Make your Dream an Aim. Don't make your Aim a Dream. CA Gaurav Rajaram By CA Gaurav Rajaram. P a g e 1

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1 Make your Dream an Aim. Don't make your Aim a Dream CA Gaurav Rajaram By CA Gaurav Rajaram P a g e 1

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3 " You are born free and then taxed to death " P a g e 3

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5 Dear Samvitian, With immense pleasure, we welcome you to IPCC. Samvit Academy, as always, assures that you will receive the highest quality of training which will enable you to clear this level of CA with ease. CA is not all hard work but a lot of smart work too and we will equip you with various skills, some of which will be useful for IPCC and some of it for life. You must remember that CA is simply a small part of your life and not your life altogether. Be sure to enjoy the journey and you will reach your destination safe, sound and in good spirits. A mix of commitment, inquisitiveness and a dash of fun are a sure shot combination to achieve your goals in the long-run. As someone said "If you can't change the direction of the wind, you can always adjust your sails to always reach your destination". We wish you the very best! We are always there to help, support and guide you. P a g e 5

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7 BASICS OF INCOME TAX CA Gaurav Rajaram Important definitions in the Income tax Act, 1961 ('Act') Section 2(7) Assessee means a person who is required to pay tax and includes Assessee includes A person who is assessed in respect of own income, loss or refund A person who is assessed in respect of another person's income, loss or refund A deemed assessee An assessee in default Example A person who earns income above taxable limit Agent of non-resident is the representative assessee of non resident Guardian of a minor, Executor of a deceased assessee Person who fails to pay TDS Section 2(9) Assessment Year (AY) means the period of twelve months commencing on the 1st day of April every year Section 3 Previous Year (PY) means the financial year immediately preceding the assessment year Provided that in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession Section 2(22A) Domestic Company means an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividend within India in respect of its income liable to tax under this Act Section 2(31) Person - includes an individual a Hindu undivided family a company a firm an association of persons or a body of individuals, whether incorporated or not, a local authority, and every artificial juridical person, not falling within any of the preceding sub-clauses P a g e 7

8 Section 2(24) Income - includes CA Gaurav Rajaram Profits or gains of business or profession. Dividend. Voluntary Contribution received by a charitable or religious trust or institution or an electoral trust. The value of perquisite or profit in lieu of salary taxable u/s. 17 and special allowance or benefit specifically granted either to meet personal expenses or for the performance of duties of an office or an employment of profit. Export incentives (Duty Drawback etc). Interest, salary, bonus, commission or remuneration earned by a partner of a firm from such firm. Capital Gains chargeable u/s 45. Winnings from lotteries, cross word puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. Deemed income u/s 41 or 59. Sums received by an assessee from his employees towards welfare fund contributions such as provident fund, superannuation fund etc. Amount received under Keyman Insurance Policy including bonus thereon. Amount received under agreement for (a) not carrying out activity in relation to any business (Non Compete fee) or (b) not sharing any know-how, patent, copyright etc. Benefit or perquisite received from a Company, by a Director or a person holding substantial interest or a relative of the Director or such person. Any other income falling under Section 28 Income referred in Section 56 (2) i.e., gifts in excess of Rs. 50,000. Consideration received for issue of shares in excess of the fair market value of shares referred to in Section 56(2)(viib). Any sum of money received by way of advance or otherwise in the course of negotiations for transfer of a capital asset if such sum is forfeited and the negotiations do not result in the transfer of the capital asset assistance in the form of a subsidy or grant or cash incentive or duty drawback or wavier or concession or reimbursement by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee except the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance to sec. 43(1) P a g e 8

9 2. Rates of income tax for AY CA Gaurav Rajaram Rebate from Income tax to Resident Individual - Sec. 87 A This provision does not apply to a resident individual aged 80 years and above since such individuals are not liable to pay any income tax upto Rs. 5 lakhs (Rebate is given for total income up to Rs 3.5 Lakh) "If you earn anything, it's minus taxes. If you buy anything it's plus taxes" P a g e 9

