1 Basic concepts. 2 Residential status and tax incidence. u A few words from the authors I-5 u About the authors I-7 u Section-wise Index I-25 I-9

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1 Contents u A few words from the authors I-5 u About the authors I-7 u Section-wise Index I-25 1 Basic concepts 1. Assessment year 1 2. Previous year 1 3. Person 5 4. Assessee 6 5. Charge of income-tax 6 6. Income 7 7. Gross total income Total income and tax liability Agricultural income Difference between exemption and deduction Assessment Definition of manufacture Capital asset Company Fair market value Capital receipts vs. Revenue receipts Capital expenditure vs. Revenue expenditure Method of accounting Definitions of amalgamation, demerger, infrastructure capital company and infrastructure capital fund Rules of interpretation 38 2 Residential status and tax incidence 22. What is relevance of residential status Residential status - General norms Residential status of an individual Residential status of a Hindu undivided family Residential status of the firm and association of persons Residential status of a company Residential status of every other person Relation between residential status and incidence of tax Receipt of income Accrual of income Income deemed to accrue or arise in India 74 32A. Fund Managers in India not to constitute business connection of offshore funds 90 I-9

2 Contents I Hints for tax planning in respect of residential status Problems on residential status and tax incidence 93 3 Incomes exempt from tax 38. Incomes exempt under section Special provisions in respect of newly established undertakings in free trade zone, etc A. Special provisions in respect of newly established units in Special Economic Zone Special provisions in respect of newly established hundred per cent export-oriented undertakings Special provision in respect of export of artistic hand-made wooden articles Income exempt under section 13A Exemption to Electoral Trust Salaries 46. Essential norms of salary income Basis of charge Place of accrual of salary income Tax treatment of different forms of salary income Allowance Perquisites Valuation of perquisites Deduction from salary income Tax on salary of non-resident technicians Salaries of other foreign citizens Employees provident fund Approved superannuation fund Approved gratuity fund Deduction under section 80C Relief under section Meaning of salary for different computations Hints for tax planning Problems on salary income 198 Annex 1 : Frequently Asked Questions (FAQs) about computation of salary income Income from house property 86. Chargeability Applicability of section 22 in certain typical situations Principle of mutuality vis-a-vis section Property income exempt from tax Computation of income from a let out house property Computation of income from self-occupied property Special provisions when unrealised rent is realised subsequently Mode of taxation of arrears of rent in the year of receipt 233

3 I-11 Contents 94. Hints for tax planning Problems on computation of property income 234 App. Frequently Asked Questions (FAQs) about mode of computation of annual value Profits and gains of business or profession 101. Chargeability General principles governing assessment of business income Method of accounting Scheme of deductions and allowances Basic principles governing admissibility of deduction under sections 30 to 44DB Deductions expressly allowed in respect of expenses/allowances Rent, rates, taxes, repairs and insurance of building Repairs and insurance of machinery, plant and furniture Depreciation Investment allowance for acquisition and installation of new plant and machinery A. Investment allowance in backward area in Andhra Pradesh, Bihar, Telangana or West Bengal Tea/coffee/rubber development account Site restoration fund Reserves for shipping business Expenditure on scientific research Expenditure on acquisition of patent rights, copyrights, know-how Expenditure for obtaining right to use spectrum for telecommunication services Amortization of telecom licence fees Expenditure on eligible projects or scheme Deduction in respect of expenditure on specified business Payment to the associations and institutions carrying out rural development programmes A. Weighted deduction for expenditure incurred on agricultural extension project B. Weighted deduction for expenditure for skill development Amortisation of preliminary expenses A. Amortisation of expenditure in the case of amalgamation/demerger B. Amortisation of expenditure under voluntary retirement scheme Amortisation of expenditure on prospecting, etc., for development of certain minerals Insurance premium Insurance premium paid by a federal milk co-operative society Insurance premium on health of employees Bonus or commission to employees Interest on borrowed capital A. Discount on zero coupon bonds Employer s contribution to recognised provident fund and approved superannuation fund A. Employer s contribution to notified pension scheme Contribution towards approved gratuity fund Employees contribution towards staff welfare schemes Write off allowance for animals Bad debts Provision for bad and doubtful debts relating to rural branches of commercial banks 366

