 33ABA] An assessee who is carrying on business consisting of the prospecting for, or extraction or production of petroleum or natural gas, or both in India pursuant to an agreement with the Central Government for such business, can claim deduction under this section in respect of: (a) Any amount deposited with the SBI to a special account in accordance with the scheme approved by the Central Government, or (b) Any amount deposited to the Site Restoration Account in accordance with the scheme approved by the Central Government. The amount shall be deposited before the end of the relevant previous year. Amount of deduction: Subject to the fulfillment of the specified conditions, the amount of deduction shall be the lower of the following amount: (i) The aggregate of amount deposited under (a) and (b) above, (ii) 20% of the profits of such business before making any deduction under this section and any adjustment for brought forward loss of earlier years.

9.11 EXPENDITURE ON SCIENTIFIC RESEARCH [SECTION 35] Under section 35, deduction for expenditure on scientific research is allowed in respect of expenditure incurred by the assessee as well as contributions made to the outsiders for purposes that may or may not be related to the business of the assessee. 1. Expenditure on in-house research: The following expenses incurred by an assessee on in-house research are allowed as a deduction: (i) Revenue expenses: Any revenue expenses incurred on scientific research and related to the business of the assessee are allowed as deduction. [Section 35(1)(i)]. Points to note: Revenue expenditure incurred by the assessee after 31st March, 1973 on salary (exclusive of perquisites) to an employee engaged in scientific research on purchase of materials used in scientific research within the three years immediately preceding commencement of business shall, to the extent certified by the prescribed authority, also be allowed as deduction in the year in which the business is commenced [Explanation to Section 35(1)(i)]. (ii) Capital expenditure: Capital expenditure incurred by the assessee after 31st March, 1967, shall be deducted in full in the previous year in which the expenditure is incurred [Section 35(2)(ia)]. Capital expenditure incurred within three years immediately preceding the commencement of business shall also be deductible in the year in which the business is commenced [Explanation 1 to Section35(2)(ia)]. But capital expenditure incurred on acquisition of land after 29th February, 1984 is not allowed to be deducted [Proviso to Section 35(2)(ia)]. Depreciation in respect of capital asset used for scientific research is not allowed.  Sale of assets used for scientific research: When assets used for the purpose of scientific research are sold, the consequences would be as follows : (a) When the asset is sold without being used for any other purposes: When an assets used for scientific research is sold without being used for any other purposes, then the net sale proceeds or the cost of the asset, which was earlier allowed as deduction under Section 35, whichever is less, shall be chargeable to tax as the income of the business or profession of the previous year in which the sale took place [Section 41(3)]. Any excess of the sale price over the cost of the asset, however, shall be charged as short-term capital gains under Section 45. DIRECT TAXATION

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(b) When the asset sold is used for business purposes: When an asset, after it ceases to be used for scientific research and is used for other purposes, it shall be included in the relevant block of assets. The actual cost of such asset, however, shall be nil, since full amount of the cost of the asset has been allowed as deduction under Section 35. The sale proceeds of such an asset shall be deducted from the block of assets to arrive at the written down value of such block. (iii) Deduction for in-house research in the case of corporate assessee: When a company engaged in the business of bio-technology or any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule, incurs any expenditure (both revenue and capital expenditure but excluding cost of land and buildings) then a weighted deduction equal to twice the expenditure shall be allowed [Section 35(2AB)(1) as amended by the Finance Act 2016]. 2. Contributions to outside agencies: Any contribution for scientific research to the following agencies for purposes related or unrelated to the business of the assessee shall be allowed a weighted deduction equal to: (a) one and three-fourth times the actual contribution where it relates to any research association which has as its objective the undertaking of scientific research or a university or a college or any other institution which is approved in accordance with the guidelines prescribed by the Central Government and such association, university, college or other institution are specified by the Central Government by notification in the Official Gazette. [Section 35(1)(ii)] ; (b) one and one-fourth times the actual contribution where it relates to any research association which has as its main object the undertaking of research in social science or statistical research or to a university, college or other institution to be used for research in social science or statistical research, provided that such institutions are approved for the purpose by the Central Government [Section 35(1)(iii)]; (c) two times the actual contribution where it relates to a National Laboratory or a university or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved by the prescribed authority [Section 35(2AA)]. 3. Contribution to a company for the purpose of scientific research: With a view to encouraging outsourcing of scientific research, particularly by small companies which are not capable of building in-house scientific facilities, with effect from the assessment year 2009-2010, a new clause (iia) in Section 35(1) is inserted to allow a weighted deduction of one and one-fourth times the amount paid by a person to a company to be used for scientific research, if such company: (i) is registered in India ; (ii) has as its main object the scientific research and development ; (iii) is for the time being approved by the prescribed authority in the prescribed manner ; and (iv) fulfils such other conditions as may be prescribed. Summary of deductions u/s 35 and phasing out of weighted deduction introduced by the Finance Act 2016 Section Deduction up to Deduction from AY 2018-19 AY 2017-18 35(1(ii): Contribution to an approved 175% of actual 150% of the actual amount for the research association, university, etc. contribution assessment year 2018-19 to 2020-21; 100% thereafter. 35(1) (iia): Contribution to an approved Indian scientific company 35(1)(iii): Contribution to universities etc. for research in social science or statistical research 35(2AA): Contribution to an approved

125% of actual contribution 125% of actual contribution

100% actual contribution from the AY 2018-19 100% actual contribution from the AY 2018-19

200%

150% of the actual amount for the

of

actual

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National Laboratory, university, etc.

contribution

35(2AB): Expenditure by a company on an approved in-house research

200% of the actual contribution

assessment year 2018-19 to 2020-21; 100% thereafter. 150% of the actual amount for the assessment year 2018-19 to 2020-21; 100% thereafter.

Example 5: P furnished the following particulars relating to the payments made for scientific research for the year ended 31.3.2017: `(Lakh) (i) Payments made to URC Ltd. 40 (ii) Payment to made to MM College 30 (iii) Payment made to CPC College 20 (iv) Payment to National Laboratory 16 (v) Machinery purchased for in-house scientific research 50 (vi) Salaries to research staff engaged in in-house scientific research 24 Compute the amount of deduction available under section 35 of the Income-tax Act 1961. Answer: Computation of deduction u/s 35 for scientific research for the assessment year 2017-18 Particulars Amount Section Rate Deduction `(Lakh) `(lakh) (i) (ii) (iii) (iv) (v) (vi)

Payments made to URC Ltd. Payment to made to MM College Payment made to CPC College Payment to National Laboratory Machinery purchased for in-house scientific research Salaries to research staff engaged in in-house scientific research Total

40 35(1)(ii) 30 35(1)(ii) 20 NA 16 35(2AA) 50 35(2)(ia)

175% 175% Nil 200% 100%

70.00 52.50 Nil 32.00 50.00

24

100%

24.00 228.50

35(1)(i)

Note: Since the amount paid to CPC college is not used for the purpose of scientific research, no deduction shall be available for it. 4. Carry forward and set-off of unabsorbed capital expenditure on scientific research: Where, due to the absence or insufficiency of profits of the business, any capital expenditure for scientific research cannot be deducted either partially or in full, such unabsorbed capital expenditure shall be allowed to be carried forward without any time limit and shall be set off in any subsequent assessment year. However, when there is any brought forward business loss, in the matter of set off, such business loss shall have priority over the unabsorbed capital expenditure on scientific research.

9.12 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM

FOR TELECOMMUNICATION SERVICES [SECTION 35ABA]

With effect from the assessment year 2017-18, section 35ABA is inserted to provide deduction in respect of any capital expenditure incurred for acquiring any right to use spectrum for telecommunication services either before the commencement of the business or thereafter at any time during any previous year and for which payment has actually been made to obtain a right to use spectrum. The deduction shall be given in equal installments over the period starting from the year in which such payment has been made and ending in the year in which the useful life of spectrum comes to an end.

DIRECT TAXATION

105

There shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.

9.13 EXPENDITURE FOR OBTAINING LICENCE TO OPERATE TELECOMMUNICATION SERVICES [SECTION 35ABB]

Deduction under this section is allowed in respect of capital expenditure for acquiring any right to operate telecommunication services. For this purpose, the expenditure may be incurred either before the commencement of business to operate such services or at any time thereafter. But deduction is allowed only in respect of the payment which has been actually made to obtain the licence. Amount of deduction: Sums actually paid shall be allowed to be deducted in equal installments over the tenure of the licence, beginning with the year in which the payment is made. Where, the payment is made before the commencement of such business, it is to be deducted from the previous year in which the business has actually commenced. Example 6: S Ltd. which followed mercantile system of accounting, obtained licence on 1.6.2015 from the Department of Telecommunications for a period of 10 years. The total license fee payable is ` 36,00,000, payable as under: Year ended 31st March 2016 2017

Licence fee payable for the year 20,00,000 16,00,000

Payments made on 30.3.2016 15.5.2016 28.2.2017

Amount 7,40,000 12,60,000 10,80,000

The balance of ` 5,20,000 is pending as on 31.3.2017. Compute the amount of available u/s 35ABB for the assessment year 2016-17 and 2017-18. Ans.: As provided u/s 35ABB, the amount actually paid for obtaining licence shall be deducted in equal installments over the tenure of the licence, beginning with the year in which the amount is paid. Accordingly, the deduction for assessment years 2016-17 and 2017-18 shall be as under: Financial year in which payment is made `7,40,000 2015-16 `23,40,000 2016-17

Assessment year in which deduction claimed/ Remaining years 2016-17/ 10 years 2017-18/ 9 years

Amount` 1/10 x 7,40,000 = `74,000 (1/9 x 23,40,000)+ 74,000= `3,34,000

9.14 EXPENDITURE ON ELIGIBLE PROJECTS OR SCHEMES [SECTION 35AC] Deduction under this section is available to the corporate as well as non-corporate assessees on the expenditure by way of payment of any amount to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme. A corporate assessee can also claim deduction under this section for expenditure incurred directly by it on the eligible projects or schemes. For this purpose, ―eligible project or scheme‖ means such project or scheme for promoting social and economic welfare and upliftment of the public as the Central Government may specify by notification in the Official Gazette. However, no deduction under this section shall be available from the assessment year 2018-19.

DIRECT TAXATION

106

Conditions: 1. In order to claim deduction under this section the assessee shall, along with the return of income, furnish a certificate in the prescribed form as under: (i) where the payment is made to a public sector company or a local authority or to an approved institution, a certificate from the donee-organisation in Form No. 58A ; (ii) where the assessee himself incurs the expenditure, a certificate from a chartered accountant in Form No. 58B. 2. Where in any previous year a deduction has been allowed under this section, no deduction for the same shall be allowed under any other section. Amount of deduction: 100% of the expenditure incurred during the previous year for the aforesaid purposes is allowed as deduction.

9.15 CAPITAL EXPENDITURE IN RESPECT OF SPECIFIED BUSINESS [SECTION 35AD] This section provides 100% deduction for any expenditure of capital nature (excluding expenditure incurred on the acquisition of any land or goodwill or financial instrument) incurred, wholly and exclusively, during the previous year for the following specified businesses: (i) *setting up and operating a cold chain facility (defined to mean a chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce) on or after 1st April 2009; (ii) *setting up and operating a warehousing facility for storage of agricultural produce on or after 1st April 2009; (iii) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage on or after 1st April 2007. (The existing scheme of deduction u/s 80IA(4)(vi) is to be discontinued from the assessment year 2010-11). (iv) building and operating a new hotel of two-star or above category on or after 1st April 2010 ; (v) *building and operating a new hospital with at least one hundred beds for patients on or after 1st April 2010; (vi) building a housing project under a scheme for slum development or rehabilitation framed by the Central Government or a Statement, as the case may be, on or after 1st April 2010 ; (vii) *developing and building a housing project under a scheme for affordable housing framed by the Central Government or a Statement Government on or after 1st April, 2011; (viii) *a new plant or in a newly installed capacity in an existing plant for production of fertilizers on or 1 st April, 2011. (ix) setting up and operating on or after 1st April 2012 an inland container depot or a container freight station notified or approved under the Customs Act, 1962. (x) Bee-keeping and production of honey and beeswax commenced on or after 1st April 2012. (xi) Setting up and operating a warehousing facility for storage of sugar on or after 1st April 2012. (xii) Laying and operating a slurry pope line for the transportation of an iron ore; (xiii) Setting up and operating a semi-conductor wafer fabrication manufacturing unit and (xiv) Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility on or after 1st April 2017 (defined as: [W.e.f. AY 2018-19]. The term infrastructure facility has been defined as: (i) a road including toll road, a bridge or a rail system; (ii) a highway project including housing or other activities being an integral part of the highway project; (iii) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; (iv) a port, airport, inland waterway, inland port or navigational channel in the sea; DIRECT TAXATION

107



Weighted deduction: With effect from the assessment year 2013-14, a weighted deduction equal to one and one-half times of the expenditure shall be allowed in respect of the business specified in *(i), *(ii), *(v),* (vii) and *(viii)above. [ *With effect from the AY 2018-19 no weighted deduction shall be allowed under these clauses]

Example 7: C Ltd. commenced the business of operating a three-star hotel in Tirupati on 01.04.2016. It furnishes you the following information: ` Cost of land (acquired in June 2014) 60 lakhs Cost of construction of hotel building Financial year 2014-15 30 lakhs Financial year 2015-16 150 lakhs Plant and Machineries (all new) acquired during financial year 2015-16 30 lakhs [All the above expenditures were capitalized in the books of the company] Net profit before depreciation for the financial year 2016-17 ` 80 lakhs. Determine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961, for the assessment year 2017-18. [CMA-Inter_ Dec. 2011] Answer: Under section 35AD, 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the specified business, which includes the business of building and operating a hotel of two-star or above category anywhere in India which commences its operations on or after1.4.2010, would be allowed as deduction from the business income. However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be eligible for deduction. Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to commencement of operation would be allowed as deduction during the previous year in which the assessee commences operation of his specified business. A condition has been inserted that such amount incurred prior to commencement should be capitalized in the books of account of the assessee on the date of commencement of its operations. Accordingly, the deduction under section 35AD for the A. Y. 2017-18 in the case of C Ltd. would be calculated as follows, assuming that the expenditures were capitalised in the books of the company on1.4.2016, being the date of commencement of operations— Particulars Cost of land (not eligible for deduction under section 35 AD) Cost of construction of hotel building (`30Iakhs+`150lakhs) Cost of plant and machinery Deduction under section 35AD

`(in lakhs) Nil 180 30 210

Note: For A.Y.2017-18, the loss from specified business of operating a three-star hotel would be `130lakhs (i.e. `210 lakhs- 80lakhs). As per section 73A, any loss computed in respect of the specified business referred to in section 35 AD shall be set off only against profits and gains, if any, of any other specified business. The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any specified business in the following assessment year.

9.16 EXPENDITURE ON AGRICULTURAL EXTENSION PROJECT [SECTION 35CCC] Deduction under this section is allowed to an assessee for an amount equal to one and one-half times of the actual amount incurred on agricultural extension project notified by the Board in this behalf in accordance with the guidelines as may be prescribed. [No weighted deduction shall be allowed from the assessment year 2021-22]. DIRECT TAXATION

108

However, an assessee who is allowed a deduction under this deduction shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year.

9.17 EXPENDITURE ON SKILL DEVELOPMENT PROJECTS [SECTION 35CCD] Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or building) on any skill development project notified by the Board in this behalf in accordance with the guidelines as may be prescribed, then, there shall be allowed a deduction of a sum equal to 150% of such expenditure [No weighted deduction shall be allowed from the assessment year 2021-22]. An assessee who is allowed a deduction under this deduction shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year.

9.18 Amortisation of preliminary expenses (Sec. 35D) Preliminary expenses incurred by a company or any other resident assessee (a) before the commencement of the business for setting up of business, or(b) after the commencement of business for extension of any unit or setting up of any new unit, are eligible for deduction under this section. Qualifying expenditure: The expenditure which qualifies for deduction are: (a) Expenditure in connection with preparation of feasibility report, preparation of project report, conducting market survey or any other survey and engineering survey relating to the business. (b) Legal charges for drafting any agreement between the assessee and any other person for the purpose of setting up or conduct of business of the assessee. (c) In the case of a company, expenditure for legal charges for drafting the Memorandum and Articles of Association, fees for registration of the company under the provisions of the Companies Act, 1956 or underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus in connection with the public issue of shares and debentures. The aggregate amount as mentioned above shall not exceed 2 1/2% of: (i) cost of the project, or (ii) at the option of corporate assessee, the capital employed in the business. However, where the expenditure is incurred after 31st March, 1998, the aggregate amount which qualifies for deduction shall not exceed 5% of the cost of the project or as the case may be, 5% of capital employed by a corporate assessee. Actual deduction: One-fifth of the qualifying expenditure for each of the five successive previous years (one-tenth for each of the ten successive years, if the expenditure is incurred before 1st April, 1998) beginning with the previous year in which the business is commenced or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation Example 8: V Ltd. Is an existing Indian Company which sets up a new industrial unit. It incurs the following expenditure in connection with the setting up of a new industrial unit:

Preparation of project report Feasibility report expenses ` Expenses for raising additional capital required for the new unit DIRECT TAXATION

` 4,00,000 6,00,000 3,00,000 109

The following additional data are given: Factory construction cost 12,00,000 Cost of project (including construction of factory) 40,00,000 Capital employed in the new unit 30,00,000 Compute the deduction admissible to the company under section 35D of the Income-tax Act, 1961 for [CMA- Inter, June 2012 (adapted)] the assessment year 2017-18. Answer: Computation of deduction u/s 35D for the assessment year 2017-18 relating to the previous year 201617 ` ` A. Qualifying expenditure: Preparation of project report Feasibility report expenses ` Expenses for raising additional capital required for the new unit Total B. Cost of the project: C. Capital employed D. Qualifying amount: Actual expenditure but subject to the maximum of the following: (i) 5% of the cost of the project (ii) 5% of capital employed Amount to be amortized during the year [ 1/5 th x `2,00,000]

4,00,000 6,00,000 3,00,000 13,00,000 40,00,000 30,00,000 13,00,000

2,00,000 1,50,000

40,000

9.19 AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER [SECTION 35DD] An Indian company which incurs any expenditure wholly exclusively for the purposes of amalgamation or demerger of an undertaking on or after 1st April, 1999, can claim deduction under this section. The amount of deduction is one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. When deduction under this section is allowed, no deduction for the same can be claimed under any other provision of the Act.

9.20 AMORTISATION OF EXPENDITURE INCURRED UNDER

VOLUNTARY RETIREMENT SCHEME [SECTION 35DDA]

Under this section deduction is allowed for any payment made to an employee at the time of his voluntary retirement in accordance with any scheme or schemes of voluntary retirement. The amount of deduction is one-fifth of the amount so paid for each of the five successive previous years beginning with the year in which the payment is made. Section 35DDDA has been amended by the Finance Act, 2005, [w.r.e.f. the assessment year 2004-2005] to provide that the deduction shall be available for any such payment made in connection with the retirement of the employee. As a result, not only payments made to the employees at the time of retirement shall be deductible in five equal installments, but also the amount paid after the date of retirement shall be eligible for deduction in five equal installments reckoned from the year in which the amounts are actually paid.

DIRECT TAXATION

110

Example 9: X Ltd. made the following payments to one of its employees on account of voluntary retirement: Previous year: ` 2015-16 `3,00,000 2016-17 `3,00,000 Show how deduction u/s 35DDA shall be claimed in different assessment years. Answer: Computation of deduction u/s 35DDA AY (2016-17) AY 2017-18 PY 2015-16 60,000 60,000 PY 2016-17 60,000 Total 60,000 1,20,000

AY 2018-19 60,000 60,000 1,20,000

AY 2019-20 60,000 60,000 1,20,000

AY 2020-21 60,000 60,000 1,20,000

AY 2021-22 60,000 60,000

9.21 OTHER DEDUCTIONS U/S 36 1. Insurance premium [Sec. 36(1)(i)]: against destruction or damage of stock-in-trade is deductible. 2. Insurance premium paid by a federal milk co-operative society [Section 36(1)(ia)] : Insurance premium paid by a federal milk co-operative society on the lives of the cattle owned by the member of a primary co-operative supplying milk to the federal co-operative society is allowed as deduction. 3. Insurance premium on the health of employees [Sec.36(1) (ib)]: If paid by cheque, it will qualify for deduction. 4. Bonus or commission to employees [Sec.36(1)(ii)]:is deductible on payment basis only if they are not payable as profit or dividend. Deduction on accrual basis is allowed if it is paid on or before the due date of submission of returns u/s 39(1). 5. Interest on borrowed capital [Sec.36(1)(iii)]: Interest on capital is deductible subject to the following:  money has been utilised for the purpose of the business;  borrowed money can be utilised both for capital and revenue expenditure purpose;  interest paid by firm to the partners is deductible subject to a maximum of 12% p.a.;  even if the asset purchased with the borrowed money is not used during the previous year, interest is deductible;  interest paid before the commencement of business is not deductible, it is to be capitalised ;  with effect from the assessment year 2004-2005, interest paid by an existing concern up to a period when the asset is first put to use shall be capitalised.  The interest must be paid or payable and claimed as deduction : Except for the cases mentioned under Section 43B, interest on borrowed fund is deductible if it is either paid or payable during the previous year. If the assessee maintains his books of accounts under ―cash basis‖ interest is deductible only when it is paid. Where the interest is paid outside India, no deduction can be claimed unless tax on such interest is paid or deducted at source [Section 40(a) (i)]. Brokerage and any other expenses paid in connection with raising the loan is not deductible under this section but under Section 37(1).  A few instances of interests on borrowed capital which are deductible : (i) Interest paid on capital borrowed for purchasing shares for the purpose of business is allowable even though dividend on shares is assessable under Section 56. (ii) Interest on money borrowed is allowed in full although a part of the borrowed fund is used for the purpose of earning non-assessable income. (iii) Interest paid to Government on funds borrowed for payment of purchase tax is deductible. (iv) Interest paid by a firm to the partners in terms of the provisions of the partnership deed is allowable to the extent of 12% p.a.  A few instances of interests on borrowed capital which are not deductible : DIRECT TAXATION

111

(i)

(ii) (iii)

(iv) (v)

Interests on funds borrowed and subsequently lent to the partners without interest for their personal purposes, or interest on loan borrowed by the parent company and re-lent to the subsidiary company without interest is not allowable. Interest on funds borrowed for the purpose of business which is not assessable, is not deductible. Interest on funds borrowed for the purpose of business which is discontinued before the commencement of the previous year, is not allowed, neither can the interest on borrowed fund for a discontinued business be allowed to be deducted nor set off against the profits of a separate business. Interest on funds borrowed for the purposes of business would be disallowed in the subsequent years if such funds are used for non-business purposes in the subsequent years. Interest on loan paid prior to the commencement of business is not deductible. Interests payable for such period on funds used for acquiring capital assets are to be capitalised.

6. Discount on zero coupon bond [Section 36(1)(iiia)] :Effective from the assessment year 2006-2007, Finance Act 2005 has inserted a new clause (iiia) to Section 36(1) to provide deduction for the discount on a zero coupon bonds. The deduction shall be allowed on a pro rata basis over the period of life of such bond to be calculated in the manner as may be prescribed. 7. Employer‘s contribution to recognised provident fund or approved superannuation fund [Sec. 36(1)(iv)] : is allowed as deduction. Contribution to unrecognised fund is not deductible. 8. Employer‘s contribution to the New Pension Scheme [Sec. 36 (1)(iva)]: Employer‘s contribution to the New pension Scheme referred to in Section 80CCD is allowed to be deducted to the extent of 10 percent of the salary of the employee. 9. Contribution to approved gratuity fund by the employer [Sec.36 (1)(v)] : is deductible, only if paid by creating an irrevocable trust. 10. Employees‘ contribution towards staff welfare scheme [Sec.36(1)(va)] : is allowed if the sum is credited to the employees‘ fund on or before the due date of crediting such amount. 11. Deduction in respect of animals [Section 36(1)(vi)]: An assessee can claim deduction in respect of animals, not being stock-in-trade, which have been used for the purposes of business or profession of the assessee and have died or have become permanently useless for such purpose. The amount of deduction shall be the difference between the actual cost of the animals to the assessee and the amount, if any, realised in respect of the carcasses of animals. 12. Bad debts [Sec.36 (1)(vii)] : Bad debt is allowed as deduction subject to the following : ● The debt, in respect of which the claim is made, has been taken into account in computing income of the concerned year. ● It is written off in the year in which deduction is claimed. ● Since bad debt is an estimate, the Assessing Officer may not allow the full amount as claimed. ● If in the subsequent year any final recovery is made, then if the sum total of recovery plus bad debt earlier allowed over the original claim is negative then it is to be allowed as final deduction in this year. On the other hand, if the difference is positive it is to be charged to tax in that year. ● In view of the newly introduced Income Computation and Disclosure Standards notified u/s 145(2), where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts. ● Provision illustrated: In 2016-2017 bad debt claimed is `80,000, but the A.O. allows only `50,000. In 2017-18 `20,000 is finally recovered. In this case `10,000 will be allowed as deduction in 2017-18 [i.e., (50,000 + 20,000) – 80,000]. On the other hand, if recovery is ` 35,000, `5,000 will be charged to income in 2017-18. ● Bad debts in respect of a discontinued business are not allowed. DIRECT TAXATION

112

13. Bad debts in the case of banks and other financial institutions [Section 36(1)(viia)] :In the case of specified banks and financial institutions, an assessee can claim deduction in respect of provision for bad and doubtful debts to the extent of the following amount : (i) In the case of a scheduled bank (not being a foreign bank) or a non-scheduled bank or a cooperative bank (but not a primary agricultural credit society or a primary co-operative agricultural and rural development bank), 7·5% of the total income computed before deduction under this section and Sections 80C to 80U and 10% of the aggregate average advances made by the rural branch of such banks. (ii) In the case of a foreign bank or a public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, 5% of the total income computed before making deduction under this Section and Sections 80C to 80U. (iii) In the case of institutions mentioned in (i) and (ii) above, the deduction for bad debts u/s 36(1)(vii) shall be limited to an amount by which such debts exceed the credit balance in the provision for bad and doubtful debts. If the actual bad debt during the previous year is less or equal to the provision for doubtful debts, no deduction for bad debt shall be allowed. (iv) With effect from the assessment year 2004-2005, a scheduled bank or a non-scheduled bank shall, at its option, be allowed a further deduction in excess of the aforesaid limits, for an amount exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government. No deduction under this provision shall be allowed unless such income has been disclosed in the return of income under the head ―Profits and gains of business or profession‖. (v) With effect from the assessment year 2017-18, in the case of a non-banking financial company, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter. 14. Deduction in respect of special reserve [Section 36(1)(viii)]:Under this section deduction is allowed in respect of any special reserve created and maintained by a specified entity in respect of reserve created from the specified business. The amount of deduction shall be least of the following: (i) amount transferred to the reserve account during the previous year, or (ii) 20% of the profits derived from the business of providing long-term finance, or (iii) twice the amount of the paid-up share capital and the general reserve. Meaning of specified entity and specified business: Specified entity Specified business A financial corporation specified in section 4A The business of providing long-term finance for of the Companies Act, 1956 industrial or agricultural development or development of infrastructure facility in India or development of housing in India. A financial corporation which is a public sector Same as above. company A banking company Same as above. A co-operative bank other than a primary Same as above. agricultural credit society or a primary cooperative agricultural and rural development bank A housing finance company The business of providing long-term finance for the construction or purchase of houses in India for residential purposes. Any other financial corporation including a The business of providing long-term finance for public company development of infrastructure facility in India.

DIRECT TAXATION

113

15. Family planning expenditure [Sec.36(1)(ix)]:A corporate assessee is allowed 100% deduction if it is revenue in nature and 1/5th of the expenses in each of the five years if it is capital in nature. A noncorporate assessee can claim deduction for this purpose u/s 37(1). Expenditure incurred by specified entities: [Section 36(1)(xii)]: Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes referred to in the Act under which such corporation or body corporate was constituted or established and is notified by the Central Government in the Official Gazette, shall be allowed as a deduction. 16. Deduction for baking transaction tax [ Section 36(1)(xiii)]:With effect from 1.4.2009, Banking Transaction Tax is withdrawn. 17. Deduction for contribution to credit guarantee trust fund: [Section 36(1)(xiv)]: Any contribution made by a public financial institution towards credit guarantee fund trust for small industries as the Central Government may, by notification in the Official Gazette, specify in this behalf, shall be allowed as a deduction. 18. Deduction for securities transaction tax [Section 36(1)(xv)]:Securities transaction tax paid by the assessee during the year in respect of taxable securities transactions entered into in the course of business shall be allowed as deduction under Section 36(1)(xv) subject to the condition that such income from taxable securities transactions is included under the head ‗Profits and gains of business or profession‘. 19. Deduction for commodities transaction tax [Section 36(1)(xvi)]:Commodities transaction tax paid by the assessee in respect of the taxable commodities transactions entered into in the course of his business during the previous year shall be allowable as deduction, if the income arising from such taxable commodities transactions is included in the income computed under the head ―Profits and gains of business or profession‖. 20. Deduction for expenditure for purchase of sugarcane by a co-operative society [Section 36(1)(xvii)]:With effect from the assessment year 2016-17, deduction under this section is allowed to a co-operative society engaged in the manufacture of sugar on account of purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government.

9.22 GENERAL DEDUCTION (SEC. 37) Section 37 deals with the residual category of deductions which are not claimed u/s 30-36. Deduction under this section will be available if the expense in question:  is not in the nature of capital expenditure;  is incurred during the previous year; and  is incurred wholly and exclusively for the purpose of business. CSR Expenditure not eligible for deduction: With effect from the assessment year 2015-16, an Explanation has been inserted so as to provide that for the purposes of Section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under Section 37. However, the CSR expenditure which is of the nature described in Section 30 to Section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein. Example 10: [Zero coupon bond] section 36(1) (iiia)] On 1.10.2016 An infrastructure financing company issued deep discount bond/ zero coupon bonds aggregating ` 10,00,000. The maturity date and maturity value of the bonds are 30.11.2026 and ` 20,80,000 respectively. Determine the amount of discount to be allowed as deduction for the assessment year 2017-18 and 2018-19. DIRECT TAXATION

114

Answer: Computation of discount allowed for zero coupon bond ` Discount on issue of Bond [ `20,80, 000 – `10,00,000] Maturity period Discount per month [`10,80,000/120] Amount of discount allowable for the previous year 2016-17 [`9,000 x 6] Amount of discount allowable for the previous year 2017-18 [`9,000 x 12]

`10,80,000 120 months `9,000 54,000 1,08,000

EXPENSES ALLOWABE U/S 37(1) Expenses Examples Legal  Legal expenses incurred in the normal course of business expenses  Legal expenses incurred for alleged breach of trading contract  Legal expenses incurred to defend assessee‘s title to his assets  Legal expenses incurred to protect assessee‘s business  Legal expenses incurred for recovery of debt  Legal expenses incurred for terminating disadvantageous trading relationship.  Legal expenses on defending an employee against criminal prosecution in the interest of business.  Legal expenses incurred in successfully defending the assessee against alleged infringement of patent rights  Legal charges for obtaining loan from financial institutions  Expenditure for income-tax proceedings  Legal expenses to protect the assessee from being declared insolvent Interests  Interest on loan taken to pay purchase tax  Interest for delayed payment under the Employees‘ Provident Funds Act  Interest on arrear tax payable under the Sales Tax Act  Interest on funds borrowed to pay advance tax  Interest on purchase consideration due or on unpaid purchase price of plant and machinery  Interest on borrowed funds to pay off trading loss Brokerage and  Brokerage paid for sale of old plant commission  Brokerage paid in connection with the lease of business premises  Commission paid to bank in respect of guarantee for payment of purchase consideration ofassets  Commission paid for procuring business contracts  Commission paid to selling agents Fines, Penalties and fines for infringement or breach of law are not deductible. However, penalties, the following are held to be deductible: damages, Penalty for delay in payment of sales tax compensation,  Demurrage paid to port or railway authorities for delay in clearing goods etc.  Penalty for not producing or exporting a stipulated quantity of goods  Penalty/compensation paid by building contractor for deviation from the original building plan  Penalties/compensation paid for delay in executing contracts  Compensation for breach of contract Compensation  Payment made to get rid of an employee  Compensation paid to workers at the time of closure of some units  Gratuity paid to the widow of a director in accordance with the company‘s articles of association  Ex gratia/pension paid to dependents of former employees  Retrenchment compensation paid to employees on the ground of DIRECT TAXATION

115

commercial expediency Expenditure incurred on the inauguration ceremony of the factory Expenditure on celebration of annual day Gift made on the occasion of marriage of relatives of the employees Presentation of wrist watch to the employees as a gesture of goodwill Contributions to trade association with a view to preventing uneconomic competition Taxes  Tax on business or profession levied by local authority  Profession tax levied by the State  Purchase tax on goods Expenses  Diwali and Mahurat expenses allowed under  Civil defence expenses specific  Advertisement expenses, other than those prohibited under Section 37(2B) instructions of  Payment for telephone connection under OYT scheme and security deposit for CBDT telex. Refund of deposit shall be taxable u/s 41 (1).  Expenditure on replacement of fluorescent tubes. Miscellaneous  Expenditure on propaganda to oppose nationalisation of business. expenses  Compensation payable as a result of negligence of the assessee or his employee in carrying on business  Legal charges for amending memorandum and articles of association to facilitate company‘s trading operations  Expenditure incurred on stamp duty, registration fees, lawyer‘s fees, etc., for issue of debentures  Expenditure on payment of stamp duty, registration fees, legal costs, etc., in connection with lease of property  Commission paid to general manager as a percentage of net profit  Expenditure on foreign trip by directors of a company for promotion of business  Expenditure on registration of trademark  Lump sum paid to an employee in commutation of annual pension EXPENSES NOT ALLOWED U/S 37(1) Legal  Legal expenses incurred by a partner in proceedings for dissolution of expenses partnership and rendition of accounts  Legal expenses incurred litigation in connection with acquisition of capital assets  Legal charges, brokerage, commission, etc., in connection with issue of preference shares  Legal expenses in connection with recovery of debt, which is not a trading debt  Legal expenses in defending the assessee from criminal prosecution Interests  Interest paid for delay in payment of income-tax or delay in filing of incometax return  Interest on funds borrowed for payment of income-tax  Interest on overdraft for payment of income-tax  Interest on borrowed fund which is utilised for personal purposes of the assessee  Interest on fund borrowed for donation Brokerage and  Brokerage and commission in connection with the issue of preference shares commission  Secret commission paid to promote business Fines,  Fine paid for infringement under the Factories Act penalties,  Fine paid for delay in payment of contribution to Employees‘ Provident Fund damage,  Penalty or fine paid to the customs authorities in lieu of confiscation of goods compensation imported without valid licence Ceremonial expenses, gifts, donations and contributions

    

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  

Compensation /payment to employees

  

Ceremonial expenses, gifts, donations



Taxes

 

Miscellaneous Expenses

      

 

 

Penalty paid for delay in filing sales tax return Compensation paid for cancellation of a contract Penalty paid for infraction of law., e.g., breaches of customs, excise or other regulations Penalty for non-payment of sales tax within prescribed time Voluntary pension and lump sum payments made by a company to its employees on its winding up Retrenchment compensation to the employees on transfer or closure of the entire business Expenditure incurred for puja and dinner to workers on the last day of the working session Donation for flood relief in areas where the assessee has its office Contribution made towards Water Treatment Plant Scheme of the Government Income-tax and wealth-tax [Disallowed u/s 40(a)]. Tax paid on behalf of a non-resident assessee, which ultimately could not be recovered Expenditure incurred in completing imperfect title to a capital asset Expenditure incurred to buy off competition or elimination of competition Premium paid by a leasee for the grant or renewal of a lease Payment to a tenant to induce him to vacate Expenses incurred for acquiring a concern or goodwill Fees paid for use of goodwill is however, deductible. Liability arising out of failure to deduct tax at source from the salary of the employees Expenditure on shifting factory/registered office to new location due to locational advantage Expenditure incurred to launch a new project

Advertisement to political parties [Section 37(2B)]: Expenditure on advertisement is a normal business expense and is deductible under Section 37(1). But under Section 37(2B), no deduction can be claimed for expenses on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. However, donations to political parties are now allowed under the provisions of Sections 80GGB and 80GGC.

9.23 SPECIFIC DISALLOWANCE 1. Amounts not deductible under section 40: The following expenses are specifically disallowed: A. In the case of any assessee [Section 40 (a)]: (i) Interest, royalty, fees, etc., payable outside India or in India to a non-resident : Any interest, royalty, fees for technical services or other sums chargeable under the Act, which is payable :

(a) outside India, or (b) in India to non-resident (not being a company) or to a foreign company, and in either case, tax has not been deducted or, after deduction, has not been paid on or before the due date specified in Section 139(1) [Section 40(a)(i)]. However, such sums shall be allowed as a deduction in the previous year in which such sums have been paid. (ii) Sums payable to a resident: Thirty percent of any sum payable to a resident on which tax has not been deducted or after deduction has not been paid on or before the date of filing return u/s 139(1). However, if such tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in Section 139(1), thirty per cent of

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such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid [Section 40(a)(ia]. (iii) Any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in section 139(1). However, if such equalization levy has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in Section 139(1), it shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid [Section 40(a)(ia), with effect from AY 2017-18]. (iv) Tax: Any rate or tax (e.g., income-tax) levied on the profits and gains of business or profession [Section 40(a)(ii)]. (v) Wealth-tax : Any sum paid on account of wealth-tax [Section 40(a)(iia)]. (vi) Certain fees, charges, etc. charged by the state government exclusively on its undertakings: Any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called which is levied on State Government undertaking by the State Government shall not be allowed as deduction in computing the income chargeable under the head ―Profits and gains of business or profession‖ [Section 40(a)(iib), with effect from A.Y. 201415]. (vii) Salaries payable outside India: Any payment which is chargeable under the head ―Salaries‖, if it is paid outside India or to a non-resident and tax thereon has not been paid or deducted at source [Section 40(a)(iii)]. (viii) Payment to provident fund: Any payment to provident fund or other funds established for the benefit of the employees of the assessee, if effective arrangement for deduction of tax at source in the event of payment from the fund is not made [Section 40(a)(iv)]. (ix) ax on perquisites: w.e.f. the assessment year 2003-2004, any tax on perquisite paid by the employer, for which exemption u/s 10 (10CC) has been granted to the employee of the assessee, shall not be allowed as deduction in computing profits and gains of business or profession[Section 40(a)(v)]. B. In the case of a firm assessed as such [Section 40(b)]: Discussed in the chapter on assessment of firms and associations of persons. ● In the case of an association of persons or body of individuals [Section 40(ba)]: Discussed in the chapter on assessment of firms and associations of persons. 2. Expenses and payments not deductible in certain circumstances [Section 40A]: The expenses and payments covered under Section 40A, for which deductions are not allowed, are as follows: (a) Payment to specified persons which is excessive or unreasonable [Section 40A(2)(b)]:Any expenses incurred by the assessee towards any payment to any person specified below, which in the opinion of the Assessing Officer is excessive or unreasonable having regard to the fair value of the goods, services or facilities for which the payment is made, shall be disallowed to the extent it is excessive or unreasonable. The specified persons mentioned in this section are: (i) In the case of an individual assessee: any relative of the assessee; (ii) In the case of a company, firm, association of persons or Hindu undivided family: any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii) Any individual who has substantial interest in the business or profession of the assessee, or any relative of such individual. (iv) A company, firm or association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee, or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest. DIRECT TAXATION

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(v) An individual or any relative of such an individual who has substantial interest in the business of the assessee; and any person being a company, firm, association of persons or Hindu undivided family or a director or partner or member thereof who has substantial interest in the business of the assessee. For the above purpose, a person is deemed to have substantial interest in the business or profession when, in the case of a company, such person is the beneficial owner of shares carrying not less than 20% of the voting power, and in any other case, such a person is entitled to not less than 20% of the profits of the business. (b) Payments exceeding `20,000 made otherwise than by a crossed cheque or bank draft [Section 40A(3)] : Where a payment or aggregate of payments made to a person in a single day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds `20,000, the entire amount of such expenses shall be disallowed [Section 40A(3)].Section 40A(3A) also provides for deeming a payment as profits and gains of business or profession of the subsequent year if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding `20,000 in a single day otherwise than by an account payee cheque or by an account payee bank draft. However, with effect from October 1, 2009, where the payment is made for plying, hiring or leasing goods carriages, the aforesaid limit of `20,000 shall be taken to be `35,000 [Second proviso to Section40A(3A) w.e.f. 1.10.2009]. Exceptions: Under Rule 6DD, in the following circumstances no disallowance shall be made even if the payment made otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds `20,000: (i) Payments are made to the RBI, SBI, any co-operative bank or land mortgage bank, Life Insurance Corporation of India, any primary agricultural credit society or specified financial institutions. [Rule 6DD(a)]. (ii) Payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender. [Rule 6DD(b)]. (iii) Payment is made under any letter of credit arrangements through a bank, a mail or telegraphic transfer through a bank or a book adjustment from any account in a bank to any other account in that or any other bank or a bill of exchange or the use of electronic clearing system through a bank account or a credit card or a debit card. [Rule 6 DD(c)]. (iv) Payment is made by way of adjustment against the amount of any liability for goods supplied or services rendered. [Rule 6DD(d)]. (v) Payment is made to a producer for the purchase of agricultural or forest produce, produce of animal husbandry, dairy or poultry farming, fish or fish products, products of horticulture or apiculture. [Rule 6DD(e)]. (vi) Payment is made to a producer for the purchase of the products manufactured processed without the aid of power in cottage industry. [Rule 6DD(f)]. (vii) Payment is made in a village or town not being served by any bank, or payment made to a person who ordinarily resides or is carrying on business, profession or vocation in a village or town not being served by any bank. [Rule 6DD(g)]. (viii) Payment is made for gratuity, retrenchment compensation or similar terminal benefit to an employee or the legal heirs of such an employee where income of the employee chargeable under the head salaries in the year of retirement, death, etc., or the immediately the preceding financial year of such retirement, etc., does not exceed `50,000. [Rule 6DD(h]. (ix) Payment is made to an employee by way of salary after deduction of tax at source where the employee is temporarily posted for a continuous period of 15 days or more in a ship or in a place other than his place of normal duty, if the employee has no bank account in such ship or place. [Rule 6DD(i)]. (x) Payment is made on a day on which banks are closed on account of holiday or strike. [Rule 6DD(k)].

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(xi) Payment is made by a person to his agent who is required to make payment in cash for goods or services on behalf of such person. [Rule 6DD(k)]. (xii) Payment is made by an authorised dealer or money changer against purchase of foreign currency or travellers cheque in the normal course of his business. [Rule 6DD(l)]. (c) Provision for gratuity [Section 40A (7)]: Apart from the provisions of Section 43B, gratuity is allowed to be deducted where: (i) it is paid or has become payable during the previous year; or (ii) a contribution is made to an approved gratuity fund or a provision is made for the purpose of payment by way of contribution to such an approved gratuity fund. A mere provision made by the assessee for the payment of gratuity is not sufficient to claim deduction. It is further provided that where any provision made by the assessee for the payment of gratuity has been allowed as a deduction in any assessment year, any sum paid out of such provision by way of contribution to an approved gratuity fund or by way of gratuity to an employee shall not be allowed as deduction again [Explanation to Section 40A (7)]. (d) Contributions to any fund, trust, etc. [Sub-sections (9), (10), (11) to Section 40A]: Any contribution made by the assessee as an employer towards setting up of, or as contribution to, any fund (not being a recognised provident fund or an approved superannuation fund or an approved gratuity fund) trust, company, association of persons, body of individuals, society or other institution for any purpose, shall not be allowed as deduction. 3. Disallowance of unpaid liability (Sec. 43B): ● In order to be eligible for deduction for expenses in respect of tax, duty, cess or fees; contribution to any approved provident fund or superannuation fund or gratuity fund; bonus or commission to the employees for services rendered; or interest on borrowing from public financial institutions or any scheduled bank or any sum payable by the assessee as an employer in lieu of leave to the credit of the employees or any sum payable by the assessee to the Indian Railways for the use of railway assets [with effect from AY 2017-18], are to be paid during the previous year or on or before the due date for submission of return u/s 139(1). Points to note: A liability incurred in the previous year, say, 2015-2016, for the aforesaid expenses can be claimed in the previous year 2015-2016, if it is paid within the same previous year or it is paid within the due date specified u/s 139(1) for furnishing return of income for the previous year 20152016. But if the liability is paid after the end of the due date specified in Section 139(1), it can be claimed as deduction only in the previous year 2016-2017. Once a liability is allowed as deduction on accrual basis, it shall not be allowed again on payment basis. Example 11: The profit and Loss Account of a trader included the following payments during the financial year 201516. ` ` Bonus to staff 1,00,000 Sales tax 1,00,000 Excise duty 1,20,000 Employer‘s contribution to RPF 60,000 On scrutiny it is found that the due date of filing the return of income was 31. 7.2016, but: (a) bonus to staff was paid: `50,000 on 9.7.2016 and another `50,000 was paid 15.12.2016 (b) Sales tax `60,000 was paid on 16.7. 2016, and balance `40,000 was paid on 10.10. 2016 (c) Excise duty `80,000 was paid 10.7.2016, and balance `40,000 was paid on 9.9.2016. (d) Employer‘s contribution to RPF was paid on 31.7.2016. In which previous year can the above payments be claimed as deduction?

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Answer: Computation of deduction for specified expenses Expenses Bonus to staff

Date of payment Amount of payment 9.7. 2016 50,000 15.12. 2016 50,000 Sales tax 16.7. 2016 60,000 10.10. 2016 40,000 Excise duty 10.7. 2016 80,000 9.9. 2016 40,000 Employers ‗contribution to RPF 31.7.2016 60,000

Previous year for deduction 2015-16 2016-17 2015-16 2016-17

2015-16

9.24 DEEMED PROFITS CHARGEABLE TO TAX [SECTION 41] Under this section, the following receipts are chargeable to tax as profits and gains of business or profession. 1. Recovery against any loss, expenditure or liability [Section 41(1)]: Where any allowance is granted in any year in respect of any loss, expenditure or trading liability and subsequently during any previous year the assessee receives, whether in cash or otherwise, any amount in respect of such loss, expenditure or trading liability, or the assessee obtains any benefit due to the remission or cessation of that liability, the amount so received or the liability so ceased is chargeable to tax as the profit of the business for that previous year. The amount is chargeable to tax even if the business or profession in respect of which the allowance or deduction has been made is not in existence in that year. 2. Balancing charge [Section 41(2)]: In the case of any building, machinery, plant or furniture owned by a power sector unit in respect of which depreciation has been claimed under Section 32(1)(i) on the actual cost of such assets, is sold, discarded, demolished or destroyed in the previous year, the following three situations may arise:  Terminal depreciation [Section 32(1)(iii)] : The amount by which moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value of such assets, such shortfall shall be deemed to be terminal depreciation and shall be allowed as a deduction.  Balancing charge [Section 41(2)]: If in the aforesaid case the moneys payable together with the scrap value, if any, exceeds the written down value of such assets, then such excess as does not exceed the difference between the actual cost and the written down value of the asset shall be chargeable to income-tax as income of the previous year in which the moneys payable for the asset became due. If the asset is sold, discarded or demolished in the previous year in which it is first put to use, there will be no balancing charge, but the surplus will be charged to tax under Section 45 as capital gains.  Capital gains [Section 50A]: Section 50A makes a special provision in respect of assets of power unit in respect of which a deduction has been allowed under Section 32(1)(i) in any previous year. In this case, the provisions of Sections 48 and 49 shall apply, subject to the modification that the written down value of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. 3. Sale of capital assets used for scientific research [Section 41(3)]: When any capital asset used for scientific research is sold without being used for any other purpose, then the net sale proceeds or the cost of the asset, which was earlier allowed as deduction under Section 35, whichever is less, shall be charged tax as income of the business of the previous year in which the sale took. 4. Recovery of bad debts [Section 41(4)]: The deduction for bad debts is ordinarily based upon estimate. Ultimately, the amount may be recovered. If the amount ultimately recovered on any such debt or part of the debt is less than the difference between the debt and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made [Section 36(2)(ii)]. On the other hand, if the DIRECT TAXATION

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amount so recovered is more than the difference between the debt and the amount allowed as deduction earlier, the excess shall be chargeable to tax u/s 41(4) as the income of the previous year in which it is recovered. In other words, if the amount already allowed as bad debt plus the amount of recovery is less than the amount claimed as bad debt, the difference is to be allowed as bad debt in the year the amount is finally recovered. On the other hand, if the amount already allowed as bad debt plus the amount of recovery is more than the amount claimed as bad debt, the difference shall be chargeable to tax in the year the amount is finally recovered. [See para 21.12].

9.25 DEEMED INCOME IN RESPECT OF UNDISCLOSED INCOME/ INVESTMENT, ETC. In the following cases when the assessee is unable to provide satisfactory explanation regarding the nature and sources of the following, they will be charged to tax as income of the previous year: (a) Cash credit [Section 68]: Where any sum is found credited in the books of an assessee during the previous year and the assessee has no satisfactory explanation for the source of such cash credit; (b) Unexplained investment [Section 69]: where during the financial year the assessee has made investments which are not recorded in the books of the assessee and the assessee fails to offer satisfactory explanation; (c) Unexplained money, etc. [Section 69A]: Where in the financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and the assessee is unable to offer explanation; (d) Undisclosed investment etc. not fully disclosed[Section 69B]: Where in the financial year the assessee has made investments or is found to be the owner of any bullion, jewellery, etc. and the amount spent on them are in excess of the amount recorded in the books of account and the assessee offers no explanation about such excess amount; (e) Unexplained expenditure, etc. [ Section 69C]: where in the financial year the assessee has incurred any expenditure and he offers no explanation about the source of such expenditure; (f) Amount borrowed or repaid by hundi [Section 69D]: Where any amount is borrowed on hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque.

9.26 COMPULSORY MAINTENANCE OF BOOKS BY CERTAIN PERSONS

CARRYING ON PROFESSION OR BUSINESS [SECTION 44AA; RULE 6F]

The requirement of this section regarding maintenance of books of account by certain persons are based on two criteria: (a) Financial criteria; (b) Persons specified under Section 44AA(1). Accordingly, the requirement of keeping books of account shall be as under: Types of profession/ Financial criteria business Specified professions Total gross receipts exceed `1,50,000 in any u/s 44AA (1). of the three years immediately preceding the previous year or where the profession is newly set up in the previous year, total gross receipts are likely to exceed `1,50,000. Specified professions Total gross receipt `1,50,000 or below in any u/s 44AA (1). of the three years immediately preceding the previous year or total gross receipts not likely to exceed `1,50,000 in the previous year, if the profession is newly set up. Other persons

Income from business or profession exceeds DIRECT TAXATION

Books of account / documents to be maintained Books and documents as prescribed under Rule 6F (2).

Such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provision of the Act. Such books of account and 122

`1,20,000 or total sales, turnover or gross receipts exceed `10 lakh in any of the three years preceding the previous year or in the case of business or profession newly set up in the previous year income or sales, etc. as mentioned above likely to exceed `10 lakh, or where profits and gains from the business are claimed to be lower than profits computed under Section 44AD or 44AE or 44AF or 44BB or 44BBB. Do Below the income criteria mentioned above Presumptive profits When the assessee claims his income to be and gains of business lower than the presumptive income coming within the mentioned under the section purview of Section 44AD

other documents as may enable the Assessing Officer to compute his total income in accordance with the provision of the Act

Not required to maintain any books of account. Such books and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Act.

1. Persons specified u/s 44AA (1): Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorized representative or film artist. 2. Books and documents specified under Rule 6F: The books of account and other documents prescribed under Rule 6F (2) are: (i) a cash book; (ii) a journal, if the accounts are maintained under mercantile system of accounting (iii) a ledger; (iv) for an amount exceeding `25, carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the assessee and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him; (v) original bills wherever issued to the assessee and receipts in respect of expenditure incurred by the assessee or, where such bills and receipts are not issued and the expenditure incurred does not exceed `50, payment vouchers prepared and signed by the assessee. In cases where the cash book maintained by the assessee contains adequate particulars in respect of the expenditure incurred by him, it would not be necessary to prepare and sign the payment voucher. In addition to the above books of account and other documents, under Rules 6F(3) a person carrying on medical profession shall also maintain the following : (i) a daily case register in Form No. 3C; (ii) an inventory under broad heads, as on the first and the last day of the previous year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession. The books of account and other documents specified under Rule 6F (2) and 6F(3) shall be kept and maintained for a period of 6 years from the end of the relevant assessment year

9.27 COMPULSORY TAX AUDIT OF ACCOUNTS OF CERTAIN PERSONS [SECTION 44AB] Under the provisions of this section, the following persons shall compulsorily get their accounts audited by a chartered accountant: (a) A person carrying on business, if his total sales turnover or gross receipts in the business exceed ` 1 crore in any previous year. (b) A person carrying on a profession, if his gross receipts in the profession exceed `50lakh in any previous year. DIRECT TAXATION

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(c) A person carrying on a business, if the profits and gains from the business are deemed to be the profits and gains of such person under Section 44AE / 44BB/ 44BBB and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business in any previous year. (d) An assessee carrying on profession who claims his income to be lower than the presumptive income mentioned in section 44 ADA and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year. (e) With effect from the AY 2017-18, in the case of an assessee, who is covered under the newly inserted section 44ADA, the audit of books of account is required if he claims that the profits and gains from the profession are lower than the profits and gains computed in accordance with the provisions of sub-section (1) of the new section and if his income exceeds the maximum amount which is not chargeable to income-tax. Also include 44AD

9.28 PRESUMPTIVE INCOMES AND SPECIAL PROVISIONS FOR COMPUTATION OF INCOME OF THE RESIDENT ASSESSEES IN CERTAIN CASES [SECTIONS 44AD, 44ADA, 44AE]

In accordance with the provisions of these sections the income from the specified business shall be the higher of the notional income specified in these sections or the actual income as claimed by the assessee: 1.Presumptive incomes of persons specified in Section 44AD: An eligible assessee can claim 8 percent of the total turnover or gross receipts from eligible business as the presumptive income, if any higher sum is not claimed by the assessee. Eligibility: The benefit of section 44AD can be availed of, if: (i) the assessee is an individual, HUF, or a partnership firm (other than LLP); (ii) the assessee does not avail of the benefits of section 10AA, 10B, 10BBA or deductions u/ss 80 80HH80RRB; (iii) the assessee is not engaged in the business of plying, hiring or leasing goods carriage referred to in section 44AE; Other conditions: The deduction under this section is subject to the following further conditions: (i) No deductions u/s 30-38 can be claimed; (ii) Where the assessee claims his income lower than the presumptive income mentioned above, they have to maintain adequate books of account specified under section 44AA and get them audited. (iii) In the case of a firm, partners are not eligible to claim salary and interests [w.e.f. AY 2017-18]. (iv) An assessee who claims benefit of this section has to offer his income to be taxed as such for five consecutive years. Any break would entail ineligibility for the subsequent five years. Example: For the assessment year 2017-18, 2018-19 and 2019-20, the assessee clams the benefit of presumptive income u/s 44AD. For the assessment year 2020-21 he offers a lower income. In this case, since the assessee has not offered his income in accordance with the provision of section 44AD for 5 consecutive assessment years, he will not be eligible to claim the benefit for the section for the next five assessment years starting from 2021-22. Such assessees, if their income is above the maximum amount which is not taxable, shall keep and maintain books of account as specified u/s 44AA and get them audited as provided in section 44AB. 2. Presumptive income of persons engaged in specified professions [Section 44ADA]: With effect from the assessment year 2017-18, section 44ADA has been inserted by the Finance Act 2016 to provide that persons specified in para 25.1 above can also avail of the benefit of presumptive tax if the gross receipts from these professions are not more than `50 lakhs. The presumptive income in that case shall be 50% of the gross receipts from the profession. DIRECT TAXATION

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Conditions: (i) No further deduction u/s 30-38; (ii) If the assessees claims a lower income, they shall keep and maintain books of account as specified u/s 44AA and get them audited as provided in section 44AB. 3. Presumptive income in the case of business of plying, hiring and leasing of goods carriage [Section 44AE]: Subject to the fulfilment of the conditions mentioned below, an assessee can claim his presumptive income to `7,500 per month or part thereof in respect of each goods carriage, if any higher amount is not claimed by the assessee. Conditions: (i) No further deduction u/s 30-38. However, where the assessee is a firm, subject to the limitations of section 40(b), salaries and interest paid to the partners shall be allowed as deduction. (ii) If the assessees claims a lower income, they shall keep and maintain books of account as specified u/s 44AA and get them audited as provided in section 44AB. Example 12: An assessee owns a light commercial vehicle for 8 months and 3 days, a medium goods vehicle for 11 months another medium goods vehicle for 12 months during the previous year. Compute his profits from the three trucks in terms of Section 44AE. [CMA -Inter June 2013] Answer: Since the assessee does not own me than 10 vehicles at any time during the previous year, he is entitled to the benefits of presumptive income u/s 44AE. Accordingly, his income shall be as under: Type of Vehicles No of months Rate per month Amount Light vehicle 9 7,500 67,500 Medium Vehicles 11 7,500 82,500 Another medium vehicle 12 7,500 90,000 Total income 2,40,000 Example 13: OPTIMA Ltd. is engaged in the business of plying goods carriages. On 1 st April, 2016, the company owns 10 trucks (6 out of which are ―heavy goods vehicles‖). On May 2, 2016 one of the heavy goods vehicles is sold by OPTIMA Ltd. To purchase a light goods vehicle on May 6, 2016, which is put to use only from June 15, 2016. Find out the total income of OPTIMA Ltd. For the assessment year 2017-18 taking into consideration the following data gathered from its books: ` Freight collected Less: Operational expenses Depreciation as per Section 32 Other office expenses Net profit Other non-business income

8,90,000 (6,40,000) (1,90,000) (15,000) 45,000 70,000 [CMA-Inter, June 2007]

Answer: Under Section 44AE, an assessee who owns not more than 10 goods carriage at any time during the previous year, shall be deemed to have earned a sum of `7,500 p.m. for each such vehicle. A lower income may be claimed, under the provisions of section 44AE(7), only if the assessee keeps and maintains such books of account as specified u/s 44AA (2) and the books are duly audited in accordance with the provisions of section 44AB. Accordingly the income of the assessee shall be: (A) When provisions of section 44AE(7) are complied with: As given in the problem, (` 45,000 + ` 70,000) `1,15,000. (B) When the provisions of section 44AE (7) are not complied with: DIRECT TAXATION

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Presumptive income from vehicles u/s 44AE No. of Vehicles 10 11 10 10 10 10 10 10 10 10 10 10

April May June July August September October November December January February March Total Total income Presumptive income Non-business income Total taxable income

` 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500

` 75,000 82,500 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 9,07,500

` 9,07,500 70,000 9,77,500

Example 14: T had 4 heavy goods vehicles as on 1.04.2015. He acquired 7 heavy goods vehicles on 27.6.2015. He sold 2 heavy goods vehicles on 31.05.2015. He has brought forward business loss of `50,000 relating to assessment year 2012-13 of a discontinued business. Assuming that he opts for presumptive taxation of income as per Section 44AE, compute his total income chargeable to tax for the assessment year 2016-17. [CMA-Inter, Dec. 2011 (Adapted)] Answer: Computation of total income of P for the assessment year 2017-18 ` Presumptive business income under section 44AE 4 heavy goods vehicles for 2 months (4 x`7,500 x 2) Balance 2 heavy goods vehicles for 10 months (2 x`7,500 x 10) 7 heavy goods vehicles for 10 months (7 x`7,500 x 10) Business Income Less; Brought forward business loss of discontinued business Total income

60,000 1,50,000 5,25,000 7,35,000 (-) 50,000 6,85,000

Example 15: P, engaged in retail trade, reports a turnover of ` 98,50,000 for the financial year 2016-17. His income from the said business as per books of account is computed at ` 4,90,000. Retail trade is the only source of his income: (i) Is P eligible to opt for presumptive determination of his income chargeable to tax for the assessment year 2017-18? (ii) If so, determine his income from retail trade as per the applicable presumptive provision. (iii) In case he does not opt for presumptive taxation of Income from retail trade, what are his obligations under the Income tax- Act, 1961? (iv) What is the due date for filing his return of income under both the options? [CMA-Inter, Dec. 2011 (Adapted)].

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Answer: (i) Yes. Since his total turnover for the financial year is below ` 1 crore, he is eligible to opt for presumptive taxation scheme under section44AD in respect of his retail trade business. (ii) His income from retail trade , applying the presumptive tax provisions under section 44AD, would be `7,88,000, being 8% of `98,50,000. (iii) In case he does not opt for the presumptive taxation scheme under section44AD, and claims that his income is `4,90,000 (which is lower than the presumptive business income of `7,88,000), he has to maintain books of account as required under section44AA (2) and also get them audited and furnish a report of such audit under section 44 AB, since his total income exceeds the basic exemption limit of `2,50,000. (iv) In case he opts for the presumptive taxation scheme under section 44 AD, the due date would be 31st July, 2017. In case he does not opt for the presumptive taxation scheme and claims that his income is `4,90,000 as per books of account, then he has two options. If he chooses to file return without audit, the due date is 31st July 2017. If he chooses to get his books audited u/s 44 AB then due date is 30th September, 2017 Example 16: A partnership firm consisting of three partners P, Q and R is engaged in the business of selling fast foods in a mall. The turnover of the business for the previous year 2016-17 amounts to `90 lakhs. Expenses include purchase of `30,000 for which payment was made in cash on a single day. As authorised by the partnership deed the partners are entitled to interest at 13% per annum on their capital accounts and the aggregate amount of such interest is `1.30 lakhs. The firm did not opt for presumptive taxation under section 44AD for Assessment Year 2016-17. It had business loss of `70,000 and unabsorbed depreciation of `80,000 carried forward from Assessment Year 2016-17. The firm opts for presumptive taxation under section 44AD for Assessment Year 2017-18. (i) Compute business income of the firm for Assessment Year 2017-18. (ii) Is the firm liable to advance tax in respect of Assessment Year 2017-18? [CMA-Inter, June, 2014] Answer: Computation of profits and gains of business or profession for the assessment year 2017-18 relating to the previous year 2016-17 ` Presumptive income under section 44AD [ ` 90,00,000 x 8%] Less: Interest to partners [See note] Less: Business loss brought forward u/s 72 Business Income

7,20,000 Nil 7,20,000 70,000 6,50,000

Notes: (1) With effect from the assessment year 2017-18, due to the deletion of proviso to section 44AD(2), interest to partners cannot be claimed as a deduction from presumptive income. (2) Brought forward business loss is allowed to be set off (3) u/s 44AD(4), no advance tax is required to be paid out of presumptive income. Example 17: X, a retail trader of Mumbai gives the following Trading and Profit and loss Account for the year ended 31st March, 2017 Trading and Profit and Loss Account for the year ended 31.03.2017

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`

`

To opening stock To Purchases To Gross profits

86,000 10,00,000 3,06,000

To Salaries To Rent and rates To Interest on loan To Depreciation To Postage and Telegram To Printing and Stationary To Loss on sale of shares (Short term) To General expenses To Net Profit

13,92,000 60,000 40,000 10,000 l 02,000 1,640 23,200 8,100 11, 060 50,000 3,06,000

By Sales By Other business receipts By Income from UTI By Closing Stock

12,11,500 6,500 2,400 1,71,600 13,92,000 3,06,000

By Goss Profit B/D

3,06,000

Additional Information: Some stocks were found to be not included in both the opening and closing stock, the value of which were: Opening Stock `12,000, Closing Stock `21,000. Salary include `18,000 paid to his brother, which is unreasonable to the extent of `2,000. The whole amount of Printing and Stationary was paid in cash. Depreciation as per Income Tax rules is `66,000. Rent and Rates includes Sales Tax Liability of `5,000 paid on April 4, 2017. Other Business Receipts include `3,000 received as refund of Sales Tax relating to the year, 2015-16. General expenses include `1,500 paid as donation to a Public Charitable Trust. You are required to advise X whether he can offer his Business Income under sec. 44 AD, i.e. Presumptive Taxation. [CMA-Inter- Dec. 2009] (A) Computation of business income for the assessment year 2017-18 ` Net profit as per P/L Account Add: Expenses disallowed: Loss on sales of shares Net undervaluation of stock [ 21,000 -12,000] Depreciation not allowed [ 1,02,000 -66,000] Unreasonable salary to brother Less: Items to be deducted: Income from UTI Income from business

` 50,000

8,100 9,000 36,000 2,000

(+) 55,100 (-) 2,400 1,02,700

(B) Presumptive income u/s 44AD: Since the gross turnover or receipt from the eligible business does not exceed `1 crore, the assessee may pay presumptive tax being 8% of the gross receipt or `12,11,500 x 8% = ` 96,920. Example 18: X ltd is a manufacturing company. The profit and loss Account of X Ltd. For the year ending March 31, 2017 is given below: ` ` Sales tax Other expenses Net profit Total

50,000 14,15,000 5,45,000 20,10,000

Sales

20,10,000

Total

20,10,000

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Other information: 1. Out of sales tax of `50,000 only `47,000 is paid, the payment is made as follows: `40,000 on September 2, 2016; `4,000 on May 9, 2017; and `3,000 on November 1, 2017. 2. Return of income is submitted on November 10, 2017 and evidence of Sales tax payment as stated in 1 (ii) and 1 (iii) above is submitted along with the return of income. 3. During the previous year 2016-17, the following payments are made in respect of expenses pertaining to earlier years: (i) Bonus to employees pertaining to the previous year 2016-17 paid on April 30, 2017 `15,000; (ii) Customs duty pertaining to the previous year 2016-17 paid on May 3, 2016: `25,000; (iii) Electricity bill payable to BSES pertaining to previous year 2016-17 paid on May 3, 2016: `35,000 (iv) Excise duty pertaining to the previous year 2016-17 paid on May 20, 2017: `40,000; and (v) Leave salary payable to employees pertaining to the previous year 2016-17 paid on December 2, 2016: `45,000. These payments do not pertain to the previous year 2016-17. Consequently, these are not recorded in the Profit & Loss Account. Find out the consequences on the net income of X Ltd. For the assessment year 2017-18, assuming that there are on other adjustments. [CMA-Inter June 2006]. Answer: Computation of Profits and gains of business or profession for the assessment year 2017-18 relating to the previous year 2016-17. ` Net profit as per P/L Account Add: Expenses disallowed u/s 43B: Sales tax not yet paid but debited to the account Sales tax paid after the due date of submission of return Less: Expenses paid after the previous year but within the date specified u/s 43B: Bonus to employees Customs duty Leave salary Excise duty Business income

` 5,45,000

3,000 3,000 15,000 25,000 45,000 40,000

6,000

1,25,000 4,26,000

Note: Under section 43B sales tax, bonus to employees, customs duty, and leave salary are to be allowed on accrual basis if the expenses are paid within the due date of submission of return which is 30th September in the case of a company and the evidence of such payments are submitted along with return. Accordingly, sales tax not paid and those paid after 30 th September 2017 are disallowed. Similarly, although bonus, customs duty, excise duty and leave salary are not paid within the previous year, these are allowed as deduction on accrual basis as they are paid within 30 th September 2017. Since electricity bill is not covered under section 43B, it has been allowed on accrual basis. Example 19: V Pharma Ltd. informs that it has net profit of `60 lakhs for the year ended 31st march, 2017. It gives you the following further information: (i) Depreciation as per books `3,50,000. (ii) Bad debts written off in the books `5,00,000, which includes `1 lakh due from one customer who has disputed the liability to pay but continues to have business relationship with the company. (iii) Proposed dividend debited to profit and loss account `6 lakhs. (iv) One machinery which has become useless has been written off in P & L Account, the amount debited being `90,000.

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(v) Provident Fund collections from employees for the year `1,50,000 and company‘s own contribution of `1,10,000 for the year have not been remitted. These amounts are shown as Sundry Liability in the books. Assume it will be remitted after 31st December, 2017. (vi) Income from agricultural lands surrounding the factory `50,000 credited to Profit and Loss account. (vii) Bank term loan for purchases of machinery waived `2 lakhs is credited to capital reserve account. (viii) The opening WDV of plant and machinery was `15,90,000. One machinery for 4,10,000 was acquired on 01.06.2016 and was put to use immediately. (ix) Provisions for taxation debited in the Profit and Loss Account amounts to `15 lakhs. (x) You are required to compute the income of the company under the head ‗profits and gains of [CMA-Inter, June 2015] business or profession‘ for the assessment year 2017-18 Answer: Computation of Profits and gains of business or profession for the assessment year 2017-18 relating to the previous year 2016-17 ` ` Net profit as per P/L Account Add: Expenses disallowed: Depreciation (treated separately) Bad debt (Note 1) Proposed dividend Machinery discarded (treated separately) Provident fund collection from employees and own contribution not deposited within due date Provision for taxation Less: Incomes wrongly credited: Agricultural income Bank loan credited to capital reserve (Note 2) Less: Depreciation as per IT Act (Note 3) Business income

60,00,000 3,50,000 Nil 6,00,000 90,000 2,60,000 15,00,000 50,000 Nil 3,00,000

(+)28,00,000

(-)3,50,000 84,50,000

Note: (1) In TRF Ltd. V. CIT it has been held that it is not necessary to establish that the debt has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the accounts of the assessee. (2) Recently, the Delhi High Court (High Court) in the case of Logitronics Pvt. Ltd.[ Logitronics Pvt. Ltd v. CIT (ITA no. 1623 of 2010) & CIT v. Jubilant Securities Pvt. Ltd. (ITA No. 503 of 2010) it was held that in the context of waiver of loan amount, taxability would depend upon the purpose for which the loan was taken. Waiver of loan taken for acquiring a capital asset would not result in income exigible to tax. However, waiver of loan availed for trading purpose, results in the income taxable under the Income-tax Act, 1961(the Act). (3) Depreciation as per IT Act: WDV as on 1.4.2106 15,90,000 Add: New machinery purchased 4,10,000 4,10,000 Less: Money received in respect of machinery discarded or demolished Nil WDV as on 31.3.2017 20,00,000 Depreciation @ 15% 3,00,000 Example 20: The statement of Profit and loss of XYZ Limited for the previous year 2016-17 shows a net profit of `8,50,390 after debiting/crediting the following items: Purchase of goods for `42,000 (market value `35,000) from one of the directors of the company. Interest of `1,00,000 paid on loan taken from Mr. Ron of USA without deducting tax at source. Advance of `90,000 paid in earlier year for purchase of machinery written off Income tax on perquisites of employees paid by the company `20,000. Recovery of bad debt of ` 30,000 which was disallowed in previous assessment of the company. DIRECT TAXATION

130

Compute income of XYZ limited under the head ―Profits and gains of business or profession‖ for Assessment Year 2017-18 indicating reasons for treatment of each item. [CMA- Inter, Dec. 2015] Answer: Computation of Profits and gains of business or profession for assessment year 2017-18 relating to the previous year 201617 ` ` Net profit as per P/L Account Add: Expenses disallowed: Amount paid to Director in excess of market value [Vide section 40A(2) Interest paid to non-resident without deduction of tax at source [Vide section 40(a)(i)] Advance paid for machinery written off (Capital loss) Tax on non-monetary perquisite paid by the employers [vide section 40(a)(v) Less: Recovery of bad debt disallowed in earlier year Business Income

8,50,000 7,000 1,00,000 90,000 20,000 (+)2,17,000 (-) 30,000 10,37,000

Example 21: Following is the Profit and Loss Account of A, a resident of India, for the year ended 31.03.2017: ` ` To Administrative Expenses To Interest To Life Insurance Premium: Self —daughter in law To Depreciation To Net Profit

2,75,000 55,000 25,000 15,000 1,50,000 3,24,200 8,44,200

By Gross Profit By Agricultural income (net): from Lands in India from lands in Malaysia By Interest (PPF) By Dividend from listed Indian companies By Savings Bank Interest

7,50,000 25,000 20,000 31,200 12,000 6,000 8,44,200

Other information: (i) Depreciation allowable for the year under section 32 of the income-tax Act, 1961 amounts to `1,75,000. (ii) Administrative expenses include salary taken by Mr. Ashwin at `10,000 per month for 8 months. (iii) Interest includes payment of `24,000 to daughter @36% per annum when the market rate of interest is 15% per annum. Compute the total income of A for the assessment year 2017-18. Answer: Computation of total income of A for the assessment year 2017-18 relating to the assessment year 2016-17 ` ` ` Profits and gains of business or profession: Net profit as per P/L Account Add: Expenses disallowed: Life insurance premium of self and daughter-in-law (25,000 +15,000) Interest in excess of the market rate [ 21/36]x 24,000] Salary paid to self Depreciation (treated separately) Less: Expenses allowable: Deprecation DIRECT TAXATION

3,24,200 40,000 14,000 80,000 1,50,00 (+)2,84,000 131

Less: Income not chargeable under the head: Agricultural income in India Agricultural income in Malaysia Interest on PPF Dividend from Indian companies Savings Bank Interest Business income Income from other sources: Agricultural income from Malaysia Savings Bank Interest Gross Total Income: Less: Deductions u/s 80C – 80U (i) U/s 80C in respect of LIC premium on own life (ii) U/s 80TTA in respect of Savings Bank Interest Total income

25,000 (-)1, 75,000 20,000 31,200 12,000 6,000 (-) 94,200 20000 6000

3,39,000

26,000

25000 6000 31,000

Example 22: Discuss the admissibility or otherwise of the following items in the computation of income under the head ―Profits and gains of business or profession‖ for the assessment year 2016-2017: (a) `14,000 paid to an income-tax adviser for conducting appeal before the Income-tax Appellate Tribunal. (b) `500 paid for raising loan of `20,000. The loan is repayable after five years. (c) `2,000 paid for shifting the factory from one place to another for easier supply of raw materials. (d) `3,000 paid to a trade association representing assessee‗s business for propaganda against the move for nationalisation of his trade. (e) Legal expenses amounting to `1,000 paid for defending assessee ‗s title to an asset. (f) Paid `10,000 being cost of a machine purchased for scientific research relating to the business. (g) `600 paid for legal charges for drafting a partnership deed. (h) `700 was considered as bad debt. The debtors were declared insolvent having no asset. The amount was, however, not written off as irrecoverable in the accounts of the assessee. (i) Paid `40,000 as cost for growing agricultural raw materials in assessee‗s own land, the raw materials being used in his production. The market price of the materials was `50,000. (j) `20,000 paid to the customs authorities as penalty for importing prohibited goods which were required for assessee‗s business and which yielded a large margin of profit. The profit, however, was credited to assessee‗s profit and loss account. Answer: (a) `14,000 paid to an income-tax adviser for conducting an appeal before the Income-tax Appellate Tribunal is allowed as deduction. (b) `500 paid (as legal charges or brokerage, whatsoever) for raising loan of `20,000 is entirely deductible during the previous year [Orissa Cement vs. CIT 73 ITR 14]. (c) `2,000 paid for shifting the factory from one place to another on the ground of easier supply of raw materials is a capital expenditure, since it confers upon the assessee a benefit of an enduring nature. It is, therefore, not deductible [Sitalpur Sugar Works Ltd. vs. CIT 49 ITR 160 (SC)]. (d) `3,000 paid to a trade association representing assessee‗s business for propaganda against the move for nationalisation of his trade is allowable expenditure [Ambala Bus Syndicate vs. CIT 95 ITR 383]. (e) Legal expenses amounting to ` 1,000 paid for defending assessee‗s title to an asset is allowable expenditure [Dalmia Jain & Co. Ltd. vs. CIT 81 ITR 745(SC)]. (f) Under Section 35(2)(ia), capital expenditure incurred by an assessee after 31st March,1967 for the purpose of scientific research carried on by the assessee himself is allowed as deduction in full in the previous year in which the expenditure is incurred. DIRECT TAXATION

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In view of the above provision `10,000 paid for purchase of machinery for scientific research related to assessee‗s business is fully deductible. In this case, however, no depreciation on the asset can be claimed. (g) Legal charges for drafting partnership deed is a preliminary expense, which will be amortised u/s 35D in five equal installments beginning with the year in which the business has commenced. However, legal charges for drafting partnership deed in relation to an existing business is a revenue expense, therefore, allowed to be deducted in full in the year in which the expense is incurred. (h) Under Section 36(1)(vii), bad debt can be claimed as deduction only if it is written off as irrecoverable in books during the previous year. In the present case, since the amount has not been written off in the books, it will not be allowed as deduction. (i) In cases where the nature of the income is partly agricultural and partly non-agricultural, in determining the non-agricultural income which is taxable, Rule 7 is applicable. According to this Rule, the market value of the agricultural produce (which is `50,000 in the present case) which is used as input for production, shall be deducted from the sale proceeds of the goods. In the case of rubber, under Rule 7A, 35% of the income from the manufacture of rubber shall be taken to be business income, while in the case of coffee and tea, under Rule 7B and 8 respectively, 40% of the income shall be treated as business income. (j) Penalty imposed by the customs authorities for illegal import of goods is not deductible [Haji Aziz & Abdul Shakoor Brs vs. CIT 41 ITR 350 (SC)]. The profits of illegal business are, nonetheless, taxable. Particulars To Salaries " Travelling expenses " Rent and taxes " Interest on capital " Depreciation " Income-tax " Birthday gift to son " Net profit Total

Amount (`) 70,000 25,000 3,000 5,000 25,000 50,000 25,000 40,000 2,43,000

Amount (`) 2,31,000 7,500 4,500

Particulars By Gross profit ―Dividend ―Discount

Total

2,43,000

Example 23: X, a businessman submits the following profit and loss account for the year ended 31.3.2017: The following additional information was available: (a) Salaries include `15,000 paid to the proprietor's wife who was an engineer and before joining the business of her husband was employed in a Government concern and was drawing a salary of `10,000 p.m. She joined here on 15.2.2014. (b) The proprietor went to foreign tour for business purposes and stayed there for 18 days, of which he spent 3 days for sight-seeing. Total expenses incurred in foreign country was `18,000, which was included in travelling expenses a/c. (c) Depreciation as per IT Rules was `40,000. (d) Birthday gift presented to son in cash was invested in a nationalized bank, interest on the same accrued up to 31-3-2014 was `2,500. His son is a minor. Compute X's taxable income from business for the assessment year 2017-2018. Answer: Computation of income under the head ―Profits and gains of business or profession" of X, a resident individual, for the assessment year 2017-2018 relating to the previous year 2016-2017. Particulars Net profit as per Profit and Loss Account Add: Expenses disallowed: DIRECT TAXATION

`

` 40,000

133

Travelling expenses [personal expenses ` 18,000 X 3/l8] Interest on capital Depreciation (treated separately) Income-tax Birthday gift to son

3,000 5,000 25,000 50,000 25,000

Less: Expenses allowed under the Act: Depreciation as per IT Rules

1,08,000 1,48,000 40,000 1,08,000

Less: Income not chargeable wider this heads: Dividend Business Income

7,500 1,00,500

Example 24: H is the owner of a small scale industry. The following are the particulars of his business and other related matters during the accounting year 2016-2017. (a) Net Profit as per Profit and Loss Account `36,000. (b) The Profit and Loss Account was debited for `1,200 as his interest on capital and for `2,400 as remuneration to self. (c) H has taken goods for his personal consumption valued `8,000. On this account sales account was credited for `6,000 only. (d) Opening and closing stock of finished goods are valued for `4,500 and `7,200 respectively which were 10% below the cost of production. (e) Profit and Loss Account is debited for `1,500 as rent for godown owned by H. (f) Profit and Loss Account has been credited for `2,500 as interest on fixed deposit with Bank and for `5,000 (Gross) as dividend from Indian company. (g) Profit and Loss Account is excess debited by `2,500 on account of depreciation. (h) Profit and Loss Account is debited for ` 4,000 as donation to National Defence Fund. From the above particulars, compute the taxable income of H for the assessment year 2017-2018. Answer: Computation of total income of H for the assessment year 2017-2018, relating to the previous year 20162017 ` ` ` • Profits and gains of business or profession : Net profit as per Profit and Loss Account Add : Expenses disallowed:

36,000

Interest on capital Remuneration to self

1,200 2,400

Rent of self-owned godown Excess depreciation

1,500 2,500

Donation to National Defence Fund

4,000

11,600 47,600

Add : Goods withdrawn by owner below cost price (` 8,000 – ` 6,000) Add: Net adjustment for undervaluation of stocks [` (7,200 - 4,500) x 1/9]

2,000 300

2,300 49,900

Less:

Incomes not taxable under this head: Bank interests DIRECT TAXATION

2,500 134

Dividend from Indian company • Income from other sources: Bank interest

7,500

42,400

2,500

Dividend from Indian companies [Exempt u/s 10(34))

-

Gross total income Less : Deductions u/ss 80C to 80U :

2,500 44,900

Deduction u/s 80G in respect of donation to National Defence Fund Total

5,000

income

4,000 40,900

Objective questions: The correct answer is marked in bold 1. Preliminary expenses are incurred in every business. What are the expenses that qualify for deduction u/s.35D? A. Expenses for drafting memorandum and articles of association B. Payment of duty at the office of Registrar of companies C. Expenditure incurred in preparation of project report D. All of the above 2. The preliminary expenses that can be amortized under the Income Tax Act 1961 has to be restricted to ______________ of the cost of project A. 3% B. 8% C. 5% D. 20% Ans. C . 5% 3.

