CA Final Course Chapter 7 Direct Tax Laws Chapter 13 Unit 2 Rajendra Prasad Talluri B.Com; CA; Grad CWA

Transcription

1 CA Final Course Chapter 7 Direct Tax Laws Chapter 13 Unit 2 Rajendra Prasad Talluri B.Com; CA; Grad CWA

2 Meaning: Person includes an Individual [Sec (2(31)] ; And the term individual has not been defined under the Act. Liability to pay tax: If the total income earned by the individual exceeds the first slab, he is liable to tax. Administrator / Executor When liable to tax? If an individual who is liable to pay tax for any year dies before he is assessed to tax, his Executor / Administrator / Legal Representative is treated as the individual assessee for the purposes assessment of income of the deceased person. 2

3 Assessment of a Minor / Lunatic: In the case of an individual who is a minor / a lunatic, the assessment of his income will be made on his Guardian / or the Trustee. However, if the incapaciated person has no Trustee / Guardian / if the Guardian is a non-resident and cannot be traced, the assessment can be made directly on the Minor / Lunatic. 3

4 Incomes assessable at concessional tax rate of 20% U/S 115BBA: Nature of income covered U/S 115BBA: Income Received by a Foreign National Non- Resident Sportsman From ----Participation in any game or sport[other than those given in Sec 115BB i.e casual incomes] in India; or ----Advertisement; or ----Contribution of articles relating to any game or sport in India in journals, news papers, magazines, etc,. 4

5 Non Resident Entertainer who is not a Citizen of India from his / her performance in India. No need to file return of income if the necessary TDS is already done: No need to file return if the necessary TDS under chapter XVII-B is made and if it were the only income. No deduction under any of the provisions of the IT Act: No deduction shall be allowed under any provisions of the Act against such special income and Income is assessed at a Flat Rate of 20%. 5

6 Principle # 1: Optional Scheme The provisions contained in Chapter XII-A are optional. If the NRI opts, then income will be assessed as per the following provisions. Principle # 2: Definitions [Sec 115C] Investment Income: The income derived by a non-resident Indian from any foreign exchange asset other than dividend referred to U/S 115-O is called Investment Income. 6

7 Foreign exchange asset: Foreign exchange asset means the following assets acquired or purchased with or subscribed to in, convertible foreign exchange: Shares in an Indian Company; [Public or Private] Debentures issued by an Indian public company; [Only Public] Deposits with an Indian public company [Only Public] Securities of the Central Govt; & Such other assets as may be notified by the Central Govt. 7

8 Non-Resident Indian: Non-resident Indian means an individual, being a citizen of India or a person of Indian origin who is not a resident. A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. 8

9 Principle # 3: Deductions in computation [Sec 115D] In computing the Investment income arising from such foreign exchange asset to a non-resident Indian No deduction in respect of any expenditure or allowance under any provisions of the Income-tax Act is allowable; No deduction under chapter VIA shall be allowed. Also, against the LTCG arising from such foreign exchange asset No deduction under chapter VIA shall be allowed and No indexation U/S 48 will be available. 9

10 Where the total income of a non-resident Indian consists only of Investment income and/or income by way of long term capital gains arising from the transfer of any foreign exchange asset, such investment income shall be charged to income-tax at a flat rate of 20% and such long term capital gains shall be charged at 10%. 10

11 Principle # 5: How the income be taxed if he has any other income? The investment income and/or long term capital gains in respect of foreign exchange asset will constitute a separate block of income and charged to income tax at a flat rate of 20% or 10%, as the case may be. If the non-resident Indian has any other income in India, such other income will constitute an altogether separate block of income and charged to tax under the normal provisions of the Act [i.e Chapter VI-A deductions shall be allowed against the other income] as if such other income had been the total income. The aggregate of the income-tax so calculated in respect of the said two blocks of income will be the tax payable for the relevant asst year. 11

12 The LTCG arising from the transfer of any foreign exchange asset will be exempt from tax in proportion to the extent of the net proceeds realized on such transfer that are re-invested or redeposited within 6 months after the date of such transfer in the above mentioned Foreign exchange assets or savings certificates notified U/S 10(4B). 12

