Volume - III CMA INTER DIRECT TAX

Transcription

1 Volume - III CMA INTER DIRECT TAX

2 SURAJ AGRAWAL TAX CLASSES D-323, Gali No. 12, Ameena Complex, 3rd floor, Lalita Park, Laxmi Nagar, Delhi ,

3 THIS BOOK HAS BEEN A REALITY ONLY BECAUSE OF MY FAMILY & STUDENTS. CA SURAJ AGRAWAL

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5 PREFACE Taxation is a dynamic subject, which is not only a vast subject but also difficult to comprehend in view of frequent amendments. Yet it is the scoring subject of your syllabus. In addition, practice in the field of Taxation is also highly remunerative. My association with the students has helped me to bring this book in its present form simplified, comprehensive and easy to understand. The present edition of this book is designed to bridge the gap between theory & applications and incorporates the following: Updated with Finance Act 2017 Covers entire syllabus with theoretical concepts, examples etc Contains more than 1000 practical problems with solutions Chapter-wise short notes (separate volume) for revision purpose. Hope this book serves the purpose of the students. I shall be thankful to the readers for their suggestions, criticism and feedback if any. suraj.agrawal@hotmail.com; Mobile: ; ACKNOWLEDGEMENT This book is a result of sincere efforts of our family members, colleagues, associates, well-wishers and students, whose contribution cannot go unacknowledged. Master Reyaan, my wife CA Monika Agrawal and my mother deserve special mention for the time (on which they had the first right) they allowed me for this book. My brother CA Roshan Agrawal & Sisters have been a constant source of inspiration & motivation for me. I dedicate this book to my beloved late grandparents & Papa. CA Suraj Agrawal One more step towards success

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7 Inside S. No. Particulars Page No. 5 Income from Other Sources Practical Questions Solutions 6 Deduction Practical Questions Solutions 7 Capital Gain Practical Questions Solutions 19 TDS Practical Questions Solutions 20 Deductions & Exemptions [Section 10AA] Other Exemption u/s A.01 5A.06 5B.01 5B A.01 6A.08 6B.01 6B A.01 7A.12 7B.01 7B A.01 19A.04 19B.01 19B

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9 IOS By CA Suraj Agrawal SATC 5.1 INCOME FROM OTHER SOURCES [Section 56 to 59] Any income includible in the total income of an assessee, which cannot be included under any of the first four heads of income, is chargeable under the head IOS. Following conditions must be satisfied before an income can be taxed under the head Other Sources : a) There must be an income b) Such income must not be exempted income c) Such income must not be income falling under first four heads. IOS Income may include: a) Dividend Income b) Casual Income c) Gift d) Income from Sub-Letting of a House Property e) Family Pension f) Director s Sitting Fee g) Remuneration received by MP/MLA h) Interest on bank deposit / deposits with companies or on loan i) Income from undisclosed sources j) Examiner-ship fee from non-employer k) Rent from a vacant piece of plot of land l) Agricultural Income from land situated outside India m) Interest on Income Tax Refunds n) Sum received from Keyman Insurance Policy o) Dividend income from foreign company p) Premium amount (shares issued on premium) q) Advance money forfeited in the course of negotiation for transfer of a capital asset. The following income is chargeable under the head Income from other sources only if such income is not chargeable under the head Profits and gains of business or profession : a) Income from letting out of plant, machinery or furniture. b) Where letting out of buildings is inseparable from the letting out of plant, machinery or furniture, the income from such letting. c) Insurance Commission d) Income from Royalty e) Interest on Securities

10 IOS By CA Suraj Agrawal SATC 5.2 Class Notes

11 IOS By CA Suraj Agrawal SATC 5.3 CASUAL INCOME 1) Casual income includes income in the nature of winning from lotteries, crossword puzzles, horse races (including camel race), card games and other games of any sort, gambling, betting etc. 2) Such winnings are chargeable to tax as per section 115BB. Section 115BB provides that above casual income would be taxed at a flat rate of 30% [plus surcharge, if applicable, plus EC & SHEC. 3) No expenditure or allowance can be allowed from such income. 4) Loss under other head or under the head of IOS is not allowed to be set off with casual income. 5) No Deduction under Chapter VI-A [Section 80C to 80U] 6) Adjustment of unexhausted basic exemption limit is also not permitted against such income. 7) Grossing up where earning given after TDS: Income by way of winnings from lotteries / crossword puzzles / card game or other game of any short exceeding Rs. 10,000/- and from Horse Races [Not a camel Races] exceeding Rs. 10,000 Rs. 5,000 (w.e.f. 01/06/2016) is subject to TDS u/s 194B or 194BB. [TDS Rate is 30%] Thus, it is included in total income of the assessee after being grossed up as follows: Gross Winnings= [Net winnings 100 / (100 - Rate of TDS)] 8) Income derived from owning & maintaining racehorses is not a casual income and normal slab rate will be applicable on such income. SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY Any sum received under a Keyman insurance policy (including any bonus) is chargeable under the head IOS if such income is not chargeable under the head PGBP or under the head Salaries i.e. if such sum is received by any person [Family Members] other than the employer who took the policy (PGBP Income) and the employee in whose name the policy was taken (Salary Income). Note: (i) If it is received by Employer: PGBP (ii) If it is received by Employee: Salary INTEREST ON COMPENSATION OR ENHANCED COMPENSATION Interest received on compensation/enhanced compensation deemed to be income in the year of receipt and taxable under the head Income from Other Sources [Sections 56(2)(viii)] Note: A fixed deduction of 50% of interest received will be allowed u/s 57 irrespective of actual expenses.