Mr. A withdraws goods costing ` 100000 for personal use from his proprietorship concern at an agreed value of ` 120000. Amount Taxable as profit isA. 100000 B. 20000 C. 120000 D. Nil Ans. D Nil 4.

Rate of depreciation charged on an intangible asset isA. 10% B. 15% C. 25% D. 30% Ans. C 25% 5.

Unabsorbed depreciation can be carried forward for________A. 8 years B. 4 Years C. Any number of years even if the business is discontinued D. Any number of years if the business is continued Ans. C. Any number of years even if the business is discontinued 6.

Zero Coupon Bonds can be issued by any of the following entities— A. Scheduled bank B. Public sector company DIRECT TAXATION

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C. Both (a) and (b) D. None of these Ans. C. Both (a) and (b) 7.

Expenditure incurred for ready to use software is deductible at (A) 15% as depreciation (B) 30% as depreciation (C) 60% as depreciation (D) 100% as revenue expenditure Ans. (D) 100% as revenue expenses 8.

Expenditure incurred towards Corporate Social Responsibility in accordance with section 135 of the Companies Act, 2013 is (A) Expenditure deductible at 100% (B) Expenditure deductible at 150% (C)Inadmissible expenditure (D) Expenditure deductible in five annual instalments Ans. (C) Inadmissible expenditure 9.

Investment allowance under section 32AC of the Income-tax Act, 1961, is applicable where the investment in new plant and machinery exceeds (A)` 25 Crores (B) ` 50 Crores (C) `100 Crores (D) `40 Crores Ans. (A) : ` 25 crores 10. A company engaged in eligible manufacturing activity acquires new Plant & Machinery (15% block) costing `15 lacs on 30th June, 2016. Depreciation admissible on such new Plant & Machinery in Assessment Year 2017-18 is: (A) ` 5,25,000 (B) ` 4,50,000 (C) ` 5,00,000 (D) ` 2,25,000 Ans. (A) ` 5,25,000 (11) Audit of accounts u/s 44AB of the Income-tax Act, 1961 is mandatory for a person carrying on profession where his gross receipts exceed (A) ` 50,00,000 (B) ` 60,00,000 (C) ` 20,00,000 (D) ` 25,00,000 Ans. (A) `50,00,000 (12) A & Co., a partnership firm, contributed ` 1,00,000 towards family planning programme among the employees. The amount eligible for deduction would be (A) ` 1,00,000 (B) ` 20,000 (C) ` 1,50,000 (D) ` ‗Nil‘ not eligible for deduction Ans. A) ` 1,00,000

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(13) A sum of ` 50,000 was written off as bad debt in the assessment year 2013-14 and was disallowed. During financial year 2016-17 ` 20,000 was recovered. Out of the recovery how much is taxable? (A) ` 20,000 (B) ‗Nil‘ (C) ` 30,000 (D) ` 70,000 Ans. (B) ‗Nil‘ (14) P Ltd. incurred ` 35,00,000 towards voluntary retirement compensation paid to its employees in the financial year 2016-17. How much is deductible for the assessment year 2017-18 out of the said payment? (A) ` 7,00,000 (B) ` 5,00,000 (C) ` 35,00,000 (D) ` 3,50,000 Ans. (A) ` 7,00,000 (15) PREM BANSAL Ltd. makes a payment of ` 35,000 in cash to a transporter for plying of goods carriages in a single day. The disallowance under section 40A(3) will be : (A) ` 35,000 (B) ` 20,000 (C). ` 15,000 (D) Nil Ans. (D) Nil

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STUDY NOTE : 10 CAPITAL GAINS [SECTIONS 45-55A] THIS STUDY NOTE INCLUDES: 10.1 Basis of Charges [Section 45(1)] 10.2 Meaning of Capital asset [Section 2(14)] 10.3 Classification of capital assets 10.4 Meaning of transfer of capital asset [Section 2(47)] 10.5 Mode of computation of capital gains [Section 48] 10.6 Computation of capital gains under certain special circumstances 10.7 Capital gains exempt from tax

10.1

BASIS OF CHARGE [SECTION 45(1)]

Any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head ―Capital gains‖ and shall be deemed to be the income of the previous year in which such transfer took place, provided that such capital gains are not exempt under Sections 54, 54B, 54D, 54E, 54EC,54EE, 54F, 54G, 54GA, 54GB and 54H. Besides, as provided under section 45(1A), capital gains also arise on receipt of money or other assets from an insurance company on account of damages or destruction to the capital assets belonging to the assessee due to: (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war). The charge under this head, thus, depends on the fulfillment of the following conditions:  There must be a capital asset.  The capital asset must be transferred during the previous year or must have suffered any of the damages mentioned u/s 54(1A).  There must be profits or gains on transfer of the capital asset. For this purpose, the term ―profits and gains‖ also includes any loss on transfer of any capital asset.  Such capital gain is not exempt under Sections 54, 54B, 54D, 54E, 54F, 54G, and 54H.

10.2

MEANING OF CAPITAL ASSET [SECTION 2(14)]

―Capital asset‖ means property of any kind held by an assessee, whether or not connected with his business or profession. The expression ―property‖ is wider enough and it includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever [Explanation to Section 2 (14) inserted by the Finance Act 2012 w.e.f. assessment year 196263]. With effect from the assessment year 2015-2016, Capital assets also include any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 [As amended by the Finance (No. 2) Act, 2014, w.e.f. A.Y.2015-16].  Assets which are excluded from the definition of capital assets: Capital assets, however, does not include the following: (a) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; DIRECT TAXATION

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(b) any personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him. Exceptions: when personal effects are treated as capital asset: The following assets, which are in the nature of personal effects, shall be regarded as capital assets: (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. For the aforesaid purpose, the expression ―jewellery‖ includes: (i) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (ii) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel. (c) agricultural land in rural area in India Rural area means: Any area which is outside the jurisdiction of a municipality (whether known as municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or It is not located within such distance of the said municipality or cantonment board as measured aerially: When population does not exceed 1,00,000 Within 2 km of from the local limits of the municipality or the cantonment board When population is more than 1,00,000 but Within 6 km of from the local limits of the municipality does not exceed 10 lakh or the cantonment board When population is more than 10 lakh Within 8 km of from the local limits of the municipality or the cantonment board (d) 61/2% Gold Bonds, 1977 or 7% Gold Bonds, 1980, National Defence Gold Bonds, 1980;

(e) Special Bearer Bonds, 1991; (f) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999. (g) Deposit Certificates issued under the Gold Monetisation Scheme 2015. General instances of capital assets: ―Capital asset‖ as used in Section 2(14) is an expression of broad connotation and includes property of any kind, except the six categories of assets mentioned in (a) to (g) above. The following are some instances of properties held to be capital assets:

(i) Goodwill of a business, whether purchased or self-generated [With effect from the assessment year 2017-2018, Section 55 has been amended to provide that in relation to the cost of improvement of capital assets being goodwill of a business as well as profession shall be nil. However, CBDT in its Circular No. 495, dated 22-9-1987 has clarified that section 55 does not apply to goodwill of professional firms. In view of this, goodwill of a firm is not to be treated as capital asset. In other words, the judgment in CIT v Srinivasa Setty is still applicable.

(ii) Foreign currency held on capital account. (iii) A business undertaking. (iv) A leasehold right or tenancy right. (v) Right to subscribe for shares of a company. (vi) A route permit. (vii) A manufacturing license. (viii) A partner‘s share in a firm (ix) A leasehold right (x) Bullion or coins which are meant to be used for puja or worship of deities on special occasions. DIRECT TAXATION

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10.3

CLASSIFICATION OF CAPITAL ASSETS

 Depending on the period of holding, capital assets are divided into two categories: long-term capital asset and short-term capital asset.  Short-term capital asset [Section 2(42A)]:―Short-term capital asset‖ means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Exceptions: (1) In the case of a share held in a company or any other security listed in a stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund specified under Section 10(23D), or a zero coupon bond the period of thirty-six months shall be taken to be twelve months. That is, if these assets are held for not more than 12 months, they will be treated as short-term capital assets; (2) In the case of unlisted shares, they will be treated as short-term capital assets if the period of holding is not more than 24 months. 

Long-term capital asset [Section 2(29A)]:―Long-term capital asset‖ means a capital asset which is not a short-term capital asset.

Short-term capital gains and long-term capital gains: Since there are two types of capital assets, there may be two types of capital gains. Capital gains on transfer of short-term capital asset will be treated as short-term capital gain [Section 2(42B)], while capital gain on transfer of long-term capital asset will be treated as long-term capital gains [Section 2(29B)]. The distinction between these two types of capital gains are material because short-term and long-term capital gains are taxed at different rates.

10.4

MEANING OF TRANSFER OF CAPITAL ASSET [SECTION 2(47)]

‗Transfer‘ in relation to a capital asset includes: (a) the sale, exchange or relinquishment of the asset; or (b) the extinguishment of any rights therein; or (c) the compulsory acquisition thereof under any law; or (d) in case where the asset is converted by the owner thereof into, or is treated by him as, stock-intrade of a business carried on him, such conversion or treatment; or (e) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882; or (f) the maturity or redemption of a zero coupon bond; or (g) any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or any immovable property. With retrospective effect from the assessment year 1962-63, a new Explanation has been inserted to provide that ―transfer‖ includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India [Explanation 2, inserted by the Finance Act 2012]. Besides, under Section 45(1A), any receipt of money or other assets under an insurance from an insurer on account of damage to or destruction of any capital asset (due to natural calamities, riot or civil DIRECT TAXATION

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disturbances, accidental fire or enemy action) shall be regarded as transfer of capital asset and consequently any profits or gains arising from such receipts shall be chargeable as capital gains. General instances of transactions held to be transfer (a) A lease of mines or transfer of land for a salami or premium. (b) Reduction of share capital of a company entailing payment to the shareholders. (c) Proprietary business taken over by a firm (d) Transfer of capital asset by a person to a firm [Section 45(3)]. (e) Distribution of capital assets on dissolution of a firm [Section 45(4)]. (f) Repurchase of units of any Mutual Fund specified in Section 10 (23D) or units of the UTI [Section 45(6)]. Transactions not regarded as transfer [Sections 46 and 47]: For the purpose of Section 45, the following transactions are not regarded as transfer: (a) any distribution of assets by a company to its shareholders on liquidation [Section 46(1)]; (b) any distribution of capital assets on the total or partial portion of a Hindu undivided family [Section47(i)] ; (c) any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)] ; [However, with effect from the assessment year 2001-2002, transfer under a gift or an irrevocable trust of capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees‘ Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued by the Central Government shall not be treated as transfer within the meaning of Section 45] ; (d) any transfer of capital asset by a company to its wholly owned Indian subsidiary company [Section47(iv)] ; (e) any transfer of capital asset by a wholly owned subsidiary company to the Indian holding company [Section 47(v)].[However, Sections 47(iv) and 47(v) do not apply to any transfer of capital asset made after 29th February, 1988, as stock-in-trade] ; (f) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated Indian company [Section 47(vi)] ; (g) any transfer, in a scheme of amalgamation, of capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if at least 25% of the shareholders of the amalgamating company continue to remain shareholders of the amalgamated foreign company and such transfer does not attract capital gains in the country in which the amalgamating company is incorporated [Section 47(via)]; (h) any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under Section 45(7) of the Banking Regulation Act,1949, of a capital asset by the banking company to the banking institution [Section 47(viaa), inserted by the Finance Act,2005 w.e.f. A.Y. 2005-2006] ; (i) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in the Explanation 5 to Section 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated [Section 47(viab), inserted by the Finance Act 2015 w.e.f. AY 2016-17]. (j) any transfer, in a demerger, of a capital asset by a demerged company to the resulting Indian company [Section 47(vib)] ; (k) any transfer, in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to DIRECT TAXATION

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(l) (m)

(n)

(o)

(p)

(q) (r)

(s) (t)

(u) (v) (w)

(x)

(y)

remain shareholders of the resulting foreign company and such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated [Section 47(vic)]; any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank [Section 47 (vica), w.e.f. the assessment year 2008-2009] ; any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank[Section 47 (vicb), w.e.f. the assessment year 2008-2009] ; any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in the Explanation 5 to Section 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if the shareholders, holding not less than three-fourths in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated. [Section 47(vicc), inserted by the Finance Act 2015 w.e.f. AY 2016-17]. any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company, if the transfer of issue is made in consideration of demerger of the undertaking. [Section 47(vid)]; any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company and the amalgamated Indian company [Section 47(vii)] ; any transfer of a capital asset, being bonds or Global Depository Receipts referred to in Section115AC(1), made outside India by a non-resident to another non-resident [Section 47(viia)] ; any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a nonresident to another non-resident [Section 47(viib)]. any transfer of agricultural land in India effected before 1st March, 1970 [Section 47(viii)]; any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or paint, to the Government or a university or the National Museum, National Art Gallery, National Archives or any such other public museum or institution as may be notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States [Section 47(ix)]; any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company [Section 47(x)] ; any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 115AC into shares or debentures of any company [Section 47(Xa)]. any transfer made on or before 31st December, 1998 by a person (other than a company) of a capital asset being membership of a recognised stock exchange to a company in exchange of shares allotted by that company to the transferor [Section 47(xi)] ; any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared and sanctioned under Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, where such sick industrial company is being managed by its workers‘ co-operative, provided that such transfer is made during the period commencing from the previous year in which the said company under Section 17(1) of that Act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses [Section 47(xii)] ; any transfer of a capital asset, or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in DIRECT TAXATION

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India as a result of which an association of persons or body of individuals is succeeded by a company, provided that the following conditions are satisfied : (i) all the assets and liabilities of the firm or the association of persons or body of individuals (ii) relating to the business immediately before the succession become the assets and liabilities of the company ; (iii) all the partners of the firm immediately before the succession became the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession ; (iv) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company ; (v) the aggregate of shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be such for a period of five years from the date of succession ; (vi) the corporatisation of a recognised stock exchange in India is carried out in accordance with the scheme of demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under Section 3 of the Securities and Exchange Board of India Act, 1992 [Section 47(xiii)]. (z) any transfer of a capital asset being a membership right held by a member of a recognised stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India [Section 47(xiiia)]; (za) any transfer of capital asset or intangible asset on conversion of a private company or unlisted public company into an Limited Liability Partnership (LLP) in accordance with Section 56 and Section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under Section 45, if the following conditions are fulfilled: (i) the total sales, turnover or gross receipts in business of the company do not exceed sixty lakh rupees in any of the three preceding previous years ; (ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company ; (iii) no consideration other than share in profit and capital contribution in the LLP arises to partners ; (iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion; (v) all assets and liabilities of the company become the assets and liabilities of the LLP ; (vi) the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees [ with effect from the assessment year 2017-18]; and (vii) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion. [Section 47(xiiib) w.e.f. assessment years 2011-12]; (zb) Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company, provided the following conditions are satisfied: (i) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company; (ii) the shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the company and his shareholding continues to remain as such for period of five years from the date of the succession; and (iii) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company [Section 47(xv)] ; (zc) any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by the Securities and Exchange Board of India, established under Section 3 of DIRECT TAXATION

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(zd) (ze)

(zf) (zg)

the Securities and Exchange Board of India Act, 1992 or the Reserve Bank of India in this regard [Section 47(xv)]. any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [Section 47(XVI)]. any transfer of capital asset, being a government security carrying periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident [Section 47(viib)]. any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor [Section 47(xvii)] any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund. [Section 47(xviii), inserted by the Finance Act 2015 w.e.f. AY 2016-17].

10.5

MODE OF COMPUTATION OF CAPITAL GAINS [SECTION 48]

As per Section 48, the computation of both short-term and long-term capital gains is to be made with reference to: (i) full value of consideration received or accruing as a result of transfer of capital asset ; (ii) expenditure incurred wholly and exclusively in connection with such transfer ; (iii) cost of acquisition of the asset transferred; and (iv) cost of any improvement to such asset. The above mode of computation of capital gains is, however, subject to the following further considerations: (i) Shares and debentures acquired by a non-resident through foreign currency : In the case of a nonresident assessee, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency. This procedure shall be followed in respect of capital gains accruing or arising from every reinvestment in shares and debentures in Indian companies and their sale thereafter [First proviso to Section 48]. (ii) Indexation for certain long-term capital assets : Where long-term capital gain arises from the transfer of a long-term capital asset (other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso to Section 48) then in place of ―cost of acquisition‖ and ―cost of improvement‖ ―indexed cost of acquisition‖ and ―indexed cost of improvement‖ shall be taken into consideration [Second proviso to Section 48]. (iii) No indexation for bonds and debentures: Indexed cost of acquisition and indexed cost of improvement as mentioned above in the second proviso, shall not, however, be applicable to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bond issued by the Government [Third proviso to Section 48].

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(iv) No deduction for securities transaction tax: In computing income chargeable under the head ―Capital gains‖, no deduction shall be allowed in respect of any sum paid on account of securities transaction tax [Fifth proviso, inserted by the Finance (No.2) Act, 2004, w.e.f. A.Y. 2005-2006]. 1. Capital gains exempt under Section10: In the following cases, any gain arising as a result of transfer of capital assets shall be exempt from tax: A. Capital gain on transfer of units of US-64 [Section 10(33)]: Study Note 6 B. Long-term capital gains on transfer of BSE-500 shares [Section 10(36)]: Study Note 6 C. Capital gains arising from compulsory acquisition of urban agricultural land Section10(37)]: With effect from the assessment year 2005-2006, any capital gain, whether short-term or long-term, arising from transfer of urban agricultural land is exempt from tax, if the following conditions are fulfilled: (i) The assessee is an individual or a Hindu undivided family. (ii) The assessee owns agricultural land, which is situated in an urban area as described in Para 2 above. (rural area described in para 2) (iii) During the period of two years immediately preceding the date of such transfer the land was being used for agricultural purposes by the individual or his parents or the Hindu undivided family. (iv) Such transfer is either by way of compulsory acquisition or being a transfer, the consideration of which is determined/approved by the Central Government or the Reserve Bank of India. (v) The compensation or consideration for the transfer of the land is received by the assessee on or after 1st April, 2004. D. Long-term capital gains on transfer of equity shares or units of equity oriented fund [Section 10(38)]: See Study Note 6 E. Capital gains on transfer of capital assets of power sector undertakings [Section 10(41)]: See Study Note 6. 2. Computation of short-term capital gain: Having determined the components of capital gain, the short-term capital gain is to be computed as follows: Computation of short-term capital gains Step I: Find out the full value of consideration received or accruing on transfer of short-term capital asset Step II: Deduct the following: (a) Expenditure incurred wholly and exclusively in connection with such transfer (b) Cost of acquisition of capital asset (c) Cost of improvement to capital asset Balance Step III: Deduct exemptions under Sections 54B, 54D, 54G and 54GA. The balance is taxable short-term capital gain/loss. Computation of long-term capital gain: The long-term capital gain is to be computed as follows: Computation of long-term capital gain Step I: Find out the full value of consideration received or accruing on transfer of long-term capital asset Step II: Deduct the following: (a) Expenditure incurred wholly and exclusively in connection with such transfer (b) Indexed cost of acquisition of long-term capital asset (where applicable) DIRECT TAXATION

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(c) Indexed cost of improvement to capital asset (where applicable) Balance Step II: Deduct exemptions under Sections 54, 54B, 54D 54EC, 54F, 54G, 54GA and 54GB. The balance is the taxable long-term capital gain 3. Meaning of full value of consideration: The expression ―full value of consideration‖ means what a person receives or is entitled to receive as a result of transfer of capital asset. While determining full value of consideration, the following points need to be considered:  Full value of consideration includes not only the amount of money received or receivable, but also includes any other asset received or to be received in consideration of sale, exchange, relinquishment of the asset or extinguishment of rights to the asset transferred.  If the consideration is received or to be received in installments, the sum total of all the installments shall be taken to be the full consideration, even though the installments are spread over different years.  In the case of compulsory acquisition of asset by the Government, any ex gratia payment received over and above the compensation shall be treated as part of the full consideration for transfer of the asset [CIT vs. Subaida Beevi 160 ITR 557]. Compensation or consideration received for compulsory acquisition of asset by the Government becomes taxable in the year in which it is received. However, any subsequent enhancement of compensation or consideration under an order of Court, Tribunal or any other authority, shall be deemed to be income chargeable under the head ―Capital gains‖ of the previous year in which such amount is received by the assessee. But if the compensation or consideration is reduced in any subsequent year by the aforesaid authorities, the capital gain of this year shall be recomputed by taking such reduced compensation or consideration [Section 45(5)]. Cases where full value of consideration is taken at deemed value: SI. Mode of transfer Deemed full value of consideration No. (a) Insurance claim received as a Value of money or fair market value of other asset result of damage or destruction on the date of receipt. of capital asset. (b) Conversion or treatment of Fair market value of the capital asset on the date capital asset into stock-in-trade of of conversion or treatment into stock-in-trade. business of the assessee. (c) Transfer of capital asset to a firm/ Amount recorded in the books of account of the AOP/BOI by a partner/ member firm/AOP/BOI as the value of the capital asset. as contribution of capital. (d) Distribution of asset on dissolution Fair market value of the assets distributed on the of a firm AOP/BOI. date of distribution. (e) Receipt by a shareholder on liquidation of a company.

(f) Gift of shares, debentures, warrants allotted under Employees' Stock Option Plan. (g) Transfer of land or building or both.

Fair market value of the asset on the date of distribution less amount assessed as deemed dividend u/s 2(22Xc). Market value on the date of gift.

Section 45(1 A)

45(2)

45(3)

45(4) 46(2)

4th proviso to Section 48 When actual consideration is less than the amount Section 50C determined by the stamp valuation authority, then amount so determined by such authority. When reference is made to the valuation officer and the value determined by the Valuation Officer is: (i) More than the value assessed by the stamp valuation authority, amount assessed or assessable DIRECT TAXATION

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by the stamp valuation authority; (ii)Less than the value assessed or assessable by the stamp valuation authority, the amount determined by the valuation officer. If value assessed or assessable by the stamp valuation authority is revised in any appeal or reference, such revised value. Note: Where the date of agreement and the date of registration are not the same, the value adopted by the stamp valuation authority on the date of agreement shall be considered as the full value of consideration. In that case, the consideration or part of it should be received by account payee cheque/ ECS on or before the date of agreement [W.e.f. AY 2017-18]. 

Fair market value to be full value of consideration in certain cases [Section 50D]: Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

4. Meaning of expenditure incurred wholly and exclusively in connection with transfer: Other than the statutory provisions, capital gains are to be computed on ordinary principles of commercial accounting. Therefore, expenditures which are incidental to, and laid out wholly and exclusively in connection with the transfer of capital asset, are to be allowed as deduction. Examples of expenditures incurred in connection with transfer  Brokerage, commission, legal fees, etc., in connection with transfer.  Stamp duty and registration charges for transfer of capital asset.  Expenses for preparing a layout and plotting out land for housing sites.  Payment made to tenant for vacating property which has been agreed to be sold with vacant possession.  Payment made to mother of the assessee for relinquishing her right to residence in the property.  Expenses incurred for settling compensation or claiming enhanced compensation for acquisition of property. 5. Meaning of cost of acquisition of capital asset: Cost of acquisition in relation to a capital asset means the price which is paid by the assessee. It also includes the incidental expenses incurred by the assessee for this purpose. The following are the instances of incidental expenses which have been held to be part of the cost of acquisition of capital asset:  Litigation expenses for getting shares registered in the name of the assessee with a view to gaining better voting rights.  Interest on fund borrowed for payment of the purchase price of the asset.  (repeated) 6. Deemed cost of acquisition [Section 49]: In the cases mentioned below, the cost of acquisition shall be taken as under: SL Classes of assets and their mode of Deemed cost of acquisition No. acquisition by the assessee 1.  Distribution of assets on the total or Cost for which the previous owner partial partition of HUF acquired the asset plus cost of any  Gift or will improvement incurred by the previous  Succession, inheritance or devolution owner or the assessee.  Distribution of asset on dissolution of DIRECT TAXATION

Section 49(1)

147

firm/BOI/AO Distribution of assets on liquidation of a company  Transfer to a revocable or irrevocable trust  Transfer by a company to its subsidiary company, or transfer by a subsidiary company to a holding company, or transfer by an amalgamating company to an amalgamated company, or transfer by an amalgamating foreign company to an amalgamated foreign company [cases covered under clauses (iv), (v), (vi) and (via) (viaa), (viab), (vib), (vica), (vicc) , (xiii) , (xiiib) or (xiv) of Section 47].  In the case of an assessee being a HUF, by the mode referred to in Section 64(2) [i.e., individual property of a member converted into family property after 31.12.1969 Where any share in an Indian company, which became property of the assessee pursuant to a scheme of amalgamation Shares or debentures in a company in consideration of conversion of bonds or debentures or debenture stock or deposit certificates or the specified security or sweat equity shares specified in Section 115AC Specified security or sweat equity shares 

2.

3.

4.

5.

6. 7.

8.

Where the capital asset, being share or shares of a company, is acquired by a non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC (1)(b) held by such assessee Capital asset being the unit of a business trust referred to the section 47(xvii) Where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, became the property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47 Capital asset being rights of a partner referred to in Section 42 of the LLP Act

9.

Shares in the resulting company

10.

Original shares held in the demerged company

Cost of acquisition of shares in the amalgamating company Part of the cost of debentures, debenture stocks or deposit certificates in relation to which the shares or debentures are acquired by the assessee

49(2)

49(2A)

The fair market value which has been taken 49(2AA) into account while computing the value of perquisite u/s 17(2)(vi). The cost of acquisition of the share or 49(2ABB) shares shall be the price of such share or shares prevailing on any recognised stock exchange on the date on which a request for such redemption was made. Cost of acquisition

49(2AC)

The cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund.

49(2AD)

Cost of acquisition of the shares in the company immediately before its conversion Net Book value of assets  Cost of  transferred  Shares in the  on demerger  demarged  × Networth of the  company    demerged company immediately before demerger Cost of original shares less amount determined in (9) above.

DIRECT TAXATION

49(2AAA)

49(2C)

49(2D)

148

11.

12.

13.

In the case of transfer of capital asset acquired by a subsidiary company from the holding company and vice versa, cost of acquisition to the transferee company when the assets are transferred by the transferred company before the expiry of 8 years from the date of acquisition In the case of transfer of a property acquired by an individual or HUF on or after 1.10. 2009 in a mode specified in Section 56(2)(vii) or section 56(2)(viia).

Where capital gains arises from transfer of an asset declared under the Income Declaration Scheme 2016, and tax, surcharge and penalty have been paid in accordance with the provisions of the Scheme on the fair market value of the assets as on the commencement of the Scheme

Cost for which the assets are acquired by the transferee company

49(3)

In the case of immovable property: The stamp duty value, if acquired without consideration; excess of the stamp duty value over the consideration paid, if the consideration paid falls short of the stamp duty value by ` 50,000.  In the case of any other property: When acquired without consideration and the fair market value exceeds ` 50,000, the whole of the fair market value of the property; when acquired for a consideration which is less than the fair market value by an amount exceeding ` 50,000, the excess of the fair market value over consideration paid Fair market value of the asset which have been taken into account for the purposes of the Scheme.

49(4)



49(5)

7. When cost of acquisition is taken as the fair market value as on 1st April, 1981[Section 55(2)(b)]: In the following circumstances, the assessee may, at his option, take either the actual cost or the fair market value as on 1st April, 1981 to be the cost of acquisition of the capital asset: (a) where the capital asset became the property of the assessee before 1st April, 1981; (b) where the capital asset became the property of the assessee by any mode of acquisition specified in Section 49(1) [e.g., distribution of assets on partition of HUF, gift or will, succession or inheritance, dissolution of firm/AOP/BOI, liquidation of company, etc.] and the capital asset became the property of the previous owner before 1st April, 1981.  When option of fair market value as on 1st April, 1981 is not available: The option of fair market value as on 1st April, 1981 is not available in the following cases: (a) the option is not available in the case of depreciable assets; (b) the option is not available in the case of goodwill (self-generated or purchased), tenancy rights, stage carriage permits, patent rights and loom hours. 8. Cost of acquisition in certain other cases: The cost of acquisition of certain other capital assets are as follows: (a) Goodwill of a business, trade mark, brand name, right to manufacture or produce or process any article or thing, right to carry on business, tenancy rights, stage carriage permits or loom hours. [Section 55(2)(a)]:The cost of acquisition of these assets are as follows:  when such assets are acquired by the assessee from the previous owner by purchase, the amount of purchase price;  when such assets are self-generated, Nil.

DIRECT TAXATION

149

(b) Allotment of additional financial assets [Sections 55 (2) (aa), 55(2)(b)]: Where, by virtue of holding share or any other security, the assessee becomes entitled to subscribe, additional financial assets or is allotted any additional asset without any payment, the cost of acquisition in relation to such financial assets shall be as under: (i) Bonus shares: In the case of bonus shares including the original shares, which are transferred after 31st March, 1995, the cost of acquisition shall be determined as follows: Shares Original shares and bonus shares acquired before 1st April, 1981. Original shares acquired before 1st April, 1981, but bonus shares allotted after 31st March, 1981. Both original shares and bonus shares acquired after 31st March, 1981.

Cost of acquisition (i) Original shares : Actual cost or fair market value as on 1st April, 1981, whichever is higher. (ii) Bonus shares : Fair market value as on 1st April, 1981. (i) Original shares : Actual cost or fair market value as on 1st April, 1981, whichever is higher. (ii) Bonus shares : Nil (i) Original shares : Actual cost (ii) Bonus shares : Nil

Note: Long-term capital gains on transfer of both bonus shares and original shares on or after 1st October, 2004 shall be exempt from capital gains, provided that the transaction is subjected to securities transaction tax. (ii) Right share and right entitlement: The cost of as follows: Capital assets Right entitlement which is renounced by the assessee in favour of another person. Shares purchased in exercise of the right. Right shares purchased by any person in whose favour the right has been renounced.

acquisition of right share and right entitlement shall be Cost of acquisition Nil Amount actually paid. Aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company for acquiring such right shares.

(c) Equity shares allotted to a shareholder of a recognised stock exchange under a scheme of corporatisation of a recognised stock exchange in India [Section 55(2)(ab)] : The cost of acquisition of the equity shares in this case shall be taken to be the cost of acquisition of his original membership of the stock exchange. (d) Capital asset becoming the property of the assessee on the distribution of capital assets of a company on its liquidation, which is taxable under Section 46 [Section 55(2)(b)(iii)] : The cost of acquisition in this case shall be taken to be the fair market value of the capital asset as on the date of distribution. (e) Share or stock of a company becoming the property of the assessee on consolidation and division of share or stock into larger or smaller denomination, conversion of shares into stock and vice versa, conversion of one kind of shares into another kind [Section 55(2)(b)(v)]: The cost of acquisition in this case shall be calculated with reference to the cost of acquisition of the shares or stock from which such assets are derived. (f) When cost for which previous owner acquired the property cannot be ascertained [Section 55(3)]: The cost of acquisition of such capital assets shall be the fair market value of the asset on the date when the previous owner acquired such assets. DIRECT TAXATION

150

(g) Cost of acquisition when advance money is received [Section 51]: Where any capital asset was on any previous occasion the subject of negotiations for its transfer, and any advance or other money is received and retained by the assessee in respect of such negotiations before 1st April 2014, it shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. However, advance money received and retained on or after 1.4.20014 shall not be deducted from the cost of acquisition or the written down value of the asset; it shall be taxable as Income from other sources [Section 56 (2)(ix)]. Points to note: (i) Advance money is deductible from the cost of acquisition only if it is received and retained by the assessee. Advance money received and retained by the previous owner is not deductible. (ii) If the advance was received and retained by the assessee before 1st April, 1981 and the assessee has adopted the fair market value on 1st April, 1981 as the cost of acquisition of the asset, then even though the advance money was received before 1st April, 1981, it can be deducted from the fair market value of the asset on 1st April, 1981. (iii) If the advance money received and retained exceeds the cost of acquisition of the asset, the excess of advance money over the cost of the asset will not be treated as capital gain, as there was no transfer of the capital asset. Such excess shall, however, be taxable as capital gain in the year in which the asset is actually sold or transferred. (h) Cost of acquisition in case of depreciable asset of power units [Section 50A]:In this case, the provisions of Sections 48 and 49 shall apply subject to the modifications that the written down value, as defined in Section 43(6), as adjusted, shall be taken as the cost of acquisition of the asset.  Indexed cost of acquisition under different circumstances: A. When the assets are directly acquired by the assessee : Situation 1. Assets acquired before 1.4.1981

Indexed cost of acquisition

2. Assets acquired on or after 1.4.1981

B.

Assets acquired by the assessee from the previous owner on any distribution of assets on partition of HUF, gift/ will , succession, inheritance , etc.** [Section 49(1)]:

Situation 1. Assets acquired before 1.4.1981

Indexed cost of acquisition

2. Assets acquired on or after 1.4.1981

(a) The previous owner acquired it before 1.4.1981:

DIRECT TAXATION

151

(b) The previous owner acquired it on or after 1.4.1981:

**Point to Note: Although Explanation (iii) to Section 48 requires indexation from the year in which the asset was held by the assessee, in terms of some recent legal judgments of Bombay High Court [CIT v. Manjula J Shah, 2012] and Delhi High Court [Arun Shungloo Trust v. CIT, 2012], in a situation where the assessee becomes owner of the asset as mentioned u/s 49(1), i.e. gift, inheritance, etc., the indexation has to be done with reference to the year in which the asset was first held by the previous owner.

 When indexation is not allowed: In the following cases, indexation of cost is not allowed: (i) Short-term capital assets including assets on which depreciation is allowed. (ii) Long-term capital assets being bond or debenture other than capital indexed bonds issued by the Government. (iii) In the case of a non-resident assessee, capital gain arising on transfer of shares or debentures in Indian company acquired in foreign currency or any financial asset specified under sections 115AB, 115AC, 115ACA and 115AD. (iv) Transfer of undertaking on slump sale. 9. Meaning of cost of improvement [Section 55(1) b)]: Section 55(1)(b) defines cost of improvement as under: (a) In case of goodwill of a business or a right to manufacture, produce or process any article or thing or the right to carry on any business, cost of improvement shall be taken to be nil. (b) In case of any other asset: (i) Where the capital asset became the property of the previous owner or the assessee before the 1st April, 1981, it means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after 1st April, 1981 by the previous owner or the assessee; and (ii) where the capital asset is acquired on or after 1st April, 1981, it means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and where the capital asset became the property of the assessee by any of the modes specified in Section 49(1), it means such capital expenditure incurred by the previous owner. Point to note: Expenditure incurred before 1st April, 1981 by the assessee or the previous owner shall not be treated as cost of improvement.

DIRECT TAXATION

152

10. Indexed cost of improvement under different circumstances: Capital expenditure on improvement Indexed cost of improvement A. Expenditure incurred by the assessee himself: (i) Before 1.4.1981 (i) Indexation not required (ii) On or after 1.4.1981 (ii)

B. Expenditure incurred by the previous owner [other than a mode of acquisition specified u/s 49(1) (i) Incurred before 1st April,l98l (ii) Incurred on or after 1st April, 1981 C. Expenditure incurred by the previous owner [in a mode of acquisition specified u/s 49(1)] : (i) Incurred before 1st April,1981 (ii) Incurred on or after 1st April , 1981

(i) Indexation not required, as such, expenditure is to be completely ignored. (ii)Same as above. (i) Same as before (ii)

11. Cost Inflation Index [ Explanation (v) to Section 48]: Financial Year Cost Inflation Index (CII) 1981-1982 100 1982-1983 109 1983-1984 116 1984-1985 125 1985-1986 133 1986-1987 140 1987-1988 150 1988-1989 161 1989-1990 172 1990-1991 182 1991-1992 199 1992-1993 223 1993-1994 244 1994-1995 259 1995-1996 281 1996-1997 305 1997-1998 331 1998-1999 351

10.6

Financial Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Cost Inflation Index (CII) 389 406 426 447 463 480 497 519 551 582 632 711 785 852 939 1024 1081 1125

COMPUTATION OF CAPITAL GAINS UNDER CERTAIN SPECIAL CIRCUMSTANCES

A. Capital gains in case of receipt of insurance claim for damage or destruction of capital Asset [Section 45(1A)]: Where any person receives during the previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of capital assets as a result of flood, typhoon, earthquake, etc., or riot or civil disturbance or accidental fire or explosion or enemy action, then, any DIRECT TAXATION

153

profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head ―Capital gains‖ and shall be deemed to be the income of such person of the previous year in which such money or other money was received. For the purpose of Section 48, value of money or fair market value of other assets on the date of receipt shall be deemed to be the full value of consideration received or accruing as a result of such transfer. Example 1: Y owns a house property which was purchased for ` 1,50,000 on 1st May, 1980. The property was destroyed by fire on 1 July, 2016 and ` 25,80,000 was received from the insurance company during the year. Given that the fair market value of the property on 1st April, 1981 was ` 1,80,000 and Cost Inflation Index: 1981-1982 = 100 and 2016-2017 = 1125, compute capital gains of X for the assessment year 20172018. Ans. Computation of Capital gains of Y for the assessment year 2017-18 relating to the previous year 2016 -17 ` Full value of consideration received (Amount of claim from insurance company) Less: Indexed cost of acquisition [ ` 1,80,000 x 1125/100] Long-term capital gains

25,80,000 20,25,000 5,55,000

B. Capital gains on conversion of capital asset into stock-in-trade [Section 45(2)]: With effect from the assessment year 1985-1986, the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him, shall be chargeable to tax under the head ―Capital gains‖. Such capital gains shall be chargeable to tax not in the year in which the asset is converted into stock-in-trade, but in the previous year in which such converted assets are sold or otherwise transferred. The fair market value of the asset on the date of conversion shall be deemed to be the full value of consideration of the asset. The difference between the sale price and the fair market value of the asset as on the date of conversion shall, however, be charged to tax as ―Profits and gains of business or profession‖. Example 2: C, an individual, purchased 5,000 shares of X Limited at ` 50 per share and 4,000 shares of Y Limited at ` 60 per share in the previous year 2011-12 and held them as capital assets. In the previous year 2015-16, he converted the shares into his stock-in-trade. The fair market value of the shares of both the companies on the date of conversion was ` 300 per share. In the previous year 2016-17, he sold the shares of the two companies at ` 380 per share. Shares were sold by way of private sale and hence securities transactions tax was not payable. Ascertain chargeable capital gain and business income from the above-noted transactions in the hands of C. Cost Inflation Index: Financial Year 2011-12: 785 Financial Year 2015-16: 1081 Financial year 2016-17: 1125 [CMA- Inter, Dec, 2013 (Adapted)] Answer: Computation of Capital gains of C for the assessment year 2017-18 relating to the previous year 2016 -17

Particulars Fair market value of the shares on the date of conversion [9,000 × ` 300] Less: Indexed cost of acquisition [Note] Long-term capital gains Note: Indexed cost of acquisition = [(5,000 × 50) + (4,000 × 60)] × 1125/785 = ` 7,02,229.

DIRECT TAXATION

` 27,00,000 7,02,229 19,97,771

154

Computation of Profits and gains of business or profession of C for the assessment year 2017-18 relating to the previous year 2016 -17 ` Particulars Sale proceeds [9,000 × 380] 34,20,000 Less: Fair market value on the date of conversion 27,00,000 Business income 7,20,000 C. Transfer of capital asset as capital-in-kind by a person to a firm /AOP/BOI [Section 45(3)]: The profits and gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place. For this purpose, the amount recorded in the books of account of the firm/AOP/BOI as the value of the capital asset shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset. Similarly, under Section 45(4), profits and gains arising on distribution of capital assets on dissolution of such firm/AOP/BOI shall be chargeable as income of the firm/AOP/BOI under the head ―Capital gains‖ in the previous year in which such transfer takes place. The fair market value of the assets on the date of such distribution shall be taken to be the full value of consideration for the purpose of computation of capital gains. Example 3: A is a partner of a firm. During the previous year 2016-2017, he transferred the following assets to the firm as his contribution towards capital: (a) One old motor car which was exclusively used for his personal use. The car was purchased on 1 st January, 2014 for `3,60,000. During the previous year when the car was transferred to the firm, its market value was ` 3,00,000, but it was recorded in the books of the firm for ` 3,50,000. (b) Another property which he acquired by way of gift from his father on 15.6.2003. His father acquired the property on 1st July, 1996 for ` 3,00,000. The market value of the property during the previous year was ` 8,00,000, but it was recorded in the books of the firm for `8,77,258. You are required to compute A‘s capital gains, if any, for the assessment year 2017-2018. Answer: Computation of ―Capital gains‖ of A, for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Transfer of motor car : Since motor car is a personal effect, there will be no capital gain on transfer Transfer of other property: Full value of consideration [being value recorded in the books of the firm] Less: Indexed cost of acquisition [ 3,00,000 x 1125 x 463]

Nil 8,77,258 7,28,942

1,48,316

Note: Since the property is acquired by way of gift, its cost to the previous owner shall be taken to be the cost to the assessee. This has to be indexed with CII for the financial year in which the asset was first held by the assessee. In this case, the CII for the financial year in which the asset was first held by the assessee, i.e., 2003-2004 is 463. D. Capital gains on transfer by way of compulsory acquisition [Section 45(5)]: The chargeability under this section is as under: Situation (1) Initial compensation

Chargeability

Chargeable as income under the head ―Capital gains‖ of the previous year in which such compensation or consideration or part thereof was first received. But indexation of cost of acquisition, if required, shall be made with reference to the year in which the asset was transferred under compulsory acquisition DIRECT TAXATION

155

(2) ??

(i) Enhanced ?? shall be deemed to income chargeable under the head ―Capital gains‖ of the previous year in which such amount is received by the assessee. (ii) Compensation is received in pursuance to the interim order of a court, Tribunal or other authority, it shall be taxable in the year in which the final order of such court, Tribunal or other authority is made. (iii) In relation to such enhanced compensation or consideration received subsequently, the cost of acquisition and the cost of improvement, according to Explanation (i) to Section 45, shall be nil. (iv) If due to the death or otherwise of the assessee, such compensation or consideration is received by another person, it shall be taxable as ―Capital gains‖ in the hands of such other person.

Example 4: The urban land of A was acquired by the State Government 10 years back and compensation was paid. A took up the matter before the Court / Tribunal. Enhanced compensation of ` 10 lakh was awarded by the Court / Tribunal in February, 2016 and the same was received in May 2016. State the consequences under the Income-tax Act, showing clearly the year of taxability. What will happen if A died and L, his legal heir received the enhanced compensation? [CMA- Inter June, 2009] Answer: (a) Enhanced shall be deemed to income chargeable under the head Capital gains of the previous year in which such amount is received by the assessee, i.e. 2016-2017. The cost of Acquisition in relation to the enhanced compensation shall be nil. In view of this, the entire sum of ` 10 lakh shall be taxable as Capital gains during the previous year 2016-2017. (b) If the transferor (A) dies and his legal heir L receives the enhanced compensation, it will be treated as Capital gain in his hand in the year of receipt. Example 5: A is the owner of a house, which he purchased for ` 50,000 in 1979. He spent ` 10,000 in 1980 towards addition and alteration of the house. During the previous year 2014-2015 the house was acquired by the Government in the Public interest and ` 7,40,750 was awarded to him as compensation by the Government. The fair market value of the house on 1.4.1981 was ` 70,000. On 16.4.2016, A died and his son B received `1,20,000 on 1st August, 2016 as additional compensation in consequence of a suit filed by A. B had to incur legal expenses amounting to ` 5,000 in connection with the suit. You are required to compute capital gains for the relevant assessment year/years. Answer: (a) Computation of ―Capital gains‖ of A for the assessment year 2015-2016 relating to the previous year 2014-2015 ` ` Initial consideration received Less: Indexed cost of acquisition [ ` 70,000 x 1024/100] Long-term capital gains

7, 40,750 7,16,800 23,950

(b) Computation of ―Capital gains‖ of A for the assessment year 2016-2017 relating to the previous year 2015-2016 ` ` Additional compensation received Less: Cost of acquisition Less: Incidental cost Long-term capital gains

1,20,000 Nil 5,000

DIRECT TAXATION

5,000 1,15,000

156

E. Capital gains on repurchase of units of Mutual Funds or Unit Trust of India [Section 45(6)]: Long-term capital gains on repurchase of the units of Mutual Funds specified under section 10(23D) are exempt from tax, if such transactions are: (i) entered into on or after 1st October, 2004 and (ii) covered under the securities transaction tax [Section 10(38)]. Where such units are short-term capital assets, the difference between the repurchase price and the capital value of the units shall be taxable as shortterm capital gains in the previous year in which such repurchase takes place or the plan under which the units are acquired are terminated. Under Section 111A, such short-term capital gains shall be subjected to tax @ 15% (plus surcharge and education cess). F. Capital gains on conversion of debentures into shares [Section 49(2A)]: Any conversion of bonds or debentures or debenture stock or deposit certificate of a company into shares or debentures of that company is not regarded as transfer [Section 47(x)].However, on sale of such converted shares or debentures, the profit shall be charged to tax as capital gains. For this purpose, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture stock or deposit certificates or bonds, in relation to which such shares or debentures were acquired by the assessee. Indexation, if required, shall be done from the date of such conversion. However, in the case of conversion of debentures, debenture stock, etc. into equity shares, long-term capital gains on transfer of such shares on or after 1st October, 2004 shall be exempt from tax, provided that such transactions are subjected to securities transaction tax. For this purpose, the period of holding these shares shall be reckoned from the date of conversion of the debenture/debenture stocks into equity shares. Example 6: On 1.1.2001, X purchased 500 debentures of ` 500 each of AE Ltd. On 1.1.2011 AE Ltd. converts ` 400 per debenture into fully paid equity shares of the company. The face value of the shares were @ ` 10 each, but for the purpose of conversion, each share was valued at `12·50. On 30th September, 2016, X sold 50% of the shares @ ` 25 each. You are required to compute capital gains, if any, in the hands of X for the relevant assessment year. [CII: 2010-2011 = 711; 2016-2017 = 1125]. Answer: Computation of ―Capital gains‖ of X for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Sale proceeds of 8,000 shares [Note 2] Less: Indexed cost of acquisition [Note 3] Long-term capital gains.

2,00,000 1,58,228 41,772

Notes: (1) No of shares received on conversion: 400/ 12.50 x 500 = 16,000 (2) 50% of the shares sold @ ` 25 each ( 25 x 8000) = ` 2,00,000 (3) Indexed cost of acquisition = (` 12.50 x 8,000) x 1125/711)= 1,58,228. G. Capital gains on purchase by a company of its own shares or other specified securities [Section 46A]: On purchase of own shares by a company, difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other securities are purchased by the company.

DIRECT TAXATION

157

H. Capital gains on transfer of shares, debentures or warrants issued under Employees‘ Stock Option Plan [Section 49(2AA)]:The provisions of section 49(2AA) are as under:  If equity shares received under the Employees‘ Stock Option Plan are subsequently sold by the employee through a recognised stock exchange in India on or after 1st October, 2004, any longterm capital gains arising as a result of such transfer shall be exempt u/s 10(38).  Short-term capital gain on such transfer shall, however, be taxable @ 15% (plus surcharge and education cess).  The cost of acquisition of such shares, debentures, warrants, sweats equities, etc., shall be their fair market value as on the date the option is exercised (prior to the assessment year 2010-11, the date of vesting option) as reduced by the amount recovered from the employee.  When these shares, debentures or warrants are transferred by the employee subsequently, the full value of consideration shall mean the amount actually realised on sale and in relation to a transfer under a gift or irrevocable trust, the fair market value on the date of such transfer. [Fourth proviso to Section 48.]  The securities transaction tax is not deductible from the sale proceeds of the shares. Example 7: R Ltd. grants option to its employee X on 1st April, 2012 to apply for 100 shares of the company at a predetermined price of ` 50 per share with date of vesting of the option being 1st April, 2015 and exercise period being 1st April, 2015 to 31st March, 2018. X exercises his option on 31st March, 2016 and shares are allotted to him on 3rd April, 2016. On 25 th October, 2016 these shares are sold for ` 200 each. On the date of vesting of the option, fair market value of the share was ` 80 per share. Compute taxable capital gains, if any, in the hands of X. Answer: Computation of ―capital gains‖ for the assessment year 2017-2018, relating to the previous year 20162016 Sale consideration [ 100 x ` 200] 20,000 8,000 Less: Cost of acquisition [ being FMV on the date of vesting option] *Short-term capital gains [*holding period: 3rd April to 25th October, 2016 being less than 12 months] 12,000 I. Capital gains on transfer of goodwill, trademark or brand name, tenancy rights, route permits, loom hours or right to manufacture: Capital gains for these types of assets shall be the excess of sale consideration over the actual expenses on transfer and cost of acquisition and improvement. The cost of acquisition and cost of improvement for these type of assets shall be: For self-generated assets – Nil; when purchased, at actual cost or indexed cost, as the case may be. In both the cases, option to take fair market value as on 1.4.1981 is not available. Example 8: Compute capital gains, if any, in the case of the following transfers: (a) X, a solicitor, sells his practice on 1.4.2016 and receives `5,00,000 in consideration for the transfer of goodwill. (b) A inherited the business of his father on 1.4.2007. He sold the business on 1st June, 2016 and received `10,00,000 as consideration for the goodwill of the business. His father had acquired the goodwill for `2,00,000 on 1.4.1979. A also received `5,00,000 on 1st June, 2016 as sale consideration of the tenancy rights of the office premises, which he had acquired on 1.4.2007 for `1,00,000. His incidental expenses in connection with the transfer of the tenancy right was `10,000.

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Answer: Computation of ―Capital gains‖ for the assessment year 2017-2018 relating to the previous year 20162017. ` ` • Capital gains on transfer of goodwill of profession: Goodwill of profession is not subject to capital gains [CIT vs. B.C. Srinivasa Setty] • Capital gains on transfer of goodwill of business: Sale consideration Less: Indexed cost of acquisition (Note 1) [ ` 2,00,000 x 1125/551] • Capital gain on transfer of tenancy rights: Sale consideration Less: Indexed cost of acquisition [ ` 1,00,000 x 1125/551] Less: Cost of transfer Long-term capital gains

Nil 10,00,000 4,08,348 5,91,652 5,00,000 2,04,174 10,000 2,85,826

J. Computation of capital gains in case of slump sale [Section 50B]: The computation of capital gains arising from slump sale is subject to the following: (a) In relation to the capital assets being an undertaking or division transferred by way of such sale, the ―net worth‖ of the undertaking or division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of Sections 48 and 49. Indexation of cost of acquisition and cost of improvement shall not be applicable in this case. (b) The ―net worth‖ as mentioned above shall be the aggregate value of the total assets of the undertaking or division as reduced by the aggregate value of total liabilities of the undertaking or division as appearing in its books of account. Any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computation of ―net worth‖. (c) Any profits or gains arising from the transfer under slump sale of capital asset being one or more undertakings owned and held by an assessee for more than 36 months immediately preceding the date of its transfer shall be deemed to be long-term capital gains. If the aforesaid holding period is less than 36 months, the capital gains as arising shall be treated as short-term capital gains. In both cases, it will be deemed to be the income of the previous year in which the transfer took place. Example 9: V Limited has two units - one engaged in manufacture of computer hardware and the other involved in developing software. As a restructuring drive, the company has decided to sell its software unit as a going concern by way of slump sale for ` 385 lakh to a new company called S Limited, in which it holds 74% equity shares. The balance sheet of V Limited as on 31st March, 2017 being the date on which software unit has been transferred, is given hereunder—

Liabilities Paid up Share Capital General Reserve Share Premium Revaluation Reserve Current Liabilities Hardware unit Software unit

Balance Sheet as on 31.3.2017 in lakh ` Assets 300 Fixed Assets 150 Hardware unit 50 Software unit 120 Debtors Hardware unit 40 Software unit 90 Inventories Hardware unit Software unit 750

in lakh ` 170 200 140 110 95 35 750

Following additional information are furnished by the management. (i) The Software unit is in existence since May, 2009. (ii) Fixed assets of software unit includes land which was purchased at`40 lakh in the year DIRECT TAXATION

159

(iii) 2006 and revalued at ` 60 lakhs as on March 31, 2017. (iv) Other Fixed assets of software unit mirrored at `140 lakh (` 200 lakh minus land value `60 lakh) is written down value of depreciable assets as per books of account. However, the written down value of these assets under section 43(6) of the Income Tax Act is `90 lakh. Ascertain the tax liability, which would arise from slump sale to S Limited [CMA- Inter Dec.2011] Answer: Computation of tax liability from slump sale of software unit for the assessment year 2017-2018 relating to the previous year 2016-2017 Particulars `(lakh) Sale consideration for slump sale of Software Unit 385 Less: Cost of acquisition being the net worth of Software Unit 185 Long term capital gains arising on slump sale 200 (The capital gains is long-term as the Software Unit is held for more than 36 months) Tax liability on LTCG 40.00 Under section 112 @ 20% on ` 200 lakhs 3.00 Add: Surcharge 7.5% 43.00 Add : Education Cess @2% and SHEC @ 1% ] 1.29 Tax payable 44.29 Note: (1) Computation of net worth of the software unit: ` (lakh) (1) Book value of non-depreciable assets: Land (Revaluation not to be considered) Debtors Inventories Written down value of depreciable assets under section 43(6) Aggregate value of total assets Less : Current liabilities of software unit Net worth of software unit

40 110 35 90 275 90 185

Note 2: For computing net worth, the aggregate value of total assets in the case of depreciable assets shall be the written down value of the block of assets as per section 43(6).

10.7

CAPITAL GAINS EXEMPT FROM TAX

Under Sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB and 54H capital gains on transfer of certain specified long-term capital assets are exempt. The conditions and the extent of exemption specified under these sections are discussed below: 1. Capital gains on transfer of residential house [Section 54]: Subject to the conditions mentioned below, capital gains on transfer of residential house is exempt from tax: (i) (i)The assessee is either an individual or a Hindu undivided family. (ii) The capital gains arise from the transfer of long-term capital asset, being a residential house or land appurtenant thereto. (iii) The income from such house property is chargeable under the head ―Income from house property‖. (iv) The assessee has purchased a residential house in India within a period of one year before or two years after the date of such transfer or has constructed a residential house within a period of three years after the date of such transfer. DIRECT TAXATION

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● Amount of exemption: If the above conditions are fulfilled, then the lower of the following amounts shall be exempt: (a) Actual amount of capital gains, or (b) Amount invested in a new residential house within the specified time. In other words, if the amount of capital gain is lower than the investment in the new residential house, then the entire amount of capital gains shall be exempt. On the other hand, if the amount of capital gain is more than the investment in the new residential house, then the difference between the amount of capital gains and the cost of the new house shall be taxable under Section 45 as the income of the previous year. ● Deposit in Capital Gains Account Scheme [Section 54(2)] : The amount of the capital gains which is not utilised by the assessee towards the purchase of the new residential house within one year before the date of transfer, or is not utilised for the purchase or construction of a new residential house before the date of furnishing return of income under Section 139, shall be deposited by him before furnishing such return in an account in any specified bank or institution under the Capital Gains Account Scheme, 1988. The return of income shall be accompanied by proof of such deposit. The amount, if any, already utilised by the assessee for the purchase or construction of the new assets together with the amount so deposited in the Capital Gains Account Scheme, shall be deemed to be the cost of the new house. If the amount deposited under the Capital Gains Account Scheme is not utilised wholly or partly for the purchase or construction of the new residential house within the specified time, then the amount not so utilised shall be charged under Section 45 as the income of the previous year in which the period of three years from the date of transfer expires. In this case, the assessee shall be entitled to withdraw such amount in accordance with the aforesaid scheme. ● Consequence of transfer of the new house: Where the new house purchased or constructed is transferred within a period of three years of its purchase or construction, then for the purpose of computing capital gains on such transfer, the cost of acquisition of the new house shall be reduced by the amount of capital gain which was exempt earlier. Such capital gains shall always be short-term capital gains. Example 10: R sells a residential building at Jodhpur for ` 15,00,000 on July 1, 2016. The building acquired for ` 1, 50,000 on June 1, 2005. She pays brokerage @ 2% at the time of sale off the building. She invests ` 7 lakhs in purchasing a residential building on December, ?? 2016 and deposits ` 2 lakhs under section 54EC in bonds of NHAI (Redeemable after 3 years) on March, ?? 2017. Compute the capital gain chargeable to tax for the assessment year 2017-18. [CMA- Inter Dec 2009] Answer: Computation of Capital gains of R for the assessment year 2017-2018 relating to the previous year 20162017. (`) Particulars Sales consideration 15,00,000 Less: Sales expenses (2% brokerage) 30,000 Net consideration 14,70,000 Less: Cost of Acquisition [ 1,50,000 x (1125/480)] 3,51,563 Long Term Capital Gain 11,18,437 Less: Exemption u/s 54 7,00,000 Less: Deduction u/s 54EC Nil 7,00,000 Taxable Long term capital gain 4,18,437 Note: Deduction u/s 54EC shall not be available unless investments are made within 6 months from the date of transfer of the capital asset. DIRECT TAXATION

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Example 11: K, an owner of 3 houses, sells a residential house property in Madurai for `12, 30,000 on 24th May, 2016. This house was purchased by him on 1st April, 2006 for ` 2,91,000. On 30th May, 2016 he purchased one flat in Bombay for ` 8,65,000 for the purpose of residence of his son-in-law. On 1st March, 2017, K sells the house in Bombay for ` 12,10,000. Compute the capital gains arising on the two transactions. Is K eligible for exemption under Section 54 in respect of the second sale? [Cost Inflation Index for the financial years 2006-2007 and 2016-2017 are 519 and 1125 respectively]. Answer: Computation of Capital gains of K for the assessment year 2017-2018 relating to the previous year 20162017. ` ` Particulars • Madurai: Sale considerations Less: Indexed cost of acquisition [` 2,91,000 x1125/ 519] Long-term capital gains Less : Exemption u/s 54 [Amount of capital gains or cost of the new flat, whichever is less) Taxable Long-term capital gains • Bombay Flat: Sale consideration

12,30,000 6,30,780 5,99,220 5,99,220 Nil 12,10,000

Less: Cost of acquisition [` 8,65,000 – ` 5,99,220) Short-term capital gains Less : Exemption u/s 54 [as it is a short-term capital gains] Taxable Short-term capital gains

2,65,780 9,44,220 Nil 9,44,220

2. Capital gains on transfer of agricultural land used for agricultural purposes [Section 54B]: Under Section 54B, a provision somewhat similar to Section 54 exists for granting exemption in respect of capital gains (whether short-term or long-term) from transfer of agricultural land. ● Conditions for exemption: To avail of the exemption under Section 54B, the assessee, being an individual, or a Hindu undivided family should fulfill the following conditions: (i) The capital gain does not arise as a result of transfer by way of compulsory acquisition under any law or as a result of consideration which is determined or approved by the Central Government or the Reserve Bank of India; such capital gains are exempt under Section 10(37). (ii) The agricultural land was used in the two years immediately preceding the date of transfer by the assessee or his parents for agricultural purposes; and (iii) The assessee has, within a period of two years after the date of such transfer, purchased another land for agricultural purposes. The land so purchased may be situated in rural or urban areas. ● Amount of exemption: The exemption under this section is equal to the amount of capital gains arising on transfer or the amount of investment in the new agricultural land within the specified time, whichever is lower. If the cost of the new land is less than the amount of capital gains, then the excess of the capital gains over the cost of the new land shall be charged under Section 45B as the income of the previous year. ● Deposit under the Capital Gains Account Scheme [Section 54B (2)]: Like the provisions of Section 54(2), the amount of capital gains which is not utilised by the assessee for the purchase of a new agricultural land before the date of furnishing return of income under Section 139, shall be deposited by him before furnishing such return of income in an account in any specified bank or institution under

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the Capital Gains Deposit Scheme, 1988. Such return of income shall be accompanied by a proof of such deposit. The amount, if any, already utilised by the assessee for the purchase of a new agricultural land, together with the amount so deposited in the aforesaid scheme, shall be deemed to be the cost of the new land purchased. If, on the other hand, the amount deposited under the Capital Gains Deposit Scheme is not utilised by the assessee for the purchase of a new agricultural land within the specified time of two years, then the amount not so utilised shall be charged under Section 45 as the income of the previous year in which the said period of two years, reckoned from the date of the transfer, expires. In this case, the assessee shall be entitled to withdraw such amount in accordance with the said deposit scheme.  Consequence of the transfer of the new land within a period of three years from the date of its purchase: In this case, the cost of acquisition of the new land shall be reduced by the amount of capital gains exempted earlier. The resulting capital gains shall be treated as short-term capital gains Example 12: An agricultural land purchased and used for agriculture since its purchase in October 2005 for ` 8,15,390, was sold by R in April, 2015 for ` 25,20,000. In December, 2015 he purchased another agricultural land worth ` 10,00,000. The new land was, however, sold in April, 2016 for ` 12,00,000. What will be amount of taxable capital gains in the hands of R for the financial years 2015-16 and 2016-17? Answer: Computation of capital gains and exemption u/s 54B for the assessment year 2016-2017 ` Sale considerations 25,20,000 Less: Indexed cost of acquisition [ ` 8,15,390 x 1024/ 497] 16,79,999 Long-term capital gains 8,40,001 Less: Deduction u/s 54B 8,40,001 Taxable capital gains Answer: Computation of capital gains and exemption u/s 54B for the assessment year 2017-2018 ` Sale considerations 12,00,000 Less: Cost of acquisition [ ` 10,00,000- 8,40,001] 1,59,999 Short-term capital gains Less: Deduction u/s 54B Taxable capital gains

`

Nil

`

10,40,001 Nil 10,40,001

Note: Since the new land is sold before a period of 3 years from the date of its purchase, at the time of computation of capital gain arising on transfer of the new agricultural land, the amount of capital gain claimed as exempt under section 54B will be deducted from the cost of acquisition of the new agricultural land. Applying this provision, the cost of acquisition of new land will be [` 12,00,000 – (10,00,000 – 8,40,001] = 10,40,001. 3. Capital gains on compulsory acquisition of lands and buildings [Section 54D]: Under Section 54D, exemption in respect of capital gains is available to any assessee who fulfils the following conditions: ● Conditions for exemption: (i) The capital gains (whether short-term or long-term), in respect of which exemption is sought, arises on transfer by way of compulsory acquisition under any law of any land, building or any right in land or building, which forms part of an industrial undertaking belonging to the assessee. (ii) Such assets were being used by the assessee for the purposes of the business of the said undertaking in the two years immediately preceding the date on which the transfer took place.

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(iii) The assessee has, within a period of three years after the date of such transfer, purchased any other land or building or any right in any other land or building or constructed any other building for the purpose of shifting or re-establishing the said undertaking or setting up another industrial undertaking. ● Amount of exemption: The amount of exemption under this section is restricted to the amount of capital gains arising on transfer of the aforesaid capital assets or the amount actually re-invested in the specified new assets, whichever is lower. In other words, if the amount of capital gains is less than the amount reinvested in the new assets, then the entire amount of capital gains is exempt. But, if the amount of re-investment in the new assets is less than the amount of capital gains, the difference between the capital gains and the amount reinvested in the new assets shall be taxable under Section 45 as income of the previous year. Such income, depending on the period of holding of the assets transferred, may be short-term or long-term capital gains. ● Deposit under the Capital Gains Account Scheme [Section 54D (2)]: The provision of deposit in Capital Gains Account Scheme, as discussed earlier, shall also apply in this case. 4. Exemption of capital gains on investment in certain special bonds [Section 54EC]: With effect from the assessment year 2001-2002, Section 54EC applies to any assessee where the capital gains arises from the transfer of a long-term capital asset and the assessee has, within a period of six months from the date of such transfer, invested the whole or any part of capital gains in the longterm specified assets. Amount of exemption: Actual exemption under Section 54EC shall be as follows: (i) Where the cost of the long-term specified asset is not less than the capital gains, then the entire amount of capital gains shall be exempt. (ii) Where the cost of the long-term specified asset is less than the capital gains, then the cost of the long-term specified asset shall be allowed as exemption. (iii) W.e.f. the assessment year 2015-16, the exemption under this section shall not be more than ` 50 lakh. ● Meaning of long-term specified asset: ―Long-term specified assets‖ means any bond redeemable after three years, which is notified by the Central Government with such terms and conditions as it thinks fit and issued on or after 1st April 2006 by: (a) the National Highways Authority of India (an institution constituted under Section 3 of National Highways Authority of India Act, 1988); or (b) the Rural Electrification Corporation Limited (a company formed and registered under the Companies Act, 1956). ●Consequence of transfer of long-term specified asset within three years from the date of its acquisition: Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money within a period of three years from the date of its acquisition, the amount of capital gain exempted earlier under Section 54EC shall be deemed to be income chargeable as long-term capital gains of the previous year in which such asset is transferred or converted (otherwise than transfer) into money. Point to note: On and from 1st April 2007, subject to a maximum limit of investment of ` 50 lakh per year, ―long-term specified asset‖ shall mean only the bonds, which are issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited. However, any bond, which is so notified by the Central government before 1st April 2007, shall be deemed to be a bond notified under this section. 5. Exemption of capital gains on investment in units of specified fund [ Section 54EE]: With effect from the assessment year 2017-18, subject to the following propositions, capital gains from transfer of long-term capital assets are exempt to the extent of the actual amount of such gains or the amount invested in the specified assets within six months from such transfer, whichever is less: DIRECT TAXATION

164

(a) the investment made on or after the 1st day of April, 2016, in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees: (b) the investment made by an assessee in the long-term specified asset, from capital gains arising from the transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees; (c) where the long-term specified asset is transferred by the assessee at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under Section 45 on the basis of the cost of such long-term specified asset as above, shall be deemed to be the income chargeable under the head ―Capital gains" relating to long-term capital asset of the previous year in which the long-term specified asset is transferred. (d) In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have transferred such specified asset on the date on which such loan or advance is taken. [Explanation 1] For the purpose of this Section, ―long-term specified asset" means a unit or units, issued before the 1st day of April, 2019, of such fund as may be notified by the Central Government in this behalf. [Explanation 2(b)] 6. Exemption of capital gains on transfer of certain capital asset, when reinvestment is made in residential house property [Section 54F]: Section 54F applies to capital gains arising from the transfer of any long-term capital asset (other than a residential house) which is reinvested for acquisition of a residential house within the specified time. Conditions: Section 54F applies where the following conditions are fulfilled: (i) The assessee is an individual or a Hindu undivided family. (ii) The capital gains arise from the transfer of any long-term capital asset, except a residential house. (iii) The assessee has, within a period of one year before or two years after the date of transfer of the capital asset, purchased a residential house or has constructed a residential house in India within a period of three years from the date of such transfer. (iv) On the date of transfer, the assessee does not own more than one residential house, other than the new house purchased or constructed. (v) The assessee does not purchase any residential house, other than the new house, within a period of one year after the date of transfer of the capital asset, or does not construct any residential house, other than the new house, within a period of one year after the date of transfer of the capital asset, or does not construct any residential house, other than the new house, within a period of three years after the date of transfer of the capital asset. (vi) the income of the residential house, so purchased or constructed, is chargeable under the head ―Income from house property‖. Amount of exemption: The amount of exemption under this section is: (i) Where the cost of the residential house is not less than the net consideration of the capital asset transferred, the entire amount of capital gains is exempt. (ii) Where the cost of the residential house is less than the net consideration in respect of the capital asset transferred, the amount of exemption shall be as follows:

 

Scheme of deposit under the Capital Gains Account Scheme: The provision of deposit in Capital Gains Account Scheme, as discussed earlier, shall also apply in this case also. Withdrawal of exemption: In the following cases, the exemption which has been allowed to the assessee under Section 54F may be withdrawn: DIRECT TAXATION

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(i)

Where the assessee purchases, within a period of two years after the date of transfer of the capital asset or constructs within a period of three years after such date any residential house, other than the new house, the income from which is chargeable under the head ―Income from house property‖, the amount of capital gains exempted earlier u/s 54F shall be chargeable as long-term capital gains of the previous year in which such residential house is purchased or constructed. (ii) Where the new house purchased (for which exemption under Section 54F has been claimed) is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains, which was exempted u/s54F, shall be deemed to be income chargeable as longterm capital gains of the previous year in which such new house is transferred. 7. Exemption of Capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area [Section 54G]: Exemption under Section 54G is available to any assessee in respect of capital gains, both short-term or long-term, on the transfer of certain capital assets of an industrial undertaking effected to shift it from urban area to any area, other than the urban area. ● Conditions: The conditions for claiming exemption under this section are as follows: (i) The assets transferred consist of machinery or plant or building or land or any rights in building used for the purposes of the business of an industrial undertaking, which is situated in an urban area. (ii) The aforesaid assets are transferred in connection with the transfer of the undertaking from an urban area to any area, other than an urban area. (iii) Any urban area for this purpose means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries and other relevant factors, by general or special order, declare to be an urban area. (iv) (iii)The assessee has within a period of one year or three years after the date of such transfer: (a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area in which the said undertaking is shifted; (b) acquired building or land or constructed building for the purposes of his business in the said area; (c) shifted the original asset and transferred the establishment of such undertaking to such area; and (d) incurred expenses on such other purposes as may be specified in a scheme framed by the Central Government for this purpose. ● Amount of exemption: Actual exemption under this section is equal to the amount invested for the purposes mentioned under (a) to (d) above, or, the amount of capital gains, whichever is lower. ● Deposit under Capital Gains Account Scheme: The provision of deposit in Capital Gains Account Scheme, as discussed earlier, shall also apply in this case also.  Consequence of transfer of the new asset within three years: If the new asset is transferred within a period of three years of its being purchased, acquired or constructed, the cost of such asset shall be reduced to nil and the capital gains so computed shall be chargeable as the income of the previous year in which such new asset is transferred. Such gain shall always be regarded as short-term capital gains. 8. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone [Section 54GA]: Section 54GA has been inserted by the Special Economic Zones Act 2005, w.e.f. 10th February 2006. The provisions of this section are as under:  Conditions of exemption: Exemption under this section is available subject to the fulfillment of the following conditions:

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(a) The assessee, being an industrial undertaking situated in an urban area, has transferred capital assets comprising machinery or plant or building or land or any rights in any building or land used for the purpose of business the industrial undertaking.

(b) The aforesaid transfer of capital asset is in consequence of shifting the industrial undertaking to any Special Economic Zone developed in any urban area or any other area.

(c) The assessee has, either within one year before or three years after the date of transfer of the capital assets: (i) purchased machinery or plant for the purpose of business of the industrial undertaking in the Special Economic Zone; (ii) acquired building or land or constructed building for the purpose of his business in the Special Economic Zone; (iii) shifted the original asset and transferred the establishment of such undertaking to the Special Economic Zone; and (iv) incurred expenses on such other purposes as may be specified by the Central Government.  Amount of exemption: If the aforesaid conditions are fulfilled, then the lower of the following amount shall be exempt:

(a) Actual amount of capital gains; or (b) Amount invested in the new asset within the specified time. In other words, if the amount of capital gains does not exceed the amount invested in the new assets, then the entire amount of capital gains shall be exempt. However, if the amount capital gains are more than the amount invested in the new asset, then, the excess of capital gains over the investment in the new assets shall be taxable under Section 54GA as the income of the previous year.  Special deposit scheme: If the amount of capital gain is not utilised by the assessee, either within one year before the date on which the original asset was transferred or before the due date of submission of return u/s 139(1), for all or any of the purposes mentioned in Sl. No. (i) to (iv) above, then, the amount of capital gains shall be deposited in an account in any such bank or institutions and utilised in accordance with a scheme as may be framed by the Central government. If the amount deposited is not utilised within the specified period for the purposes mentioned in Sl. No. (i) to (iv) above, then, the amount not so utilised shall be charged as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires. The assessee in that case shall be entitled to withdraw the amount from the special deposit account. 9. Exemption from capital gains on investment in small or medium enterprise [Section 54GB]: Section 54GB is inserted to provide relief from long-term capital gains tax to an individual or an HUF on sale of a residential property (house or plot of land) in case of reinvestment of sale consideration in the equity of a newly set up SME company in the manufacturing sector which is utilized by the company for the purchase of new plant and machinery. Conditions of exemption: The exemption under Section 54GB is subject to the following conditions and propositions: (i) the amount of net consideration is used by the individual or HUF before the due date of furnishing of return of income under Section 139(1), for subscription in equity shares in the SME company in which he holds more than 50% share capital or more than 50% voting rights. (ii) The amount of subscription as share capital is to be utilized by the SME company for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares. [with effect from AY 2017-18, new assets shall include computers and computer software]. (iii) If the amount of net consideration subscribed as equity shares in the SME company is not utilized by the SME company for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the unutilized amount is deposited under a deposit scheme to be prescribed in this behalf.

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(iv) The exemption would be available in case of any transfer of residential property made on or before 31st March, 2017 (for eligible start-up defined in section 80-IAC extended up to 2019). Amount of exemption: The exemption shall be as under: (i) If the amount of the net consideration is greater than the cost of the new asset, then, so much of the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under Section 45 as the income of the previous year. (ii) If the amount of the net consideration is equal to or less than the cost of the new asset, the capital gain shall not be charged as the income of the previous year. Consequence of transfer of shares/new assets within five years: If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property not charged to tax shall be deemed to be the income of the assessee chargeable under the head ―Capital gains‖ of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be. 10. Treatment of short-term capital loss and long-term capital loss: See Chapter on Set off and Carry Forward of losses. Example13. D sold a residential building at Cochin for ` 65 lakhs in December 2016. The stamp valuation authority determined the value at ` 80 lakhs which was not contested by D. The property was acquired in April, 2005 for ` 6 lakhs. He acquired a residential flat at Ranchi for ` 55 lakhs and another residential house at Cuttack for ` 25 lakhs before March, 2017. Compute the capital gain of D for the assessment year 2017-18. Note: Financial Year Cost Inflation Index 2005-06 497 2016-17 1125 You are required to plan in such a way that the incidence of tax is the least.