13 Principle # 7: Amount of Exemption: LTCG Net Proceeds reinvested in eligible securities Net proceeds realized on account of transfer of foreign exchange assets Withdrawal of exemption where the new asset is transferred or converted (otherwise than by transfer) into money within a period of 3yrs from its acquisition, the capital gains arising from the transfer of the original asset which has been exempted from tax shall be deemed to be the LTCG of the previous year in which the new asset is transferred or converted into money. [Note that it is always taxed as LTCG.] 13

14 A non-resident Indian having only investment income or income by way of LTCG arising from the transfer of any foreign exchange asset or both, need not file the return of income U/S139, if the tax deductible from such income has been correctly deducted at source. However, it is permissible for him to opt U/S115-I of the Income-tax Act to submit the return of income and claim the refund due to him, if any. 14

15 Principle # 9: Benefit after the assessee becomes a Resident [Sec 115-H] [Available only with regard to investment income]: A non-resident Indian who becomes a resident in any subsequent year has the option to claim that the special provisions shall continue to apply to him in relation to investment income derived from foreign exchange asset (other than shares in Indian companies) for that asst year and for every subsequent asst year until the transfer or conversion of such assets into money. Such option can be exercised by furnishing a declaration in writing to that effect along with his return of income for that asst year. 15

16 A non-resident Indian has the option to claim that in respect of any particular asset year the special provisions relating to taxation of investment income and long term capital gains under which the tax on such income is to be charged at a flat rate should not apply to him by furnishing his return of income with such declaration for that asst year U/S 139. In such a case, the whole of the total income of that asst year will be charged to tax under the general provisions of the Income-Tax Act. [i.e If the non-resident Indian is silent, then these provisions are always applicable.] 16

17 CA Final Course Chapter 7 Direct Tax Laws Chapter 13 Unit 2 Rajendra Prasad Talluri B.Com; CA; Grad CWA

18 Content No Basics of HUF 3 to 5 Schools of Hindu Law 6 HUF Capital Gains ; IOS and Clubbing Provisions 7 Partition of HUF 8 Some Questions and Case Laws 9 to 10

19 Meaning: A HUF consists of all males lineally descended from a common ancestor, their wives and daughters. A HUF [Hindu Undivided Family] is also known as JHF [Joint Hindu Family] Status of Female : A daughter is a member of HUF till her marriage and on being married, she becomes a member of the family of her husband as a daughter in law. [Also, she continues to be a coparcener in the HUF of her father after her marriage.]

20 A coparcener is that member of HUF, who acquires by birth an interest in the joint property of the family. The coparceners can ask for partition. On the other hand, the members of the family who are not coparceners have no right to claim / demand partition, although they receive share upon actual partition. 20

21 Can a female become coparcener? W.E.F Sep 2005, due to amendment in the Hindu Succession Act, the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son. Hence, the daughter can also ask for partition. Up to how many degrees Members become Coparceners? A HUF, as such, can consist of a very large number of members including female members as well as distant blood relatives in the male line. However, out of this, coparceners are only those who are within 3 degrees in lineal descendent from the common male ancestor. 21

22 Who is a Karta? As a general rule, the father of the family, if alive, or in his absence, the senior male member of the family, is entitled to be the manager with the consent of others. However, a junior member of the family may also become the Manager or Karta of the HUF. Can a Female become Karta of a HUF? An unmarried daughter can certainly become Karta of her father s HUF. Can there be a HUF with only One Male Member? There should be at least 2 members to constitute HUF. There can be a JHF consisting of a single male member and widows of deceased coparceners. Gowli Buddana Vs CIT [60 ITR 293] 22

23 Dayabhaga School of Hindu Law: This school of law prevails in West Bengal and Assam. Under this school, a son does not acquire any interest in the ancestral property by birth. However, such interest is acquired by son only after the death of his father. Therefore, under this school of law, the son does not enjoy right to demand partition during the life time of his father. The father enjoys an absolute right to dispose of the property of the family according to his desire. 23

24 This applies to whole of India except West Bengal and Assam. A son becomes a member of coparcenary as soon as he is born. Each son acquires, by birth, an equal interest with his father in ancestral property. The coparcenary fluctuates under this school of law with the birth / death of each male member. W.E.F Sep 2005, due to the amendment in the Hindu Succession Act, the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son 24