12 IOS By CA Suraj Agrawal SATC 5.4 Class Notes

13 IOS By CA Suraj Agrawal SATC 5.5 Taxability of Family Pension 1) Family pension means pension received by the family members of the deceased employee. It is chargeable to tax under the head Income from Other Sources. 2) Deduction u/s 57: Least of the following is allowed as a deduction: 3) Exemptions: (a) 1/3 rd of such income (b) Rs.15,000 (a) Pension received by Army personnel who are recipient of gallantry awards or Family pension received by his family members is exempt in full. [Section 10(18)]. (b) Family pension received by the widow or children or nominated heirs of a member of the armed forces (including para-military forces) whose death has occurred in the course of operational duties is exempt in full [Section 10(19)]. Lump sum payment made gratuitously or by way of compensation or otherwise to widow / legal heirs of an employee, who dies while in service, will not be taxable under the Act. [CBDT Circular] Ex-gratia payment received, by a person or his legal heir, from the Central / State Govt. / Local Authority / Public Sector Undertaking, consequent upon injury to the person / death of a family member, while on duty, will not be taxable under the Act. [CBDT Circular] Taxability of Allowances to MLA/MP Daily Allowances & Constituency Allowances to MLA & MP are exempt from tax u/s 10(17).

14 IOS By CA Suraj Agrawal SATC 5.6 Class Notes

15 IOS By CA Suraj Agrawal SATC 5.7 PROVISION RELATING TO TAXABILITY OF INTEREST ON SECURITIES Interest on securities may be taxed on Receipt basis or on Due basis, depending on the system of accounting adopted by the assessee. If no system of accounting is followed, it will be taxable on DUE basis. LIABILITY FOR TAX: The person who owns the security on the due date of payment of interest is liable for the entire interest even if he is not the owner for the entire period to which the interest relates. INTEREST AFTER TDS: If interest is received after TDS, then such amount is required to be grossed up to include in the total income. The interest is grossed up as follows:- Note: 1. Rate of TDS is 10%. 2. In case of Govt. Securities Rate of TDS is NIL Gross Interest = [Net Interest 100 / (100 Rate of TDS)] 3. No TDS is deductible if debentures is issued by a widely held company if interest is paid /payable to a Resident Individual/HUF by an account payee cheque & the aggregate amount of such interest during the FY does not exceeds Rs. 5,000. Section 10(15) EXEMPTED INTEREST INCOME Interest on Notified Relief Bonds (Only to Individual or HUF) Interest on Gold Deposit Bonds Interest from Deposit Certificates issued under the Gold Monetisation Scheme, 2015 Interest on notified bonds issued by a local authority Interest on 7% Capital Investment Bond Interest on PPF Interest on notified bond/debentures of Public Sector Company Interest from Post Office Saving Bank Accounts: Interest from Post Office Saving Bank Accounts is exempt to the extent of Rs. 3,500 in case of an Individual Account and Rs. 7,000 in the case of Joint Account. Note: However following Interest Income are taxable: Interest from Tax Saving Bonds Interest from Monthly Income Scheme of Post office Interest from NSC Interest from Bank FD Interest from Saving Bank Interest (any Bank) Section 10(4) Interest Income from Non Resident External Account is exempt. Section 10(11A) Interest Income from account opened as per Sukanya Samriddhi Account Rules 2014 is exempt from AY [Amount deposited will qualify for deduction u/s 80C]

16 IOS By CA Suraj Agrawal SATC 5.8 Class Notes

17 IOS By CA Suraj Agrawal SATC 5.9 DEDUCTIONS ALLOWABLE [SECTION 57] i) Dividend (other than dividends referred to in section 115-O) or Interest on Securities: Any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee. ii) Income consists of recovery from employees as contribution to any provident fund etc.: A deduction will be allowed in accordance with the provisions of Section 36(1)(va) i.e. to the extent the contribution is remitted before the due date under the respective acts. iii) Income from letting on hire of machinery, plant and furniture, with or without building: Deduction allowable are: any current repairs any insurance premium the normal depreciation allowance iv) Interest Received on Compensation / Enhanced Compensation: Deduction allowed is 50% of income by way of interest received on compensation/enhanced compensation received chargeable to tax. No further deduction of any expenses will be allowed. v) any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income will be allowed. vi) Deduction against Family Pension DEDUCTIONS NOT ALLOWABLE [SECTION 58] i) Personal Expenses of the assessee ii) Any Interest / Salary payable outside India where TDS has not been paid or deducted. iii) NEW: FA Payment in the nature specified in Section 40(a)(ia) iv) Payments of expenses in the nature specified in Section 40A(2) & Section 40A(3) v) Income - Tax and Wealth -Tax Paid. vi) No deduction in respect of any expenditure incurred for earning Casual Income

18 IOS By CA Suraj Agrawal SATC 5.10 Class Notes

19 IOS By CA Suraj Agrawal SATC 5.11 TAXABILITY OF GIFTS Section 56(2)(vii) - Taxability from to : - INDIVIDUAL/HUF Section 56(2)(x) - Taxability from : - ANY PERSON Gift of any sum of money or property or transfer of property for inadequate consideration on or after 1st April, 2017 to be subject to tax in the hands of Any Person as IOS subject to the following: Nature of asset Particulars Taxable value Money Without consideration The whole of aggregate amount if the same exceeds Rs. 50,000. Movable property Without consideration The aggregate Fair Market Value (FMV) of the property, if it exceeds Rs. 50,000. Movable property Inadequate consideration The difference between the aggregate FMV and the consideration, if such difference exceeds Rs. 50,000. Immovable property Without consideration The Stamp Duty Value [SDV] of the property, if it exceeds Rs. 50,000. [Each Property Separately] Immovable property Inadequate consideration The difference between the SDV and the consideration, if such difference exceeds Rs. 50,000. [Each Property Separately] Note: 1) Gift provisions will not be applicable if property is received as stock in trade, consumable stores and raw materials. 2) Sum of money includes not only cash but also cheque, drafts, fixed deposits receipts or a NSC since it represents a sum of money though not in cash. 3) For this purpose, property means the capital Asset of the assessee namely immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art or bullion. 4) Stamp Duty Value means the value adopted by any authority for the purpose of payment of stamp duty in respect of an immovable property. 5) If the Stamp Duty Value of immovable property is disputed by the assessee, the AO may refer the valuation of such property to a Valuation Officer. In such a case, the provisions of section 50C shall, as far as may be, apply for determining the value of such property. CG Class 6) When date of agreement and date of registration are not same - Where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration (or a part thereof) for the transfer has been received by any mode (other than cash) on or before the date of the agreement.