[CMA Inter- June 2015]

Answer: Computation of capital gains of D for the assessment year 2017-18 relating to the previous year 2016-17 ` Particulars Sale consideration of residential building at Cochin Stamp Valuation Authority has determined the value at The higher of the two is to be adopted as deemed sale consideration u/s 50C Less: Indexed Cost of Acquisition [` 6,00,000 x (1125/497)] Long-term capital gains Less: Exemption U/s 54: In respect of residential property acquired in Ranchi Taxable Long-term capital gains

65,00,000 80,00,000 80,00,000 13,58,149 66,41,851 55,00,000 11,41,851

Note: Under Section 54, exemption is limited to one residential house in India. Out of the two residential houses acquired by him, he can option for exemption under Section 54 in respect of one property only. The higher of the values has been adopted for maximizing the benefit to assessee. Example 14. S furnishes the following particulars for the previous year 2016-17: A plot of land was sold on 19.7.2016 for ` 35,00,000. He paid brokerage on its sales at one percent. He had purchased this plot on 20.12.1990 for ` 4,20,000. On 1.2.17, he had purchased a residential house

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for ` 18,00,000. He owns another residential house, purchased on 8.7.12. The cost of inflation index for financial years 1990-91 and 2016-17 are 182 and 1125 respectively. (a) Find out the amount of capital gains chargeable to income tax. (b) Suppose S sells the new additional residential house on 1.1.2019, what will be the taxable amount of capital gains and in which year will it be charged to tax? (c) Is the same short-term or long-term in nature? [CMA Inter- June 2011] Answer: (a) Computation of capital gains of S for the assessment year 2017-18 relating to previous year 2016-17: ` ` Particulars Sale consideration Less: Brokerage @1% Net sale consideration Less: Indexed cost of acquisition [` 4,20,000 x (1125/182)] Long-term capital gains Less: Exemption u/s 54F [(18,00,000/34,65,000) x 8,68,846] Taxable long-term capital gains

35,00,000 35,000 34,65,000 25,96,154 8,68,846 4,51,349 4,17,497

(b) As per section 54F, if the assessee sells the house within 3 years of its purchase, the amount of capital gains which was earlier exempt will be taxed in the year in which the house is sold. If S sells his house on 1.1.2019 i.e. before expiry of 3 years from the date of purchase, the amount of ` 4,51,347 which is given as exemption in assessment year 2018-19 will be withdrawn and consequently taxed in the assessment year 2019-20. (c) If Mr. S purchases another residential house within 2 years of sale of original house, then exemption will be withdrawn and amount earlier exempted u/s 54F will be taxable as Long-term capital gain in the assessment year 2019-20. Example 15: B acquired a house property in March, 1981 for ` 2 lakhs. The fair market value as on 01.04.1981 was ` 3,40,000. He gifted the property to his son R in December 2001 when the fair market value was ` 10 lakhs. R entered into a sale agreement in January 2014 and received ` 1 lakh from R which was subsequently forfeited as the buyer R did not fulfill the commitment. In June, 2016 an agreement was made for sale of property with D and a sum of `2 lakh was received as advance. This advance was also forfeited by R due to failure of D. Finally R sold the property to P for ` 90 lakhs in January, 2017.He started construction of a residential house in August, 2016 and incurred ` 10 lakhs till March, 2017. R subscribed to REC bonds for `30 lakhs in March, 2017 and wished to invest the balance amount in construction of residential house in the financial year 2017-18 in such a way that his Income from Capital Gains reduce to ‗NIL‘. Compute his income under the head capital gains‘ for the assessment year2017-18. Cost Inflation Index: Financial Year Cost inflation index 1980–1981 100 2001-2002 426 2013-2014 939 2016-2017 1125 [CMA Inter- June 2015] DIRECT TAXATION

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Answer: Computation of capital gains of R for the assessment year 2017-18 relating to previous year 2016-17: ` ` Particulars Sale consideration Less: Indexed cost of acquisition [` 3,40,000 x 1125/*426] (Note 1] Long-term capital gains Less: Exemption u/s 50EC for REC Bond Less: Exemption u/s 54 for construction of new house Taxable capital gains

90,00,000 8,97,887 81,02,113 30,00,000 51,02,112

81,02,113 Nil

Note 1: Since the property is inherited by R from his father, indexation is done with reference to the FMV as on 1.4.81 or actual cost whichever is higher. However, the indexation benefit is available with reference to the time when R became the owner. However, if the judgment of the Bombay High Court in CIT v. Manjula J Shah (2012) is adopted, the indexation benefit shall be available with reference to the year in which the previous owner first became the owner (Here with reference to 1.4.1981. In accordance with this judgment the answer would be as under: ` ` Particulars Sale consideration 90,00,000 Less: Indexed cost of acquisition [ ` 3,40,000 x 1125/*100] (Note 1] 38,25,000 Long-term capital gains 51,75,000 Less: Exemption u/s 50EC for REC Bond 30,00,000 Less: Exemption u/s 54 for construction of new house 21,75,000 51,75,000 Taxable capital gains Nil Note 2: Amount forfeited after 1.4.2014 shall be taxable as income from other sources. It will no longer be deducted from cost of acquisition. Example 16: During the previous year 2016-2017 R sells the following capital assets: [not yet checked] Asset Sale Proceeds Cost of acquisition Year of acquisition Fair market Value as on 1.4.81 Land Gold Debentures

1,80,00,000 24,07,000 1,57,000

12,00,000 2,20,000 75,000

1980 1980 1976

15,00,000 2,00,000 40,000

Assuming that his business income is `1,46,000, determine his net income for the assessment year 20172018. Cost Inflation Index – F.Y 2016-17: 1125 Answer: Computation of net income or total income of R for the assessment year2017-2018 relating to the previous year 2016-2017: ` ` ` Particulars Profits and gains of business or profession 1,46,000 Capital Gains: (a) Long-term capital gains on transfer of land: Sale Consideration 1,80,00,000 Less: Indexed Cost of Acquisition 1,68,75,000 (+)11,25,000 ` 15,00,000 x (1125/100) (Note 1) (b) Long-term capital gains on transfer of gold: Sale consideration 24,07,000 Less: Indexed cost of acquisition 24,75,000 (-)68,000 DIRECT TAXATION

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` 2,20,000 x (1125/100) (Note 2) (c) Long-term capital gains on transfer of debentures: Sale Consideration Less: Cost of Acquisition (Note 3) Total Income/Net Income

1,57,000 75,000

(+)82,000

11,39,000 12,85,000

Notes: (1) At the option of the assessee, the fair market value of the land as on 1.4.1981 has been taken to be the cost of acquisition and it is this cost which has been further indexed. (2) At the option of the assessee, the higher of actual cost or fair market value of gold on 1.4.1981 has been taken to be the cost of acquisition. The indexation has been done with reference to the CII for 1981-82=100 and 2016-2017=1125. (3) Indexation of cost of debenture is not allowed. Example 17: A Ltd., an Indian company furnishes the following particulars of its income/ assets/investments for the previous year 2016-2017: `1,00,000 (a) Business income before depreciation (b) Sale of shares (privately transferred) in September, 2016 (purchased in April, 2013 for `60,000)

`61,350

(c) Sale of land in December, 2016 (purchased in April, 2008 for ` 5,00,000)

`13,00,361

(d) Written down value of plant and machinery ` 20,00,000

Used in business on 1.4.2016 Machinery purchased in July, 2015

` 4,00,000

Machinery sold in November, 2016

` 6,00,000

(e) Out of the sale proceeds of land `4,00,000 was Invested in the special account under Capital Gains Deposit Scheme in March, 2017. Answer: Compute total income of the company for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` ` Particulars • Profits and gains of business or profession: Business income before depreciation 1,00,000 Less : Depreciation as per IT Rules (Note 1) Business income (unabsorbed depreciation) • Capital gains : (a) Long-term capital gains on transfer of shares: (Note 2) Sale consideration Less: Indexed cost of acquisition [` 60,000x 1125/939] (b) Long-term capital gains on sale of land : Sale consideration Less : Indexed cost of acquisition [` 5,00,000 x 1125/582] Less : Exemption under Section 54E (Note 3) (provide note 3)

2,70,000 (-)1,70,000 61,350 71,885

(-) 10,535

13,00,361 9,66,495 3,33,866

3,33,866

3,23,331

Nil

Gross total income

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Less : Deductions under Sections 80C to 80U Total income

Nil 1,53,330

Notes: (1) Depreciation as per IT Rules : WDV of Plant and Machinery as on 1.4.2016 Add : Purchase during the year Less : Sales during the year WDV for the purpose of depreciation Depreciation @ 15%

` 20,00,000 4,00,000 24,00,000 6,00,000 18,00,000 2,70,000

2. Since the shares are privately transferred, the benefit of exemption u/s 10(38) will not be available. Section10(38) applies only if the shares are transacted in a recognised stock exchange in India on or after 1st October, 2004 and such transactions are subjected to securities transaction tax. 3. Capital assets transferred after 31st March 1992 are not eligible for exemption under Section 54E. Multiple Choice Questions: 1.

Which of the following transaction is not regarded as transfer? a) Conversion of asset into stock in trade b) Maturity of a Zero Coupon Bond c) Any distribution of capital asset of a HUF among its member at the time of partition d) Exchange of land for gold Ans. (c): Any distribution of capital asset of a HUF among its member at the time of partition 2.

Cost of Inflation Index for 2016-17 isa) 785 b) 1125 c) 852 d) 711 Ans. (b): 1125. 3.

Short term capital gain covered u/s 111A isa) Exempt b) Taxable at general rate applicable to the assessee c) Taxable @ 15% d) Taxable @ 10% Ans: (c) Taxable @ 15% 4.

Deduction u/s 54GB is available to a) Individual b) HUF c) Individual & HUF d) All assessee Ans. (c) : Individual & HUF. 5.

Deduction u/s 54GB is available against transfer of: a) Long term capital asset being residential property b) Any capital asset being residential property c) Any long term capital asset d) Long term capital asset other than residential property Ans. Long term capital asset being residential property DIRECT TAXATION

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6.

Where the entire block of the depreciable asset is transferred after 36 months there will bea) Short term capital gain b) Short term capital gain or loss c) Long term capital gain d) Long term capital gain or loss Ans. (b) Short term capital gain or loss 7.

The exemption under section 54 shall be availablea) To the extent of capital gain invested in the house property b) Proportionate to the net consideration price invested c) To the extent of amount actually invested d) None Ans. (a) To the extent of capital gain invested in the house property 8.

Exemption u/s 10(37) is available to— a) An individual or an HUF b) An individual c) All assessee d) HUF Ans. (a): An individual or an HUF 9.

As per section ……… long-term capital gain arising on transfer of equity shares or units of equity oriented mutual fund or units of business trust is not chargeable to tax in the hands of any person, if specific conditions are satisfied in this regard: (a) 10(18) (b) 10(28) (c) 10(38) (d) 10(48) Ans. (c) 10(38). 10. Generally, long-term capital gain is charged to tax @ ……. (plus surcharge and cess as applicable). (a) 10% (b) 15% (c) 20% (d) 30% Ans. (c) 20%.

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STUDY NOTE - 11 INCOME FROM OTHER SOURCES [SECTION 56-59] THIS STUDY NOTE INCLUDES: 11.1 Chargeability 11.2 Method of Accounting 11.3 Incomes that are taxable under this head [Section56] 11.4 Taxability of cash, immovable property or other movable property received without any consideration [Section 56(2)(vii)] 11.5 Taxability of share premium in excess of the fair market value [Section 56(2) (viib)] 11.6 Other incomes which are chargeable under this head 11.7 Tax treatment of dividend [Section 56(2)] 11.8 Tax treatment of winnings from lotteries, crossword puzzles, horseracing, etc. 11.9 Interest on securities 11.10 Family pensions 11.11 Deductions from income under the head ―Income from other sources‖ [Section 57] 11.12 Expenditure expressly disallowed [Section 58

11.1

CHARGEABILITY

―Income from other sources‖ is the fifth and the residuary head. It includes every other income which is not covered under any of the first four heads and which is not exempt under the provisions of Sections 10 to 13A of the Act. In other words, to attract chargeability under this head, the following conditions should be satisfied: (a) There must be an income. (b) The income is not exempt from tax; and (c) Such income is not chargeable to tax under any of the first four heads of income.

11.2

METHOD OF ACCOUNTING

According to Section 145, income chargeable under this head shall be computed in accordance with either cash or mercantile basis of accounting regularly employed by the assessee. Thus, if the books of account are maintained under cash basis, the income is to be taxed on cash basis and deductions from the income can be claimed on payment basis. The department cannot force the assessee to maintain the books of account under the mercantile system. Where no method of accounting has been regularly employed, an assessee should not be assessed in respect of the money that has not been received [IR vs. Whitworth38TC531]. With effect from the assessment year 2016-17, computation of income under the head ―Profits and gains of business or profession‖ and ―Income from other sources‖ shall be subjected to Income Computation and Disclosure Standards [See notification No.32/2015, F. No. 134/48/2010-TPL, dated 31st March, 2015]

11.3

INCOMES THAT ARE TAXABLE UNDER THIS HEAD [SECTION56] DIRECT TAXATION

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In accordance with the provisions of Section 56(2), the following specific incomes shall be chargeable under this head: (i) dividends (other than dividends received from domestic company); (ii) any winnings from lotteries, cross word puzzles, races, including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever; (iii) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund setup under the provisions of the Employees‘ State Insurance Act, 1948 or any other fund for the welfare of such employees, provided that it is not taxable under the head ―Profits and gains of business or profession‖; (iv) Income by way of interest on securities, if it is not chargeable under the head ―Profits and gains of business or profession‖; (v) Income from machinery, plant or furniture belonging to the assessee and let on hire, if it is not chargeable under the head ―Profits and gains of business or profession‖. (vi) Income resulting to an assessee who lets on hire machinery, plant or furniture belonging to him and also building, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, provided that it is not chargeable under the head ―Profits and gains of business or profession‖; (vii) any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy, if it is not chargeable under the head ―Profits and gains of business or profession‖. (viii) any income by way of interest received by an assessee on compensation or enhanced compensation referredtoinSection145A(b). (ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if such sum is forfeited and the negotiations do not result in transfer of such capital asset [Section 2(56(ix) w.e.f. the assessment year 2015-2016].

11.4

TAXABILITY OF CASH, IMMOVABLE PROPERTY OR OTHER MOVABLE PROPERTY RECEIVED WITHOUT ANY CONSIDERATION [SECTION 56(2)(VII)]:

With effect from the financial year 2006-2007, The Taxation Laws (Amendment) Act, 2006 has inserted Section 56(2)(vi) to provide that where any sum of money exceeding `50,000 [ `25,000 from 1.9.2004 to 31.3.2006: vide Section 56(2)(v)] is received without consideration by an individual or a Hindu undivided family from a person on or after 1st April 2006, the whole of such sum shall be treated as the income of such individual or the Hindu undivided family. Now, with effect from 1.10.2009, with a view to widening the ambit of taxation, Finance (No. 2) Act, 2009 has inserted Section 56(2) (vii) to cover the receipt by an individual or Hindu undivided family of any immovable property or any other property exceeding a value of ` 50,000. The taxability of receipt of such immovable property or other movable property is over and above the cash receipt mentioned above and is subject to the following conditions and propositions: A. Cash receipt without any consideration [Section 56(2)(vi)(a)]: Cash receipt up to `50,000 is exempt. For cash receipt exceeding `50,000, the entire sum is taxable. Multiple gifts coming under this clause to be aggregated to arrive at the limit of `50,000. B. Immovable property [Section 56(2) (vi)(b)]: (i) If without any consideration: If the stamp duty value of the property exceeds `50,000, the entire sum is taxable. (ii) If received for a consideration -which falls short of stamp duty value by more than `50,000: The excess of the stamp duty value over the consideration received is taxable. Where the consideration or part of it is paid in a mode other than cash, and the date of agreement and the date of registration are different, it is the date of agreement which shall be taken into reckoning.

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Aggregation of multiple transactions not required under this clause. Each transaction is to be treated separately for arriving at the limit of `50,000. [Pro-vision as amended from the A.Y.2014-15].C Any other property [Section 56(2)(vi)(c)(i)]: If received without any consideration: If the fair market value of the property exceeds `50,000, the entire fair market value of the property is taxable. Any other property [Section 56(2)(vi)(c)(ii)]: If received for a consideration which falls short of the fair market value by more than `50,000: The excess of the fair market value over the consideration received is taxable. Multiple transactions are required to be aggregated to arrive at the limit of `50,000

Sl. No. (i)

(ii)

(iii)

(iv)

Examples: A receives `15,000 on 1-10-2016 from B, ` 20,000 from C on 10-12-2016 and ` 30,000 from D on 11-1-2017, without consideration. In this case, although each gift is below the limit of ` 50,000, the entire sum of ` 65,000 shall be taxable at the hands of A during the assessment year 2017-18. Section 56(2)(vi)(a) requires multiple gifts to be aggregated. A receives as a gift from B an agricultural land having a stamp duty value of `45,000. He also receives as gift a piece of land meant for residential use from B. The value of the land is ` 1,00,000. In this case only `1,00,000, being the value of the residential plot, shall be treated as income of A. Section56(2)(vi)(b) does not require aggregation of multiple transactions. On the occasion of her birthday, A receives gift of jewellery from Mr. B, C and D respectively, having a fair market value of ` 35,000, ` 25,000 and ` 20,000. Here although each transaction is below ` 50,000, the aggregate amount of `80,000 shall be treated as income from other sources at the hand of Mrs. A. Under Section 56(2)(vi)(c) multiple transactions are required to be aggregated to arrive at the taxable limit of `50,000. A receives from B as gift or without consideration ` 20,000 in cash, from C jewellery worth ` 35,000. He also received as gift an immovable property worth ` 48,000 from D. Here the first item comes under clause(a) of Section 56(2)(vii).Second item comes within the purview of clause (c), while the last item comes within the purview of clause (b). Section 56(2)(vii) does not contemplate aggregation of items under different clauses in order to arrive at the taxable limit of `50,000. Since none of the transactions are exceeding ` 50,000, they would not be taxable.

 Exceptions: The aforesaid provision shall not apply to the following cases: A. Gifts from any relative: Any gift in cash or movable or immovable property received from any relative specified below is not taxable. B. Gifts on the occasion of the marriage: Any gift in cash or movable or immovable property received on the marriage of the individual, whether from the specified relatives or other persons and irrespective of the quantum of value, is not taxable. C. Gifts under a will or by way of inheritance: Any gift received from any person under a will or by way of inheritance, whether in cash or in kind, is not taxable. D. Gifts in contemplation of death of the payer: Any gift in cash or in property of any kind received from any person (whether relative or not) in contemplation of the death of the payer is not taxable. E. Sum received from specified institutions: Any sum received from a local authority or from any fund or foundation or university or other educational institution or hospital or other medical institution or any other trust or institution referred to in Section 10(23C) or institution registered under Section 12AA.  Meaning of relative: The expression ―relative‖ mentioned above means: (A) In the case of an individual (a) Spouse of the individual; DIRECT TAXATION

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(b) Brother or sister of the individual; (c) Brother or sister of the spouse of the individual; (d) brother or sister of either of the parents of the individual; (e) any lineal ascendant or descendant of the individual; (f) any lineal ascendant or descendant of the spouse of the individual; (g) spouse of the persons referred to in (b)to(f)above. (B) In the case of a Hindu undivided family, any member thereof.

 Meaning of property: The expression ―property‖ means: (i) immovable property being land or building or both; (ii) shares and securities; (iii) Jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion 

Meaning of ―Jewellery‖: Refer to para 11.2, Study Note 10.

Taxability of shares received for inadequate or without consideration [Section 56(2)(viia)]: With effect from the assessment year 2010-11, the scope of Section 56(2) has been widened to bring within its ambit transactions undertaken in shares of a company (not being a company in which the public are substantially interested) where the recipient is a firm or a company (not being a company in which the public are substantially interested). Accordingly, a new clause (viia) has been inserted with effect from 1st June 2010 so as to include in the taxable income of the aforesaid assesses the following amounts: (a) Where the transaction is without consideration and the aggregate fair value of the shares so transferred exceeds `50,000, the whole of the aggregate fair value of the shares. (b) Where the transaction is for a consideration which is less than the aggregate fair value of the shares so transferred by an amount exceeding ` 50,000, the excess of the aggregate fair value of the shares over the consideration so paid.  Exceptions: The aforesaid provisions shall not apply to the following cases where: (a) The transfer of shares is made pursuant to a scheme of amalgamation referred to in Section 47(via) or Section 47(vii); or (b) The transaction is made in a demerger referred to in Section 47(vic) or Section 47(vid); or (c) The transaction is made pursuant to a business reorganization referred to in Section47 (vicb).

11.5

TAXABILITY OF SHARE PREMIUM IN EXCESS OF THE FAIR MARKET VALUE [SECTION 56(2) (VIIB)]

Under the provisions of section 56(2)(viib) share premium received by a company in excess of its fair market value shall be chargeable to tax under the head ‗Income from other sources‘, provided that the following conditions are satisfied : (i) it is received by a company in which public are not substantially interested; (ii) the premium is from a resident; DIRECT TAXATION

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(iii) the issue price of shares exceeds the face value of such shares. The provision of this newly inserted clause, however, does not apply to: (i) a venture capital undertaking receiving the consideration for issue of shares from a venture capital company or a venture capital fund; and (ii) a company receiving the consideration from a class or class of persons (‗Notified persons‘) as may be notified by Central Government.

11.6

OTHER INCOMES WHICH ARE CHARGEABLE UNDER THIS HEAD

The list of incomes provided under Section 56, which are chargeable under this head, is not exhaustive. The following are the instances of other incomes which are chargeable under this head: (i) income from subletting ; (ii) casual income ; (iii) interest on bank deposits or deposits with companies, or loans ; (iv) insurance commission ; (v) directors‘ fees ; (vi) family pensions ; (vii) ground rent ; (viii) agricultural income from land situated outside India ; (ix) income from vacant land ; (x) income from undisclosed sources ; (xi) remunerations of the Member of Parliament ; (xii) examiner‘s fees received by a teacher from institutions other than his employer ; (xiii) interest on securities of foreign Governments ; (xiv) income from royalty, if not charged under the head ―Profits and gains of business or profession‖; (xv) income from fisheries ; (xvi) interest on employee‘s contribution to the unrecognised provident fund ; (xvii) gratuity received by a director, who is not an employee of the company ; (xviii) income from racing establishments ; (xix) income from granting of grazing rights ; (xx) director‘s commission for standing guarantor to bankers or for underwriting shares of a new company ; (xxi) income received after discontinuation of business ; (xxii) annuity payable under will or contract or trust deed (not being annuity from the present or former employer) ; (xxiii) annuity payable to the lender of trademark ; (xxiv) interest on tax refunds u/s 214; (xxv) interest earned prior to commencement of business ; (xxvi) income from hoardings on business premises.

11.7

TAX TREATMENT OF DIVIDEND [SECTION 56(2)]

Dividends declared by a domestic company or any dividend or income declared by the Unit Trust of India are exempt u/s 10(34) and 10(35) respectively. However, dividends declared by a foreign company or loans and advances made by a company to certain categories of shareholders covered under Section 2(22)(e) are taxable.

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Under Section 2(22)(e), dividend, which attracts the provision of Section 56(2), includes any payment by a company, not being a company in which public are substantially interested, of any sum (whether representing a part of the assets of the company or otherwise), not exceeding the accumulated profits of the company, by way of loan or advances to : (a) any equity shareholder who is the beneficial owner of shares holding not less than 10% of the voting rights; (b) any concern in which the aforesaid shareholder is a member or a partner and in which he has substantial interest; (c) any person, on behalf of, or for the individual benefit of such shareholder.

11.8

TAX TREATMENT OF WINNINGS FROM LOTTERIES, CROSSWORD PUZZLES, HORSERACING, ETC.

Under Section 2(24) (ix), any 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 is chargeable to tax under the head ―Income from other sources‖. W. e. f. the assessment year 20022003, lottery includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any other scheme or arrangement by whatever name called, and card game and other games of any sort includes any game show, an entertainment programme on television or electronic mode in which people compete to win prizes or any other similar game. In view of deletion of Section 10(3) from the assessment year 2003-2004, the entire amount of such income shall be charged to tax u/s 115BB at a flat rate of 30% plus education cess @ 3% (including 1% secondary and higher education cess) on tax (See Appendix I) without claiming any deduction under Sections 80C to 80U. Grossing up net winnings from lotteries, etc.: Under Section 194B and 194BB, the person responsible for paying to any person any income by way of winnings from lotteries, etc., for an amount exceeding `10,000 (or `5,000 in case of winnings from races including horse races) has to deduct tax at source @ 30% plus education cess (including secondary and higher education cess). The net amount received by the assessee has to be grossed up to find out the amount which is chargeable to tax. The gross amount shall be determined as follows: Net amount

1- 30%  education cess 11.9

INTEREST ON SECURITIES

Income by way of interest on securities is chargeable to tax under the head ―Income from other sources‖, if such income is not already charged under the head ―Profits and gains of business or profession‖. Interests on securities are taxable either on receipt basis or accrual basis, depending on the methods of accounting regularly used by the assessee.  Interests exempt from tax [Section10(15)]: By virtue of Section 10(15), interests earned from the following securities, bonds and certificates are exempt from tax: (a) income by way of interest, premium on redemption or other payments on 12 Year National Savings Annuity Certificates ; National Defence Gold Bonds, 1980 ; Special Bearer Bonds, 1991; 10-Year Treasury Savings Deposit Certificates ; Post Office Cash Certificates (5 years) ; National Plan Certificates (10 years) ; National Plan Savings Certificates (12 years) ; Post Office National Savings Certificates (12 years/7 years); Post Office Savings Bank Accounts ; Public Account of Post Office DIRECT TAXATION

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(b) (c) (d)

(e) (f)

(g) (h) (i)

(j)

(k)

(l)

(m) (n)

(o) (p) (q)

(r) (s) (t)

Savings Account Rules (interest up to ` 5000) ; Post Office CTD ; Fixed deposits governed by the Government Savings Certificates (Fixed Deposit) Rules, 1968, Special Deposit Scheme, 1981 ; Nonresident (Non-reparable) Rupee Deposit Scheme ; interest on notified Capital Investment Bonds, in case of individual and Hindu undivided family; No such bond shall be notified by the Government on or after 1st June, 2002 ; interest on 9% or 10% Relief Bonds, in case of individual and Hindu undivided family ; interest on notified bonds (no such shall be notified by the Government on or after 1st June, 2002) arising to a non-resident Indian or an individual owning the bonds as a nominee or survivor of the non-resident Indian or a person who has received these bonds as a gift from the non-resident Indian, provided that the aforesaid bonds are purchased by the non-resident Indian in foreign exchange and the interest and principal amount of the bonds are not taken out of India; interest on securities held by the Issue Department of the Central Bank of Ceylon ; interest payable to any bank incorporated in a country outside India and authorized to perform central banking functions in that country on any deposit made by it, with the approval of the Reserve Bank of India, with any scheduled bank; interest payable by Government or a local authority on moneys borrowed by it before the 1st day of June, 2001 from or debts owed by it before the 1st day of June, 2001 to, sources outside India; interest payable by an industrial undertaking in India on moneys borrowed by it under a loan agreement entered into with any approved financial institution; interest payable by an industrial undertaking in India on moneys borrowed or debt incurred by it before the 1st day of June, 2001 in foreign currency for purchase outside India of raw materials or components or capital plant and machinery; interest payable by the Industrial Finance Corporation of India or Industrial Development Bank of India or Export-Import Bank of India or the National Housing Bank or the Small Industries Development Bank of India or the Industrial Credit and Investment Corporation of India on moneys borrowed by it before 1st June, 2001, from sources outside India; interest payable by any other financial institution established in India or a banking company on any money borrowed by it before 1st June, 2001, from sources outside India under a loan agreement approved by the Central Government; interest payable by an industrial undertaking in India on any money borrowed in foreign currency from sources outside India under a loan agreement approved by the Central Government before 1st June, 2001; interest payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident on deposits made in foreign currency; interest payable by an Indian company carrying on the business of providing long-term finance for the construction or purchase of a house in India for residential purposes on any money borrowed by it from sources outside India under a loan agreement approved by the Central Government before 1st June, 2003; interest payable by a public sector company on such bonds or debentures and subject to such conditions as the Central Government may by notification in the Official Gazette specify; interest payable by the Government on notified deposits made by the employees of the Central or State Government out of the moneys due to him on account of his retirement; interest on securities held by the Welfare Commissioner, Bhopal Gas Victims, in the Reserve Bank‘s SGL Account No. SL/DH 048 or any deposit for the benefit of the victims of the Bhopal gas leak disaster held in such account, with the Reserve Bank of India or with a public sector bank; interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 ; interest on bonds issued by a local authority or by a State Pooled Finance Entity ; interest payable to the Nordic Investment Bank on a loan advanced by it to a project approved by the Central Government in terms of Memorandum of Understanding entered into by the Central Government with that Bank on 26th November, 1986;

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(u) interest payable to the European Investment Bank, on loan granted by it in pursuance of the framework-agreement for financial co-operation entered into on 25th November, 1993 by the Central Government with that Bank; (v) interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after 1st April 2005 in an Offshore Banking Unit [w.e.f 10.2.2006]. Grossing up of interests: In case the interests on securities are subject to deduction of tax at source, the net amount received shall be grossed up and included in the total income of the assessee. The net interest will be grossed up as follows: Net amount

1- 30%  education cess 11.10 FAMILY PENSIONS Family pension received by the legal heirs of the deceased is taxable in the hands of the legal heirs as income from other sources. Family pension for this purpose means a regular monthly amount payable by the employer of the deceased to a person belonging to the family of the employee in the event of his death. u/s 57 (iia), the recipient of the family pension is eligible for standard deduction at the rate of 33 1/3% of the pension or `15,000, whichever is less. However, family pension received by the widow or children or nominated heirs of a member of the armed forces of India, where the death of such member has occurred in the course of operational duties, shall be exempt from tax [Section 10(19].

11.11 DEDUCTIONS FROM INCOME UNDER THE HEAD ―INCOME FROM OTHER SOURCES‖ [SECTION 57] (a) In the case of dividends and interests: In the case of dividends (not being dividends received from a domestic company) any reasonable sum paid by way of commission or remuneration to a banker or other person for the purpose of realizing such dividends and interests are deductible [Section 57(i)]. (b) In case of contribution towards staff welfare schemes: Employees‘ contribution towards staff welfare scheme which is received by the employer is chargeable under the heads ―Income from other sources‖, if not charged under the head ―Profits and gains of business or profession‖. However, if the employer deposits such amount to the fund for which it is paid by the employees, on or before the specified dates, it will be allowed as deduction u/s 57(ia). (c) In the case of income from letting out of plant, machinery, furniture and building: The following amount shall be deducted u/s 57(ii): (i) Expenditure on current repairs on plant, machinery, furniture or building. (ii) Insurance premium on any of these assets. (iii) Depreciation on these assets. Depreciation on building is allowed if the assessee is the owner of the building. (d) In the case of family pension: Family pension received by the legal heirs of a deceased employee is eligible for deduction at the rate of 33 1/3% of the family pension or ` 15,000, whichever is less. (e) In the case of any other income: In the case of any other income not specifically covered under Section 56(2), actual expenditure (not being in the nature of capital expenditure) incurred wholly and exclusively for earning the income is deductible. For example, examiner‘s remuneration DIRECT TAXATION

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received by a teacher from persons/institutions other than his employer, or royalty received by an author. In these cases, actual expenditure incurred in earning the income is deductible. (f) In the case of income received by way of interest on compensation or enhanced compensation: Interest received on compensation or enhanced compensation under the provision of Section 145A(b), a deduction of a sum equal to 50% of such income shall be allowed as deduction [Section 57(iv].

11.12 EXPENDITURE EXPRESSLY DISALLOWED [SECTION 58] In computing income of an assessee under the head ―Income from other sources‖ no deduction shall be allowed in respect of: (a) any personal expenses of the assessee, (b) any interest payable outside India on which tax has not been deducted at source, (c) any payment chargeable under the head ―Salaries‖, if it is payable outside India without any deduction of tax at source, (d) In the case of winnings from lottery, crossword puzzle, etc., (other than from the activity of owning and maintaining horses for horse races) no deduction can be claimed in connection with expenditure for earning the income. Example 1. From the following particulars of P for the previous year ended 31 st March, 2016 compute the Income under the head ―Income from other Sources‖: Particulars Directors Fee from a company Interest on the bank deposits Income from undisclosed source Winnings from Lotteries (Net) Royalty on a book written by him Lectures in Seminars Interest on loan given to a relative Interest on Debentures of a Company (listed in a Recognized Stock Exchange) Net of Taxes Interest on Post Office Savings Bank Account Interest on Government Securities Interest on monthly Income Scheme of Post Office.

` 10,000 3,000 12,000 33,500 9,000 5,000 7,000 3,588 500 2,200 33,000

He paid `1,000 for typing the manuscript of book written by him. Answer: Computation of the income from Other Source of P for the assessment year 2017-18 relating to previous year 2016-17: ` ` Particulars Director‘s fees 10,000 Interest on bank deposit 3,000 Income from undisclosed source

12,000

Royalty on books written Less: Expenses Lectures in seminars Interest on loan given to a relative

9,000 1,000

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8,000 5,000 7,000

182

Interest on listed debentures -Net received Add: T.D.S @ 10% [3,588 x (10/90)]

3,588 399

Interest on Post Office Savings Bank [exempt under Section 10(15)] Interest on Government Securities Income on Post Office monthly Income Scheme Winning from lotteries (Net) Add: T.D.S @ 30% [33500 x (20/70)] Income From Other Sources

3,987 Nil 2,200 33,000

33,500 14,357

47,857 1,32,044

Example 2: A, is engaged in retail trade and is a distributor for the products of Mr. X. In appreciation of high turnover effected by Mr. A, Mr. X presented him a new car worth ` 4 lakhs. Discuss the eligibility to tax of the above receipt in the hands of Mr. A. [CMA Inter- June 2009]

Answer: As per the provision of Section 28(v), the value of any benefit or perquisite, whether convertible into money or not, arising from business or in exercise of a profession shall be taxable as business income. The value of car of ` 4,00,000 is chargeable to tax as business income. Example 3: In the following cases, state the head of income under which the relevant receipt is to be assessed, along with reasons: V let out his property to B. B sublets it. How is subletting receipt to be assessed in the hands of B? [CMA Inter- June 2010] Answer: Depending upon the facts and circumstances of each case, sub-letting receipt is to be assessed as ―Income from other sources‖ or as ―Profits and gains of business or profession‖ in the hands of Mr. B. It is not assessable as income from house property, since one of the conditions for assessing an income under this head is that the assesse should be the owner of the property. In this case, since Mr. B is not the owner of the house property, sub-letting receipt cannot be assessed under the head ―Income from House Property‖. Example 4: J received the following gifts during the financial year 2016-2017 ` Cash gift from father-in-law 25,000 Cash gift friends on the occasion of marriage 37,000 Gift by the way of wrist watch from a friend (Value of watch) 12,000 Shares received as gift from wife‘s friend: Market value as on the date of gift 51,000 State the taxability of each item above. Calculation of the total amount liable to tax is not required. [CMA Inter- Dec 2010] Answer: Sl. No. Particulars (i) Cash gift from father-in-law (ii) Gifts received at the time of marriage (iii) Gifts received from a friend (not covered by the term ‗Property‘) (iv) Shares received from wife‘s friend (As per explanation to Section 56(2)(vii), shares are given in the definition of Property)

Answer Exempt Exempt Exempt Taxable

Example 5 : Discuss, with reasons, the taxability of the following transactions during the assessment year 2017-18. The assessee in each case is a different person. DIRECT TAXATION

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1. 2. 3.

4. 5.

Cash gift amounting to `50,000 received from a friend on 31st August, 2016. Cash gift of `50,001 received from a friend on the occasion of marriage anniversary of X on 2 nd April, 2016. Units of Mutual Fund received as gift from a business associate on 1st April, 2016. The value of the units on that date was `55,000. The units are sold by X on 31st March, 2017 and after deduction of 0·125% securities transaction tax net proceeds amounting to `54,931.25 realized. Cash gifts of `40,000 received on 1st April, 2016from each of the two friends. Gifts valued `55,000 received from a friend on 1st December, 2016. The gift comprises a gold ring valued `10,000 and the balance in cash.

Answer: 1. The provision of Section 56(2)(vi)(a)[andSection56(2)(vii) w.e.f. 1.10.2009] is attracted if the amount of cash gift exceeds ` 50,000. In the present case the amount of gift does not exceed ` 50,000.Therefore, nothing would be taxable. 2. Cash gifts received by an individual or a Hindu undivided family on or after 1 st April, 2006 from any person, except from the specified relatives, shall be taxable in full. In this case ` 50,001 shall be taxable under the head ―Income from other sources‖. 3. Shares or securities received as gift from an associate on or after 1.10.2009 attract the provisions of Section 56(2)(vi)(c)if the value of such gift exceeds `50,000. Accordingly, the entire amount of `55,000 shall be taxable during the previous year 2016-17. On subsequent sale within one year the assessee will be liable to pay tax on short-term capital gains as under: Sale proceeds excluding securities transaction tax–Cost of acquisition being the fair market value on the date of acquisition of the assets: [`55,000–55,000]=Nil. [Under the fifth proviso to Section 48, securities transaction tax paid is not deductible for computing capital gains tax]. 4. Cash gifts received from friends attracts the provision of Section 56(2)(vii)(a). Under clause (a), the aggregate value of cash gifts exceeding 50,000 is taxable in full. Therefore, the entire amount of `80,000 shall be taxable at the hands of X. 5. Gifts received in cash or in kind on or after 1.10.2010 comes within the purview of the newly inserted Section 56(2)(vii). Clause (a) of the aforesaid section covers gift received from specified persons and becomes taxable only if the amount is in excess of `50,000. Clause(c) of the same section covers gift of any other property other than immovable property and becomes taxable if the aggregate value of such property is in excess of ` 50,000. The term ―property‖ has been defined in Explanation (d) of Section 56 (2) and means: (i) immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art or (ix) bullion; Since the aforesaid definition of property does not include cash, it will not be aggregated with other property in order to arrive at the value of `50,000. Thus, in the present case neither cash gift nor the gift of the gold ring shall be taxable in the hands of X. Example 6: X is the owner of a piece of urban agricultural land, which he had been using for several years for the purpose of agriculture. The land was compulsorily acquired by the Government and in consideration a sum of `5,00,000 was received from the Government during the financial year 2013-14. Pursuant to a litigation, a further sum of `3,00,000 along with interest of `30,000 was also received by him during the financial year 2015-16. His legal expenses for this purpose were `20,000. Discuss the taxability of the sum in the hands of the assessee. Answer: Compensation received for compulsory acquisition of urban agricultural land is exempt u/s 10(37). But with effect from the assessment year 2012-13, interest on compensation or additional compensation is taxable u/s 56(2)(viii). However, the assessee shall be eligible to claim deduction on account of such interest for a sum equal to 50% of the amount of interest –vide newly inserted Section 57(iv). There shall DIRECT TAXATION

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be no other deduction for any expenses incurred for this purpose. In view of the aforesaid, ` 15,000 (30,000 less 50%) shall be taxable to the assessee during the assessment year 2017-2018. Example 7: On 1 April 2007, X acquired a house property in Kolkata for `10,80,000. On 1.1.2013 he entered in to an agreement to sell the property to Y for `19,00,000 and got an advance of `1,00,000. On the failure of Y to complete the transaction on time, the agreement was cancelled and the advance money was forfeited by X. Subsequently, X entered into another agreement for sale with Z and on 1.4. 2016 and got an advance of `1,50,000, the balance amount of `29,00,000 is to be paid at the time of registration before the end of the current financial year. X informs that this agreement also fell through and he had forfeited the advance money. Discuss the tax treatment for the forfeiture of the advance. Answer: Advance money received and forfeited before the financial year 2014-2015 shall be deducted from the cost of acquisition of the property while calculating capital gains at the time of transfer of the property. However, advance money received and forfeited on or after 1 st April 2014, shall be treated as Income from other sources, if the following conditions are satisfied: (i) The sum is forfeited; and (ii) The negotiations do not result in transfer of such capital assets. In the present case, since the capital asset is not yet transferred, `1,00,000 that was received on the first occasion shall remain untaxed till the property is actually sold or transferred, while the advance money received and forfeited on the second occasion shall be treated as Income from other sources during the assessment year 2017-2018. Multiple Choice Questions 1. The provision of 56(2)(vii) is applicable (a) All assessee (b) An individual and HUF (c) On an individual only (d) On an HUF only Answer: (b) An individual and HUF) 2.

On the occasion of marriage of A, he received a gift of ` 65,000 from a relative. Such amount shall be(a) Taxable (b) Taxable subject to standard deduction of 50% (c) Not taxable (d) None of the above Answer: (c) Not taxable 3.

Marriage gift from a non-relative is ______ (a) Exempted from tax (b) Not exempted from tax (c) Taxable (d) None of these Answer: (a) Exempted from tax 4.

In case of winnings from horse races, payments exceeding _____ are subject to tax deduction at source at the rate of: (a) ` 5,000 (b) ` 2,000 (c) ` 15,000 (d) ` 10,000 Answer: (a) ` 5,000 DIRECT TAXATION

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5.

The maximum amount of standard deduction in case of family pension is _____ (a) ` 5,000 (b) ` 2,000 (c) ` 15,000 (d) ` 10,000 Answer: (c) ` 15,000

6.

Expenses of purchasing lottery are deducted out of winning from lottery under the head income from other sources (a) True (b) False Answer: (b) False

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STUDY NOTE : 12 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE‘S TOTAL INCOME [CLUBBING OF INCOME – SECTIONS 60 – 65] THIS STUDY NOTE INCLUDES: 12.1 Introduction 12.2 Transfer of Income without transfer of assets [Section 60] 12.3 Income of Individual to include income of spouse, minor child, etc. [Section 64] 12.4 Income from assets transferred to spouse [Section 64(1)(iv)] 12.5 Income from assets transferred to son‘s wife [Section 64(1)(vi)] 12.6 Clubbing of Income when transferred asset is invested in business [Explanation 3 to Section 64] 12.7 Income from assets transferred to other person or AOP for the benefit of spouse [Section 64 (1)(vii)] 12.8 Income from assets transferred to other person or AOP for the benefit of son‘s wife [Section 64(1)(viii)] 12.9 Income from accretion to property transferred or accumulated income of such property 12.10 Clubbing of income of minor child [Section 64(1A)] 12.11 Income from self-acquired property converted into joint family property [Section 64(2)] 12.12 Liability of a person in respect of income included in the income of another person [Section 65]: 12.1 INTRODUCTION Under the Income-tax Act 1961, an assessee is generally liable to pay tax in respect of his own income. However, there are certain circumstances where the incomes of others persons are also included in his income. This is known as clubbing of income. The clubbing provisions are necessary because in a taxation system where the tax burden increases with the increase in the slab of income, there is always a possibility on the part of the assessee to divert income, at least partially, in favour of the spouse, minor children or other persons, to minimise the tax burden, but at the same time, retaining control over the income. For example, if a male individual below the age of 60 years has a total income of `3,00,000, then his tax liability is ` 5,000. But if the assessee diverts a part of the income, say ` 50,000, in favour of his minor son, then the assessee‘s own income becomes ` 2,50,000 and his son‘s income becomes ` 50,000 and both his son and he himself can avoid paying any tax. Chapter V of the Income-tax Act (i.e., Sections 60 to 65) contains deterrent provisions whereby such incomes of the other persons are to be clubbed with the total income of the assessee. The various situations where such clubbing is done are discussed below: 12.2 TRANSFER OF INCOME WITHOUT TRANSFER OF ASSETS [SECTION 60] All income arising to any person by virtue of a transfer shall be chargeable to income-tax as the income of the transferor and shall be included in his total income, provided that the following conditions exist: (a) There is a transfer of income by the assessee. (b)The income so transferred may be revocable or irrevocable. (c) Such income is transferred either before or after the commencement of the Income-tax Act, 1961. (d) The assessee does not transfer the assets from which such income arises.

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A. Revocable transfer of assets [Section61]: As provided in section 61, all income arising to any person by virtue of a revocable transfer of assets, shall be chargeable to income-tax as the income of the transferor and shall be included in his total income. B. Exceptions when transfer is irrevocable for specified period [Section 62(1)]: Section 62 provides the exceptions to the rule contained in section 61 that in the case of revocable transfer of asset, income arising from such assets shall be included in the total income of the transferor. The following are the exceptions where income arising to any person from transfer of assets, shall not be included in the total income of the transferor: (a) such income arises to any person by virtue of a transfer by way of a trust which is not revocable during the lifetime of the beneficiary, and in the case of any other transfer, it is not revocable during the life time of the transferee; or (b) such income arises by virtue of a transfer made before 1 st April, 1961 and is not revocable for a period exceeding six years. In both the cases, the transferor should not derive any direct or indirect benefit from such income. The income in this case shall be chargeable in the hands of the transferee. Section 62(2), however, provides that, as and when the power to revoke the transfer arises, the income shall be chargeable in the hands of the transferor. Example 1: On 1.4.2010 X transfers a house property to a trust with the explicit direction that till the life time of Y, his widowed mother, the income from the house shall be applied for the maintenance of Y. Y dies on 1.5.2016 and thereafter X continues to receive the income from the house. Discuss who is liable to tax in respect of the income from the house property: Answer: By virtue of Section 62(1), from 1.4.2010 to 1.5.2016, the trustees shall be liable to tax in respect of the income from the house for that period. Under Section 62(2), income arising from the propertyafter1.5.2016 shall be assessable in the hands of X. C. Meaning of transfer and revocable transfer [Section 63]: For the purpose of Sections 60, 61 and 62, the expressions ―transfer‖ and ―revocable transfer‖ shall mean the following: (a) Transfer: It includes any settlement, trust, covenant, agreement or arrangement. (b) Revocable transfer: A transfer shall be deemed to be revocable if: (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor; or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. 12.3 INCOME OF INDIVIDUAL TO INCLUDE INCOME OF SPOUSE, MINOR CHILD, ETC. [SECTION64] In computing income of an individual, the income of the under mentioned persons shall be included in the total income of the individual; Remuneration received by spouse [Section 64(1)(ii)]: Income arising to the spouse of an individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind from a concern in which such individual has substantial interest, shall be included in the total income of such an individual. B. Exceptions: Where the aforesaid income arises to the spouse by virtue of possession of technical or professional qualifications and the income is solely attributable to the application of his or her technical or

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professional knowledge and experience, the income of the spouse shall not be clubbed with the total income of the individual [ProvisotoSection64(1)(ii)]. When both the husband and wife have substantial interests [Explanation 1 to Section 64(1)]: When both husband and wife have substantial interests in the concern and both of them are in receipt of remuneration, the remuneration shall be clubbed with the total income of the husband or wife, whose total income (excluding such remuneration) is greater. Once any such income is included in the total income of either spouse, such income arising in any succeeding year shall not be included in the total income of the other spouse, unless the Assessing Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary to do so. C. Meaning of substantial interest [Explanation 2]: For the purpose of Section 64(1)(ii), an individual shall be deemed to have a substantial interest in a concern: (i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than 20% of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of his relatives; (ii) in any other case, if such person is entitled, or such person and one or more of his relatives, are entitled to the aggregate, at any time during the previous year, to not less than 20% of the profits of such concern. Example 2: (a) Mr. X and Mrs. X are employed in X Ltd., where both of them are holding equity shares to the extent of 20% and 25% respectively. Salary of Mr. X is ` 20,000 p.m. while that of Mrs. X is ` 24,000 p.m. Other incomes of Mr. X and Mrs. X are ` 1,20,000 and `1,00,000 respectively. Compute the total income of Mr. X and Mrs. X. (b) What will be the total income of Mr. X and Mrs. Y if both of them are employed in X Ltd. as chartered accountants? Answer: (a) Since the remunerations received by Mr. X and Mrs. X from X Ltd. Are not owing to possession of any technical or professional qualifications, under Section 64(1)(ii), read with Explanation1, salary of Mrs. X shall be clubbed with the total income of Mr. X and the total income of Mr. X and Mrs. X will be as under: Computation of total income of Mr. X and Mrs. X

Income under the head "Salaries": Mr. X [` 2,40,000 less deduction u/s 16] Mrs. X [ ` 2,88,000 less deduction u/s 16] Income from other sources: Gross total income Less : Deductions u/ss 80C to 80U Total income Total income

` Mr. X

` Mrs. X

2,40,000 2,88,000 1,20,000 6,48,000 Nil 6,48,000

1,00,000 1,00,000 Nil 1,00,000

(b) Since both Mr. X and Mrs. X are chartered accountants and the remunerations received by them are in exercise of their professional skills, the provision of Section 64(1)(ii) for clubbing of income shall not be applicable. Accordingly, the total income of Mr. X and Mrs. X shall be as under: Computation of total income of Mr. X and Mrs. X Mr. X Mrs. X ` ` Income under the head Salaries (as above) 2,40,000 2,88,000 Income from other source 1,20,000 100000 Gross total income 3,60,000 3,88,000 Less: Deduction u/s 80C to 80U Nil Nil Total income 3,60,000 3,88,000 DIRECT TAXATION

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12.4 INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SECTION 64(1)(IV)] Income arising to the spouse of an individual from any asset (other than house property) transferred directly or indirectly to the spouse of such individual, otherwise than for adequate consideration or in connection with an agreement to live apart, shall be included in the total income of such individual. House property transferred to the spouse, otherwise than for adequate consideration, is outside the ambit of Section 64(1)(iv) because, in the case of such transfer (not being a transfer in connection with an agreement to live apart), the transferor is deemed to be the owner of the property and is accordingly chargeable to tax for income arising from such property. 12.5 Income from assets transferred to son‘s wife [Section 64(1)(vi)] Income arising to the son‘s wife of any individual from any asset transferred directly or indirectly on or after 1st June, 1973, to the son‘s wife, otherwise than for adequate consideration, shall be included in the total income of such individual. 12.6 CLUBBING OF INCOME WHEN TRANSFERRED ASSET IS INVESTED IN BUSINESS [EXPLANATION 3 TO SECTION 64] Where the assets transferred directly or indirectly by an individual to his spouse or son‘s wife (i.e., the transferee) are invested by the transferee, income arising from such investments shall be included in the total income of that individual for that previous year as under: (i) When the transferred assets are invested in any business, (such investment being not in the nature of the contribution of capital as partner in a firm or for being admitted to the benefits of partnership in a firm), the part of the income arising out of business to the transferee in any previous year, which bears the same proportion to the income of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the transferee as on the first day of the previous year. (ii) When the transferred assets invested by the transferee are towards the contribution of capital as a partner in a firm, the part of the interest receivable by the assessee from the firm in any previous year, which bears the same proportion to the interest receivable by the transferee from the firm as the value of investment aforesaid as on the first day of the previous year bears to the total investment by way of capital contribution as a partner in the firm as on the said day. It may be noted that the provision of Explanation3 to Section 64 applies to only interests receivable from the firm. It does not apply to share of profits from the firm, as such income is exempt under Section 10(2A). Example: 3 On 1.4.2016, Mr. X had gifted ` 1,00,000 to his wife Mrs. X. On the same day, Mrs. X borrowed ` 1,50,000 from the bank by mortgaging her jewellery and the total amount was invested by her in a business. For the year ending 31st March, 2017, the total profit earned from the business amounted to ` 50,000. Determine the amount to be clubbed in the hands of Mr. X. Solution: For the assessment year 2016-2017 relating to the previous year 2015-2016, the amount to be included in the total income of Mr. X is ` 20,000, calculated as under: Profits of the business × Amount invested out of the gift money as on the first day of the previous year 50,000 1,00,000 = = 20,000 2,50,000 Total amount invested as on the first day of the previous year

12.7 INCOME FROM ASSETS TRANSFERRED TO OTHER PERSON OR DIRECT TAXATION AOP FOR THE BENEFIT OF SPOUSE [SECTION 64(1)(VII)]

190

Income arising to any person or association of persons from assets transferred directly or indirectly by any individual, otherwise than for adequate consideration, to the person or association of persons, shall be included in the total income of such individual to the extent to which income from such assets is for the immediate or deferred benefit of the spouse of the individual. 12.8 INCOME FROM ASSETS TRANSFERRED TO OTHER PERSON OR AOP FOR THE BENEFIT OF SPOUSE [SECTION 64(1)(VII)] In the case of any transfer of asset by an individual on or after 1st June, 1973 to any person or association of persons, otherwise than for adequate consideration, any income arising to the person or association of persons from such assets shall be included in the total income of the individual to the extent to which such income is for the immediate or deferred benefit of the son‘s wife of the individual. 12.9 INCOME FROM ACCRETION TO PROPERTY TRANSFERRED OR ACCUMULATED INCOME OF SUCH PROPERTY When any asset is transferred by the individual under clauses (iv), (vi), (vii) and (viii) of Section 64(1), any income arising from accumulated income or from accretions to such assets shall not be included in the total income of the individual. [C.I.T. vs. Saraswathi 133 ITR 315]. 12.10 CLUBBING OF INCOME OF MINOR CHILD [SECTION 64(1A)] In computing the total income of any individual, all such income as arises or accrues to a minor child shall be included in the total income of such individual. When clubbing is not applicable: The income of the minor child shall not be included in the total income of the parent of the minor when: (i) the minor child is suffering from any of the disabilities specified in Section 80U (e.g., permanent Physical disability including blindness, mental r e tar da ti on , etc.); or, (ii) the income arises to such minor on account of any manual work done by him; or (iii) the income arises to the minor from activity involving application of his skill, talent or specialised knowledge and experience. ● Further considerations: Points to note: The provisions of Section 64(1A) relating to the clubbing of minor‘s income with the total income of his or her parent is subject to the following further considerations: (i) The income of the minor child shall be included in the total income of either of the parents, whose total income (excluding the minor‘s income) is greater, provided that the marriage of the minor‘s parents subsists. Where such marriage of the parents does not subsist, it shall be included in the total income of the parent who maintains the minor child in the previous year. (ii) Where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary to do so. (iii) The parent, whose total income includes the income of any minor child, can claim exemption under Section 10(32) to the extent such income does not exceed `1,500 in respect of each minor child, whose income is so included in the total income of the parent.

DIRECT TAXATION

191

12.11 INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED INTO JOINT FAMILY PROPERTY [SECTION 64(2)] 64(1A)] When an individual, being a member of a Hindu undivided family, converts on or after 31st December, 1969 his separate property into joint family property, otherwise than for adequate consideration, the income derived from such property shall be included in the total income of the individual. A. Consequence of partition of Hindu undivided family [Section 64(2)(c)] When the converted property has been the subject matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property, as is received by the spouse of the individual after the partition, shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and shall be accordingly included in the total income of the individual who transferred the asset. Clubbing of loss: For the purpose of Section 64, income includes loss also. Therefore, loss arising to the transferee shall also be included in the total income of the transferor. 12.12 LIABILITY OF A PERSON IN RESPECT OF INCOME INCLUDED IN THE INCOME OF ANOTHER PERSON [ SECTION 65] As discussed above, although income from any transfer of asset or from membership in a firm is to be included in the total income of the transferor, under Section 65, the Assessing Officer may serve notice to the transferee to pay the portion of tax levied on the transferor, which is attributable to the income so clubbed. In a case, where such asset is held jointly by more than one person, they shall be jointly and severally liable to pay the tax which is attributable to the income from the assets so included. Example 4: Following particulars were provided by Mr. D ` 90,000

Income from Mr. D‘s business Salary derived from an educational institution by Mrs. D; she is the Principal of that institution 50,000 Interest on Company deposits were made in the name of Master K (Minor son). These deposits were made in the name of K by his father‘s Father about 6 years ago. 12,000 Receipts from sale of paintings and drawings made by minor S (Minor Daughter of Mr. and Mrs. D and a noted child artist) 60,000 Income by way of lottery earning by Master P (Minor son of Mr. and Mrs. D) 28,000 Discuss whether the above will form part of the total income of any individual, duly considering applicability of clubbing provisions in each case, and also compute the total income of Mr. D. [CMA Inter, Dec. 2008] Answer: Mr. D‘s income from business is assessable in his own hands. Mrs. D‘s salary is assessable in her own hands. The clubbing provision is not attracted to in case of salary income unless it is received from a concern in which the spouse has substantial interest. The income of minor sons Master K and P will be clubbed with income of the parent whose total income before clubbing is greater. Mr. D‘s income (` 90,000) is greater than the total income of Mrs. D (` 50,000). Hence the income of the minor children will be clubbed in the hands of Mr. D. The income of minor daughter S from painting is chargeable in her individual hands. The clubbing provisions do not apply to minor child‘s income which is earned by her from manual work or activity involving application of specialized knowledge, talent, skill or experience. Lottery winnings? Computation of income of Mr. D for the assessment year 2017-18 relating to the previous year 2016-17 DIRECT TAXATION

192

Particulars Profits and gains of business or profession Income from other sources: Interest on Company deposit derived by Master K [clubbed u/s 64(1A)] Less: Exemption under Section 10(32) Lottery earning by Master P Less: Exemption under Section 10(32) Gross Total Income/Total Income

`

`

12,000 1,500 26,000 1,500

` 90,000

10,500 24,500

35,000 1,25,000

Example 5: The following details of income of Mr. X and his wife, for the assessment year 2017-18 are made available to you: Mr. X Mrs. X ` ` Income from own business/profession 1,20,000 90,000 Income from other sources 2,10,000 1,10,000 Income received from Z & Co. 20,000 4,10,000 Salary received from Z & Co. 96,000 84,000 Mr. X and Mrs. X are partners in Z & Co. each having 10% profits sharing. Determine the total income of Mr. X and Mrs. X. Will your answer be different, (a) If each one of them holds 8% shares in profits of Z & Co.? (b) Mr. X and Mrs. X both possess professional qualifications. [CMA Inter- June 2009] Answer: (a) Since Mr. and Mrs. X together hold 20% share in the concern, the clubbing provisions as mentioned in section 64(1) will be applicable here. The salary shall be clubbed with the total income of the husband or wife, whose total income, excluding the remuneration, is greater. In the present case total income (excluding salary from Z & Co.) of Mrs. X is more than the total income of Mr. X (See note 1). Accordingly, salary of Mr. X from Z & Co. shall be clubbed with the income of Mrs. X and the total income of Mr. and Mrs. X will be as under: Mr. X (`) Ms. X (`) Income from own business 1,20,000 90,000 Interest from Z & Co. 20,000 4,10,000 Income from other sources (as given) 2,10,000 1,10,000 Salary from Z & Co.: Mr. X (Clubbed u/s 64(1)) 96,000 Mrs. X 84,000 Gross total income 3,50,000 7,90,000 Less: Deduction u/s 80C-80U Nil Nil Total income 3,50,000 7,90,000 (b) If the combined shares of Mr. X and Mrs. X are less than 20%, the clubbing provision will not be applicable. In that case, salary income of Mr. X will not be added with the income of Mrs. X. Note 1: Total income of Mr. X and Mrs. X: Mr. X 1,20,000 2,10,000 20,000 3,50,000

Income from own business Income from other sources Interest from Z & Co. Add salary Total

Mrs. X 90,000 1,10,000 4,10,000 6,10,000

Example 6. Mr. R commenced business with a capital of ` 2 lakhs in the financial year 2009-10. His capital as on 1.4.2015 was ` 5 lakhs. His wife gifted ` 1 lakh on 10.04.2015, which was also invested in the business. DIRECT TAXATION

193

His Net profit for the year 2015-16 = ` 2 lakhs. His Net profit for the year 2016-17 = ` 4 lakhs. Compute the income from business to be clubbed in the hands of Mrs. R and the income from business taxable in the hands of Mr. R for the assessment year 2017-18. Mr. R did not withdraw any money from the business from 01.04.2016 to 31.03.2017. [CWA Inter-June 2011]

Answer: Computation of total income for the assessment year 2017-18 relating to the previous year 2016-2017 Particulars R‘s Capital Capital Contribution Total (`) Contribution out of gift from wife Created as on 01.04.2015 5,00,000 Nil 5,00,000 Investment as on 10.04.2015 out of gift from his wife Nil 1,00,000 1,00,000 Total Capital invested till 31.03.2016 5,00,000 1,00,000 6,00,000 Profit for F.Y 2015-16 2,00,000 Nil 2,00,000 Capital employed on 1.04.2016 7,00,000 1,00,000 8,00,000 Profit for the F.Y 2016-17 to be apportioned on the 3,50,000 50,000 4,00,000 basis of capital employed on 01.04.2016(i.e. 7:1 ratio) Hence, the income assessable in the hands of Mr. R for A.Y 2017-18 is ` 3,50,000, and the income assessable in the hands of Mrs. R for A.Y 2017-18 would be ` 50,000. Example 7: On 21.3.2016, Mr. P gifted to his wife Mrs. P 200 listed shares, which had been bought by him on19.4.2015 at ` 2,000 per share. On 1.6.2016 bonus shares were allotted in the ratio of 1:1. All these shares were sold by Mrs. P as under. Date of Manner of sale sale 21.5.2016 Sold in recognized stock exchange, STT paid 21.7.2016 Private sale to an outsider 28.2.2017 Private sale to her friend Mrs. N (Market value on this date was `2,10,000)

No. of shares 100 All bonus shares 100

Net sales value (`) 2,20,000 1,25,000 1,70,000

Briefly state the income-tax consequences in respect of the sale of the shares by Mrs. P showing clearly the person in whose hands the same is chargeable, the quantum and the head of income in respect of the above transactions. Detailed computation of total income is NOT required. Net sales value represents the amount credited after all taxes, levies, brokerage, etc., and the same may be adopted for computing the capital gains. Cost inflation index for the F.Y. 2016-17 is 1125 and for the F.Y. 2015-16is 1081. [CMA Inter-Dec 2011] Answer: Where an asset has been transferred by an individual to his spouse otherwise than for adequate consideration, the income arising from the sale of the said asset by the spouse will be clubbed in the hands of the individual. Where there is any accretion to the asset transferred, income arising to the transferee from such accretion will not be clubbed. Hence, the profit from sale of bonus shares allotted to Mrs. P will be chargeable to tax in the hands of Mrs. P. Therefore, the capital gains arising from the sale of the original shares has to be included in the hands of Mr. P, and the capital gains arising from the sale of bonus shares would be taxable in the hands of Mrs. P. Where an asset received by way of gift has been sold, the period of holding of the previous owner should be considered for determining whether the capital gain is long term or short term. The cost to the previous owner has to be taken as the cost of acquisition. DIRECT TAXATION

194

(a) Income/ loss to be clubbed in the hands of Mr. P Long-term capital gains/loss Particulars (i) 100 shares sold on 21.5.2016 in a recognized stock exchange, STT paid. Long-term capital gains on sale of such shares is exempt under section10(38) (ii) Shares sold to a friend on 28.2.2011: Sale consideration Less: Indexed cost of acquisition of 100 shares(`2,000 × 100 × 1125/1081) Long term capital loss to be included in the hands of Mr. P

` Nil 1,70.000 2,08,140 (38,140)

(b) Income taxable in the hands of Mrs. P: Short-term capital gains (on sale of 100 bonus shares) `

Particulars Sale consideration Less: Cost of acquisition of bonus shares Short-term capital gains

1,25,000 Nil 1,25,000

(c) Taxability in the hands of Mrs. N under the head ―Income from other sources‖ Mrs. N has received shares from her friend Mrs. P for inadequate consideration. Even though shares fall within the definition of ―property‖ under section 56(2)(vii), the provisions of section 56(2)(vii) would not be attracted in the hands of Mrs. N, since the difference between the fair market value of shares and actual sale consideration does not exceed `50,000. Example 8. M gifted `3,00,000 to his wife on 01.07.2016, which she invested in her beauty parlour business. The capital of Mrs. M as on 01.04.2016 was `6,00,000. The profit for the year ended 31.03.2017 (computed) from business amounts to `2,40,000. The total income of M (before clubbing) is `4,50,000 (computed). Determine the income liable for clubbing in the hands of Mr. M out of the incomes earned by Mrs. M during the financial year 2016-17. [CMA Inter-Dec 2013] Answer: Since the amount was gifted by M to his wife on 1.7.2016, it will not attract the clubbing provision contained in the Explanation 3 to section 64. The provision of this Explanation require clubbing of income from gifted property in the same proportion to the transferee from the business as the value of the assets as on the first day of the previous year bears to the total investment in the business by the transferee. However, from financial year 2017-18, the clubbing would be applicable. Example 9: Mr. A started a proprietary business on 20.04.2015 with a capital of `5,50,000. His wife Smt. P gifted `2,00,000 on the occasion of his birthday on 28.07.2015, out of which he introduced `1,00,000 into his proprietary business. Details of his income from business are given below: Financial year (Loss) Income 2015-16 `(1,50,000) 2016-17

-

`4,00,000

He did not withdraw any amount from the business for his personal use. Determine the amount chargeable to tax in the hands of A and the amount liable for clubbing in the hands of his wife Smt. P. [CMA Inter-Dec 2013] Answer: Computation of Income from business chargeable in the hands of Mr. A and clubbing in the hands of Smt. P.: Sl. Particulars 2015–2016 2016–2017 No. (`) (`) (i) Profit/(Loss) `(1,50,000) ` 4,00,000 DIRECT TAXATION

195

(ii)

(iii)

Gifted amount considering the investing part in the business Capital

`1,00,000

--

`5,50,000

`5,00,000 [Previous Year Capital + gifted amount– [Loss of Business] (5,50,000+1,00,000–1,50,000) ` 80,000 [Profit Earned x Gifted Amount ÷ Total Capital] (4,00,000x1,00,000÷5,00,000) ` 3,20,000 [Profit Earned–Clubbed Amount] (4,00,000–80,000)

(iv)

Clubbed Amount

--

(v)

Income chargeable in the hands of A

--

Income chargeable to tax in the hands of A= `3,20,000. Clubbing in the hands of P = ` 80,000. Notes: Based on Mohini Thapar vs. CIT and R. Ganesan vs. CIT case decisions, the amount of profit to the extent of gifted to total capital on the first day of the previous year must be clubbed in the hands of Smt. P. The gift was made on 28.07.2015. Therefore, the clubbing provisions shall not apply as the gift was made after the 1st day of the previous year. As per question, A not withdraw any amount for his personal use. So, closing capital of 2015-16 plus profit for that year is taken as the capital for Financial Year 2016-17.

DIRECT TAXATION

196

STUDY NOTE : 13 SET OFF AND CARRY FORWARD OF LOSSES [SECTIONS 70-80] THIS STUDY NOTE INCLUDES: 13.1 Introduction 13.2 Inter-source adjustments [Section 70] 13.3 Inter-head adjustments [Section 71] 13.4 Carry forward of loss 13.5 Carry forward and set off of loss and depreciation in the case of amalgamation or demerger [Section 72A (1)]: 13.6 Carry forward and set off of loss and depreciation in the case of demerger [Section 72A(4)] 13.7 Carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in case of amalgamation of banking company [Section 72AA] 13.8 Carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in business reorganization of co-operative banks [Section 72AB] 13.9 Losses of firms [Section 75] 13.10 Carry forward and set off of losses in case of change in constitution of firm or on succession [Section 78] 13.11 Carry forward and set off of losses in the case of certain companies [Section 79] 13.12 Submission of return for losses [Section 80] 13.1 INTRODUCTION It may be pointed out that Income-tax is one tax which is imposed on a single tax base known as ―Total Income‖. One of the important consequences that follow from this is that while aggregating incomes under different heads in order to arrive at the total income, the losses, if any under any of the heads, will have to be deducted. Sections 70-80 of the Income-tax Act provide the procedure for adjustments of losses in the process of computing the total income. Under the Income-Tax Act, 1961, the right of the assessee to set off and carry forward a loss is, however, not unrestricted. Sections 70 to 80, which contain the provisions relating to set off and carry forward, involves the following three stages: (a) Inter-source adjustments, (b) Inter-head adjustments, and (c) Carry forward of losses. These provisions are discussed below: 13.2 INTER-SOURCE ADJUSTMENTS [SECTION 70] Inter-source adjustments involves set off of loss from one source against income from another source under the same head of income. Where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head [Section 70(1)]. For example, a short-term capital loss can be set off against any short-term capital gain or long-term capital gain in the same year [Section 70(2)]. Exceptions: (i) Long-term capital loss: Long-term capital loss can be set off against long-term capital gains only. (ii) Speculation loss: Any loss in respect of a speculation business can be set off only against profits and gains of another speculation business [Section 73(1)]. (iii) Loss from owning and maintaining race horses: A loss incurred from the activity of owning and maintaining race horses can be set off only against income from owning and maintaining race horses, and not against income from any other sources [Section 74A(3)].

DIRECT TAXATION

197

(iv) Loss from gambling, lotteries, crossword puzzles, etc.: Under section 58(4), income by way of 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 cannot be applied to set off any loss [Section 58(4)]. (v) Loss from a source which is exempt: If income from a particular source is altogether exempt from tax, loss from such sources cannot be set off against income of a source which is taxable. Example 1: X furnishes the following particulars of his income and losses during the previous year 2016- 2017: ` (a) (b) (c) (d) (e) (f) (g)

Long-term capital gain from house property Short-term capital gain from shares Short-term capital loss from house property Income from house property Loss from trading business Profits from construction business Loss from speculation business in bullion

60,000 20,000 30,000 20,000 60,000 1,00,000 16,000

You are required to compute his total income for the assessment year 2017-2018. Answer: Computation of total income of X for the assessment year 2017-2018 relating to the previous year 20162017. ● Income from house property ● Profits and gains of business or profession: Profits from construction business 20,000 Less: Loss from trading business 1,00,000 Less: Loss from speculation business to be (–) 60,000 carried forward, as it can be set off only against profits of a speculation business Nil ● Capital gains: Long-term capital gain from house property Short-term capital gain from shares Short-term capital loss from house property (Note) Gross total income Less: Deductions under Sections 80C to 80U Total income

60,000 20,000 (–) 30,000

40,000

50,000 1,10,000 Nil 1,10,000

Note: U n d e r s ection 70, short-term capital loss can be set off only against capital gains arising from transfer of short-term or long-term capital assets. 13.3 INTER-HEAD ADJUSTMENTS [SECTION 71] As provided under section 70, if the results of computation under one head is a loss, such loss can be set off against income for that assessment year under any other head. For example, a loss under the head ―Profits and gains of business or profession‖ can be set off against income under the head ―Capital gains‖ or Income from other sources. Similarly, a loss under the head ―Income from house property‖ can be set off against income under the head ―Salaries‖ or under the head ―Income from other sources‖.

DIRECT TAXATION

198

Important exceptions: (i) Loss under the head ―Profits and gains of business or profession‖: Any loss under the head ―Profits and gains of business or profession‖ cannot be set off against income under the head ―Salaries‖. [Section 71(2A)]. (ii) Loss under the head ―Capital gains‖: Where in respect of any assessment year the net result of computation under the head ―Capital gains‖ is a loss, such loss cannot be set off against income under any other head [Section 71(3)]. (iii) Speculation loss: Any loss computed in respect of a speculation business cannot be set off against income under any other head. Such loss can be set off against profits and gains of another speculation business only [Section 73(1)]. (iv) Loss from owning and maintaining race horses: Any loss computed in respect of the activity of owning and maintaining race horses cannot be set off against income under any other heads. Such loss can be set off against the income of similar activities only [Section 74A(3)]. (v) Loss from gambling, lotteries, crossword puzzles, card games, betting, or games of any other sport: Loss from such gambling, lottery, etc., cannot be set off against income under any other head [Section 58(4)]. (vi) Loss by 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 [Section 73A (1]. Example 2: G, a businessman, furnishes the following particulars of his income and loss for the previous year 20162017: Income from house property in New Delhi 60,000 Loss from self-occupied house property 20,000 Profits from speculation business in scrap 40,000 Loss from speculation business in grains 20,000 Profits from retail business in cloth 40,000 Loss from betting 20,000 Long-term capital gain on transfer of house property 70,000 Long-term capital loss on sale of shares 40,000 Short-term capital loss on sale of plant and machinery 40,000 Assuming that G has no loss in the earlier previous years, compute his total income for the assessment year 2017-2018. Ans.: Computation of total income of G for the assessment year 2017-2018 relating to the previous year 2016-2017. ` ` ` • Income from house property : Income from New Delhi House 60,000 Loss from self-occupied house (-)20,000 40,000 • Profits and gains of business or profession : Profits from speculation business in Scrap 40,000 Loss from speculation business in grains (-)20,000 20,000 Profits from retail business in cloth 40,000 60,000 • Capital gains: Long-term capital gains on transfer of house property 70,000 Long-term capital loss on sale of shares set off (-) 40,000 30,000 Short-term capital loss on sale of plant and machinery set off (-)40,000 Loss under the head "Capital gains" not to be set off against any other head

(-)10,000

Nil

(-)20,000

Nil

• Income from other sources : Loss from betting not to be set off against any other income Gross total income Less: Deductions under Sections 80C to 80U Total income

DIRECT TAXATION

1,00,000 Nil 100,000

199

Example 3. J furnishes the following particulars of his income during the previous year 2016-2017: Income under the head ―Salaries‖

1,95,000

Loss from manufacturing business

80,000

Profits from construction business

60,000

Profits from speculation business in bullion

10,000

Loss from trading in shares (He never took delivery of shares)

25,000

Loss from self-occupied house

20,000

Dividend from Indian companies

5,000

Interest on fixed deposit in bank

10,000

Long-term capital gains

10,000

Short-term capital loss

15,000

Medical insurance premium paid

10,000

You are required to compute total income of J for the relevant assessment year. Answer: Computation of total income of J for the assessment year 2017-2018 relating to the previous year 20162017. `

`

`

• Income under the head "Salaries": • Income from house property: • Profits and gains of business or profession: Loss from manufacturing business Profits from construction business Loss from speculation in shares (Note 1) Profits from speculation in bullion

1, 95,000 (-) 80,000 (-) 20,000 (-) 20,000 (+) 60,000

Speculation loss to be carried forward

(-) 15,000

• Capital gains: Long-term capital gains Short-term capital loss Loss under the head "Capital gains" not to be set off against any other head • Income from other sources: Dividend from Indian companies [Exempt w/s 10(34)] Interest on fixed deposit with bank Business loss not to be set off against "Salaries" (Note 2) Gross total income Less: Deductions under Sections 80C to 80U: Less: 80D in respect of medical insurance premium Total income

(-) 25,000 (+) 10,000

(+) 10,000 (-) 15,000 (-) 5,000

Nil 10,000

Nil

+ 10,000 (-) 10,000 1,75,000 10,000 1,65,000

Notes: 1. As per Section 43(5), where shares are purchased or sold without taking actual delivery, the transaction is to be regarded as speculative transaction. Loss from such a source can be set off only against profits from a similar source. 2. Loss under the head ―Profits and gains of business or profession‖ cannot be set off against income under the head ―Salaries‖.

DIRECT TAXATION

200

13.4 CARRY FORWARD OF LOSS If the results of computation under any head is a loss and the same cannot be set off against income under other heads, such loss is to be carried forward to the following years and set off against the income of the subsequent years. Under the Income-tax Act, only the following losses can be carried forward: (A) Loss under the head ―Income from house property‖. (B) Loss under the head ―Profits and gains of business and profession‖ including loss of speculative business and the business specified in Section 35AD. (C) Loss under the head ―Capital gains‖. (D) Loss under the head ―Income from other sources‖ to the extent it relates to the activity of owning and maintaining of race horses. The provisions relating to carry forward of these losses are discussed below. A. Carry forward and set off of loss from house property [ Section 71B]: If any loss under the head ―Income from house property‖ cannot be fully set off against income under any other head of income in the same assessment year, then such loss shall be carried forward and set off against the income under the head ―Income from house property‖ in the subsequent year or years. Such loss can be carried forward for a maximum period of eight assessment years immediately succeeding the assessment year for which the loss was first computed. B. Carry forward and set off of business losses [Section 72]: The provisions in this regards are as under: (i) The loss can be carried forward and set off against the income in the subsequent year or years of any business, profession or vocation carried on by the assessee. (ii) The loss can be carried forward and set off in the subsequent assessment years against the income of any business even if the original business in respect of which such loss was computed is discontinued by the assessee. (iii) The loss so carried forward can be set off against the income of any business in the subsequent years even if such income is chargeable under other heads. For example, interest on securities held by a bank as stock-in-trade, dividend on shares held in as stock-in-trade. The brought forward business loss can be set off against income from these sources, as these incomes are considered to be part of the business income of the assessee, even though these are chargeable under different heads [Western State Trading vs. CIT 80 ITR 21(SC)]. (iv) Subject to the exceptions mentioned below, a business loss can be set off only by the assessee who has incurred the loss. Exceptions: The aforesaid rules are subject to the following exceptions;  Inheritance  Business loss in the case of amalgamation or demerger  Firm or proprietary concern succeed by a company  Private company or unlisted public company succeeded by a limited liability partnership (v) Except for the loss of a discontinued business mentioned in section 33B, any loss under the head ―Profits and gains of business and profession‖ can be carried forward for not more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. (vi) The order of set off shall be as follows: Depreciation allowance can be carried forward without any time limit. Besides, the other two allowances which can be carried forward without any time limit are: (i) unabsorbed scientific research capital expenditure; (ii) unabsorbed capital expenditure on family planning (applicable for corporate assessees only). Section 72(2), however, provides that business loss shall be first set off before setting off unabsorbed depreciation and unabsorbed scientific research, capital expenditure, etc. The carried forward business loss shall be set off only after allowing the current year ‘s depreciation, the current year‘s capital expenditure on scientific research and current year‘s capital expenditure on family planning expenditure. In view of this proposition, the order of set off shall be as under:

DIRECT TAXATION

201

Order of set off: (i) current year ‘s capital expenditure on scientific research [Section 35(1)] ; (ii) current year ‘s capital expenditure on family planning [Section 36(1)(ix)] ; (iii) current year ‘s depreciation [Section 32(1)]; (iv) brought forward business loss [Section 72(1)]; (v) Unabsorbed capital expenditure on family planning [Section 36(1)(ix)]. (vi) unabsorbed depreciation [Section 32(2)]; (vii) unabsorbed capital expenditure on scientific research [Section 35(4)]. C. Carry forward and set off of loss in the case of speculation business [Section 73]: The loss of a speculation business can be set off only against the income of another speculation business. The unabsorbed loss of such business can be carried forward for not more than four assessment years immediately succeeding the year for which the loss was first computed. ● Meaning of speculation business: The term ―speculative transaction‖ has been defined in Section 43(5). According to this section, speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Exceptions: The following transactions are, however, not to be treated as speculative transactions: (i) A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. (ii) A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations. (iii) A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member. (iv) An eligible transaction in respect of trading in derivatives carried out in a recognized stock exchange. (v) (v) An eligible transaction in respect of trading in commodity derivatives carried out in a recognized association which is chargeable to commodities transaction tax. D. Carry forward of loss under the head ―Capital gains‖ [Section 74]: Where in respect of any assessment year, the net result of computation under the head ―Capital gains‖ is a loss, such loss shall be carried forward to the following assessment year or years and shall be dealt with as under: (i) Loss from short-term capital assets may be set off against short-term or long-term capital gains. (ii) Loss from long-term capital asset which is not set off under Section 71, shall be carried forward to the following assessment year and shall be set off against income under the head ―Capital gains‖ assessable for the assessment year in respect of long-term capital assets only. (iii) Any loss arising from transfer of short-term or long-term capital assets shall be carried forward for not more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. E. Carry forward and set off of loss from the activity of owning and maintaining of race horses [Section 74A (3)]: Losses incurred by the assessee in the activity of owning and maintaining of race horses in any assessment year as is not set off under Section 71, shall be carried forward to the following assessment year and it shall be set off only against income from similar activities assessable for that assessment year. Any such loss shall be carried forward for not more than four assessment years immediately succeeding the assessment year in which the loss was first computed.