4 Contents I Transfer to special reserve Family planning expenditure Contribution towards Exchange Risk Administration Fund Revenue expenditure incurred by entities established under any Central, State or Provincial Act A. Contribution to credit guarantee trust fund B. Commodities transaction tax/securities transaction tax Expenditure for purchase of sugarcane by a co-operative society engaged in sugar manufacturing Expenditure on advertisement Expenses deductible from commission earned by life insurance agents, UTI agents, post office/government securities agents and agents of notified mutual funds General deduction Amounts expressly disallowed under the Act Amount not deductible under section 40(a) Amount not deductible in the case of partnership firm Amounts not deductible in the case of an association of persons and body of individuals Amount not deductible under section 40(c)/(d) Payments to relative Payments exceeding Rs. 10,000 paid otherwise than by account payee cheques or bank drafts Expenditure on payment of salary or perquisite to employees Fees for services payable to a former employee Provision for payment of gratuity Interest on public deposit Restriction on contributions by employers to non-statutory funds Disallowance of expenditure incurred in connection with income-tax proceedings Disallowance of unpaid liability Deemed profit Income from undisclosed sources Maintenance of accounts by certain persons Audit of accounts of certain persons Special provisions consequential to changes in the rate of exchange of currency Special provision for deduction in the case of trade, professional or similar associations Special provisions Valuation of stock Hints for tax planning Problems on computation of income from business/profession Capital gains 166. Chargeability Meaning of capital asset Types of capital assets Transfer of capital asset Computation of capital gain Full value of consideration Expenditure on transfer 541

5 I-13 Contents 173. Cost of acquisition Cost of improvement Indexed cost of acquisition and indexed cost of improvement Computation of capital gain in certain special cases Reference to Valuation Officer Capital gains exempt from tax Capital gains arising from transfer of residential house Capital gains arising from the transfer of land used for agricultural purpose Capital gains on compulsory acquisition of land and buildings forming part of industrial undertaking Capital gain not to be charged on investment in certain bonds A. Capital gain not to be charged on investment in units of a specified fund Capital gains on transfer of a long-term capital asset other than a house property Capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone A. Capital gain on transfer of residential property B. Extension of time-limit for acquiring new asset Short-term/long-term capital gains - How charged to tax Hints for tax planning Problems on computation of capital gains Income from other sources 191. Basis of charge Relevance of method of accounting Dividend Winnings from lotteries, crossword puzzles, horse races and card games, etc Sum received from employees as their contribution towards staff welfare schemes Interest on securities Income from machinery, plant or furniture let on hire Income from composite letting of building, machinery, plant or furniture Money/property is received without consideration or for inadequate consideration Share premium in excess of fair market value Advance money received in course of negotiations for transfer of a capital asset Interest on KVP, IVP, NSC, etc Deductions Other points Problems on computation of income from other sources Income of other persons included in assessee s total income 206. Transfer of income without transfer of assets Revocable transfer of assets When an individual is assessable in respect of remuneration of spouse When an individual is assessable in respect of income from assets transferred to spouse 684