10 Rates of tax for companies CA Gaurav Rajaram Type of company Basic Tax Rate Surcharge If Total Income is in the range of Rs. 1 Crore Rs. 10 Crore Surcharge If the Total Income is above Rs. 10 Crores Domestic Company 30% 7% 12% Foreign Company 40% 2% 5% Where total turnover or the gross receipts of a domestic company in Previous Year does not exceed Rs 50 crores, the tax rate will be 25% "The Indian government does some strange things. It puts a high tax on liquor and then raises the other taxes that drive people to drink" Marginal Relief Compute tax payable by Mr A, a resident individual below 60 years who has a total income of (i) Rs 1,03,00,000 Steps Compute tax and surcharge on total income --- (1) Amount Compute tax on Rs 1 Crore. Add to it, amount exceeding Rs 1 crore ---- (2) Lower of (1) and (2) is tax payable. Add education cess at 3% Marginal Relief = (1) Less (2) (ii) Rs 1,04,00,000 Steps Compute tax and surcharge on total income --- (1) Amount Compute tax on Rs 1 Crore. Add to it, amount exceeding Rs 1 crore ---- (2) Lower of (1) and (2) is tax payable. Add education cess at 3% Marginal Relief = (1) Less (2) (iii) Rs 1,08,00,000 Steps Compute tax and surcharge on total income --- (1) Amount Compute tax on Rs 1 Crore. Add to it, amount exceeding Rs 1 crore ---- (2) Lower of (1) and (2) is tax payable. Add education cess at 3% Marginal Relief = (1) Less (2) P a g e 10

11 3. Scope of total income (Section 5) CA Gaurav Rajaram Particulars Resident and Ordinary Resident Resident but not Ordinary Resident Non resident Income received or deemed to be received in India Income accruing or arising or deemed to accrue or arise in India Taxable Taxable Taxable Taxable Taxable Taxable Income accruing or arising outside India from a) Business controlled in India Taxable Taxable Not Taxable b) Profession set up in India Taxable Taxable Not Taxable c) Any other source Taxable Not Taxable Not Taxable 4. Determination of residential status (Section 6) Residential status of individuals Conditions under Section 6(1) - Basic condition An individual is said to be a resident in India in the previous year if He is in India in that previous year for 182 days or more OR He is in India for 60 days or more in that previous year AND 365 days or more during the 4 previous years preceeding that previous year Breaking the above section down, we can understand that If the person satisfies either of the above conditions, he is a RESIDENT If the person does not satisfy both the above conditions, he is a NON RESIDENT P a g e 11

12 Conditions under Section 6(6) CA Gaurav Rajaram An individual is said to be a Resident and Ordinary Resident in India in the previous year if He has been a resident in 2 or more years out of 10 preceeding previous years AND He is in India for 730 days or more in the 7 previous years preceeding that previous year Breaking the above section down, we can understand that If the person satisfies BOTH the above conditions, he is a RESIDENT AND ORDINARY RESIDENT (R & OR) If the person does not satisfy both the above conditions, he is a RESIDENT BUT NOT ORDINARY RESIDENT (RBNOR) Residential status of other persons Entity Condition for being Resident Conditions for R & OR Hindu Undivided Family (HUF) Firm, AOP and every other person Company If its Control & Management (C&M) is wholly or partly in India If its C & M is wholly or partly in India An Indian company Any other company whose Place of Effective Management is in India Karta has been a resident in more than 2 out of 10 preceeding previous years AND Karta is in India for 730 days or more in the 7 previous years preceeding that previous year N.A N.A Place of Effective Management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are in substance made. Exemption to the 60 days condition in Section 6(1) for the following assessees Citizen of India leaving India for employment outside India Citizen of India leaving India as crew member of an Indian ship P a g e 12