DIRECT TAXATION

202

(iv) ―Income by way of stake money‖ means the gross amount of prize money received on a race horse or race horses by the owner thereof on account of the horse or horses or any one or more of the horses winning or being placed second or in any lower position in horse races [Explanation (c) to Section 74A]. 13.5 CARRY FORWARD AND SET OFF OF LOSS AND DEPRECIATION IN THE CASE OF AMALGAMATION OR DEMERGER [SECTION 72A (1)] Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company or an amalgamation of a banking company referred to in Section 5(c) of the Banking Regulation Act, 1949 with a specified bank, or an amalgamation of one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. 13.6 CARRY FORWARD AND SET OFF OF LOSS AND DEPRECIATION IN THE CASE OF DEMERGER [SECTION72A(4)] In the case of demerger, the accumulated loss and the allowance for depreciation shall be dealt with as under: (i) Where such loss or unabsorbed depreciation is directly related to the undertakings transferred to the resulting company, the resulting company shall be allowed to carry forward and set off such loss and unabsorbed depreciation allowance. (ii) The loss or unabsorbed depreciation, which is not directly related to the undertakings transferred to the resulting company, shall be appropriated between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company and shall be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be. 13.7 CARRY FORWARD AND SET-OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN CASE OF AMALGAMATION OF BANKING COMPANY [SECTION 72AA] Where there has been an amalgamation of a banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under Section 45(7) of the Banking Regulation Act, 1949, the accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to be the loss or, as the case may be, allowance for depreciation of such banking institution for the previous year in which the scheme of amalgamation was brought into force and other provisions of the Income-tax Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly. 13.8 CARRY FORWARD AND SET-OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN BUSINESS REORGANIZATION OF CO-OPERATIVE BANKS [SECTION 72AB] The provisions of section 72AB are applicable to an assessee, being a successor co-operative bank, in a case where amalgamation has taken place during the relevant previous year. The said successor co-operative bank will be entitled to set off the accumulated loss and the unabsorbed depreciation, if any, of the predecessor co-operative bank as if such amalgamation had not taken place. All the other

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203

provisions of this Act relating to set off and carry forward of loss and allowance for depreciation will also apply accordingly. 13.9 LOSSES OF FIRMS [SECTION 75]

Where the assessee is a firm, any loss in relation to the assessment year commencing on or before 1st April, 1992, which could not be set off against any other income of the firm and which had been apportioned to a partner of the firm but could not be set off by such partner prior to the assessment year commencing on 1st April, 1993, then such loss shall be allowed to be set off against the income of the firm subject to the condition that the partner continues in the said firm and to be carried forward for set off under Sections 70, 71, 72, 74 and 74A. 13.10 CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE IN CONSTITUTION OF FIRM OR ON SUCCESSION [SECTION 78]

The provisions relating to carry forward and set off of loss in the event of change in the constitution of a firm or succession is as under: (i) Where the change in the constitution of a firm is owing to the death or retirement of a partner, the firm shall not be allowed to carry forward and set off the loss proportionate to the share of the retired or deceased partner. (ii) Where any person carrying on any business or profession has been succeeded in such capacity by another person, otherwise than by inheritance, such person (i.e., the successor) shall not be entitled to have the loss of the predecessor carried forward and set off against his income. 13.11 CARRY FORWARD AND SET OFF OF LOSSES IN THE CASE OF CERTAIN COMPANIES [SECTION 79]

In the case of a company, not being a company in which the public are substantially interested, where a change in shareholding has taken place in a previous year, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if on the last day of the previous year the shares of the company carrying not less than 51% of the voting rights were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred. 13.12 SUBMISSION OF RETURN FOR LOSSES [SECTION 80] In the following cases, if return of income is not submitted within the due date specified u/s 139(3), the right to carry forward losses shall be lost: (i) L o s s u n d e r t h e h e a d ― Profits and gains of business or profession‖, excluding loss from speculative business [Section 72(1)]. (ii) Loss from a speculative business [Section 73(2)]. (iii) Loss under the head ―Capital gains‖ [Section 74(1)]. (iv) Loss from the activity of owning and maintaining race horses [Section 74A (3)], Example 4: During the previous year 2016-2017, D furnishes the following particulars of his incomes and losses: ` (a) (b) (c) (d)

Salary from ABC Ltd. Dividends from Indian company Interest on Government securities Profits from the grocery business

DIRECT TAXATION

1,80,000 40,000 14,000 60,000

204

(e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o)

Profit from speculation in shares Loss from speculation in bullion Short-term capital loss Long-term capital gains 1st Prize in the West Bengal State Lottery Tickets of lottery bought Gains from card games Loss on betting Stake money received in respect of horses Expenses on maintaining horses Interest on borrowed capital in respect of self-occupied house

16,000 18,000 12,000 10,000 2,00,000 30,000 20,000 10,000 1,00,000 1,20,000 20,000

You are required to compute total income of Mr. Roy for the assessment year 2017-2018. Computation of total income of D for the assessment year 2017-2018 relating to the previous year 20162017. Answer: ` ● Income under the head ―Salaries‖ : Gross salary received Less : Deduction u/s 16 ● Income from house property : Annual value Less: Interest on borrowed capital ● Profits and gains of business or profession: Profits from grocery business Profits from speculation in shares Less : Set off of loss on speculation in bullion Loss on speculation to be carried forward (Note 1) ● Capital gains: Long-term capital gains Less : Set off of short-term capital loss Loss under the head ―Capital gains‖ to be carried forward (Note 2) ● Income from other sources: Dividend from Indian company [Exempt u/s 10(34)] Interest on Government securities 1st Prize in West Bengal State Lottery Less: Tickets bought (Note 3) Gains from card games Loss from betting (Not to be set off) (Note 4) Stake money in respect of horse races Less: Expenses on maintaining horses Loss on the activity of maintaining race horses to be carried forward (Note 5) Gross total income

`

`

1,80,000 Nil Nil 20,000

1,80,000 (-) 20,000

60,000 16,000 18,000

Nil

60,000

2,000 10,000 12,000 2,000 Nil 14,000 2,00,000 Nil 1,00,000 1,20,000 20,000

2,00,000 20,000 Nil Nil

Nil

2,34,000 4,54,000

Notes: (1) Under Section 73, loss from one speculation business can be set off only against income of the same or another speculation business. Unabsorbed loss can be carried forward and set off against income of speculation business within the next four assessment years. (2) Short-term capital loss can be set off against gains from both short-term and long-term capital assets. But if the results of computation under the head is loss, such loss can be carried forward and

DIRECT TAXATION

205

set off, as provided under Section 74(1), against income from any capital asset when such loss relates to short-term capital assets, and against income from long-term capital assets when the loss relates to long-term capital assets. Any loss under this head can be carried forward for eight assessment years. (3) As provided under Section 58(4), income from lotteries, crossword puzzles, card games, betting, etc., shall be chargeable to tax without any deduction for expenses. (4) Loss on betting cannot be set off against income from betting or against any other source. (5) The provision of Section 58(4) does not apply to the activity of maintaining race horses. Expenses on maintaining race horses is, therefore, deductible against stake money. Any loss from this source can be carried forward for four assessment years and set off against income from similar activities. Example 5: During the previous year 2015-2016, Mrs. Dasgupta furnishes the following particulars of his incomes and losses: (a) Income under the head ―Salaries‖ (computed) 90,000 (b) Income from house property in Chennai 1,20,000 (c) Loss from self-occupied house property in Agra 1,50,000 (d) Income from cloth business 1,65,000 (e) Loss from computer business 1,20,000 (f) Income from speculation business 66,000 (g) Loss from speculation business 75,000 (h) Short-term capital gain on sale of shares 60,000 (i) Short-term capital loss on sale of shares 66,000 (j) Long-term capital gain on sale of land 60,000 (k) Income from card games 30,000 (l) Loss from card games 24,000 (m) Casual and non-recurring income 20,000 (n) Dividend from Indian company 21,000 Assuming that he had in the previous year 2015-2016 an unabsorbed business loss of 30,000 from the cloth business, compute total income of X for the assessment year 2017-2018. Answer: Computation of total income of Mrs. Dasgupta for the assessment year 2017-2018 relating to the previous year 2016-2017. Headings?? • Income under the head "Salaries" 90,000 • Income from house property: Income from Chennai house 1,20,000 Loss from self-occupied house (-) 1,50,000 (-) 30,000 • Profits and gains of business or profession : Income from cloth business 1,65,000 Less: Unabsorbed loss in cloth business 30,000 1,35,000 Loss from computer business (-) 1,20,000 Income from speculation business 66,000 Less: Loss from speculation business (-) 75,000 Loss from speculation business to be carried forward (Note I) (-) 9,000 Nil 15,000 • Capital gains: Short-term capital gain on shares 60,000 Short-term capital loss on shares (-) 66,000 Long-term capital gain on land (Note 2) 60,000 54,000 • Income from other sources : Casual and non-recurring income 30,000 Dividend from Indian company [Exempt u/s 10(34)) Nil Income from card games 30,000 Loss from card games (Note 3) Nil 30,000 60,000 Gross total income 1,89,000 Less: Deductions u/ss 80C to 80U Nil Total income 1,89,000

DIRECT TAXATION

206

Notes : (1) Loss on speculation business can be set off only against income of speculation business. The unabsorbed loss can be carried forward for the next four assessment years. (2) Short-term capital loss can be set off against both short-term and long-term capital gains (3) u/s 58(4) loss from card games, lottery, etc. cannot be set off against income from similar activities. Example 6: From the following information compute the total income of R for the A.Y.2017-18: ` Income from salary 2,60,000 Income from House Property 1,00,000 Business Loss 3,20,000 Short term capital gains 1,40,000 Long term capital gains 2,80,000 [CMA-Inter , Dec 2009] Answer: Computation of total income of R for the Assessment year 2017-18 relating to previous year 2016-17 ` ` Income under the head ―Salaries‖ 2,60,000 Income from house property 1,00,000 Profits and gains of business or profession (-)3,20,000 Capital gains: short term capital gains 1,40,000 Long term capital gains 2,80,000 4,20,000 Total income 4,60,000 Note: Business loss cannot be set off against income under salary. Therefore, the business loss of `3,20,000 will be adjusted from house property (` 1,00,000) and capital gains (`4,20,000). Example 7: During the year ended 31.3.2017 S has the following income and brought forward losses: ` Particulars Short term capital gain on sale of shares Long term capital loss of A.Y.2015-16

2,60,000 90,000

Short term capital loss of A. Y2016-17 Long term capital gains Income from lotteries Cost of lottery tickets purchased

80,000 78,000 3,10,000 2,000

Loss from Betting Income from card games

-1,20,000 80,000

Briefly compute the gross total income and loss eligible for carry forward in the hands of Mr. S for the A.Y.2017-18 [CMA-Inter, June 2010] Answer: Computation of total income of S for the assessment year 2017-20018 relating to the previous year 20016-20017 ` ` Capital gains Short term capital gain on sale of shares 260000 Less: Brought forward short term capital loss of A.Y.2016-17 (80000) 180000 Long term capital gain 78000 Less: Brought forward Capital loss of A.Y.2015-16[see note 1 below] 78000 Nil Income chargeable under head Capital gains 1,80,000 Income from other sources (a)Income from lotteries (cost of lottery tickets not deductible) 3,10,000 (b)Income from card games 80,000 3,90,000 Gross total income 5,70,000

DIRECT TAXATION

207

Note: 1. Long term capital loss cannot be set-off against short-term capital gain. Hence the unadjusted long term capital loss of A.Y.2015-16 of ` 12.000 (i.e.`90,000-`78,000) has to be carried forward the next year to be set off against the long term capital gain o that year. 2. Loss from betting can neither be set against any other income nor can it be carried forward to subsequent year. 3. As per Section 58(4), cost of lottery tickets cannot be set off against income from lotteries. Example 8: The following are the details relating to S a resident Indian, aged 57, relating to year ended 31.3.2017: ` Income from salaries 2,20,000 Loss from house property 1,90,000 Loss from cloth business 2,40,000 Income from speculation business 3,0000 Loss from specified business covered by section 35AD 20,000 Long term capital gains from sale of urban land 25,0000 Long term capital loss from sale of listed equity shares in recognized stock exchange (STT 11,0000 paid) Loss from card games 32,000 Income from betting 45,000 Life insurance premium paid 1,20,000 Compute the total income and show the items to eligible for carry forward. [CMA-Inter, Dec. 2011] Answer: Computation of total income of S for the assessment year 20017-2018 relating to the previous year 2016-2017 ` ` Salaries Income from Salaries Less: Loss from house property Profits and gains of business or profession Income from speculation business Loss from cloth business Capital gains Long term capital gains from sale of urban land Income from other sources Income from betting Gross total income Less: Deduction under section 80C (life insurance premium paid) Total income Losses to be carried forward: Loss from specified covered under section 35AD

2,20,000 1,90,000

(+) 30,000

30000 2,40,000

(-) 2,10,000 (+) 2,50,000 45,000 1,15,000 30,000 85,000

20,000

Notes: (ii) Loss from specified business covered by section 35AD can be set-off only against profits and gains of any other specified business. The unabsorbed loss has to be carried forward for set-off against profits and gains of any specified business in the following year. (iii) Business loss cannot be set off against Income under the head Salaries. (iv) Income from betting/ lottery is subjected to tax @ 30% without any deduction. Deduction u/s 80C is not available against Income from Long-term capital gains or betting. In the preset case deduction u/s 80C can be claimed against salary income only. DIRECT TAXATION

208

Example 9: A furnishes the following particulars of income/loss pertaining to previous year 2016-17: (` in lacs) (i) Profit from trading business 6.00 (ii) Loss from manufacturing business 1.50 (iii) Loss from profession 2.50 (iv) Profit from speculation in shares 2.50 (v) Loss from speculation in commodities 3.00 He has no other income during the year. Determine total income of A for the Assessment Year 2017-18. Also state the loss to be carried forward. The manner of set off must be clearly shown in your answer. [CMA-Inter Dec. 2013] Answer: Particulars Profit from trading business: Less: Set off of loss from manufacturing business and loss from profession u/s 70 Profit from speculation business Less: Set off of loss from speculation in commodities u/s 73 [Note] Total income

` 6,00,000 4,00,000 2,50,000 2,50,000

` 2,00,000 Nil 2,00,000

Note: Unabsorbed loss of ` 0.50 lacs from speculation in commodities can be carried forward by A for four assessment years. Multiple choice questions 1. Unabsorbed business losses can be carried forward for not more than: (a) Unlimited assessment years (b) 8 assessment years (c) 10 assessment years (d) 12 assessment years Ans: (b) 8 assessment years Long term capital loss can be adjusted against: (a) Any income excluding winning from lottery, etc. (b) Any capital gain (c) Any long term capital gain (d) Any speculative business income Ans: (c) Any long term capital gain 2.

3.

Unabsorbed depreciation can be carried forward for: (a) Indefinite periods (b) 4 years (c) 8 years (d) 10 years Ans: (a) Indefinite periods 4.

The maximum period for which speculation loss can be carried forward is not more than : (a) 4 years (b) 8 years (c) Indefinitely (d) Cannot be carried forward Ans: (a) 4 years 5.

Which of the following loss cannot be carried forward? (a) Loss from speculative business DIRECT TAXATION

209

(b) Loss under the head Capital gains (c) Loss under the head Income from other sources (d) Loss under the head Income from house property Ans: (c) Loss under the head Income from other sources 6.

Unabsorbed depreciation cannot be set off against: a) Income under the head ‗Income from other sources‘ b) Income under the head ‗Income from House-Property‘ c) Income under the head ‗Salaries‘ d) Capital gains Ans: (c) Income under the head ‗Salaries‘ 7.

Accumulated losses of a firm which is converted into Limited Liability Partnership can be carried forward for: (a) 8 years (b) 7 years (c) 4 years (d) Cannot be carried forward Ans: (a) 8 years 8.

Loss from activity of owing and maintaining horse race can be carried forward for: (a) 8 years (b) 4 years (c) Indefinite years (d) 2 years Ans: (b) 4 years 9.

Loss from house property can be carried forward and set off in subsequent 8 assessment years: (a) Only if return of loss is filed within due date (b) Even if return of loss is filed after due date (c) It does not matter when return is filed (d) Carry forward of loss from house property is not allowed at all Ans: (b) Even if return of loss is filed after due date.

DIRECT TAXATION

210

STUDY NOTE : 14 DEDUCTIONS FROM GROSS TOTAL INCOME [SECTION S80C— 80U] THIS STUDY NOTE INCLUDES: 14.1 Nature of Deduction 14.2 Deduction available to a Non-Corporate Assessee 14.3 Deductions for Specified Savings and Payments [Section 80C] 14.1 NATURE OF DEDUCTION In computing the taxable income or total income of an assessee, Chapter VI-A of the Income-tax Act allows certain deductions. The various deductions available to the different types of assessees are specified in sections 80 C to 80U. In order to claim deductions under this Chapter of the Act, the following conditions are to be complied with: A. Overall deductions [Sections 80A; 80AB]: Deductions under this chapter can be claimed only with respect to the income which is included in the gross total income [Section 80AB]. The aggregate deductions under Sections 80C to 80U, however, shall not exceed the gross total income of the assessee [Section 80A(2)]. Further, multiple deductions for the same income/profit are not allowed under this section. As result, if any deduction has already been allowed to the assessee under the provisions of Section10A or Section 10AA or Section 10B or Section 10BA or under any provisions of Chapter VI-A under the heading ―C.Deductions in respect of certain incomes‖ (i.e. u/s 80H to 80U) in any assessment year, no deduction shall again be allowed under any other provisions of the aforesaid sections. Besides, it is mandatory for the assessee to claim these deductions in the return of income. B. Deduction in certain cases are subject to furnishing of returns [ Section 80AC]: No deduction shall be allowed u/s 80-IA or 80-IAB or 80IB or 80IC or Section 80-ID or Section80-IE unless the assessee furnishes a return of his income for such assessment year on or before the due date specified under Section 139(1). 14.2

DEDUCTIONS AVAILABLE TO A NON-CORPORATE ASSESSEE

The deductions under Sections 80C to 80U available to a non- corporate assessee may be classified into two groups: A. Deductions in respect of certain payments and expenses B. Deductions in respect of certain incomes. Deductions available u/s 80C to 80U for non-corporate assessee Section *8OC *80CCC

Nature of deduction A. Deductions in respect of certain payments Deduction in respect of life insurance premium and certain other savings. Deduction in respect of certain pension funds. [*Aggregate amount of deductions u/ss 80C, 80CCC and 80CCD(1) shall not exceed ` 1,50,000 [Section 80CCE]

DIRECT TAXATION

Maximum amount of deduction ` 1,50,000 ` 1,50,000.

211

Section Nature of deduction *80CCD (1) Deduction for contributions to the notified 80CCD(1B) pension scheme for the employees of the Central Government or any other employer who have joined service on or after 1st January, 2004 or contributions by any selfemployed person. 80CCG

Deductions in respect of investments made under an equity savings scheme

80D

Deduction in respect of medical insurance premium.

80DD 80DDB

80E 8OEE

80G 80GG 80GGA 80GGB 80GGC

80IA

80-IAB

80IB

80IC 80JJA

80JJAA

Deduction in respect of maintenance, including medical treatment of handicapped dependent. Deduction in respect of medical treatment of some specified diseases

Deduction in respect of payment of interest on loan taken for higher education. Interest on loan taken from financial institutions for acquisition of residential house property for assessees who do not own any residential house property on the date of sanction of the loan Deduction in respect of donation to certain funds and charitable institutions. Deduction in respect of rent paid. Deduction in respect of certain donations for scientific research or rural development. Deduction in respect of contributions given by an Indian company to political parties. Deduction tor contributions to political parties by any person, except local authority and an artificial juridical authority wholly and partly funded by the Government. B. Deductions in respect of certain incomes Deduction in respect of profits and gains from industrial undertakings or enterprise engaged in infrastructure development. Profits and gains of an undertaking engaged in the development of Special Economic Zone. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development under-takings. Deduction for undertakings in special category states. Deduction in respect of profits from the business of collecting and processing of biodegradable waste. Deduction in respect of Employment of new workman in the case of a company assesse having business income from manufacture of goods in factory DIRECT TAXATION

Maximum amount of deduction Contributions made by the employer and employee are deductible to the extent of 10% of salary. [80CCD (1)] Additional amount up to ` 50,000 [80CCD(1B)]. Subject to the ceiling on investment of ` 50,000, actual deduction is 50%. of the sum actually invested, provided that the GTI of the assessee does not exceed ` 12 lakh. (a)For senior citizens ` 30,000 and (b)`25,000 for others. Maximum possible deduction `60,000 [a+ b] ` 75,000 ; ` 1,25,000 in case of severe disability Actual amount spent or, ` 80,000 for very senior citizens, ` 60,000 for senior citizens and ` 40,000 for others, whichever is lower. Actual amount paid. Fixed at ` 50,000 during the assessment years 2017-18 and subsequent assessment years. Amount of loan should not exceed ` 35 lakhs and value of the property should not exceed ` 50 lakhs 100%. of donations to specified funds and 50% in other cases. 25% of total income subject to a maximum of ` 5,000 p.m. Actual amount paid. Actual amount contributed (other than cash) during the previous year. Actual amount contributed (other than cash) during the previous year.

100% of profits.

100% of profit for 10 assessment years.

100% of profits for industries in backward states; in other cases 25% of profit (30% for corporate assessee). 100% of profits. 100% of profits.

30% of the wages paid to new workmen for three years including the year in which employment is provided.

212

80LA

Deduction in respect of income of offshore banking units.

80QQB

Deduction in respect of royalty income of authors of certain books other than text books.

80RRB

Deduction in respect of royalty on patent.

80U

14.3

Deduction in the case of a person with disability.

100% of income for the first fire consecutive years and 50% of the income for the next five years. In case of lump sum payment amount actually received or ` 3,00,000, whichever is lower; in other cases 15% of the value of books sold or ` 3,00,000, whichever is lower. 100% of royalty or ` 3,00,000, whichever is lower. ` 75,000; ` 1,25,000 in case of severe disability.

DEDUCTIONS FOR SPECIFIED SAVINGS AND PAYMENTS [SECTION80C]

1. The schemes of deduction under this section is as under: A. Important features of Section 80C: The important features of Section 80C are as under:

(a) Deduction under this section is available to an individual and a Hindu undivided family. (b) The aggregate of deductions u/ss80C, 80CCC and 80CCD shall not exceed `1,50,000. Besides, the maximum amount that can be allowed under this section must not exceed the gross total income of the assessee.

(c) Deduction under Section 80C is allowed with reference to the amount actually paid during the previous year. However, such amount need not be paid out of the taxable income of the assessee.

(d) Deduction under Sections 80C – 80U cannot be claimed against long-term capital gains which are chargeable to tax u/s 112 and short-term capital gains from shares of a company or units of an equity oriented fund which are chargeable to tax u/s 111A. Similarly, no deduction u/s 80C can be claimed against income from lotteries, crossword puzzles and horse races. B. Gross qualifying amount and net qualifying amount of deduction: In view of the restrictions mentioned in A above, deduction under Section 80C shall be computed under the following steps:

(a) Qualifying amount: The amount which qualifies for deduction u/s 80C is the sum total of amount mentioned below.

(b) Actual deduction: The net qualifying amount or actual amount which qualifies for deduction u/s 80C shall be the least of the following: (i) Aggregate of amounts mentioned in para C below; (ii) ` 1,50,000 where the assessee has no claim for deduction u/ss 80CCC and 80CCD. Where the assessee has claim under Sections 80C, 80CCC and 80CCD, the aggregate of deductions under Sections 80C, 80CCC and 80CCD (1) [Section 80CCD (1) relates to employee‘s own contribution to the New Pension Scheme specified under Section 80CCD] shall not exceed ` 1,50,000. [Vide section 80CCE]. With effect from the assessment year 201213, due to the amendment of Section 80CCE, contribution made by the Central Government or any other employer to the said pension fund shall not be included in the overall limit of ` 1,50,000. Employers‘ contribution to the said pension fund to the extent of 10% of salary of the employee shall be separately deductible u/s 80CCD (2). (iii) The adjusted gross total income [i.e., GTI – LTG – STG taxable u/s 111A]. C. Savings/ payments which qualifies for deduction u/s 80C: The following payments/savings are eligible for deduction u/s 80C (a)

• Life insurance premium (including arrears of premium) on the life of the assessee, his/her spouse or any child or in the case of a HUF, any member thereof.

10% of the sum assured in respect of policies issued on or after 1.4.2012 (20% in respect of policies issued

DIRECT TAXATION

Child may be married or unmarried, major or minor, 213

(b)

(c)

(d)

• Premium (including arrears of premium) for securing a deferred annuity Any sum deducted from salary of a Government employee for the purpose of securing him a deferred annuity or making provision for his wife or children.

before 1.4.2012); and 15% of the policy in respect of policy taken on or after 1st April 2013 on the life of persons with disability. Any excess premium shall be ignored. Not applicable

Contribution to any statutory provident fund, recognized provident fund or public provident fund Contribution to an approved superannuation fund

20% of salary*

Do

(e)

Subscription to National Savings Certificates VIII Issue, including accrued interest for the first 5 years

Do

(f)

Contribution to Unit-Linked Insurance Plan of UTI Contribution to Unit-Linked Insurance Plan of LIC Mutual Fund (e.g., Dhanaraksha Plan Contribution to any notified annuity plan of LIC or any other insurer (e.g., New Jeevan Akshay, New Jeevan Dhara -I, New Jeevan Akshay-I plan of LIC, New Jeevan Akshay-II plan of LIC and New Jeevan Akshay-III) Subscriptions to notified Equity-Linked Savings Schemes of notified mutual funds or UTI Contribution to any approved pension fund set up by notified mutual funds u/s 10(23D) or UTI [e.g., Retirement Benefit Scheme of UTI]. Any subscription made to any such deposit scheme, as the Central Government may, by notification in the Official Gazette, specify for the purpose of being floated by (a) public sector companies engaged in providing long-term finance for construction or purchase of houses in India for residential purposes, or, (b) any authority constituted in India by, or, under any law, enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both. Subscription to Home Loan Account Scheme of the National Housing Bank

Do

Payment of instalments towards the cost or repayment of loans taken from approved institutions for purchase or construction, including stamp duty and registration

Do

(g)

(h)

(i)

(j)

(k)

(l) (m)

DIRECT TAXATION

dependent] or independent

Repayment of loan is not to be considered Do Non-residents not eligible

Do

Do

Do

Do

Do This condition does not apply where an additional unit is constructed on 214

(n)

(o)

(p) (q)

(r)

(s) (t)

(u)

charges, of a residential house, the income of which h is chargeable under the head "Income from house property". /Approved institution means: Central or State Government, any bank/co-operative bank, LIC, National Housing Bank, any Indian public company/co-operative society carrying on the business of providing longterm finance for construction/ purchase of residential house, assessee's employer, which is a public] company or a public sector company, or a university/college or a local authority or a co-operative society or an authority or a board or a corporation or any other body established under a Central or State Act.) Tuition fees, at the time of admission or thereafter, to any university, college, school or other educational institution situated in India for the whole time education of children of the assessee

Any subscription to equity shares or debentures forming part of the eligible issue of capital approved by the board on an application made by a public company or as subscription to any eligible issue of capital by any public financial institution Subscription to units of any mutual funds referred to in Section 10(23D) Any term deposit for a period of not less than five years with a scheduled bank under the Bank term Deposit Scheme 2006 Subscription to such bonds issued by the National Bank for Agriculture and Rural Development as the Central Government may by notification in the Official Gazette specify in this behalf. Deposit in an account under the Senior Citizens Savings Scheme Rules, 2004;

an existing residential house property [Vide Ministry of Finance Utter No. F.178l24j 88-IT(Al) dt.U2.89J. The property must be completed during the previous year.

Do

Deduction is allowed only for two children. Development fees, donation or payment of similar nature are not eligible.

Do

Do Do

As five year time deposit in an account under the Post Office Time Deposit Rules, 1981. Any sum paid or deposited during the year in the Scheme in the name of any girl child of the individual or in the name of any girl child for whom such individual is the legal guardian (Sukanya Samridhi Account Scheme)

2. Deduction in respect of certain pension funds [Section 80CCC]: An individual assessee who paid or deposited during the previous year any sum to effect or to keep in force a contract for any annuity plan of the Life Insurance Corporation of India or any other insurer for receiving pension is eligible for deduction u/s 80CCC. Amount of deduction: `1,50,000 or actual amount paid, whichever is less. The deduction under this section is subject to the following conditions:

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215

(i)

Where the assessee or his nominee surrenders the annuity before the maturity date of such annuity, the entire amount received on surrender of the annuity plan shall be taxable in the hands of the assessee or his nominee, as the case may be. (ii) The amount of pension received by the assessee or his nominee shall be taxable in the hands of the assessee or his nominee, as the case may be, in the year of receipt. (iii) Where deduction has been claimed under this section, a deduction with reference to such amount shall not be available under Section 80C. 3. Deduction in respect of contribution to pension scheme of Central Government employees [Section 80CCD]:

The provisions of this section that relates to the new pension schemes for the Central Government as well as the private sector employees are as under: Contribution made to this pension scheme during the previous year by the Central Government or any other employer shall be included in the definition of salary [Section 17(1)(viii)]. Besides, u/s 7(iii), this contribution of the employer shall be deemed to be received during the previous year. As a result of these amendments, the contribution of the employer to this pension scheme shall be included in the gross salary of the employee. Section 80CCD has been inserted in order to provide deductions for contributions made to this scheme both by the employer and the employee as under:  where an assessee being an individual, employed by the Central Government or any other employer on or after 1st January, 2004,or a self-employed person, who has paid or deposited any amount in this account under a pension scheme notified or as may be notified by the Central Government, then, subject to a maximum of 10% of salary of the employee, (in the case of selfemployed person 10% of gross total income) there shall be allowed a deduction in the computation of his total income of the whole of the amount paid or deposited by him [Section 80CCD(1)].However, in view of the overall limit u/s 80CCE, the amount of deduction u/s80CCD shall not exceed `1.50lakh.  With effect from the assessment year 2016-17, Irrespective of the deduction u/s 80CCD(1), an assessee may be allowed a further deduction upto ` 50,000 under any notified pension scheme [Section 80CCD (1B)]. In other words, the maximum deduction u/s 80CCD shall be `2,00,000 [u/s 80CCD(1) ` 1,50,000 + u/s 80 CCD(1B) `50,000].  In the case of contribution by the employer to the aforesaid pension scheme, subject to a maximum of 10 % of the salary of the employee, the assessee shall be allowed a deduction in the computation of his total income, of the whole amount so contributed by the employer [Section80CCD(2)].  Where any amount standing to the credit of the assessee in his pension account in respect of which a deduction has been allowed under Section 80CCD(1) or 80CCD(1B), together with the amount accrued thereon, if any, is received by the assessee or his nominee on account of closure or his opting out or the said pension scheme whether in whole or in part in any previous year, or as pension received from the annuity plan, shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such withdrawal is made or as the case may be, pension is received and shall accordingly be chargeable to tax as income of that previous year [Section80CCD(3)].However, with effect from the assessment year 2017-2018, amount received by the nominee on the death of the shall not be treated as income of the nominee. It is clarified that, when the corpus of the pension fund is used for purchasing an annuity plan, the assessee shall be deemed not to have received any amount in the previous year [Section80 CCD(5)].  Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (1) or 80 CCD (1B), no rebate with reference to such amount shall be allowed under Section 80C [Section 80CCD(4)].  For this purpose ―salary‖ includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

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216

4. Deduction for investment under an equity scheme [Section 80CCG]: Under the provision of this section further deduction is available in respect of investment in listed equity shares or listed units of an equity oriented fund. The deduction under this section is subject to the following conditions: a. The assessee is a resident individual whose gross total income for the assessment year does not exceed ` 12 lakh. (ii) The investment is made by him as a retail investor in the listed equity shares in accordance with a scheme notified by the Central Government fund (e.g. Rajiv Gandhi Equity Savings Scheme, 2013). (iii) The deduction is allowed for three consecutive assessment years, beginning with the assessment year in which the aforesaid shares or units were first acquired. (iv) The investment is locked-in for a period of three years from the date of acquisition of the shares. (v) The maximum amount of investment allowed under the scheme is ` 50, 000. (vi) Actual deduction is 50% of the sum invested under the scheme, subject to the maximum of ` 25,000. (vii) If the shares are sold within the locked-in period specified above, the deduction originally allowed shall be added to the income of the assessee for the year in which such shares are sold 5. Deduction in respect of medical premia [Section 80D]: What is allowed to be deducted: With effect from the assessment year 2016-2017, deduction u/s 80D shall be available for:

(a) Insurance on the health of the employee (including contribution to the Central Government Health Scheme) and his family to the extent of `25,000 (` 30,000 if any of the insured person is a senior citizen)

(b) Insurance on the health of the parents of the employee to the extent of `25,000 (` 30,000 if any of the insured person is a senior citizen)

(c) Preventive health check-up up to `5,000, that may be paid by any mode including cash, within the overall limit under (a) and (b) above; [Maximum amount allowed to be deducted for this purpose is ` 5,000]

(d) Medical expenditure up to ` 30,000 incurred for the assessee or any member of the family who is a very senior citizen and no amount paid to keep in force an insurance on the health such person; and

(e) Medical expenditure up to ` 30,000 incurred for any of the parents of the assessee who is a very senior citizen and no amount paid to keep in force an insurance on the health such person. [In other words persons mentioned under (d) and (e) are very senior citizens who do not have health insurance coverage] Maximum deduction: The maximum deduction is as follows: (a) + (c) (b) + (d) Total

No Senior citizen 25,000 25,000

Senior citizen 30,000 30,000

50,000

60,000

Note that, if none of the assessee‘s own family is a senior citizen and any of the parents of the assessee is a senior or very senior citizen, the maximum deduction shall be [` 25,000 + ` 30,000] = ` 55,000. Meaning of senior citizen and very senior citizen: A senior citizen has been defined to be an individual resident in India who is of the age of sixty years or more at any time during the previous year. Similarly, a very senior citizen has been defined to be an individual resident in India who is of the age of 80 years or more at any time during the previous year. Example: Assessee and his family

Assessee‘s parents

Amount of premium

DIRECT TAXATION

Preventive check-up

Person to get deduction u/s 80D

217

Age not exceeding 60

—

Age not exceeding 60

Age not exceeding 60

Age Not exceeding 60

Age exceeding 60

Age exceeding 60

Age exceeding 60

Assessee and his family Age exceeding 60

Assessee‘s parents Age exceeding 60

Age not exceeding 60

Father 82 years Mother 72 years Father 82 years Mother 72 years

Age not exceeding 60

Age not exceeding 60

Father 82 years Mother 72 years

` 30,000 paid by the assessee for himself and family: premium paid by the assessee ` 30,000 for himself and family, ` 30,000 for parents: premium paid by the assessee ` 30,000 for himself and family; ` 30,000 for parents, out of which ` 10,000 paid by the parent out of his own income ` 35,000 for himself and family, ` 30,000 for parents — all paid by the assessee

Amount of premium ` 40,000 for himself and family; `40,000 for parents, out of which parent paid ` 16,000 out of his own income 30,000 paid by the assessee for himself and family: premium paid by the assessee

` 5,000

Assessee: ` 20,000 +` 5,000 = ` 25,000

Total ` 8,000

Assessee: (` 25,000 + 30,000] = `55,000. Cost of preventive check-up included within `55,000. Assessee ` (25,000 + 20,000)=45,000; Parent to get deduction ` 10,000.

` 5,000

Assessee: (25,000 + 30,000] =` 55,000. Preventive check-up included

Preventive check-up 5,000

Person to get deduction u/s 80D Assessee: [30,000 + 24,000] = ` 54,000. Parent to get deduction for ` 16,000.

5,000

Assessee : ` 20,000 + ` 5,000 = `25,000

(a) ` 30,000 for himself and Assessee and his family ` Total ` 8,000, 25,000 + Parents ` 30,000 = family, (b) `30,000 for mother‘s out of this ` 55,000. for mother insurance ` 3,000 (c) Medical expenses of father ` 10,000 ` 10,000 for (Assesse and his family = (a) No insurance policy for `5,000 + Parents ` 30,000 = assessee and his family; assessee (b) Medical expenses for mother ` 30,000. and his ` 20,000 family (c) Medical expenses for father ` 31,000.

Example 1: During the previous year 2017-2018, X pays the following amount for the purpose of medical insurance of his family. His family consists of his wife, a dependent daughter and a son (working as an engineer in a company) and his father who is of the age of 60 years and working at a central university. (i) Premium paid for self and wife `20,000; (ii) Premium paid for son `10,000; (iii) Premium paid for daughter ` 8,000; An additional amount of ` 4,000 was spent for preventive health check-up for her. (iv) Premium paid for father `31,000. (a) Under what section can X claim for deduction in respect of the medical insurance premiums? (b) How much deduction can X claim in respect of the premiums?

DIRECT TAXATION

218

Answer:

(a) In respect of medical insurance premiums X can claim deduction u/s 80D. (b) The total amount for which X can claim deduction u/s 80D is `55,000, which is computed as under: (a) Premiums for self and wife (b) Premium for son(not dependent) (c) Premium for dependent daughter (including cost of preventive check-up) Total amount paid for the family subject to a maximum of ` 25,000 (d) Premium paid for father (a senior citizen but not dependent on X) Total deduction u/s 80D to be claimed by X

20,000 Nil 12,000 25,000 30,000 55,000

Note: With effect from the assessment year 2014-15, cost of preventive check-up up to ` 5,000 is allowed to be claimed under Section 80D, but this must be claimed within the overall limit of ` 25,000 or ` 30,000, as the case may be. Example 2: From the particulars given below by X during the financial year 2016-17 find out the amount of deduction u/s 80D: Cases Assessee Wife Daughter Father Mother (50 yrs) (45 yrs) (18 yrs) (80 yrs) (75 yrs) Case A: Medical insurance premium 15,000 10,000 5,000 — 20,000 Preventive check-up/medical expenditure — 3,000 2,000 20,000 1,000 Case B: Medical insurance premium — — — — 15,000 Preventive check-up/medical expenditure — — 5,000 30,000 — Ans: Computation of deduction u/s 80D for the assessment year 2016-2017 Case A : (a) Premiums for own family (15,000 + 10,000 + 5,000) + preventive health check-up (3,000 + 2,000 + 1,000), subject to a maximum of ` 25,000 (b)Premium for parents plus preventive check-up: maximum limit ` 30,000 Amount allowed to be deducted: Case B : [a) Preventive cheek-up for daughter [ u/s 80D(2)(a))] (b) Medical insurance premium for mother [M/S 80D(2)(b)] [c) Medical expenditure for father Amount allowed for deduction Maximum amount for (a) +(b)=(c)

` 25,000

`

21,000 55,000 5,000 15,000 30,000

30,000 35,000

6. Deduction in respect of maintenance, including medical treatment of a dependent who is a person with disability [Section 80DD]: Subject to the fulfilment of the conditions, deduction under this section can be claimed by an individual or HUF in respect of the following expenditures/ deposits:

(a) any expenditure during the previous year for the medical treatment (including nursing), training and rehabilitation of a dependent, who is a person with disability; or

(b) any amount deposited or paid under a scheme framed in this behalf by the Life Insurance Corporation or any other insurer or the UTI. Amount of deduction: Irrespective of the actual amount spent or deposited under (a) or (b) above, the deduction shall be: (i) ` 1,25,000 where the dependent is a person with severe disability. (ii) ` 75,000 in other cases. Conditions: Some of the important conditions are:

DIRECT TAXATION

219

(1) The scheme in (b) above provides for payment of annuity or lump sum amount for the benefit of the handicapped dependent in the event of death of the individual or member of the HUF in whose name subscription to the scheme has been made. (2) The assessee nominates either the dependent, being a person with disability or any other person or a trust to receive the payment on his behalf, for the benefit of the dependent, being a person with disability. (3) If the dependent, being a person with disability, predeceases the assessee, an amount equal to the amount paid or deposited in (b) above shall be deemed to be the income of the previous year in which such amount is received by the assessee and shall accordingly be charged to tax as the income of the previous year. ●Meaning of dependent: ―Dependent‖ means: (i) in the case of individual: the spouse, children, parents, brothers and sisters; (ii) in the case of a HUF: any member of the HUF, who is dependent wholly or mainly on such individual or HUF for his support and maintenance, and who has not claimed any deduction u/s 80U in respect of his income during the relevant previous year. ● Meaning of disability: ―Disability‖ shall have the meaning assigned to it in Section 2 (i) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 [i.e. , blindness, low vision, leprosy-cured, hearing impairment, locomotors disability, mental retardation and mental illness]. and, w.e.f. the assessment year 2005-2006, includes ―autism‖, ―cerebral palsy‖ and ―multiple disability‖ referred to in clauses (a) , (c) and (h) of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999 ●Meaning of person with severe disability: For the purpose of this section ―person with severe disability‖ means: (i) a person with eighty percent or more of one or more disabilities, as referred to in Section 56 (4) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995; or (ii) a person with severe disability referred to in Section 2(o) of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999. 7. Deduction in respect of medical treatment of some specified diseases [Section 80DDB]: Under this section, an assessee, who is a resident in India, can claim deduction for treatment of diseases specified in Rule 11DD. The deduction is allowed in respect of treatment for the assessee himself or a dependent relative or in the case of a HUF, any member of the HUF. Specified diseases under Rule 11DD: (a) Neurological Diseases (where the disability level has been certified to be 40% and above) : Dementia, Dystonia Musculorum Deformans, Motor Neuron Disease, Ataxia, Chorea, Hemiballismus, Aphastia, Parkinson‘s Disease, (b) Malignant Cancers, (c) AIDS, (d) Chronic Renal Failure, (e) Hematological disorder : Hemophilia, Thalassaemia. ●Amount of deduction: (i) Actual amount spent during the previous year or `40,000, whichever is lower. (ii) In case the assessee or any person for whom the expenditure is made, is a senior citizen (i.e. 60 years or more at any time during the previous year), actual amount spent during the previous year or ` 60,000, whichever is lower. (iii) In the case of an assessee who is a very senior citizen (80 years of age or more at any time during the previous year) actual sum spent during the year or ` 80,000, whichever is lower.

●Conditions: (1) No such deduction shall be allowed unless the assessee obtains the prescription for such medical treatment from a neurologist, an oncologist, a urologist, a haematologist, an immunologist or such other specialist, as may be prescribed. DIRECT TAXATION

220

(2) The amount of deduction (` 40,000or `60,000 or ` 80,000, as the case may be) shall be reduced by the amount of any claim received under a medical insurance policy or reimbursed by the employer. 8. Deduction in respect of payment of interest on loan taken for higher education [Section 80E]: Deduction under his section is available in respect of any interest on loan taken from any financial institution or any approved charitable institution for pursuing his/her higher education or for the purpose of higher education of his/her spouse and children. Amount of deduction: Deduction under this section is the actual amount of interest paid during the previous year. The deduction shall be allowed for eight assessment years starting from the year the payment of interest starts, or the year in which interest is paid in full, whichever is earlier. Meaning of higher education: Higher education‖ means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so and includes all fields of studies including vocational studies. Deduction under this section is available for part-time courses as well. 9. Deduction for interest on loan taken for residential property [Section80EE]: With effect from the assessment year 2017-2018, section 80EE has been amended to provide deduction for interest payable on loan taken by an individual from any financial institution for the purpose of acquisition of a residential house property. Conditions: (i) Beginning with the assessment year 2017-2018 and subsequent assessment years, the deduction under this section shall not exceed ` 50,000. (ii) The loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017. (iii) The amount of loan sanctioned for acquisition of the residential house property does not exceed ` 35 lakh. (iv) The value of residential house property does not exceed ` 50 lakh. (v) The assessee does not own any residential house property on the date of sanction of the loan. (vi) Where any deduction under this section is allowed in respect of the interest, no deduction shall be allowed in respect of such interest under any other provision of the Act for the same or any other assessment year. 10. Deduction in respect of donation to certain funds and charitable institution s [Section 80G]: Deduction under this section is available to any assessee and the quantum of actual deduction varies from 100% to 50% of the qualifying amount. Further, no deduction under this section shall be allowed in respect of any donation exceeding ` 10,000 unless it is paid by any mode other than cash. The table below enumerates the eligible funds and institutions along with the maximum limit of contribution and actual deduction. SI. No. 1 2 3 4 5 6 7

Funds or Institutions where contribution is made

The National Defence Fund. Jawaharlal Nehru Memorial Fund. The Prime Minister's Drought Relief Fund. The Prime Minister's National Relief Fund. The Prime Minister's Armenia Earthquake Relief Rind. The Africa (Public Contribution India) Fund. The National Children's Fund

DIRECT TAXATION

Maximum Actual deduction Limit of (% of net qualifying contribution amount) No limit 100% Do 50% Do 50% Do 100% Do 100% Do 100% Do 100%

221

8 9 10 11 12

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

28 29 30

31

32

33 34 35

The Indira Gandhi Memorial Trust. The Rajiv Gandhi Foundation. The National Foundation for Communal Harmony. Any University or Educational Institution of National eminence approved by the prescribed authority. The Maharashtra Chief Minister's Relief Fund during the period beginning on the 1st day of October, 1993 and ending on the 6th day of October 1993, or the Chief Minister's Earthquake Relief Fund, Maharashtra. Any fund sol up by the Slate Government of Gujarat exclusively for providing relief lo the victims of the earthquake in Gujarat Any Zilla Saksharata Samiti. The National Blood Transfusion Council or any State Blood Transfusion Council. Any fund set up by the Slate Government to provide medical relief for the poor. Any Central Welfare Fund for the Army, Navy or Air Force. The Andhra Pradesh Chief Minister's Cyclone Relief Fund. The National Illness Assistance Fund. The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund. The National Sports Fund. The National Cultural Fund. The Fund for Technology Development and Application set up by the Central Government. The National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Diseases. Any other fund or Institution to which Section 80G(5) The Government or any local authority, to be utilised for any charitable purpose (other than for promoting family planning) Any authority constituted In India by or under any law engaged for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or Improvement of cities, towns and villages or both four/. A.Y. 20032001). Any Corporation referred to in Section 10(20BB). The Government, any local authority or Institution for the purpose of promoting family planning. Any sum paid in the previous year as donations for renovation or repair of temple, mosque, gurdwara, church or other places notified by the Central Government. For an assessee being a company, any sum paid to the Indian Olympic Association or any other association covered under Section 10(23) for development of Infrastructure for sports and games and sponsorship of sports and games in India. Any sum paid during the period beginning on the 26th of January. 2011, and ending on the 30th of September. 2001,to any trust, institution or fund to which Section 80G(5C) applies for providing relief to the victims of the earthquake in Gujarat. the Swachh Bharat Kosh, set up by the Central Government . Clean Ganga Fund, set up by the Central Government, where such assessee is a resident. National Fund for Control of Drug Abuse

Do Do Do Do

50%. 50%. 100% 100%

Do

100%

Do

100%

Do Do

100% 100%

Do

100%

Do Do Do Do

100% 100% 100% 100%

Do Do Do

100% 100% 100%

Do

100%

Upper limit applies Upper limit applies Upper limit applies

50%

Upper limit applies Upper limit applies Upper limit applies

50%

50% 50%

100% 50%.

Upper limit applies

50%

No upper limit

100%

No upper limit No upper limit No upper limit

100% 100% 100%

Applicability of section 80G(5): Section 80G (5) applies to donations to any institution or fund only if it is established in India for a charitable purpose and it fulfils the following conditions: (i) The institution or fund derives any income which is exempt u/s 11 or 12 or 10(23AA) or 10(23C). (ii) Any part of the income or assets of the institution or fund are not applied for any purpose other than a charitable purpose. DIRECT TAXATION

222

(iii) The institution or fund is not for the benefit of any particular religious community or caste. (iv) The institution or fund maintains regular accounts of its receipts and expenditure. (v) The institution or fund is either constituted as a public charitable trust or is registered under the Societies Registration Act, 1860 or under Section 25 of the Companies Act. (vi) If the institution is an educational institution, it is either a university established by law or is an institution which is recognised by the Government or by a university established by law. (vii) The institution or fund is approved by the Commissioner of Income-tax in accordance with Rule 11AA. Applicability of Section 80G(5C): This section applies only if the trust or institution or fund is established in India for a charitable purpose and it fulfils the following conditions: (i) It is approved by the Commissioner of Income-tax in accordance with Rule 11AA. (ii) It maintains separate accounts of income and expenditure for providing relief to the victims of earth quake in Gujarat. (iii) The donations made to the trust or institution or funds are applied only for providing relief to the earth quake victims of Gujarat on or before the 31st March, 2004. (iv) The amount of donation remaining unutilised on the 31st March, 2004 is transferred to the Prime (v) Minister‘s National Relief Fund on or before the 31st March, 2004. (vi) It renders accounts of income and expenditure to the Director General of Income-tax in accordance with the provisions of Rule 18AAAA on or before the 30th June, 2004. Upper limits of contributions: In SL. No.25 to 35 of the table above, the aggregate amount of contributions made by the assessee shall not exceed 10% of the adjusted total income. Adjusted gross total income for this purpose means the gross total income as reduced by: (i) Long-term capital gains. (ii) Short-term capital gains u/s 111A. (iii) All deductions u/s 80C to 80U, except deduction u/s 80G. (iv) Incomes on which no tax is payable under any provision of the Income-tax Act. (v) Incomes mentioned u/s 115A, 115AB, 115AC, 115ACA and 115AD. Example 3: X makes the following donations during the previous year 2016-2017: (a) Chief Minister‘s Relief Fund for the Gujarat Earth quake Victims ` 5,000 (b) The Prime Minister‘s Relief Fund 10,000 (c) Ramakrishna Mission: In cash 5,000 In kind 5,000 Determine how much deduction is X eligible for the donations during the assessment year 2017-2018. Ans: Computation of deduction u/s 80G of X for the assessment year 2016-2017 relating to the previous year 2016-2017. Gross Rate of Actual Amount Deduction Deduction ` ` ` (a) Chief Minister‘s Relief Fund for Gujarat Earthquake Victims 5,000 100% 5,000 (b) Prime Minister‘s Relief Fund 10,000 100% 10,000 (c) Ramakrishna Mission 5,000 50% 2,500 —in cash 5,000 Nil Nil —in kind Total 25,000 17,500 Example 4: Mrs. A has a gross total income of ` 5,00,000 during the previous year 2016–2017. During the years he makes the following donations: ` 10,000

(a)Rajiv Gandhi Foundation DIRECT TAXATION

223

(b)Kolkata Municipal Corporation for promotion of family planning c) Zila Saksharata Samiti (d)Prime Minister‘s Drought Relief Fund

60,000 10,000 10,000

Compute the amount of deduction Mrs. A is eligible during the assessment year 2017–2018. Ans: Computation of deduction u/s 80G of Mrs. A for the assessment year 2017-2018 relating to the previous year 2016-2017. Gross Qualifying Role of Actual Amount Amount Deduction Deduction ` ` ` ` A. Donation without upper limits : Rajiv Gandhi Foundation 10,000 10,000 50% 5,000 Zila Saksharata Samiti 10,000 10,000 100% 10,000 Prime Minister's Drought Relief Fund 10,000 10,000 50% 5,000 B. Donation with upper limits : Kolkata Municipal Corporation for Promoting Family Planning 60,000 *50,000 100% 50,000 (*not exceeding 10% of GTI) Total 90,000 80,000 70,000 Example 5: For the assessment year 2017-2018, the gross total income of Q was ` 2,28,240,which includes long-term capital gains of `45,000 and short-term capital gains(from sale of jewellery) `8,000.The gross total income of Q also includes interest from bank `12,000.Q deposited `60,000 in the Public Provident Fund Account and also paid `11,000 for medical insurance premium. He also contributed `15,000 to a public charitable trust eligible for deduction u/s80G. Compute total income of Q. Answer: Computation of total income of Q, a resident individual, for the assessment year 2017-2018 relating to the previous year2016-2017. ` ` Gross total income 2,28,240 Less: Deductions under Sections 80C to 80U : (i) u/s 80C in respect of PPF 60,000 (ii) u/s 80D in respect of medical insurance premium 11,000 (iii) u/s 80G in respect of contribution to charitable trust (See Note) 5,612 76,612 Total income (Rounded off) 1,51,628 Note: Deduction u/s80G has been calculated as under: (a) Adjusted gross total income : Gross total income Less : (i) Long-term capital gains (ii) Deduction u/s 80C (ii) Deduction u/s 80D Adjusted gross total income (b) Qualifying amount of for deduction u/s 80G being 10% adjusted gross total income (c) Actual deduction: 50% of qualifying amount

`

` 2,28,240 45,000 60,000 11,000

1,16,000 1,12,240 11,224 5,612

11. Deduction in respect of rent paid [Section80GG]: An individual, being either a salaried employee or a self–employed person, who is not in receipt of any house rent allowance but has to incur expenditure for any rented accommodation, can claim deduction under this section.

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Amount of deduction:(a) ` 5,000p.m.(b)25%oftheadjustedtotalincome,or(c)Rent paid less 10%of adjusted total income, whichever is least. Adjusted total income for this purpose means total income before deduction u/s 80GG but after allowing deductions u/s 80C to 80U, long-term capital gains, short-term capital gains specified u/s111A and income mentioned under Sections115Ato115D. Conditions: 1. The assessee or his spouse or any minor child, or the Hindu undivided family of which he is a member, does not own any residential accommodation at the place where he ordinarily resides or performs his duties in connection with his employment or business or profession carried on by him. 2. Where the assessee owns any accommodation at any other place, it is not assessed to tax as a self- occupied house under Section 23(2)(a)or23(2)(b). Example 6: D is a self-employed person. During the previous year 2016–2017, his gross total income was ` 3,80,000. He lives in a rented house in Kolkata for which he pays `5,500 p.m. as rent. During the same period, he donates ` 10,000 to the Chief Minister‘s Relief Fund. You are required to compute the deduction in respect of rent paid for the assessment year 2017-2018. Answer: Computation of deduction u/s80GG in respect of rent paid by D for the assessment year 2017-2018 relating to the previous year 2016-2017. (a)Rentpaidless10%ofadjustedtotalincome(`66,000–37,000)(See Note) (b) 25%ofadjustedtotalincome(See Note) (c)Statutory limit@ ` 5,000p.m. Actual deduction [(b)being least] Note: Adjusted total income: Gross total income Less: Deduction u/s80G Adjusted gross total income

29,000 92,500 60,000 29,000

3,80,000 10,000 3,70,000

12. Deductions in respect of certain donations for scientific research or rural development [Section 80GGA]: An assessee whose gross total income does not include income chargeable under the head ―Profits and gains of business or profession‖ can claim deduction in respect of donations and contributions for the following purposes: (a) Any sum paid by the assessee in the previous year to a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research, provided that such association, university, college or institution is approved by the Central Government by notification in the Official Gazette. (b) Any sum paid by the assessee in the previous year to a university, a college or any other institution, which is approved by the Central Government by notification in the Official Gazette, to be used for research in social science or statistical research. (c) Any sum paid by the assessee in the previous year to an association or institution, which is approved for the purpose of Section 35CCA, for carrying out any programme of rural development or for the purpose of the training of persons for implementing programmes of rural development (d) Any sum paid by the assessee in the previous year to a public sector company or a local authority or to an association or institution approved by the National Committee, for carrying out any eligible project or scheme, provided that the assessee furnishes a certificate from the donee. (e) Any sum paid by the assessee on or before 31stMarch, 2002 to an association or institution, which has as its object the undertaking of any programme of conservation of natural resources or of

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afforestation, to be used for carrying out any programme of conservation of natural resources or of aforestation approved for the purposes of Section 35CCB. (f) Any sum paid by the assessee on or before 31stMarch, 2002 to such fund for afforestation as is notified by the Central Government under Section 35CCB(1)(b). (g) Any sum paid by the assessee in the previous year to a rural development fund set up and notified by the Central Government for the purposes of Section 35CCA(1)(c). (h) Any sum paid by the assessee in the previous year to the National Urban Poverty Eradication Fund set up and notified by the Central Government for the purposes of Section 35CCA(1)(d). Other Considerations:  No deduction under this section shall be allowed in respect of any donation exceeding ` 10,000 unless it is paid by any mode other than cash.  The deduction, to which the assessee is entitled to in respect of any sum paid to the afore said institutions, shall not be denied merely on the ground that subsequent to the payment of such sum by the assessee, the approval to such institutions have been withdrawn. 13. Deduction in respect of contributions given by companies to political parties [Section 80GGB]: In computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it in any mode other than cash, in the previous year to any political party or an electoral trust. ●Meaning of contribution: For the purposes of this section, the word ―contribute‖, with its grammatical variation, has them eaningassignedtoitunderSection293AoftheCompaniesAct, 1956. 14. Deduction in respect of contributions given by any person to political parties [Section 80GGC]: In computing the total income of an assessee, being any person, except local authority and every artificial juridical person wholly or partly funded by the Government, there shall be deducted any amount of contribution made by him otherwise than in cash, in the previous year to a political party or an electoral trust. Explanation: For the purposes of Sections 80GGB and 80GGC, ―political party‖ means a political party registered under Section 29A of the Representation of the People Act, 1951. 15. Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development [Section80-IA]: Deduction under this section is available in respect of any profits and gains of the following under takings: (A) Under takings engaged in the business of developing, operating and maintaining any infrastructure facility: In the case of an undertaking engaged in the business of providing infrastructure facilities 100% of the profits from such business for 10 consecutive assessment years shall be allowed as deduction. The period of 10 years may, at the option of the assessee, be selected out of the 20 years beginning from the year in which the undertaking develops and starts such infrastructure facilities. ● Conditions: (i) The under taking is owned by a company registered in India or by a consortium of such companies or by an authority or aboard or a corporation or any other body established or constituted under any Central or State Act. (ii) It has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (a) developing or (b) operating and maintaining or (c) developing, operating and maintaining a new infrastructure facility. (iii) It has started operating and maintaining the infrastructure facility on or after1st April1995 but before 1st April 20017. ● Meaning of infrastructure facility: ―Infrastructure facility‖ means: DIRECT TAXATION

226

(i) a road including to ll road, a bridge or a rail system; (ii) a high way project including housing or other activities being an integral part of the high way project; (iii) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; (iv) a port airport, inland water way or in land port or navigational channel in the sea. (B) Undertakings engaged in business of providing telecommunication services: In this case deduction is allowed to any undertaking which has started or starts providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services on or after the 1 st April, 1995, but on or before 31st March, 2005. ● Conditions: (i) Except for the circumstances mentioned u/s33B, the undertaking is not formed by splitting up, or the reconstruction, of a business already in existence. (ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. ● Amount of deduction: The deduction in this caseis100% of the profits for the first 5 assessment years out of 15 years commencing from the year in which the undertaking starts providing telecommunication services and thereafter, 30% of such profits and gains for further five assessment years. (C) Undertakings engaged business of developing and maintaining an industrial park or a special economic zone: In this case deduction is available to an undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zones between 1 st April, 1997 and 31st March, 2011. However, in view of insertion of sub-section (13), w.e.f.10.2.2006, no deduction shall be allowed under this section in respect of any Special Economic Zone developed on or after 1st April 2005. Such an undertaking shall claim deduction under the newly inserted Section 80IAB. ●Amount of deduction: The deduction in this case is 100% of the profits from such business for 10 consecutive assessment years. The period of 10 years may be selected out of 15 years beginning from the year in which the undertaking develops, operates or maintains such industrial park or special economic zones. However, in the case of an assessee which develops an industrial park on or after1st April 1999 or a special economic zone on or after1st April 2001, and there after transfers such industrial park or special economic zone to another undertaking, deduction for the remaining period shall be granted to the transferee undertaking. (D) Undertakings engaged in the business of generation, transmission or distribution of power: In this case deduction is available to an undertaking which: (i) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1 st day of April, 1993 and ending on the 31st day of March, 2014; (ii) starts transmission or distribution by laying a network of new transmission or distribution lines at any time between 1st April, 1999 and 31st March, 2014 (deduction in this case shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution). (iii) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time between1stApril,2004and31st,March,2014. ● Conditions: The conditions for exemption in this case is same as mentioned in (B) above. However, with effect from the assessment year 2005-2006, the restrictions imposed on the transfer of old plant and machinery and splitting up of old business shall not apply in the case of splitting up/reconstruction/reorganisation of the State Electricity Boards. DIRECT TAXATION

227

● Amount of deduction: In the cases mentioned in (i) and (ii) above, the deduction is100% of the profits for any 10 out of 15 years beginning with the year in which the undertaking begins to generate power or starts transmission or distribution of power. In the case of (iii) above, the amount of deduction is the same, but the period of 10 years or15years, as the case may be, shall be reckoned from the year in which such substantial renovation or modernisation takes place. ―Substantial renovation and modernisation‖ in this case means increase in the book value of plant at least by fifty percent. (E) Undertakings owned by an Indian company and set up for reconstruction or revival of a power generating plant: With effect from the assessment year 2006-2007, the Taxation Laws (Amendment) Act 2005 has inserted a new clause (v) to Section 80-IA(4) to provide deduction for an undertaking set up for reconstruction of a power unit. The amount of deduction shall be 100% of the profits and gains derived from such business for ten consecutive years. ● Conditions: (i) It is an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant. (ii) Such an Indian company is formed before 30th November 2005 with majority equity participation by public sector companies and is notified by the Central Government for the purpose of this clause before31stDecember2005. (iii) The aforesaid undertaking begins to generate or transmit or distribute power before 31stMarch 2013. (F) Undertaking carrying on the business of laying and operating across-country natural gas distribution network: With effect from the assessment year 2010-11, deduction for the business of laying and operating cross country natural gas distribution network is available under the newly inserted Section 35AD [See Chapter on Business profession]. 16. Deduction in respect of profits and gains of an undertaking or enterprise engaged in development of Special Economic Zone [Section 80-IAB]: This section has been inserted by the Special Economic Zones Act2005, w.e.f.10.2.2006, to provide deductions for profits and gains derived by developer of Special Economic Zones, which is set up on or after1stApril2005 but before 1st April 2017. The quantum of deduction in this case is 100% of the profits and gains derived from the business of development of Special Economic Zones for the 10 consecutive assessment years. However, the assessee has an option to choose the period of 10 years out of the 15 years beginning from the year in which the Special Economic Zone has been notified by the Central Government. Other considerations: (a) The assessee should have no income other than those derived as a developer of Special Economic Zones. (b) The accounts of the assessee in respect of the year for which the deduction is claimed should be audited and the report of such audit in FormNo.10CCB should be furnished along with the return. (c) The return of income must be submitted within the due date specified under Section 139(1). (d) In the event of transfer of the operation and maintenance of the undertaking to another developer, the deduction shall be allowed to the transferee developer for the remaining period which the transferor would have been eligible had such transfer not taken place. 17. Deduction for specified business [Section 80-IAC]: With effect from the assessment year 2017-18, section 80-IAC is inserted to provide deduction to eligible start-ups for eligible business 100% deductions out of its profits derived from the eligible business. The deduction shall be available for three consecutive assessment years out of the five years beginning from the year in which the eligible start-up operates.

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228

A. "Eligible business" means a business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. B. "Eligible start-up" means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions: (a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019; (b) the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021; and (c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government 18. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings [Section 80-IB]: Deductionunderthissectionisavailableinrespectofprofitsandgainsfromthebusinessof: 1. Industrial undertakings including cold storage. 2. Ships. 3. Hotels. 4. Scientific research and development. 5. Commercial production or refining of mineral oil. 6. Developing and building housing projects. 7. Handlings to rage and transportation of food grains. 8. Multiple x theatre. 9. Convention centre. 10. Hospitals in rural area. Amount of Deduction: The amount of deduction available to an assessee is as under: Deduction; u/s 80-IB Industry Conditions Period when Rate of Period of production deduction deduction should start Company Other 1. Industrial Not to be set up by splitting or undertakings: (See reconstruction of business note) already in existence, or formed by transfer of plant and (a) Backward states Does not produce goods 1.4.1993 100% 100% For first 5 specified in the Eleventh 31.3.2004 years 30% 25% For next 5 years (b) North Eastern Does not produce any article Do 100% 100% For first *10 Region. Jammu and specified in part C of the years Kashmir Thirteenth Schedule. (c)A-category 1.4.1993 100% 100% For first 5 Backward states 31.3.2004 years 30% 25% For next 5 years (d) B-category 1.10.94 to 100% 100% For first 3 backward states 313.2004 years Next 5 years (e) Other industries in 1.4.95 to 30% 25% First *10 small scale sector 31.3.2004 years other priority sector 1.4.91 to 31.3.95 30% 25% First *10 2. Ships Owned by Indian company. brought to use 30% Nil First 10 between 1.4.91 years and

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229

3. Hotels Owned by an Indian company Starts (a) Hotels in hilly area and is not formed by splitting or functioning /rural area or place of reconstruction of business between 1.4.90 pilgrimage or other already in existence. and 31.3.94. notified (b) Hotels in hilly areas 1.4.97-31.3.2001 / place of pilgrimage or notified areas but other than hotels in the municipal jurisdiction of (c)Non-specified Hotels located in 1.4.97 and places other than 31.3.2001 Mumbai, Kolkata, Delhi, Chennai. • Other hotels Do 4.(a)Company Registered in India, main carrying on objective being industrial scientific research and development; approved by prescribed authority before 1.4.99. (b)Companies Approved by prescribed covered u/s 80IB(8A). authority between 31.3.2000 and 31.3.2007 5.(a)Commercial (i) Located in the North-Eastern Begins production or refining Region commercial of mineral oil production of mineral oil before 1.4.1997. (ii) Located in any part of India

(iii) Engaged in refining of mineral oil

(b)Commercial Blocks licensed under the VIII production of natural Round of bidding for award of gas exploration contracts or IV Round of bidding for award of exploration contracts for Coal Bed Methane blocks 6.Developing and building housing projects

(i) Approved before 31.3.2008 by a local authority, size of the plot for project - minimum one acre; (ii) built-up area for residential units 1,000 sq. ft. for Mumbai and Delhi, or places within 25 km. from the local limits of these cities and 1,500 sq. ft. for other places; (iii) built-up area for shops and other commercial establishments 3% of the aggregate built-up area or

Begins commercial production of mineral oil on or before 1.4.97. Begins production on or after 1.10.98 but not later than 31.10.2012 Begins commercial production on or after 1st April 2009 but not later than 31st March 2017. In relation to project commencing on or after 1.10.98: (i)to be completed on or before 31.3.2008 if the project is approved before 1.4.2004 (ii)for projects approved on or after 1.4.2004, but before

DIRECT TAXATION

50%

Nil

First 10 years

50%

Nil

First 10 years

30%

Nil

First 10 years

30% 100%

Nil Nil

First 10 First 5 years.

100%

Nil

First 10 years.

100%

100%

First 7 years.

100%

100%

First 7 years.

100%

100%

First 7 years.

100%

100%

First 7 years.

100%

100%

First 7 years For the relevant previous year

230

5,000 sq.ft., whichever is more; (iv) not more than one residential unit in the housing project is allotted to any person not being an individual; in a case where a residential unit in the housing project is allotted to a person being an individual, no other residential unit in such housing project is allotted to the individual or the spouse or the minor children of such individual, or the Hindu undivided family in which such individual is the karta or any person representing such individual, the spouse or the minor children of such individual or the Hindu undivided family in which such individual is the karta.

1.4.2005, to be completed within four years. (iii)for projects approved on or after 1.5.2005, to be completed within 5 years.

7.(a) Processing, preservation and packaging of fruits or vegetables or the integrated business of handling, storage and transportation of food grains

Begins to operate on or after 1.4.2001

(b) Meat and meat products or poultry or marine or dairy products

Begins to operate after 1.4.2009

8. Multiplex theatre.

Should not be located in the Constructed at municipal jurisdiction of Kolkata. any time Chennai. Delhi or Mumbai. between 1.4.2002 and 9. Convention Should not be formed by Constructed at centre. splitting upon reconstruction of any time a business already in existence. between 1.4.2002 and 10. (a) Hospitals in Should have at least 100 beds. Constructed rural area. between 1.10.2004 and 312.2008. (b) Non-metro cities. Do Constructed between 1.4.2008 and 312.2013

100%

100%

First 5 years

30%. 100%

25% Next 5 years 100% First 5 years

30% 50%.

25% Next 5 years 50% First 5 years

50%

50%

First 5 years

100%

100%

First 5 years

100%

100%

5 years

*Note: From the A.Y. 2004-2005 in the following cases deduction shall be available u/s80IC not u/s8-IB: Export Processing Zone, Integrated Infrastructure Development Centre, Industrial Growth Centre, Industrial Park, Software, Technology Park, Industrial Theme Park in the State of Sikkim, Himachal Pradesh, Uttaranchal and North-Eastern States. *Non metro cities mean the areas other than those comprising the urban agglo merations of Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Ahmadabad, the districts of Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar and Gandhi nagar and the city of Secunderabad

DIRECT TAXATION

231

19. Deductions in respect of profits and gains of housing projects [Section 80-IBA] With effect from the assessment year 2017-18, Section 80-IBA is inserted so as to provide 100% deduction where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects. Conditions: The deduction under this section is subject to the following conditions: (a) the project is approved by the competent authority after the 1st day of June, 2016 but on or before the 31st day of March. 2019, in accordance with such guidelines as may be prescribed: (b) the project is completed within a period of three years from the date of approval by the competent authority: (c) the built-up area of the shops and other commercial establishments included in the housing project does not exceed three per cent, of the aggregate built-up area; (d) the project is on a plot of land measuring not less than one thousand square metres where such project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of twenty-five kilometres from the municipal limits of these cities, or two thousand square metres within the jurisdiction of any other municipality or cantonment board; (e) the residential units comprised in the housing project does not exceed thirty square metres where such project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of twenty-five kilometres from the municipal limits of these cities, or sixty square metres, where such project is located within the jurisdiction of any other municipality or cantonment board; (f) where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual; (g) the project utilises— (i) not less than ninety per cent, of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be. Where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of twenty-five kilometres from the municipal limits of these cities, or (ii) not less than eighty per cent, of such floor area ratio where such project is located in any area other than the areas referred to in (i) above; (h) the assessee maintains separate books of account in respect of the housing project. (i) Where the housing project is not completed within the period specified above, and in respect of which a deduction has been claimed and allowed under this section, the total amount of deduction so claimed and allowed in one or more previous years, shall be deemed to be the income of the assessee chargeable under the head ―Profits and gains of business or profession" of the previous year in which the period for completion so expires. (j) Where any amount of profits and gains derived from the business of developing and building housing projects under any scheme for the housing is claimed and allowed under this section for any assessment year, deduction to the extent of such profit and gains shall not be allowed under any other provisions of this Act. 20. Deductions for certain undertakings in special category States [Section 80-IC]: Finance Act, 2003 has inserted Section 80-IC [w.e.f. assessment year2004-2005] to provide deductions for certain undertakings situated in the special category States. The provisions of this section are as under: Specified business (1) Specified place (2) Specified time (3) Deduction (4) A. Undertaking or enterprise which has begun or begins or undertakes substantial expansion for producing or manufacturing any

Export Processing Zone/ Integrated Infrastructure Development Centre/ Industrial Growth Centre/ Industrial Estate or

On or after 23.12.2002 but before1.4.2007. On or after 7.1.2003 but before1.4.2012. Onorafter24.12.1997but

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100% of such profit for 10 assessment years beginning with the initial assessment year. 100% for the first five assessment year 232

article or thing other than those specified in the Thirteenth Schedule

B. Undertaking or enterprise which has begun or begins or Undertakes substantial expansion for producing or manufacturing any article specified in the Fourteenth Schedule

Park/ Software Technology Park, Industrial area/ Theme Park: (i) In Sikkim (ii) Himachal Pradesh or Uttaranchal (iii)North-Eastern States (i) Sikkim

(ii) Himachal Pradesh or Uttaranchal

before1.4.2007.

and 25% (30% in the case of a company) thereafter. 100% of such profit for 10 assessment years beginning with the initial assessment year.

On or after 23.12.2002 but before1.4.2012.

100% of such profit for 10 assessment years beginning with the initial assessment year. 100% for first five assessment years and 25% (30% in the case of a company) thereafter. 100% of such profit for 10 assessment years beginning with the initial assessment year.

Onorafter7.1.2003but before 1 .4.2012. On or after 24.12.1997 but before1.4.2007.

(iii)North-Eastern S tates

21. Deduction in respect of profits and gains from business of hotels and convention centres in specified area [Section 80-ID]: With effect from the assessment year 2008-2009, section80-ID has been inserted by the Finance Act 2007 to provide deduction in respect of profits and gains from business of hotels and convention centres in specified area. The provisions of this newly inserted section areas under. Eligibility

Conditions to be fulfilled

Deduction is available to an undertaking situated in the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautama Buddha Nagarand Ghaziabad and(i) Engaged in the business of hotel, if such hotel is constructed and has started or starts functioning at any time during the period beginning on the 1st April, 2007 and ending on 31st July, 2010;or (ii) Engaged in the business of building, owning and operating a convention centre, if such convention centre is constructed at any time during the period beginning on the1stApril, 2007 and ending on the 31st July, 2010. (iii)Engaged in the business of hotel located in the specified district having a World Heritage Site, if such hotel is constructed and has started or starts functioning at any time during the period beginning on the 1st April, 2008 and ending on the 31st March, 2013.

(i) The business is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) The business is not formed by the transfer to a new business of a building previously used as a hotel or a convention centre, as the case may be. (iii)The business is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (iv)The assessee furnishes along with the return of income, the report of an audit in such form and containing such particulars as may be prescribed, and duly signed and verified by a chartered accountant, certifying that the deduction has been correctly claimed. (v) No deduction shall be allowed under any other section contained in Chapter VIA or section 10AA, in relation to the profits and gains of the under- taking.

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Amount of deductions 100% of the profits and gains derived from such business for five consecutiv e assessment years beginning from the initial assessment year.