20 IOS By CA Suraj Agrawal SATC ) Exceptions: However, any gift received from following ways would be outside the ambit of Section 56(2)(x): (1) from any relative; or (2) on the occasion of the marriage of the individual; or (3) under a will or by way of inheritance; or (4) in contemplation of death of the payer or donor, as the case may be; or (5) from any local authority; or (6) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C); or (7) by any fund or trust or institution or university or other educational institution or hospital or other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via); (8) from or by any trust or institution registered under section 12AA [Charitable or Religious Trust] (9) from an Individual by a Trust created or established solely for the benefit of relative of the Individual. (10) From HUF on Total/Partial Partition of HUF by members (11) Asset received by Amalgamated Indian company from Amalgamating company (12) Asset received by Indian Resulting Company from Demerged company in a demerger (13) Any shares received by shareholders under Amalgamation/Demerger which is not regarded as Transfer u/s 47. For the purpose of this clause, the expression RELATIVE means In Case of Individual: (i) spouse of the individual, (ii) brother or sister of the individual, (iii) brother or sister of the spouse of the individual, (iv) brother or sister of either of the parents of the individual, (v) any lineal ascendant or descendant of the individual, (vi) any lineal ascendant or descendant of the spouse of the individual, and (vii) spouse of a person referred to in items (ii) to (vi) mentioned above. In Case of HUF: Any Member Clubbing Provisions: As per Section 64(2), if a member of the HUF converts his separate property into the property belonging to the family otherwise than for adequate consideration, the income derived from the converted property shall be deemed to arise to the individual and not the family.

21 IOS By CA Suraj Agrawal SATC 5.13 Class Notes

22 IOS By CA Suraj Agrawal SATC 5.14 Class Notes

23 IOS By CA Suraj Agrawal SATC 5.15 Question: X receives the following gifts during the PY : 1. On the occasion of marriage of X, he gets Rs. 2,90,000 as gift on April 2, 2017 (out of which Rs. 2,00,000 is received from friends of X and Mrs. X and remaining amount is received from close relatives of X and Mrs. X). 2. On June 22, 2017, he gets a gift of Rs. 23,000 from C, who is cousin of his father. 3. On August 18, 2017, he gets a gift of Rs. 15,000 from D, who is elder brother of his grandfather. 4. On September 20, 2017, he gets a gift of Rs. 7,00,000 from his grandmother. 5. A computer received from his employer (it was purchased for Rs. 65,000 by the employer on May 1, 2017 and given as gift to X on October 20, 2017). 6. On November 30, 2017, X gets a gift of a plot of land from his grandfather (stamp duty value is Rs. 15,00, On December 30, 2017, X gets by gift a commercial flat from the elder brother of his father-in-law (stamp duty value is Rs. 25,00,000). 8. On January 6, 2018, he gets a gift of Rs. 2,00,000 (cash gift of Rs. 25,000 and gift of a work of art whose market value is Rs. 1,75,000) from a notified public charitable institution. 9. X receives on January 11, 2018 a house property under will of a person known to him. The stamp duty value is Rs. 15,40, On January 20, 2018, he gets a wrist watch by gift (fair market value : Rs. 40,000) from his friend B. 11. On January 25, 2018, he purchases a work of art for Rs. 16,00,000 from an exhibition in New York (the fair market value of the work of art on the date of purchase is Rs. 17,00,000). 12. On February 5, 2018, he gets a birthday gift of a gold chain (fair market value : Rs. 11,000) from his friend. 13. On February 10, 2018, X gets by way of gift a plot of land in Pune from a partnership firm. The partnership firm has only two partners- father of X and Mrs. X. The stamp duty value of the plot of land is Rs. 19,00, On February 16, 2018, X purchases 500 shares in Tata Chemicals from his friend D at Rs. 90 per share (outside stock exchange). The lowest market quotation in the Bombay Stock Exchange and the National Stock Exchange on the date of purchase is Rs. 300 and 310 respectively. 15. On March 1, 2018, X gets a gift of gold ring from a cousin of his mother-in-law. The fair market value is Rs. 20, On March 20, 2018, X gets a painting by way of gift from C Ltd. Mrs. X holds 70 per cent shares in C Ltd. The fair market value of painting is Rs. 19, On March 25, 2018, X gets a small plot of land by way of gift from a cousin of Mrs. X (stamp duty value is Rs. 44,000). 18. On March 31, 2018, X receives a shop (situated in Jammu) by way of gift from a friend (stamp duty value is Rs. 50,000). Compute the amount chargeable to tax in the hands of X under the head "Income from other sources" from the AY Solution: 1. Gift on occasion of marriage of X (not taxable) 2. Cash gift from C (C is not "relative") 3. Cash gift from D (elder brother of grandfather is not "relative") 4. Cash gift from grandmother (gift from a "relative" is not taxable) Cash gift Gift of immovable property Gift of movable property Purchase movable properly for Inadequate consideration Rs: Rs. Rs. Rs. Nil , , Nil - - -