6 Contents I When individual is assessable in respect of income from assets transferred to son s wife When individual is assessable in respect of income from assets transferred to a person for the benefit of spouse When an individual is assessable in respect of income from assets transferred to a person for the benefit of son s wife Income of minor child Conversion of self-acquired property into joint family property and subsequent partition Other profits Recovery of tax Hints for tax planning Problems explaining clubbing provisions Set off and carry forward of losses 226. Mode of set off and carry forward - The three steps Inter-source adjustment - How made Inter-head adjustment - How made Carry forward of loss Loss of partnership firms Loss of closely held companies Carry forward and set off of loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank Problems illustrating the provisions of set off and carry forward of losses Deductions from gross total income and tax liability 234. Essential rules governing deductions Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc A. Deduction in respect of deposit under National Savings Scheme Equity Linked Savings Scheme Deduction in respect of pension fund A. Deduction in respect of contribution to a National Pension System (NPS) B. Deduction in respect of subscription to long-term infrastructure bonds - When available under section 80CCF C. Deduction in respect of investment made under any equity saving scheme Deduction in respect of medical insurance premia Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available Deduction in respect of medical treatment, etc Deduction in respect of payment of interest on loan taken for higher studies A. Deduction in respect of interest on loan taken for residential house property Deduction in respect of donation to certain funds, charitable institutions, etc 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 companies to political parties or electoral trust 754

7 I-15 Contents 246. Deduction in respect of contributions given by any person to political parties or electoral trust Deduction in respect of profits and gains from projects outside India Deduction in respect of profits and gains from housing projects aided by World Bank Tax incentives for exports Deduction in respect of earnings in convertible foreign exchange Deduction in respect of profit from export of computer software Deduction in respect of profits and gains from export or transfer of films software Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. - How to find out A. Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone B. Deduction in respect of eligible start-up Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail A. Deduction in respect of profits from housing projects Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out A. Deduction in the case of hotels and convention centre in NCR B. Deduction in respect of certain undertakings in North-Eastern States Deduction in respect of profits and gains from the business of collecting and processing of bio-degradable waste Deduction in respect of employment of new employees Deduction in respect of interest on certain securities, investments, etc Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre Deduction in respect of royalties from certain foreign enterprises Deduction in respect of income of a co-operative society Deduction in respect of income from business of publication of books Deduction in respect of royalty income of authors Deduction in respect of remuneration or professional income from certain foreign sources Deduction in respect of royalty on patents Deduction in respect of interest on deposits in savings accounts Deduction in case of a person with disability Deduction from gross total income of the parent in certain cases Deductions from tax liability Rebate for resident individuals Agricultural income 278. Definition Income which is partly agricultural and partly from business Partially integrated taxation of non-agricultural income with income derived from agriculture Computation of net agricultural income Typical problems on assessment of individuals 285. Tax incidence on individuals Taxable income - How computed 825

8 Contents I Tax liability Problems on computation of taxable income Tax treatment of Hindu undivided families 295. Meaning of Hindu undivided family Hindu coparcenary Different schools of Hindu law Jain and Sikh families Assessment as Hindu undivided family - Basic conditions Taxable income - How to compute Rates of tax Partition of a Hindu undivided family Problems on Hindu undivided families Special provisions governing assessment of firms and association of persons 313. Meaning of partnership Scheme of taxation of firms When remuneration/interest is deductible What are the conditions a firm should fulfil under section What are the conditions for claiming deduction of remuneration to partners under section 40(b) What are the conditions for claiming deduction of interest to partners under section 40(b) Carry forward and set-off of loss in the case of change in the constitution of firm Computation of income of firm Computation of tax of firm Assessment of partners of a firm How to compute income of an association of persons (AOP) or body of individuals (BOI) Computation of income of an AOP/BOI Computation of tax of AOP or BOI Assessment of member of AOP/BOI Hints for tax planning Problems on computation of taxable income of firms/partners and association of persons Taxation of companies 333. Definitions Taxable income and tax liability - How computed Carry forward and set-off of losses in the cases of certain companies Minimum alternate tax Tax on distributed profits of domestic companies A. Tax on income distributed to unitholders B. Tax on income received from venture capital companies and venture capital funds 936