233

22. Special provisions in respect of certain undertakings in North-Eastern States. [Section 80-IE]: Effective from the assessment year 2008-2009, Section 80-IE has been inserted by the Finance Act 2007 to provide tax holiday for certain undertakings in the North Eastern States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. ● Eligible undertakings: Deduction under this section applies to any undertaking which has, during the period beginning on the 1st day of April, 2007 and ending before the 1 st day of April, 2017, begun or begins, in any of the aforesaid North-Eastern States,— (i) to manufacture or produce any eligible article or thing; (ii) to undertake substantial expansion to manufacture or produce any eligible article or thing; (iii) to carry on any eligible business. ●Conditions: Deduction under this section is subject to the fulfilment of the following conditions: (i) Except for the circumstances specified in Section 33B, the undertaking is not formed by splitting up, or the reconstruction, of a business already inexistence. (ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (iii) in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in Section 10A or Section 10AA or Section 10B or Section 10BA, in relation to the profits and gains of the undertaking. ●Actual deductions: If the aforesaid conditions are fulfilled, the assessee shall be allowed a deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years commencing with the initial assessment year. Other considerations: (i) ― Eligible article or thing‖ means the article or thing other than the following: (a) goods falling under Chapter 24 of the First Schedule to the Central Excise Tariff Act, 1985 which pertains to tobacco and manufactured tobacco substitutes; (b) pan masalaas covered under Chapter 21 of the First Schedule to the Central Excise Tariff Act, 1985; (c) plastic carry bags of less than 20 micronsas specified by the Ministry of Environment and Forests [vide Notification No.S.O.705(E), dated 2nd September, 1999 and S.O.698(E), dated 17th June,2003]; or (d) goods falling under Chapter 27 of the First Schedule to the Central Excise Tariff Act, 1985, produced by petroleum oil or gas refineries; (ii) ―Eligible business‖ means the business of,— (a) hotel (not below two star category); (b) adventure and leisure sports including ropeways; (c) providing medical and health services in the nature of nursing home with a minimum capacity of25beds; (d) running an old-agehome; (e) operating vocational training institute for hotel management, catering and food craft, entrepreneurship development, nursing and para-medical, civilaviationrelated training, fashion designing and industrial training; (f) running information technology related training centre; (g) manufacturing of information technology hardware; and (h) bio-technology. (iii) ―Initial assessment year‖ means the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, or completes substantial expansion. (iv) ―substantial expansion‖ means increase in the investment in the plant and machinery by atleast 25% of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. 23. Deduction in respect of profits and gains from business of collecting and processing bio-degradable wastes [Section 80JJA]: This section allows deduction to any assessee deriving profits from the business of collecting and processing or treating of bio-degradable wastes for generating power or producing bio-fertilizers, bio-

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pesticides or other bio-logical agents or for producing bio-gas or making pellets orbriquettes for fuel or organic manure. Amount of deduction: 100% of profit for 5 years beginning with the previous year in which business commences. 24. Deduction in respect of Employment of New Workman [Section 80JJAA]: Subject to the fulfilment of the conditions, this section allows deduction of an amount equal to 30% of the additional wages paid to the new regular workmen employed by a corporate assessee for manufacture of goods in its factory. The deduction is available for three assessment years includingtheassessmentyearrelevanttothepreviousyearinwhichsuchemploymentisprovided. The expressions ‗additional wages‘ and ‗regular workmen‘ are explained to mean: (a) Additional wages :It means the wages paid to the new regular workmen in excess of one hundred workmen employed during the previous year. In the case of an existing factory, the additional wages shall be nil if the increase in the number of regular workmen employed during the year is less than 10 percent of the existing number of workmen employed in such factory. (b) Regular Workmen: It does not include: (i) a casual workman; (ii) a workman employed through a contract labour; and (iii) any other workman employed for a period of less than 365 days during the previous year. Conditions: No deduction under this section is available if: (a) the factory is hived off (i.e. created by splitting an existing one ) from another existing entity or acquired by the assessee company as a result of amalgamation with an other company. (b) A report of the accountant is furnished along with return of income giving the prescribed particulars. 25. Deduction in respect of certain incomes of Offshore Banking Units and International Financial Services Centre [Section 80LA]: With effect from the assessment year 2006-2007, the existing Section 80LA has been replaced by a new Section 80LA [inserted by the Special Economic ZonesAct, 2005,w.e.f.10.2.2006]. ●Eligible assessee: Under this section, deduction is available to: (a) a scheduled bank having an Offshore Banking Unit; (b) a foreign bank having an Offshore Banking Unit; (c) a unit of an International Financial Services Centre. ●Eligible income: Deduction under section 80LA is eligible only in respect of the following incomes: (a) Income from an Offshore Banking Unit in a Special Economic Zone. (b) Income from a business referred to in Section 6(1) of the Banking Regulation Act, 1949 with an undertaking located in a Special Economic Zone or any other undertaking which develops, develops and operates or develops, operates and maintains a Special Economic Zone. (c) Income from any Unit of the International Financial Services Centre from its business for which it has been approved for setting up such a Centre in a special Economic Zone. ● Conditions for deduction: Deduction under Section 80LA is available if the assessee, alongwith the return of income, furnishes: (a) a report of a chartered accountant in the prescribed form certifying that the deduction has been correctly claimed in accordance with the provisions of this section; (b) a copy of the permission obtained under Section 23(1)(a) of the Banking Regulation Act, 1949 ● Amount of deduction: If the aforesaid conditions are fulfilled, the assessee shall be eligible to claim the following deductions: (a) 100% of the eligible income for the first five consecutive assessment years relevant to the previous year in which the permission under Section 23(1)(a) of the Banking Regulation Act or registration under the Securities and Exchange Board of India or other relevant law is obtained. (b) 50% of the eligible incomes for the subsequent five years. DIRECT TAXATION

235

26. Deduction in respect of royalty income of authors of certain books other than text-books [Section 80QQB]: Section 80QQB has been inserted by the Finance Act, 2003, w.e.f .the assessment year 2004-2005. Under this section an assessee can claim deduction if the following conditions are satisfied: (a) The assessee is an individual, who is resident in India. (b) His gross total income includes income derived by him in exercise of his profession as an author. (c) The income is received as lump sum consideration for the assignment for grant of any of his interests in the copyright of any book or on account of royalty or copyright fees (receivable in lump sum or otherwise) in respect of any book. (d) The books are the work of literary, artistic or scientific nature. ●Amount of deduction: The amount of deduction shall be as under: (a) For lump sum consideration received: Amount actually received or 3,00,000, whichever is less; (b) Where the amount is not received in lump sum: Least of the following amount: (a) Amount actually received; or (b) 15% of the value of books sold during the previous year; or (c) 3,00,000. (c) Where the income is earned from a source outside India: Amount brought in toIndia in convertible foreign exchange within six months from the end of the relevant previous year (or such further period as may be allowed) or 3,00,000,whichever is less. 27. Deduction in respect of royalty on patent [Section 80RRB]: This section has been inserted by the Finance Act, 2003, w.e.f. assessment year 2004-2005. Under this section deduction shall be allowed to an individual, who is— (a) resident in India; (b) a patentee; and (c) in receipt of any income by way of royalty in respect of a patent registered on or after 1stApril, 2003 underthePatentsAct,1970. ●Amount of deduction: The amount of deduction shall be as follows: (a) Where a compulsory licence is granted in respect of any patent under the Patents Act, 1970: 3,00,000 or the amount of royalty under the terms of and conditions of a licence settled by the Controller under the Patents Act, whichever is lower; (b) Where such royalty is earned from a source outside India: `3,00,000 or the amount of royalty as is brought into India in convertible foreign exchange within six months from the end of the relevant previous year (or such other extended time, as may be allowed),which ever is lower. (c) In other cases: the entire amount of such royalty or ` 3,00,000,whichever is less. ●Conditions: (1) The assessee shall furnish a certificate in Form No. 10CCE, duly signed by the prescribed authority, along with there turn of income setting forth such particulars as may be prescribed. (2) In respect of any income earned from a source outside India, the assessee shall furnish a certificate of foreign inward remittance in Form No.10H. (3) Where a deduction for any previous year has been claimed and allowed in respect of any income referred to in this section, no deduction in respect of such income shall be allowed under any other provision of this Act in any assessment year. 28. Deduction in respect of interest on deposit in savings account [Section 80TTA]: With effect from the assessment year 2013-14, Section 80TTA is inserted to provide for deductions on account of interest on savings bank accounts (not being time deposits) with : (i) a banking company to which the Banking Regulation Act, 1949(10of1949), applies (including any bank or banking institution referred to in Section 51 of that Act) ; (ii) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank) ; or (iii) a post office, as defined in Section 2(k) of the Indian Post Office Act, 1898. The deduction under this section is subject to the following conditions: (a) The deduction under this section can be claimed only by an individual or a Hindu undivided family. DIRECT TAXATION

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However, where the aforesaid income is derived from any deposit in a savings account held by, or on behalf of, a firm, an association of persons or a body of individuals, no deduction shall be allowed in respect of such income in computing the total income of any partner of the firm or any member of the association or body. (b) Maximum deduction shall not exceed ` 10,000. 29. Deduction in case of a person with disability [Section 80U]: With effect from the assessment year 2004-2005, New Section 80U has been substituted for the old Section 80U to provide deduction for a resident individual, who, at any time during the previous year is certified to be a person with disability. ● Amount of deduction: The amount of deduction under this sectionis ` 75,000. However, wherethe aforesaid individual is a person with severe disability, the amount of deduction shall be `1,25,000. ● Conditions: (1) Every person claiming deduction under this section shall along with the return of income under Section 139, furnish a copy of the certificate issued by the medical authority in respect of the assessment year for which the deduction is claimed. (2) Where the condition of disability requires re-assessment of its extent after a period stipulated in the aforesaid certificate, no deduction under this section shall be allowed for any assessment year relating to any previous year beginning after the expiry of the previous year during which the aforesaid certificate of disability had expired, unless a new certificate is obtained from the medical and a copy thereof is furnished alongwith the return of income under Section 139. ● Meaning of different terms: The terms ―disability‖, ―person with disability‖, ―person with severe disability‖ and ―medical authority‖ have been defined under the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 and the National Trust for Welfare of Persons with Autism, Cerebral Palsy, and Mental Retardation and Multiple Disabilities Act, 1999 as under: (a) ―Disability‖ shall have the meaning assigned to it in Section 2(i) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act,1995, and includes ―autism‖, ―cerebral palsy‖ and ―multiple disabilities‖ referred to in clauses (a), (c) and (h) of Section 2 of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple DisabilitiesAct,1999. (b) ―Medical authority‖ means the medical authority as referred to in Section 2(p) of the Persons with Disabilities(Equal Opportunities, Protection of Rights and Full Participation)Act, 1995, or such other medical authority as may, by notification, be specified by the Central Government for certifying ―autism‖, ―cerebral palsy‖, ―multiple disabilities‖, ―person with disability‖ and ―severe disability‖ referred to in clauses (a), (c), (h), (j) and (o) of Section 2 of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999. (c) ―Person with disability‖ means a person referred to in Section 2(t) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or Section 2(j) of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999. (d) ―Person with severe disability‖ means: (i) a person with eighty percent or more of one or more disabilities, as referred to in Section 56(4) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation Act, 1995); or a person with severe disability referred to in Section 2(o) of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999. Example 7: Duringthepreviousyear2017-2018, X furnishes the following particulars of his income: (a) Gross salary (b) Interest on fixed deposit with a bank (c) Interest on fixed deposit of minor daughter (d) Income from UTI received by his handicapped son During the year X paid the following sums: (a) Contribution to LIC for pension fund u/s80CCC (b) Deposit to Public Provident Fund (c) Deposit under equity savings scheme DIRECT TAXATION

4,15,200 5,000 3,000 3,000 10,000 55,000 20,000 237

(d) Tuition fees for part-time MBA course of son (e) Tuition fees for full-time Engineering course in India for the daughter Compute taxable income of X for the assessment year2 017-2018.

25,000 40,000

Answer: Computation of total income of X for the assessment year 2017-2018 relating to the previous year 2016-2017. ` ` ` • Income under the head "Salaries" : Gross salaries 4,15,200 less: Deduction u/s 16: Nil 4,15,200 • Income from other sources: Interest on fixed deposit with bank 5,000 Interest on fixed deposit of minor daughter 3,000 less: Exemption u/s 10(32) 1,500 1,500 Income from UTI received by his handicapped son [Exempt u/s 10(33)) Nil 6,500 Gross total income 4,21,700 less: Deductions u/ss 80C - 80U : (i)u/s 80C: For specified savings/ payments (Note 1) 95.000 (ii)u/s 80CCC: For pension fund of LIC 10.000 Total deductions u/s 80C, 80CCC and 80CCD not to exceed ` 1,50,000, vide Section 80CCE] 1,05,000 1,05 ,000 (iii) u/s 80CCG: For deposit under Equity Savings Scheme (50%) 10,000 Total income 3,06,700 Note : Deduction u/s80C: Deposit to Public Provident Fund Tuition fees for son (Part-time course not eligible) Tuition fees for daughter in full-time course Total

55,000 Nil 40,000 95,000

Example 8: For the assessment year 2017-2018, the gross total income of X was `4,23,240, which includes long-term capital gains of `1,45,000 and short-term capital gains of `18,000. The gross total income also includes interest income from deposits in savings bank account `12,000.The remaining income was earned from a proprietary business. During the year X has invested in the PPF ` 60,000 and also paid medical insurance premium `16,000. X also contributed `15,000 to a public charitable trust, which is eligible for deduction u/s80G. Compute taxable income and tax liability of X on the assumption that X attains the age of 60 on 31 st March 2017. Ans.: Computation of total income and tax liability of X for the assessment year 2017-2018 relating to the previous year 2016-2017.

Profits and gains of business or profession: (Note 1) • Capital gains: Short-term capital gains Long-term capital gains • Income from other sources: Interest from bank Cross total income Less: Deductions u/s 80C — 80U: (i) u/s 80C: For deposit to PPF (ii) u/s 80D: For medical insurance premium (Note 2) (iii)u/s 80G: For donation to charitable institution (Note 3) (iv)u/s 80TTA: For interest on savings bank account Total income (Rounded off)

2,48,240 18,000 1,45,000

1,63,000 12,000 4,23,240 96,112

60,000 16,000 10,112 10,000 3,27,380

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Tax on total income of ` 3,27,380: Tax on first ` 3,00,000 Balance ` 27,380 comprising LTC @ 20% less: Rebate u/s 87A Tax after Rebate Add: Surcharge Tax and surcharge Add: Education cess: @ ` 2% of tax and surcharge Add: Secondary and Higher Education cess @ 1 % Tax payable (Rounded off)

Nil 5,476 5,000 476 Nil 476 10 5 490

Notes: 1. Business income [4,23,240–1,63,000–12,000]= `2,48,240 2. For senior citizens deduction u/s80D is actual amount paid or `30,000, whichever is lower. It is assumed that the amount has been paid by a cheque. 3. Qualifying amount for deduction u/s 80G: Gross total income 4,23,240 Less: Long-term capital gains 1,45,000 Deduction m/s 80C 60,000 Deduction m/s 80D 16,000 2,21,000 Adjusted total income 2,02,240 ` 20,224 Qualifying amount for deduction u/s 80G being 10% of adjusted total income or Actual deduction : 50% = 10,112. Example9: From the particulars given below, compute taxable income of X for the assessment year2017-2018: Net income from manufacturing business 1,30,000 Interest on Post Office Savings Bank Account 1,900 Share of profit from a partnership concern 22,000 Short-term capital gains on sale of land 24,000 Long-term capital gain on sale of house property 1,20,000 Share of income from HUF in which X is a member 8,200 Winning from camel race 10,000 Interest on bank fixed deposit: (i) Deposit in his own name 4,000 (ii) In the name of minor son 1,300 Expenditure incurred on medical treatment of 67 years old brother [Who being a person with disability, is dependent on X] 40,000 Repayment of loan (including interest 4,000) taken for part-time Studies for postgraduate course in Management 10,000 Donation to Prime Minister‘s National Relief Fund 20,000 Answer: Computation of total income and tax liability of X for the assessment year 2017-2018 relating to the previous year 2016-2017. ` • Profits and gains of business or profession: Net income from manufacturing business Share of profit from a partnership concern [Exempt u/s 10(2A)] Share of income from 11UF in which X is a member [Exempt u/s 10(2)) • Capital gains : Short-term capital gains on sale of land Long-term capital gain on sale of house property DIRECT TAXATION

`

1,30,000 Nil Nil

1,30,000

24,000 1,20,000

1,44,000 239

• Income from other sources : Interest on Post Office Savings Bank Account [Exempt u/s 10(15)] Interest on bank deposit in own name Interest on bank deposit in the name of minor child [Exempt u/s 10(32)] Winning from camel race Gross total income Less : Deductions u/ss 80C - 80U : (i) u/s 80DD for medical treatment of dependent with disability[Fixed] (ii) u/s 80E for repayment of education loan [4,000 x 1/8 (Note 1)] (iii) u/s 80C for donation (Note 2) Total income

Nil 4,000 Nil 10,000

75,000 500 20,000

14,000 2,88,000

95,500 1,92,500

Notes: (1) With effect from the assessment year 2006-07, deduction under Section 80E is allowed on account of interest for loan taken to pursue any higher education (part-time or full-time course) in India or abroad. The deduction shall be allowed over eight assessment years. (2) 100% of donation to the Prime Minister‘s National Relief Fund is eligible for deduction u/s80G. Example 10. Dare tired government employee of 67 years age, derived the following income in respect of financial year 2016-2017: Pension 2,20,000 Interest on bank fixed deposits 55,000 Accrued interest on NSC purchased during 2015-2016 8,000 Total 2,83,000 He has paid ` 18,000 as premium to effect insurance on his health and his dependent parents. He pays a rent of `3,000 p.m. for an accommodation in Kolkata. During the previous year he contributed ` 1,000 to an approved institution for the purpose of rural development programme. Compute taxable income of D for the relevant assessment year. Answer: Computation of total income of D a resident individual, for the assessment year 2017-2018 relating to the previousyear2016-2017 ` ` • Income under the head "Salaries''': Pension received 2,20,000 Less: Deduction u/s 16: Nil 2,20,000 • Income from other sources: Interest on bank fixed deposit 55,000 Accrued interest on NSC 8,000 63,000 Gross total income 2,83,000 Less: Deductions u/s 80C - 80U : j) u/s 80C : For NSC interest (Deemed to be reinvested) 8,000 [ii) u/s 80D : For medical premium (Note 1) 18,000 [iii) u/s 80GG : for rent paid (Note 2) 10,400 [iv) u/s 80CCA: For donation to approved institution for rural development 1,000 37,400 Total income 2,45,600 Note: 1. Deduction for medical premium for a senior citizen is actual amount paid or `30,000, whichever is lower. 2. Deduction u/s80GG in respect of rent paid being least of the following: (a) Rent paid less 10% of adjusted total income [36,000–25,600] 10,400 (b)25% of adjusted total income 64,000 (c) 5,000p.m. 60,000 [Adjusted total income=2,83,000–8,000–18,000–1,000=2,56,000] DIRECT TAXATION

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Multiple Choice Questions: 1. Deduction allowed to an individual u/s 80CCC is restricted to (a) ` 5000 (b) ` 7500 (c) ` 1,50,000 (d) ` 12,500 Ans: (c) ` 1,50,000 2.

80GGA available for donations made to(a) Charitable Institutions (b) Educational Institutions (c) Research Associations (d) Religion organizations Ans: (c) Research Associations 3.

Deduction u/s. 80JJA is available if the assesse(a) Is engaged in scientific research (b) Sets up an industrial unit in a backward area (c) Is engaged in agriculture business (d) Is engaged in the business of collecting and processing biodegradable waste. Ans: (d) Is engaged in the business of collecting and processing biodegradable waste. 4.

Section 80QQB of the Income Tax Act, 1961, deals with – (a) Interest on debentures of a Govt. company (b) Royalty Income of authors (c) Royalties from patent (d) Profits from export of computer software Ans: (b) Royalty Income of authors 5.

Deduction u/s 80C is available up to a maximum of – (a) ` 1,00,000 (b) ` 1,50,000 (c) ` 20,000 (d) ` 25,000 Ans: (b) ` 1,50,000

6.

Deduction u/s 80GGB or 80GGC is available on donation to – (a) Political Party or electoral trust (b) Political Party (c) Poor people provided donation must be given in cash (d) University Ans: (a) Political Party or electoral trust 7.

Maximum Deduction available under section 80CCG is – (a) ` 15,000 (b) ` 20,000 (c) ` 25,000 (d) ` 1,00,000 Ans: (c) ` 25,000 8.

As per section 80JJA, an assessee engaged in the business of processing of bio-degradable waste is allowed as deduction of(a) 100% profit for 2 years (b) 100% profit for 5 years DIRECT TAXATION

241

(c) 100% profit for 10 years (d) No deduction available Ans: (b) 100% profit for 5 years 9.

Aggregate amount of deduction under 80C, 80CCC and 80CCD cannot exceed – (a) ` 1,10,000 (b) ` 2,00,000 (c) ` 1,50,000 (d) There is no maximum limit. Ans: (c) ` 1,50,000 10. Amount of deduction in case of a person with severe disability under section 80U will be – (a) ` 50,000 (b) ` 75,000 (c) ` 1,25,000 (d) ` 1,50,000 Ans: (c) ` 1,25,000 11. For the purpose of deduction u/s 80DD, which of the following statements is/are true? (a) Assessee is either an individual or a HUF (b) Assessee is resident in India (c) Assessee has a dependent disable relative (d) All of the above Ans.: (c) Assessee has a dependent disable relative 12. In case of a person being an individual not having income under the head ‗Salaries‘ is eligible for deduction u/s 80CCD for contribution towards eligible pension scheme. The deduction is restricted to(a) 10% of his gross total income in the previous year (b) ` 1,50,000 (c) 20% of his gross total income in the previous year (d) 12% of his gross total income in the previous year Ans.: (a) 10% of his gross total income in the previous year 13. Maximum deduction one can claim u/s 80D is(a) ` 60,000 (b) ` 50,000 (c) ` 30,000 (d) ` 35,000 Ans: (a) ` 60,000

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STUDY NOTE : 15 RATES OF TAX AND TAX LIABILITY, REBATES AND RELIEFS THIS STUDY NOTE INCLUDES: 15.1 Tax Rates for the Assessment Year 2017-2018 15.2 Relief [Section 89]

15.1

TAX RATES FOR THE ASSESSMENT YEAR 2017-2018

1. Individual, HUF, AOP/ BOI / Every artificial person (other than senior citizen) [A non-resident individual assessee, irrespective of his age, shall be taxed at the rates mentioned below] Total income

Rate of Income-tax

 where the total income does not exceed ` 2,50,000  where the total income exceeds ` 2,50,000 but does not exceed ` 5,00,000  where the total income exceeds ` 5,00,000 but does not exceed ` 10,00,000  where the total income exceeds ` 10,00,000

Nil; 10 per cent, of the amount by which the total income exceeds ` 2,50,000; ` 25,000 plus 20 per cent, of the amount by which the total income exceeds ` 5,00,000; ` 1,25,000 plus 30 per cent, of the amount by which the total income exceeds ` 10,00,000.

a.

In the case of every individual, being a resident in India, who is of the age of sixty years or more but less than eighty years at any time during the previous year Total income Rate of Income-tax  where the total income does not exceed ` Nil; 3,00,000  where the total income exceeds ` 3,00,000 but 10 per cent, of the amount by which the total income exceeds ` 3,00,000; does not exceed ` 5,00,000  where the total income exceeds ` 5,00,000 but does not exceed ` 10,00,000  where the total income exceeds ` 10,00,000

b.

` 20,000 plus 20 per cent, of the amount by which the total income exceeds ` 5,00,000; ` 1,20,000 plus 30 per cent, of the amount by which the total income exceeds ` 10,00,000.

In the case of every individual, being a resident in at any time during the previous year Total income  Where the total income does not exceed ` 5,00,000  where the total income exceeds ` 5,00,000 but does not exceed `10,00,000  Where the total income exceeds ` 10,00,000





India, who is of the age of eighty years or more Rate of Income-tax Nil; 20 per cent, of the amount by which the total income exceeds ` 5,00,000; ` 1,00,000 plus 30 per cent, of the amount by which the total income exceeds ` 10,00,000.

Tax Rebate for resident individual: An assessee, being an individual resident in India, whose total income does not exceed five lakhs rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of ` 5,000, whichever is less. Surcharge on income-tax: The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 of the Income-tax Act, shall, in the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person DIRECT TAXATION

243



referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, having a total income exceeding one crore rupees, be increased by a surcharge for the purposes of the Union calculated at the rate of fifteen per cent, of such income-tax: Marginal Relief: In the case of persons mentioned above having total income exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

2. Co-operative society Total income (1) where the total income does not exceed ` 10,000 (2) where the total income exceeds ` 10,000 but does not exceed ` 20,000 (3) where the total income exceeds ` 20,000

Rate of Income-tax 10 per cent, of the total income; ` 1,000 plus 20 per cent, of the amount by which the total income exceeds ` 10,000; ` 3,000 plus 30 per cent, of the amount by which the total income exceeds ` 20,000.

Surcharge on income-tax: The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 of the Income-tax Act, shall, in the case of every co-operative society, having a total income exceeding one crore rupees, be increased by a surcharge for the purposes of the Union calculated at the rate of twelve percent, of such income- tax: Marginal Relief: The case of every co-operative society mentioned above having total income exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees. 3. Firm: On the whole of the income @ 30%. Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 of the Income-tax Act, shall, in the case of every firm, having a total income exceeding one crore rupees, be increased by a surcharge for the purposes of the Union calculated at the rate of twelve per cent, of such income-tax: Marginal Relief: In the case of every firm mentioned above having total income exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees. 4. Local authority: On the whole of the income @ 30%. Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 of the Income-tax Act, shall, in the case of every firm, having a total income exceeding one crore rupees, be increased by a surcharge for the purposes of the Union calculated at the rate of twelve per cent of such income-tax: Marginal Relief: In the case of every local authority mentioned above having total income exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

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5. Company: Company I. In the case of a domestic company, — (i) where its total turnover or the gross receipt in the previous year 2014-15 does not exceed five crore rupees; (ii) other than that referred to in item (i) II. In the case of a company other than a domestic company— (i) on so much of the total income as consists of (a) royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961 but before the 1st day of April, 1976; or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 29th day of February, 1964 but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government (ii) on the balance, if any, of the total income

29 per cent, of the total income 30 per cent, of the total income

50 per cent. 40 per cent.

Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 of the Income-tax Act, shall, be increased by a surcharge for the purposes of the Union calculated, — (i) in the case of every domestic company, —

(a) having a total income exceeding one crore rupees but not exceeding ten crore rupees, at the rate of seven per cent, of such income-tax; and

(b) having a total income exceeding ten crore rupees, at the rate of twelve per cent, of such income-tax; (ii) in the case of every company other than a domestic company, —

(a) having a total income exceeding one crore rupees but not exceeding ten crore rupees, at the rate of two per cent, of such income-tax; and

(b) having a total income exceeding ten crore rupees, at the rate of five per cent, of such income-tax: Marginal Relief: in the case of every company having a total income exceeding one crore rupees but not exceeding ten crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees In the case of every company having a total income exceeding ten crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of ten crore rupees by more than the amount of income that exceeds ten crore rupees.

15.2

RELIEF [SECTION 89]

Subject to the conditions laid down under Rule 21A, relief under section 89 may be availed by a salaried employee on account of lump sum received for arrears of:  Salary,  Gratuity,  Leave encashment  Commuted value of pension  Family pension.

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A. Computation of relief on receipt of arrears of salary or salary received in advance: The relief on salary received in arrears or in advance is computed in the manner laid down in Rule 21A(2) as under : Step 1. Compute the tax payable on the total income, including the additional salary, of the relevant previous year in which the same is received. Step 2. Compute the tax payable on the total income, excluding the additional salary, of the relevant previous year in which the additional salary is received. Step 3. Find out the difference between the tax at step (1) and (2). Step 4. Compute the tax on the total income after including the additional salary in the previous year to which such salary relates. Step 5. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates. Step 6. Find out the difference between tax at step (4) and (5). Step 7. The excess of tax computed at step (3) over tax computed at step (6) is the amount of relief admissible under Section 89. If tax computed at step (3) is less than the tax computed at step(6), there shall be no relief and the assessee in such a case need not apply for relief. If the additional salary relates to more than one previous year, salary would be spread over the previous years to which it pertains in the manner explained above. B. Computation relief in respect of gratuity: Under Section 89, a relief can be claimed by an assessee if gratuity is received in excess of the specified limits. However, no relief is admissible if taxable gratuity is in respect of services rendered for less than five years. Cases in which the relief is admissible may be divided into the following two categories: (i) where the gratuity payable is in respect of past service of 15 years or more, and (ii) where such period is 5 years or more but less than 15 years. Relief in a case belonging to category (i) is worked out as under: Step 1. Compute the average rate of tax on the total income, including the gratuity in the year of receipt. Step 2. Compute the tax on gratuity at the average rate of tax computed at step (1) above. Step 3. Compute the average rate of tax by adding one-third of the gratuity to the other income of each of the three preceding years. Step 4. Find out the average of the three average rates computed in the manner specified in step (3) above and compute the tax on gratuity at that rate. Step 5. The difference between tax on the gratuity computed at step (2) and that at step (4) will be the relief admissible under Section 89. In cases covered under category (ii), the relief is computed in the same manner except that instead of average of the average rates of the preceding three years, the average of the rates of the preceding two years is computed by adding one-half of the gratuity to the other income of each of preceding two years. (C) Computation of relief in respect of compensation on termination of employment: Relief for compensation received from the employer or the former employer on termination of employment is available only if the employee renders continuous service for not less than three years. The relief in this case is to be computed in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more. (D) Computation of relief in respect of payment in commutation of pension: A relief can be claimed in respect of payment in commutation of pension received if the amount is in excess of the prescribed limits. Such relief is computed in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

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(E) Computation of relief in respect of other payments: In respect of payment received by an employee other than those mentioned above, the relief under Section 89 will be granted by the Central Board of Direct Taxes after examining the circumstances of each individual case. Rounding off of Income [Section 288A, Rule 21A]: The amount of total income computed in accordance with the foregoing provisions of this Act shall be rounded off to the nearest multiple of ten rupees. Rounding off amount payable and refund due [Section 288B]: Any amount payable, and the amount of refund due, under the provisions of this Act shall be rounded off to the nearest multiple of ten rupees. Example1: Choose the most appropriate alternative: The basic exemption limit for a non-resident super senior citizen above the age of 80 for the assessment year 2017-18 is: (i) ` 2,50,000 (ii) ` 3,00,000 (iii) ` 5,00,000 [CMA- Inter, Dec. 2012] Ans. ` 2,50,000. Example 2: Mr. Rajput, aged 82 years gives you the following information for the previous year 2016-17: Interest on fixed deposits with banks ` 4,80,000 Long-term capital gain on sale of land ` 50,000 Short-term capital gain on sale of shares (securities transaction tax paid) ` 20,000 Compute tax payable by Mr. Rajput for the assessment Year 2017-18 in cases (i) he is a resident; (ii) he is non-resident. [CMA- Inter, June 2013] Ans. Computation of tax payable by Mr. Rajput for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Capital gains : Long-term capital gains 50,000 Short-term capital gains on sale of shares 20,000 Net Capital gains Nil 70,000 Income from other sources: 6,000 Interest on Fixed Deposit 3,000 4,80,000 Gross total income 5,50,000 Less: Deductions u/s 80C -80U Nil Total income Tax on total income: 5,50,000 On ` 5,00,000 On ` 30,000 of LTG @20% [` 50,000 – (`5,00,000- `4,80,000] On ` 20,000 of STG on shares @ 15% 9,000 Total tax Nil Less: Rebate u/s 87A Tax after rebate 9,000 Add: Education cess and SHEC @ 3% 9,270 270 Tax payable Example 3: A (male aged 50) an employee of a semi-government organisation in Orissa, furnishes the flowing particulars for the previous year ended on 31.3. 2017: (i) Salary for the year (ii) Salary for the year 2010-11 received during the year (iii) Assessed income of the financial year 2010-11

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5,50,000 50,000 2,00,000

247

You are required to compute relief u/s 89 of the Income-tax Act 1961 and tax payable for the assessment year 2017-2018. The rates of Income-tax for the assessment year 2011-12 are as under: On the first ` 1,60,000 Nil Next ` 3,40,000 10% Next ` 3,00,000 20% Balance 30% Surcharge: No surcharge for the AY 2011-12. Answer: Computation of relief u/s 89

Salary Arrears of salary Gross salary Less: Deduction u/s 16 ―Salaries‖ Add: Other income GTI Less: Deduction u/s 80C-80U Total income Tax on total income Less: Rebate u/s 87A Add: Surcharge Tax after rebate Add: Education cess [2+1%] Tax payable before relief Less: Relief u/s 89 Tax payable

Taxable income and tax liability on receipt basis AY 2017-18 AY 2011-12 ` (1) ` (2) 5,50,000 2,00,000 50,000 6,00,000 2,00,000 Nil Nil 6,00,000 2,00,000 Nil Nil 6,00,000 2,00,000 Nil Nil 6,00,000 2,00,000 45,000 4,000 Nil Nil Nil Nil 45,000 1,350 46,350 15,450 30,900

Relief u/s 89: Tax as per Column no. 1 Tax as per column No. 2 Difference between (1) and (2) Tax as per Col No. 3 Tax as per col. No. 4 Difference between (3) and (4) Relief u/s 89 = [A- B]

Taxable income and tax liability on accrual basis AY 2107-18 AY 2011-12 ` (3) ` (4) 5,50,000 2,00,000 50,000 5,50,000 2,50,000 Nil Nil 5,50,000 2,50,000 Nil Nil 5,50,000 2,50,000 Nil Nil 5,50,000 2,50,000 35,000 9,000 Nil Nil Nil Nil

4,000 120 4,120 -

35,000 1,050 36,050 -

9,000 270 9,270 -

` 46,350 4,120 42,230(A) 36,050 9,270 26,780 (B) 15,450

Multiple choice questions: 6.

The normal rates of income tax are mentioned in : A. Income tax Act 1961 B. Finance Act C. Income-tax Rules D. None of these Ans. (B) Finance Act 7.

For the assessment year 2017-18, the basic exemption limit for a non-resident woman who is 70 years old is: A. 2,00,000 B. 2,50,000 C. 5,00,000 D. None of these Ans. (B) 2,50,000

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8.

The basic exemption limit for a non-resident super senior citizen above the age of 80 is : A. 2,00,000 B. 2,50,000 C. 5,00,000 D. None of these Ans. (B) 2,50,000 9.

The basic exemption limit for a resident super senior citizen above the age of 80 is : A. 2,00,000 B. 2,50,000 C. 5,00,000 D. None of these Ans. (C) 5,00,000 10. If the total income of a partnership firm exceeds ` 1 crore, the following surcharge on income is payable: A. 12% B. 10% C. 5% D. 7% Ans. 12% 11. In the case of a foreign company, surcharge at 5% is payable on the Income-tax where the total income exceeds : A. 1 crore B. 5 crores C. 10 crores D. None of these. Ans. (C) 10 crores. 12. In the case of every senior citizen resident in India, tax rebate u/s 87A is: A. ` 5,000 B. ` 2,000 C. ` 10,000 D. Nil Ans. (D) Nil 13. A limited liability partnership firm is taxable at the rate of : A. 10% B. 20% C. 30% D. None of these Ans. (C) 30% 14. Under section 288A, rounding off of total income is done : A. To the nearest multiple of 1 rupee B. To the nearest multiple of 10 rupees C. To the nearest multiple of 100 rupees D. None of these Ans. (B) To the nearest multiple of 10 rupees 15. Under section 288B , the rounding of is done : A. In respect of any amount payable and refund due B. To the nearest multiple of ` 10 C. To the nearest multiple of ` 100 D. None of these Ans. (B) To the nearest multiple of ` 10

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249

STUDY NOTE : 16 ASSESSMENT OF INDIVIDUALS (INCLUDING NON-RESIDENTS) AND COMPUTATION OF TAX LIABILITY THIS STUDY NOTE INCLUDES: 16.1 Introduction 16.2 Computation of Total Income 16.3 Computation of Gross Tax Liability 16.4 Tax Rebate 16.5 Surcharge 16.6 Education Cess 16.7 Relief 16.8 Special Provisions for Taxation of Non-Resident Individual Assessees 16.1

INTRODUCTION

The computation of tax liability of an individual shall be done in the following successive stages: A. Computation of total income. B. Computation of gross tax liability. C. Rebates. D. Surcharge. E. Education cess, and F. Reliefs. 16.2

COMPUTATION OF TOTAL INCOME

The computation of total income of an individual involves the following three steps: Step1. Compute income under each of the five heads in accordance with the provisions of Sections 1559, i.e.,  Income under the head ―Salaries‖ [Sections 15-17].  Income from house property [Sections22-27].  Profits and gains of business or profession [Sections28-44].  Capital gains [Sections44-55].  Income from other sources [Sections56-59]. In computing income under the five heads mentioned above, the following should be considered: (i) Income of any other person in respect of which an individual is chargeable to tax under Sections 60-64, shall be included under the respective heads. The other person‘s incomes in respect of which an individual is chargeable to tax are : transfer of income where there is no transfer of assets (u/s 60), revocable transfer of assets (u/ss 61-63), and income of spouse, minor child, etc., (u/s 64). (ii) If the net result of computation in respect of one source of income shows a loss, it can be set off against income from another source under the same head (Section 70). In setting off income of one source against income from another, restrictions imposed under Section 70 should be considered. (iii) If the net result of computation under any head shows a loss, this can be set off against income under other heads (Section 71). The restrictions imposed u/s 71 in respect of such inter-head adjustments should be considered. (iv) If there is any unabsorbed loss in the earlier previous year or years, these shall be set off in accordance with the provisions of the Act. Step 2. The aggregate of income under all the five heads in Step No. 1 is called gross total income. Allow deductions from gross total income under Sections 80C to 80U [See para 3, Chapter 12]. Step 3. The balance of income after allowing deductions u/ss 80C to 80U is called total income. Under the provision of Section 288A, the total income so determined shall be rounded off to the nearest multiple of ` 10. DIRECT TAXATION

250

16.3

COMPUTATION OF GROSS TAX LIABILITY

Once the total income is determined, the gross tax liability of an individual assessee shall be computed in accordance with the rate or rates specified for the assessment year. For the assessment year 2017-2018, the tax rates are given in Study Note 15. 16.4

TAX REBATES

For rebate u/s 87A refer to Study Note 15. 16.5

SURCHARGE

See Study Note 15. 16.6

EDUCATION CESS

See Study Note 15. 16.7

RELIEFS

From the amount of tax liability computed above (i.e. gross tax liability plus education cess) an individual can claim the following reliefs. (i) Relief in respect of share of profit from an association of persons or body of individuals [Section 110]: When the association of persons or body of individuals is chargeable to tax at normal rates applicable to individuals, the share of income received by the individual is to be included in his or her total income. Under Section 110, an individual can claim relief for such income at the average rate of tax calculated on the total income. However, where no tax is payable or tax at the maximum marginal rate is payable by the association of persons or body of individuals, any share of income received by the individual from such association of persons or body of individuals need not be included in his total income. (ii) Relief in respect of arrears or advance salary [Section89]: Refer to Study Note 15. Under Section 190, pending assessment, it is obligatory on the part of the assessee to pay tax by deduction at source or by advance payment. The balance of tax, if any, remaining after deduction of tax at source or advance payment, is the final tax payable at the time of submission of return of income. Under Section Computation of tax liability of an individual for the assessment year 2017-2018 Step1. Gross total income (being aggregate of income under five heads) Step2. Less : Deduction u/ss 80C to 80U Total income (Step1minus Step 2) Step3. Tax on total income Step4. Less: Rebate u/s 87A Tax after rebate Add : Education cess @2% of tax and surcharge Add: Secondary and higher education cess@1% of tax and surcharge Total Step 5. Less: Reliefs (u/s89 or u/s110) Tax liability for the assessment year Step 6. Less: Tax deducted at source/Advance tax Tax payable at the time of submission of return of income. 16.8

** ** *** ** * * * * * ** ** ** ***

SPECIAL PROVISIONS FOR TAXATION OF NON-RESIDENT INDIVIDUAL ASSESSEES

While assessing the income of a non-resident assessee, the following provisions should be taken into consideration:

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A. Following incomes are treated as incomes deemed to accrue or arise in India: (i) Capital gain arising on transfer of property situated in India. (ii) Income from business connection (to be discussed in later part) in India (*). (iii) Income from salary in respect of services rendered in India. (iv) Salary received by an Indian national from Government of India in respect of services rendered outside India. However, allowances and perquisites are exempt in this case. (v) Income from any property, asset or other source of income located in India. (vi) Dividend paid by an Indian company. (vii) Interest received from Government of India. (viii) Interest received from a resident is treated as income deemed to accrue or arise in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and is used for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India. (i) Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is earned in respect of funds borrowed by the nonresident for earning on any business/profession in India. (ii) Royalty/fees for technical services received from Government of India. (iii) Royalty/fees for technical services received from resident is treated as income deemed to accrue or arise in India in all cases, except where such royalty/fees relates to business/profession 1 other source of income carried on by the payer outside India. (iv) Royalty/fees for technical services received from non-resident is treated as income deemed to accrue or arise in India if such royalty/fees is received for business/profession other source of income carried on by the payer in India. B. Disallowance for business expenditure: Under section 40 (a)(i), any interest, royalty, fees for technical services or other sum which is payable outside India to any person or in India to a non-resident, is not deductible, if the assessee has not deducted tax at source from such payments, or after deducting tax, he has not deposited such tax with the Government before the end of previous year [or before the due date of deposit specified under section 200(1) in case due date of deposit falls in next year]. However, if tax is deposited in next year(s) after the due date of deposit, then such amount is deductible in the subsequent previous year in which the said tax is deposited by the assessee with Government. Similar disallowance shall also be made under section 40(a)(iii) due to default in deduction/payment of tax at source on salary payable outside India or in India to a non-resident. C. TDS provisions applicable to a non-resident individual: Section 193 requires deduction of tax at source for interest on securities. Similarly, section 194A deals with TDS on interest other than on securities, while 194J deals with TDS in respect of fees for professional and technical services, directors‘ fees and royalties. Although TDS requirement under these sections does not cover a non-resident, under section 195 persons making payment to a non-resident shall also make TDS in respect of these payments. D. Special provisions for computation of total income of non-residents [Section 115D]: Where in the case of an assessee, being a non-resident Indian, the gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee under Chapter VI-A and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head "Capital gains. E. Tax on investment income and long-term capital gains of non-residents [Section 115E]: Where the total income of an assessee, being a non-resident Indian, includes:

(a) any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of: (i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent; (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and DIRECT TAXATION

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(iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b). F. Advance tax: Under the provisions of section 207, a senior citizen who is resident in India is not required to pay advance tax. However, the non-residents are not exempt from paying advance tax. G. Exemption limits: A non-resident assessee is not entitled to the higher exemption limits applicable to the senior or very senior citizens. They will pay tax at the rates mentioned in Para 1.1. of Study Note 15. Besides, the following shall also be taken into consideration: (i) Adjustment of basic exemption limit against long-term capital gains: A non-resident individual is not entitled to adjust basic exemption limit against income from long-term capital gains. (ii) Adjustment of basic exemption limit against short-term capital gains covered under section111A: Only a resident individual and resident HUF can adjust the exemption limit against STCG covered under section 111A. Thus, a non-resident individual cannot adjust the exemption limit against STCG covered under section 111A. (iii) Tax rebate u/s 87A: A non-resident individual is not entitled to tax rebate under section 87A. Point to note: A resident individual can adjust the LTCG but such adjustment is possible only after making adjustment of other income. In other words, first income other than LTCG is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against LTCG. Examples 1. K (age 62 years ) is a retired person. He purchased a piece of land in December, 2010 and sold the same in April, 2016. Taxable long-term capital gain on such sale amounted to ` 1,80,000. Apart from gain on sale of land, he is not having any other income. What will be his tax liability for the year 2016-17 if: (i) He is resident in India? (ii) He is a non-resident? Answer: (i) If K is a resident in India, his tax liability, after adjustment of basic exemption limit would be nil. (ii) If K is a non-resident, he will not be entitled to adjust basic exemption limit against his income from long-term capital gains. In view of this, his tax liability will be ` 37080 [ ` 1,80,000 x 20% + 3% education cess]. Example 2: C (age 67 years and resident) is a retired person earning a monthly pension of ` 5,000 from his Indian employer. He purchased some jewellery in December, 2010 and sold the same in April, 2016. Taxable LTCG amounted to ` 2,70,000. Apart from pension income and gain on sale of gold he is not having any other income. What will be his tax liability for the year 2016-17: (i) If C is a resident? (ii) C is a non-resident? Answer: Computation of tax liability for the assessment year 2017-2018 ` A. In the case of resident assessee: Income under the head ―Salaries Capital gains [LTG]] Gross total income Less: Deduction u/s 80C- 80U Total income Tax on total income : (Note 1) Less: Tax rebate u/s 87A Balance tax Add: Education cess @3% Tax payable B. In the case of non-resident assessee: Total income as above Tax on total income (Note 2) Add: Education cess

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60,000 2,70,000 3,30,000 Nil 6,000 5,000 1,000 30

`

3,00,000

1,030 3,30,000

54,000 1,620

55,620

253

Note1: Since C is a senior citizen below 80 years, the basic exemption limit is ` 3,00,000. Further, a resident individual can adjust the basic exemption limit against LTCG. However, such adjustment is possible only after adjusting income other than LTCG. In this case, he is having pension income of ` 60,000 (` 5,000 × 12) and LTCG of ` 2,70,000. Thus, first we have to adjust the pension income against the exemption limit and the balance limit will be adjusted against LTCG. Accordingly, his tax liability will be [ ` 3,30,000 – 60,000 – (3,00,000 -60,000) x 20%] =` 6,000. 2. For non-resident individual, irrespective of the age, the basic exemption limit is ` 2,50,000. Further, a non-resident individual cannot adjust the basic exemption limit against LTCG covered under section 112. In other words, C can adjust the pension income against the basic exemption limit but the remaining exemption limit cannot be adjusted against LTCG . Accordingly, his tax liability will be ` 3,30,000 – 60,000) x 20% = ` 54,000. Example 3. The income and related particulars of Mr. C, aged 56, for the year ended 31.03.2017 are given below:

(a) Salary ` 24,000 per month. (b) He was provided with a rent free accommodation in Hyderabad for which rent of ` 6,000 per month was paid by the employer.

(c) His wife was sick and treatment was taken in a private hospital, for which an amount of ` 32,000 was paid towards medical expenses by his employer in December 2016.

(d) An allowance of ` 13,200 was paid by his employer towards his son‘s education; (e) The employer paid D.A. `10,000 per month (considered for retirement benefits), Professional tax of `2,400 and Income Tax liability of ` 15,000.

(f) (g) (h) (i)

He encashed earned leave of his credit to the tune of ` 10,000; Loss from speculative business `20,000. Loss from sale of shares in ABC Pvt. Ltd. Held for 10 months ` 8,000;

Profit on sale of sale of long term capital assets ` 10,000. Compute the total income and tax liability of Mr. C for the Assessment Year 2017-18. [CMA Inter- Dec 2008]

Answer: Computation of total income and tax liability of Mr. C, for the assessment year 2017-18 relating to the previous year 2016-17 ` Salaries: Basic salary [ ` 24,000 x 12] 2,88,000 Encashment of leave while in service (fully taxable) 10,000 D.A. 1,20,000 Perquisites: Rent free accommodation [Note] 62,700 Reimbursement of medical expenses 32,000 Less: Exemption (non-recognized hospital) 15,000 17,000 Children education allowance 13,200 Less: Exempt u/s 10(14) [@ `100 p.m.] 1,200 12,000 Income-tax paid by employer 15,000 Professional tax paid by the employer 2,400 Gross salary 5,27,100 less: Professional tax u/s 16(iii) 2,400 Net salary 5,24,700 Capital Gains (Long-term capital gains) 10,000 Less: Short-term capital loss 8,000 2,000 Total income 5,26,700 Tax Liability Tax on long term capital gains (`2,000 @ 20%) Tax on other incomes of `5,24,700 at normal rates Add: Education Cess and Higher Education cess 3% (2% + 1%) Total Tax Liability DIRECT TAXATION

400 29,940 30,340 910 31,250 254

Working Note:1. Rent- free accommodation being lower of the following: A. Rent paid by employer B. 15% of salary (basic salary, leave encashment and D.A. i.e., (2,88,000+10,000+1,20,000 = ` 4,18,000)

` 72,000 ` 62,700

Note 2: Loss from speculation business is to be set off against income from speculation business income only. Example 4: V has the following incomes for the financial year 2016-17 ` (-) 40,000 16,000 2,90,000

Business Income Short-term capital gains Long-term capital gains

He deposits ` 10,000 in public provident fund account. You are required to find out his tax liability for the assessment year 2017-2018. [CMA Inter- Dec 2008] Answer: Computation of income of Mr. V for the Assessment Year 2017-18 relating to the previous year 2016-17 ` ` Business income (-) 40,000 Capital gains: Short-term 16,000 Long-term 2,90,000 3,06,000 Gross total income 2,66,000 Less: Deduction u/s 80C Nil Total income 2,66,000 Notes: 1. Business loss can be set off against capital gains. It is beneficial to first set it off against short term capital gain and the balance against long term capital gain. The whole of total income would consist of long term capital gain. 2. Deduction u/s 80C is not available in respect of PPF, since the whole of gross total income consist of income by way of long term capital gains. Computation of tax liability ` Total income (long-term capital gains) Tax on total income : Up to ` 2,50,000 Balance ` 16,000 @20% Total tax Less: Tax rebate u/s 87A [ 100 % of tax or ` 5,000, whichever is less] Tax payable

2,66,000 Nil 3,200 3,200 3,200 Nil

Example 5: Y submits the following particulars of his income for the year ended 31.032017. 1) On 30.04.2016, when he attained the age of 60, his friend gave him a flat at Surat, each contributing `40, 000 in cash. The cost of the flat was ` 6.4 lakhs. 2) Another friend sent cash gift of ` 75,000 for the occasion. 3) Y sold the flat on 30.01.2017 for `8.9 lakhs. The registrar‘s valuation for stamp duty purposes was `9.2 lakhs. Neither the buyer nor Y questioned this value. 4) He also purchased equity shares (listed) of X Ltd. On 05.02.2016 for ` 3.5 lakhs. These were sold privately on 15.03.2017 for `2.8 lakhs. 5) He has paid life insurance premium of ` 90,000 for his major son who is not dependent on him. 6) You are required to calculate the total income of Y for the Assessment Year 2017-18, Cost inflation indices 1125 for 2016-17; and 1081 for 2015-16. [CMA Inter- June 2009]

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Answer: Total income of Y for the Assessment Year 2017-2018. ` 2,80,000 75,000 3,55,000 90,000 2,65,000

Capital Gains (Note 1) Income from other sources (Note 2) Gross total income Less: Deduction under Chapter VI-A (Note 3) Total Income Working Note 1: Working of capital gains Short-term capital gains from sale of flat at Surat: Full value of consideration being higher of stamp duty value u/s 50C or actual amount received Less: Cost of Acquisition Short term capital gains Sale of equity shares [long term capital asset] Sale consideration 3,50,000 x 1125/1081 Long term capital loss

` 9,20,000 6,40,000 2,80,000 2,80,000 3,64,246 (84,246)

Note 1: Chargeable capital gains: Loss from long-term capital assets can be set off only against profits from similar assets). Note 2: The gift of property is covered by section 56(2)(vi)(b). Since the amount of gift in kind does not exceed ` 50,000 in each case and this section does not need aggregation of multiple gifts, it is not taxable. However, the gift of ` 75,000 received from another friend (non – relative) is covered by section 56(2)(vi)(a). Hence his is taxable. Note 3: w.e.f. 1-10-2009 value of immovable property shall be the stamp duty value of the property. Hence, stamp duty value of the property is taxable at the hands of Y. Note 4: Deduction u/s 80C can be claimed in respect of LIC paid for any child. Example 6. Compute the total income of Mr. P from the information given below: Particulars Net income from House Property Income from business Short-term capital gain on sale of shares Long term capital loss on sale of property (brought forward from A.Y. 2014-15) Income from integrated activities of growing tea crops and manufacturing tea Dividends from Indian companies carrying on agricultural operations Current year depreciation Brought forward business loss(loss incurred six years ago) Expenditure incurred on medical treatment of dependent with severe disability

` 1,75,000 2,25,000 80,000 (70,000) 1,50,000 70,000 35,000 (65,000) 1,20,000 [CMA Inter- June 2010]

Answer: Computation of total income and tax liability of Mr. P, for the assessment year 2017- 2018 relating to the previous year 2016-2017 ` ` Particulars Income from House property: 1,75,000 Income from business: Profit before depreciation 2,25,000 Less: Current year depreciation 35,000 Less: Brought forward business loss 65,000 1,25,000 Income from tea business [40% is business income] 60,000 1,85,000 Capital gains: Short term capital gain 80,000 Long term capital loss from property [Not to be set off] Nil 80,000 DIRECT TAXATION

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Gross total income Less: Deduction under Section 80DD Total Income

4,40,000 1,25,000 3,15,000

Example 7: D, aged 55, resident of India, furnishes the following information for the previous year ended 31.03.2017. ` House property income (net)

18,500

Business income Capital gains(short term)

5,000 22,000

Capital gains(long term) Income from horse race

2,500 15,000

Income from card games Additional information are as follows:

16,000

Brought forward business loss for A.Y.2008-09

12,000

Unabsorbed depreciation for A.Y.2014-15 Long term Capital Loss for A.Y. 2013-14

6,000 12,000

Loss from horse race suffered in AY 2013-14 Speculative loss for AY 2012-13

8,000 10,000

D has taken a life insurance policy for his major son working in a software company for a salary of `5 lakhs per annum. He has paid a premium of ` 60,000 in cash for a capital sum assured of `4,00,000/He has paid PPF of ` 70,000 by raising a hand loan from his friend. Calculate total income and tax liability. State the items to be carried forward. [CMA Inter- Dec 2010] Answer: Computation of total income and tax liability of Mr. D, for the assessment year 2017-2018 relating to the previous year 2016-2017: Particulars (`) (`) Salaries Nil Income from house property 18,500 Profits and gains of business and profession 5,000 Less: business loss brought forward (12,000) nil Capital gains/Losses Long-term capital gain 2,500 Less: Long term capital loss brought forward (12,000) nil Short-term capital gain 22,000 Less: Unabsorbed depreciation for 2014-15 (6,000) 16000 Income from other sources Income from horse races(15,000-8000 set off) 7,000 Income from card games 16,000 23,000 Gross total income 57,500 Less: Deduction under Chapter VI-A u/s 80C 40,000 Life insurance policy (maximum 10% of sum assured) 70,000 Public provident fund 34500 But restricted to income from HP and short-term capital gains) Taxable Income 23,000 Tax payable @ 30% on Income from horse race &Income from card games 6,900 Less: Rebate 87A 5,000 Education cess and SHE cess) 2+ 1%)% (Rounded off) 1,900 Tax payable 57 1,957 Item to be Carried Forward 9,500 Long term capital loss of AY 2013-14 Note: In respect of speculative loss of 2012-13, time limit for carry forward has expired. DIRECT TAXATION

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Example 8. Mrs. S, aged 64 has carried on business during the year ended March 31, 2017. The particulars of Profit and Loss account are given below: Profit and Loss Account for the year ended 31.03.2017 ` To office salaries 22,000 By Gross Profit To Proprietor‘ salary 12,000 By profit on sale of residence To General expenses 8,500 By Disallowed Bad debts recovered To Bad debts 7,500 By Interest from Government Securities (net) To Fire insurance premium 5,500 By Dividend from JB Agro Ltd. To Depreciation 2,500 By income from horse race (gross) To Motor car expenses 7,500 By Sundry receipts To donation to Goa University 60,000 To Income tax 2015-16 8,000 To Life insurance premium 10,000 To Reserve for future loss 2,000 To Advertisement 6,000 To Net Profit 3,56,250 5,07,750

` 3,78,150 33,500 62,000 12,600 4,000 16,000 1,500

5,07,750

Additional Information: (i) General expenses include ` 1,500 paid as compensation to an old employee whose services were terminated. His service was considered detrimental to business interest. A sum of ` 6,000 being cost of small machines is also included in general expenses. (ii) One – third of the motor car expenses is for personal use. (iii) Reserve for future loss represents a demand of Sales tax under dispute. (iv) Depreciation is found to be in excess of `500 as per Income Tax Rules. (v) Actual income tax for 2016-17 ` 12,000. (vi) Profit on sale of residence represents long term capital gains computed in the prescribed manner. (vii) Tax has been deducted at source from the Govt. Securities at 10% (viii) JB Agro Ltd. is a Listed company. (ix) She received ` 4,000 as interest on moneys lent to her friends, which has not been reflected in the books. (x) Compute her total income and Tax Liability. [CMA Inter- June 2012] Answer: Computation of total income and tax liability of Mrs. S, for the assessment year 2017-2018 relating to the previous year 2016-2017 (`) (`) Particulars Net profit as per P&L Account 3,56,250 Add: Inadmissible expenses: Proprietor‘s salary 12,000 Motor car expenses 2,500 Donation to Goa University 60,000 Income tax 8,000 insurance Premium 10,000 Reserve for future loss 2,000 Excess Depreciation 500 Cost of small machine (capital expenses) 6,000 1,01,000 Total 4,57,250 Less: Incomes not taxable under the head: Profits of house property 33,500 Recovery of bad debts disallowed earlier 62,000 Dividend Income 12,600 DIRECT TAXATION

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Horse race income Business Income Capital gains: Long-term capital gain on sale of house property Income from other sources: Interest on Securities(12,600 x 100/90=14,000) Income from horse races Interest from friends Dividends from domestic company Gross total income Less: Deduction under section 80C: Life insurance premium

16000

1,28,100 3,29,150 33,500

14,000 16,000 4,000 exempt

Tax on income other than race horse `3,70,650 Tax on Horse Race Income (16,000 x 30%) Less: Rebate u/s 87A Add: Education cess and SHE cess @ 3% Tax payable (rounded off)

34,000 3,96,950 10,000 3,86,650 7,065 4,800 11,865 5000 6,865 206 7,070

Example 9: M gives you the following information for the year ended 31.03.2017: Owns 3 goods carriages throughout the financial year 2016-17. Retail trade turnover ` 36,00,000. Has eligible brought forward depreciation of the assessment year 2012-13 ` 60,000 relating to retail trade. Deposited ` 80,000 in PPF account and ` 90,000 in tax saver deposit. Assume that he wants to offer income by opting for sections 44AD and 44AE. Compute his total income for the assessment year 2017-18. [CMA Inter- June 2015] Answer: Computation of total income of M for the Assessment Year 2017-2018 relating to the previous year 20162017 ` ` Particulars Income U/s 44AD from retail trade @ 8% on `36,00,000 2,88,000 Income U/s 44AE in respect of plying of goods carriage (`7,500 x 3 x 12) 2,70,000 Business income prior to set off Less: Brought depreciation not eligible for set off as the brought forward depreciation is deemed to be current year depreciation and has been deducted while computing income under Section 44AD Gross Total Income Less: Deduction under Section 80C In respect of PPF Contribution In respect of Tax Saver Deposit Maximum amount allowable Total Income

5,58,000 ---------5,58,000 80,000 90,000 1,50,000 4,08,000

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STUDY NOTE : 17 ASSESSMENT OF HINDU UNDIVIDED FAMILY THIS STUDY NOTE INCLUDES: 17.1 Meaning of Hindu Undivided Family 17.2 Assessment of Hindu Undivided Family 17.3 Computation of Income of the HUF 17.4 Computation of Tax Liability of a HUF 17.5 Assessment after Partition of Hindu Undivided Family [Section171] 17.1

MEANING OF HINDU UNDIVIDED FAMILY

Although the definition of ―Person‖ under section 2(31) includes a Hindu undivided family, the term has not been define din the Income-tax Act. It is expression of the Hindu Law and denotes a Hindu family consisting of all male members who have lineally descended from a common ancestor and includes their wives and unmarried daughters [CIT vs. Laxminarayan (1935) Bom. 618]. It is a relationship which arises not from any contract, but from status. 1. A few examples of Hindu undivided family: A Hindu undivided family requires at least two members [Krishna Prasad vs. CIT 97 ITR 493 (SC)]. Such members may be all males or all females or a combination of both. There is, however, no requirement that the number of the coparceners is more than one. The following are some examples of Hindu undivided family:  A-a male Hindu, B-wife of A, C-unmarried daughter of A [Gowli Buddanna vs. CIT 60 ITR293(SC)].  A- a male Hindu, B widow of deceased brother of A [Sitabai vs. Ramchandra, AIR 1970S. C.343].  C and D, the widows of A and B respectively the two deceased brothers [CIT vs. Veerappa Chettier76ITR467].  A family consisting of mother and hart domino sons [Champa vs. Board of Revenue46 ITR81]. 2. Sikh and Jain families: Sikhs and Jains are not governed by the Hindu law. For the purpose of the Income-tax Act, however, such families are treated as Hindu undivided families [CWT vs. Surajit Singh 138 ITR 186; CWT vs. Champa 83ITR720]. 17.2

ASSESSMENT OF HINDU UNDIVIDED FAMILY

For the purpose of assessment of a Hindu undivided family to Income-tax, the following points may be considered as relevant: 1. Continued status: Once a Hindu undivided family is assessed dissect, it shall continue to be assessed as a Hindu undivided family except where a partition is claimed by the members and the findings of a partition are recorded [Section 171(1)]. 2.

Residential status of the HUF: See Study Note 5.

3. Income received as a member of the Hindu undivided family: Under Section 10(2), any sum received by an individual member out of the income of the Hindu undivided family is exempt from tax. 4. Income of imparitable estate: In the case of income from impartible estate, such income belongs solely and exclusively to the holder of the estate, even though the impartible estate is owned by the joint family. Therefore, the holder of an impartible estate is liable to be taxed on the income as an individual and not as the representative of the Hindu undivided family. Any amount received by other members of the Hindu undivided family out of the income of such impartible estate belonging to the family is, however, exempt under Section10 (2). DIRECT TAXATION

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5. Family income and individual income of a member: As mentioned above, amounts received out of the income of the Hindu undivided family is not taxable in the hands of the members. But individual income or income arising to a member out of the separate and self-acquired property of the member is taxable as income of the individual and not as the income of the Hindu undivided family. 6. Salary to the members and Karta of the HUF: Salary paid by the HUF to the Karta or any member under a valid agreement and as a matter of commercial expediency, shall be allowed as a deduction in computing the income of the HUF [Jugal Kishore Baldeo Sahaivs.CIT63 ITR238(SC)]. 17.3

COMPUTATION OF INCOME OF THE HUF

The computation of total income for a Hindu undivided family shall be made as under: Step 1: Compute gross total income, which is the sum total of income under the following four heads: Income from house property [u/s 22 to 27].  Profits and gains of business or profession [u/s 28 to 44].  Capital gains [u/s 45 to55].  Income from other sources [u/s 56 to 59].  Step 2: Income of other persons to be included in total income of the HUF under Sections 60 to 63. Step 3: Set-off and carry forward of losses under Sections 70 to 80. Step 4: The sum total of income under steps1to 4 shall be called the Gross total income of the HUF. Step 5: Allow deductions under Sections 80 C to 80 U as under: Section 80C 80CCF 80D

Particulars Deduction in respect of specified savings. Deduction in respect of long-term infrastructure bonds Deduction in respect of medical insurance premium.

80DD

Deduction in respect of maintenance, including medical treatment of handicapped dependent.

80DDB

Deduction in respect of medical treatment of some specified disease.

80G

Deduction in respect of donation to certain funds and charitable institutions.

80GGA Deduction in respect of certain donations for scientific research on rural development. 80GGC Deduction for contribution to political parties. 80-LA Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development. 80-1A B Profits and gains of an undertaking engaged in the development of special Economic Zone. 80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. 80-IC 80-ID 80-IE 80JJA

Special provision for certain undertakings in certain backward States. Deduction in respect of profits and gains of hotels and convention centers in specified area. Deduction in respect of certain undertakings in the North-Eastern States of India. Deduction in respect of profits from the business of collecting and processing of biodegradable waste.

80TTA

Deduction in respect of interest on savings bank account.

Step 6: The balance of income after Step 5 is the total income. Under Section 288A. Total income is to be rounded off in multiples of `10. DIRECT TAXATION

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Important considerations: (i) A HUF cannot have income under the head ―Salaries‖. (ii) In computing income under the head ―Capital gains‖, a HUF is eligible for deduction sunder Sections 54, 54D, 54EC, 54F, 54G and 54GA. (iii) The provisions of Section 64 relating to clubbing of income are not applicable to a HUF. The section applies to an individual only.



17.4

COMPUTATION OF TAX LIABILITY OF A HUF

Step 1: Find out the gross tax on total income at the prescribed rates [See Study Note 14]. The total income has to be rounded off to the nearest ` 10. Step 2: The amount of tax and surcharge is to be further enhanced by education cess@ 2% of the tax and surcharge and secondary and higher education cess @1% tax and surcharge. The amount of tax thus arrived at is to be rounded off u/s 288B to the nearest ` 10. Step 3: Deduct the amount of tax deducted at source (TDS) and advance tax already paid. The balance is the net tax payable at the time of submission of return on income.

17.5

ASSESSMENT AFTER PARTITION OF HINDU UNDIVIDED FAMILY [SECTION171]:

The assessment of a Hindu undivided family is governed by Section 171. This sectioned cognizes two distinct types of partitions, e.g., (a) Total or complete partition, and (b) Partial partition. The consequence of partition of a Hindu undivided family, whether total or partial, is discussed below: ● Total or complete partition: Total partition means a partition of the HUF where all the properties of the family are divided among the members and the family ceases to exist as an undivided family. Such partition under Explanation (a) to Section171 has been referred to as mere ―partition ―and means — (i) Where the property admits of physical division, a physical division of the property; but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or (ii) Where the property does not admit of a physical division, then such division as the property admits of; but a mere severance of status shall not be deemed as a partition. ● Partial partition: According to Explanation (b) to Section171, ―partial partition‖ means partition which is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both. 1.

Consequence of partition:

The consequence of a total or partial partition is as follows: (i) A Hindu undivided family hither to assessed as undivided shall continue to be assessed as such unless the finding of partition has been recognized by the Assessing Officer under Section171[Section171(1)]. (ii) Where, at any time of making an assessment under Section 143 or Section 144, it is claimed by or on behalf of any member of a Hindu undivided family that a partition, (whether total or partial) has taken place among the members of the family, it is incumbent upon the Assessing Officer to make an inquiry into it an record a finding as to whether there has been a total or partial partite on of the

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(iii)

(iv)

(v)

(vi)

2.

joint family, and ,if there has been such a partition, the date on which it has taken place[subsections(2)and (3)ofSection171]. Where such a partition has taken place during the previous year and the finding has been recorded by the Assessing Officer, the total income of the joint family in respect of the period upto the date of partition shall be assessed as if no partition had taken place, and each member or group of members shall, in addition to any tax for which he or it may be separately liable, be jointly and severally liable for the tax on the income so assessed[Section171(4)]. Where the partition has taken place after the end of the previous year and the finding has been recorded by the Assessing Officer, the total income of the previous year of the joint family shall be assessed as if no partition had taken place[Section171(5)]. Where the Assessing Officer finds after the completion of the previous year that the family has already effected a partition, the Assessing Officer shall proceed to recover the tax from every person who was a member of the family before the partition and every such person shall be jointly and severally liable for the tax on the income so assessed[Section171(6)]. For the purpose of Section171, the several liabilities of any member or group of members shall be computed according to the partition of the joint family property allotted to him or it at the time of partition [Section171(7)]. Consequence of a partial partition after 31st December, 1978 [Section 171(9)]:

The consequence of a partial partition after 31stDecember, 1978 is as follows: (i) Such a partition is not recognized and no claim that such a partition has taken place shall be inquired into and recorded by the Assessing Officer. (ii) Such family shall continue to be liable to be assessed as if no such partial partition had taken place. (iii) Each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable by the family in respect of any period, whether before or after such partial partition. (iv) The several liability of any member or group of members shall be computed according to the portion of the joint family property allotted to him or it at such partial partition. Example 1: The following details have been supplied by the Karta of a Hindu undivided family during the previous year 2016-2017: You are required to compute total income of the family for the relevant assessment year. ` (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Profits from business Salary paid to the Karta by the family Salary received by the Karta from his services elsewhere Director‘s fees received by the Karta Rental income from property belonging to the family Dividends from Indian company Long-term capital gains on transfer of building belonging to the family Short-term capital gains on transfer of shares(family property) Donation to Ramakrishna Mission Share of profits from a partnership entered into by the Karta on behalf of the family

4,80,000 80,000 80,000 20,000 1,60,000 40,000 24,000 32,000 20,000 40,000

Answer: Computation of total income of Hindu undivided family for the assessment year 2017-2018 relating to the previous year 2016-2017. ` ` • Income from house properly: Gross annual value (assumed rental value is higher than

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the gross municipal value) Less : Municipal tax paid

1,60,000 Nil

Net Annual Value

1,60,000

Less: Standard deduction u/s 24(a) @ 30% • Profits and gains of business or profession: Business profit Less: Reasonable salary of the Karla • Capital gains: Long-term capital gains on transfer of building Short-term capital gains on transfer of shares • Income from other sources: Dividends from Indian company - Exempt u/s 10(34) Gross total income Less: Deduction under Section 80G in respect of Donation (50% of sum donated] Total income

48,000

1,12,000

4,80,000 80,000

4,00,000

24,000 32,000

56,000 Nil 5,68,000 10,000 5,58,000

Notes: (1) Salary paid to the Karta by the HUF is deductible from business income [Jugal Kishore Baldeo Sahai vs. CIT63ITR238]. (2) Salary received by the Karta for service sales where is not assessable as the income of the HUF. (3) Share of income from partnership firm is exempt u/s 10(2A). (4) It is assumed that director‘s fee is received by the Karta in his individual capacity. It is, therefore, not assessable as the income of the HUF.

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STUDY NOTE : 18 ASSESSMENT OF FIRMS AND ASSOCIATION OF PERSONS THIS STUDY NOTE INCLUDES: THIS STUDY NOTE INCLUDES: 18.1 Meaning 18.2 Partnership Firms Assessed As Such [PFAS] 18.3 Partnership firms assessed as association of persons [PFAAOP] 18.4 Assessment of association of persons and body of individuals

18.1

MEANING

Under Section 2(31) (iv) of the Income-tax Act, a firm is a distinct unit of assessment. Before we proceed with the assessment procedure of firms, the following points need to be underscored:  There will be no distinction between registered and unregistered firms.  The income of the firm under the head ―Profits and gains of business and profession‖ shall be computed in accordance with the provisions of Sections 30 to 38. Besides, the firm can claim special deduction, subject to the limits prescribed under Section 40(b), on account of remuneration to the working partners and interest on capital.  The share of a partner in the income of the firm will not be included in his total income. Such income is exempt under Section 10(2A). However, remuneration and interest, which are allowed u/s 40(b) in computing business income of the firm, shall be taxable in the hands of the partners in their individual assessments under the head ―Profits and gains of business or profession‖.  Under the new scheme of taxation of firms, effective from the assessment year 1993-1994, partnership firms will be of the following two types: (a) Partnership firms assessed as such [PFAS], and (b) Partnership firms assessed as association of persons [PFAAOP].  The income of the firm shall be charged to tax at a flat rate of 30% (20% for long-term capital gains, 15% for short-term capital gains specified u/s 111A). For the assessment year 2017- 2018, for an income exceeding `1 crore, surcharge shall be 12% and education cess and secondary and higher education cess @ 2% and 1% respectively shall be charged on the amount of income tax computed above.

18.2

PARTNERSHIP FIRMS ASSESSED AS SUCH [PFAS]

A firm shall be assessed as a firm if the following conditions are fulfilled: (a) The partnership is evidenced by an instrument [Section 184(1)(i)]. (b) The individual shares of the partners are specified in that instrument [Section 184(1)(ii)]. (c) A certified copy of the instrument of partnership shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after 1st April, 1993 in respect of which assessment as a firm is first sought [Section 184(2)]. ●

Consequence of failure to company with the provision of Section 144 : Till the assessment year 20032004, the failure to comply with the provision of Section 144 was a reason of a firm to be assessed as an association of persons under the provisions of Section 167B [which means that interest/salaries, etc., paid to the partners shall be disallowed and the firm shall be taxed either at the rate applicable to an individual or at the maximum marginal rate (30% plus education cess) if any of the partners has income above the taxable limit]. With effect from the assessment year 2004-2005, due to the amendment of Section 184(5) and Section 185, a firm shall continue to be assessed as such even if there is failure on the part of the firm to comply with the provisions of Section 144. However, in this case payment of interest, salary, bonus, commission or remuneration made by the firm to any partner shall not be allowed in computing the income of the firm under the head ‗‘Profits and gains of business or profession.‘‘. As a result, these amounts will not be taxable in the assessment of the partners. DIRECT TAXATION

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1.

2.

Continued status as a firm: Where any firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year, if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought [Section 184(3)]. Where, however, any change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to the previous year. Computation of business income: When a firm is assessed as such, its income under the head ―Profits and gains of business or profession‖ shall be computed in the usual manner after claiming deductions under Sections 30 to 38. But in respect of payment of interest and remuneration, the following should be considered:  Interest paid to a partner is allowable as deduction u/s 36.  Remuneration paid to a working partner is allowable as deduction u/s 37.  The payment of interest and remuneration to a partner of a firm assessed as such is subject to the restrictions under Sections 40(b) and 40A.

A. Restrictions on payment of interest and remuneration to partners [Section 40(b)]: The payment of interest and remuneration to the partners of a firm assessed as such is subject to the following rules: (i) Any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is to be disallowed [Section 40(b)(i)]. (ii) Any payment of remuneration to any partner who is a working partner or any payment of interest to a partner which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed, is to be disallowed [Section 40(b)(ii)]. (iii) Any payment of remuneration to any working partner or payment of interest to any partner which is authorised by the partnership deed but which relates to a period prior to the date of such partnership deed shall not be allowed as deduction [Section 40(b)(iii)]. (iv) Any payment of interest to any partner in accordance with the partnership deed relating to a period falling after the partnership deed shall be allowed to the extent of 12% simple interest p.a., or the actual rate of interest in accordance with the partnership deed, whichever is lower [Section 40(b)(iv)]. (v) Any payment of remuneration to any working partner in accordance with the partnership deed shall be allowed subject to the maximum limit shown below [Section 40(b)(v)]. Book-profit

Actual amount deductible

(a) on the first `3,00,000 of the book-profit or in case of a loss (b) on the balance of the book-profit ●

`1,50,000 or @ 90 per cent of the book-profit, whichever is more. @60% of the book-profit.

Interest payable to a partner in representative capacity [Explanation 1 to Section 40(b)]: Where an individual is a partner in a firm on behalf, or for the benefit, of any other person, interest paid by the firm to such individual otherwise than as partner in representative capacity shall not be taken into consideration for the purpose of Section 40(b). However, interest paid by the firm to such individual as partner in a representative capacity and interest paid to the person so represented shall be taken into account for the purposes of Section 40(b). Further, under Explanation 2 to Section 40(b), where an individual is a partner in a firm otherwise than in a representative capacity, interest paid by the firm to such individual shall not be taken into consideration for the purposes of Section 40(b), if such interest is received by him on behalf, or the benefit, of any other person.

Example 1: X, the Karta of a Hindu undivided family, is a partner of a firm on behalf of the HUF. During the year, X receives 30,000 from the firm as interest on capital comprising: (a) 1,00,000 from the HUF, (b) 50,000 provided out of his personal fund as loan to the firm and (c) 50,000 provided by his nephew out

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of his personal fund as loan to the firm. Discuss the admissibility or otherwise of the interest in the assessment of the firm. Answer: The rate of interest being 15% [i.e., 30,000 × 100/2,00,000] p.a., for the purpose of deduction in the hands of the firm, the interest shall be treated as follows: (i) Interest paid to X as a partner representing the HUF shall be allowed to the extent of 12% p.a., or `12,000, since it is covered u/s 40(b). (ii) The entire amount of interest paid to X on his own fund as well as fund provided by is nephew as loan shall be allowed as deduction. B.

Restrictions on payment to any partner or any relative of such partner [Section 40A]: Under Section 40A, if in the opinion of the Assessing Officer, any expenditure /payment to a partner or his relative is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment is made, then so much of the expenditure/payment as is considered excessive or unreasonable shall not be allowed as deduction.

C. Meaning of book profit [Explanation 3 to Section 40(b)]: Book profit means the net profit, as shown in the profit and loss account for the relevant previous year, computed in accordance with the provisions of Sections 28 to 44D and increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. In other words, the book profit shall be computed under the following steps: Step I. Find out the net profit as given in the profit and loss account. Step II. Adjust the net profit in accordance with the provisions of Sections 28 to 44D. Step III. Add the aggregate amount of remuneration paid or payable to any partner, if it is already debited to the profit and loss account. The resulting amount is the book profit. For the purpose of computation of book profit, the following should also be considered: (i) Income under any other heads [e.g., Income from house property, Capital gains and Income from other sources] are not part of the book profit. These incomes, if included in the profit and loss account, shall be excluded. (ii) Bought forward business loss shall not be deducted to arrive at the book profit. But unabsorbed depreciation being allowed under Section 32, shall be deducted. (iii) Deduction under Chapter VIA [i.e., deductions u/s 80C to 80U] shall be ignored for the purpose of computation of book profit. Deductibility of fringe benefit tax: Although fringe benefit tax payable by a firm is expenditure laid out wholly and exclusively for the purposes of the business, Section 40(a)(ic) expressly prohibits the deduction of the amount of fringe benefit tax paid for the purpose of computing income under the head ―Profits and gains of business or profession‖. Therefore, fringe benefit tax is not a deductible expenditure for computing book profit within the meaning of Section 40(b). Example 2: The profit and loss of M/s. X and Y, (a PFAS), a retail cloth merchant, for the year ending 31st March, 2017 is given as under: ` ` To Opening Stock 1,80,000 By Sales 20,00,000 „ Purchases 11,00,000 „ Rent from house property 40,000 „ General expenses 2,00,000 „ Dividend from Indian „ Remuneration to partners 2,00,000 companies 10,000 „ Interest to partners 90,000 „ Closing stock 2,00,000 „ Municipal tax paid 4,000 „ Sundry expenses 26,000 „ Net Profit: X 3,00,000 Y 1,50,000 4,50,000 22,50,000 22,50,000 DIRECT TAXATION

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Other information: (i) General expenses include salary paid to the brother-in-law of X, which, in the opinion of the Assessing Officer, is excessive to the extent of ` 15,000. (ii) Sundry expenses include ` 5,000 being provision for bad and doubtful debts. (iii) Sales tax amounting to ` 75,000 was paid on 10th April, 2016 and not debited to the profit and loss account. (iv) Capital of X and Y was ` 4,00,000 and ` 2,00,000 respectively and they share profit and loss in the ratio of 2 : 1. (v) Interests and remunerations are paid to the partners in accordance with the provisions of the partnership deed. From the above particulars, you are required to compute: (a) Book profit of the firm. (b) Interest on capital allowable as per Income tax law, and (c) Remuneration to partners as per Income tax law. X and Y are working partners in the firm. Answer: (a) Computation of book profit for the assessment year 2017- 2018 relating to the previous year 20162017: ` ` Net profit as per profit and loss account Add: Expenses disallowed: Salary of brother-in-law of X being unreasonable [u/s 40A] Provision for bad and doubtful debts Municipal tax (being chargeable under the head Income from house property) Interest on partner's capital [disallowed u/s 40(b)] [See (b)] Remuneration to the partners [treated separately] Less: Expenses allowed: Sales tax [allowed u/s 43B] Less : Income either chargeable under other head or exempt : Dividend from Indian companies Rent from house property

4,50,000 15,000 5,000 4,000 18,000 2,00,000

75,000 10,000 40,000

Book-profit (b) Interest on capital allowable u/s 36, read with Section 40(b) Total capital of X and Y Interest allowed subject to a maximum of 12% p.a.

Total Since actual remuneration as per partnership deed is lower, it will be allowed as deduction

1,25,000 5,67,000 6,00,000 72,000

Interest to be disallowed (` 90,000 – ` 72,000) (c) Aggregate of remuneration allowable u/s 37 read with Section 40(b) On 1st ` 3,00,000 of book-profit: ` 1,50,000 or 90%, whichever is more On balance of book-profit: 60%. of ` 2,67,000

2,42,000 6,92,000

18,000 2,70,000 1,60,200 4,30,200 2,00,000

3. Provisions relating to set off and carry forward of business loss: The brought forward business loss of a firm shall be dealt with as under:

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●

●

●

●

Loss relating to the assessment year commencing on or before 1st April, 1992 [Section 75]: Such loss, which could not be set off against any other income of the firm and which had been apportioned to a partner of the firm, but could not be set off by such partner prior to the assessment year commencing on 1st April, 1993, then, such loss shall be allowed to be set off against the income of the firm subject to the condition that the partner continues in the said firm and to be carried forward for set off under Sections 70, 71, 72, 73, 74 and 74A. Loss relating to the assessment year commencing on or after 1st April, 1993: With effect from the assessment year 1993-1994, there is no separate provision for set off and carry forward of losses of a firm. Such losses, as is the case with the other assessees, shall be dealt with under the provisions of Sections 70 to 74A. Carry forward and set off losses in the case of change in the constitution of firm [Section 78(1)]: Where any change has occurred in the constitution of the firm owing to death or retirement of a partner, then the firm shall not be allowed to carry forward and set off so much of the loss proportionate to the share of such retired or deceased partner as exceeds his share of profits in the firm in respect of the previous year. Carry forward and set off losses in the case of succession of business [Section 78(2)]: The broad principle underlying Sections 72 to 74 is that the right to carry forward and set off business loss is available only to the person who has incurred the loss. Section 78(2), however, permits the successor of a business to carry forward and set off the loss of his predecessor against his income, if the succession is by means of inheritance. For example, if a widow is taken up as the partner of a firm after the death of her husband, the firm shall be entitled to carry forward and set off the loss attributable to the deceased partner.