24 IOS By CA Suraj Agrawal SATC Gift from employer (it is taxable under the head Salary) 6. Gift of immovable property from grandfather [gift Nil. - from relative" is not taxable] 7. Gift of commercial property - 25,00, (elder brother of 'other for is not "relative") 8. Gift from notified public charitable institute [Not Nil - Nil - Taxable] 9. Gift under a will - Nil - - [not taxable even if received from on-emotive] 10. Gift of a wrist watch [wrist watch is not "property" for the purpose of section 56(2)(x) and not taxable] 11. Purchase of a work of art for inadequate ,00,000 consideration 12. Gift of gold chain 11, Gift from a partnership firm - 19,00, [partnership firm is not "relative" even if relatives of X are partners] 14. Purchase of shares for inadequate consideration ,05,000 [(Rs Rs. 90) x 500)] 15. Gift of gold ring ,000 - (cousin of mother-in-low is not "relative" of X) 16. Gift from a company ,000 - (company is not a "relative" even if Mrs. X is a major shareholder) 17. Gift of plot of land - Nil - - (not taxable as stamp duty value does not exceed Rs. 50,000) 18. Gift of shop (not taxable as stamp duty value does not exceed Rs. 50,000) - Nil - - Total 38,000 44,00,000 50,000 2,05,000 Amount taxable under section 56(2)(x) under the head "Income from other sources" will be calculated as follows Rs. Cash gift (not'taxable as the aggregate amount of cash gift does not exceed Rs. 50,000) Nil Gift of immovable properties 44,00,000 Gift of movable properties (not taxable as the aggregate amount does not exceed Rs. Nil 50,000) Purchase of movable properties for inadequate consideration 2,05,000 Amount taxable 46,05,000

25 IOS By CA Suraj Agrawal SATC 5.17 Taxation of Gift in the hands of Firm/Company [Sec 56(2)(viia)] 1. Where a firm or a company not being a company in which the public are substantially interested [Closely Held Company], receives, in any previous year, from any person or persons, any property, being the shares of company not being a company in which the public are substantially interested [Closely Held Company]- a) Without consideration, the aggregate FMV of which exceeds 50,000; the whole of the aggregate FMV of such property; b) For a consideration which is less than the aggregate FMV of the property by an amount exceeding 50,000 the aggregate FMV of such property as exceeds such consideration will be chargeable to tax as Income under this head. 2. The above provisions shall not apply to any such property received by way of Amalgamation/Demerger not regarded as transfer under section 47. Note: 1. Donor may be any person 2. Only shares are covered. 3. Gifting gold to company is not covered here. 4. AOPs/BOIs/Trust are not covered here. [Content of Section 56(2(vii) & 56(2)(viia) is now merged in Section 56(2)(x)] Share premium in excess of the FMV to be treated as income [Section 56(2)(viib)] 1. Section 56(2)(viib) provides that where a company, not being a company in which the public are substantially interested (i.e. Closely held Company), receives any consideration from issue of shares in excess of the face value of such shares from any person being a resident, then consideration as exceeds from FMV of the shares shall be chargeable to income tax under the head IOS 2. However, the above provision shall not apply where the consideration is received by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund.

26 IOS By CA Suraj Agrawal SATC 5.18 Class Notes

27 IOS By CA Suraj Agrawal SATC 5.19 DIVIDEND INCOME SECTION 10(34) DIVIDEND INCOME EXEMPT FROM TAX Any income by way of dividends referred to in Section 115-O shall be exempt from income tax in the hand of shareholders. [Dividend excludes dividend chargeable to tax under section 115BBDA] SECTION 115-O - TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES Every Domestic Company, which has declared, distributed or paid any amount by way of dividends (whether interim / otherwise), whether out of current or accumulated profits shall be charged to tax on Distributed 20.36% [i.e. 15% (net of tax basis) + 12% + 3% Cess], in addition to the income-tax chargeable in respect of the Total Income of such a domestic company. Notes 1) Dividend shall include any dividend u/s. 2(22)(a), 2(22)(b), 2(22)(c), 2(22)(d) and such dividends shall be exempt in the hands of shareholders u/s 10(34). However, dividend u/s. 2(22)(e) is not covered u/s. 115-O and the same shall be taxable in hands of the shareholder and the company shall not pay tax on such dividend. The payer company will be responsible for TDS deducted. 2) Dividend received from a FOREIGN COMAPNAY is not covered u/s. 115-O and shall not be exempt in the hands of shareholder u/s 10(34). Such dividend is taxable in hands of shareholder at the normal tax rates. 3) Any dividend paid to NPS Trust [New Pension Scheme Trust] shall be exempt from Dividend Distribution Tax. 4) Dividend Income from Units of UTI & Other Mutual Fund is Exempt u/s Section 10(35) 5) Dividends from cooperative society are Taxable in the hands of members. TAXATION OF CERTAIN FOREIGN 15% [Section 115BBD] 1. Section 115BBD provides that where Total Income of an Indian Company includes any dividend income received from a foreign specified company, then such dividends shall be taxable at the rate of 15% (plus applicable surcharge and cess) on the gross amount of dividends. 2. No expenditure in respect of such dividends shall be allowable under the Act. 3. Income other than foreign dividend as specified above shall be taxable at Normal Rate of Tax. 4. Specified Foreign Company means a foreign company in which the Indian Company holds 26% or more in nominal value of the equity share capital of the company. Tax on Certain Dividends received from Domestic Com. [Sec 115BBDA] 1. Notwithstanding anything contained in this Act, where the total income of a Specified Assessee, being an Individual, HUF or a Firm, Resident in India [FA 2017], includes any income in aggregate exceeding ten lakh rupees, by way of dividends [except 2(22)(e)] declared, distributed or paid by a domestic company or companies, then dividend in excess of Rs. 10,00,000 shall be taxable at the rate of 10%. 2. No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends as referred above. 3. NEW - FA 2017: Specified Assessee means a person other than (a) A Domestic Company (b) A Trust/Institution registered under Section 12A or Section 12AA (c) A Fund/Institute/Trust/Any University/Other Educational Institution/Any Hospital/other Medical Institution/Hospital/Medical Institution as referred in Section 10(23C)(iv)/(v)/(vi)/(via).