13 Indian citizen or persons of Indian origin who are settled outside India and who come to India on a visit 5. Income deemed to be received in India (Section 7) Employer s contribution to recognised provident fund exceeding 12% of salary Interest credited to recognised provident fund exceeding 9.5% p.a Balance transferred from unrecognised provident fund to recognised provident fund (employers contribution + interest thereon) Contribution made by employer to account of employee under a pension scheme referred to in Section 80 CCD 6. Dividend Income (Section 8) Dividend by a Domestic Company is exempt in the hands of the Shareholder as the Company is liable to pay Dividend Distribution Tax of 15% plus applicable Surcharge plus Cess of 3% u/s 115-O. However, Dividend income exceeding Rs 10,00,000 will be taxable in the hands of the shareholder at a rate of 10% [not applicable to dividend u/s 2(22)(e)] Section 115-O does not apply to deemed dividend u/s 2(22)(e) and dividend by a Foreign Company. Hence, for those dividends, taxability is as follows: Final dividend Interim Dividend Deemed dividend PY in which such dividend is declared PY in which such dividend is unconditionally made available by the company PY in which such dividend is paid 7. Incomes deemed to accrue or arise in India (Section 9) Any income out of business connection in India Income through or from any property, any asset or source of income in India Income through the transfer of a Capital asset situated in India Income chargeable under the head Salaries earned for services rendered in India Salary paid by the Government to a citizen of India for service outside India Dividend paid by an Indian company outside India Interest, Royalty and fees for technical services as below Nature of Income Interest Payable by Government Resident Non resident Deemed to accrue or arise in India Deemed to accrue or arise in India except when used for a business or profession carried on outside India or for any source of income outside India Deemed to accrue or arise in India only when used for the purpose of business or profession carried on in India or for any source of income in India P a g e 13

14 Royalty Fees for Technical Services (FTS) CA Gaurav Rajaram do do do 8. Business connection A business connection is defined to include a business activity carried on by a non resident in India through an agent. The agent should perform any of the following activities: He habitually exercises in India an authority to conclude contracts He habitually maintains a stock of goods or merchandise in India and from which he regularly delivers goods or merchandise He habitually secures orders in India mainly or wholly for the non resident or various non residents who are under common control Some key points to understand the concept of business connection The non resident should have a real and significant nexus with India The non resident should have an economic nexus with India The non resident should earn profits out of the above 'business connection' in India Some factors which clearly establish business connection The non resident has a factory in India The non resident has a branch office in India The non resident has a depot in India Exceptions Mere purchase of goods in India for export In case of an assessee who is engaged in the business of running a news agency, no income from business connection in India if news/ views in India are merely collected for transmitting out of India Carrying on business in India through an independent agent (agent who does not act wholly or mainly on behalf of the non resident). Eg stock broker Shooting of cinematography films in India by (a) an individual if he is not a citizen of India. (b) a Firm if no partner is a citizen or resident of India. (c) a Company if no shareholder is citizen or resident of India. The Supreme Court in the case of CIT vs R.D. Agarwal & Co 56 ITR 20 held that "A business connection involves a relationship between a business carried on by a non resident which yields profits or gains and some activity in India which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity and a stray and isolated transaction is not normally regarded as business connection" P a g e 14

15 The existence of a 'Professional Connection amounts to existence of a Business Connection. For example, a lawyer from England fights a case in the Karnataka High Court. His fees will be taxed in India (even if paid outside India) as it is a 'Professional Connection' and hence amounts to Business Connection in India. 9. Cases where income is taxed in the same year Shipping business of non-resident (Section 172) Assessee should be a non-resident 7.5% of amount of such carriage including demurrage and handling charges shall be deemed as income of the assessee (Section 44B) The master of the ship should file the return and pay tax on such income or must make necessary arrangements for payment of such tax in the same year Person leaving India (Section 174) The assessee leaves India either during the current previous year or immediately thereafter He does not have any intention to return to India immediately His total income from the date of expiry of previous year upto the date of departure shall be assessed as income in the same year AOP or BOI or artificial juridical person formed for a particular event or purpose (Section 174A) It is established or incorporated for a particular event or purpose It is likely to be dissolved in the assessment year in which it was established or incorporated or immediately after such assessment year The total income of the period from the expiry of the previous year for that assessment year upto the date of resolution shall be chargeable to tax in the same year Persons likely to transfer property to avoid tax (Section 175) The assessee is likely to charge, sell or transfer or dispose of his asset The asset may be movable or immovable property The intention of transfer is to avoid payment of any tax liability under Act The total income from the expiry of previous year upto the date of proceeding is taxable in the same year Discontinued business (Section 176) The business or profession carried on by the assessee is discontinued during the previous year The income from the expiry of the previous year upto the date of discontinuation may be assessed in the same year P a g e 15