25 Treatment of Gifts received from members of the family by the HUF Implications U/S 56 (Income From Other Sources) W.E.F AY Relative definition with respect to HUF for Sec 56(2) has been so amended to include members of HUF. Thus, conversion of self acquired property by a member into HUF property will not be taxable under IOS in the hands of the HUF. Capital Gains Implications Gift is not treated as Transfer for the purposes of capital gains and hence there is no tax incidence under the head Capital Gains. 25

26 By virtue of Sec 64(2), clubbing provisions are applicable whereby, income from the gifted assets are included in the hands of the Transferor individual till the date of partition. After partition, the transferor individual is assessable with regard to his / her share and the share received by his / her spouse. 26

27 Principle # 1: No Capital Gains on Partition: Distribution of a capital asset by the HUF is not treated as transfer U/S 47(i) if such distribution is on account of total or partial partition i.e. there is no capital gains incidence. Principle # 2: Who is assessed if there is actual partition? If Partition has taken place in the previous year: The total income of the family up to the date of partition shall be assessed in the hands of HUF and subsequently the same will be assessed in the hands of members. If Partition has not taken place: The total income of the previous year shall be assessed in the hands of HUF as if no partition has taken place. 27

28 Each member of the HUF before partition shall be jointly and severally liable for any sum payable by the HUF under the Act. The several liability of any member shall be determined in proportion of the joint family property allotted to him 28

29 Q # 1: Gifts from strangers of the family: Kumar, his wife Shyamala and his unmarried daugheter Vasantha living together, do not own any ancestral property. Kumar s sister Susheela, makes declaration under which she transfers a house property owned by her for the benefit of Kumar and his family members to be jointly owned and enjoyed by them. In what status will the income of house property be assessed in the hands of the transferee? 29

30 Sol: The SC in the case of Satyendra Kumar 232 ITR 360, held that a gift can be made to a HUF by any one including a stranger to the family, provided such gift has been made for the benefit of the HUF as whole. In view of the above, the gift received by kumar and his family from Susheela is valid and the title vests with them. Therefore, the family as a whole will be assessed to tax in respect of income from such property under the status HUF. 30

31 Q # 2: Marriage Expenses Set aside upon partition of HUF Taxability On partition, certain amount was set aside for the marriage expenses of the daughters and the amount was handed over to the head of the family i.e Karta. Who would be taxable with regard to interest income? Sol: In the hands of daughters only. [CIT Vs Basant Singh] [1982] [11 Taxman 49] [Punjab and Haryana] 31

32 To claim exemption U/S 10(2), two conditions are to be satisfied. First, he / she is a member of HUF and Second he / she receives sum out of the income of such HUF, may be of earlier year. Thus, where the widow of a deceased coparcener receives sums towards maintenance as a member of such HUF, then such amount received towards maintenance is exempt from tax. Every member of a HUF has a claim as to his maintenance. Receiving anything in consideration of his pre-existing right in a property / income is covered by Sec 10(2). [Vedathanni Vs CIT] [1933] [1 ITR 70] [Madras HC] 32

33 Assessment of Local Authorities Rajendra Prasad Talluri B.Com; CA; Grad CWA Finance Act, 2013

34 All about Local Authorities Meaning: Local Authority means: i. Panchayat as referred to in clause (d) of Article 243P of the Constitution; ii. Municipality as referred to in clause (e) of Article 243P of the Constitution; iii. Municipal Committee and District Board legally entitled to, or entrusted by the Government, with the control or management of a municipal or local fund; Or iv. Cantonment Board as defined in Section 3 of the Cantonments Act, 1924.

35 Exemption U/S 10(20) with regard to Local Authorities Within its Jurisdiction Income From House Property Capital Gains Income From Other Sources Income From a Trade / Business of supply of Water / Electricity; Or Outside its Jurisdiction Income from a trade or business of supply of water or electricity is exempted from tax. All other incomes are taxable. Any Other Commodity / Service

36 Some Questions / Case Laws on Local Authority Case Law # 1: A State Forest Corporation is not a local authority. Hence, exemption U/S 10(20) is not available to the same. [CIT Vs UP Forest Corporation] Case Law # 2: An authority constituted under a State Legislation for planned development of industrial areas and promotion of industries, cannot claim benefit of exemption U/S 10(20). [Adityapur Industrial Area Development authority Vs UOI & Ors 283 ITR (SC) 97]