9 I-17 Contents 337C. Additional income-tax on distributed income by company for buy-back of unlisted shares Problems on computation of taxable income of a corporate-assessee Assessment of co-operative societies 339. Meaning of co-operative society Taxable income and tax liability - How computed Deduction in respect of income of co-operative societies Problems on computation of income of a co-operative society Assessment of charitable and other trusts 343. Meaning of trust Tax exemption Charitable purpose Essential conditions for exemption How to find out exemption u/s Accumulation of income Forfeiture of exemption Public charitable/religious trust - How chargeable to tax Private discretionary trust Income from property held under trust partly for religious purposes and partly for other purposes A. Oral trust B. Tax on distributed income by securitization trusts C. Special provisions pertaining to business trust D. Pass through status to Category I and Category II Alternative Investment Funds Return of income and assessment 353. Voluntary return Return of loss Extension of time Belated return Revised return Defective or incomplete return Scheme to facilitate submission of returns through Tax Return Preparers A. Power of Board to dispense with furnishing of documents B. Filing of return in electronic form Return by whom to be verified Permanent Account Number (PAN) A. Quoting of Aadhaar number What is self-assessment Inquiry before assessment Summary assessment without calling the assessee Assessment in response to notice under section 143(2) Best judgment assessment A. Reference to dispute resolution panel 1042

10 Contents I Reassessment Issue of notice for reassessment What are the provisions regarding rectification of mistake Time limit for completion of assessments/reassessments Provisions of section Problems on return of income and assessment A. Obligation to furnish annual information return pertaining to financial transactions B. Submission of statement by a non-resident having liaison office in India C. Furnishing of information or document by an Indian concern Penalties and prosecutions 373. Penalties for defaults in brief Penalty for concealment/under-reporting of Income Who can levy penalty Power of Commissioner to reduce or waive penalty Procedure for imposition of penalty Time-limit for completion of penalty proceedings Offences and prosecutions Onus of proof Advance payment of tax 381. Income liable for advance tax Advance tax liability - Under different situations Interest payable by the assessee or Government Problems illustrating advance tax provisions Interest 385. Interest payable by the assessee Interest payable to assessee Procedure to be followed in calculation of interest Waiver or reduction of interest under sections 234A, 234B and 234C Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases Power of CBDT and Settlement Commission to reduce/waive interest Writ petition Problems illustrating computation of interest Tax deduction or collection at source 404. Scheme of tax deduction at source Deduction of tax from salaries A. Tax deduction at source from withdrawal from employees provident fund scheme Deduction of tax at source from interest on securities Deduction of tax at source from dividends Deduction of tax at source from interest other than interest on securities 1179

11 I-19 Contents 409. Deduction of tax at source from winnings from lotteries or crossword puzzles Deduction of tax at source from winnings from horse races Deduction of tax at source from payments to contractors or sub-contractors Deduction of tax at source from insurance commission A. Tax deduction from payment of life insurance policy Payment to non-resident sportsman or sports association Deduction of tax from payments in respect of National Savings Scheme Deduction of tax at source on payments on account of repurchase of units by Mutual Funds or UTI Deduction of tax from commission, etc., on sale of lottery tickets Deduction of tax at source from commission or brokerage Deduction of tax at source from income by way of rent A. Tax deduction at source on purchase of immovable property B. Tax deduction from payment of rent by certain individuals/hufs C. Tax deduction from payment under joint development agreement Tax deduction at source on fees for professional or technical services, royalty or directors fees Tax deduction from payment of compensation in certain cases A. Deduction of tax at source from interest payable on infrastructure debt fund AA. Tax deduction from income from units of business trust AB. Tax deduction from income in respect of units of investment fund ABB. Tax deduction from income in respect of investment in Securitization fund B. Tax deduction by an Indian specified company or business trust from interest to a non-resident/foreign company C. Tax deduction at source on interest on bonds/government securities Deduction of tax at source from other sums Tax deduction from any income payable to non-resident unit-holders of Mutual Fund Deduction of tax at source in respect of units referred to in section 115AB Deduction of tax from income or long-term capital gain from foreign currency bonds/global Depository Receipts Deduction of tax at source from income of Foreign Institutional Investors from securities Payment without tax deduction or with deduction at lower rate Time of tax deposit, annual reports, etc Other points for consideration Tax collection at source Refund of excess payments 430. Right to claim refund - When arises Who can claim refund How to claim refund Other points 1239