16 Problems CA Gaurav Rajaram Mr Brett Lee, an Australian cricketer, came to India for the first time in and was in India for 120 days. His stay in , , and was 45 days, 120 days, 145 days and 60 days. Determine his residential status in AY Mrs Madonna came to India for the first time in and was in India for 80 days. Her stay in , , and was 45 days, 120 days, 115 days and 60 days. Determine her residential status in AY Mr Brad Pitt, an American actor, came to India for the first time in and was in India for 120 days. His stay in , , and was 45 days, 120 days, 145 days and 52 days. Determine his residential status in AY Mr Adams, an American, came to India on and was in India till He caught a flight back on His stay in , , and was 145 days, 120 days, 145 days and 360 days. Determine his residential status in AY Mrs Nira, a UK national gives you the following information. Determine her residential status in AY Date of arrival - January 30, Date of departure - March 31, Her period of stay previously was as follows: AY Days Mr Arjun, an Indian citizen leaves India to become a crew member of a ship on 15th November Thereafter, he returns to India for a visit on and stays for 190 days. Determine his residential status for AY Mrs Aruna, an Indian citizen leaves India to take up employment with the Government of Australia. Her flight is on 27th September Thereafter, she returns to India for a visit in and stays for 173 days. Determine her residential status for AY P a g e 16

17 8. Mr Shankar, who was born in undivided India and now settled in USA comes to India on and stays till His previous visits in was for 25 days, in for 182 days, in for 195 days, for 185 days and for 160 days. Determine his residential status. If he had arrived on April 2nd instead, would it make any difference to his residential status for AY ? 9. Mr A, a non resident owns a property in Chennai. Mr A sells the property to Mr B, another nonresident. The consideration is received in India. Determine the taxability of this income in India. 10. In the above case, if the consideration is received in USA, would the income be taxable in India? 11. Mr Arun, is sent on deputation to India for 45 days by a Foreign company to an Indian company. He gets a salary of Rs 2,50,000 during his stay in India. Determine the taxability of this income in India if the salary is paid by the Indian company. 12. In the above case, if the salary is paid by the Foreign company outside India, would the income be taxable in India? 13. Samsung, a South Korean Company, a non-resident under the Income Tax Act, 1961, had the following receipts of royalty in the PY. Indicate whether they will be taxable in India with reasons (a) Rs. 50,000 from the Government of India under an agreement approved by the Government of South Korea and India. (b) Rs. 1,00,000 from Reliance Co. Ltd., a resident Indian Company, for import of technical know how for use in a business in India. (c) Rs. 2,00,000 from a Mumbai Company, for import of drawing for use in its business in Singapore. (d) Rs. 4,00,000 from Bill Gates, a non-resident under Indian Income Tax Law, for use of a formula for a business in India. (e) Rs. 8,00,000 from Bill Gates an Indian non-resident for use of drawings and technical know-how for a business in the U.S.A. 14. Hari is a non-resident in India. From the information given below, find out his income chargeable to tax for the AY : (i) Royalty received by him outside India from the Government of India Rs 17,000. (ii) Technical fees received from an Indian company in Germany for advice given by him in respect of a project situated in Iran Rs 1,17,000. (iii) Income from a business situated in Sri Lanka (goods are sold in Sri Lanka, sale consideration is received in Sri Lanka but business is partly controlled in Sri Lanka and partly in India) Rs 2,17,000. (iv) Income received in Nepal from a business connection in India Rs 3,17,000. (v) Gift in foreign currency from a friend received in India Rs 80,000. (vi) Past untaxed profit of brought in India Rs 27,000. P a g e 17