37 CA Final Course Paper 7 Direct Tax Laws Chapter13 Unit 2 Rajendra Prasad Talluri B.Com; CA; Grad CWA

38 PFAS Vs PFAOP Under the IT Act, 1961, Firms are categorized into two types for the purposes of Assessment Viz PFAS Partnership Firms Assessed As Such PFAOP Partnership Firms Assessed as Association of Persons What about LLPs? Sec 2(23) of the IT Act, 1961 had been so amended to include LLPs also within the ambit of Firm. Thus, the assessment of LLP is similar to that of PFAS

39 Key Differences Allowability of Interest, Remuneration etc,. Interest, Bonus, Commission, Remuneration are allowed in the hands of PFAS whereas the same are not allowed in the hands of the PFAOP Tax Rates PFAS The general incomes are taxed at a Flat Rate of 30% PFAOP The general incomes are taxable at different rates depending on the composition. [i.e It may be assessed at the rates applicable to an individual or assessed at the rates applicable to a foreign company or assessed at the MMR (Maximum Marginal Rate)

40 Firm Must be evidenced by an instrument in writing Individual Shares of the partners must be specified in the instrument Certified Copy of the instrument should be submitted along with the Return of Income Revised instrument should be submitted whenever there is a change in the constitution of the Firm / Profit Sharing Ratio There should not be any failure as is mentioned in Sec 144

41 In the hands of the Partnership Firm: No deduction shall be allowed with regard to Interest, Salary, Bonus, Commission or Remuneration made by such firm to any of the partners U/S 40b In the hands of the Partners: The remuneration, interest, bonus, commission thus disallowed as above shall not be treated as income U/S 28(v).

42 Question # 1: In one of the earlier years, the firm was accorded the status of PFAS. Next Year it does not satisfy the requirements of Sec 184. In the second year (i.e the year of default), in what status the firm will be assessed? Sol: It will be assessed as PFAS only, but in that year, deduction is not allowed towards interest, bonus, commission, remuneration etc,.

43 Question # 2: In Year 1, the P&L ratio among the partners A,B and C is 1:1:1 (Equal Partners.) In Year 2, the ratio has not been changed but there is a change in the remuneration allowed to the partners. The firm failed to file revised deed as required U/S 184. In what status the firm will be assessed in Year 2? Sol: It will be still assessed as PFAS only. However, remuneration shall be allowed as per Old Partnership Deed only.

44 Change in constitution [Sec 187]: Instances of change in constitution: One or more partners joined or retired but at least One of the old partners continue as partner in the new firm; All the partners continue with a change in their respective shares or shares in some of them; No change in the profit sharing ratio but there is a change in the remuneration / interest. How shall the assessment be done in the above case? There shall be only one assessment. And the assessment shall be done on the firm as constituted at the time of assessment.

45 Where none of the old partners continue after the change or one firm is succeeded by another firm and the case is not covered U/S 187 then, two assessments shall be done as per Sec 170. [i.e till the date of succession, in the hands of the old firm and thereafter in the hands of the new firm]

46 Conditions stipulated U/S 40(b) with regard to remuneration Remuneration should be paid only to a working partner; Remuneration should be authorized by the partnership deed and paid in accordance with the deed; Remuneration should not pertain to a period prior to partnership deed; Remuneration should not exceed the permissible limit. Conditions stipulated U/S 40(b) with regard to Interest: Interest should be authorized by the deed; It should pertain to the period after the partnership deed; Rate of interest should not exceed 12% p.a.

47 Monetary ceilings applicable w.r.t remuneration Book Profit Amount deductible in respect of remuneration to partners If book profit is negative Rs. 150,000 In the case book profit is positive On first Rs.3 Lacs of Book Profit On the balance of Book Profit Rs. 150,000 or 90% of the Book Profit whichever is more 60% of the Book Profit

48 Particulars Net Profit as per Profit and Loss Account Add: Remuneration to partners if debited to P&L Account Add: Interest debited to P&L Account Add / Less: Adjustments as provided in Sec 28 to Sec 44D Less: Interest to the extent provided U/S 40(b) Book Profit for the purposes of 40(b) Rs/- XXX XXX XXX XXX XXX XXX By virtue of the above, income chargeable to tax under the heads IHP, Capital Gains, IOS will not form part of book profit. Also, brought forward business losses, deductions under chapter VI-A will not be deducted while computing the book profit. However, unabsorbed depreciation has to be reduced since it is covered under section 32.