12 Contents I Appeals and revisions 435. Meaning of appeal Appellate hierarchy Appeal to the Commissioner (Appeals) Revision by the Commissioner of Income-tax Appeal to the Appellate Tribunal Appeal to High Court Appeal to the Supreme Court Provision for avoiding repetitive appeals Procedure for appeal by revenue when an identical question of law is pending before Supreme Court Consequence of non-filing of appeal in respect of cases where the tax effect is less than the prescribed monetary limit Income-tax authorities 445. Tax authorities Central Board of Direct Taxes Settlement of cases 457. Introduction Meaning of case Settlement Commission Application for settlement of cases Procedure on receipt of application under section 245C Power of Settlement Commission to order provisional attachment to protect revenue Power of Settlement Commission to reopen completed proceedings Powers and procedure of Settlement Commission Inspection, etc., of reports Powers of Settlement Commission to grant immunity from prosecution, etc Abatement of proceeding before Settlement Commission Order of settlement to be conclusive Other points Special measures in respect of transactions with persons located in notified jurisdictional area 471. Special measures in respect of certain transactions Notified jurisdictional area 1297

13 I-21 Contents 473. Applicability of transfer pricing provisions Disallowance of payment to financial institutions located in notified jurisdictional area Disallowance of other expenditure Amount received to be treated as income in some cases TDS at higher rate Provisions illustrated General Anti-avoidance Rule 480. Applicability of general anti-avoidance rule Impermissible avoidance arrangement Procedure for invoking GAAR Clarifications given by Board Advance ruling for non-residents 486. Advance ruling Procedure for filing application Procedure on receipt of application Applicability of advance ruling Advance ruling to be void in certain circumstances Powers of authority A. Authority for advance rulings Search, seizure and assessment 492. Powers regarding discovery, production of evidence, etc Search and seizure Requisitioning of books of account, etc Application of assets seized or requisitioned Power to call for information Power of survey Power to collect certain information A. Power to call for information by prescribed income-tax authority Scheme of assessment in case of search or requisition Prior approval in the case of search Transfer pricing 506. Taxation of international transaction Computation of the arm s length price Arm s length price - Computation of Computation of arm s length price in cases where more than one price is determined under most appropriate method 1347

14 Contents I Reference to transfer pricing officer A. Power of Board to make Safe Harbour Rules Maintenance of books of account Report from accountant Specified domestic transactions Advance Pricing Agreement (APA) A. Secondary adjustment in certain international transactions B. Provisions pertaining to thin capitalisation C. Important judicial rulings Business restructuring 515. Restructuring business Amalgamation Demerger Conversion of sole proprietary business into company Conversion of firm into company Slump sale Transfer of assets between holding and subsidiary companies Amalgamation or demerger of co-operative banks Conversion of private company/unlisted public company into Limited Liability Partnership (LLP) Tax planning 525. Tax planning Tax planning with reference to setting up of a new business Tax planning with reference to financial management decisions Tax planning with reference to specific managerial decisions Tax planning in respect of employees remuneration Tax planning in respect of non-residents Tax planning in respect of amalgamation or demerger of companies or business restructuring Miscellaneous 532. Introduction of Tonnage Tax Securities Transaction Tax Tax clearance certificate What is equalisation levy Income-tax on fringe benefit Commodities transaction tax Facility for electronic communication 1439

15 I-23 Contents 541. Introduction of Document Identification Number Power to withdraw approvals Restriction on cash transactions 1440 ANNEXURES 1. Tax rates Rates of depreciation The Eleventh Schedule, Thirteenth Schedule, Fourteenth Schedule/ Investment ceiling in the case of small scale industrial undertaking Notified backward districts Questions set for CA (Final) examinations and answers Questions set for CS (Final) examinations and answers Questions set for CMA (Final) examinations and answers 1645