18 15. Mr. Suraj, employee of ABC Ltd left India for the first time on due to his transfer to USA. He did not visit India any time during the previous year. He has received the following income i. Salary (paid outside India) Rs 5,00,000 ii. Foreign Allowance (paid outside India) Rs 4,00,000 iii. Interest on fixed deposit from SBI (In India) Rs 1,00,000 iv. Income from agriculture in Pakistan Rs 2,00,000 v. Income from house property in Pakistan Rs 2,50,000 Compute his total income and tax for AY Mr. Dhanraj, serving in the Ministry of External Affairs was transferred to the Indian Consulate in UK. He left India for the first time on He visited India for 135 days during the previous year. He has received the following income. i. Salary Rs 5,00,000 ii. Interest on fixed deposit from SBI Rs 2,00,000 iii. Income from house property in Rajasthan Rs 2,00,000 iv. Income from house property in United Kingdom Rs 2,50,000 v. Foreign Allowance Rs 1,00,000 Compute his total income and tax for AY P a g e 18

19 HEADS OF INCOME SALARIES P a g e 19

20 1. Chargeability under this head CA Gaurav Rajaram Amounts which are received from employer (including former employer) which fall under the definition of the term "Salary" as given in Section 17 are chargeable to tax under this head. Important Tip There must be an Employer-Employee relationship. If there is no Employer-Employee relationship, it cannot be taxed under this head Contract of Service (taxable under this head) An employer has the control over the work of the employee in such a way that he can control and direct as to what is to be done by the employee and the manner in which it should be done Contract for Service (taxable under "Profits and Gains from Business or Profession") The contractee may only specify the nature of work to be done and it is up to the skill and competence of the contractor to execute the same in the best manner possible MPs, MLAs and Advocate General do not have employer-employee relationship with the Government and hence any payments to them are taxable under the head "Income from other sources" (CBDT Instruction) Payments received by judges are to be taxed as "Salary" as they are constitutional functionaries (decision of the Supreme Court in the case of Justice Deoki Nandan Agarwala 237 ITR 872) Remuneration received by Chief Minister is taxable as 'Salary' Taxability of amount received by Directors should be taxed depending on the nature of service agreement with the company (either under the head 'Salaries' or 'Business/Profession') 2. Definition of "Salary" under Section 17 As per Section 17(1), Salary includes Wages Annuity or pension Gratuity Fees, commission, perquisite or profit in lieu of or in addition to any salary or wages Leave encashment Interest credited in excess of 9.5% on balance in recognised provident fund (RPF) Employer contribution in excess of 12% of salary to RPF The accumulated transferred balance from un-recognised provident fund account to a RPF account to the extent it is chargeable The contribution made by the Central Govt. or any other employer in the PY to the account of an employee under a pension scheme u/s 80CCD P a g e 20

21 Important Tip Salary received by a partner of a firm is taxable under the head "Profits and Gains from Business or Profession" as there is no employer-employee relation between the firm and the partner 3. Year of taxability Salary is taxable in the previous year in which it is received or it falls due, whichever is earlier. In other words, salary is taxable on receipt or due basis, whichever is earlier Important Tip Loan taken from Employer (Salary Advance) is not taxable when received even if it is recovered from salary paid subsequently 4. Place of accrual Particulars Place of accrual Taxability Other points Work performed in India Always taxable in India Place of payment does not India matter Status of person making payment does not matter Work performed outside India Outside India Normally not taxable in India, but salary paid by Govt of India to Indian Citizen taxable in India even if work performed outside India (Sec 9) Foreign Nationals may claim exemption u/s 10(6) Allowances and Perquisites are exempt u/s 10(7) in the hands of the Indian Citizen 5. Deductions under Section 16 Particulars Section 16(ii) - Entertainment Allowance Section 16(iii) - Professional Tax Eligible Amount Lowest of a) Actual amount received b) Rs 5,000 c) 1/5 of basic salary Actual amount paid P a g e 21