49 Explanation 1: provides that 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 a representative capacity, is not taken into account, for the purposes of Sec 40(b). Example: X is a partner in a firm on behalf of his HUF. The firm pays to X interest on deposit and capital Rs.4000/- to X (on the personal loans given by X) and Rs.5000/- (for the loans given by HUF). In this case Rs.4000/- is deductible once the provisions of Sec 36(1) (iii) and 40A (2) are complied with. However, Rs.5000 will be allowed if the provisions of Sec 40(b) are complied with in addition to those specified U/S 36(1)(iii) and 40A(2).

50 provides that where an individual is a partner in a firm otherwise than in a representative capacity, interest paid by the firm to such individual will not be taken into account for Sec 40(b), if such interest is received by him, for and on behalf of any other person.

51 Question # 3: Can Salary and Interest be disallowed even if the conditions of Sec 40(b) are satisfied? Sol: Instances where interest and salary will be disallowed even if conditions of Sec 40(b) are satisfied: Case # 1: For failures to comply with the provisions of Sec 184: For instance, where there is a failure on the part of the firm as referred to in Sec 144, then salary and interest paid by the firm to its partners shall be disallowed. Case # 2: For failures to fulfill the conditions of Sec 40A(2): Where the salary and interest paid to the partners are excessive and unreasonable having to the legitimate business needs of the business as per Sec 40A(2), such excess can be disallowed.

52 Provisions of Sec 170: Where a person carrying on business or profession has been succeeded by any other person who continues to carry on the business or profession, then: i) The predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession and ii) The successor shall be assessed in respect of the income of the previous year after the date of succession.

53 Where the predecessor cannot be found / the taxes cannot be recovered from the predecessor, then the income will be assessed / taxes will be recovered from the successor in respect of incomes/taxes of the following two years. i) The previous year in which succession took place. ii) The immediately preceding previous year in which succession took place.

54 Where any tax, penalty or any other sum payable by a firm for any assessment year is due, then every person who was the partner of the firm during the relevant previous year and the legal representatives of any such person who is deceased shall be jointly and severally liable along with the firm in respect of such sums payable by the firm. However, the liability of the legal representative of the deceased partner cannot exceed the value of the estate devolving upon him.

55 Where a firm is dissolved or the business or profession is discontinued, the firm shall be deemed to be in existence for the purposes of any proceedings pending under the Income Tax Act, and the proceedings shall be continued accordingly. Similarly, the firm shall be deemed to be in existence for the purposes of initiating proceedings against the firm. In respect of any tax, interest, penalty or any other sum, payable by the firm all the persons who were the partners together with the legal heirs of the deceased partner at the time when dissolution or discontinuance took place shall be jointly and severally liable to pay any such amount.

56 Sec 189 is not a charging section and does not extend to income or profits which accrue after the dissolution of the firm. In such cases, the sums received after discontinuance shall be assessable U/S 176(3A) in the hands of the recipients.

57 Carry forward of house property loss, business loss, capital loss and loss from the activity of owning and maintaining race horses: These losses can be set off and carried forward by a firm in the case of change in the constitution of the firm as follows, as per the provisions of section 78. First ascertain the share of outgoing partner in the profit/loss of the firm in the year of change; Compute the share of loss of outgoing partner in the brought forward loss.

58 The difference between (a) and (b) [in the case of profit in the year of change] or the aggregate of (a) and (b) [if there is loss in the year of change in the constitution of the firm] cannot be allowed to be set off and carry forward in the hands of the reconstituted firm.

59 Taxation scheme of LLP has been incorporated on the same lines as of general partnership firms. In brief an LLP would be taxable for the AY on the following lines. Issue # 1: Tax liability of an LLP The tax liability in the case of an LLP is higher of the following two amounts. Tax calculated as per the normal provisions (i.e Similar to the way in which tax is calculated for general partnership firms) And Tax as per AMT provisions (Alternate Minimum Tax Provisions)

60 Same treatment as applicable to PFAS. i.e Remuneration and Interest to partners is deductible in the hands of LLP within the parameters of Sec 40(b) if the firm satisfies the requirements of Sec 184. The amount of remuneration and interest which is deductible in the hands of the LLP, will be taxable in the hands of partners U/S 28.

61 Issue # 3: Signing of the return [Sec 140(cd)] The designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner can sign the return.

