Selected Questions and Answers on Assessment of other entities. Rajendra Prasad Talluri B.Com; CA; Grad CWA

Transcription

1 on Assessment of other entities Rajendra Prasad Talluri B.Com; CA; Grad CWA Finance Act,

2 Question # 1: Who shall sign and verify the return of income of an LLP? Sol: It shall be signed and verified by the Designated Partner. Where there is no Designated Partner as such or where for any unavoidable reason, he could not sign, then the return can be signed by any partner of the LLP. [Sec 140] Question # 2: XYZ LLP is liquidated. What is the liability of partners of XYZ LLP in respect of its tax dues? Sol: Every person who was a partner of the LLP at any time during the relevant previous year are jointly and severally liable for payment of tax unless he proves that 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. Sec 167C has been amended with effect from June 1, 2013 to clarify that the expression tax due includes penalty, interest or any other sum payable under the Act. 2

3 Question # 3: JK Associates is an Association of Persons (AOP) consisting of two members, J and K. Shares of the members are: 60% (J) and 40%(K). Income of the AOP for the previous year is Rs.6 lakh. Compute tax liability of the AOP and the members in the following situations: (i) J and K have their income, other than income from AOP, amounting to Rs.1 lakh and Rs.6.90 lakh, respectively. (ii) J and K's income, other than income from AOP, amount to Rs.1 lakh and Rs.1.20 lakh, respectively. 3

4 Sol: Tax on total income of AOP is computed as follows: (i) If individual share of a member is known, and the total income of any member exceeds the basic exemption limit, then the AOP will pay tax at the maximum marginal rate. (ii) If individual share of a member is known and no member has total income exceeding the basic exemption limit, then the AOP will pay tax at the rates applicable to an individual. Section 86 provides for assessment of share in the hands of members of AOP as follows: A member s share in the total income of AOP will be treated as follows:- (i) If an AOP has paid tax at the maximum marginal rate or a higher rate, the member s share in the total income of AOP will not be included in his total income and will be exempt. (ii) If the AOP has paid tax at regular rates applicable to an individual, the member s share in the income of AOP will be included in his total income and he will be allowed rebate at the average rate of tax in respect of such share. 4

5 Tax Liability of J K Associates, AOP: Situation # 1: As K s income, other than that from the AOP, exceeds the basic exemption limit, the AOP shall pay tax at maximum marginal rate of 30.9% (i.e. 30% plus education cess@2% plus secondary and higher education cess@1%). Thus the tax payable by AOP = Rs.6,00,000 x 30.9% = Rs.1,85,400. Tax liability of J and K [i.e Individual Assessment]: Situation # 1: Particulars J Rs. K Rs. Share of profit from AOP Exempt Exempt Income from other sources 1,00,000 6,90,000 Total Income 1,00,000 6,90,000 Tax liability Nil 68,000 Education cess@2% + SHEC@1% Nil 2,040 Total tax payable Nil 70,040 5

6 Tax Liability of J K Associates, AOP: Situation # 2: Since none of the members have income, other than income from the AOP, exceeding the basic exemption limit, the AOP would be taxed at the rates applicable to an individual. Therefore, the AOP s tax liability = Rs.51,500/-. Tax liability of J and K [i.e Individual Assessment]: Situation # 2: Particulars J Rs. K Rs. Share of profit from AOP 3,60,000 2,40,000 Income from other sources 1,00,000 1,20,000 Total Income 4,60,000 3,60,000 Tax liability 26,000 16,000 Education cess@2% + SHEC@1% Total tax payable 26,780 16,480 Average rate of tax *[26, ,000]; **[16, ,000] 5.82% 4.58% Total tax liability 26,780 16,480 Less: Rebate under section 86 in respect of share of profit from AOP 20,952* 10,992** *[360, %]; **[240, %] Tax liability of members 5,828 5,488 Tax liability of members rounded U/S 288-B 5,830 5,490 6

7 Question # 4: A HUF is carrying on the business of purchase and sale of food grains. The Karta of HUF manages the business. Can the HUF pay salary to the Karta and claim the payment made as a deduction from the profits of its Business? If so, what are the conditions and limitations for such payment? Sol: Selected Questions and Answers Principle: If the salary paid to Karta is bonafide and wholly and exclusively for the business of the family, then such payment shall be allowable as an expenditure while computing the income of the HUF. [Jugal Kishore Baladeo Sahai 63 ITR (SC)] The salary paid shall be allowed as a deduction if the following conditions are satisfied: Remuneration should be paid under a Valid agreement. It should be in the interest of, and expedient for the business of the family. The payment should be genuine and not excessive. 7