4. Computation of total income of PFAS: The total income of a firm assessed as such, shall be computed under the steps mentioned below: Step I. Compute the income of the firm under the various heads [e.g., Income from house property, profits and gains of business or profession, Capital gains and Income from other sources]. Step II. Make adjustments for clubbing of income under Sections 60 and 61. Step III. Make adjustment for unabsorbed depreciation and brought forward loss, if any. The income remaining at this stage is called Gross total income. Step IV. Allow deductions under Chapter VIA as specified below: 80G Deduction in respect of donation to certain funds and charitable institutions 80GGA Deduction in respect of certain donations for scientific research or rural development 80GGC Deduction for contribution to political parties 80-IA Deduction in respect of profits and gains from industrial undertakings or enterprise engaged in infrastructure development 80-IAB Profits and gains of an undertaking engaged in the development of Special Economic Zone. 80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings 80-IC Deduction for certain undertakings in special category states. 80-ID Deduction in respect of profits and gains of hotels and convention centres in specified area. 80-IE Deduction in respect of certain undertakings in the North-Eastern States of India 80 JJA Deduction in respect of profits from the business of collecting and processing of biodegradable waste The balance of income after deductions in Step IV is the total income of the firm. 5. Computation of tax of PFAS: For the assessment year 20162017, PFAS is liable to tax at the rates specified below: ● Long-term capital gains ● Short-term capital gains covered u/s111A

20% 15%

● Winnings from lottery 30% ● Other income 30% ● Surcharge: From the assessment year 2017-2018,for an income exceeding ` 1 crore, surcharge will be12%. ● Education cess: For the assessment year 2017-2018, education cess is 2% of tax and surcharge and secondary and higher education cess is 1% of tax and surcharge. DIRECT TAXATION

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6. Assessment of partners of partnership firm assessed as such: The provisions relating to the assessment of partners of PFAS are as under: A. Share of profit from the firm: Under Section 10(2A), the share of income of a partner of a firm assessed as such is exempt from tax. B. Share of loss including brought forward loss: Any loss of the firm in relation to the assessment year commencing on or after 1st April, 1993, shall not be apportioned to the partners. Such losses shall be carried forward and set off by the firm under the provisions of Sections 70 to 74A. Any loss in relation to the assessment year commencing on or before 1st April, 1992, which could not be set off against any other income of the firm and which had been apportioned to a partner of the firm but could not be set off by such partner prior to the assessment year commencing on 1st April, 1993, shall be allowed to be set off against the income of the firm and carried forward for set off under Sections 70 to 74A, provided the partner continues in the said firm [Section 75]. C. Remuneration and interest: The tax treatment of remuneration and interest in the assessment of a partner of PFAS shall be as under: ● Remuneration: Any payment received by a partner from the firm by way of salary, commission, bonus or remuneration or by whatever name called, shall be included in the total income of the partner under the head ―Profits and gains of business or profession‖ to the extent it is not disallowed under Section 40(b)(v). Amount disallowed under Section 40(b) shall be treated as his share of profit from the firm and accordingly, shall be exempt under Section 10(2A). ● Interest: Interest received or receivable by the partner from the firm shall be included in the total income of the partner under the head ―Profits and gains of business or profession‖ to the extent it is not disallowed under Section 40(b)(iv). Amount of interest disallowed under Section 40(b)(iv) shall be treated as his share of profit from the firm and accordingly, shall be exempt under Section 10(2A). 7. Assessment of Limited Liability Partnership [LLP]: The definition of ―firm‖ in section 2(23) includes a limited liability partnership as well. The assessment procedures for such a limited liability partnership shall therefore be made under the foregoing 12 provisions as much as they are applicable to a partnership firm defined in the Indian Partnership Act 1932. However, the following provisions need to be underscored:

(a) Presumptive tax under section 44AD is not applicable to LLP. (b) Alternate Minimum Tax (ATM) which was applicable to LLP only, is now applicable to all assessees other than a company. [ See Box below]

(c) LLP is not subjected to Dividend Distribution Tax. Minimum Alternate Tax for certain persons other than a company [Sections 115JC/115JF]: The special provisions contained in Chapter XIIBA of the Act for MAT are as under:

(a) To who MAT applies: MAT applies to a person who has claimed any deduction u/s 80IA to 80RRB (other than 80P), section 10A; and section 35AD.

(b) Under the provisions of section 115JC(1),all persons other than a company is required to pay MAT , where the regular income tax payable for the previous year is less than the alternate minimum tax. In that case the adjusted total income shall be deemed to be the total income and accordingly such a person shall pay tax on such adjusted total income @18.5% [plus surcharge and Education cess and SHEC].

(c) Meaning of adjusted total income [Section 115JC (2): Adjusted total income means the total income before giving effect to the provisions under sections 115JC/115JF as increased by: (i) deductions claimed under any sections 80H to 80RRB (other than section 80P) (ii) deduction claimed, if any, under section 10AA and (iii) deduction claimed, if any, under section 35AD as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction under section 35AD was allowed in respect of the assets on which the deduction under that section is claimed. DIRECT TAXATION

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(d) Who are excluded: MAT is not applicable to an Individual, HUF, AOP/BOI/Artificial juridical authority whose adjusted total income does not exceed ` 20 lakhs. (e) Tax credit for MAT [Section 115JD]: The excess of tax payable under the provisions of section 115JC(1) over the tax payable on total income under the normal provisions of the Act is known as MAT credit. Such excess amount can be carried forward till the tenth assessment year immediately succeeding the assessment year for which tax credit becomes available and set off when the tax payable under the normal provisions is more than tax payable under section 115JC. Example 3: ABC, LLP, furnishes you the following details pertaining to the financial year 20162017: ` Net profit as per P/L Account Depreciation debited in P/L Account Depreciation allowable u/s 32 Inadmissible expenses Deduction 10AA (computed) Deduction 80-IA ( computed)

90,00,000 7,00,000 9,00,000 5,00,000 12,00,000 60,00,000

Compute total income, adjusted total income u/s 115JC, and tax liability of ABC LLP for the assessment year 2017-18. Answer: (a) Computation of total income of ABC LLP for the assessment year 2017- 2018 relating to the previous year 2016- 2017 ` ` Net Profit as per P/L Account Add: Depreciation debited in P/L account Add: Inadmissible expenses Total Less: Depreciation allowable u/s 32 Less: Deduction u/s 10AA Less: Deduction u/s 80IA Total income

90,00,000 7,00,000 5,00,000 1,02,00,000 9,00,000 12,00,000 60,00,000

81,00,000 21,00,000

(b) Adjusted total income u/s 115JC: ` Total income as above Add: Deduction u/s 12AA Add: Deduction u/s 80IA Adjusted Total Income Tax Liability: ` 93,00,000 x 18.5% Add: EC & SHEC [ 2+1%]

18.3

`

21,00,000 12,00,000 60,00,000 93,00,000 17,20,500 51,615

17,72,115

PARTNERSHIP FIRMS ASSESSED AS ASSOCIATION OF PERSONS [PFAAOP]

The provisions relating to the assessment of firms assessed as an association of persons are discussed below. A. Circumstances under which a firm is assessed as an association of persons: A firm shall be assessed as an association of persons if —

(a) the firm is not evidenced by an instrument, or (b) the individual shares of the partners are not specified in that instrument, or (c) a certified copy of the instrument of partnership is not given with the return of income of the firm of the previous year relevant to the assessment year commencing on or after 1st April, 1993 in which the assessment as a firm is first sought.

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(d) after the assessment of the firm as such, if in any subsequent year there is a change in the constitution of the firm or shares of the partners and a certified copy of the revised instrument of partnership is not submitted along with the return of income. B. Consequence if the firm is assessed as an association of persons: When a firm is assessed as an AOP, it has the following consequences:  Interest and remuneration paid to partners: The firm is not entitled to claim deduction on account of interest, salary, bonus, commission or remuneration, by whatever name called, paid to the partners [Section 40(ba)]. ● When the firm allows interest on capital as well as receives interest on drawings by the partners, the amount of interest to be disallowed shall be limited to the amount by which the payment of interest by the PFAAOP to the partner exceeds the payment of interest by the partner to the PFAAOP [Explanation 1 to Section 40(ba)]. ● When an individual is a partner of the PFAAOP in a representative capacity, interest paid by the PFAAOP to such individual or by such individual to the PFAAOP otherwise than in a representative capacity shall not be disallowed under Section 40(ba). However, interest paid by the PFAAOP to an individual or by such individual to the PFAAOP in a representative capacity and interest paid by the PFAAOP to the person so represented or by the person so represented to the PFAAOP shall be disallowed under Section 40(ba) [Explanation 2 to Section 40(ba)]. ● Where an individual is a partner of a PFAAOP otherwise than in a representative capacity, interest paid by the PFAAOP to such individual shall not be disallowed under Section 40(ba), if such interest is received by him on behalf, or for the benefit, of any other person [Explanation 3 to Section 40(ba)]. C. Treatment of losses: It has already been discussed that the losses of PFAS can be brought forward and set off by the firm. But if a firm after being assessed as such is treated as an AOP in any subsequent year, the brought forward loss of the firm cannot be carried forward and set off by the AOP. This will remain so even if the AOP in any subsequent year is assessed as a firm. The reason behind this is that the assessee changes in all these cases. D. Computation of total income of PAAAOP The total income of PFAAOP shall be computed in the same manner as is done in the case of PFAS [See para 3.4]. E. Computation of tax liability of PFAAOP: The computation of tax of PFAAOP is governed by the provisions of Section 167B. According to this section, tax on the total income shall be charged as under: (a) When the individual share of the partners in the whole or any part of the income of the PFAAOP is unknown or indeterminate [Section 167B(1)]: In this case, for the assessment year 2016-2017, tax shall be charged on the total income of the PFAAOP at the maximum marginal rate, which is 30% plus 2% education cess on income tax and 1% secondary and higher education cess on income tax. ● Where the total income of any partner/member is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the PFAAOP at such higher rate. For example, in the case where a foreign company is a partner of PFAAOP, the rate of tax applicable to the PFAAOP shall be 40% (plus 12% surcharge if total income exceeds 1 crore plus 2% education cess on tax and surcharge and 1% secondary and higher education cess on tax and surcharge). (b) When the individual share of the partners in the whole or any part of the income of the PFAAOP is determinate and known [Section 167B(2)] : The tax liability in this case shall be determined as under :

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(i)

Where one of the partners has total income (excluding his share from PFAAOP) exceeding the maximum exemption limit of ` 2,50,000 : In this case, PFAAOP shall be charged to tax on its total income at the maximum marginal rate of 30% plus 2% education cess on tax and surcharge and 1% secondary and higher education cess on tax and surcharge. Where, however, the income of a partner of the PFAAOP is charged at a rate higher than the maximum marginal rate of 30% (plus education cess and secondary and higher education cess), tax shall be charged on that portion of income of the PFAAOP which is relatable to the share of such partner at such higher rate, and the balance of the total income of the PFAAOP shall be taxed at the maximum marginal rate of tax (i.e., 30% plus education cess and secondary and higher education cess). (ii) Where none of the partners of the PFAAOP has income exceeding the maximum exemption limit of ` 2,50,000: In this case, the PFAAOP shall be charged to tax its total income at the rates which apply to an individual [See Appendix I].

F.

Assessment of partners of PFAAOP: The provisions relating to the assessment of partners of PFAAOP are as under. 1. Method of computing a partner‘s share in the income of PFAAOP [Section 67A(1)]: The individual share of a partner in the total income of the PFAAOP shall be as follows: (a) Any interest, salary, bonus, commission or remuneration paid to any partner shall be deducted from the total income of the PFAAOP and the balance of income shall be apportioned among the members in the ratio in which the partners are entitled to the income of the PFAAOP. (b) Where the amount apportioned to a partner under (a) above is profit, interest, salary, bonus, commission or remuneration so paid shall be added to that amount, and the aggregate amount shall be treated as the partner‘s share in the income of the PFAAOP. (c) Where the amount apportioned under (a) above is a loss, interest, bonus, etc., paid to the partner by the PFAAOP shall be adjusted against the aforesaid loss, and the result shall be treated as the partner‘s share in the income of the PFAAOP. ●

Additional considerations: (a) The share of a partner in the income or loss of the PFAAOP as computed above, shall be apportioned under the various heads of income in the same manner in which the income or loss of the PFAAOP has been determined under each head of income [Section 67A(2)]. (b) In computing the income of a partner under the head ―Profits and gains of business or profession‖ in respect of his share in the income of the PFAAOP, any interest paid by a member on capital borrowed by him for the purposes of investment in the PFAAOP shall be deducted from his share [Section 67A(3)].

G. Tax treatment of share of income in the hands of the partners of PFAAOP: In respect of share of income in the hands of the partners of PFAAOP, the incidence of tax shall be as follows:

(a) Where the PFAAOP has been chargeable to tax at the maximum marginal rate (30% plus education cess and secondary and higher education cess) or at a rate higher than the maximum marginal rate, the share of the income from PFAAOP shall not be included in the total income of the partner. Such share of income is exempt from tax.

(b) Where the total income of the PFAAOP has been charged to tax at the rates applicable to an individual, the share of income of a partner from the PFAAOP shall be included in his total income. Under Section 86, the partner shall be entitled to claim rebate at the average rate of tax on such income. But if the total income of the PFAAOP is less than the maximum exemption limit of 2,50,000, the share of income of the partner from the PFAAOP shall be included in his total income. In this case, there will be no rebate in respect of share of income from the PFAAOP.

18.4

ASSESSMENT OF ASSOCIATION OF PERSONS AND BODY OF INDIVIDUALS

In this case, the provisions relating to PFAAOP discussed above shall be applicable.

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Example 4: The profit and loss account of ABC & Co. (a firm of chartered accountants) for the year ended 31st March, 2017 is given below: ` ` Expenses 2,46,000 Receipts from clients and audit fees Depreciation 60,000 Interest (gross) from companies Remuneration to partners 1,80,000 Net loss Interest to partners 1,05,000 Total 5,91,000 Total Other information: (a) Out of the expenses of ` 2,46,000, ` 52,200 is not deductible under Sections 36 and 37. (b) Depreciation as per IT Rules is ` 52,500. (c) Interest paid to partners is fully deductible u/s 40(b).

5,10,000 45,000 36,000 5,91,000

Find out the total income of the firm and the tax liability of the firm for the assessment year 2017-2018. Answer: Computation of total income and tax liability for the assessment year 2017-2018 relating to the previous year 2016-17. Profits and gains of business or profession: Net loss as per profit and loss account Add : Expenses disallowed : Inadmissible expenses u/s 36 and 37 52,200 Excessive depreciation [ 60,000 – 52,500] 7,500 Remuneration of partners [treated separately] 1,80,000 Less: Income not chargeable under this head: Interest from companies Book-profit Less: Remuneration allowed to partners:1,50,000 or 90% of `1,58,700 whichever is more (Note 1)

(36,000)

2,39,700 2,03,700 45,000 1,58,700 1,50,000

● Income from other sources : Interest from companies

8,700 15,000

Gross total income Less : Deductions under Chapter VI-A [80C – 80U] Total income Tax liability of the firm: Gross tax @ 30% on 23,700 Add : Surcharge Tax and surcharge Add : 2% Education cess on tax and surcharge Add : 1% Secondary and higher education cess on tax and surcharge Tax payable Rounded off (u/s 288B)

23,700 Nil 23,700 7,110 Nil 7,110 142 71 7,323 7,320

Example 5: D and C, a partnership firm consisting of two partners, reports a net profit of ` 14,00,000 before deduction of the following items: 1. Salary of ` 40,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership). 2. Depreciation on plant and machinery under Section 32(computed) ` 3,00,000. 3. Interest on capital at 15% per annum .The amount of capital eligible for interest `10,00,000. Compute: (i) Book profit of the firm under Section 40(a) of the Income Tax Act, (ii) 1961. (iii) Allowable working partner salary for the assessment year 2017-18 as per Section 40(b) of the Income Tax Act, 1961. DIRECT TAXATION

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Answer: Computation of book profit for the assessment year 2017-2018 relating to the previous year 2016-2017 ` ` Particulars Net profit (before deduction of depreciation, salary and interest)

14,00,000

Less: Depreciation under Section 32

3,00,000

Interest @ 12% p.a. [being the maximum allowable as per section 40(b)] (10,00,000 × 12%)

1,20,000

Book Profit

4,20,000 9,80,000

Notes: Salary actually paid to working partners =40,000 x 2 x 12 = ` 9,60,000. According to Section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits: On the first `3,00,000 of book Profit

` 1,50,000 or 90% of the book profit whichever is higher

On the balance of book profit

60% of the book profit

Therefore, the maximum allowable working partners‘ salary for the A.Y. 2017-18 in the case would be: ` Particulars On the first `3,00,000 of book profit [(`1,50,000 or 90% of `3,00,000), whichever is more] 2,70,000 On the balance of book profit [60% of (` 9,80,000-`3,00,000) 4,08,000 Maximum allowable partners‘ salary 6,78,000 Hence, allowable working partners‘ salary for the A.Y.2017-18 as per provisions of section 40(b)(v) is `6,78,000.

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STUDY NOTE : 19 ASSESSMENT OF CO-OPERATIVE SOCIETY THIS STUDY NOTE INCLUDES: 19.1 Introduction 19.2 Computation of total income 19.3 Deduction under section 80P 19.4 Tax rates

19.1

INTRODUCTION

Under section 2(19) of the Income-tax act 1961, a c-operative society means a society registered under the Co-operative Societies Act, 1912. Since a co-operative society comes within the purview of the definition of persons given under section 2(31(v) (i.e. an association of persons or body of individuals), it is a distinct unit of assessment. 19.2

COMPUTATION OF TOTAL INCOME

The gross total income of a co-operative society shall be determined as usual for any other entity. To arrive at the total income, the flowing deductions may be claimed [See Study Note 14]: Section Particulars 80G Deduction in respect of donation to certain funds and charitable institutions. 80GGA Deduction in respect of certain donations for scientific research on rural development. 80IA Profits and gains from industrial undertakings engaged in infrastructure business, etc. 80IAB Profits and gains of certain industrial undertakings other than infrastructure development Special Economic Zone 80-IB Profits and gains of certain industrial undertakings other than infrastructure development undertakings 80-IC Special provision for certain undertakings in certain backward States. 80-ID Deduction in respect of profits and gains of hotels and convention centres in specified area. 80-IE Deduction in respect of certain undertakings in the North-Eastern States of India. 80JJA Deduction in respect of profits from the business of collecting and processing of biodegradable waste. 80P Deduction for income of co-operative society 19. 3

DEDUCTION UNDER SECTION 80P

The following deductions are available under section 80P: Section Activity of the co-operative society 80P((2)(a)(i) Income from carrying on banking business for its members and income from providing credit facilities to its members 80P((2)(a)(ii) Income from cottage industry 80P((2)(a)(iii) Income from marketing agricultural produce 80P((2)(a)(iv) Income from purchase of agricultural implements, seeds, livestock, etc. for agricultural purpose and supplying them to its members 80P((2)(a)(v) Income from Processing of agricultural produce without aid of power 80P((2)(a)(vi) Income from collection and disposal of labour 80P((2)(a)(vii) Income from fishing and allied activities 80P((2)(b) Income of the primary society engaged in supply of milk, oil seeds, fruits, etc. 80P((2)(c) Income from other activities: (i) In the case of consumer co-operative society (ii) In any other case 80P((2)(d) Income from interest or dividends derived from investments with any other co-operative society DIRECT TAXATION

Amount of deduction 100% 100% 100% 100% 100% 100% 100% 100% ` 1,00,000 ` 50,000 100%

276

80P((2)(e) 80P((2)(f)

Income from letting of godown, warehouse for storage and processing or facilitating the marketing of commodities In the case of a co-operative society (not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power) where the gross total income does not exceed twenty thousand rupees, income by way of interest on securities or any income from house property chargeable under section 22

100% 100%

Note: Where the assessee is entitled to deduction u/ss 80HH, 80HHA, 80HHB, 80HHC, 80HHD, 80-I, 80-IA, 80-IJ and 80J, the aforesaid deductions u/s 80P shall be claimed after deduction in these sections have been claimed.

19. 4 TAX RATES: SEE STUDY NOTE 15 Example 1: The Hyderabad Co-operative Society has the following sources of income during the financial year 2016-17: ` Particulars Income from processing with the aid of power 8,000 Income from collective disposal of labour of its members 15,000 Interest from another Co-operative Society 25,000 Chargeable income from House Property 60,000 Income from other business 55,000 Find its total income, showing the computation under proper heads of income, and the tax payable, as per the provisions of the Income Tax Act 1961. Answer: Calculation of Total Income of Hyderabad Co-operative Society for the Assessment Year 2017-18 relating to the Previous Year 2016-17 ` ` Particulars Income from House Property 60,000 Business Income Processing with the aid of power 8,000 Collective disposal of labour. 15,000 Other business income 55,000 78,000 Income from other sources Interest received from other society 25,000 Gross total income 1,63,000 Less: Deductions u/s 80P: Interest ]u/s 80P(2)(d)] 25,000 Collective disposal of labour [u/s 80P(2)(a)(vi)] 15,000 Other Business Income [u/s 80(2)(c)] (limited to `50,000) 50,000 90,000 Total income 73,000 Tax payable Education Cess@2% SHEC Total Tax Payable Rounded off

18,900 378 189 19,467 19,470

Working Note: Calculation of Tax Payable: Up to `10,000 : @10% Next `10,000 : @20% Balance Income: @30% (73,000-20,000 = 53,000) Tax Payable

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1,000 2,000 15,900 18,900

277

STUDY NOTE : 20 ASSESSMENT OF TRUSTS, CHARITABLE AND RELIGIOUS INSTITUTIONS THIS STUDY NOTE INCLUDES: 20.1 Introduction 20.2 Tax treatment of income of trusts or institutions from contributions [Sections 11-13]

20.1

INTRODUCTION

The expression ―Trust‖ has not been defined in the Income-tax Act 1961. However, section Section 3 of the Indian Trusts Act 1882 defines a trust to mean ―an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another and the owner‖.

20.2 TAX TREATMENT OF INCOME OF TRUSTS OR INSTITUTIONS FROM CONTRIBUTIONS [SECTIONS 11-13] Subject to the provisions of sections 60 to 63, the following incomes of the trusts and charitable institutions shall be exempt:

(a) Income from property held under trust wholly for charitable or religious purposes [Section 11(1)(a)]:Income from property received by such a trust shall be exempt to the extent to which it is spent in India. Where any such income is accumulated or set apart for application in India, then such income shall also be exempt if such accumulation is not in excess of 15% of the income of such property.

(b) Income from property held under trust in part which is applied only for religious or charitable purposes [Section 11(1)(b)]: Income derived from property held under trust in part only for such purposes shall be exempt to the extent it is applied to such purposes in India, provided that the trust is created before1st April, 1962. Where any such income is set apart for application to such purposes in India, exemption shall not be denied, provided that the income so set apart is not in excess of 15% of the income from such property.

(c) Income from property held under trust which is applied for charitable purposes outside India [Section 11(1)(c)]:Income derived from property held under trust: (i) created on or after 1st April, 1952 for charitable purpose to promote international welfare in which India is interested, and (ii) created on or after 1st April, 1952 for charitable or religious purposes, shall be exempt to the extent to which such income is applied to such purposes outside India. (iii) In both the cases mentioned above, the Board shall, by general or special order, direct that it shall not be included in the total income of the person who is in receipt of the income.

(d) Voluntary contribution forming part of the corpus [Section 11(1)(d)]: Income in the form of voluntary contributions made with specific direction that they shall form part of the corpus of the trust or institution shall be fully exempt. Such contributions need not be applied to charitable purposes but may be retained as the corpus of the trust without attracting tax liability. Under Section 2(24)(iia), such income is also exempt from tax. 1. Treatment of capital gains [Section 11(1A)]: Where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes, and hence exempt, to the extent as under: (i) where the whole of the net consideration is utilized in acquiring the new capital asset, the whole of such capital gain; (ii) where only a part of the net consideration is utilized for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilized exceeds the cost of the transferred asset; DIRECT TAXATION

278

Where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely: (i) where the whole of the net consideration is utilized in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain; (ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilized for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset. 2. Conditions for exemption: In order to claim exemption under Section 11, the following conditions should be satisfied: (i) The property from which the income is derived should be held under a trust or other legal obligations (Explanation 1 to section 13). (ii) The property should be so held for charitable or religious purposes, which come into existence for the benefit of the public. Under Section 2(15), ―charitable purpose‖ includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. (iii) The exemption is confined to such portion of the income of the trust or institution as is applied to charitable or religious purposes. Where any such income is accumulated for application to later time, such accumulation does not exceed the limit specified in clause (a) or clause (b) or clause (c) of Section 11(1) or Section 11(2). (iv) Except for the cases mentioned under Section 11(1)(c), no part of the income shall be applied or accumulated for application outside India. (v) Where the property of the trust consists of a business undertaking, the conditions of Sections 11(4) and 11(4A) should be satisfied. (vi) An application for registration of the trust or institution in Form No. 10A to the Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA. However, with effect from 1st June, 2007, the restriction of getting the trust or institution registered within one year shall not be applicable. It is also provided that where an application for registration of the trust or institution is made on or after 1st June, 2007, the provisions of Sections 11 and 12 shall apply in relation to the income of the trust or institution from the assessment year immediately following the financial year in which such application is made. (vii) Where the total income of the trust or institution as computed under this Act without giving effect to the provisions of Section 11 and Section 12 exceeds the maximum amount which is not taxable in any previous year, the accounts of the trust or institution for that year should be audited and the audit report should be furnished along with the return of income. (viii) The funds of the trust should be invested or deposited in one or more of the forms and modes specified in Section 11(5). Example 1: S Charitable Trust registered under section 12AA of the Income Tax Act is engaged in providing medical assistance to the physically challenged persons. The trust has furnished the following details relating to previous year 2016-17; Particulars Net income from the properties held under trust Voluntary Contribution (including donation ` 1,50,000 received with direction from the donor that it would form part of corpus) Financial assistance to physically challenged persons Purchase of Land for construction of office of the trust Compute tax payable, if any, by the trust for the Assessment Year 2017 – 2018.

16,50,000 5,00,000 9,50,000 4,00,000

Answer: Computation of tax payable by S Charitable Trust for the assessment year 2017-2018 relating to the previous year 2016-2017 DIRECT TAXATION

279

` Income from property held under trust Voluntary contribution Less: Voluntary Contribution received with direction from the donor that it would form part of corpus being exempt u/s 11(1) (d)

16,50,000 5,00,000

1,50,000 Total Less: Amount set apart for future (15%) Balance Less: Amount applied for charitable purposes: Financial assistance to physically challenged persons Purchase of Land for construction of office of the trust Total income Tax on total income First ` 2,50,000 Balance ` 1,00,000 @10% Total tax Add: Education cess and SHEC (2% + 1%) Tax payable

`

9,50,000 4,00,000

3,50,000 20,00,000 3,00,000 17,00,000

13,50,000 3,50,000

Nil 10,000 10,000 300

10,300

Example 2: During the financial year 2016-2017 a New Delhi-based charitable organisation sold a house property for ` 50 lakh and earned a long-term capital gain of ` 20 lakhs. In the same year it bought another house property for ` 40lakh. Find out the taxable capital gain. Answer: ` Cost of the new house Cost of the old asset [` 50 lakh – 20 lakh] Utilization of capital gains Taxable Capital gains [` 20,00,000 – 10,00,000]

DIRECT TAXATION

`

40,00,000 30,00,000 10,00,000 10,00,000

280

STUDY NOTE : 21 CORPORATE TAXATION THIS STUDY NOTE INCLUDES: 21.1 Some useful concepts 21.2 Computation of total income of a company assessee 21.3 Computation of tax liability 21.4 Minimum Alternate Tax [ Section 115JB] 21.5 Tax credit for MAT [Section 115JAA] 21.6 Dividend distribution tax [ Section 115-O (1)] 21.7 Other provisions 21.1

SOME USEFUL CONCEPTS

A. (i) (ii) (iii)

Meaning of company: Under section 2(17) of the Income-tax Act, company means: any Indian company, or any body corporate incorporated by or under the laws of a country outside India, or any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company. However, such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration; B.

Classification of companies: Under the Income-tax Act 1961, the following classifications are found:

Section 2(26)

Section 2(22)A

Section 2(23)A

Section 2(18)

 Indian Company

 Domestic Company

 Foreign Company

 Company in which public are substantially interested

 Closely

held Company

(I) Indian Company [Section 2(26)]: Indian company" means a company formed and registered under the Companies Act, 1956, and includes: (i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union territories specified in subclause (iii) of this clause); (ia) a corporation established by or under a Central, State or Provincial Act ; (ib) any institution, association or body which is declared by the Board to be a company under section (17); (ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State ; (iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa , Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory: Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India;

DIRECT TAXATION

281

(II) Domestic company [Section 2(22A)]: "Domestic company" means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ; (III) Foreign company [Section 2(23A)]: "Foreign company" means a company which is not a domestic company. (IV) Company is which public are substantially interested [Section 2(18)]: A company is said to be a company in which the public are substantially interested (also known as widely held company): (a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank; or (aa) if it is a company which is registered under section 25 of the Companies Act, 1956 (1 of 1956); or (ab) if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested: Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration; or (ac) if it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society; or (ad) if it is a company, wherein shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more co-operative societies; (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:— (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made there under; (B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by—

(a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation: In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words "not less than fifty per cent", the words "not less than forty per cent" had been substituted; (V) Closely held company: A company is a closely held company if it is not a widely held company or a company in which public are not substantially interested.

DIRECT TAXATION

282

21.2

COMPUTATION OF TOTAL INCOME OF A COMPANY ASSESSEE

The total income of a company is arrived at after deducting from the Gross Total Income the following: 80G Deduction in respect of donation to certain funds and charitable institutions 80GGA Deduction in respect of certain donations for scientific research or rural development 80GGB Contribution to political parties 80-IA Deduction in respect of profits and gains from industrial undertakings or enterprise engaged in infrastructure development 80-IAB Profits and gains of an undertaking engaged in the development of Special Economic Zone. 80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings 80-IC Deduction for certain undertakings in special category states. 80-ID Deduction in respect of profits and gains of hotels and convention centres in specified area. 80-IE Deduction in respect of certain undertakings in the North-Eastern States of India 80 JJA Deduction in respect of profits from the business of collecting and processing of biodegradable waste 80JJAA Employment of new workmen 80LA Income of off shore banking units 21.3

COMPUTATION OF TAX LIABILITY

In accordance with the tax rates given for a company [See para 5, Study Note 15] and subject to the provisions of Minimum Alternate Tax [see para (b) below], the tax liability shall be computed as under: a. Normal tax on total income: Step 1: Find out the total income as above Step 2: Total income x Rate of tax [for domestic company: 29% where the gross receipt during the previous year 2014-15 does not exceed ` 5 crores; Other domestic companies @30%. Foreign companies @ 40%] Step 3: Add surcharge Step 4: Add Education cess and SHEC [2 +1 %] on the total of step 1 and step 2. Step 5: Deduct tax rebate u/s 86,90, 90A and 91. = Tax payable b. Tax payable under MAT Step 1: Find out book profit Step 2: Work out 18.5% of book profit Step 3: Add: Surcharge Step 5: Add Education cess and SHEC as above = Tax payable under MAT c. Surcharge for the assessment year 2017-2018: Net income does not Net income exceeds ` 1 core Net income exceeds ` exceed ` 1 crore but not ` 10 crore 10 crore Domestic company Nil 7% 12% Foreign company Nil 2% 5% d. Minimum Alternate Tax rate: Book profit does not exceed ` 1 crore IT SC EC + Total SHEC Domestic 18.5 - 0.555 19.055 company Foreign 18.5 - 0.555 19.055 company

Book profit 1- 10 Crore IT

SC

Book profit over 10 crore

EC + Total SHEC 18.5 1.295 0.59385 20.38885

IT

SC

18.5

2.22

EC + SHEC 0.6216

21.3416

18.5

18.5 0.925 0.58275

20.00775

0.37

0.5661

19.4361

Total

Note: With effect from the assessment year 2017-2018, in respect of a unit located in an International Financial services Centre, the rate of MAT shall be 9%.

DIRECT TAXATION

283

21.4

MINIMUM ALTERNATE TAX [SECTION 115JB]

The provisions related to MAT are as under: A. When MAT does not apply: MAT does not apply to : (i) any income accruing or arising to a company from life insurance business referred to in section 115B. [ section 115JB(5A)]; (ii) the income accrued or arising on or after the 1st day of April, 2005 but before 1 st April 2012 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be. (iii) a foreign company if:  the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or  the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies B. How book profit is computed : As provided in Explanation 1, to section 115JB, book-profit shall be computed as under: Step 1: Find out net profit as per P/L Account of the relevant previous year Step 2: Add the following:  the amount of income-tax paid or payable, and the provision therefor;  the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC;  the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;  the amount by way of provision for losses of subsidiary companies;  the amount or amounts of dividends paid or proposed;  the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or  the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or  the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from: o the capital gains arising on transactions in securities; or o the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, o if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1);  the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or]  the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or  the amount of depreciation,  the amount of deferred tax and the provision therefor,  the amount or amounts set aside as provision for diminution in the value of any asset,  the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, DIRECT TAXATION

284

 the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be. Step 3: Subtract the following :  the amount withdrawn from any reserve or provision, if any such amount is credited to the profit and loss account:  the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or  the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets); or  the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or  the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the profit and loss account; or  the amount of income accruing or arising to an assessee, being a foreign company, from,—  the capital gains arising on transactions in securities; or  the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, o if such income is credited to the profit and loss account and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or  the amount representing,—  notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or  notional gain resulting from any change in carrying amount of said units; or  gain on transfer of units referred to in clause (xvii) of section 47, o if any, credited to the profit and loss account; or  the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be; or]  the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or  (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.  the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.  the amount of deferred tax, if any such amount is credited to the profit and loss account. Step 4: Step 1+ Step 2 – Step 3 = Book-profit.

21.5

TAX CREDIT FOR MAT [SECTION 115JAA]

The difference between tax payable under the provisions of section 115JB and the amount of tax payable by the assessee on his total income computed in accordance with the normal rate of tax is

DIRECT TAXATION

285

called MAT credit. Tax credit so determined shall be carried forward for the ten assessment years immediately succeeding the assessment year in which tax credit becomes allowable.

21.6

DIVIDEND DISTRIBUTION TAX [SECTION 115-O (1)]

Under the provisions of section 115-O, a domestic company shall, in addition to tax on total income, pay tax on any amount declared, distributed or paid as dividend (whether interim or otherwise). It does not make any difference whether the dividend is paid or declared out of the current profit or accumulated profit. The rate of dividend distribution tax for the assessment year 207-18 is @15% (Plus surcharge and education cess and SHEC). 1. Dividend received from the subsidiary company [Section 115-O(1A)]:According to Section 115O(1A), the amount distributed, declared or paid as dividend may be out of accumulated or current year profits, but the same shall exclude: (i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,

(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or

(b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend. However, the same amount of dividend shall not be taken into account for reduction more than once. (ii) the amount of dividend, if any paid to any person for, or on behalf of, the New Pension System Trust referred to section 10 (44). 2. Grossing up of dividend and income distribution tax [ Section 115-O(1B)]: For the purposes of determining the tax on distributed profits, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits. Applying the provisions of section 115-O(1A), effective DDT rate would be as under: Where dividend distributed is ` 85, then DDT would be ` 15 and gross distributed profit will be ` 100. Now DDT will be ` 15 and dividend distributed to the shareholders will be ` 85 [` 100-15]. Effective rate of DDT: Tax paid u/s 115-O on ` 85 is ` 15. Therefore, DDT on ` 100 distributed will be ` 15/85x 100 = 17.6470 % Add: surcharge @12% 2.1176% Total 19.7646% Add: Education cess &SHEC : [2+ 1%] 0.5924% Total effective DDT rate 20.3576% Example 1: X Ltd., an Indian company, intends to distribute ` 18 lakh as dividend to its shareholders. Out of this ` 8 lakh is dividend received from Indian subsidiary which had paid DDT. Determine the amount of dividend distribution tax payable if such dividends are paid during the financial year 2016-17. Answer: (assuming that ` 18,00,000 is the net Dividend being distributed) ` Amount of dividend to be distributed Less: Dividend from subsidiary companies Net Dividend DDT payable [@20.35765%] Alternatively, Net dividend is to be increased [ 100/85 x 10,00,000] DDT payable @ 17.304%

DIRECT TAXATION

` 18,00,000 8,00,000 10,00,000 2,03,576 11,76471 2,03,576

286

3. When dividend distribution tax is not applicable: Dividend distribution tax is not applicable in the following cases: (a) No tax on distributed profits shall be chargeable under this section in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends (whether interim or otherwise) to a business trust out of its current income on or after the specified date. However, this provision shall apply in respect of any amount declared, distributed or paid, at any time, by the specified domestic company by way of dividends (whether interim or otherwise) out of its accumulated profits and current profits up to the specified date [ Section 115-O(7)] Note: (i) specified domestic company" means a domestic company in which a business trust has become the holder of whole of the nominal value of equity share capital of the company (excluding the equity share capital required to be held mandatorily by any other person in accordance with any law for the time being in force or any directions of Government or any regulatory authority, or equity share capital held by any Government or Government body); (ii) "specified date" means the date of acquisition by the business trust of such holding as is referred to in clause. (b) No tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2017, out of its current income, either in the hands of the company or the person receiving such dividend. [Section 115-O (8)]. 21.7

OTHER PROVISIONS

A. Tax on distributed income of domestic company for buy-back of shares [Section 115QA]: Under the provision of this section addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognized stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income. (a) Buy-back here means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies. (b) Distributed income here means the consideration paid by the company on buy-back of shares as reduced by 16[the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed B. Tax on income distributed to the unit holders by specified company or mutual fund [Section 115R(2)]: Any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income at the rate of: (i) 25% on income distributed to any person being an individual or a Hindu undivided family by a money market mutual fund or a liquid fund; (ia) 30% on income distributed to any other person by a money market mutual fund or a liquid fund; (ii) 25%on income distributed to any person being an individual or a Hindu undivided family by a fund other than a money market mutual fund or a liquid fund; and (iii) 30% on income distributed to any other person by a fund other than a money market mutual fund or a liquid fund (iv) where any income is distributed by a mutual fund under an infrastructure debt fund scheme to a non-resident (not being a company) or a foreign company, the mutual fund shall be liable to pay additional income-tax @25% on income so distributed. (Any income distributed by the Administrator of the specified undertaking, to the unit holders; or to a unit holder of equity oriented funds in respect of any distribution made from such funds excluded) Under section 115R (2), the income shall be grossed up in the same manner as discussed in para 2 under point 21.6.

DIRECT TAXATION

287

Example 2: From the following data, compute the book profit of ABC Ltd. under Section 115JB of the Income Tax Act,1961 for the Assessment Year 2017-2018. ` Particulars Net profit as per Profit and Loss Account (before tax) 49,00,000 Profit on sale of listed securities (these listed securities are long term capital assets) 5,00,000 included in the net profit as above Depreciation charged in accounts 10,00,000 Proposed Dividend (including Dividend Distribution Tax thereon) 5,00,000 Transfer to General Reserve 5,00,000 Provision for taxation – current tax 10,00,000 Provision for taxation (deferred tax liability) 6,00,000 Of the depreciation charged in accounts, `6,00,000 is the depreciation on Plant & Machinery which was revalued upwards on 1.04.2016. The increase on revaluation was credited to Revaluation Reserve. Had there been no revaluation, depreciation charged on plant and machinery (as per books) would have been `4,50,000. [ CMA-Inter, June 2006] Answer: Computation of book-profit u/s 115JJB Particulars Net profit as per Profit and Loss Account (before tax) Less: Profit on sale of listed securities (long term capital asset) included in the net profit as above. Book profit under Section 115JB

` 49,00,000 5,00,000 38,00,000

Example 3: A domestic company derives the following income for the year ended 31.03.2017 Income from business `90 lakhs Chargeable long term capital gains from sale of vacant site ` 30 lakhs Compute the total income and tax payable by the company for the assessment year 2017-18. Ignore MAT provisions. [CMA Inter, June, 2012] Answer: Computation of total income and income-tax liability of a domestic company Particulars Income from business long term capital gains Total Income Computation of Tax Liability: on Business Income @ 30% On Long term capital gain @ 20% Add: Surcharge @ 7% (Total income of the company exceed `100 lakhs, hence liable to Surcharge) Add: Education Cess @ 2% Add: Senior and Higher Secondary Education Cess@ 1% Total Tax Liability

` 90,00,000 30,00,000 1,20,00,000 27,00,000 6,00,000 33,00,000 2,31,000 35,31,000 70,620 35,310 30,96,390

Example 4: Raj Industries Ltd. furnishes you the following information for the year ended 31.03.2017: (i) Net Profit as per Statement of Profit and Loss ` 16,00,000. (ii) Provision for warranties to customers Statement of Profit and Loss ` 2,00,000. (iii) Wealth tax paid debited to Statement of Profit and Loss ` 30,000. (iv) Agricultural income credited to Statement of Profit and Loss ` 1,00,000. (v) Deferred tax credited to Statement of Profit and Loss account ` 4,00,000. (vi) The company has as per books: Brought forward depreciation of ` 2,50,000 and Business loss of ` 3,00,000. Compute ―book profit‖ under section 115JB for the assessment year 2017-18.

DIRECT TAXATION

288

Ans. Computation of book- profit of R Industries Ltd. for the assessment year 2017-2018 ` Net profit as per Statement of Profit and Loss Add: provision for warranties to customers is an ascertained liability. Hence, no addition is required Wealth tax is not to be added back. Only income tax paid/payable/provided is added back Total Less: Agricultural income being exempt is to be excluded Deferred tax credit to be excluded Lower of brought forward loss or unabsorbed depreciation as per books is deductible Book-profit u/s 115-JB

DIRECT TAXATION

` 16,00,000 Nil Nil 16,00,000

1,00,000 4,00,000 2,50,000

7,50,000 8,50,000

289

STUDY NOTE : 22 TAX DEDUCTED AT SOURCE AND TAX COLLECTED AT SOURCE THIS STUDY NOTE INCLUDES: 22.1 Introduction 22.2 Duty of the person deducting tax [Section 200] 22.3 Consequence of failure to deduct or pay tax [Section 201] 22.4 Common tax deduction and collection account number [Section 203A, Rule 114A] 22.5 Furnishing of statement of tax deducted [Section 203AA, Rule 31AB] 22.6 Collection of tax at source [Section 206C]

22.1

INTRODUCTION

As provided under section 190, the liability for tax has to be discharged in the previous year itself under any of the following two modes:  Deduction or collection at source by the payer of certain categories of income/payment, or  Advance payment by the assessee. Taxes recovered under these two modes are to be deducted from the total tax liability of the assessee, which is determined on assessment. In this study note we shall discuss various provisions related to tax deduction and tax collection. Section

Particulars

192

Deduction from salary: Any person who is responsible for paying any income under the head ―Salaries‖ is required to deduct tax at the time of making such payment on the basis of rates at force [including education cess and SHEC: See Study Note 15 for tax rates]. An employee can furnish to the employer/Drawing and Disbursing Officer (DDO) particulars of other income under any head other than ―Salaries‖ and of tax deducted at source thereon. Such income should not be a loss under any such head other than the loss under the head ―Income from house property‖ for the same financial year. The DDO shall take such other income and tax, if any, deducted at source from such income, and the loss, if any, under the head ―Income from house property‖ into account for the purpose of computing tax deductible at source u/s 192. While calculating tax, the DDO shall exclude any income which is exempt under section 10; Deductions u/s 80C, 80CCC, 80D, 80DD, 80DDB, 80E, 80GG, and 80U shall be considered. However, on due verification deduction u/s 80G for certain donations may be considered by the employer [Jawaharlal Nehru Memorial Fund; PM‘s Drought Relief Fund, etc.]. Tax rebate u/s 87A and relief u/s 89 shall also be allowed. An employee claiming to pay tax at lower rate or if he claims that no tax is payable may apply to the Assessing officer in Form No. 13. The DDO shall furnish to the employee a statement giving correct and complete particulars income in Form No. 16.For not providing such statement within one month from the end of the financial year, the DDO shall be liable to pay fine u/s 272A(2) @ ` 100 for each day during which the failure continues. Payment of accumulated balance due to an employee: When the accumulated balance due to an employee participating in a Recognized Provident Fund is payable to an employee and such sums are included in the total income of the employee due to the nonfulfilment of the conditions, the person responsible for payment of such sums shall deduct tax @10%. If PAN is not provided by the recipient of the sums, tax shall be charged at the highest marginal rate. No tax shall be deducted if the sum payable is less than ` 50,000. Deduction from ―Interest on securities‖: Except for the following cases, the person responsible for making payment of interest shall deduct tax at source for @10% (20% when PAN is not provided by the payee): (i) interest payable on 41/4% National Defence Bond, 1972 held by an individual who is not a non-resident;

192A

193

DIRECT TAXATION

290

(ii)

interest payable to an individual on 41/4% National Defence loan, 1968, or 43/4% National Defence Loan, 1972 ; (iii) interest payable on National Development Bonds; (iv) interest payable on 7-year National Savings Certificate (IV Issue) ; (v) interest payable on such debentures, issued by any institution or authority, or any public sector company, or any co-operative society (including Co-operative Land Mortgage Bank or Co-operative Land Development Bank) as may be notified by the Central Government. (vi) Interest payable on 61/2% Gold Bonds, 1977, or 7% Gold Bonds, 1980 (held by a resident individual),provided the holder of such bonds makes a declaration in writing before the person responsible for paying the interest that the total value of these bonds held by him did not exceed ` 10,000 in either case; (vii) interest payable on any security of the Central Government or a State Government ; (viii) interest payable by account payee cheque to a resident individual on debentures issued by a company in which public are substantially interested, if such debentures are listed in any recognised stock exchange in India and the amount of interest does not exceed ` 5,000; (ix) interest payable to the Life Insurance Corporation of India/General Insurance Corporation of India or any other insurer in respect of any securities owned by it or in which it has full beneficial interest; (x) interest payable on 8% Savings (Taxable) Bonds, 2003, if such interest does not exceed ` 10,000 during the financial year. (xi) interest payable on any security issued by a company, where such security is in dematerialised form and is listed on a recognised stock exchange in India [w.e.f. 1.6.2008]. (xii) interest payable to a resident individual or a Hindu undivided family on any debenture (listed or unlisted) issued by a company in which the public are substantially interested, for an amount not exceeding ` 5,000, provided that such interest is paid by the company by an account payee cheque

194

194A

No TDS in the following cases: (a) The payee furnishes to the person responsible for paying the interest, a declaration in writing in duplicate in Form No. 15G to the effect that the tax on his estimated total income of the previous year in which the interest is to be included in computing his total income will be nil. (b) in the case of a resident individual, who is of the age of 60 years at any time during the previous year no tax shall be deducted at source under the provisions of Sections 193, 194, 194A, 194EE or 194K, if the payees referred to in these sections give a declaration in Form No. 15H to the effect that the tax on the estimated total income during the previous year will be nil. (c) No deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf. Deduction from dividends: Payment of dividend requires TDS @ 10% [20% without PAN]. No TDS is the following cases: (a) The payee furnishes declaration in Form No.13/15G (b) Amount of dividend does not exceed ` 2,500 in aggregate (c) No tax shall be deducted at source where such dividends are credited or paid to the Life Insurance Corporation of India/General Insurance Corporation of India or the four other companies formed under the General Insurance Business (Nationalisation) Act, 1972/any other insurer in respect any shares owned by it or on which it has full beneficial interest. (d) No tax shall be deducted in respect of any dividend referred to in Section 115-O (e) No tax shall be deducted at source in the case of senior citizens Interest other than interest on securities: Persons responsible for making TDS are:

(a) Any person (other than an individual or HUF) who is responsible for paying to a resident DIRECT TAXATION

291

any income by way of interest other than interest on securities.

(b) An individual or a HUF paying income to a resident by way of interest other than interest on securities when turnover or gross receipts from business exceeds `1 crore or gross receipts from profession exceeds `50 lakh during the financial year immediately preceding the financial year in which such interest is credited or paid. The rate of TDS is same as above.

194B 194BB

No TDS in the following cases: (a) When the amount of interest or the aggregate amount of interest credited or paid or likely to be paid or credited during the financial year does not exceed ` 10,000 if the payer is a banking company or a co-operative bank or a post office in respect of a scheme framed by the Central Government and ` 5,000 in all other cases. (b) In the case of time deposit with banking company or co-operative society carrying on banking business or in the case of deposit with a public company formed and registered in India with the main object of providing long-term finance for construction/purchase of residential houses in India [such companies being eligible for deduction in respect of the interest paid u/s 36(1)(viii)], when the amount of interest paid or credited by such banking companies or public company does not exceed `5,000. (c) When the interest is credited or paid to any banking company, any financial corporation established under any Central or Provincial Act or the Life Insurance Corporation of India, the UTI, any company or co-operative society carrying on the business of insurance or any other institution, association or body as may be notified by the Central Government. (d) Income credited or paid by a firm to a partner. (e) Income credited paid or by a co-operative society to its members or to any other cooperative society. (f) Interest credited or paid in respect of deposits under any scheme framed and notified by the Central Government. (g) Interest credited or paid in respect of deposits (other than time deposits made on or after 1.6.1995) with a banking company. (h) Interest credited or paid in respect of deposits with primary agricultural credit society/primary credit society/co-operative land mortgage bank/co-operative land development bank on deposits (other than time deposits made on or after 1.6.1995) with a co-operative society. (i) Interest credited or paid by the Central Government under any provisions of the Incometax Act, Estate Duty Act, Wealth-tax Act, Super Profits Tax Act, Companies (Profits) Surtax Act or Interest-tax Act. (j) Income credited by way of interest on compensation amount awarded by the Motor Accidents Claim Tribunal. (k) Income credited or paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal, where the amount or the aggregate amount of such income credited or paid during the financial year does not exceed ` 50,000. (l) Income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company or a public sector bank in relation to a zero coupon fund or a public sector company in relation to zero coupon bond issued on or after 1st June 2005 by such company or fund or public sector company or public sector bank. (m) The payee is a senior citizen or furnishes declaration in Form No. 15G. Deduction from winnings from lotteries or crossword puzzles: The rate of TDS is 30%. No TDS if the amount does not exceed ` 10,000. Deduction from winnings from horse races: Same as above

DIRECT TAXATION

292

194C

Deduction from payments to contractors or sub-contractors: Payment by specified persons requires TDS as under: a. Individual/HUF contractor: @ 1%; b. Other than individual/HUF contractor: @ 2%; c. Contractor engaged in the business of plying, hiring or leasing goods carriages: Nil. (In all cases without PAN TDS shall be @20%) Meaning of ―Specified person‖: Specified person here means: the Central Government or any State Government; any local authority; any corporation established by or under a Central State or Provincial Act; any company any co-operative society, any housing/town planning authority in India, any society registered under the Societies Registration Act, 1860, any trust, any recognised university, any firm, any individual/ HUF, or an association of persons or body of individuals, whether incorporated or not, whose gross receipt or turnover from business exceed ` 1 crore or gross receipt from profession exceed ` 50 lakhs.

194D 194DA

194E

194EE

194F

When no TDS is made: In the case of a payer being an individual or HUF, no tax is required to be deducted if such payment is paid or credited to the account of the contractor for the personal purposes of such individual or any member of the HUF. (b) When the contractor (or sub-contractor), desiring deduction at lower rates applies to the Assessing Officer in Form No. 13 and the Assessing Officer on being satisfied grants a certificate directing the person responsible for making such payment, tax may be deducted at lower rates in accordance with the certificate. However, with effect from the assessment year 2010-11, no declaration in Form No. 13 shall be valid unless the deductee furnishes his Permanent Account Number. (c) When the amount paid or likely to be paid to the account of, or to, the contractor or sub-contractor does not exceed ` 30,000, no tax shall be deducted at source. Tax shall be deducted at source if: (i) a single payment exceeding ` 30,000 is made to the contractor or the sub-contractor; or (ii) the aggregate amount paid or likely to be paid during the financial year to the contractor (or the sub-contractor) exceeds ` 100,000. (iii) No deduction shall be made in respect of payment to a contractor during the course of business of plying, hiring or leasing goods carriage , if such a contractor owns ten or less goods carriage at any time during the previous year and furnishes declaration to that effect along with his Permanent Account Number. Deduction from insurance commission: Rate of TDS: with PAN 10%, without PAN @ 20%. No TDS when the amount paid or credited does not exceed ` 20,000. Deduction for payment in respect of life Insurance Policy: any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under Section 10 (10D), shall, at the time of payment thereof, deduct income-tax thereon at the rate of one per cent. However, where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than ` 1,00,000, no deduction shall be made. Deduction from payments to non-resident sportsmen or sports associations: Income by way of participation in India in any game (other than game specified in Section 115BB) or sport, or advertisement or contribution of articles relating to any game or sport in India in newspapers, magazines or journals payable to a non-resident sportsman is liable to TDS @20%. Deduction from payments in respect of deposit under National Savings Scheme, etc.: The person responsible for paying to any person any amount referred to in Section 80CCA(2)(a) [i.e., National Savings Scheme, 1987, annuity plans of the LIC like ―Jeevan Dhara‖ and ―Jeevan Akshay‖] shall at the time of payment thereof, deduct income-tax thereon at the rate of 10%. No TDS is required if the payment is less than ` 2,500. Deduction from payments on account of purchase of units by Mutual Fund or UTI: TDS in this DIRECT TAXATION

293

case is @ 20% . 194G 194H

194-I

Deduction from commission, etc., on the sale of lottery tickets: Payment exceeding ` 15,000 requires TDS @ 5%. Deduction from commission or brokerage: Any person (including an individual or HUF whose total sales/gross receipts/turnover from business exceeds ` 1 crore or receipts from profession exceeds ` 50 lakh during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid) who is responsible for payment to a resident any income by way of commission (other than insurance commission) or brokerage shall deduct tax Deduction from rent: Any person (including an individual or HUF whose total sales/gross receipts/turnover from business exceeds ` 1 crore or receipts from profession exceeds ` 50 lakh during the financial year immediately preceding the financial year in which such income is credited or paid) who is responsible for paying to a resident any income by way of rent, shall deduct tax @ 2% for use of machinery or any equipment, and @ 10% for use of any land/building or furniture and fittings. No tax is required to be deducted:

(c) When the sum paid is not more than ` 1,80,000 p.a. (d) When such income is paid to a business trust which is owned directly by such business 194-1A

194J

trust. Deduction from immovable property: any person, being a transferee, responsible for paying (other than the person referred to in Section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land) shall deduct an amount equal to one per cent of such sum as income-tax at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of cheque or draft or by any other mode, whichever is earlier. However, no deduction shall be made where consideration for the transfer of an immovable property is less than ` 50 lakhs. Besides, the person responsible for deduction of tax at source is exempted from quoting his tax deduction and collection account number under Section 203A. Deduction from fees for professional or technical services: TDS @10% is required to be made for payment to a resident by way of fees for professional services or fees for technical services or any remuneration or fees or commission (except those chargeable to tax under the head ―Salaries‘‘) to a director of a company or royalty or sum specified u/s 28(va). No TDS is required if: (i) the aggregate sum paid/payable during the financial year does not exceed ` 30,000; or (ii) the person responsible for such payment is an individual or HUF and during the financial year immediately preceding the financial year in which such payments are made, the gross receipts or turnover from the business do not exceed R. 1 crore, and in the case of profession the gross receipts do not ` 50 lakhs; or (iii) the sums are paid exclusively for personal purposes of such individual or HUF.

194LA

Deduction from compensation on acquisition of certain immovable property: Any person responsible for paying to a resident any compensation or enhanced compensation or consideration or enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any movable property (except agricultural land), shall deduct tax at source @ 10%. Tax shall be deducted at the time of payment in cash or by the issue of a cheque or draft or any other mode, whichever is earlier. No TDS is required if the payment does not exceed ` 2,50,000.

194LB

Deduction from interest on infrastructure debt fund: where any interest is payable to a nonresident, not being a company or a foreign company, by an infrastructure debt fund referred to in Section 10(47), the person responsible for making such payment shall deduct income tax thereon at the rate of 5 percent. Deduction from incomes of business trust: Income of a business trust requires deduction of tax at the rate of five per cent in case of non-resident unit holders and at the rate of ten per

194LBA

DIRECT TAXATION

294

194LBB

194LC

194LD

195

196

196A

196B

196C

cent in case of resident unit holders of business trust on that portion of distributed income of the trust which is taxable in the hands of unit holder. Income in respect of units of Investment Fund: Where any income, other than that proportion of income which is of the same nature as income referred to in clause (23FBB) of Section 10, is payable to a unit holder in respect of units of an investment fund specified in clause (a) of the Explanation 1 to Section 115UB, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon: (a) where the payee is a resident, at the rate of ten percent; and (b) Where the payee is a non-resident (not being a company) or a foreign company: (i) In respect of the income that is not chargeable under the Act, Nil and (ii) for other incomes: at the rates in force. Note: The term rates in force has been defined under section 2(37A) as the rate in the relevant Finance Act or the rate in the agreement under section 90 or section 90A, as the case may be. Deduction from income from interest from Indian company: Where any income by way of interest specified below is payable to a non-resident, not being a company or to a foreign company or a business trust by an Indian company, the person responsible for making the payment, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct the income-tax thereon at the rate of 5 per cent. Any person who is responsible for paying to a person being a Foreign Institutional Investor or a Qualified Foreign Investor, any income by way of interest referred to in sub-section (2), shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent. Deduction from other sums: Payment of interest and other sums (other than income chargeable under the head ―Salaries‖) which is payable to a non-resident, not being a company or a foreign company requires TDS at the rates in force. Interest or dividend or other sums payable to Government, RBI or certain corporations: No tax shall be deducted at source in respect any payment by way of interest or dividend or in respect of any other income accruing or arising to the following authorities/institutions: (i) the Government, or (ii) the Reserve Bank of India, or (iii) a corporation established by or under any Central Act which is exempt from tax on its income, or (iv) a Mutual Fund specified in Section 10(23D). Income in respect of units of non-residents: No tax is required to be deducted at source under this section at the time of payment or crediting any amount to a non-resident (other than a company) or to a foreign company in respect of units of a Mutual Fund specified u/s 10(23D) or of the Unit Trust India. Income from units: Section 196B applies to payment of income in respect of units purchased in foreign currency by an overseas financial institution or Offshore Fund (as covered u/s 115AB) or of income by way of long-term capital gains from such units. The person responsible for making such payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque, deduct tax at the rate of 10%. Income from foreign currency bonds or shares of Indian company: Section 196C applies to payment to a non-resident of any income by way of interest or dividends in respect of bonds or Global Depository Receipts or income by way of long-term capital gains arising from the transfer of such bonds or Global Depository Receipts. In this case, the person responsible for payment of such amount shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque/draft or any other mode, whichever is earlier, deduct tax at the rate of 10%. However, with effect from 1st April, DIRECT TAXATION

295

2003, no tax is to be deducted at source in case of dividends referred to in Section 115-O. 196D

22.2

Income of foreign institutional investors from securities: Any person responsible for paying to a foreign institutional investor any income in respect of securities referred to in Section 115AD(1)(a), shall deduct tax at the rate of 20%. Such tax shall be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque/draft or any other mode, whichever is earlier. In the case of income by way of capital gains arising from transfer of securities referred to in Section 115AD and dividends referred to in Section 115-O (w.e.f. 1.4.2003), no tax is required to be deducted at source.

DUTY OF THE PERSON DEDUCTING TAX [SECTION 200]

Any person deducting tax in accordance with the provisions of this Chapter shall pay within the prescribed time [See below], the sum so deducted to the credit of the Central Government or as the Board directs. Similarly, a person, being an employer, referred to in Section 192(1A), shall pay within the prescribed time the tax to the credit of the Central Government or as the Board may direct. With effect from the assessment year 2005-2006, any person deducting tax on or after 1st April, 2005, in accordance with the provision of this Chapter shall, after paying the tax deducted to the credit of the Central Government within the prescribed time , prepare quarterly statements for the period ending on 30th June, 30th September, 31st December and 31st March in each financial year and deliver or cause to be delivered to the Director-General of Income-tax (Systems) as under [Section 200(3)] Quarterly statement of deduction / collection of tax [Rule *31A/ Rule 31AA]: Nature of TDS/TCS Form Time of submission of quarterly statement Salaries 24Q  First quarter (ending on 30th June): on or before 31st July ● Second quarter (ending on 30th September): on or before 31st October ● Third quarter (ending on 31st December): on or before 31st January ● Fourth quarter (ending on 31st March): on or before 31st May of the financial year immediately following the financial year in which the deduction is made.



Non-resident not being a company or a foreign company Other sources Collection of tax at source (TCS)

27Q

Same as above

26Q 27EQ

Same as above First quarter : on or before 15th July  Second quarter : on or before 15th October  Third quarter : on or before 15th January  Fourth quarter : on or before 15th May following the last quarter of the financial year * Income-tax (Eleventh Amendment) Rules, 2016, w.e.f. 1-6-2016. Time and mode of payment to Government account of tax deducted at source [Rule 30] :The provisions of Rules 30 are as under: Nature of Deduction Circumstances Due date of payment All sums deducted in Deduction by or (i) On the same day where tax is paid without production accordance with on behalf of challan. (ii) In the case of deduction u/s 192(1A), where the provisions of of the tax is paid by an income-tax challan, on or before 7 days Chapter XVII-B Government from the end of the month in which the deduction is made. (iii) In the case of any sum deducted under section 194-IA, it shall be paid to the credit of the Central Government within a period of 30 days from the end of DIRECT TAXATION

296

All sums deducted in accordance with the provisions of Chapter XVII-B.

Deduction by or on behalf of persons other than the Government

Quarterly payment of the tax deducted under section 192 or section 194A or section 194D or section 194H in special cases

Prior approval of the Joint Commissioner required

22.3

the month in which the deduction is made. (i) On or before 30th April where the income is credited or paid in the month of March; (ii) In the case of any sum deducted under section 194-IA, it shall be paid to the credit of the Central Government within a period of 30 days from the end of the month in which the deduction is made. (iii) In any other case including the cases covered u/s 192(1A), within 7 days from the end of the month in which the deduction is made. (i) Quarter ended on 30th June: 7th July. (ii) Quarter ended on 30th September: 7th October (iii) Quarter ended on 31st December: 7th January (iv) Quarter ended on 31st March : 30th April

CONSEQUENCE OF FAILURE TO DEDUCT OR PAY TAX [SECTION 201]

The consequence of failure to deduct or pay tax shall be as under: ●

Failure to deduct tax at source: Failure to deduct tax at source shall result in the following consequences:

(a) Tax demand [Section 201(1)] :The person responsible for deduction of the tax at source shall be deemed to be an assessee in default in respect of such tax. However, no order shall be made deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of two years from the end of the financial year in which the statement for deduction at source is filed by the deduct or, Where no such statement is filed, such order can be passed up till four years from the end of the financial year in which the payment is made or credit is given [Section 201(3)] (b) Interest payable [Section 201(1A)] : The person responsible for deduction of such tax shall be liable to pay simple interest @ 1% per month or part of the month on the amount of such tax from the date on which such tax was deductible to the date on which the tax is actually deducted and a further sum calculated @ 1·5% for every month or part of the month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid. Such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of Section 200(3) [Section 201(1A) inserted by the Finance Act 2010, w.e.f. 1.7.10]. (c) Penalty [Sections 221, 271C]: The person in default shall be liable to pay by way of penalty, a sum equal to the amount of tax which such person has failed to deduct. 

Failure to deposit tax :If a person having deducted the tax at source fails to deposit such tax to the credit of the Central Government within the prescribed time or does not deposit the tax, he shall face the following consequences:

(a) Tax demand [Section 201(1)]: Same as above. However, where the deduct or has deducted but not deposited the tax deducted at source, there would be time-limit for passing an order under Section 201(1). (b) Interest payable [Section 201(1A)] :Same as above. (c) Penalty [Section 221] : The person in default shall be liable to pay penalty under the provisions of Section 221, up to an amount not exceeding the amount of tax in arrears. (d) Charge upon assets of the person in default [Section 201(2)] :The amount of tax due together with the interest thereon shall be a charge upon all assets of the person in default. DIRECT TAXATION

297

22.4

COMMON TAX DEDUCTION AND COLLECTION ACCOUNT NUMBER [SECTION 203A, RULE 114A]

With effect from 1st October, 2004, tax deduction and tax collection number been integrated (Section 206CA is not effective from 1.10.2004) to provide for a common number for tax deduction and tax collection. Under the amended provisions of Section 203A, every person deducting tax or collecting tax under the provisions of this Chapter, shall, if he has not already been allotted such number, apply to the Assessing Officer in Form No. 49B within one month from the end of the month in which the tax has been deducted or collected or 31st January, 2005, whichever is later. Requirement of quoting tax-deduction and tax-collection account number [Section 203A(2)]: In the following cases, quoting of tax deduction and collection account number is compulsory : (i) All challans for the payment of any sum in accordance with the provisions of Section 200 or Section 206 C(3). (ii) All certificates furnished under Section 203 or Section 203 C(5). (iii) All the statements prepared and delivered or caused to be delivered in accordance with the provisions of Section 200(3) or Section 206 C(3). (iv) All returns delivered in accordance with the provisions of Section 206 or 206(5A) or 206(5B) to any income-tax authority. (v) All other documents pertaining to such transactions as may be prescribed in the interest of revenue. 

● Penal provisions: Under Section 272BB, if a person fails to comply with the provisions of Section 203A, he shall, by an order passed by the Assessing Officer, pay, by way of penalty, ` 10,000.

22.5

FURNISHING OF STATEMENT OF TAX DEDUCTED [SECTION 203AA, RULE 31AB]

As required under this section, the Director General of Income-tax (Systems) or the person authorised by the Director General of Income-tax (Systems) shall deliver a statement of tax deducted or, as the case may be, a statement of tax collected at source (on or after 1st April 2008) to:

(a) every person from whose income the tax has been deducted; (b) the buyer/licensee/lessee as referred to in Section 206C; or (c) every person in respect of whose income the tax has been paid. The aforesaid statement in Form No. 26AS shall be delivered by 31st July following the financial year, during which taxes were deducted, collected or paid.

22.6

COLLECTION OF TAX AT SOURCE [SECTION 206C]

Section 206C contains special provisions for collection of tax at source from the buyers of specified goods. The provisions are as under: ●

Persons responsible for collection of tax : The following persons shall collect tax at source : (i) Every person, being a seller, shall collect tax from the buyers of the goods specified in Sl. No. 1 to 6 of the goods specified in the table given in para 36.1 [Section 206C(1)]. (ii) Every person, who grants a lease or a licence or enters into a contract or otherwise transfers any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry, to any other person (not being a public sector company) for the purpose of business shall collect tax from the licensee or lessee [Section 206C(1C)].

DIRECT TAXATION

298

● Time of collection of tax: The tax shall be collected at the time of debiting of the amount payable by the aforesaid buyer/ licensee/ lessee to the account of the buyer/licensee/ lessee or at the time of receipt of such amount from the said buyer/ licensee/ lessee in cash or by issue of a cheque or draft or by any other mode, whichever is earlier [Sections 206C(1), 206C(1C)]. 

Amount of tax to be collected at source: SL. No. Nature of goods 1. Alcoholic liquor for human consumption 2. Tendu leaves 3. 4 5. 6. 7. 8. 9. 10.

Timber obtained under forest lease Timber obtained under any mode other than under forest lease Any other forest produce not being timber or tendu leaves Scrap Minerals being local coal or lignite or iron ore Parking lot Toll plaza Mining and querying

Percent 1% 5% 2.5% 2.5% 2.5% 1% 1% 2% 2% 2%

1. Tax to be collected at source on purchase of bullion [Section 206C(1D): The provision of this section applies to sale of bullion, jewellery or any other goods or providing any services. Accordingly, every person, being a seller, who receives any amount in cash as consideration for sale of bullion or jewellery, shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration as income-tax, if such consideration: (i) for bullion, exceeds ` 2 lakh; or (ii) for jewellery, exceeds ` 5 lakh (iii) for any goods other than those mentioned in (i) and (ii) or any service, exceeds ` 2 lakhs. [The aforesaid conditions of sub-section (1D) shall not apply in relation to sale of any goods (other than bullion or Jewellery) or providing any service to such class of buyers who fulfil such conditions, as may be prescribed.]. (iv) Besides every person, being a seller, who receives any amount as consideration for sale of a motor vehicle of the value exceeding ten lakh rupees, shall, at the time of receipt of such amount, collect from the buyer, a sum equal to one per cent of the sale consideration as income-tax. [Section 206C(1F)]. Example 1: Raja who was born on 01.06.1944 is a retired Government Officer. Approximately he `1,80,000 as interest from on company deposits. Besides, he gets ` 1,00,000 as pension. He invested `1,00,000 in securities and other investments qualified for deduction u/s 80C. He also paid `20,000 as medical claim insurance premium. Can he submit the declaration in Form No-15H to the Company which will pay interest on company Deposits so that tax is not deducted by the payer company u/s 194A read with Section 197A? Answer: As per Section 197(IB), in the case of a senior citizen (60 years or more) no tax is required to be made if payee as such furnishes to the payer, a declaration in writing in duplicate in Form No. 15 H to the effect that the tax on his estimated total income of the previous year in which interest other than interest on securities is to be included in computing his total income will be nil. Computation of total income of the assessee: ` Income under the head Salaries Pension Interest other than interest on securities Gross Total Income Less: Deduction u/s 80C & 80D Net Income

DIRECT TAXATION

1,00,000 1,80,000 2,80,000 1,20,000 1,60,000

299

Since the maximum exemption limit for senior citizen is `3,00,000, taxable income of Mr. Raja is Nil. Mr. Raja can submit the declaration in the Form No-15H. Example 2: Mr. D.K. is employed with X Ltd., drawing a salary of ` 75,000 per month (eligible deduction under Section 80C `1,00,000). He furnishes the following particulars of income and losses from other sources as follows: ` Loss from House Property Bank interest (after deduction of tax ` 3,090) Dividend from Reliance Industries

25,400 26,910 30,000

Compute the liability of X Ltd. to deduct Tax at Source. Answer: Computation 1: When all other income declared by the employee is considered. Computation 2: When only Salary Income and loss from house property is considered. It may be noted that in the two computation, house property loss will be considered. Computation 1 ` 9,00,000 (-) 25,400 30,000 30,000 9,34,600 1,00,000 8,34,600 91,920 2,758 94,678 3,090 91,588

Salary (75,000 x 12) Income from house property Bank Interest Dividend from Reliance Industries Gross Total Income Less: Deduction under Section 80C Net Income Tax Add: E.C & S.H.E.C (3%) Less: T.D.S TDS to be deducted

Computation 2 ` 9,00,000 (-)25,400

8,74,600 1,00,000 7,74,600 79,720 2,938 82,318 82,318

Example 3: Discuss whether tax will be deducted at source in the following cases: (a) Dividend of ` 10,000 received by X from a domestic company on 15th June, 2016. (b) Interest on securities received by X on 15th August, 2016, from a company in which public has substantial interests, ` 15,000. (c) ` 20,000 received by X from the West Bengal Government as commission on sale of lottery tickets. (d) ` 1,30,000 paid by X to the West Bengal Government in respect of rent for Government premises occupied by X during the financial year 2016-2017. (e) ` 1,00,000 received as interest during the previous year 2016-2017 on a bank fixed deposit. Answer: (a) With effect from 1st April, 2016, dividends received from a domestic company (covered u/s 115-O) is exempt u/s 10(34), if the amount of such dividend does not exceed ` 10 lakh. In view of this, no tax shall be deducted at source u/s 194 on such dividends. (b) Under clause (v) of Section 193, interest on securities from a company in which public are substantially interested shall be subjected to TDS @ 10% if the amount so paid or credited to the account of a resident individual exceeds ` 5,000. In view of this provision ` 1,500 will be deducted at source at the time of payment to X. DIRECT TAXATION

300

If tax on the total income of X during the financial year is expected to be nil, in this case he should give declaration in Form No. 15G in order to get the amount without TDS. (c) Under Section 194G, amount payable as commission on sale of lottery tickets shall be subjected to TDS @ 10% if the amount of such commission exceeds ` 15,000. As a result, ` 2,000 shall be deducted at source from the amount of the commission. In this case, tax may be deducted at lower rate or no tax may be deducted if, on an application made by X in Form No. 13, the Assessing Officer issues a certificate authorising the payer to deduct no tax or deduct tax at lower rates. (d) Under Section 196, no tax is required to be deducted at source, if the amount is paid by any person to the Government. Therefore, X is not liable to deduct tax on the amount of rent paid to the Government. (e) Under Section 194A, in the case of fixed deposit with a banking company, interest paid after 1st June, 2001, shall be subjected to TDS @ 10%, if the amount of interest exceeds ` 10,000. In this case, ` 10,000 shall be deducted from the amount of interest payable to X. Example 4 SK Enterprises, a partnership firm, took a loan of ` 10,00,000 from a person resident in India. Interest on loan for the financial year 2016-17 amounted to ` 1,00,000. Should the firm deduct tax at source from the interest? Answer: Tax is to be deducted under section 194A on interest (other than interest on securities). Tax is to be deducted if the interest is paid to a resident. In this case, the firm has paid interest (other than interest on securities) to a resident and hence, the firm has to deduct tax under section 194A from interest of ` 1,00,000 paid by it. Example 5 SK Enterprises, a partnership firm, took a loan of ` 10,00,000 from a person non-resident in India. Interest on loan for the financial year 2016-17 amounted to ` 1,00,000. Should the firm deduct tax at source from the interest? Answer: In this case, the firm has paid interest (other than interest on securities) to a non-resident and hence, the firm is not liable to deduct tax at source under section 194A. However, section 195 requires deduction of tax at source from payment made to a non-resident. Hence, the firm is not required to deduct tax at source under section 194A but it is required to deduct tax at source under section 195 Example 6: SK Industries, a partnership firm has taken a loan of ` 10,00,000 from K residing in Agra (friend of one of its partners). Interest on loan for the financial year 2016-17 amounted to ` 1,00,,000. The interest is credited to the account of K in the month of March 2017, but the same is actually paid in the month of May 2017. When is the firm liable to deduct tax, in March 2017 or in May 2017? Answer: As per section 194A, tax is to be deducted at the time of payment or credit of interest (to any account by whatever name called), whichever is earlier. In this case, interest is credited to the account of the payee in March 2017 and the same is actually paid in the month of May 2017. In other words, the time of credit is March 2017 and the time of payment is May 2017, hence, the liability to deduct tax will arise in the month of March 2017. Example 7. State briefly whether the following transaction require deduction of tax at source: (i) Payment of royalty of ` 5 lakhs by P Limited, an Indian company to another Indian Company, Q Limited. DIRECT TAXATION

301

(ii) (iii)

Payment of interest of ` 7,500 by D Limited, an Indian Company to M Limited, an Indian Company for delayed payment of sale proceeds. Payment of ` 1,00,000 by a partnership firm, resident in India to Mr. L, resident contractor for manufacturing a product as per requirement of the firm. The contractor used materials which were purchased by him from a company.

Answer: (i) As the amount of royalty paid to resident exceeds ` 30,000, tax is required to be deducted at 10% under section 194J. (ii) Payment of interest by D. Ltd. to M. Ltd. resident required deduction of tax at 10%, as the amount of interest exceeds ` 5,000. (Section 194A) (iii) Under Section 194C ‗work‘ does not include manufacturing or supplying of product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. As L used the materials purchased from a third party, the firm is not required to deducted tax at source. Multiple Choice Questions: 1.

The provisions regarding TDS on Salaries are contained in : (a) Section 190 (b) Section 191 (c) Section 192 (d) Section 193 Ans. (c ) Section 192 2.

If the payee does not furnish PAN, TDS u/s 194 on dividends shall be made @ (a) 10% (b) 20% (c) 15% (d) 2% Ans. (b) 20%. Deduction of tax at source for winnings from lotteries are mandatory : (a) Irrespective of the amount (b) If the amount is more than ` 1,00,000 (c) If the amount is more than ` 10,000 (d) More than ` 20,000. Ans. (c) If the amount is more than ` 10,000. 3.

4.

Deduction of tax at source for insurance commission is @ (a) 10% (b) 20% (c) 2% (d) 12% Ans. (a) 10% (when PAN is supplied). 5.

Deduction o tax at source under section 194I is @ (a) 10% (b) 12% (c) 15% (d) 5% Ans. (a) 10%

DIRECT TAXATION

302

STUDY NOTE : 23 ADVANCE PAYMENT OF TAX [SECTIONS 207-211, 218, 219] THIS STUDY NOTE INCLUDES: 23.1 Introduction 23.2 Liability for advance payment of tax and its conditions [Sections 207, 208] 23.3 Computation of advance tax under different situations [Sections 209 and 210] 23.4 Installments of advance tax and due dates [Section 211(1)] 23.5 Assessee deemed to be in default [Section 218] 23.6 Credit for advance tax [Section 219] 23.7 Consequence of default in payment of advance tax

23.1 INTRODUCTION Advance payment of tax is one of the modes for discharging tax liability by an assessee. This scheme is also known as ‗pay as you earn‘ scheme where the assessee pays such advance tax on his estimated current income in a number of instalments during the previous year. It applies to all categories of income. The provisions of the Act relating to advance payment of tax are outlined below. Section Particulars 207 Liability for payment of advance tax 208 Conditions of liability to pay advance tax 209 Computation of advance tax Payment of advance tax by the assessee of his own accord or in pursuance of order of 210 Assessing Officer 211 Instalments of advance tax and due dates 218 When the assessee is deemed to be in default 219 Credit for advance tax

23.2 LIABILITY FOR ADVANCE PAYMENT OF TAX AND ITS CONDITIONS [SECTIONS 207, 208] Advance tax shall be payable during any financial year in respect of the total income of the assessee chargeable to tax for the assessment year immediately following that financial year. Such total income, also called current income, includes income/loss under all heads. Even agricultural income shall be included for the purpose of determining the rate of tax on the nonagricultural income. The liability for advance tax would arise only if the amount of tax payable by the assessee during the year is ` 10,000 or more (Section 208). Senior citizens (60 years or more at any time during the previous year) who have no do not have income under the head ‗Profits and gains of business or profession‘, shall not be liable to pay advance tax and such senior citizen shall be allowed to discharge his tax liability (other than TDS) by payment of self assessment tax [Section 207(2)].