62 The conversion from a general partnership to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of Sec 45 shall apply. [i.e the same will be liable to capital gains tax.]

63 Such conversion is exempted if conditions of Sec 47(xiiib) are satisfied.

64 Issue # 6: Liquidation of an LLP [Sec 167C] Sec 167C has been inserted w.e.f A.Y The provisions are briefed here under. Any tax is due from a LLP in respect of any income of any previous year; Or Any tax is due from any other person in respect of any income of any previous year during which such other person was a LLP.

65 If in the two cases stated above, tax cannot be recovered from the LLP or from such other person, then every person who was a partner of the LLP at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax. However, this rule will not be applicable if the partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. Note: Tax due includes penalty, interest or any other sum payable under the IT Act. [Finance Act, 2013]

66 Sec 45(3): Where a partner introduces or brings assets as his capital contribution, then the same will be valued at the amounts recorded in the books of account. Sec 45(4): Where capital assets are distributed on account of dissolution, the same will be valued at the market values for the purpose of computing capital gains.

67 If business is continued after dissolution of the firm: Stock shall be valued as per regular method of accounting followed by the assessee. [SC s Judgment in Shakti Trading Co is applicable] If business is discontinued after dissolution of the firm: In this case, stock will be valued at Fair Market Value. [SC s judgment in A.L.A Firm holds good.]

68 Sec 40(ba): Interest, salary, commission, bonus and remuneration payable to the members shall not be allowed in the hands of the AOP. Explanation 1 to Sec 40(ba) provides that where the AOP pays as well as receives interest from the same member then, only net interest expenditure [if positive] is disallowed.

69 provides that where an individual is a member in AOP / BOI on behalf, or for the benefit of any other person, interest paid by the AOP/BOI to such individual otherwise than as MEMBER in a representative capacity, is not taken into account, for the purposes of Sec 40(ba).

70 provides that where an individual is a member in AOP / BOI (otherwise than in a representative capacity) interest paid by the AOP / BOI to such individual will not be taken into account for the purposes of Sec 40(ba), if such interest is received by him on behalf of any other person.

71 AOP YES Are Shares of members determinate? No Is foreign company a member? No YES Share of company shall be chargeable at foreign co. rate and the MMR YES Is foreign company a member? Do any of the members have income exceeding the max amount not chargeable to tax? YES Entire income of AOP/BOI shall be MMR Entire income of AOP/BOI shall be the rate applicable to foreign co. No No Entire income of AOP/BOI shall be rates applicable to individuals Entire income of AOP/BOI shall be MMR

72 Procedure to be followed to compute the share of a member of an AOP [Sec 67A] Particulars Total Income of the AOP as calculated under the provisions of the IT Act, 1961 Less: Interest, salary, bonus, commission or remuneration by whatever name called paid / payable to members Balance (Apportioned in P&L Ratio) distributed to members Add back interest, remuneration etc deducted as supra to the balance distributed to members. If the balance as calculated above is a Loss then Interest, remuneration etc shall be deducted Resultant is the share income from AOP Rs/- XXX (XXX) XXX XXX XXX

73 Tax incidence of members of AOP / BOI: The share of a member in the income of AOP / BOI is treated in 3 different ways, depending on whether the AOP / BOI is chargeable to tax at the MMR or at the Normal Rate or is not chargeable to tax at all. These are When AOP / BOI is taxable at the MMR: Where the AOP / BOI is chargeable to tax at the MMR or at the rate higher than the MMR, the share of a member therein shall not be included in the total income at all.

74 When AOP/BOI is taxable at the normal rate and tax is paid: Where the AOP / BOI is chargeable to tax at the normal rates applicable to individuals, etc, then the share of a member therein shall be included in his total income, but a rebate therein shall be given on the same U/S 86 read with Sec 110. Rebate = [Share received from AOP Tax liability Total Income] When AOP / BOI is taxable at normal rate and no tax is payable: Where no income tax is chargeable on the total income of the AOP / BOI, the shares of a member therein shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon

75 Assessment as if no dissolution / discontinuance: In case an AOP is dissolved or its business / profession is discontinued, its total income will be assessed as if no discontinuance or dissolution had taken place. Person liable to tax: Every person who was member of AOP at the time of discontinuance / dissolution thereof, or the legal representative of any such deceased member, shall be jointly and severally liable for the amount of tax, penalty or other sum payable by the AOP. However, the liability of the legal representative shall be limited to the extent to which the estate of the deceased is capable of meeting the liability.