8 Question # 5: A Hindu Undivided Family owns a property which has been let out to a firm carrying on business. The family is a partner in the firm through the Karta. No rent has been charged by the H.U.F from the firm for use of the premises by the firm. The Assessing Officer, however, has taxed the family on the notional income from property based on municipal valuation. Is this decision justified? Would your answer be different if the Karta of the HUF is a partner in his individual capacity? 8

9 Sol: Sec 22 brings into tax Annual value of the house for tax under the head IHP. Sec 22 gives an exception if the house is used for carrying out his own business or profession from the said house. Thus, there should be some identity between the person who is liable to tax under the head IHP and the person taxable under the head PGBP to claim exemption. This can happen only when the person who is owning the house property carries on business / profession from the said house property. In the instant case, HUF owns the house property. And it is a partner in the firm through its Karta. In the case of a partner, the income from the business is taxable in the hands of that partner to the extent of his profit and there is some identity in the income from house property and the income from business. Thus, the HUF can claim exemption under the head IHP as it is using the house for the purposes of the business / profession. On the other hand, where the Karta is a partner in his individual capacity, there won t be any identity as the income from house property is taxable in the hands of HUF and as the income from business is taxable in his individual assessment. Thus, if the Karta is a partner in his individual capacity, then the HUF is assessable with regard to the Income From House Property. [Shiv Mohanlal 202 ITR 60 (Allahabad HC) 1993] 9

10 Question # 6: 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? Sol: Selected Questions and Answers The SC has held in the case of Satyendra Kumar 232 ITR 360, that a gift can be made to a HUF by anyone 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. 10

11 Question # 7: How do you deal with the following issue under the respective provisions of the Income Tax Act. Anand was the Karta of a HUF. He died leaving behind his major son prem, his widow, his grandmother and brother s wife. Can the HUF retain its status as such or the surviving persons become co-owners? Sol: Selected Questions and Answers There need not be necessarily more than one male member to form a HUF along with female members [Gowli Buddanna (SC).] In the given case, on demise of the Karta Mr.Anand, his major son Prem shall become the karta of the HUF, and it shall be continued to be assessed as such in view of the above judgment. 11

12 Question # 8: B.Kapoor was a Karta of a HUF which was assessed to income tax. He died in an Air Crash and his two sons received Rs 5 Lac as compensation and Rs 3 Lac from the insurance company. The said amount of Rs 8 Lac was invested in fixed deposits. The assessee claims that the interest income from these shares is assessable as income of the HUF composed of his sons and their families. Discuss the correctness or otherwise of the above proportion? Sol: Amount received by family members on death of an Individual cannot be treated as the property of HUF. The Compensation amounts are individual assets of the assessee and they shall pass on to the legal heirs only in their individual capacity and not in the capacity as HUF. Hence any income acquired out of such fund shall be assessable to tax only in the hands of the legal heirs and not in the hands of HUF. [Lala Bansi Dhar & Sons vs CIT 123 ITR 58 (DEL)] 12

13 Question # 9: The assessee, Pandey Co-operative Housing Society, is a registered co-operative housing society, formed with the objective of maintaining the property owned by it, to effect repairs and maintenance of the common property of the members, and to confer to the members, the usual rights and privileges. For the assessment year , the assessee has received Rs.3 lacs as transfer fees from the transferor members and like amount from the transferees, who at the time of transfer, were not members of the society. Discuss the exigibility to tax the aforesaid receipts in the hands of the assessee Sol: Transfer fees received by a co-operative housing society, whether from outgoing or from incoming members, is not liable to tax on the ground of principle of mutuality where the predominant activity of such co-operative society is maintenance of property of the society. It was so held by the Bombay HC in Sind Co-op Housing Society v. ITO (2009) 317 ITR 47. Further, section 28(iii), which provides that income derived by a trade, professional or similar association from specific services performed for its members shall be treated as business income, can have no application since the co-operative housing society is not a trade or professional association. Therefore, Rs.3 lakhs received as transfer fees by Pandey Co-operative Housing Society from its transferor members and its transferees, is not chargeable to tax. 13

14 Thank You 14