22 Other conditions Available only to Government Employees If paid by employer, either ignore the deduction or first include in Salary and then claim deduction Problems 1. Mr Anand undertook a contract to supply steel pipes to Satyam Ltd. He received a consideration of Rs 10,00,000 for his services. The Income tax department claims that the amount should be taxable under the head 'Salaries'. Is their contention correct? 2. Mr Xavier received Rs 10,000 p.m as basic salary, Rs 2,000 p.m as dearness allowance and Rs 30,000 as commission. He also received Rs 5,000 as entertainment allowance. His professional tax came to Rs 200 p.m. Calculate the taxable salary income. 3. Mr Francis who worked for Indian Railways received Rs 1,00,000 p.a as basic salary, Rs 20,000 p.a as dearness allowance and Rs 40,000 as commission. He also received Rs 3,500 as entertainment allowance. His professional tax came to Rs 100 p.m. Calculate the taxable salary income. 6. Exemptions under Section 10 in relation to Salaries Section 10(5) - Leave Travel Allowance (LTA) LTA refers to allowance received by employee for travel To claim exemption, employee must travel to any place in India Exemption given to employee, wife and children and dependent parents, brothers and sisters of employee Exemption can be claimed for 2 journeys in a block of 4 calendar years (Current block is as well as ) Only 1 journey can be carried forward and it must be claimed in the first year of the next block The exemption for each trip shall be computed on the following basis but shall be restricted to actual expenditure incurred for the purpose of such travel Journey performed by Air Any other mode (a) Rail service is available Exemption (maximum amount) Economy class fare of Air India or Indian Airlines (national carrier) for the shortest route AC first class rail fare for the shortest route (b) Rail service not available (i) but recognized public transport system exists (ii) recognized public transport system does not exist First class or deluxe class fare on such transport for the shortest route AC first class rail fare for the shortest route as if the journey had been performed by rail P a g e 22

23 Important Tip The exemption shall not be available to more than two surviving children of an Individual born on or after This restriction shall not apply in respect of children born before and also in case of multiple births after one child 4. Mr Anuj, a government employee, receives Rs 35,000 as leave travel allowance from his employer. Mr Anuj has a wife and 2 kids. Mr Anuj travels to Kerala for 3 days to utilise this allowance. He books a flight, the cost of which for himself and his family comes to Rs 25,000. The cost of first class AC train is Rs 12,000. Calculate taxable Leave Travel Allowance. 5. Mr Amar, receives Rs 1,35,000 as leave travel allowance from his employer. Mr Amar has a wife and 3 kids who were born after Mr Amar travels to Canada to utilise this allowance. He books a flight, the cost of which for himself and his family comes to Rs 1,25,000. Calculate taxable Leave Travel Allowance. 6. Mr Anand, receives Rs 2,50,000 as leave travel allowance from his employer. Mr Anand has a wife and 3 children who were born after Mr Anand travels to Kashmir to utilise this allowance. He books a flight, the cost of which for himself and his family comes to Rs 1,20,000. The cost of travel for each person is Rs 24,000. Calculate taxable Leave Travel Allowance. Section 10(10) - Gratuity (Death/ Retirement) Particulars Eligible Amount Government Employees Fully exempt Lowest of Covered by PoGA a) Actual amount received b) Rs 10,00,000 c) 15/26 x "salary" x Completed years of service or part thereof in excess of 6 months Non Government Employees Lowest of Not covered by PoGA a) Actual amount received b) Rs 10,00,000 c) 1/2 x "salary" x Completed years of service Meaning of "salary" Not Applicable Salary = Basic + DA (for the last month of service) Salary = Basic + DA + Commission (Average of last 10 months salary excluding month of retirement/death) Note: PoGA is Payment of Gratuity Act, 1972 DA means DA which is included in retirements benefits P a g e 23