23.3 COMPUTATION OF ADVANCE TAX UNDER DIFFERENT SITUATIONS [SECTIONS 209 AND 210] The amount of advance tax payable by the assessee in the financial year shall be computed as under: (a) Payment of advance tax by the assessee of his own accord [Section 210(1)]: Every person who is liable to pay advance tax shall, of his own accord, pay, on or before each of the due dates specified under Section 211, the appropriate percentage of advance tax on his current income computed as under:

DIRECT TAXATION

303

Step I. Estimate the current income of the financial year for which advance tax is payable. Current income means income under all the five heads after adjustment for losses brought forward and deductions under Sections 80C to 80U. Step II. Compute the tax on current income at the rates in force for the financial year. (Consider Rebate u/s 87A) Step III. Add Surcharge. (if applicable) Step IV. Add Education cess and secondary and higher education cess. Step V. Allow relief under Section 89. Step VI. Deduct tax deducted/collected or likely to be deducted/collected at source. Note: Where the assessee receives or pays any amount (on which the tax was deductible or collectible) without deduction or collection of tax, he shall be liable to pay advance tax in respect of such income. The balance of tax after Step V, if not less than ` 10,000, is the advance tax payable. It will be paid in the number of installments specified in Section 211. ● Revised installments: After paying any installment of advance tax, the assessee may make a revised estimate of his current income and accordingly increase or decrease the amount of advance tax payable in the remaining installment or installments [Section 210(2)]. An assessee, who pays advance tax of his own accord, need not give intimation to the Assessing Officer regarding his estimation of current income or revision of the installment/installments of advance tax. (b) Payment of advance tax in pursuance of order of the Assessing officer [Section 210(3)]: Section 210(3) applies to an assessee who has been already assessed by way of regular assessment in respect of the total income of any previous year. In this case, if the Assessing Officer is of the opinion that such person is liable to pay advance tax, he may issue to such person a notice of demand under Section 156 (in Form No. 28) at any time during the financial year (but not later than the last day of February), requiring him to pay the advance tax in installment or installments specified in the notice. The amount of advance tax pursuant to a notice by the Assessing Officer shall be higher of the following: (i) Tax on total income of the latest previous year in respect of which the assessee has been assessed by way of regular assessment, or (ii) Tax on the total income returned by the assessee in any return of income furnished by him for any subsequent previous year. Tax under (i) or (ii) shall be computed at the rates in force for the financial year in which advance tax is payable. Further, the amount of income tax computed as above shall be reduced by the amount of tax deductible/collectable at source during the financial year [Sections 209(1)(b), 209(1)(d)]. ● Estimate by the assessee: An assessee, who has been served with a notice under Section 210(3), may make his own estimate of current income and pay the advance tax accordingly. If his own estimate of advance tax payable on current income is less than the amount of advance tax specified in the notice of demand by the Assessing Officer, he may send an intimation to the Assessing Officer in Form No. 28A to that effect and pay such advance tax in accordance with his own estimate on or before the due date or each of the due dates specified in Section 211 falling after the date of such intimation [Section 210(5)]. In the case of higher estimate made by the assessee, the assessee shall pay, on or before the due date of the last installment specified in Section 211, the appropriate part or the whole of such higher amount of advance tax [Section 210(6)]. In this case, no intimation is required to be sent to the Assessing Officer. (c) Payment of advance tax in pursuance of an amended order by the Assessing Officer [Section 210(4)]: An assessment order under Section 210(3) may be amended by the Assessing Officer if, at any time before 1st March, a return of income is furnished by the assessee [either under Section 139 or 142(1)] or a regular assessment of the assessee is made in respect of a previous year later than that referred to in Section 210(3). The Assessing Officer in this case shall issue to the assessee a notice of demand under DIRECT TAXATION

304

Section 156 (in Form No. 28) requiring him to pay, on or before the due date/dates specified in Section 211 falling after the date of amended order, advance tax computed on the basis of the total income declared in such return or total income of the later year in respect of which regular assessment has been made. As discussed in (b) above, in this case also tax deductible/collectable at source shall be deducted to arrive at the advance tax payable. ● Estimate made by the assessee: In this case also the assessee can make his own estimate and pay the advance tax accordingly. However, in the case of an estimate lower than that made by the Assessing Officer in the amended order, the assessee shall send an intimation to the Assessing Officer to that effect in Form No. 28A. ● Net agricultural income: For the purpose of computation of advance tax payable under (a), (b) or (c) above, the net agricultural income shall also be taken into consideration [Section 209(2)].

23.4 INSTALLMENTS OF ADVANCE TAX AND DUE DATES [SECTION 211(1)] The amount of advance tax calculated under Section 209 shall be paid in installments as under: Due date of instalment

Amount payable Assessees other than those covered under Section 44AD*

Assessees covered under Section 44AD*

•

On or before 15th June of the Not less than 15% of advance Single instalment on or previous year tax payable. before 15th March of the financial year. • On or before 15th September of Not less than 45% of advance the previous year. tax, as reduced by the amount, if any, paid in the earlier instalment. Not less than 75% of advance  On or before 15th December of tax, as reduced by the amount or the previous year amounts, if any, paid in the earlier Instalment or Instalments. The whole amount of advance tax, as reduced by the amount or • On or before 15th March of the amounts, if any, paid in the earlier previous year instalment or instalments. Under section 44AD: A. "Eligible assessee" means. — (i) An individual. Hindu undivided family or a partnership firm (but not a limited liability partnership firm), who is a resident: and (ii) who has not claimed deduction under any of the sections 10A. 10AA. 10B. 10BA or deduction under any provisions of Chapter VIA under the heading "C. - Deductions in respect of certain incomes" in the relevant assessment year; B. "Eligible business" means. — (i) Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE: and (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of 1 crore rupees. Other considerations: (i) Any amount paid as advance tax on or before 31st March shall be treated as advance tax paid during the previous year [Proviso to Section 211(1)]. (ii) If a notice of demand is served by the Assessing Officer under Section 210(3) or Section 210(4) after any of the due dates specified in the table above, the appropriate part or the whole of the amount of advance tax specified in such notice shall be payable on or before each of such dates which fall after the date of service of the notice of demand [Section 211(2)].

DIRECT TAXATION

305

(iii)

If the last day for payment of any installment of advance tax is a day on which receiving bank is closed, the assessee can make payment on the next immediately following working day, and in such cases mandatory interest chargeable under Sections 234B and 234C would not be applicable [Circular No. 676, dt. 14.1.1994].

23.5 ASSESSEE DEEMED TO BE IN DEFAULT [SECTION 218] An assessee shall be deemed to be in default if he: (i) pursuant to a notice by the Assessing Officer under Section 210(3) or Section 210(4), does not pay the advance tax within the date falling due after such notice; or (ii) pursuant to a notice by the Assessing Officer under the aforesaid sections makes his own estimate of advance tax and, in the case of a lower estimate made by him, does not give intimation to the Assessing Officer; or (iii) having made a higher estimate of advance tax than that demanded in the notice of the Assessing Officer, does not pay such advance tax on or before the due date of the last installment specified in Section 211(1).

23.6 CREDIT FOR ADVANCE TAX [SECTION 219] Other than a penalty or interest, any sum paid by or recovered from the assessee shall be treated as payment of tax in respect of the income of the relevant previous year and credit therefore shall be given to the assessee in the regular assessment.

23.7 CONSEQUENCE OF DEFAULT IN PAYMENT OF ADVANCE TAX The consequences of default in payment of advance tax are as under: 1. Interest for defaults in payment of advance tax [Section 234B]: The provisions of Section 234B for levy of interests are as under Interests chargeable under Section 234B Circumstances under which interest is payable

Section

Rate of Interest

Period for which interest is payable

Amount on which interest is payable

• When advance tax has not been paid by the assessee

234B(1)

1% p.m. or part of month

From 1st April of relevant assessment year to the date of determination of total income u/s 143(1), or where regular assessment is made, to the date of regular assessment

On the amount of assessed tax

• When advanced tax paid is less than 90% of assessed tax

Do

Do

Do

Assessed tax less advance tax paid

• Where pursuant to reassessment or recomputation under Section 147 or Section 153A the amount on which interest payable u/s 234B(1) is increased

234B(3)

Do

Period commencing on the day following the date of determination of total income u/s 143(1) and where regular assessment is made u/s 143(3), 144, 147 or 153A, on the period following the date of such regular assessment and ending on the date of reassessment or re-computation u/s 147

Tax on total income determined u/s 147 less tax on total income on regular assessment u/s 143(1)

DIRECT TAXATION

306





Increase or decrease in the interest under certain orders [Section 234B(4)] : Where, as a result of any order under Section 154 or 155 or 250 or 254 or 260 or 262 or 263 or 264 or 245D (4), the amount on which interest was payable under Section 234B(1) or Section 234B(3) has been increased or reduced, the interest shall be accordingly increased or reduced and: (i) where the interest is increased, the Assessing Officer shall serve on the assessee a notice of demand in Form No. 7; (ii) in a case where the interest is reduced, the excess interest paid, if any, shall be refunded. Interest payable when tax is paid under Section 140A [Section 234B(2)] : Where, before the date of determination of total income under Section 143 (1) or completion of regular assessment, tax is paid by the assessee under Section 140A, interest shall be calculated as under: (i) Up to the date of payment of tax under Section 140A interest shall be first calculated under the provisions of Section 234(B)(1) in the manner laid down in the table above, and then, interest, if any, paid under Section 140A shall be subtracted. (ii) From the date of payment of interest under Section 140A, interest shall be calculated on the amount by which tax paid under Section 140A together with advance tax falls short of the assessed tax. The rate of interest shall be 1% p.m. or part of the month.

2. Interest for deferment of advance tax [Section 234C]: Under Section 234C, interest is payable if the assessee does not pay or makes under payment of installments of advance tax within the time specified under Section 211(1). The provisions of the section are as under: A. Interests payable by all assessee except for those in (B)[Section 234C(1)(a)]: In the case of all assessees except the eligible assessees mentioned in Para 4, interests under Section 234C shall be calculated as under: Circumstances

Rate of interest

Period for which interest is payable

Amount on which interest is payable

• If advance lax paid on or before 15th June is less than 15% of tax due on returned income

Simple interest @ 1% p.m.

3 months

15%. of tax due on returned income Less advance tax paid up to 15th June.

• If advance tax paid on or before 15th September is less than 45% of tax due on returned income

Simple interest @ 1% p.m.

3 months

45%. of tax due on returned income less advance tax paid up to 15th September.

• If advance tax paid on or before 15th December is less than 75% of tux due on returned income

Simple interest @ 1% p.m.

3 months

75% of the tax due on returned Income less advance tax paid up to 15th December.

If advance tax paid on or before 15th March is less than 100% of tax due on returned income

Simple interest @ 1% p.m.

3 months

100%. of the tax due on returned income less advance tax paid upto 15th March.

B. Interest payable by eligible Assessee under section 44AD [Section 234C(1)(b)]: In the case of eligible assessee referred to in para 4, who is liable to pay advance tax but has failed to pay such tax or the advance tax paid by the assessee on its current income on or before 15th March is less than the tax due on returned income then the assessee shall be liable to pay interest @ 1% on the amount of shortfall on the tax due on returned income. ● Meaning of tax due on returned income: For the purpose of Section 234C, ―tax due on returned income‖ means the tax chargeable on the total income declared in the return of income furnished by the assessee for the assessment year in which the advance tax is paid or payable as reduced by the amount of: (i) any tax deductible or collectable at source; (ii) any tax relief under Section 90 or Section 90A or Section 91; and (iii) any tax credit allowed to be set off in accordance with the provisions of Section 115JAA.

DIRECT TAXATION

307

● Shortfall of advance payment of tax on capital gains and income from lottery, crossword puzzle, etc. [First proviso to Section 234C (1)(b)]: No interest shall be payable on any shortfall in the payment of advance tax due on the returned income where such shortfall is on account of underestimate or failure to estimate the amount of capital gains or income of the nature specified in Section 2(24)(ix) [i.e., income from lottery, crossword puzzle, etc.] or income under the head ―Profits and gains of business or profession ―in cases where the income accrues or arises under the said head and the assessee has paid the whole of the amount of tax payable in respect of these incomes as part of the installments of advance tax which are due or where no such installments are due, by the 31st of March of the financial year. Example 1: K, (resident and age 65 years) is a retired person, earning rental income of `40,000 per month. Apart from rental income, he does not have any other source of income. Will he be liable to pay advance tax? Answer: Any taxpayer whose estimated tax liability for the year exceeds `10,000 has to pay his tax in advance by the due dates prescribed in this regard. However, if a person satisfies the following conditions, he will not be liable to pay advance tax: (1) He is an individual (2) He is resident in India as per the Income tax Act (3) He is of the age of 60 years or above (4) He is not having any income chargeable to tax under the head ―Profits and gains of business or profession‖ In this case K is a resident in India. His age is 65 years and he is not having any income chargeable to tax under the head ―Profits and gains of business or profession‖. Thus, he satisfies all the above conditions and, hence, he will not be liable to pay advance tax. Example 2: The estimated income of X from construction business during the previous year 2016-2017 is as under: ` 4,33,166 Business income Loss from self-occupied house 10,666 Other income (including bank interest on FD ` 12,000) 25,000 Compute the advance tax and the instalments payable on different dates: (i) If X is a corporate assessee (ii) If X is an individual, resident in India. Answer: Computation of estimated total income and tax payable by X, an individual, during the previous year 2016-2017. Company • Income from house property (loss)

Individual

10,666

10,666

4,33,166

4,33,166

• Income from other sources

25,000

25,000

Estimated gross total income

4,68,832

4,68,832

-

8,000

Estimated total income (Rounded off)

4,68,830

4,60,830

Tax on total income:

1,40,649

21,083

Less: Rebate u/s 87A

-

5,000

1,40,649

16,083

• Profits and gains of business or profession

Less: Deduction u/s 80C for PPF (info not provided in question)

Gross tax Add : Education cess and SHEC @ 2%+1%] Estimated tax liability (Rounded off u/s 288B)

DIRECT TAXATION

4,219

482

1,44,870

16,560

308

(a) Instalments of advance tax payable by a corporate assessee Date on which advance % of advance tax Payable Amount of advance tax payable tax payable ` 21,730 • on or before 15th June 2016 Not less than 15% of advance tax payable ` 43,461  on or before 15th September 2016 Not less than 45% of advance tax payable ` 43,461 • on or before 15th December 2016 Not less than 75% of advance tax payable ` 36,218 • on or before 15th March 2017 100% (b) In the case of a resident individual: The entire amount of tax has to be paid in a single installment on or before 15th March 2017. (covered under Section 44AD only) Example 3: During the Financial year 2016- 2017, R. Ltd. estimated its business income to be `4,00,000. However, on 1st October it has earned a net long-term capital gain of `75,000. Tax deductible at source during the financial year may be estimated to be `10,000. Compute advance tax payable on different dates. Answer: Computation of estimated tax liability for the financial year 2016-2017 ● Tax liability without long-term capital gains: Business income being gross total income Less: Deductions u/s 80C to 80U Estimated total income Tax on 4,00,000 @ 30% Add: Surcharge[being less than ` 1 crore] Tax and surcharge Add: Education cess @ 2% Add: Secondary and higher education cess @ 1% total Less: TDS Advance tax payable Tax liability considering long-term capital gains : Estimated total income ( 4,00,000 + 75,000) Tax on 4,75,000: Long-term capital gains @ 20% On other income @ 30% Total tax Add: Surcharge Tax and surcharge payable Add: Education cess @ 2% Add: Secondary and higher education cess @ 1% Estimated tax liability(Rounded off u/s288B) Less: TDS Advance tax payable

4,75,000 15,000 1,20,000 1,35,000 Nil 1,35,000 2,700 1,350 1,39,050 10,000 1,29,050

Instalments of advance tax payable Date on which advance tax payable % of advance tax payable ● on or before 15th June, 2016 ● on or before 15th September, 2016 ● on or before 15th December, 2016(See Note below) ● on or before15th March, 2017 (See Note below)

4,00,000 Nil 4,00,000 1,20,000 Nil 1,20,000 2,400 1,200 1,23,600 10,000 1,13,600

15% of advance tax payable 30% of advance tax payable 30% of advance tax payable 25% of advance tax payable

DIRECT TAXATION

Amount of advance Tax payable 17,040 34,080 45,668 32,262

309

Note: Under the first proviso to Section 234C(1)(b), in the case of long-term capital gains / casual income arising after the due date of any installment, the entire amount of advance tax payable on such income shall be payable in the remaining installments of advance tax which are due. Due to this provision, installments of advance tax have been calculated accordingly: Example 4: Answer the following question briefly: S‘s assessed tax for the assessment year 2017-18 is ` 12,000. The advance tax installments paid were ` 4,000 on 18.10.2016, ` 4,000 on 20.01.2016 & ` 4,000 on 10.03.2017. Are the payments of Advance Tax installments paid proper? If not, is any interest chargeable under the Income Tax Act, 1961? Answer: As per section 211, any eligible assessee as mentioned under Section 44AD shall have to deposit the amount of advance tax he is liable to pay within 15th March of the respective financial year. S being an individual is an eligible assessee and since he paid all the advance taxes due on 10.03.2017, his payment of advance tax installments is proper in all sense. Hence, no interest is to be charged thereon. (No information about being covered u/s 44AD provided) Multiple choice questions: 1.

As per section 207, ____________ not having any income from business or profession is not liable to pay advance tax. (a) A resident individual who is of the age of below 60 years (b) A resident HUF (c) A nonresident individual (d) A resident senior citizen (i.e., an individual of the age of 60 years or above) Ans. (d): A resident senior citizen (i.e., an individual of the age of 60 years or above) 2.

As per section 207, a resident individual who is of the age of below 60 years not having any income from business or profession is not liable to pay advance tax. (a) True (b) False Ans. (b) False

3.

As per section 208, every person whose estimated tax liability for the year exceeds ___________, shall pay his tax in advance in the form of ―advance tax‖. (a) ` 5,000 (b) ` 10,000 (c) ` 25,000 (d) ` 50,000 Ans. (b) ` 10,000. 4.

Exemption from payment of advance tax under section 207 is also available to a non resident senior citizen (i.e., an individual of the age of 60 years or above) not having any income from business or profession. (a) True (b) False Ans. (b) False 5. Resident partnership firm not having income from business or profession can claim exemption from payment of advance tax under section 207. (a) True (b) False Ans. (b) False

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310

Section & $GPLQLVWUDWLYH3URFHGXUHDQG,&'6 (Syllabus - 2016)

SECTION C: ADMINISTRATIVE PROCEDURE AND ICDS STUDY NOTE : 24 RETURN FILING THIS STUDY NOTE INCLUDES: 24.1 Return of income 24.2 Obligation for voluntary submission of returns [Sections 139(1), 139(4A), 139(4B) and 139(4C)] 24.3 Due date for filing return of income [Explanation 2 to Section 139(1)] 24.4 Forms for filing return [Rule 12(1)] 24.5 Mode of submission of return [Rule 12(3)] 24.6 Consequences of not filing return of income or filing of return after the due date 24.7 Return of loss [Section 139(3)] 24.8 Belated return [Section 139(4)] 24.9 Revised return [Section 139(5)] 24.10 Defective return [Section 139(9)] 24.11 Return: By whom to be verified [Section 140] 24.12 Permanent account number [Section 139A]

24.1 RETURN OF INCOME Sections 139 to 140A of the Income-tax Act contain the provisions relating to submission of return of income as under.

24.2 OBLIGATION FOR VOLUNTARY SUBMISSION OF RETURNS [SECTIONS 139(1), 139(4A), 139(4B) AND 139(4C)] The following persons are under statutory obligation to furnish voluntarily a return of income within the due date prescribed under Explanation 2 to Section 139(1): A. A company or a firm [Section 139(1)(a) and Third proviso to Section 139(1)]: In the case of a company or a firm, irrespective of profit or loss, it is mandatory to furnish return of income for every previous year. B. A resident having assets located outside India [Fourth proviso to Section 139 (1)]: In the case of a resident (other than a not ordinarily resident) assessee who during the previous year has any asset located outside India or has signing authority in any account located outside India shall furnish, on or before the due date, a return in respect of his income or loss for the previous year. C. Every other person other than a company or a firm [Section 139(1)(b)]: Every other person (not being a company or a firm) shall furnish return of income if the total income of such person or the total income of any other person in respect of which he is assessable during the previous year exceeded the maximum amount which is not chargeable to income-tax. Point to Note : With effect from the assessment year 2017-18, such basis of minimum income limit shall be calculated before claiming exemption u/s 10(38). In other words, if the total income of an assessee (i.e., an individual, HUF, an AOP/ BOI or artificial juridical person) before exemption u/s 10(38) and deductions under Sections 10A, 10B or u/ss80C-80U is more than the maximum amount which is not taxable, the assessee shall furnish return of income. D. Charitable institutions [Section 139(4A)]: In respect of the following income, every person who is in receipt of such income shall, if the total income in respect of which he is assessable as a representative assessee (the total income for this purpose being computed without giving effect to the provisions of Sections 11 and 12) exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year: DIRECT TAXATION

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(a) income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes; (b) income by way of voluntary contributions on behalf of such trust or institutions. E. Political parties [Section 139(4B)]: The chief executive officer of every political party shall, if the total income in respect of which the political party is assessable (the total income being computed without giving effect to the provisions of Section 13A) exceeds the maximum amount which is not chargeable to tax, furnish a return of such income of the previous year. F. Scientific research association n, news agency, etc. [Section 139(4C)] : With effect from the assessment year 2003-2004, every scientific research association referred to in Section 10(21), news agency referred to in Section 10(22B), institution or association referred to in Section 10(23A) for the control or regulation of the profession of law, medicine, accountancy, engineering or architecture, etc., institution referred to in Section 10(23B) for the development of khadi and village industries, institutions, funds/trusts referred to in Sub-clauses (iiiae), (iv), (v) and (vi) of Section 10(23C) for charitable purposes, public religious purpose and being a university or other educational institution existing solely for educational purposes respectively, any trade union referred to in Section 10(24)(a) or Section 10(24)(b), body or authority, Board or Trust or Commission referred to in Section 10(46) or infrastructure debt fund referred to in Section 10(47) shall, if the total income in respect of which such association/institution/fund, etc., is assessable, without giving effect to the provisions of Section 10, exceeds the maximum amount which is not chargeable to tax, furnish a return of such income of the previous year. With effect from the assessment year 2015-2016, a Mutual Fund referred to in Section 10(23D) or a securitization trust referred to in Section 10(23DA) or a venture capital company referred to in Section 10(23FB) shall furnish return on the basis of similar economic criteria. G. College, Universities and other institutions related to scientific research [Section 139(4D)]: Every college, university or other institutions referred to in clauses (ii) and (iii) of Section 35(1), [which are otherwise not required to furnish return of income or loss] shall furnish the return in respect of its income or loss in every previous year H. Business Trust [Section 139 (4E)] :With effect from the assessment year 2015-2016, every business trust, which is not otherwise required to furnish return of incomes or loss , shall furnish the return of its income in respect of the income or loss in every previous year. I. Investment Fund [ Section 139(4F): Every investment fund referred to in Section 115UB, which is not required to furnish return of income or loss under any other provisions of this section, shall furnish the return of income in respect of its income or loss in every previous year.  Power of the Central Government to exempt: Under Section 139(1C), the Central Government may, by notification in the Official Gazette, may exempt any class or classes of persons from the requirement of furnishing return of income having regard to such conditions as may be specified in that notification [Inserted by the Finance Act 2011 w.e.f. 1 June, 2011]

24.3 DUE DATE FOR FILING RETURN OF INCOME [EXPLANATION 2 TO SECTION 139(1)] The due dates for submission of return are as under: Assessee *A company Where the assessee is a person (other than a company whose accounts are required to be audited under any law) Where the assessee is a working partner of a firm, whose accounts are required to be audited under any law DIRECT TAXATION

Due date of submission of return 30th September of the assessment year 30th September of the assessment year 30th September of the assessment year 312

Any other assessee *In the case of a company which has entered into an international agreement and is required to furnish u/s 92E a report from an accountant

31st July of the assessment year 30th November of the assessment year

24.4 FORMS FOR FILING RETURN [RULE 12(1)] For the assessment year 2016-17, the forms of returns shall be as under: Type of assessee

Form No.

For individuals having income under the head ―salaries‖/or family pension/Income from ITR-1 (SAHAJ) house property from only one house and without any claim for carry forward of loss/ Income from other sources, except winnings from lottery or income from race horses and does not have any loss under the head [provided that in the case of a resident and ordinarily resident, the assessee is not having assets (including financial interest in any entity) located outside India ; or is not signing authority in any account located outside India ; or has claimed any relief under Section 90, 90A or deduction of tax under Section 91; or has income not chargeable to tax, exceeding ` 5,000]. For Individuals and HUFs not having Income from Business or Profession In the case of a person being an individual not being an individual to whom clause (a) applies or a Hindu undivided family where the total income does not include any income chargeable to income-tax under the heads "Profits or gains of business or profession" and "Capital gains" In the case of a person being an individual or a Hindu undivided family who is a partner in a firm 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 the case of individuals/HUFs or a firm, other than a limited liability partnership firm , deriving business income which is computed under the provisions of Section 44AD and 44AE [provided that in the case of a resident and ordinarily resident, (SUGAM) the assessee is not having assets (including financial interest in any entity) located outside India ; or is not signing authority in any account located outside India ; or has claimed any relief under Section 90, 90A or deduction of tax under Section 91; or has income not chargeable to tax, exceeding ` 5,000]. In the case of a person not being an individual or a Hindu undivided family or a company or a person who are required to submit return in ITR-7, be in Form No. ITR-5 and be verified in the manner indicated therein In the case of a company, not being a company which is required to submit returns in ITR-7,

ITR1(SAHAJ)

In the case of a person including a company required to file a return under sub-Section (4A) or sub-Section (4B) or sub-Section (4C) or sub-Section (4D) or sub-Section (4E)or subSection (4F)] of Section 139,

ITR -7

ITR-2 ITR 2-A

ITR-3

ITR -4S (SUGAM)

ITR-5

ITR-6

Other information: (a) The return of income shall not be accompanied by a statement showing the computation of the tax payable on the basis of the return, or proof of the tax, if any, claimed to have been deducted or collected at source or the advance tax or tax on self-assessment, if any, claimed to have been paid or any document or copy of any account or form or report of audit required to be attached with the return of income under any of the provisions of the Act. (b) The return shall be furnished electronically where an assessee is required to furnish a report of audit specified under sub-clause (iv), (v), (vi) or (via) of clause (23C) of Section 10, Section 10A, Section 10AA, clause (b) of sub-Section (1) of Section 12A, Section 44AB, Section 44AD, Section 50B, Section 80-IA, Section 80-IB, Section 80-IC, Section 80-ID, Section 80JJAA, Section 80LA, Section 92E, DIRECT TAXATION

313

Section 115JB or Section 115VW or to give a notice under clause (a) of sub-Section (2) of Section 11] of the Act.

24.5 MODE OF SUBMISSION OF RETURN [RULE 12(3)]

1.

2

Person Condition Marnier of furnishing return of income Individual or Hindu (a) Accounts are required to be Electronically under digital signature undivided family audited under Section 44AB of the (A) Electronically under digital signature, Act. or (b) Where (a) a not applicable (B) Transmitting the data in the return and— electronically under electronic (i) t(I) the return is furnished in Form So. verification code, or ITR-3 or Form So. FTR-4, or (C) Transmitting the data in the return (to) (II) the person, being a resident and electronically and thereafter ordinarily resident has, (A) any assets submitting the verification of the (including financial interest in any return in Form ITR- V entity) located outside India, or (B) signing authority in any account located outside India, or (C) any income from any source outside India, (III) any relief, in respect of tax paid outside India, under section 10 or 10A or deduction of tax under section 11 is claimed, or (IV) any report of audit referred to in proviso to sub-rule (2) is required to be furnished electronically, or (V) total income assessable under the Act during the previous year of the person (other than the person, being an individual of the age of 80 years or more at any time during the previous year and furnishing the return in Form ITR-1 or ITR-2), — (i) Exceeds ` 5 lakh or (ii) any refund is claimed in the return of income. (c) In any other case. (A) Electronically under digital signature, or (B) Transmitting the data in the return electronically under electronic verification code, or (C) Transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR.-V (D) Paper form; Company

In all cases.

Electronically under digital signature

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314

3 A person required (a) In cast of a political party; to furnish the return (b) In any other case in Form ITR-7

4 Firm or limited liability partnership or any person (other than a person mentioned in Sl. 1 to 3 above) who is required to file return in Form ITR-5

Electronically under digital signature. (A) Electronically under digital signature, or (B) Transmitting the data in the return electronically under electronic reification code, or (C)Transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V (a) Accounts are required to be Electronically under digital signature. audited under section 44AB of the (A) Electronically under digital signature, Act; or (b) In any other case. (B) Transmitting the data in the return electronically under electronic verification code, or (C) Transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR- V

24.6 CONSEQUENCES OF NOT FILING RETURN OF INCOME OR FILING OF RETURN AFTER THE DUE DATE The consequences shall be as follows: (a) Interest for defaults in furnishing return of income [Section 139(8)(a) and Section 234A]: Under Section 234A, the assessee is liable to be charged interest as under: Rate of interest Simple interest 1% per month or part of a month. Period for which interest is charged

Amount on which interest is charged

(i) Where the return of income for any assessment year is furnished after the due date of furnishing return u/s 139(1): For the period commencing on the date immediately following the due date for submission of return u/s 139(1) to the date of submission of return. (ii) Where the return of income is not furnished: For the period commencing on the date immediately following the due date for submission of return u/s 139(1) to the date of completion of the assessment under Section 144. The amount of interest shall be calculated on the tax on total income as determined under Section 143(1) or on regular assessment u/s 143(3) or u/s 144 or u/s 147, as reduced by: (i) advance tax and tax deducted at source; (ii) relief u/s 90/90A/91; and (iii) any tax credit allowed to be set off u/s 115AA.

(b) Penalty for failure to furnish return of income [Section 271F]: If a person who is required to furnish a return of his income as required under Section 139(1) or under the first proviso to Section 139(1), fails to furnish such return before the end of the relevant assessment year, the Assessing Officer may direct that such person shall pay a penalty of ` 5,000.

24.7 RETURN OF LOSS [SECTION 139(3)] A person wishing to carry forward and set off of losses under the following heads must file return within the due date prescribed under Section 139(1): (i) loss under the head ―Profits and gains of business or profession‖ [u/s 72(1)]; DIRECT TAXATION

315

(ii) any loss computed in respect of speculation business. [u/s 73(2)] ; (iii) any loss in respect of a business specified in Section 35AD which has not been fully set off [Section 73A (2)]; (iv) losses under the head ―Capital gains‖ [u/s 74(1)]; (v) loss on maintaining race horses [u/s 74A (3)]; Except in the case of a company and cases covered under the first proviso to Section 139(1), it is not necessary to furnish return if the total income is below the taxable limit. But in the case of losses mentioned above, the right of the assessee to carry forward losses shall be lost unless return is furnished within the due date prescribed in Explanation 2 to Section 139(1).

24.8 BELATED RETURN [SECTION 139(4)] A return submitted after the due date u/s 139(1) is known as belated return. In this case, the assessee may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. In this case, the assessee shall, however, be liable to pay penal interest u/s 234A. Further, in case of belated returns the benefits of carry forward of losses (other than loss under the head ―Income from house property) and exemptions/deductions under sections 10A, 10B, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID and 80IE are not available.

24.9 REVISED RETURN [SECTION 139(5)] If a person, having furnished return under Section 139(1) or under section 139(4) discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. Point to note: With effect from the assessment year 2017-18, section 139(5) has been amended by the Finance Act 2016 to the flowing effects:  For the Assessment Year 2017-18 and onwards, returns can be revised at any time before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier  Only a return filed under section 139(1) or belated return filed under section 139(4) can be revised.  A return of income filed pursuant to notice under section 142(1) of Act cannot be revised under section 139(5).

24.10 DEFECTIVE RETURN [SECTION 139(9)] Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of 15 days from the date of such intimation. If the defect is not rectified within the period of 15 days of such intimation, then, on an application being made by the assessee, the Assessing Officer, at his discretion, may extend the time for rectification of defect. If the defect is not rectified within the said period of 15 days or such extended time, then the return shall be treated as an invalid return and the provision of the Act shall apply as if the assessee had failed to furnish the return. However, where the assessee rectifies the defect after the expiry of the specified time [i.e., 15 days from the date of intimation or such extended time as allowed], but before the completion of assessment, the Assessing Officer may condone the delay and treat the return as a valid return.  When a return is considered to be defective [Explanation to Section 139(9)] : A return of income shall be regarded as defective unless all the following conditions are fulfilled:

DIRECT TAXATION

316

(a) the annexures, statements and columns in the return of income relating to computation of income chargeable under each head of income, computation of gross total income and total income have been duly filled in; (b) the return is accompanied by a statement showing the computation of the tax payable on the basis of the return; (c) the return is accompanied by the report of the audit u/s 44AB, or where the report has been furnished prior to the furnishing of the return, by a copy of such report together with proof of furnishing the report; (d) the return is accompanied by a proof of the tax, if any, claimed to have been deducted or collected at source and the advance tax, self-assessment tax, if any, claimed to have been paid. However, if the return is not accompanied by proof of tax, if any, claimed to have been deducted at source [see box below] the return shall not be regarded as defective, if a certificate for tax deducted was not furnished under Section 203 or Section 206C (Form 16 or 16A) to the person furnishing his return of income and such certificate is produced within a period of two years from the end of the assessment year in which the income is assessable. (e) where regular books of account are maintained by the assessee, the return is accompanied by copies of:  manufacturing account, trading account, profit and loss account or as the case may be, income and expenditure account or any other similar account and balance sheet;  in the case of a proprietary business or profession, the personal account of the proprietor; in the case of a firm association of persons or body of individuals, personal accounts of the partners/ members; and in the case of a partner or member of a firm, association of persons or body of individuals, also his personal account in the firm /AOP/ BOI; (f) where the accounts of the assessee have been audited, the return is accompanied by copies of the audited profit and loss account and balance sheet and the auditor‘s report, and where an audit of cost accounts of the assessee has been conducted under Section 233B of the Companies Act, also the report under that Act; (g) where regular books of account are not maintained by the assessee, the return is accompanied by a statement indicating the amounts of the turnover or, as the case may be, gross receipts, gross profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed and also disclosing the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year. However, by virtue of the newly inserted Section 139C, the Board may make rules for dispensing with furnishing, statements, receipts, certificates, audited reports or any other documents along with return. Similarly, by virtue of Section 139D, the Board is empowered to make rules for the purposes of filing return in electronic form. Point to Note: As per the current norms prescribed by CBDT vide Income-tax Rules, 1962 for filing return of income, no documents shall be attached along with the Return of Income. Hence, documents like computation of income, balance sheet and accounts, audit report, TDS certificate, tax payment challan, proof of investment, etc., are not to be attached along with the return of income. No penalty will be levied for non-submission of these documents along with the return of income and the return will not be treated as defective due to non-attachment of aforesaid documents, statements, etc.[Ref: Income-Tax Department Tutorial, Return of Income].

24.11 RETURN: BY WHOM TO BE VERIFIED [SECTION 140] With effect from the assessment year 2014 -2015, in place of the requirement of ‗signing and verifying‘, the return needs to be verified only. Accordingly, the return under Section 139 shall now be verified — A. In the case of an individual: (a) by the individual himself; (b) where the individual is absent from India, by the individual himself or by some person duly authorised by him in this behalf ; DIRECT TAXATION

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(c) where the individual is mentally incapacitated from attending to his affairs, by his guardian or any other person competent to act on his behalf, and (d) where, for any other reason, it is not possible for the individual to sign the return, by any other person duly authorised by him in this behalf. In the cases mentioned in (b) and (d) above, the person signing the return shall hold a valid power of attorney from the individual to do so, which shall be attached to the return. B. In the case of a HUF: (a) by the Karta of the family ; (b) where the Karta is absent from India or is mentally incapacitated from attending to his affairs, by any adult member of such family. C. In the case of a company: (a) by the managing director or where for any unavoidable reason such managing director is not able to sign and verify the return or, where there is no managing director, by any director of the company ; (b) where the company is not resident in India, by a person who holds a valid power of attorney from such company to do so, which shall be attached to the return ; (c) where the company is being wound up or, where any person has been appointed as the receiver of any assets of the company, by the liquidator referred to in Section 178(1) ; (d) where the management of the company has been taken over by the Central Government or any State Government under any law, by the principal officer of such company. D. In the case of a firm: (a) by the managing partner ; (b) where for unavoidable reason such managing partner is unable to sign the return or, where there is no managing partner as such, by any partner who is not a minor. E. In the case of Limited Liability Partnership : (a) by the designated partner; (b) where for any unavoidable reason such designated partner is not able to sign and verify the return, or where there is no designated partner as such, by any partner. F. In the case of a local authority: by the principal officer. G. In the case of a political party referred to in Section 139(4B): by the chief executive of the party. H. In the case of any other association: by any member of the association or the principal officer of the association. I. In the case of any other person: by that person or by some person competent to act on his behalf.

24.12 PERMANENT ACCOUNT NUMBER [SECTION 139A] A permanent account number (PAN) is a number which the Assessing Officer may allot under the provisions of Section 139A and includes a permanent account number under the new series having ten alphanumeric characters. A. Application for PAN [Section 139A(1), Rule 114] : The following persons shall apply for PAN in Form No. 49A: (a) every person, if his total income or total income of any other person in respect of which he is assessable under this Act during any previous year exceeded the maximum amount which is not chargeable to tax; or (b) every person carrying on any business or profession, whose total sales, turnover or gross receipts are or are likely to exceed ` 5,00,000 in any previous year; or (c) every person, who is required to furnish a return of income under Section 139(4A) [i.e., religious and charitable institutions]; or (d) in the case of a person who is entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVII-B in any financial year.

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Any person belonging to category (a) above shall apply for PAN on or before 31st May of the assessment year for which the income is assessable and those belonging to category (b), (c) and (d) above, shall apply for the same before the end of that financial year. Additional considerations: (i) The Assessing Officer, having regard to the nature of the transaction, may also allot a permanent account number to any other person ; such a person may or may not be liable to pay tax [Section 139(2)]. (ii) Any person, not being persons covered under Section 139A(1) and 139A(2), may apply to the Assessing Officer for allotment of PAN and the Assessing Officer shall allot PAN to such person forthwith [Section 139A(3)]. (iii) Persons covered under sub-sections (1) and (2) of Section 139A and those residing in the specified areas shall apply to the Assessing Officer for allotment of PAN under the new series by such time as the Board may notify in the Official Gazette and upon allotment of such PAN, the PAN under old series, if any, allotted earlier shall cease to have effect. A person to whom PAN under the new series has already been allotted need not apply for such number again [Section 139A(4)]. Section 139A(7) further provides that no person who has already been allotted a PAN under new series shall apply, obtain or possess another PAN. It is also clarified that every person who has been allotted a permanent account number for reasons other than furnishing return in respect of fringe benefits, shall not be required to obtain another permanent account number and the permanent account number already allotted to him shall be deemed to be the permanent account number in relation fringe benefit tax [Explanation to Section 139A(7]. B. Obligation to give intimation of PAN in certain cases : The provisions of the Act in this matter are as under: (a) Intimation of PAN to the person responsible for deduction of tax at source [Section 139A(5A)]:Every person receiving any sum or income or amount from which tax has been deducted at source, shall intimate his PAN to the person responsible for deducting such tax. Till the PAN is allotted, such persons shall intimate the General Index Register Number (GIR No.). The provisions of this section, however, does not apply to a non-resident referred to in Section 115AC(4) or Section 115BBA(2) or Section 115G. (b) Obligation of the person who has deducted tax at source [Section 139A(5B)] :Where any sum or amount has been paid after deduction of tax, every person deducting such tax shall quote the PAN of the person to whom such sum or income or amount has been paid by him in : (i) the statement furnished in accordance with the provisions of Section 192(2C); (ii) all certificates furnished in accordance with the provisions of Section 203; (iii) all returns prepared and delivered or caused to be delivered in accordance with the provisions of Section 206 to any income-tax authority. (iv) all statements prepared and delivered or caused to be delivered in accordance with the provisions of Section 200(3). Point to Note: The provisions of Section 139A(5A) and 139A(5B), do not apply to a person whose total income is not chargeable to tax or who is not required to obtain PAN under any provision of the Income-tax Act. Such persons shall, however, furnish a declaration in the form and manner prescribed under Section 197A to the effect that tax on his estimated total income of the previous year in which such income is to be included in computing his total income will be nil. (c) Obligation of the buyer of commodities referred to in Section 206C [Section 139A(5C)] : Every buyer on licensee of lessee of alcoholic liquor, timber or any other forest products or scrap referred to in Section 206 shall intimate his PAN to the seller of such commodities. (d) Obligation of the seller of commodities referred to in Section 206C [Section 139A(5D)]: Every seller collecting tax in accordance with the provisions of Section 206C shall quote the PAN of every buyer of such commodities in: (i) all certificates furnished in accordance with the provisions of Section 206C (5);

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(ii) all returns prepared and delivered or caused to be delivered in accordance with the provisions of Sections 206C(5A) or 206C(5B) to an income-tax authority. (iii) all statements prepared and delivered or caused to be delivered in accordance with the provisions of Section 206C (3). C. PAN to be quoted in certain cases [Section 139A(5)] : Every person shall quote his PAN in : (i) all his returns to, correspondence with, any income-tax authority; (ii) all challans for the payment of any sum due under the Income-tax Act ; (iii) all documents pertaining to such transactions as may be prescribed by the Board in the interests of revenue, and entered into by him. Persons specified above shall quote their GIR Number till PAN is allotted to them. Further, such persons shall intimate the Assessing Officer any change in his address or in the name and nature of his business on the basis of which the PAN was allotted to them. D. Transactions where quoting of PAN is compulsory [Rule 114B] : Every person shall quote his permanent account number in all documents pertaining to the transactions specified in the Table below [vide Income-tax [Twenty Second Amendment) Rules, 2015, w.e.f. 1-1-2016]: SL. No. 1.

2.

3.

4.

5.

Nature of Transactions Sale or purchase of a motor vehicle or vehicle, which requires registration by a registering authority under Chapter IV of that Motor Vehicles Act, other than two wheeled vehicles Opening an account [other than a time-deposit referred to at Sl. No.12 and a Basic Savings Bank Deposit Account] with a banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in Section 51 of that Act). Making an application to any banking company or a cooperative bank to which the Banking Regulation Act, 1949), applies (including any bank or banking institution referred to in Section 51 of that Act) or to any other company or institution, for issue of a credit or debit card Opening of a demat account with a depository, participant, custodian of securities or any other person registered under subSection (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992. Payment to a hotel or restaurant against a bill or bills at any one time

6.

Payment in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time

7.

Payment to a Mutual Fund for purchase of its units.

8.

Payment to a company or an institution for acquiring debentures or bonds issued by it. Payment to the Reserve Bank of India, constituted under Section 3 of the Reserve Bank of India Act, 1934 (2 of 1934) for acquiring bonds issued by it. Deposit with a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in Section 51 of that Act).

9.

10.

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All such transactions

All such transactions

All such transactions

Payment in cash of an amount exceeding ` 50,000 Payment in cash of an amount exceeding ` 50,000. Amount exceeding ` 50,000 Amount exceeding ` 50,000 Amount exceeding ` 50,000 Deposits in cash ` 50,000 during any one day.

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11.

12.

13.

14.

15.

16.

17.

Purchase of bank drafts or pay orders or banker's cheques from a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in Section 51 of that Act). Time deposit with: (i) a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (ii) ( (ii) a Post Office; (iii) a Nidhi referred to in Section 406 of the Companies Act, 2013; or (iv) a non-banking financial company which holds a certificate of registration under Section 45-IA of the Reserve Bank of India Act to hold or accept deposit from public. Payment for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of prepaid payment instruments issued by Reserve Bank of India under Section 18 of the Payment and Settlement Systems Act, 2007, to a banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in Section 51 of that Act) or to any other company or institution. Payment as life insurance premium to an insurer

A contract for sale or purchase of securities (other than shares) as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956. Sale or purchase, by any person, of shares of a company not listed in a recognised stock exchange. Sale or purchase of any immovable property

18.

Payment in cash for an amount exceeding ` 50,000 during any one day. Amount exceeding ` 50,000 or aggregating to more than ` 5 lakhs during a financial year

Payment in cash or by way of a bank draft or pay order or banker's cheque of an amount aggregating to more than ` 50,000 in a financial year. Amount aggregating to more than ` 50,000 in a financial year Amount exceeding ` 1,00,000 per transaction Amount exceeding ` 1,00,000 per transaction Amount exceeding ` 10 lakh or valued by stamp valuation authority referred to in Section 50C of the Act at an amount exceeding ` 10 lakh Amount exceeding ` 2 lakh per transaction

Sale or purchase, by any person, of goods or services of any nature other than those specified at Sl. Nos. 1 to 17 of this Table, if any (a) where a person, entering into any transaction referred to in this rule, is a minor and who does not have any income chargeable to income-tax, he shall quote the permanent account number of his father or mother or guardian, as the case may be. (b) Any person who does not have a permanent account number and who enters into any transaction specified in this rule, he shall make a declaration in Form No.60 giving therein the particulars of such transaction. E. Persons exempt from quoting PAN : The provisions of Section 139A for quoting PAN will not apply to the following class or classes of persons: (a) Persons who have agricultural income and are not in receipt of any other income chargeable to tax. Such persons shall, however, make declaration in Form No. 61 in respect of transactions referred to in Rule 114B. (b) Non-residents referred to in Section 2(30). (c) Central Government, State Government and Consular Offices in transactions where they are payers.

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F. Penalty for failure to comply with the provisions of Section 139A [Section 272B] : Section 272B, effective from 1st June, 2002, provides that if a person fails to comply with the provisions of Section 139A, he may be liable to pay a penalty of ` 10,000. A person who is required to quote his PAN in any document under Section 139A (5) or give intimation of such number under Section 139A(5A) or Section 139(5C), shall be liable to pay a penalty of `10,000, if he quotes or intimates a number which is false. Example 1: R is a doctor. The gross receipts for the year 2016-17 came to ` 19,40,000. What will be the due date for filing of return of income by R for the financial year 2016-17? Answer: Since the gross receipts of the profession for the year are less than ` 50,00,000, R will not be liable to get his accounts audited. Therefore, the due date for filing the return of income of the year 2016-17 will be 31st July, 2017.Example 2 : K is running a garments factory. Turnover of his business for the year 2016-17 amounted to ` 1,80,00,000. What will be the due date for filing of return of income by K for the financial year 2016-17? Answer: Since the turnover for the year is more than ` 1,00,00,000, the accounts of K are required to be audited. Hence, the due date of filing the return of income of the year 2016-17 will be 30th September, 2017. Example 3: Q is a partner in BK Enterprises. The turnover of the firm for the financial year 2016-17 amounted to ` 85,00,000. The firm has declared income @ 8% on presumptive basis under section 44AD of the Act. Apart from remuneration, interest and share of profit from the firm, Q is not having any other source of income. What will be the due date of filing of return of income by the partnership firm and by Q for the financial year 2016-17? Answer: Since the turnover of the firm is below ` 1,00,00,000, the accounts are not liable to be audited. Hence, the due date for filing the return of income of the year 2016-17 (in case of firm as well as Q) will be 31st July, 2017. Example 4: DK Pvt. Ltd. is a company engaged in trading of minerals and is liable to furnish a report in Form No. 3CEB under section 92E.What will be the due date for filing the return of income for the financial year 2016-17? Answer: In this case DK Pvt. Ltd. will be covered in Sr. No. 2 of the table discussed earlier and, hence, the due date for filing the return of income of the year 2016-17 will be 30th November, 2016. Multiple Choice Questions 1.

Every person, being a partnership firm (including Limited Liability Partnership), has to file its return of income compulsorily, irrespective of its income being profit or loss. (a) True (b) False Answer : (a) True 2.

Every individual/HUF/AOP/BOI/artificial juridical person has to file the return of income if his total income (including income of any other person in respect of which he is assessable) without giving effect to the provisions of section 10(38), 10A, 10B or 10BA or Chapter VIA (i.e., deduction under section 80C to 80U), exceeds ________ (a) ` 2,00,000 (b) ` 2,50,000 (c)` 5,00,000 (d) The maximum amount not chargeable to tax DIRECT TAXATION

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Answer: (d) The maximum amount not chargeable to tax 3.

The Chief Executive Officer of every political party has to file the return of income of the party if the total income of the party without giving effect to the provisions of section ____________ exceeds the maximum amount not chargeable to income-tax. (a) 11 (b) 12 (c) 13 (d) 13A Answer: (d) 13A 4.

There is not bar on obtaining more than one PAN i.e. a person can hold more than one PAN. (a) True (b) False Answer: (b) False

5.

What is the due date of filing the return of income in case of a company other than a company who is required to furnish a report in Form No. 3CEB under section 92E? (a) September 30 of the assessment year (b) November 30 of the assessment the year (c) July 31 of the assessment year (d) June 30 of relevant assessment the year Answer: (a) September 30 of the assessment year 6.

What is the due date of filing the return of income in case of a person whose accounts are to be audited under the Income-tax Law or under any other law (other than a person who is required to furnish a report in Form No. 3CEB under section 92E)? (a) September 30 of the assessment year (b) November 30 of the assessment the year (c) July 31 of the assessment year (d) June 30 of relevant assessment the year Answer : (a) September 30 of the assessment year 7.

Permanent Account Number (PAN) is a _________digit unique alphanumeric number issued by the Income Tax Department. (a) Twenty (b) Fifteen (c) Ten (d) Five Correct answer Answer: (c) Ten 8.

If a person fails to comply with the provisions relating to PAN (i.e. obtaining PAN, quoting PAN, etc.), then penalty can be levied under section _______ (a) 272 (b) 272A (c) 272B (d) 271 Answer: (c): 272B. 9.

Application for obtaining PAN is to be made in Form _______ (in case of a resident). (a) 49 (b) 49A (c) 49B (d) ITR – 1 Answer: (b): 49A.

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STUDY NOTE: 25 REFUND OF TAX [SECTIONS 237-245] THIS STUDY NOTE INCLUDES: 25.1 Introduction 25.2 When claim for refund arises [Section 237] 25.3 When a person other than the assessee is entitled to refund [Section 238] 25.4 Form of claim and time limit for refund [Section 239, Rule 41] 25.5 Refund on appeal [Section 240] 25.6 Correctness of assessment not to be questioned [Section 242] 25.7 Interest on refunds [Section 244A] 25.8 Set of for refunds against remaining payable [Section 245]

25.1 INTRODUCTION A refund under the Income-tax Act arises only when the tax paid exceeds the amount for which the assessee is properly chargeable. The provisions of the Income-tax Act relating to refund of tax are discussed below.

25.2 WHEN CLAIM FOR REFUND ARISES [SECTION 237] If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount for which he is properly chargeable under this Act for that year, he is entitled to a refund of the excess tax paid.

25.3 WHEN A PERSON OTHER THAN THE ASSESSEE IS ENTITLED TO REFUND [SECTION 238] Normally a refund can be claimed by the assessee only. However, under the following circumstances, a person other than the assessee shall be entitled to refund: (i) Where the income of one person is included under any provision of the Income-tax Act in the total income of any other person, the later alone shall be entitled to claim or receive refund. (ii) Where the value of fringe benefits provided or deemed to have been provided by one employer is included under any provisions of Chapter XII-H in the value of fringe benefits provided or deemed to have been provided by any other employer, the later alone shall be entitled to claim or receive refund in respect of such fringe benefits. Point to Note: Fringe benefit tax has been withdrawn since the assessment year 2010-2011. (iii) Where through death, incapacity, insolvency, liquidation or other causes, a person is unable to claim or receive any refund due to him, his legal representative or the trustee or guardian or receiver, as the case may be, shall be entitled to claim or receive such refund for the benefit of such person or his estate.

25.4 FORM OF CLAIM AND TIME LIMIT FOR REFUND [SECTION 239, RULE 41] The claim for refund shall be made as under: (a) A claim for refund shall be made in Form No. 30 and verified in the prescribed manner. (b) The claim for refund in respect of any assessment year shall be made within one year from the last day of such assessment year. Similarly, the claim in respect of any fringe benefits, which a reassessable for the assessment year commencing on or after 1 st April 2006, shall be made within one year from the last day of the assessment year. DIRECT TAXATION

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(c) The claim for refund shall be accompanied by a return in the form prescribed under Section 139 unless the claimant has already made such a return to the Assessing Officer. (d) Where any part of the total income of a person making a claim for refund of tax consists of dividends or any other income from which tax has been deducted under the provisions of Sections 192 to 194, Section194A and Section195, the claim shall be accompanied by TDS certificate in Form No. 16 or, as the case may be, in Form No. 16A. (e) The claim for refund in Form No. 30 may be presented by the claimant in person, or through a duly authorized agent or may be sent by post. ● Claim for refund after the statutory time limit [Section 119(2)(b)]: Under Section 119(2)(b), the CBDT may, if it considers it desirable or expedient to do so for avoiding genuine hardship in any case, by general or special order, authorize any income-tax authority [not being Commissioner (Appeals)] to admit an application or claim for refund after the expiry of the period specified under the Act. The CBDT, in exercise of its power under this section and in supersession of all the circulars and instructions issued earlier under section 119(2)(b), Circular No. 9/2015 [dated 9-62015] has been issued as under: (i) The Principal Commissioners of Income-tax/Commissioners of Income-tax (Pr.CIT/CIT) shall be vested with the powers of acceptance/rejection of such applications/claims if the amount of such claims is not more than `10 lakhs for any one assessment year. The Principal Chief Commissioners of Income-tax/Chief Commissioners of Income-tax (Pr. CCIT/CCIT) shall be vested with the powers of acceptance/rejection of such applications/claims if the amount of such claims exceeds `10 lakhs but is not more than `50 lakhs for any one assessment year. The applications/claims for amount exceeding `50 lakhs shall be considered by the Board. (ii) No condonation application for claim of refund/loss shall be entertained beyond six years from the end of the assessment year for which such application/claim is made. This limit of six years shall be applicable to all authorities having powers to condone the delay as per the above prescribed monetary limits, including the Board. A condonation application should be disposed of within six months from the end of the month in which the application is received by the competent authority, as far as possible. (iii) In a case where refund claim has arisen consequent to a Court order, the period for which any such proceedings were pending before any Court of Law shall be ignored while calculating the said period of six years, provided such condonation application is filed within six months from the end of the month in which the Court order was issued or the end of financial year whichever is later. (iv) The powers of acceptance/rejection of the application within the monetary limits delegated to the Pr. CIT/CCIT/Pr.CIT/CIT in case of such claims will be subject to following conditions: (i) At the time of considering the case under Section 119(2)(b), it shall be ensured that the income/loss declared and/or refund claimed is correct and genuine and also that the case is of genuine hardship on merits. (ii) The Pr.CCIT/CCIT/Pr.CIT/CIT dealing with the case shall be empowered to direct the jurisdictional assessing officer to make necessary inquiries or scrutinize the case in accordance with the provisions of the Act to ascertain the correctness of the claim. (v) A belated application for supplementary claim of refund (claim of additional amount of refund after completion of assessment for the same year) can be admitted for condonation provided other conditions as referred above are fulfilled. The powers of acceptance/rejection within the monetary limits delegated to the Pr.CCIT/CCIT/Pr.CIT/CIT in case of returns claiming refund and supplementary claim of refund would be subject to the following further conditions: (i) The income of the assessee is not assessable in the hands of any other person under any of the provisions of the Act. (ii) No interest will be admissible on belated claim of refunds. (iii) The refund has arisen as a result of excess tax deducted/collected at source and/or excess advance tax payment and/or excess payment of self-assessment tax as per the provisions of the Act. (vi) In the case of an applicant who has made investment in 8% Savings (Taxable) Bonds, 2003 issued by Government of India opting for scheme of cumulative interest on maturity but has accounted DIRECT TAXATION

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interest earned on mercantile basis and the intermediary bank at the time of maturity has deducted tax at source on the entire amount of interest paid without apportioning the accrued interest/TDS, over various financial years involved, the time limit of six years for making such refund claims will not be applicable. (vii) This circular will cover all such applications/claims for condonation of delay under section 119(2xb) which are pending as on the date of issue of the Circular. (viii)The Board reserves the power to examine any grievance arising out of an order passed or not passed by the authorities mentioned in para 1 above and issue suitable directions to them for proper implementation of this Circular. However, no review of or appeal against the orders of such authorities would be entertained by the Board.

25.5 REFUND ON APPEAL [SECTION 240] Where refund of any amount becomes due to the assessee pursuant to an order passed in an appeal or any other proceeding under the Income-tax Act, the Assessing Officer shall refund the amount to the assessee without requiring him to make any claim in that behalf. ● When refund becomes due: Under Section 240, refund becomes due as follows: (a) Where an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment. (b) Where the assessment is annulled, then the refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee.

25.6 CORRECTNESS OF ASSESSMENT NOT TO BE QUESTIONED [SECTION 242] In a claim of refund, it shall not be open to the assessee to question the correctness of any assessment or other matter decided which has become final and conclusive or ask for a review of the same, and the assessee shall not be entitled to any relief on such claim except refund of tax wrongly paid or paid in excess.

25.7 INTEREST ON REFUNDS [SECTION 244A] Where refund of any amount becomes due to the assessee, he will be entitled to receive, in addition to the amount of refund, simple interest as under: Interest u/s 244A Reason for refund Period for which interest is payable Rate of interest (a) Refund is due for TCS u/s 206 1st April of the assessment year to the date on 1.5% p.m. or or advance tax or treated as which refund is granted part thereof paid u/s 199 (b) In other cases From the date of furnishing return of income to Do the date on which refund is granted. (c) Refund due to self-assessment From the date of furnishing of return of income or tax u/s 140A payment of tax, whichever is later to the date on which refund is granted

Points to note: (a) In the above cases, no interest shall be payable if the amount of refund is less than 10% of the tax determined u/s 143 (1) (i.e. summary assessment without calling the assessee) or on regular assessment.

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(b) Where refund arises as a result of giving effect to an order u/s 250/254 /260/262 /263/264, wholly or partly, otherwise than making a fresh assessment or reassessment, additional interest @ 3% per annum or shall be allowed on the amount of refund for the period beginning with the date following the date of expiry of time allowed u/s 153(5) to the date on which the refund is granted [ Section 244)1A)]. Note: Section 250 relates to appeal; Section 254 orders of Appellate Tribunal; Section 260 orders of high court or supreme court; 262 hearing of supreme court; 263 and 264 revision of orders. Section 153(5) relates to giving effect to the orders under the aforesaid orders. ●

Procedure to be followed in calculating interest [Rule119A]: The calculation of interest as mentioned above is subject to the following: (a) Where interest is to be calculated on annual basis, the period for which such interest is to be calculated shall be rounded off to a whole month or months and for this purpose any fraction of a month shall be ignored. The period so rounded off shall be the period in respect of which the interest is to be calculated. (b) Where interest is to be calculated for every month or part of a month comprised in a period, any fraction of a month shall be deemed to be a full month. (c) The amount of tax, penalty or other sum in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of 100 and for this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.

25.8 SET OF FOR REFUNDS AGAINST REMAINING PAYABLE [SECTION 245] Where any refund is found to be due to any person, the Assessing Officer, Deputy Commissioner (Appeals) or Chief Commissioner, as the case may be, may, in lieu of payment of refund, set off the amount to be refunded or any part of the amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due. Such a set off, however, can be made only after giving the assessee intimation in writing. Multiple Choice Questions: 1. The provisions relating to interest on delay in payment of refund are given in section: (a) 234A (b) 234B (c) 244A (d) 244B Answer: (c) 244A. 2.

Interest on refund due to TDS /TCS or advance tax shall be allowed , provided the amount of refund is not ……… of the tax determined u/s 143(1) or on regular assessment: (a) Less than 90% (b) Less than 10% (c) More than 10% (d) Less than 15% Answer: (b) Less than 10%. 3.

Interest for delay in payment of refund arising due to any tax deducted/collected at source or tax paid by way of advance tax is granted @ ….. for every month or part of a month. (a) 1.5 % (b) 1% (c) 0.75 % (d) ½ % Answer : (a) 1.5% DIRECT TAXATION

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STUDY NOTE : 26 ASSESSMENT PROCEDURE AND NOTICE OF DEMAND THIS STUDY NOTE INCLUDES: 26.1 Introduction 26.2 Enquiry before assessment [Section 142] 26.3 Summary assessment on the basis of return [Section 143(1)] 26.4 Assessment in response to notice under section 143(2) [Section 143(3)] 26.5 Best Judgment assessment [Section 144] 26.6 Assessment or reassessment of income escaping assessment [Section 147] 26.7 Assessment of scientific research association, news agency, etc. [First proviso to Section 143(3)] 26.8 Assessment in case of search or requisition [Section 153A] 26.9 Rectification of mistake [Section 154] 26.10 Notice of demand [Section 156] 26.11 Intimation of loss [Section 157]

26.1 INTRODUCTION Although assessment is an important step, the term has not been defined in the Act, except that under section 2(8), it includes reassessment. However, generally it means the whole procedure laid down under the Act for imposing liability upon the assessee. Under the Income-tax law, there are five major types of assessments as mentioned below:  Summary assessment under section 143(1)  Scrutiny assessment under section 143(3)  Best judgment assessment under section 144  Income escaping assessment under section 147  Assessment in case of search or requisition under section 153A

26.2 ENQUIRY BEFORE ASSESSMENT [SECTION 142] Section 142 deals with the general procedure of assessment as under: A. Issue of notice: [Section 142(1)]: For the purpose of making an assessment, the Assessing Officer may serve on any person who has made a return under Section 115WD or Section 139 or in whose case time allowed under Section 139(1) for furnishing return has expired a notice for the following purposes: (i) where such person has not made a return within the time allowed under Section 139(1) or before the end of the assessment year to furnish a return of his income or the income of any other person in respect of which he is assessable under this Act, in the prescribed form within the time specified in the notice; or (ii) to produce or cause to be produced, such accounts or documents as the Assessing Officer may require; or (iii) to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require. B. Power to make inquiry [Sections 142(2), 142(3)]: For the purpose of obtaining full information in respect of income or loss of any person, the Assessing Officer may make such inquiry as he considers necessary [Section 142(2)]. Except in the case of best judgment assessment under Section 144, the assessee shall, however, be given an opportunity of being heard in respect of any material gathered on the basis of inquiry under Section 142(2) or any audit under Section 142(2A) and proposed to be utilised for the purpose of the assessment [Section142(3)]. DIRECT TAXATION

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C. Audit of accounts [Sections 142(2A) to 142(2D)] : Having regard to the nature and complexity of the accounts, volume of the accounts, doubts about correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, with the previous approval of the Chief Commissioner or Commissioner, the Assessing Officer may, after giving the assessee a reasonable opportunity of being heard, direct the assessee to get the accounts audited by an accountant to be nominated by the Chief Commissioner or Commissioner and to furnish a report of such audit in Form No. 6B duly signed and verified by such accountant [Section 142(2A)].  The audit under Section 142(2A) is independent of any audit under any other law [Section 142(2B)].  The audit report under Section 142(2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer. However, if there is sufficient reason, the Assessing Officer, either suomotu or on an application made by the assessee in this behalf, may so extend the time that the aggregate of the period originally fixed and the period so extended does not exceed 180 days from the date on which direction under Section 142(2A) was received by the assessee [Section 142(2C) as amended by the Finance Act 2008, w.e.f. 1.4.2008].  The expenses of such audit, including the remuneration of the accountant shall be determined by the Chief Commissioner or Commissioner and to be paid by the assessee. In default of such payment by the assessee, it shall be recovered from the assessee in the manner provided in Chapter XVII-D of the Income-tax Act for recovery of arrears of tax. However, in relation to any direction for audit under Section 142(2A), which is issued by the Assessing Officer on or after 1st June, 2007, the expenses of, and incidental to, such audit (including the remuneration of the Accountant) shall be determined by the Chief Commissioner or Commissioner in accordance with such guidelines as may be prescribed and the expenses so determined shall be paid by the Central Government [Section 142(2D)].

26.3 SUMMARY ASSESSMENT ON THE BASIS OF RETURN [SECTION 143(1)] Where a return has been submitted under Section 139 or in response to a notice under Section 142(1), the Assessing Officer can complete the assessment without passing a regular assessment order or calling the assessee. The assessment under section 143(1), which is also known as summary assessment, is subject to the following conditions and propositions: (a) Correction of arithmetical mistakes and adjustment of incorrect claim through centralised processing of returns [Section 143(1)(a)]:In order to correctly compute the total income, all returns submitted under the provision of Section 139 or in response to a notice under section 142(1) shall be subjected to centralised processing in order to check for: (i) any arithmetical error in the return; (ii) an incorrect claim which is apparent from any information in the return; (iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139; (iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return; (v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or (vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return The aforesaid adjustments will be made only in the course computerized processing without any human interface, but with prior intimation to the assessee either in writing or in electronic mode.

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(b) Computation of tax and interest due [Section 143(1)(b)]: On the basis of computation of total income as above, the tax and interest, if any, shall be computed. (c) Determination of sum payable by, or refund due to, the assessee [Section 143(1)(c)] : The sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, [as computed in (b) above] by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Chapter VIII-A, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest. (d) Intimation to the assessee [Section 143(1)(d)] :An intimation shall be sent to the assessee when : (i) on the basis of adjustment made in (c) above, any sum is payable by, or any refund is due to, the assessee [Section 143(1)(d)] ; (ii) the loss declared in the return by the assessee is reduced but no tax or interest is payable by, or no refund is due to, him [First proviso to Section 143(1)]. Where any sum is determined to be payable by the assessee, intimation to this effect shall be deemed to be a notice of demand issued under Section 156 and all the provisions of the Act shall apply accordingly. (e) When no intimation is required [Explanation (b) to Section 143(1)]: Where, on the basis adjustments made in (a) or (c) above, it is found that no sum is payable by, or refundable to, the assessee, no intimation is required to be sent to the assessee. In such a case, the acknowledgement of the return shall be deemed to be the intimation. (f) Time limit for intimation [Second proviso to Section 143(1)]: The time limit for sending intimation under section 143(1) to the assessee is one year from the end of the financial year in which the return is made.

26. 4 ASSESSMENT IN RESPONSE TO NOTICE UNDER SECTION 143(2) [SECTION 143(3)] An assessment under this section can be either (A) an assessment through limited scrutiny or (B) assessment through comprehensive scrutiny.

A. Assessment through limited scrutiny [*Section 143(3)(i)]: Assessment through limited scrutiny applies where a return has been furnished under section 139 or in response to a notice under Section 142(1). The assessment in this case involves the following procedure: (a) The Assessing Officer has reason to believe that any claim of loss, exemption, deduction, allowance or relief claimed in the return, is inadmissible. (b) A notice u/s 143(2)(i) is served on the assessee requiring him, on a date specified in the notice, to produce or caused to be produced evidence or particulars of such claim of loss, exemption, deduction, allowance and relief in support of his claim. The time limit for sending notice under this section is 6 months [as amended by the Finance Act 2016: Vide section 143(2)] from the end of the month in which the return is furnished. (c) After taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss and the sum payable by the assessee on the basis of such assessment. * Note that in view of the amendment of section 143(2), the provisions of section 143(3)(i) appears to be redundant.

B. Assessment through comprehensive scrutiny [Section 143(3)(ii)]: The scheme of assessment through comprehensive scrutiny is applicable where a return is filed under section 139 or in pursuance of a notice under Section 142(1). The procedure involved in this case is as under: DIRECT TAXATION

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(a) The Assessing Officer considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner. (b) A notice u/s 143(2)(ii) is served on the assessee requiring him, on a date specified in the notice, either to attend the office of the Assessing Officer or to produce or cause to be produced any evidence on which the assessee may rely in support of his return. The time limit for sending notice under Section 143(2)(ii) is 6 months from the end of the month in which the return is furnished. (c) On the day specified in the notice or soon afterwards, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund any amount due to him on the basis of such assessment. (d) The time limit for completion of assessment under section 143 shall be within 2 years from the end of the relevant assessment year.

26. 5 BEST JUDGMENT ASSESSMENT [SECTION 144] An assessment carried out by applying the wide discretionary power of the Assessing Officer is known as Best Judgment Assessment. This assessment is carried out in cases where the taxpayer fails to comply with the requirements of section 144. (A) Reasons for best judgment assessment: The best of his judgment is carried out in the following cases:  the assessee fails to file the return required within the due date prescribed under section 139(1) or a belated return under section 139(4) or a revised return under section 139(5); or  the assessee fails to comply with all the terms of a notice issued under section 142(1) or the directions under section 142(2A); or  having made a return, the assessee fails to comply with all the terms of notice issued under section 143(2). (B) Procedure of assessment under section 144  Best judgment assessment cannot be made unless the assessee is given a notice calling upon him to show cause, on the date and time to be specified in the notice, why the assessment should not be completed to the best judgment of the Assessing Officer.  No notice as given above is required in a case where a notice under section 142(1) has been issued prior to the making of an assessment under section 144.  If the Assessing Officer is not satisfied by the arguments of the taxpayer and he has reason to believe that the case demands a best judgment, then he will proceed to carry out the assessment to the best of his knowledge.  If the criteria of the best judgment assessment are satisfied, then the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment.  Under section 153, the time limit for completion of assessment under section 144 is two years from the end of the relevant assessment year. (C) Refund: No refund can be granted in the case of best judgment assessment. (D) Remedies available to the assessee: In the case of best judgment assessment, the following remedies are available to the assessee: (a) The assessee can file an appeal under Section 246A. (b) He can make an application to the Joint Commissioner for revision under Section 264.

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26. 6 ASSESSMENT OR REASSESSMENT OF INCOME ESCAPING ASSESSMENT [SECTION 147] Where the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, then, subject to the provisions of Sections 148 to 153, 153A and 153B, he may: (a) assess or reassess such income; (b) re-compute the loss or depreciation allowance or any other allowance for the relevant assessment year; (c) assess any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of assessment proceedings under Section 147 ; (d) assess or reassess such income, other than the income involving matters which are the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment [Second proviso to Section 147].  Where income deemed to have escaped assessment [Explanation 2 to Section 147] : For the purpose of Section 147, the following shall also be deemed to be the cases of income escaping assessment: (a) where no return of income has been furnished by the assessee, although his taxable income exceeded the exemption limit; (b) where a return has been furnished by the assessee, but no assessment has been made and it is noticed that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (c) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E; (d) Where an assessment has been made but: (i) income chargeable to tax has been under-assessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief; or (iv) excessive loss or depreciation allowance or any other allowance under the Act has been computed. (e) where a return of income has not been furnished by the assessee or a return of income has been furnished by him and on the basis of information or document received from the prescribed income-tax authority, under section 133C (2), it is noticed by the Assessing Officer that the income of the assessee exceeds the maximum amount not chargeable to tax, or as the case may be, the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (f) where a person is found to have any asset (including financial interest in any entity) located outside India.  • •





Procedure of assessment under section 147: An assessment under section 147 cannot be proceeded with unless the Assessing Office has served upon the assessee a notice and an opportunity of being heard. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, then he may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section. He is also empowered to recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. Time-limit for completion of assessment under section 147: As provided in section 153, assessment under section 147 shall be made within a period of one year from the end of the financial year in which notice under section 148 is served on the assessee. Time-limit for issuance of notice under section 148: Notice under section 148 can be issued within a period of 4 years from the end of the relevant assessment year.

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 

If the escaped income is ` 1,00,000 or more, then notice can be issued up to 6 years from the end of the relevant assessment year. If the escaped income relates to any asset (including financial interest in any entity) located outside India, notice can be issued up to 6 years from the end of the relevant assessment year.

26.7 ASSESSMENT OF SCIENTIFIC RESEARCH ASSOCIATION, NEWS AGENCY, ETC. [FIRST PROVISO TO SECTION 143(3)] For the assessment of the following institutions/funds: (i) scientific research association referred to in Section 10(21); (ii) news agency referred to in Section 10(22B); (iii) association or institution referred to in Section 10(23A) or Section 10(23B); and (iv) fund/institution/trust/university or other educational institution/hospital or other medical institution as referred to in clauses (iv), (v), (vi) and (via), respectively, of Section 10(23C), which are required to submit return of income under Section 139(4C), an assessment order can be passed after giving effects to the provisions of Section 10. However, the Assessing Officer can make an assessment order without giving exemption under the provisions of Section 10, provided the following conditions are satisfied: (a) Where, in his view, any contravention has taken place of the provisions of Section 10(21) or Section 10(22B) or Section 10(23A) or Section 10(23B) or clause (iv) or (v) or (vi) or (via) of Section 10(23C) by the aforesaid institutions, the Assessing Officer has intimated the Central Government or the prescribed authority of the fact of such contravention. (b) The approval granted to such scientific research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded. (c) Where the Assessing Officer is satisfied that the activities of the university, college, or other institution referred to in clauses (ii) and (iii) of Section 35(1) are not being carried out in accordance with all or any conditions subject to which the university, college or institution was granted approval, he may, after giving reasonable opportunity of showing causes against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval. On such recommendations, the central Government may, by an order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer.

26.8 ASSESSMENT IN CASE OF SEARCH OR REQUISITION [SECTION 153A] This section applies in the case of a person where a search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A. In this case the Assessing Officer shall: (a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139 ; (b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made. In this case, assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this section pending on the date of initiation of the search under Section 132 or making of requisition under Section 132A, as the case may be, shall abate [Second proviso to section153A (1)].

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(c) However, if any proceeding initiated or any order of assessment or reassessment made under Section 153A (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in 153A (1) or Section 153, the assessment or reassessment relating to any assessment year which has abated, shall stand revived with effect from the date of receipt of the order of such annulment by the Commissioner [Section 153A(2].  Time limit for completion of assessment under section 153A: The time limit for completion of assessment under section 153A is 21 months from the end of the end of the financial year in which the last authorization for search under section 132 or for requisition under section was executed.

26.9 RECTIFICATION OF MISTAKE [SECTION 154] With a view to rectifying any mistake, which is apparent from the record, an income-tax authority referred to in Section 116 may do the following: (a) amend an order passed by it under the provisions of this Act; (b) amend any intimation or deemed intimation under Section 143(1) or Section 200A (c) amend any intimation under Section 200A (1). (d) in relation to an order, where any matter has been considered and decided in any proceeding by way of appeal or revision, it cannot be rectified under Section 154. However, the matter which has not been considered and decided in the appeal or revision may be rectified under Section 154. (e) Rectification under Section 154 shall be made by: (i) the income-tax authority on its own motion. (ii) the income-tax authority, if it is brought to its notice by the assessee or the deductor or collector; (iii) the commissioner (Appeals), if the mistake is brought to its notice by the Assessing Officer.  Order of rectification: An order of rectification is subject to the following conditions: (a) Where an amendment is made under this section and if such an amendment has the effect of enhancing or reducing a refund or otherwise increasing the liability of the assessee, a notice specifying the intention to do so is necessary. The assessee shall also be allowed reasonable opportunity of being heard [Section 154(3)]. (b) In the above case, the Assessing Officer shall serve on the assessee a notice of demandin the prescribed form specifying the sum payable. Such a notice of demand shall be deemed to be notice under Section 156 and the provisions of Section 156 and the provisions of the Act shall apply in this case [Section154(6)]. (c) An order shall be passed in writing by the income-tax authority concerned [Section 154(4)]. (d) Where any such amendment has the effect of reducing the assessment, the Assessing Officer shall make any refund which may be due to the assessee or the deductor or the collector [Section 154(5)]. (e) Where any such amendment has the effect of enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee or the deductor or the collector, the Assessing Officer shall serve on the assessee or the deductor, as the case may be, a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be issued under Section 156 and the provisions of this Act shall apply accordingly [Section 154(6)]. (f) Except for cases coming under Sections 155 or 186(4), rectification of an order can be made only within four years from the end of the financial year in which the order sought to be amended was passed [Section 154(7)]. However, where a application for amendment under Section 154 is made by the assessee on an income-tax authority, the authority shall pass an order (either making the amendment or refusing it) within a period of six months from the end of the month in which the application is received by it [Section 154(8)].

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26.10 NOTICE OF DEMAND [SECTION 156] When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form (Form No. 7 or, as the case may be, Form No. 28) specifying the sum payable. Where any sum is determined to be payable by the assessee or by the deductor under sub-section (1) of Section 143 or Section 200A (1), the intimation under those sub-sections shall be deemed to be a notice of demand for the purposes of this section [proviso to Section 156 as amended by the Finance Act 2105, w.e.f. 1.6. 2015].

26.11 INTIMATION OF LOSS [SECTION 157] When, in the course of the assessment of the total income of any assessee, it is established that a loss has taken place, which the assessee is entitled to have carried forward and set off under the provisions of Sections 72(1), 73(2), 74(1), 74(3) and 74A(3), the Assessing Officer shall notify to the assessee, by an order in writing, the amount of loss as computed by him for the purposes of set off and carry-forward under these sections. Multiple Choice Questions

1. Assessment under section 143(1) is known as scrutiny assessment. (a) True (b) False Answer: (b) False

2. Assessment under section 144 is known as best judgment assessment (a) True (b) False Answer: (a) True.

3. Which of the following can be corrected while processing the return of income under section 143(1)? (a) any arithmetical error in the return (b) any mistake in the return of income (c) any error in the return of income (d) any claim by the taxpayer which is against law Answer: (a) any arithmetical error in the return

4. Assessment under section 143(1) can be made within a period of ……..year from the end of the financial year in which the return of income is filed. (a) four (b) three (c) two (d) one Answer: (d) one.