76 The tax liability is higher of tax calculated as per the normal provisions of the IT Act, 1961 and Tax calculated as per AMT (Alternate Minimum Tax) provisions. Table indicating the conditions to be satisfied for applicability of AMT Provisions: Assessee Conditions for applicability of AMT PFAOP Condition # 1: The assessee should have claimed deduction under any of the sections 10AA, 80-H to 80-TT except 80-P. Condition # 2: Adjusted Total Income exceeds Rs 20 lakhs. PFAS / LLP Only condition # 1 is relevant here.

77 Total Income Particulars Add: Deductions under Chapter VI-A falling under the heading C except 80-P [i.e From 80-H to 80-TT other than 80-P] Add: Deduction claimed as per Sec 10AA Adjusted Total Income (ATI) Tax liability at the rate of 18.5% of the above Add: 10% if the ATI exceeds Rs 1 Crore Add: Education Cess (2%)and SHEC (1%) on [Tax + Surcharge] Tax Liability as per AMT Provisions Rs/- xxx xxx Xxx Xxx Xxx Xxx Xxx Xxx

78 Principle # 1: Excess of tax paid U/S 115JC (AMT) over the normal tax shall be eligible as tax credit Principle # 2: Tax credit is allowable for next 10 assessment years

79 Principle # 3: Manner of set off of the AMT credit The AMT credit shall be allowed to be set off for an assessment year in which the regular income tax exceeds the AMT to the extent of the excess of regular tax over the AMT tax. Principle # 4: No interest shall be allowed on the excess AMT credit. Principle # 5: AMT Credit shall be allowed while calculating interest U/S 234-B/234-C

80 Assessment of Co-Operative Societies Rajendra Prasad Talluri B.Com; CA; Grad CWA Finance Act,

81 Taxation of Co-Operative Societies Meaning: Co-Operative Society means a society registered under the Co-Operative Societies Act, 1912 Or under any other law for the time being in force in any state for the registration of co-operative societies. [Sec 2(19)] Treated as separate assessee under the provisions of the IT Act, 1961: Co-operative Societies are treated separate assessable entities for the purposes of the IT Act, Thus, its income will be computed under different heads of income similar to any other assesse. Further it may be noted that income from insurance business is calculated as per the provisions of First Schedule to the IT Act. Taxation of Entrance Fees: Entrance Fees received from its members is taxable as its income from business irrespective of the nature of business carried on by the society. Co-Operative Central Bank Vs CIT 81

82 Special Provisions relating to IHP Special Provision w.r.t IHP [Sec 27(iii)] A member of a co-operative society to whom a building or a part thereof is allotted or leased under a house building scheme of the society must be deemed to be the owner of that building or part thereof. Thus, co-operative society is not liable to pay tax in respect of income from house property even though it may be the real owner according to the official records. However, where the tenant is not a member of the society, then the cooperative society shall be assessable in respect of the Income From House Property. 82

83 Exemptions, Deductions and Relaxations from TDS Exemption U/S 10(29) of the IT Act: The income of a marketing society derived from the letting out of godown or warehouses for storage, processing or facilitating the marketing of commodities is totally exempt from tax. A note on Sec 80-P deduction: This deduction is not available to Co-Operative Banks. However, Primary Agriculture Credit Societies and Primary Co-Operative Agricultural And Rural Development Banks can claim the deduction U/S 80-P. Relaxation with respect to Sec 194A provisions: Sec 194A (Interest other than interest on Securities) provisions are not applicable when such income is credited or paid By a Co-Operative Society to a member thereof / to any other society In respect of deposits with a Primary agricultural credit society / Primary Credit Society / A Co-Operative Land Mortgage Bank / A Co-Operative Land Development Bank In respect of Deposits with a co-operative society, other than a co-operative society or bank engaged in carrying on the business of banking. 83

84 CA Final Course Chapter 7 Direct Tax Laws Chapter 13 Unit 2 Rajendra Prasad Talluri B.Com; CA; Grad CWA

85 Principle: A person cannot make profit out of a transaction with himself. Income, therefore, must come from outside. Under this principle, a surplus arising to a mutual concern cannot be regarded as income chargeable to tax. Is Registration compulsory to claim the benefit under this principle? The fact whether such body of individuals is incorporated or not, is wholly irrelevant, so long as there is a complete identity between the contributors as a class and the participants of the benefits and surplus as a class.