24 Important Tip Commission is commission earned based on turnover achieved by the employee Gratuity received during service always taxable Where gratuity is received by an employee from more than one employer in the same previous year than the aggregate amount of gratuity exempt from tax cannot exceed the above limits In case where the employee has received gratuity in any earlier year from his former employer and also receives gratuity from another employer in a later year, the limit will be reduced by the amount of gratuity exempt from tax in any earlier year 7. Mr Ram received gratuity of Rs 1,80,000 from his employer. He is covered under the Payment of Gratuity Act, He retired on August 14, 2017 after rendering 32 years and 4 months of service. He was earning a basic salary of Rs 3,250 p.m and taxable perquisites of Rs 1,000 p.m at the time of his retirement. Calculate taxable gratuity. 8. Mr Shyam who was not covered under the Payment of Gratuity Act, 1972 received gratuity of Rs 90,000 from his employer. He retired on June 14, 2017 after rendering 40 years and 11 months of service. He was earning a basic salary of Rs 4,500 p.m at the time of his retirement. The average of last 10 months salary was Rs 2,200. Calculate taxable gratuity. 9. Mr Dalal was earning a salary of Rs 5,000 pm upto September 2017 and Rs 6,000 pm thereafter. He retired on and on retirement, he received gratuity of Rs 60,000. He had rendered a service of 18 years and 11 months. Calculate taxable salary under all scenarios 10. Mr Kamath retires from government service after serving for 36 years and 8 months on January 1, On retirement, he is given gratuity of Rs 55,000 for the long service rendered. After retirement he receives a pension of Rs 4,200 per month. During service, he was receiving a salary of Rs 7,200 per month. Calculate his taxable salary. 11. Mr Rushab received the following emoluments from ABC Ltd during the year. Mr Rushab retired from employment on January 31, 2018 after serving for 20 years. Basic Salary - Rs 40,000 p.m Overtime allowance - Rs 5,000 (till January 31, 2018) Leave Travel Allowance - Rs 1,20,000 Gratuity - Rs 50,000 Mr Rushab was not covered under the Payment of Gratuity Act, Till March 2017, he was earning a basic salary of Rs 30,000 p.m. He undertook a trip to Canada in June to utilise his LTA. He spent an amount of Rs 1,00,000 on himself, his wife and one child towards the economy class tickets of Air India, the national carrier. You are required to calculate taxable salary. P a g e 24

25 Section 10(10A) - Commuted Pension (lump sum pension) CA Gaurav Rajaram Particulars Government Employees In receipt of Gratuity Non Government Employees Not in receipt of Gratuity Eligible Amount Fully exempt 1/3 x Commuted Pension 1/2 x Commuted Pension Important Tip "Commuted Pension" means commuted pension if 100% of the pension had been commuted Normally, pension is taxable under Section 17 for both government and non government employees. When commuted, uncommuted portion will continue to be taxable for both For example, if Mr A has been receiving Rs 10,000 p.m as pension and he chooses to commute 30% of it for Rs 3,00,000, then Regular Pension = Rs 10,000 p.m Uncommuted Pension = Rs 10,000 x 70% = Rs 7,000 (this would continue to be received) Amount received on commutation= Rs 3,00,000 (lump sum received) Commuted Pension = Rs 3,00,000/ 30% = Rs 10,00,000 (if 100% had been commuted) 12. Mr Sundaresh retired from ABC Pvt Ltd on March 31, He is paid pension of Rs 1,800 p.m. On December 1, he receives Rs 36,000 in lieu of 50% of pension. Calculate his taxable salary income if a) He is in receipt of gratuity b) He is not in receipt of gratuity 13. Mr Arjit Singh who worked for the Indian Revenue Services retired on March 1, He receives a pension of Rs 4,000 per month. He opted to commute 25% of his pension from January 1, 2018 and receives Rs 75,000. Calculate his taxable salary. P a g e 25