28 IOS By CA Suraj Agrawal SATC 5.20 DEEMED DIVIDEND a) Any distribution of assets by a company to its shareholders shall be deemed to be the dividend [FMV of Assets] to the extent the company possesses accumulated profits whether capitalized or not Sec. 2(22)(a) b) Any distribution of debentures / debenture-stock / deposit certificates etc. by a company to its shareholders OR Any distribution of shares by way of bonus by a company to its preference shareholders shall be deemed to be the dividend to the extent the company possesses accumulated profits whether capitalized or not Sec. 2(22)(b) (i) For the purpose of CG, the COA of above debenture in the hands of the shareholders shall be taken to be NIL (ii) Bonus shares given to equity shareholders are not treated as dividend. c) Distribution on Liquidation: Any distribution of assets is made by a company to the shareholders on its liquidation shall be deemed to be the dividend to the extent of accumulated profits of the company standing immediately before its liquidation whether capitalized or not. Sec. 2(22)(c) d) Distribution on Reduction of Capital : Any Distribution of assets by company to its shareholders on reduction of its capital shall be deemed to be the dividend to the extent to which company possesses accumulated profits whether capitalized or not. Sec. 2(22)(d) Example: A Ltd. Has issued bonus shares to its equity shareholders. Subsequently company has reduced its share capital and refunded the amount so reduced to the shareholders. The amount so received by the shareholders to the extent of accumulated profit (whether capitalized or not) will be considered as dividend. e) Advance or loan by a Closely Held Company to its Shareholder [Sec. 2(22)(e)] Any payment, by a closely held company, of any sum by way of loan or advance: to a shareholder, being the beneficial owner of shares holding not less than 10% of voting power, OR to any concern, in which such a shareholder is a member/partner and in which he has a substantial interest, OR to any persons on behalf of or for the individual benefit of such a shareholder, shall be deemed to be the dividend to the extent to which the company possesses accumulated profits. Notes 1) Following conditions must be satisfied on the date on which loan/advance is given to the shareholder/concern/any other person by a closely held company in order to attract section 2(22)(e): (a) Beneficial owner of shares (b) Holding 10% or more voting power (c) Member/ Partner in concern 2) Where loan is given and accumulated profits exceeds the loan, then the entire loan will be deemed as dividend. No consideration is to be given to the proportionate share of the assessee in the accumulated profits. 3) If any such loan was given to more than such shareholders, accumulated profits shall be reduced by the amount of the loan given to the earlier shareholders. 4) Dividend shall not include any advance or loan made to a shareholder or a concern by a company in the ordinary course of its business where the money lending is substantial part of the business of the company. 5) Buy Back of Own Shares: Any payment made by a company on purchase of its own shares from a shareholder is not a deemed dividend.

29 IOS By CA Suraj Agrawal SATC 5.21 Class Notes

30 IOS By CA Suraj Agrawal SATC 5.22 PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME Unexplained Cash Credits [Sec. 68] The sum is found credited in the books of assessee. He offers no explanation about its nature and source OR the explanation offered is not satisfactory in the opinion of AO The amount so credited is treated as the income (under the head IOS) of the Previous Year in which the same is found credited. Note: Section 68 further provides that the nature and source of any sum credited, as share application money, share capital, share premium etc., in the books of a closely held company shall be treated as explained only if the source of funds is also explained by the assessee company in the hands of the resident shareholder (other than SEBI regulated entity) and such explanation in the opinion of the AO is found to be satisfactory. Unexplained Investment [Sec. 69] The assessee made investments which are not recorded in the books of accounts He offers no explanation about its nature and source OR the explanation offered is not satisfactory in the opinion of AO The value of investment so made is treated as the income (under the head IOS) of the Previous Year in which the investment is made. Unexplained Money etc. [Sec. 69A] In search, the assessee was found to be owner of any money, bullion or jewellery or other valuable article etc, Such money, bullion etc are not recorded in the books of accounts of the assessee He offers no explanation about its nature and source of acquisition or the explanation offered is not satisfactory. The value of such items shall be treated as the income (under the head IOS) of that previous year in which it is found. Investment not fully disclosed [Sec. 69B] The assessee made investments or found to be owner of bullion, jewellery or other valuable article, but has not fully recorded in his books of accounts. He offers no explanation about such excess amount or the explanation offered is not satisfactory. The excess value of the investment made shall be treated as the income (under the head IOS) of the Previous Year in which the investment is made. Unexplained Expenditure [Sec. 69C] The assessee has incurred expenditure during the financial year He offers no explanation about such expenditure or the explanation offered is not satisfactory. The amount of such expenditure shall be treated as income (under the head IOS) of the Previous Year in which it was incurred. Amount borrowed or repaid on Hundi other than by way of account payee cheque [Sec. 69D] Where any amount is borrowed on a hundi or any amount due thereon is repaid other than through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying for the PY in which the amount was borrowed or repaid, as the case may be. However, where any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again liable to be assessed in respect of such amount on repayment of such amount.