86 Mutual concerns are taxable in the following circumstances: Case # 1: Income derived by a trade, professional or similar association from specific services performed for its members U/S 28(iii) read with Sec 44A Case # 2: Income derived from Insurance business carried on by a mutual insurance company or co-operative society as provided U/S 2(24) (vii) Case # 3: Income received from non members

87 General Rule: (a) Income of a mutual concern is exempt from tax (b) Losses from a source which is exempt from tax cannot be allowed to be set off against any other heads. To these general rules, an exception is contained in Sec 44A, whereby it is provided that income derived by a trade, professional or other similar association from rendering of specific services to its members is taxable. Thus, the surplus from various general services is exempt whereas the surplus derived from rendering of specific services is not exempt from tax. 87

88 Similarly, an exception is provided to the second general rule also. The deficiency derived from exempted category of services is allowed to be set off against the taxable surplus to the extent of 50% of such taxable surplus. The taxable surplus is to be derived after setting off the carry forward business losses, carry forward depreciation, investment allowance and development rebate. Also, it is provided that where there is no other income, then the deficiency arising on account of Sec 44A, cannot be carried forwarded nor be set off. 88

89 Income From Specific Services Receipts for specific services (A) Less: Expenses attributable to the above (B) Balance: (C) = A B [This amount is taxable] If there is a loss in this category, then the same will be allowed to be set off against other heads and also is eligible for set off and carry forward for future years Income From General Services Receipts for general services (Say entrance fees, annual membership fees etc,.) [D] Less: Expenses attributable to the above [E] Balance: (F) = D E [This amount is Exempt] If there is a loss in this category (known as deficiency) then the same will be eligible to be adjusted against (C) up to 50% of adjusted (C). The remaining amount of deficiency is to be ignored if there is any. Adjusted C = Surplus as ascertained in C Add: Income under other heads Less: B/F losses, B/F depreciation and deductions under the Act. 89

90 Question # 1: A Social Club furnishes you the following data. Compute the net income of the club Particulars Receipts by way of entrance fees and annual membership fees from members Rs/- 30,000 Expenditure on members 5,000 Bank Interest 10,000 Receipts from members from specific services 30,000 Sol: Expenditure on the above specific services 25,000 90

91 Sol: Social clubs are not trade associations: A social club is not a trade association and hence even if it derives income from rendering of specific services to its members, is not taxable U/S 28(iii) and it is governed by the general principles applicable to mutual associations. Therefore, Sec 44A has no application. Hence, income received from General and Specific Services is exempt from tax. Particulars Surplus for general Services Surplus for Specific Services Bank Interest Tax Treatment Rs. 25,000 = (30,000-5,000) Exempt under the principle of mutuality Rs. 5,000 = (30,000-25,000) Exempt under the principle of mutuality Rs 10,000 = Taxable under IOS 91

92 Question # 2: A Trade Association furnishes the following data. Compute the total income. Particulars Rs/- General Receipts from members Rs. 20,000 General Exp on members Receipts from specific services performed Expenditure on specific services Bank Interest B/F depreciation Rs.45,000 Rs.30,000 Rs.16,000 Rs.30,000 Rs.6,000 92

93 Sol: Whether Sec 44A is applicable Yes; Deficiency from general services = 25,000 [Rs. 20,000 Rs.45,000] Surplus from specific services = Rs.14,000 [Rs.30,000 Rs.16,000] Computation of Total Income Particulars Surplus from specific services Rs. 14,000 Less: B/F Depn PGBP before set off of deficiency Rs/- Rs.6,000 Rs.8,000 Less: Deficiency adjusted [Refer Note] - Rs 8,000 Net Taxable Income under the head PGBP Bank interest 30,000 Less: Bal of deficiency after adjusting against PGBP -11,000 Balance taxable under IOS 19,000 Total Income taxable 19,000 NIL Note: Deficiency that can be adjusted: Least of (a) and (b) (a): Actual Deficiency = Rs 25,000 (b): 50% of [PGBP B/F Depn + Other Income] = 50% [14,000-6,000+30,000] = Rs 19,000 93

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