5. Notice under section 143(2) (i.e. notice of scrutiny assessment) should be served within a period of ………. from the end of the financial year in which the return is filed. (a) six months (b) one years (c) two years (d) eighteen months Answer: (a) Six months.

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6. Assessment under section 143(3) shall be made within a period of ……..years from the end of the relevant assessment year. (a) four (b) three (c) two (d) one Answer: (c) two

7. Assessment under section 144 shall be made within a period of ……… years from the end of the relevant assessment year. (a) four (b) three (c) two (d) one Answer: (c) Two.

8. Any mistake which is apparent from the record in any order passed by the Assessing Officer can be rectified under section ………. (a) 143 (b) 147 (c) 154 (d) 156 Answer: (c) 154.

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STUDY NOTE : 27 APPEAL, REVISION, SETTLEMENT AND DEMAND AND RECOVERY OF TAXES THIS STUDY NOTE INCLUDES: Part - A 27.1 27.2 27.3 27.4 27.5 27.6 27.7 27.8

Introduction Appealable orders before the Commissioner (Appeals) [Section 246A] Appellate Tribunal [ Section 252- 255] Appeal to High Court [Sections 260A- 260B] Appeal to Supreme Court [Sections 261-262] Special provision for avoiding repetitive appeal [Section 158A] Revision of orders prejudicial to revenue [Section 263] Revision of other orders [Section 264] Part – B 27.9 Tax Demand [Section 156] 27.10 Certificate to tax recovery officer [Section 222] 27.11 Validity of certificate [Section 224] 27.12 Other modes of recovery [Section 226]

Part - A 27.1 INTRODUCTION

An appeal is a grievance redressal mechanism where an assessee aggrieved by the order of the Assessing Officer files an appeal before the Commissioner of Income-tax (Appeals). The procedure and the stages of appeals as mentioned under Chapter XX of the Income-tax Act 1961 involves the following stages: Assessment Order First Appeal Commissioner (Appeals) Second Appeal Appellate Tribunal Third Appeal High Court Final Appeal Supreme Court

27.2 APPEALABLE ORDERS BEFORE THE COMMISSIONER (APPEALS) [SECTION 246A] Any assessee or any deductor or any collector] aggrieved by any of the following orders (whether made before or after the appointed day) may appeal to the Commissioner (Appeals) against the following orders: a. an order passed by a Joint Commissioner under clause (ii) of sub-section (3) of section 115VP or an order against the assessee where the assessee denies his liability to be assessed under this Act or an intimation under sub-section (1) or sub-section (1B) of section 143 or sub-section (1) of DIRECT TAXATION

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b. c. d.

e.

f. g.

h. i. j. k.

l.

m. n. o. p.

q. r.

s. t. u. v. w. x. y.

section 200A or sub-section (1) of section 206CB, where the assessee or the deductor or the collector objects] to the making of adjustments, or any order of assessment under sub-section (3) of section 143 except an order passed in pursuance of directions of the Dispute Resolution Panel or an order referred to in sub-section (12) of section 144BA or section 144, to the income assessed, or to the amount of tax determined, or to the amount of loss computed, or to the status under which he is assessed; an order of assessment under sub-section (3) of section 115WE or section 115WF, where the assessee, being an employer objects to the value of fringe benefits assessed; an order of assessment or reassessment under section 115WG; an order of assessment, reassessment or re-computation under section 147 except an order passed in pursuance of directions of the Dispute Resolution Panel or an order referred to in subsection (12) of section 144BA or section 150; an order of assessment or reassessment under section 153A except an order passed in pursuance of directions of the Dispute Resolution Panel or an order referred to in sub-section (12) of section 144BA; an order of assessment or reassessment under sub-section (3) of section 92CD; an order made under section 154 or section 155 having the effect of enhancing the assessment or reducing a refund or an order refusing to allow the claim made by the assessee under either of the said sections except an order referred to in sub-section (12) of section 144BA; an order made under section 163 treating the assessee as the agent of a non-resident; an order made under sub-section (2) or sub-section (3) of section 170; an order made under section 171; an order made under clause (b) of sub-section (1) or under sub-section (2) or sub-section (3) or sub-section (5) of section 185 in respect of an assessment for the assessment year commencing on or before the 1st day of April, 1992; an order cancelling the registration of a firm under sub-section (1) or under sub-section (2) of section 186 in respect of any assessment for the assessment year commencing on or before the 1st day of April, 1992 or any earlier assessment year; an order made under section 201; an order made under sub-section (6A) of section 206C; an order made under section 237; an order imposing a penalty under— (A) section 221; or (B) section 271, section 271A, section 271AAA, section 271AAB, section 271F, section 271FB, section 272AA or section 272BB; (C) section 272, section 272B or section 273, as they stood immediately before the 1st day of April, 1989, in respect of an assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment years; an order of imposing or enhancing penalty under sub-section (1A) of section 275; an order of assessment made by an Assessing Officer under clause (c) of section 158BC, in respect of search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A on or after the 1st day of January, 1997; an order imposing a penalty under sub-section (2) of section 158BFA; an order imposing a penalty under section 271B or section 271BB; an order made by a Deputy Commissioner imposing a penalty under section 271C, section 271CA, section 271D or section 271E; an order made by a Deputy Commissioner or a Deputy Director imposing a penalty under section 272A; an order made by a Deputy Commissioner imposing a penalty under section 272AA; an order imposing a penalty under Chapter XXI; an order made by an Assessing Officer other than a Deputy Commissioner under the provisions of this Act in the case of such person or class of persons, as the Board may, having regard to the nature of the cases, the complexities involved and other relevant considerations, direct.

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1. Appeal by a person denying liability to deduct tax in certain cases [Section 248]: Where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income. 2. Time-limit for presenting an appeal [Section 249]: Under section 249(2), the appeal should be presented within 30 days of the following date:

(a) Where appeal is under section 248 [see above] the date of payment of tax. (b) Where the appeal relates to any assessment or penalty, the date of service of notice of demand relating to the assessment or penalty.

(c) In any other case, the date on which intimation of the order sought to be appealed against is served. Note that, where an application is made under section 146 for reopening an assessment, the period from the date on which the application is made to the date on which the order passed on the application is served on the assessee shall be excluded from the aforesaid time-limit. Similarly, where an application has been made under sub-section (1) of section 270AA, the period beginning from the date on which the application is made, to the date on which the order rejecting the application is served on the assessee, shall be excluded. The Commissioner of Income-tax (Appeals) may admit belated application on sufficient cause being shown. Application for condonation of delay in filing the appeal, giving the reasons for the delay, along with necessary evidences should be filed with Form No. 35 (i.e., form of appeal). The Commissioner of Income-tax (Appeals) can condone the delay in filing the appeal if genuine reason exists for delay [Section 249(3)]. 3. Procedure in appeals [Section 250]: The procedures for appeal are as under: (a) The Commissioner (Appeals) shall fix a day and place for the hearing of the appeal, and shall give notice of the same to the appellant and to the Assessing Officer against whose order the appeal is preferred. (b) The following shall have the right to be heard at the hearing of the appeal:

(i) the appellant, either in person or by an authorized representative; (ii) the Assessing Officer, either in person or by a representative. (c) The Commissioner (Appeals) shall have the power to adjourn the hearing of the appeal from time to time. (d) The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals). (e) The Commissioner (Appeals) may, at the hearing of an appeal, allow the appellant to go into any ground of appeal not specified in the grounds of appeal, if the Commissioner (Appeals) is satisfied that the omission of that ground from the form of appeal was not willful or unreasonable. (f) The order of the Commissioner (Appeals) disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision. (g) In every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financial year in which such appeal is filed before him under sub-section (1) of section 246A. (h) On the disposal of the appeal, the Commissioner (Appeals) shall communicate the order passed by him to the assessee and to the Principal Chief Commissioner or] Chief Commissioner or Principal Commissioner or] Commissioner. 4. Form of appeal [Rule 45]: The form of appeal, as amended by the new Rule 45, shall be in Form No. 35. Further, e-filing of Form has been made mandatory for persons for whom e-filing of return of income is mandatory.

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5. Other considerations: An appeal shall be subject to the following considerations: A. Pre-deposit of tax: Before filing the appeal, the taxpayer should pay the tax determined as per the return of income filed by him. B. Fees: u/s 249(1), an appeal shall be accompanied by payment of fees as under: Where assessed income (i.e. total income as determined by the Assessing Officer) is: Amount of fees Not more than ` 1,00,000 ` 250 More than ` 1,00,000 but less than ` 2,00,000 ` 500 More than ` 2,00,000 ` 1,000 ` 250 Where the subject matter of appeal is not covered under any one of the above C. Documents to be submitted for appeal: The following documents shall be submitted:  Form No. 35 (including statement of facts and grounds of Appeal) – in duplicate (e-filing has been made mandatory for persons for whom e-filing of return of income is mandatory w.e.f 1st March 2016).  One certified copy of order, appealed against.  Notice of demand in original.  Copy of challans of fees the details of the challan (i.e., BSR code, date of payment of fee, serial number and amount of fee) are required to be furnished in case of e-filing of form of appeal. 27.3 Appellate Tribunal [ Section 252- 255] The provisions of the Act in this regards are as under: 1. Constitution of the Appellate Tribunal : The Central Government shall constitute an Appellate Tribunal consisting of as many members of the following categories as it might think fit: (a) Judicial members: Who must have held at least for 10 years a judicial office in the territory of India; or must have been a member of the Indian Legal Service in Grade II or any equivalent or higher post for at least three years; or must have been an advocate for at least 10 years. (b) Accountant members: who must have a minimum 10 years‘ experience in the practice of accountancy as a Chartered Accountant; or must have been a member of the Indian Income-tax Service, Group A and must have held the post of Additional Commissioner of Income-tax or any equivalent or higher post for at least three years. (c) Vice-president: The Government shall appoint one or more members of the Tribunal to be the VicePresident or Vice-Presidents thereof. The Central Government may appoint one of the Vice-Presidents to be the Senior Vice-President. The Senior Vice-President or a Vice- President shall exercise such of the powers and perform such of the functions of the President as may be delegated to him by the President in writing. (d) President: The president of the Appellate Tribunal shall be a person who is a sitting or retired judge of High Court who has completed not less than 7 years of service as judge in a High Court or one of the Vice-presidents of the Appellate tribunal may be appointed as the president of the Appellate Tribunal. 2. Appeals to the Appellate Tribunal [Section 253]: An assessee aggrieved by any of the following orders may appeal to the Appellate Tribunal against such order: (a) an order passed by an Assessing Officer under section 115VZC (1); or (b) an order passed by a Principal Commissioner or] Commissioner under section 12AA or under clause (vi) of sub-section (5) of section 80G or under section 263 or under section 270Aor under section 271 or under section 272A or an order passed by him under section 154 amending his order under section 263 or an order passed by a Principal Chief Commissioner or] Chief Commissioner or a Principal Director General or] Director General or a Principal Director or Director under section 272A; or (c) an order passed by an Assessing Officer under sub-section (3), of section 143 or section 147 or section 153A or section 153C in pursuance of the directions of the Dispute Resolution Panel or an order passed under section 154 in respect of such order;

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(d) an order passed by an Assessing Officer under section 143(3) or section 147 or section 153A or section 153C with the approval of the Principal Commissioner or Commissioner as referred to in section 144BA (12) or an order passed under section 154 or section 155 in respect of such order; (e) an order passed by the prescribed authority under sub-clause (vi) or sub-clause (via) of section 10 (23C). 3. Time-limit for filing an appeal or memorandum of cross objection [ 253(3); 250(4)]: Every appeal as mentioned above shall be filed within sixty days of the date on which the order sought to be appealed against is communicated to the assessee or to the Principal Commissioner or Commissioner, as the case may be. However, the Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of the Commissioner (Appeals), has been preferred by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof, within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the Commissioner (Appeals), and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in subsection (3), i.e. 60 days as mentioned above. 4. Fees for appeal [Section 253(6)]: An appeal to the Appellate Tribunal shall be accompanied by the prescribed fees. However, due to the amendment of section 253(6) with retrospective effect from 1.7.2012 (vide Finance Act 2016), no fees are required to be paid if an appeal is made for the aforesaid reasons. 5. Procedures of Appellate Tribunal [Section 255]: The procedures for appeal is as under: (1) The powers and functions of the Appellate Tribunal may be exercised and discharged by Benches constituted by the President of the Appellate Tribunal from among the members thereof. (2) Subject to the provisions contained in (3) below, a Bench shall consist of one judicial member and one accountant member. (3) The President or any other member of the Appellate Tribunal authorized in this behalf by the Central Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he is a member and which pertains to an assessee whose total income as computed by the Assessing Officer in the case does not exceed fifty lakh rupees, and the President may, for the disposal of any particular case, constitute a Special Bench consisting of three or more members, one of whom shall necessarily be a judicial member and one an accountant member. (4) If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it. (5) Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions, including the places at which the Benches shall hold their sittings. (6) The Appellate Tribunal shall, for the purpose of discharging its functions, have all the powers which are vested in the income-tax authorities referred to in section 131, and any proceeding before the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purpose of section 196 of the Indian Penal Code (45 of 1860), and the Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXXV of the Code of Criminal Procedure, 1898 .

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27.4 APPEAL TO HIGH COURT [SECTIONS 260A- 260B]

The provisions relating to appeal to the high Court is as under:  An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal before the date of establishment of the National Tax Tribunal, if the High Court is satisfied that the case involves a substantial question of law.  The Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be filed within one hundred and twenty days from the date on which the order appealed against is received by the assessee or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.  Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.  The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.  When an appeal has been filed before the High Court, it shall be heard by a bench of not less than two Judges of the High Court, and shall be decided in accordance with the opinion of such Judges or of the majority, if any, of such Judges. Where there is no such majority, the Judges shall state the point of law upon which they differ and the case shall then be heard upon that point only by one or more of the other Judges of the High Court and such point shall be decided according to the opinion of the majority of the Judges who have heard the case including those who first heard it. 27.5 APPEAL TO SUPREME COURT [SECTIONS 261-262]

The Supreme Court being the Apex Court in the country, an appeal against the judgment of the High Court shall lie provided that the High Court certifies it to be fit one for appeal to the Supreme Court. The costs of appeal shall be at the discretion of the Supreme Court. 27.6 SPECIAL PROVISION FOR AVOIDING REPETITIVE APPEAL [SECTION 158A] This section applies when the assessee claims identical question law is pending before High Court or the Supreme Court. Accordingly, where an assessee claims that any question of law arising in his case for an assessment year which is pending before the Assessing Officer or any appellate authority is identical with a question of law arising in his case for another assessment year which is pending before the High Court on a reference under section 256 or before the Supreme Court on a reference under section 257 or in appeal under section 260A before the High Court or in appeal under section 261 before the Supreme Court , he may furnish to the Assessing Officer or the appellate authority, as the case may be, a declaration in the prescribed form and verified in the prescribed manner, that if the Assessing Officer or the appellate authority, as the case may be, agrees to apply in the relevant case the final decision on the question of law in the other case, he shall not raise such question of law in the relevant case in appeal before any appellate authority or in appeal before the High Court under section 260A or in appeal before the Supreme Court under section 261.

27.7 REVISION OF ORDERS PREJUDICIAL TO REVENUE [SECTION 263] The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in DIRECT TAXATION

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so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment [Section 263(1)].  No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.  An order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court. However, an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court. 27.8 REVISION OF OTHER ORDERS [SECTION 264] The provisions of section 264 are as under:  In the case of any order (other than an order to which section 263 applies) passed by an authority subordinate to him, the Principal Commissioner or Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit.  The Principal Commissioner or Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously.  In the case of an application for revision under this section by the assessee, the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier. However, the Principal Commissioner or Commissioner may, if he is satisfied that the assessee was prevented by sufficient cause from making the application within that period, admit an application made after the expiry of that period.  Every application by an assessee for revision under this section shall be accompanied by a fee of five hundred rupees.  On every application by an assessee for revision under this sub-section, an order shall be passed within one year from the end of the financial year in which such application is made by the assessee for revision. 1. When revision of orders not applicable [Section 264(4)]: The Principal Commissioner or Commissioner shall not revise any order under this section in the following cases: (a) where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal; or (b) where the order is pending on an appeal before the Deputy Commissioner (Appeals);or (c) where the order has been made the subject of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal. Multiple Choice Questions 1. The Commissioner of Income-tax (Appeals) is the ……. appellate authority. (a) First (b) Second (c) Third (d) Fourth Answer: (a) First DIRECT TAXATION

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2.

Section ………… specifies the orders against which an appeal can be filed before the Commissioner of Income-tax (Appeals). (a) 261 (b) 260A (c) 253 (d) 246A Answer: (d) 246A. 3.

An appeal to the Commissioner of Income-tax (Appeals) shall be filed in Form No…… (a) 34B (b)35 (c) 34C (d) 28 Answer: (b) 35. 4.

Where assessed income (i.e. total income as determined in the assessment) is more than ` 1,00,000 but less than ` 2,00,000, the fees for filing the appeal before the Commissioner of Income-tax (Appeals) is …….. (a) ` 250 (b) ` 500 (c) ` 1,000 (d) ` 10,000 Answer: (b) ` 500.

5.

The Commissioner of Income-tax (Appeal) shall dispose of the appeal within a period of ……… from the end of the financial year in which appeal is filed. (a) 3 months (b) 6 months (c) 1 year (d) 2 years Answer: (c) 1 year. A judicial member of an Appellate Tribunal shall be a person who has for at least….years held a judicial office in the territory of India. (a) 10 years (b) 12 years (c) 15 years (d) None of these Answer: (a) 10 years. 6.

PART – B 27.9 TAX DEMAND [SECTION 156] In the Study Note No. 26 [para 10], it has already been discussed that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form (Form No. 7 or, as the case may be, Form No. 28) specifying the sum payable. In default of such payment by the assessee, it shall be recovered from the assessee in the manner provided in Chapter XVII-D of the Income-tax Act for recovery of arrears of tax as under. Points to consider:

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



Where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then, such demand shall be deemed to be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings, as the case may be, and any such notice of demand shall have the effect as specified in section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (11 of 1964) [Section 220(1A)]. Subject to the provisos to section 220(2), If the amount specified in any notice of demand under section 156 is not paid within thirty days of the service of the notice, the assessee shall be liable to pay simple interest at one per cent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid. 27.10 CERTIFICATE TO TAX RECOVERY OFFICER [SECTION 222]

When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the number of arrears due from the assessee and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below: (a) attachment and sale of the assessee's movable property; (b) attachment and sale of the assessee's immovable property; (c) arrest of the assessee and his detention in prison; (d) appointing a receiver for the management of the assessee's movable and immovable properties. 27.11 VALIDITY OF CERTIFICATE [SECTION 224] It shall not be open to the assessee to dispute the correctness of any certificate drawn up by the Tax Recovery Officer on any ground whatsoever, but it shall be lawful for the Tax Recovery Officer to cancel the certificate if, for any reason, he thinks it necessary so to do, or to correct any clerical or arithmetical mistake therein. 27.12 OTHER MODES OF RECOVERY [SECTION 226] Where no certificate has been drawn up under section 222, the Assessing Officer may recover the tax by any one or more of the modes mentioned below: (a) Attachment of salary [Section 226(2)]: If any assessee is in receipt of any income chargeable under the head "Salaries", the Assessing Officer or Tax Recovery Officer may require any person paying the same to deduct from any payment subsequent to the date of such requisition any arrears of tax due from such assessee, and such person shall comply with any such requisition and shall pay the sum so deducted to the credit of the Central Government or as the Board directs. However, any part of the salary exempt from attachment in execution of a decree of a civil court under section 60 of the Code of Civil Procedure, 1908, shall be exempt from any requisition made under this sub-section. (b) Notice to any other person [Section 226(3)]: The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, by notice in writing require any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee to pay to the Assessing Officer or Tax Recovery Officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount. If the person to whom a notice is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realization of DIRECT TAXATION

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the amount as if it were an arrear of tax due from him, in the manner provided in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of his powers under section 222. (c) Recovery from money lying with the court [Section 222(4)]: The Assessing Officer or Tax Recovery Officer may apply to the court in whose custody there is money belonging to the assessee for payment to him of the entire amount of such money, or, if it is more than the tax due, an amount sufficient to discharge the tax. (d) Recovery by distraint and sale [Section 226(5)]: The Assessing Officer or Tax Recovery Officer may, if so authorized by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner by general or special order, recover any arrears of tax due from an assessee by distraint and sale of his movable property in the manner laid down in the Third Schedule. Multiple Choice Questions: 1.

Notice under section 156 is given for: A. Failure to submit return B. Tax demand C. Deferment of tax D. None of these

2.

The notice of demand under section 156 shall be in Form No. A. 28 B. Form No. 7 C. Form No. 10 D. Form No. 29

3.

The mode of tax recovery under section 222 includes arrest and detention of the assessee. A. True B. False

4.

The correctness of certificate prepared by the Tax Recovery Officer (TRO) may be disputed by the assessee: A. True B. False

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STUDY NOTE : 28 PENALTIES, FINES AND PROSECUTION THIS STUDY NOTE INCLUDES: 28.1 Penalties and fines 28.2 Prosecution

28.1 PENALTIES AND FINES Chapter XXI of the Income-tax Act deals with the penal provisions as under: 1. Penalty for under reporting or misreporting of Income [Section 270A]: Under section 270A, the assessee will be held liable for penalty. The rate of penalty shall be fifty per cent of the tax payable on under-reported income. However, in a case where under-reporting of income results from misreporting of income, the assessee shall be liable for penalty at the rate of two hundred per cent of the tax payable on such misreported income.  What constitutes misreporting of income: A person shall be considered to have under-reported his income, if: (a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143; (b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished; (c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment; (d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143; (e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed; (f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment; (g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.  Amount of under-reported income [Section 270A (3)]: The amount of under-reported income shall be, — (i) in a case where income has been assessed for the first time: (a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143; (b) in a case where no return has been furnished, — (A) the amount of income assessed, in the case of a company, firm or local authority; and (B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A); (ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order.  Cases of misreporting of income [ Section 270A (9)]: The cases of misreporting of income shall be the following: (a) misrepresentation or suppression of facts; (b) failure to record investments in the books of account; (c) claim of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account; DIRECT TAXATION

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(e) failure to record any receipt in books of account having a bearing on total income; and (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.  Immunity from imposition of penalty [ Section 270AA]: An assessee may make an application to the Assessing Officer to grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, if he fulfills the following conditions: (a) the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of section 143 or section 147, as the case may be, has been paid within the period specified in such notice of demand; and (b) no appeal against the order referred to in clause (a) has been filed. An application referred to in sub-section (1) shall be made within one month from the end of the month in which the order referred to in (a) above has been received. The Assessing Officer shall, within a period of one month from the end of the month in which the application for immunity is received, pass an order accepting or rejecting such application. 2. Failure to keep, maintain or retain books of account, documents, etc. [Section 271A]: If any person fails to keep and maintain any such books of account and other documents as required by section 44AA or the rules made thereunder, in respect of any previous year or to retain such books of account and other documents for the period specified in the said rules, the Assessing Officer or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum of twenty-five thousand rupees. 3. Penalty for failure to keep and maintain information and document, etc., in respect of certain transactions [Section 271AA]: If any person in respect of an international transaction or specified domestic transaction: (i) fails to keep and maintain any such information and document as required by section 92D (1) or 92D(2); (ii) fails to report such transaction which he is required to do so; or (iii) maintains or furnishes an incorrect information or document, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction or specified domestic transaction entered into by such person. Besides, with effect from the assessment year 2017-18, If any person fails to furnish the information and the document as required under section 92D(4), the Assessing Officer or Commissioner (Appeal) may direct that such person shall pay, by way of penalty, a sum of ` 5 lakh. 4. Penalty where search has been initiated [Section 271AAB]: In a case where search has been initiated under section 132,in addition to tax, the assessee shall pay the following penalty: (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee: (i) in the course of the search, in a statement under section 132(4) admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date: (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee: (i) in the course of the search, in a statement under section 132(4), does not admit the undisclosed income; and (ii) on or before the specified date: (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; DIRECT TAXATION

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(c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b) above. However, no penalty under the provisions of section 270A or clause (c) of section 271(1) shall be imposed upon the assessee in respect of the undisclosed income referred to above. 5. Failure to get accounts audited [Section 271B]: If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred fifty thousand rupees, whichever is less. 6. Penalty for failure to furnish report under section 92E [Section 271BA]: If any person fails to furnish a report from an accountant as required by section 92E, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one hundred thousand rupees. 7. Failure to subscribe to the eligible issue of capital [Section 271BB]: Whoever fails to subscribe any amount of subscription to the units issued under any scheme referred to in section 88A(1) to the eligible issue of capital under that sub-section within the period of six months specified therein, may be directed by the Joint Commissioner to pay, by way of penalty, a sum equal to twenty per cent of such amount. 8. Penalty for failure to deduct tax at source [Section 271C]: If any person fails to: (a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or (b) pay the whole or any part of the tax as required by or under: (i) section 115-O (2); or (ii) the second proviso to section 194B, then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid. 9. Penalty for failure to collect tax at source [Section 271CA]: If any person fails to collect the whole or any part of the tax as required by or under the provisions of Chapter XVII-BB, then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to collect as aforesaid. 10. Penalty for failure to comply with the provisions of section 269SS [Section 271D]: If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted. 11. Penalty for failure to comply with the provisions of section 269T [Section 271E]: If a person repays any loan or deposit or specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance] so repaid. 12. Penalty for failure to furnish return of income [Section 271F]: If a person who is required to furnish a return of his income, as required under section 139 (1) or by the provisos to that sub-section, fails to furnish such return before the end of the relevant assessment year, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of five thousand rupees. 13. Penalty for failure to furnish statement of financial transaction or reportable account [Section 271FA]: If a person who is required to furnish a statement of financial transaction or reportable account under section 285BA (1), fails to furnish such statement within the time prescribed under sub-section (2) thereof, the income-tax authority prescribed under said sub-section (1) may direct that such person shall pay, by way of penalty, a sum of one hundred rupees for every day during which such failure continues:

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However, where such person fails to furnish the statement within the period specified in the notice issued under section 285BA (5), he shall pay, by way of penalty, a sum of five hundred rupees for every day during which the failure continues, beginning from the day immediately following the day on which the time specified in such notice for furnishing the statement expires 14. Penalty for furnishing inaccurate statement of financial transaction or reportable account [271FAA] :If a prescribed reporting financial institution referred to in section 285BA (1)(k) which is required to furnish a statement under that section, provides inaccurate information in the statement, and where: (a) the inaccuracy is due to a failure to comply with the due diligence requirement prescribed under section 285BA (7) or is deliberate on the part of that person; or (b) the person knows of the inaccuracy at the time of furnishing the statement of financial transaction or reportable account, but does not inform the prescribed income-tax authority or such other authority or agency; or (c) the person discovers the inaccuracy after the statement of financial transaction or reportable account is furnished and fails to inform and furnish correct information within the time specified under sub-section (6) of section 285BA, then, the prescribed income-tax authority may direct that such person shall pay, by way of penalty, a sum of fifty thousand rupees. 15. Penalty for failure to furnish statement or information or document by an eligible investment fund [271FAB]: If any eligible investment fund which is required to furnish a statement or any information or document, as required under section 9A(5) fails to furnish such statement or information or document within the time prescribed under that sub-section, the income-tax authority prescribed under the said sub-section may direct that such fund shall pay, by way of penalty, a sum of five hundred thousand rupees. 16. Penalty for failure to furnish information or document under section 92D [271G]: If any person who has entered into an international transaction or specified domestic transaction fails to furnish any such information or document as required by section 92D(3), the Assessing Officer or the Transfer Pricing Officer as referred to in section 92CA or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of the international transaction or specified domestic transaction for each such failure. 17. Penalty for failure to furnish information or document under section 285A [ 271GA]: If any Indian concern, which is required to furnish any information or document under section 285A, fails to do so, the income-tax authority, as may be prescribed under the said section, may direct that such Indian concern shall pay, by way of penalty: (i) a sum equal to two per cent of the value of the transaction in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; (ii) a sum of five hundred thousand rupees in any other case. 18. Penalty for failure to furnish report or for furnishing inaccurate report under section 286 in respect of international group [Section 271GB]: (a) If any reporting entity referred to in section 286, which is required to furnish the report referred to in sub-section (2) of the said section, in respect of a reporting accounting year, fails to do so, shall pay, by way of penalty as under:  ` 5,000 for every day for which the failure continues if the failure continues beyond a period of one month ;  fifteen thousand rupees for every day for which the failure continues beyond the period of one month. (b) Where any reporting entity referred to in section 286 fails to produce the information and documents within the period allowed under sub-section (6) of the said section, the prescribed authority may direct that such entity shall pay, by way of penalty, a sum of five thousand rupees for every day during which the failure continues, beginning from the day immediately following the day on which the period for furnishing the information and document expires. DIRECT TAXATION

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(c) If the failure as aforesaid continues after an order has been served on the entity, directing it to pay the penalty in (a) or, (b) above, then, the prescribed authority may direct that such entity shall pay, by way of penalty, a sum of fifty thousand rupees for every day for which such failure continues beginning from the date of service of such order. (d) Where a reporting entity referred to in section 286 provides inaccurate information in the report furnished in accordance with sub-section (2) of the said section and where— (i) the entity has knowledge of the inaccuracy at the time of furnishing the report but fails to inform the prescribed authority; or (ii) the entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery; or (i) the entity furnishes inaccurate information or document in response to the notice issued under subsection (6) of section 286, then, the prescribed authority may direct that such person shall pay, by way of penalty, a sum of five lakh rupees. 19. Penalty for failure to furnish statements [Section 271-H]: If a person fails to: (a) to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C; or (b) furnishes incorrect information in the statement which is required to be delivered or caused to be delivered under sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C, the amount of penalty shall be ` Not less than ` 10,000 but it can go up to ` 10,000. 20. Penalty for failure to furnish information or furnishing inaccurate information under section 195 [271I]: If a person, who is required to furnish information under section 195(6) for payment to a non-resident (not being a company), fails to furnish such information, or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees. 21. Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc. [Section 272A]: A. If any person: (a) being legally bound to state the truth of any matter touching the subject of his assessment, refuses to answer any question put to him by an income-tax authority in the exercise of its powers under this Act; or (b) refuses to sign any statement made by him in the course of any proceedings under this Act, which an income-tax authority may legally require him to sign; or (c) to whom a summons is issued under section 131(1) either to attend to give evidence or produce books of account or other documents at a certain place and time omits to attend or produce books of account or documents at the place or time (d) fails to comply with a notice under section 142 (1) or section 143(2) or fails to comply with a direction issued under sub-section (2A) of section 142 (2A), he shall pay, by way of penalty, a sum of ten thousand rupees for each such default or failure. B. If any person fails: (a) to comply with a notice issued under section 94(6); or (b) to give the notice of discontinuance of his business or profession as required by section 176(3); or (c) to furnish in due time any of the returns, statements or particulars mentioned in section 133 or section 206 or section 206C or section 285B; or (d) to allow inspection of any register referred to in section 134 or of any entry in such register or to allow copies of such register or of any entry therein to be taken; or (e) to furnish the return of income which he is required to furnish under sub-section (4A) or sub-section (4C) of section 139 or to furnish it within the time allowed and in the manner required under those sub-sections; or (f) to deliver or cause to be delivered in due time a copy of the declaration mentioned in section 197A; or (g) to furnish a certificate as required by section 203 or section 206C; or (h) to deduct and pay tax as required by sub-section (2) of section 226; DIRECT TAXATION

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(i) (j)

to furnish a statement as required by sub-section (2C) of section 192; to deliver or cause to be delivered in due time a copy of the declaration referred to in sub-section (1A) of section 206C; (k) to deliver or cause to be delivered a copy of the statement within the time specified in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C; (l) to deliver or cause to be delivered the statements within the time specified in sub-section (1) of section 206A; (m) to deliver or cause to be delivered a statement within the time as may be prescribed under subsection (2A) of section 200 or sub-section (3A) of section 206C, he shall pay, by way of penalty, a sum of one hundred rupees for every day during which the failure continues. However, the amount of penalty for failures in relation to a declaration mentioned in section 197A, a certificate as required by section 203d and returns under sections 206 and 206C and statements under sub-section (2A) or sub-section (3) of section 200 or the proviso to sub-section (3) or under sub-section (3A) of section 206C shall not exceed the amount of tax deductible or collectible, as the case may be. 22. Penalty for failure to comply with the provisions of section 133B [272AA]: If a person fails to comply with the provisions of section 133B, he shall, on an order passed by the Joint Commissioner, Assistant Director or Deputy Director or the Assessing Officer, as the case may be, pay, by way of penalty, a sum which may extend to one thousand rupees. 23. Penalty for failure to comply with the provisions of section 139A [272B]: If a person fails to comply with the provisions of section 139A, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten thousand rupees. Besides, if a person who is required to quote his permanent account number in any document referred to in section 139A (5)(c), or to intimate such number as required by sub-section (5A) or sub-section (5C) of that section, quotes or intimates a number which is false, and which he either knows or believes to be false or does not believe to be true, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten thousand rupees. 24. Penalty for failure to comply with the provisions of section 203A [272BB]: If a person fails to comply with the provisions of section 203A, he shall, on an order passed by the Assessing Officer, pay, by way of penalty, a sum of ten thousand rupees. Besides, If a person who is required to quote his "tax deduction account number" or, as the case may be, "tax collection account number" or "tax deduction and collection account number" in the challans or certificates or statements or other documents referred to in sub-section (2) of section 203A, quotes a number which is false, and which he either knows or believes to be false or does not believe to be true, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten thousand rupees.

28.2 PROSECUTION Apart from the extensive penal measures, the Income-tax Act contains several measures leading to prosecution and imprisonment. These provisions are contained in Chapter XXII as under: 1. Removing, parting or otherwise dealing with seized assets [Section 275A]: Under section 132(3) where the Income-tax authorities seize any books of account, property, etc. and due to the size, physical characteristics these properties cannot be removed, then such authorities may pass an order upon the owner of such properties not to remove or deal with the confiscated properties. Failure to comply with this order shall invite punishment with rigorous imprisonment up to 2 years. 2. Failure to provide the authorized officer with facility to inspect, books of account, etc. maintained in the form of electronic records [Section 275B]: Any violation of the this requirement as envisaged in section 132(1)(iib), shall be punishable, in addition to fine, with rigorous imprisonment up to 2 years.

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3. Removal, concealment, transfer or delivery of property to thwart tax recovery [Section 276]: Whoever fraudulently removes, conceals, transfers or delivers to any person, any property or any interest therein, intending thereby to prevent that property or interest therein from being taken in execution of a certificate under the provisions of the Second Schedule shall be punishable with rigorous imprisonment for a term which may extend to two years and shall also be liable to fine. 4. Failure to give intimation about appointment as liquidator or removing properties of a company by such person [ Section 276A]: Any violation of the requirement section 178(1) requiring a liquidator of a company to intimate the Assessing Officer or violation of the provisions contained in section 178(3) , i.e. parting with the properties of the company by such liquidator without leave of the Income-tax authorities, shall be punishable with rigorous imprisonment for a term which may extend to two years. 5. Failure to comply with the provisions of sections 269UC, 269UE and 269UL [Section276AB]: Section 269UC requires the transferor and the transferee of certain immovable properties to enter into an agreement at least 4 months before the date of transfer; Section 269UE deals with circumstances when a property is vested in the Central Government following a direction u/s 268(1); and section 269UL places restrictions on registration of immovable properties. Any failure to comply with the provisions of these sections shall be punishable with rigorous imprisonment for a term which may extend to two years and shall also be liable to fine. 6. Failure to pay tax to the credit of the Central Government [Section 276B]: Under the provisions of this section, failure to deposit tax to the credit of the Central Government as required under the Chapter XVII-B (for TDS) or u/s 115-O (Dividend distribution tax) or under the provision of the second proviso to section 194B (winnings of lottery , etc. in kinds), shall be punishable with rigorous imprisonment which shall not be less than 3months , but which may extend up to 7 years and with fine. 7. Failure to pay the tax collected at source [Section 276B]: Similar to the aforesaid provisions, failure to pay the tax collected at source u/s 206C shall be punishable with rigorous imprisonment which shall not be less than 3 months, but which may extend up to 7 years and with fine. 8. Wilful attempt to evade tax [Section 276C]:If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable under this Act, the punishment shall be as under: (i) in a case where the amount sought to be evaded or tax on under-reported income exceeds twenty-five hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; (ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine. 9. Failure to furnish returns of income [ Section 276CC]: If a person willfully fails to furnish in due time the return of income which he is required to furnish under sub-section (1) of section 139 or by notice given under clause (i) of sub-section (1) of section 142 or section 148 or section 153A, he shall be punishable as under: (i) in a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds twenty-five hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; (ii) in any other case, with imprisonment for a term which shall not be less than three months but which may extend to two years and with fine. 10. Failure to furnish return of income in search cases. [276CCC] If a person willfully fails to furnish in due time the return of total income which he is required to furnish by notice given under section 158BC(c), i.e. block assessment, he shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.

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11. Failure to produce accounts and documents [Section 276D]: If a person willfully fails to produce, or cause to be produced, on or before the date specified in any notice served on him under section 142(1), such accounts and documents as are referred to in the notice or willfully fails to comply with a direction issued to him under sub-section (2A) of that section, he shall be punishable with rigorous imprisonment for a term which may extend to one year and with fine. 12. False statement in verification, etc. [Section 277]: If a person makes a statement in any verification under this Act or under any rule made thereunder, or delivers an account or statement which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable as under: (i) where the amount of tax, which would have been evaded if the statement or account had been accepted as true, exceeds twenty-five hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; (ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine. 13. Falsification of books of account or document, etc. [ Section 277A]: If any person (first person) willfully and with intent to enable any other person (second person) to evade any tax or interest or penalty chargeable and imposable under this Act, makes or causes to be made any entry or statement which is false and which the first person either knows to be false or does not believe to be true, in any books of account or other document relevant to or useful in any proceedings against the first person or the second person, under this Act, the first person shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine. Multiple Choice Questions : 1. If the taxpayer fails to maintain books of account as per the provisions of section 44AA, then he shall be liable to pay penalty under section ……… of ` 25,000. (a) 271B (b) 271A (c)271AA (d) 271AB Answer : (b) 271A 2.

If a taxpayer, in spite of the requirement of section 44AB, fails to get his accounts audited, then he shall be liable for penalty under section 271B of one-half per cent of total sales, turnover or gross receipts, etc., or ……….., whichever is less. (a) ` 2,00,000 (b) ` 1,50,000 (c) ` 1,00,000 (d) ` 50,000 Answer: (b) ` 1,50,000.

3.

Penalty under section 271FA shall be levied for failure to file statement of financial transaction or reportable account (previously called as Annual Information Return). Penalty under section 271FA is ` ……. for every day during which the failure continues. (a) 500 (b) 250 (c) 100 (d) 50 Answer: (c) ` 100.

4.

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(c) 300% (d) 50% Answer: (d) 50%. 5.

As per section 271H, where a person fails to file the statement of tax deducted/collected at source i.e. TDS/TCS return on or before the due dates prescribed in this regard, then he shall be liable to pay penalty under section 271H. Minimum penalty can be levied of ` 10,000 which can go upto `……… (a) 1,00,000 (b) 2,00,000 (c) 3,00,000 (d) 3,00,000 Answer: (a) ` 1,00,000.

Section 272B provides penalty in case of default by the taxpayer in complying with the provisions of section 139A or knowingly quoting incorrect PAN in any document referred to in section 139A(5)(c) or intimates incorrect PAN for the purpose of section 139A(5A)/(5C). Penalty under section 272B is `……. (a) 1,00,000 (b)50,000 (c) 50,000 (d) 10,000 Answer: (d) ` 10,000. 6.

Section 272BB(1A) provides for penalty for quoting incorrect Tax Deduction Account Number or Tax Collection Account Number (as the case may be). Penalty under section 272BB is `….. (a) 75,000 (b) 50,000 (c) 10,000 (d) 5,000 Answer: (c) ` 10,000

7.

8.

If the taxpayer, fraudulently removes, conceals, transfers or delivers to any person, any property or any interest therein (which can be attached, to recover his tax dues), intending thereby to prevent that property or interest therein from being attached for recovery of tax, then prosecution proceedings shall be initiated against such person under section …… (a) Section 275A (b) Section 276B (c) Section 276 (d) Section 277 Answer: (c) Section 276.

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STUDY NOTE : 29 E-COMMERCE TRANSACTION AND LIABILITY IN SPECIAL CASES THIS STUDY NOTE INCLUDES: 29.1 Introduction 29.2 What is E-commerce? 29.3 Extent of Digital Economy in the World and its Growth in India 29.4 Challenges of Digital Economy 29.5 Impact of Taxation 29.6 Report of the Committee on Taxation to Examine the Business Models for E-Commerce 29.7 Provisions of Equalization Levy as per the Finance Act 2016 29.8 Collection and Recovery of Levy [Section 166] 29.9 Furnishing of Statement [Section 167] 29.10 Processing of Statement [Section 168] 29.11 Rectification of Mistakes [ Section 169] 29.12 Interest on Delayed Payment of Equalization Levy [Section 170] 29.13 Penalty for Failure to Deduct or Pay Equalization Levy [Section 171] 29.14 Penalty for Failure to Furnish Statement [Section 172] 29.15 Punishment for False Statement [Section 176] 29.16 Application of Certain Provisions of Income-tax Act [Section 178] 29.17 Exemption for Equalization Levy

29.1

INTRODUCTION

Digital economy and its concomitant, e-commerce, is the result of the rapid and progressive changes in information and communication technology. No wonder that the entrepreneurs across the world have been quick to evolve their businesses to take advantage of these changes, forcing upon them radical departures in the ways of doing business. The growing prevalence of E-Commerce and new services like Cloud Computing indicate the rising significance of digital economy in international commerce. Today, E-commerce overarches international trade and commerce such that it involves all the possible forms of business models like:  Business-to-business model, where business sells goods and services to another business.  Business-to-consumer model, where goods and services are sold by a business to individuals. In an E-commerce mode, the seller may have no physical presence or offline stores or there may be ―click-and-mortar‖ business that supplemented existing consumer-facing business with online sales.  Consumer-to-consumer model, which helps individuals to sell or rent their assets (car, residential property, etc.) by publishing their information on website to facilitate direct transactions.

29.2

WHAT IS E-COMMERCE?

Electronic commerce, or e-commerce, has been defined broadly by the OECD Working Party on ‗Indicators for the Information Society‘ as ―the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders. The goods or services are ordered by those methods, but the payment and the ultimate delivery of the goods or service do not have to be conducted online. An e-commerce transaction can be between enterprises, households, individuals, governments, and other public or private organisations‖. Ecommerce can be used either to facilitate the ordering of goods or services that are then delivered through conventional channels (indirect or offline ecommerce) or to order and deliver goods or services completely electronically (direct or on-line ecommerce).

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29.3

EXTENT OF DIGITAL ECONOMY IN THE WORLD AND ITS GROWTH IN INDIA

The pace at which the digital economy is advancing can be appreciated from the following facts:  There would be 3 billion internet users in the world by 2016.The digital economy which contributed USD 2.3 trillion in G-20 countries in 2010 would expand to USD 4.2 trillion.  The digital economy is growing at 10% a year, significantly faster than the global economy as a whole.  The number of Internet-connected devices (12.5 billion) surpassed the number of human beings on the planet in 2011, and by 2020, Internet-connected devices are expected to number between 26 billion and 50 billion globally.  More than two billion people globally are expected to use mobile devices to connect to the Internet in 2016, with countries like India, China and Indonesia leading the way.  More than a billion people use the Internet to bank online, to stream music, and to find a job. The trajectory of growth of internet users and e-commerce in India follows similar pattern.  India's internet user base grew over 17% in the first six months of 2015 to 354 million.  It took 10 years for India to get her first 10 million users and another 10 years to clock the first 100 million. As the rate picked up, the next 100 million users came in three years and the third 100 million took only 18 months. Internet users crossed 300 million in December 2013. India was expected to reach 402 million internet users by December 2015, registering a growth of 49 per cent over 2014 and surpassing the number of users in the United States.  About 306 million of these are expected to access Internet from their mobile devices. At around that time the number of mobile users crossed one billion. With greater penetration, improving speeds and cheaper devices hitting the market, the target to reach 500 million internet users is likely to be achieved by 2016.  Within the larger universe of the digital economy, India's e-commerce market was estimated to be worth about $3.8 billion in 2009 which went up to $12.6 billion in 2013. In 2013, the e-retail segment was worth US$ 2.3 billion.  A large part of India's e-commerce market was travel related, but that may be changing now. According to Google India, there were 35 million online shoppers in India in 2014 Q1 and is expected to cross 100 million mark by end of year 2016.  Electronics and Apparel are the biggest categories in terms of sales. Overall the ecommerce market is expected to reach `1,07,800 crores (US$24 billion) by the year 2015 with both online travel and e-tailing contributing equally. 29.4

CHALLENGES OF DIGITAL ECONOMY

In an era when services were provided primary in the form of human intervention, the need for proximity made it essential for such businesses to have a physical presence in proximity to the markets. However, with advancements of ICT, where digital or telecommunication networks are fast becoming a substitute for physical proximity, it is now possible for the businesses to have significant participation in the economic life of another country without any physical presence. These digital enterprises have already acquired significant space in global economy, and as per current and anticipated trends, their proportion in the total economy will continue to rise. Due to their ability to cater to international markets at low transactions costs, many of these enterprises are already among the most valued enterprises globally. These economic expansions, while they bode well for the global economy, they must be governed and managed to reap its full advantages. 29.5

IMPACT OF TAXATION

One, out of the several concerns, vis-à-vis the tax implications for the digital economy is the question of tax neutrality. The principle of tax neutrality provides that tax should seek to be neutral and equitable between various forms of business activities. When tax neutrality is violated, the unfair tax advantage enjoyed by some market enterprises can distort the market economy and the dead weight loss arising from it can adversely impact market efficiency. In the context of digital economy, tax neutrality has DIRECT TAXATION

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emerged as a major concern. While a purely domestic enterprise is taxed at the marginal tax rate under the domestic laws, a multinational enterprise may not be taxable at all in the country of source due to the ability of digital enterprises to conduct their business through digital and telecommunication networks without requiring any physical presence in the country of source. This lack of tax neutrality between digital enterprise and traditional enterprises can distort the market in favour of the former and thereby disrupt the existing market equilibriums. The international taxation rules on the basis of which the taxing rights are allocated between two countries in the case of a cross-border transaction are based on the permanent establishment and ―nexus‖ rules which were developed in the last century commensurate with the requirement of the brick-and-mortar economy. Accordingly, the basis of taxation for such cross-border transactions were the relationship to a person (personal attachment rules) or the relationship to a territory (the territorial attachment). In the taxation literature these are known as ―source rules‖ or permanent establishment‖ rules. India closely follows these principles. Accordingly, the existing provisions in the Income-Tax Act 1961 provide for taxation of such dealings with such cross border transactions and incomes resulting therefrom as under: 1. Source rules under the Income-tax Act 1961: The various provisions of the Income-tax Act vis-à-vis the taxation of foreign sourced incomes are as under:  Section 4 lays upon every assessee a charge on the total income of an assessee in terms of the of the residential status of an assessee defined in section 6, while section 5 defines the scope of total income of the different types of the assessees classified in section 6.  Under section 5, while a resident and ordinarily resident assessee is liable to pay tax on his‖ global income‖, a non-resident is required to pay tax on income sourced in India only (i.e., (i) income received in India or deemed to be received in India by or on behalf of such person (ii) income which accrues or arises or is deemed to accrue or rise to him during the year) . In the case of a resident but not ordinarily resident, foreign sourced incomes are excluded from total income, if it is not in connection with a foreign sourced income which is set up in India or controlled from India.  Section 9 of the Income-tax Act lays down the necessary rules to determine which incomes shall be deemed to have accrued or arisen in India as under:

(a) Section 9(1)(i) provides that all income accruing or arising to a non-resident from a ―business connection‖ in India, from property situated in India, from any property or source in India and income from transfer of capital assets situated in India shall be deemed to have accrued or arisen in India.

(b) The Income-tax Act also provide for Liability in Special Case [Chapter XV], and accordingly, under the provisions of sections 160(1(i), 161, and 163(1), an Indian resident who becomes agent/ representative of any non-resident, are responsible in respect of the tax liabilities of the non-residents. 2.

Why the existing rules are inadequate? There are several reasons for which the nexus based or permanent establishment- based concept of tax regime is unsuitable for the digital economy. First, in a digital economy, a company or business enterprise has the ability to have significant digital presence in the economy of a country without being liable to taxation due to the lack of nexus under the current tax regimes. Second, International tax treaties do not usually permit taxation of business profits of a non-resident enterprise in the absence of a permanent establishment to which these profits are attributable. For example, many jurisdictions would not tax income derived by a non-resident enterprise from remote sales to customers located in that jurisdiction unless the enterprise maintained some degree of physical presence in that jurisdiction. As a result, the issue of nexus also relates to the domestic rules for the taxation of non-resident enterprises. Third, there remains considerable ambiguity regarding the characterization of income arising from transactions involving telecommunication networks, software and data exchange. These disputes on characterization of payments are more commonly observed in countries like DIRECT TAXATION

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India, having tax treaties that allocate taxing rights to the source jurisdiction in respect of royalty and fee for technical services. Finally, the continuing ambiguity related to nexus and characterization of the payments have the potential of giving rise to tax disputes, particularly in countries like India, where the tax treaties allocate taxing rights to the source jurisdiction. The resultant ambiguity, uncertainty and unpredictability can develop as a significant constraint for the expansion of digital economy in India. This makes an important case for finding a solution to all these issues, in the form of a simple, clear and predictable tax rule that unambiguously defines the tax liability of digital enterprises, thereby facilitating their business planning, reducing their tax risk and contingent liabilities, while also reducing compliance costs, disputes and administrative burden. 29.6

REPORT OF THE COMMITTEE ON TAXATION TO EXAMINE THE BUSINESS MODELS FOR E-COMMERCE

To identify the direct tax issues in relation to e-commerce transactions and suggest an approach to deal with these issues, a Committee on Taxation of e-commerce was constituted by the Central Board of Direct Taxes to examine the business models for e-commerce. The Report of the Committee was received by the Government and taken into consideration in the preparation of Finance Bill, 2016. This Report provides the view of the Committee on issues related to taxation of e-commerce and recent international developments in this area. The Committee took cognizance of the Report on Action 1 of Base Erosion & Profit Shifting (BEPS) Project, wherein very significant work has been undertaken for identifying the tax challenges arising from digital economy, the possible options to address them and constraints likely to be faced. The Committee also notes that this report has been accepted by G-20 countries, including India and OECD, thereby providing a broad consensus view on these issues. The Committee took note of the work done in this field by other experts, as well as the lack of uniformly accepted standards in taxation of royalty and fee for technical services, and the resultant tax disputes. The BEPS Report on Action 1 clearly highlights the need for modifying existing international taxation rules, and identifies three options, i.e. a new nexus based on significant economic presence, a withholding tax on digital transactions, and Equalization Levy. The Report elaborates in detail the characteristics of these options and their possible tax design. After examining the three options identified in the report, the Committee notes that compared to the first two options, i.e. a new nexus based on significant economic presence and the withholding tax on digital transactions, which would require changes in a number of tax treaties, the third option of ‗Equalization Levy‘ provides a simpler option that can be adopted under domestic laws without needing amendment of a large number of tax treaties. Accordingly, the Committee recommends the adoption of this option to address the tax challenges of digital economy and provide greater certainty and predictability in its taxation. The Equalization Levy imposed on the payment for digital transactions, would not be a tax on income, and hence would not be covered by tax treaties. As Equalization Levy is not proposed as tax on income, it would need to be imposed outside the Income-tax Act, 1961. 29.7

PROVISIONS OF EQUALIZATION LEVY AS PER THE FINANCE ACT 2016

In terms of the recommendations of the aforesaid Committee on Taxation of E-Commerce, with effect from 1.6.2016, a new Chapter VIII has been inserted to provide for as under: 1. Charge of Equalization levy: On and from the date of commencement of this Chapter VIII, there shall be charged an equalisation levy at the rate of six percent of the amount of consideration for any specified service received or receivable by a person, being a non-resident from: (i) a person resident in India and carrying on business or profession; or (ii) a non-resident having a permanent establishment in India.

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Meaning of specified service: Under section 165(i) of the Finance Act 2016, "specified service" means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf. 2.

When equalization levy is not chargeable: Under Section 165(2), the equalisation levy shall not be charged where: (a) the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment; (b) the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or (c) where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession.

29.8

COLLECTION AND RECOVERY OF LEVY [SECTION 166]

The provisions in this regards are as under: (1) Every person, being a resident and carrying on business or profession or a non-resident having a permanent establishment in India shall deduct the equalisation levy from the amount paid or payable to a non-resident in respect of the specified service at the rate specified in section 165, if the aggregate amount of consideration for specified service in a previous year exceeds one lakh rupees. (2) The equalisation levy so deducted during any calendar month shall be paid by every assessee to the credit of the Central Government by the seventh day of the month immediately following the said calendar month. (3) Any assessee who fails to deduct the levy shall, notwithstanding such failure, be liable to pay the levy to the credit of the Central Government. 29.9

FURNISHING OF STATEMENT [SECTION 167]

The provisions relating to furnishing of returns are as under: (1) Every assessee shall, within the prescribed time after the end of each financial year, prepare and deliver or cause to be delivered to the Assessing Officer or to any other authority or agency authorised by the Board in this behalf, a statement in Form No. 1 [vide Equalization Levy Rules 2016], verified in such manner and setting forth such particulars as may be prescribed, in respect of all specified services during such financial year. The statement has to be furnished electronically under digital signature or with digital verification code. (2) An assessee who has not furnished the statement within the time prescribed under sub-section (1) or having furnished a statement under sub-section (1), notices any omission or wrong particular therein, may furnish a statement or a revised statement, as the case may be, at any time before the expiry of two years from the end of the financial year in which the specified service was provided. (3) Where any assessee fails to furnish the statement under sub-section (1) within the prescribed time, the Assessing Officer may serve a notice upon such assessee requiring him to furnish the statement in the prescribed form, verified in the prescribed manner and setting forth such particulars, within such time, as may be prescribed. 29.10 PROCESSING OF STATEMENT [SECTION 168] Where a statement has been made under section 167 by the assessee, such statement shall be processed in the following manner: (a) the equalisation levy shall be computed after making the adjustment for any arithmetical error in the statement; DIRECT TAXATION

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(b) the interest, if any shall be computed on the basis of sum deductible as computed in the statement; (c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the amount computed under clause (b) against any amount paid under sub-section (2) of section 166 or section 170 and any amount paid otherwise by way of tax or interest; (d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, him under clause (c); and (e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to him. However, no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the statement is furnished. For the purposes of processing of statements under sub-section (1), the Board may make a scheme for centralised processing of such statements to expeditiously determine the tax payable by, or the refund due to, the assessee as required under that sub-section.

29.11 RECTIFICATION OF MISTAKES [SECTION 169] The provisions relating to rectification of mistakes are as under: (1) With a view to rectifying any mistake apparent from the record, the Assessing Officer may amend any intimation issued under section 168, within one year from the end of the financial year in which the intimation sought to be amended was issued. (2) The Assessing Officer may make an amendment to any intimation under sub-section (1), either suomotu or on any mistake brought to his notice by the assessee. (3) An amendment to any intimation, which has the effect of increasing the liability of the assessee or reducing a refund, shall not be made under this section unless the Assessing Officer has given notice to the assessee of his intention so to do and has given the assessee a reasonable opportunity of being heard. (4) Where any such amendment to any intimation has the effect of enhancing the sum payable or reducing the refund already made, the Assessing Officer shall make an order specifying the sum payable by the assessee and the provisions of this Chapter shall apply accordingly.

29.12 INTEREST ON DELAYED PAYMENT OF EQUALIZATION LEVY [SECTION 170] Every assessee, who fails to credit the equalization levy or any part thereof as required under section 166 to the account of the Central Government within the period specified in that section, shall pay simple interest at the rate of one per cent of such levy for every month or part of a month by which such crediting of the tax or any part thereof is delayed.

29.13 PENALTY FOR FAILURE TO DEDUCT OR PAY EQUALIZATION LEVY [SECTION 171] Any assessee who: (a) fails to deduct the whole or any part of the equalization levy as required under section 166; or (b) having deducted the equalization levy, fails to pay such levy to the credit of the Central Government in accordance with the provisions of sub-section (2) of that section, shall be liable to pay: (i) in the case referred to in clause (a), in addition to paying the levy in accordance with the provisions of sub-section (3) of that section, or interest, if any, in accordance with the provisions of section 170, a penalty equal to the amount of equalization levy that he failed to deduct; and

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(ii) in the case referred to in clause (b), in addition to paying the levy in accordance with the provisions of sub-section (2) of that section and interest in accordance with the provisions of section 170, a penalty of one thousand rupees for every day during which the failure continues, so, however, that the penalty under this clause shall not exceed the amount of equalization levy that he failed to pay. 29.14 PENALTY FOR FAILURE TO FURNISH STATEMENT [SECTION 172] Where an assessee fails to furnish the statement within the time prescribed under sub-section (1) or subsection (3) of section 167, he shall be liable to pay a penalty of one hundred rupees for each day during which the failure continues. 29.15 PUNISHMENT FOR FALSE STATEMENT [SECTION 176] The provisions of section 176 are as under: (1) If a person makes a false statement in any verification under this Chapter or any rule made thereunder, or delivers an account or statement, which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable with imprisonment for a term which may extend to three years and with fine. (2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, an offence punishable under sub-section (1) shall be deemed to be non-cognizable within the meaning of that Code. 29.16 APPLICATION OF CERTAIN PROVISIONS OF INCOME-TAX ACT [SECTION 178] The provisions of sections 120, 131, 133A, 138, 156, Chapter XV and sections 220 to 227, 229, 232, 260A, 261, 262, 265 to 269, 278B, 280A, 280B, 280C, 280D, 282 and 288 to 293 of the Income-tax Act shall so far as may be, apply in relation to equalization levy, as they apply in relation to income-tax. 29.17 EXEMPTION FOR EQUALIZATION LEVY Under section 10(50) of the Income-Tax Act 1961, any income from any specified services provided shall be exempt from tax. Multiple Choice Questions: 1.

E-Commerce stands for: A. Commerce carried out by the European Community B. Electronic Commerce C. Economy of Commerce D. None of this. Answer: B. Electronic commerce. 2.

Equalization levy has been introduced by the Finance Act : A. 2016 B. 2015 C. 2014 D. None of these Answer: A. 2016. 3.

Equalization levy shall come into force with effect from : A. 1.4.2016 B. 1.6.2016 C. 1. 4. 2017 D. None of these Answer: B. 1.6.2016. DIRECT TAXATION

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4.

The threshold exemption limit for equalization Levy is `: A. ` 5 lakh B. ` 3 lakh C. ` 2 lakh D. ` 1 lakh Answer: D. ` 1 lakh. 5.

The compliance burden for Equalization Levy is on: A. Every resident who is carrying on business or profession B. Every resident and carrying on business or profession or a non-resident having a permanent establishment in India. C. On the non-resident providing specified service in India D. None of these. Answer: B. Every resident and carrying on business or profession or a non-resident having a permanent establishment in India. 6.

The statement for Equalization Levy shall be furnished with the prescribed authority in: A. Form No. A B. From No. 1 C. From No. C D. Form No. 2 Answer: B. Form No. 1. 7.

The rate of interest for delayed payment of Equalization Levy is: A. 1% p.m. B. 1% p.m. or part of the month C. 1.5% p.m. D. 1.5% p.m. or part of the month. Answer: B. 1% p.m. or part of the month 8.

The penalty for failure to deposit Equalization Levy is: A. ` 1,000 per day during which the failure continues B. ` 10,000 C. ` 100 per day during which the default continues D. ` 1,000 for every day during which the failure continues, subject to the maximum of the amount of amount of equalization levy that the assessee failed to pay. Answer: D. ` 1,000 for every day during which the failure continues, subject to the maximum of the amount of amount of equalization levy that the assessee failed to pay. 9.

The maximum punishment for false statement in respect of Equalization Levy is : A. 1 year B. 2 years C. 3 years D. 4 years Answer: C. 3 years. 10. Income from Equalization Levy is exempt from tax u/s A. 10 (45) B. 10(38) C. 10 (50) D. None of these Answer: C. 10(50).

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STUDY NOTE : 30 INCOME COMPUTATION AND DISCLOSURE STANDARDS THIS STUDY NOTE INCLUDES: 30.1 Introduction 30.2 ICDS issued by Central Government

30.1

INTRODUCTION

In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961, the Central Government has notified [vide Notification No. 32/2015, F. No. 134/48/2010 TPL, dt. 31.3. 2015] the Income Computation and Disclosure Standards (ICDS). This standard came into effect from 1st day of April, 2015, and shall accordingly apply to the assessment year 2016-17 and subsequent assessment years. 1. Features of ICDS: The following are the main features of ICDS: (i) ICDS are to be followed by all assessees, following the mercantile system of accounting. (ii) ICDS are applicable to the computation of income chargeable to income-tax under the head ―Profit and gains of business or profession‖ or ―Income from other sources‖. (iii) This standard is not applicable for maintenance of books of account. As ICDS are meant for computation of income only, there is no need for maintenance of books of account for this purpose. (iv) In the case of conflict between the provisions of the Income-tax Act, 1961 and ICDS, the provisions of the Act shall prevail to that extent. (v) Non-compliance of ICDS will lead to Best Judgment Assessment.

30.2

ICDS ISSUED BY CENTRAL GOVERNMENT

So far the Central Government has issued the following ten ICDS: ICDS No. Name of the ICDS Corresponding ICDS I Accounting Policies. ICDS II Inventories ICDS III Construction Costs ICDS IV Revenue Recognition ICDS V Tangible Fixed Assets ICDS VI Effects of Changes in Foreign Exchange Rates. ICDS VII Government Grants ICDS VIII Securities ICDS IX Borrowing Costs ICDS X Provisions, Contingent Liabilities and Contingent Assets. 1.

Accounting Standards AS 1 AS 2 AS 7 AS 9 AS 10 AS 11 AS 12 AS 13 AS 16 AS 19

ICDS I relating to Accounting Policies:  This Income Computation and Disclosure Standard deals with significant accounting policies. The fundamental Accounting assumptions as used in this ICDS are: Going concern, consistency and accrual. Other fundamental accounting assumptions which are conspicuous by their absence are materiality and prudence. In the absence of these concepts considerable time and cost will be involved making adjustments in net profit to arrive at business income.  The standard has defined accounting policy as the specific accounting principles and the methods of applying those principles adopted by a person.  Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose: (i) the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; and

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(ii)

 

2.

marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard. An accounting policy shall not be changed without reasonable cause. Disclosure of accounting policies: (i) Any change in an accounting policy which has a material effect shall be disclosed. (ii) If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed.

Income Computation and Disclosure Standard II relating to valuation of inventories: The standard shall be applicable to the valuation of inventories. However, the following shall be excluded from the purview of the standard. (a) Work‐in‐progress arising under ‗construction contract‘ including directly related service contract which is dealt with by the Income Computation and Disclosure Standard on construction contracts; (b) Work‐in‐progress which is dealt with by other Income Computation and Disclosure Standard; (c ) Shares, debentures and other financial instruments held as stock‐in‐trade which are dealt with by the Income Computation and Disclosure Standard on securities; (d) Producers‘ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realizable value; (e) Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets. In accordance with the standard, valuation of inventories shall be valued at cost or net realizable value, whichever is lower.

A. Cost of inventories: Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.  The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.  The costs of services in the case of a service provider shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.  The costs of conversion of inventories shall include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods.  Other costs shall be included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition.  Interest and other borrowing costs shall not be included in the costs of inventories, unless they meet the criteria for recognition of interest as a component of the cost as specified in the Income Computation and Disclosure Standard on borrowing costs. B.

Cost formulas: The standard recognizes three formulae, e.g. (i) Specific Identification Method; (ii) First-in-First-Out Method; and (iii) Weighted Average Cost. The Cost of inventories of items that are not ordinarily interchangeable; and goods or services produced and segregated for specific projects shall be assigned by specific identification of their individual costs. Where there are a large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs shall not be made. Cost of inventories shall be assigned by using the First-in First-out (FIFO), or weighted average cost formula.

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"Net realizable value" is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause. Disclosure: The following aspects shall be disclosed: (a) the accounting policies adopted in measuring inventories including the cost formulae used; and (b) the total carrying amount of inventories and its classification appropriate to a person. 3.

Income Computation and Disclosure Standard III relating to construction contracts: The following definitions have been used in this standard:  Construction contract‖ is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: (i) contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; (ii) contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets. 

 

  

―Fixed price contract‖ is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses. ―Cost plus contract‖ is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a mark-up on these costs or a fixed fee. ―Retentions‖ are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. ―Progress billings‖ are amounts billed for work performed on a contract whether or not they have been paid by the customer. ―Advances‖ are amounts received by the contractor before the related work is performed. Combining and Segmenting Construction Contracts: The requirements of this Income Computation and Disclosure Standard shall be applied separately to each construction contract except as provided for below:  Where a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when: (i) separate proposals have been submitted for each asset; (ii) each asset has been subject to separate negotiation; (iii) the costs and revenues of each asset can be identified. (iv) A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when: (a) the group of contracts is negotiated as a single package; (b) the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and (c) the contracts are performed concurrently or in a continuous sequence.

Contract Revenue:  Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection.  Contract revenue shall comprise of: (a) the initial amount of revenue agreed in the contract, including retentions; and (b) variations in contract work, claims and incentive payments.  Where contract revenue already recognised as income is subsequently written off in the books of accounts as uncollectible, the same shall be recognised as an expense and not as an adjustment of the amount of contract revenue.

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Contract Costs: Contract costs shall comprise of: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; (c) such other costs as are specifically chargeable to the customer under the terms of the contract; and (d) allocated borrowing costs in accordance with the Income Computation and Disclosure Standard on Borrowing Costs. (e) These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue. (f) Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract. (g) Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress. 

Recognition of Contract Revenue and Expenses (a) Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. (b) The standard recognizes percentage completion method, and accordingly, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed.



Disclosure: The disclosure requirements under the standard requires a person report: (a) the amount of contract revenue recognised as revenue in the period; and (b) the methods used to determine the stage of completion of contracts in progress. (c) amount of costs incurred and recognised profits (less recognised losses) up to the reporting date; (d) the amount of advances received; and (e) the amount of retentions

4.

Income Computation and Disclosure Standard IV relating to revenue recognition: This Income Computation and Disclosure Standard deals with the basis for recognition of revenue arising in the course of the ordinary activities of a person from (i) the sale of goods; (ii) the rendering of services; and (iii) the use by others of the person‘s resources yielding interest, royalties or dividends.  Definition of revenue: Revenue has been defined as the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person‘s resources yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. Other terms which have been used in the standard but not defined, shall have the meaning attributed to them in the Income-tax Act.  Recognition: The flowing are the revenue recognition criteria: (a) Revenue shall be recognised when there is reasonable certainty of its ultimate collection. (b) In a transaction involving the sale of goods, the revenue shall be recognised when the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. (c) In a situation, where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer of significant risks and rewards of ownership to the buyer. (d) Revenue from service transactions shall be recognised by the percentage completion method, in which revenue from service transactions is matched with the service transactions costs incurred in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed. DIRECT TAXATION

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

5.

Disclosure: The following shall be disclosed: (a) In a transaction involving sale of good, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty. (b) The amount of revenue from service transactions recognised as revenue during the previous year. (c) the method used to determine the stage of completion of service transactions in progress. (d) In the case of service transactions in progress, amount of costs incurred and recognised profits (less recognised losses) up to end of previous year, amount of advance and retentions shall be disclosed.

Income Computation and Disclosure Standard V relating to tangible fixed assets: The following terms have been defined in the Standard:  Tangible fixed asset: Tangible fixed asset‖ is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.  Fair Value: ―Fair value‖ of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm‘s length transaction. Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act.  Cost of assets: The following shall be considered as part of the cost: (a) The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure on making the asset ready for its intended use. Any trade discounts and rebates shall be deducted in arriving at the actual cost. (b) Administration and other general overhead expenses are to be excluded from the cost of tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset. (c) The expenditure incurred on start‐up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised. The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption, shall be treated as revenue expenditure.  Self‐constructed Tangible Fixed Assets: In arriving at the actual cost of self‐constructed tangible fixed assets, the same principles shall apply as those described in paragraphs 5 to 8. Cost of construction that relate directly to the specific tangible fixed asset and costs that are attributable to the construction activity in general and can be allocated to the specific tangible fixed asset shall be included in actual cost. Any internal profits shall be eliminated in arriving at such costs.  Non‐ monetary Consideration: When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost. When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost.  Improvements and Repairs: An expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. Similarly, the cost of an addition or extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral part of the existing tangible fixed asset is to be added to its actual cost.  Depreciation : Depreciation shall be computed in accordance with the provisions of the Income-tax Act.  Transfers: Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act.  Disclosures: The following are the requirements of disclosures: (i) description of asset or block of assets; DIRECT TAXATION

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(ii) rate of depreciation; (iii) actual cost or written down value, as the case may be; (iv) additions or deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004; change in rate of exchange of currency; and subsidy or grant or reimbursement, by whatever name called; (v) depreciation Allowable; and (vi) written down value at the end of year. 6.

Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates: This Income Computation and Disclosure Standard deals with: (a) treatment of transactions in foreign currencies; (b) translating the financial statements of foreign operations; (c) treatment of foreign currency transactions in the nature of forward exchange contracts.



Definitions: The following definitions have been used in this Standard: (a) ―Average rate‖ is the mean of the exchange rates in force during a period. (b) ―Closing rate‖ is the exchange rate at the last day of the previous year. (c) ―Exchange difference‖ is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates. (d) ―Exchange rate‖ is the ratio for exchange of two currencies. (e) ―Foreign currency‖ is a currency other than the reporting currency of a person. (f) ―Foreign operations of a person‖ is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India. (g) ―Foreign currency transaction‖ is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person: (i) buys or sells goods or services whose price is denominated in a foreign currency; or (ii) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or (iii) becomes a party to an unperformed forward exchange contract; or (iv) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. (h) ―Forward exchange contract‖ means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature; (i) ―Forward rate‖ is the specified exchange rate for exchange of two Currencies at a specified future date; (j) ―Indian currency‖ shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999; (k) ―Integral foreign operation‖ is a foreign operation, the activities of which are an integral part of the operation of the person; (l) ―Monetary items‖ are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items; (m) ―Non‐integral foreign operation‖ is a foreign operation that is not an integral foreign operation; (n) ―Non‐monetary items‖ are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non‐monetary items; (o) ―Reporting currency‖ means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out.

 Initial Recognition A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used.

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

Conversion at Last Date of Previous Year: At last day of each previous year: (a) foreign currency monetary items shall be converted into reporting currency by applying the closing rate; (b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realised from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realised from or required to disburse such item at the last date of the previous year; and (c) non‐monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction.



Recognition of Exchange Differences: In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year. In respect of non‐monetary items, exchange differences arising on conversion. There of at the last day of the previous year shall not be recognised as income or as expense in that previous year.



Integral Foreign Operations: The financial statements of an integral foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been those of the person himself.



Non‐integral Foreign Operations: In translating the financial statements of a non‐integral foreign operation for a previous year, the person shall apply the following, namely: (a) the assets and liabilities, both monetary and non‐monetary, of the non‐integral foreign operation shall be translated at the closing rate; (b) income and expense items of the non‐integral foreign operation shall be translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences shall be recognised as income or as expenses in that previous year.



Forward Exchange Contracts: Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for the previous year.

7.

Income Computation and Disclosure Standard VII relating to government

Grants: This standard deals with government grants (also called subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc.), but it does not deal with Government assistance other than in the form of Government grants; and Government participation in the ownership of the enterprise. 





Definition: ―Government grants‖ have been defined as assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person. Recognition of Government Grants: Government grants should not be recognised until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. Treatment of Government Grants

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(a) Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to. (b) Where the Government grant relates to a non‐depreciable asset or assets of a person requiring fulfilment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income. (c) Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to. (d) The Government grant that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs, shall be recognised as income of the period in which it is receivable. (e) The Government grants other than covered by paragraph (a) to (d) shall be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. (f) The Government grants in the form of non‐monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost. 

Refund of Government Grants (i) The amount refundable in respect of a Government grant referred to in paragraphs (b), (d) and (e) above shall be applied first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement. (ii) The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate.

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Disclosures: Following disclosure shall be made in respect of Government grants: (a) nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year; (b) nature and extent of Government grants recognised during the previous year as income; (c) nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets and reasons thereof; and (d) nature and extent of Government grants not recognised during the previous year as income and reasons thereof.

8.

Income Computation and Disclosure Standard VIII relating to securities: This Income Computation and Disclosure Standard deals with securities held as stock-in‐ trade. The Standard does not deal with: (a) the bases for recognition of interest and dividends on securities which are covered by the Income Computation and Disclosure Standard on revenue recognition; (b) securities held by a person engaged in the business of insurance; (c) securities held by mutual funds, venture capital funds, banks and public financial institutions.

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Definitions: The following terms are used in this standard: DIRECT TAXATION

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(a) ―Fair value‖ is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm‘s length transaction. (b) ―Securities‖ shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956. 

Recognition and Initial Measurement of Securities: A security on acquisition shall be recognised at actual cost. (a) The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess. (b) Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost. (c) Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost. (d) Where unpaid interest has accrued before the acquisition of an interest‐bearing security and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre‐acquisition and post‐acquisition periods; the pre‐acquisition portion of the interest is deducted from the actual cost.

9.

Income Computation and Disclosure Standard IX relating to borrowing costs: This Income Computation and Disclosure Standard deals with treatment of borrowing costs. This Standard does not deal with the actual or imputed cost of owners‘ equity and preference share capital.

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Definitions: The flowing definitions have been used: (a) ―Borrowing costs‖ has been defined as interest and other costs incurred by a person in connection with the borrowing of funds and include: (i) commitment charges on borrowings; (ii) amortised amount of discounts or premiums relating to borrowings; (iii) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings; (iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements. (b) ―Qualifying asset‖ has been defined to mean: (i) land, building, machinery, plant or furniture, being tangible assets; (ii) know‐how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; (iii) inventories that require a period of twelve months or more to bring them to a saleable condition.

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Recognition: (a) Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined in accordance with this Income Computation and Disclosure Standard. Other borrowing costs shall be recognised in accordance with the provisions of the Act.

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Borrowing Costs Eligible for Capitalisation: To the extent the funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed.

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Disclosure: The following disclosure shall be made in respect of borrowing costs: (a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalised during the previous year.

DIRECT TAXATION

372

10. Income Computation and Disclosure Standard X relating to provisions, contingent liabilities and contingent assets: This Income Computation and Disclosure Standard deals with provisions, contingent liabilities and contingent assets, except those: (i) resulting from financial instruments; (ii) resulting from executory contracts; (iii) arising in insurance business from contracts with policyholders; and (iv) covered by another Income Computation and Disclosure Standard. This Income Computation and Disclosure Standard does not deal with the recognition of revenue which is dealt with by Income Computation and Disclosure Standard ‐ Revenue Recognition. The term ‗provision‘ is also used in the context of items such as depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets and are not addressed in this Income Computation and Disclosure Standard. A. Recognition of provisions: Provisions shall not be recognized unless the following conditions are met: (a) a person has a present obligation as a result of a past event; (b) it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. B. Recognition of Contingent Liabilities: A person shall not recognise a contingent liability. C. Recognition of contingent assets: A person shall not recognise a contingent asset. Contingent assets are assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs. D. Measurement: The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the previous year. The amount of a provision shall not be discounted to its present value. The amount recognised as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the previous year. The amount and related income shall not be discounted to its present value. E. Reimbursements: Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when it is reasonably certain that reimbursement will be received if the person settles the obligation. The amount recognised for the reimbursement shall not exceed the amount of the provision. Where a person is not liable for payment of costs in case the third party fails to pay, no provision shall be made for those costs. An obligation, for which a person is jointly and severally liable, is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. F. Review: Provisions shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. An asset and related income recognised as provided in para 11 shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an inflow of economic benefits will arise, the asset and related income shall be reversed. G. Disclosures: Following disclosure shall be made in respect of each class of provision: (a) a brief description of the nature of the obligation; (b) the carrying amount at the beginning and end of the previous year; (c) additional provisions made during the previous year, including increases to existing provisions; (d) amounts used, that is incurred and charged against the provision, during the previous year; (e) unused amounts reversed during the previous year; and (f) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. (g) Following disclosure shall be made in respect of each class of contingent assets: (i) a brief description of the nature of the asset and related income; (ii) the carrying amount of asset at the beginning and end of the previous year; DIRECT TAXATION

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(iii) additional amount of asset and related income recognised during the year, (iv) including increases to assets and related income already recognised; and (v) amount of asset and related income reversed during the previous year. Multiple Choice Questions: Income Computation and Disclosure Scheme (ICDS)comes into effect from the assessment year : A. 2015-16 B. 2014-15 C. 2016-17 D. 2017-18 Answer: C. 2016-17 1.

2.

ICDS are applicable to the computation of income chargeable to income-tax under the head: A. All heads of income B. Profits and gains of business or profession C. Profits and gains of business or profession and Income from other sources D. Capital gains Answer: C. Profits and gains of business or profession and Income from other sources 3.

The number of ICDS issued so far are : A. 10 B. 12 C. 14 D. 8 Answer: A. 10 4.

In the case of conflict between the provisions of the Income-tax Act, 1961 and ICDS, the provisions of ….. shall prevail to that extent. A. Income-tax Act B. ICDS C. Opinion of the Assessing Officer D. Appellate Tribunal Answer: A. Income-tax Act 5.

ICDS II relates to: A. Accounting policy B. Inventory C. Government Grants D. None of these Answer: B. Inventory 6.

The number of cost formula recognized by ICDS II are: A. Three B. Four C. Two D. None of these Answer: A. Three.

DIRECT TAXATION

374