31 IOS By CA Suraj Agrawal SATC 5.23 Taxation of Cash Credit, Unexplained Money, Unexplained Investment etc. covered u/s 68, 69, 69A, 69B, 69C & 69D [Section 115BBE] A. Section 115BBE has been inserted to tax the unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C & 69D B. Tax Rate: 60% [plus surcharge (25%) and cess as applicable] [From AY 17-18] C. No deduction in respect of any expenditure or allowances or Set off of any loss [Added w.e.f ] shall be allowed in computing above deemed income. D. Benefit of Basic Exemption Limit is also not available while computing tax liability.

32 IOS By CA Suraj Agrawal SATC 5.24 Class Notes

33 IOS By CA Suraj Agrawal SATC 5.25 Class Notes

34 IOS By CA Suraj Agrawal SATC 5.26 Class Notes

35 IOS By CA Suraj Agrawal SATC 5A. 1 PRACTICAL QUESTIONS IOS 1. From the following particulars of Pankaj for the previous year ended 31st March 2018, Compute the Income under the head "Income from other Sources": (i) Directors Fee from a Company 10,000 (ii) Interest on Bank Deposits 3,000 (iii) Income from undisclosed source 12,000 (iv) Winnings from Lotteries (Net) 35,000 (v) Royalty on a book written by him 9,000 (vi) Lectures in Seminars 5,000 (vii) Interest on loan given to a relative 7,000 (viii) Interest on Debentures of a Company (listed in a Recognised Stock Exchange) Net of Taxes 6,300 (ix) Interest on Post Office Savings Bank Account 500 (x) Interest on Government Securities 2,200 (xi) Interest on Monthly Income Scheme of Post office 33,000 He paid Rs. 1,000 for typing the manuscript of book written by him. Rs. 2. Check the taxability of the following gifts received by Mrs. Rashmi during the previous year and compute the taxable income from gifts for AY : i) On the occasion of her marriage on , she has received Rs.90,000 as gift out of which Rs. 70,000 are from relatives and balance from friends. ii) On , she has received gift of Rs. 18,000 from cousin of her mother. iii) A cell phone of Rs. 21,000 is gifted by her employer on iv) She gets a gift of Rs. 25,000 from the elder brother of her husband's grandfather on v) She has received a gift of Rs. 2,000 from her friend on A perusal of R's bank account revealed following deposits during financial year : Particulars Gift from his friend on his birthday Amount (Rs.) 12,000 Dividends from shares of various Indian companies 13,200 Gift from his fiancée 85,000 Gift from his mother's friend on his engagement 28,000 Gift from his sister in Netherlands 220,000 Interest on bank deposits 30,000 Compute his total income for the AY assuming that his income from house property (computed) is Rs. 72, Mr. Sandeep received a sum of Rs. 20,000/ each from Mr. Lalith and Mr. Santosh and Rs. 10,000/ from Mr. Koti, who are all non relatives, on the occasion of New Year. Discuss the tax liability of the sum received. 5. Mr. Ashok received a sum of Rs. 5,00,000, as gift during the FY , the details of which are as follows. Discuss the tax liability of the sum received. (i) from relatives on the occasion of birthday Rs. 1,00,000; (ii) from an unregistered charitable institution in connection with compensation for floods Rs. 50,000; (iii) Rs. 1,50,000 received from friends on the occasion of birthday;

36 IOS By CA Suraj Agrawal SATC 5A. 2 (iv) Rs. 2,00,000 received from a neighbor, who is in death bed. 6. Raman received Rs. 5 lakhs from his relatives and the parents of his wife on the occasion of their marriage on 21/09/2017. He also receives a car, some jewellery whose fair market values are Rs. 2,50,000 and Rs. 50,000 respectively and a sum of Rs.1,50,000 from persons, other than relatives on the said occasion. His grandfather registers in his favour, land worth Rs.10 lakhs after a month, as his gift. Discuss the tax for AY Mr. Ketan acquired a land at Mumbai from Mr. Agarwal for a purchase consideration of Rs. 1 Crore on The assessable value of the property for stamp duty purposes is Rs crore. Subsequently, in a different transaction he was gifted with a land near Indore by his friend, the assessable value of which for stamp duty purpose is Rs. 49,000. Advise on the taxability of these transactions. 8. Mrs. Rajni who draws a salary of Rs. 30,000 p.m. received the following gifts during the previous year: i) Gift of Rs. 5,00,000 on from a friend, ii) Gift of jewellery worth Rs. 4,00,000 on from her fiancée, iii) Gift of Rs. 41,000 each received from her 4 friends on the occasion of her marriage on iv) Gift of Rs. 1,10,000 on from her mother's sister, v) Gift of Rs. 70,000 on from her father's brother, vi) Gift of Rs. 40,000 from her husband's friend on , vii) Gift of Rs. 31,000 on from her mother's friend. viii) Gift of Rs. 27,000 on from her brother's father in law. ix) Gift of Rs. 1,21,000 from her husband's brother, x) Gift of Rs. 23,000 from her employer. xi) Scholarship of Rs. 2,20,000 from, a charitable institution registered u/s 12AA xii) She has purchased an immovable property whose stamp duty value is Rs. 22,80,000 from Gita who is not her relative for a sum of Rs. 22,60,000. Compute her total income for the assessment year Mr. V asks you to compute his taxable income from the following transactions which took place with his friends during January 2018: i) Cash gifts received during the year from Mr. X and Mr. Y: Rs. 30,000 each; ii) Two flats gifted to him by Mr. S and Mr. T: Stamp Value Rs. 4,00,000 and Rs 50,000 respectively; iii) He purchased a plot of land at Rs. 6,10,000 from Mr. A, which was not registered, but the prevalent stamp value of which was Rs. 6.6 lakh; iv) A gold ring and a painting worth Rs. 30,000 and Rs. 35,000 respectively gifted by Mr. M and Mr. N; v) A gold biscuit purchased by him at Rs. 10 lakh from Mr. P, when prevalent market value is Rs lakh and shares and securities purchased by him at Rs. 2.5 lakh from Mr. L, when fair market value thereof was Rs. 2.8 lakhs. 10. X receives the following gifts during the PY : a) On April 10, 2017, he gets a gift of Rs. 25,000 from his friend A. b) On May 1, 2017, he gets another gift of Rs. 500 from his friend A. c) On June 1, 2017, he gets a gift of Rs. 26,000 from C, who is cousin of his father. d) On July 8, 2017, he gets a gift of Rs. 5,000 from D, who is elder brother of his grandfather. e) On July 20, 2017, he gets a gift of Rs. 41,000 from his grandmother. f) On the occasion of marriage of X, he gets Rs. 1,90,000 as gift on July 31, 2017 (out of which Rs. 1,00,000 is received from different relatives of X and Mrs. X and remaining amount is received from friends of X and Mrs. X). g) A computer received from his employer (it was purchased for Rs. 40,000 by the employer on May 1, 2017 and given as gift on August 20, 2017). h) On September 6, 2017, he gets Rs. 80,000 from a notified public charitable institution. i) X receives Rs. 5,40,000 on September 30, 2017 under will of a person known to him. j) On October 10, 2017, he gets a gift of Rs. 40,000 from his friend. k) On December 12, 2017, he purchases a work of art for Rs. 72,000 from an exhibition in Chennai (the fair market value of the work of art on the date of purchase is Rs. 2,00,000). l) On March 31, 2018, he gets a birthday gift by cheque of Rs. 11,000 from his friend. Compute the amount chargeable to tax in the hands of X under the head "Income from other sources" for the AY

37 IOS By CA Suraj Agrawal SATC 5A X holds the following securities on April 1, 2017: Rs. 1,48,000 10% securities of the Tamil Nadu Government and Rs. 40,000 5% non listed debentures of ABC Ltd. Interest in both the cases is payable on December every year. On August 1, 2017 X borrows Rs. 20,000 at 7 per cent per annum and invests it in purchasing Rs. 20,000, 7.5 per cent securities of the Central Government [due date of interest; March 15 every year; interest due on March 15, 2018 is received on April 2, 2018]. Interest on borrowing for the period ending March 31, 2018 is, however, paid by X on April 15, His business income is Rs. 7,86,000. Determine the taxable income of X for the AY under the following situations: a) X maintains books of account on "mercantile" system, and b) X maintains books of account on "cash" basis. 12. Shri Kishan is a businessmen dealing in cloth. On , his investments was as under: (i) Rs 44,000 7.% Government of India Loan (ii) Rs. 86,000; 9% (Tax free) Debentures of Birla Jute Mills Ltd. (iii) Rs. 20,300, 12% Debentures of G Ltd. (iv) Interest on National Savings Certificate (VIII issue) due Rs. 3,860. (v) Rs. 35,000; 7% Rajasthan Government Loan (vi) Rs. 20,000; 7% Capital Investment Bonds. The due dates of interest of all the above securities are 1st May and 1st November. Calculate income from other sources for the AY X holds the following securities on April 1, 2017: Rs. 10,00,000 5% UP Government loan (date of payment of interest : January 1), Rs. 40,000 6% Non-listed debentures of ABC Ltd. (dates of payment of interest: June 11 and December 11 every year). Rs. 25,000 8% debentures of PQR Ltd. (dates of payment of interest: June 15 and December 15 every year). On December 1, 2017, X sells Rs. 25,0008% debentures of PQR Ltd. Calculate the taxable income of X for the AY on the assumption that his business income is Rs. 5,64,000 and he has received a gift of Rs. 1 lakh in foreign currency from a friend on December 1, 2017 on his marriage anniversary. 14. R, a resident individual, submits the following particulars of his income for the year ended : (i) Royalty from a Diamond mine Rs. 20,000. (ii) Agricultural income in Sri Lanka Rs. 15,000. (iii) Salary as a MP Rs. 36,000 (iv) Daily allowance as M.P. Rs. 5,000 (v) He has taken a residential house has been taken on a rent of Rs. 10,000 p.a., half of which is sublet at Rs. 1,200 p.m. (vi) Dividend received from a cooperative society Rs. 6,000. (vii) He has incurred the following expenses i) Paid collection charges Rs. 200 for collecting dividends ii) Rs spent for earning and collecting royalty income Compute R's income from other sources for the assessment year J furnishes the following particulars relating to his house properties and other incomes and expenditure for the year : A. First House: This house is taken by him on lease for 10 years which is let to a tenant, for his residence, at a monthly rent of Rs. 2,400. He has incurred the following expenses during this year : Lease rent Rs. 1,000 per month Salary of Durban Rs. 200 per month Interest on loan taken to pay for the acquisition of the lease Rs. 200 per month B. Second House: This house was constructed by him in 1989, but was transferred to his wife in 1993 out of love and affection. He, however, continues to stay in this house with his wife till date. He has taken a loan for the construction of this house for which interest of Rs. 6,000 becomes due for the year, but had not been paid by him. He has paid repair expenses of Rs. 1,000 during the year. C. Taxable income from business for this year amounts to Rs. 64,000. Compute gross total income of J for the AY

38 IOS By CA Suraj Agrawal SATC 5A Ms. Rupali furnishes the following details for the AY : Particulars Net Agricultural Income in India 4,800 Net agricultural income from land in Sri Lanka 10,000 Amount (Rs.) Profit on sale of agricultural land situated in Mangalore City 25,00,000 Vacant land ground rent received 12,000 Rent received on sub letting house 37,500 Rent payable for house sub let 15,000 Maintenance expenses on house sublet 1,200 Directors sitting fees 3,600 Interest on Deposits with nationalized bank 1,000 Interest on Postal savings bank account 1,200 Interest credited to PPF account 6,000 Interest accrued but not received on NSC VIII Issue 1,050 Interest received under Post Office Monthly Income Scheme 12,000 Interest on deposits with HDFC 900 Interest on securities (gross) 5,000 Dividends received from Indian Companies 12,000 Bank Charges for collection of above dividend 100 Dividend received from foreign companies 1,100 Interest paid on amount borrowed to invest in shares of foreign co Gift received from a Charitable Institution registered u/s 12AA 55,000 Gift from a friend in foreign currency 50,001 Gift from another friend in Indian currency 500 Winnings from Lottery (Net of Tax of Rs. 30,000) 70,000 Cost of Lottery Tickets purchased during the year 5,300 Debenture Interest on 10% debentures of ABC Ltd. of Face Value of Rs. 1,00,000 (due half yearly on 30.9 and 31.3.) but received on Compute the taxable income from other sources of Ms. Rupali, who is following mercantile system of accounting. 17. From the following particulars, compute Gross Total Income of Radha for AY : (i) She is employed on a part time basis in a fashion designing firm on a monthly salary of Rs. 5,000. (ii) She has a house property situated in Delhi which has been let out at a rent of Rs. 3,000 p.m. (iii) She holds the following shares and securities: a. 1,000 Equity shares in X Ltd. of Rs. 10 each, Rs. 40 per share. b. Rs. 20,000, 8% ICICI Bonds. c. 1,000,12% Preference shares of Rs.100 each in Rosa Ltd. Dividend received on 25th March, d. X Ltd. declared 18% equity dividend on 25th March, 2018, but the cheque was received subsequent to 31st March, Other interest and dividends were, however, duly received. (iv) She had set up a factory with building, plant, machinery, furniture, etc. However, she decided to give it on hire at a composite rent of Rs. 12,000 p.m. During the year, she spent Rs. 15,000 for repairs and Rs. 5,000 for insurance of the factory. The depreciation allowable is Rs. 50,000. She had borrowed Rs. 5,00,000 against mortgage of these assets and paid Rs. 60,000 interest thereon. The amount was spent for marriage of her brother.

39 IOS By CA Suraj Agrawal SATC 5A X, a resident ind., submits the following particulars of his income for the previous year ending March 31, 2018: Name of payer company It is Date dividend under section 2(22)(e) declaration of dividend of Amount of tax Deducted under section 194 Rs. Net amount paid to X A Ltd., a foreign company No July 15, 2017 Nil 70,000 3,000 B Ltd., a foreign company No April 1, 2017 Nil 43,000 50,000 C Ltd., an Indian company No October 31,2017 Nil 2,500 2,000 D Ltd., an Indian company Yes May 1, ,000 18,000 11,000 Rs. 'Interest paid by X on capital borrowed to invest in shares Rs. Rent from letting a factory along with plant and machinery (letting out of factory cannot be separated from letting out of plant and machinery): Rs. 30,600. Collection charges in respect of rent: Rs Fire insurance premium in respect of building: Rs Fire insurance premium in respect of plant and machinery: Rs Repairs in respect of building: Rs. 4,600. Depreciation of building, plant and machinery: Rs. 18,600. Winnings from lottery on December 1, 2017: net amount: Rs. 70,000; tax deducted at source: Rs. 30,000. Winnings from card games: Rs. 13,500 (gross). Interest on securities issued by the Government of Japan: Rs. 30,670. During the previous year, X has received the following gifts Gift from whom Date of gift Amount Rs. Gift from a friend August 20, ,00,000 Gift from a friend September 10, ,000 Gift from brother December 30, ,000 Gift from grandfather received by will October 1, ,40,000 Gift from friends at the time of marriage of X October 10, ,35,000 Gift from a friend September 20, ,000 Determine the income chargeable under the head "Income from other sources" for the AY Sunder died on 23rd July, 2007 while being in Central Government service. In terms of rules governing his service, his widow Mrs. Sunder is paid a family pension of Rs. 10,000 per month and dearness allowance of 40% thereof. State whether the amount of family pension is assessable in her hands, and if so, under what head of income. Can she claim any relief/deduction on such receipt? Compute taxable income for the AY and tax thereon. 20. Mr. M a Government Servant, died on whilst still being in service. In terms of the rules governing his service, his widow Mrs. M, is paid, a Family Pension of Rs. 2,950 p.m. and Dearness Allowance of 30% thereof. For the AY , is Mrs. M assessable on the receipt and if so, under what head of income? Is she entitled to any relief or deduction on the above sum? Discuss. 21. Mr. B, a defence personnel, was killed in a war. His wife was paid an ex-gratia payment of Rs. 1,00,000 in February, She also received the family pension of Rs. 7,500 per month during the year Advise her on the taxability of receipts. 22. Interest on enhanced compensation received by Mr. G during the previous year is Rs. 5,00,000. Out of this interest, Rs. 1,50,000 relates to the previous year , Rs.1,65,000 relates to previous year and Rs. 1,85,000 relates to previous year Discuss the tax implication, if any, of such interest income for AY M/s. Rama InfoTech Ltd. has taken a Keyman insurance policy for a sum of Rs. 25 lakhs in the name of Mr. Rakesh, who is heading the software division of the company. The annual premium paid by the company towards the policy is Rs. 2 lakhs. Examine the tax consequence assuming that the maturity proceeds are received by: i) Mr. Rakesh; ii) company; iii) assigned to Mrs. Rakesh.