26 Section 10(10AA) - Leave Salary CA Gaurav Rajaram Particulars Government Employees Non Government Employees Eligible Amount Fully exempt Lowest of a) Actual amount received b) Rs 3,00,000 c) 10 months "salary" (based on average salary of last 10 months) d) [(1 month x No of yrs of service) - Leave taken] x "Salary" Meaning of "salary" Not Applicable Salary = Basic + DA which is included in retirements benefits + Commission (Average of last 10 months salary) Important Tip Leave Encashment received during service always taxable Where Leave Encashment is received by an employee from more than one employer in the same previous year than the aggregate amount of Leave Encashment exempt from tax cannot exceed the above limits prescribed In case where the employee has received Leave Encashment in any earlier year from his former employer and also receives Leave Encashment from another employer in a later year, the limit will be reduced by the amount of Leave Encashment exempt from tax in any earlier year 14. Mr Karanth retires from AB Pvt Ltd after serving for 24 years and 8 months on January 1, On retirement, he encashes leave salary of Rs 80,000. Mr Karanth has taken 9 months of leave during his service. Leave entitlement as per company rules is 1.5 months per year. 10 months average salary is Rs 3,000 and last drawn salary is Rs 3,500. Calculate his taxable leave salary. 15. Mr Babu receives leave salary of Rs 36,000. Company rules stipulate 45 days of leave after the completion of each year. Basic salary of Rs 2,500 p.m and Dearness allowance of Rs 500 p.m from Duration of service 22 years, 9 months. Leave available to his credit is 12 months. Calculate his taxable leave salary. P a g e 26

27 Section 10(10B) - Retrenchment compensation CA Gaurav Rajaram Amount of retrenchment compensation received by a worker exempt to the extent of a. Amount calculated under the Industrial Disputes Act, 1947 or (15 days average pay for every completed year of service or part thereof) b. Rs 5,00,000 Section 10(10C) - Voluntary retirement scheme (VRS) or Voluntary separation scheme (VSS) Particulars Eligible Amount Lowest of a) Actual amount received b) Rs 5,00,000 Exemption c) Last Drawn Salary x 3 x completed years of service OR Last Drawn Salary x remaining months of service Whichever is higher Meaning of "salary" Eligible Employees Salary = Basic + DA which is included in retirements benefits + Commission Employees of Important Tip Government (State and Central) Any private or public company Any university IIT Local Authority and Co-operative society The exemption is given only ONCE Scheme Guidelines should be as follows it applies to employees of the company who have completed 10 years of service or completed 40 years of age (this condition does not apply to a Public Sector Company) it applies to all employees (by whatsoever name called) including workers and executives of the company except directors of the company the scheme of voluntary retirement or voluntary separation has been drawn up to result in overall reduction in the existing strength of the employees of the company P a g e 27

28 the vacancy caused by voluntary retirement or voluntary separation is not to be filled up. The retiring employee should also not be employed in another company or concern belonging to the same management 16. Mr Johnson received Rs 5,50,000 under an approved VRS. Calculate the taxable amount of receipt. 17. Mr Sheshu, aged 54 years, a government employee resigned under a scheme of voluntary separation. He was drawing a salary of Rs 20,000 pm at the time of retirement. He has put in a service of 20 years and 3 months. If he had continued service, he would have had to serve 4 years and 2 months more. He is paid Rs 12 lakhs as compensation. Calculate taxable compensation. State assumptions. 18. John is employed in a public company and is paid a sum of Rs. 6,00,000 on Voluntary Retirement from service. The normal age of retirement in the company is 60 and John, who was 45 at the time of retirement, has completed 20 years of service. His monthly salary at the time of retirement was as follows: Particulars Basic Pay Dearness allowance (50% includible for pension) H.R.A. Conveyance Allowance Rs. 10,000 6,000 3, What is the amount of compensation taxable under the Act? Section 10(11) - Statutory Provident Fund (SPF) / Public Provident Fund (PPF) Section 10(12) - Recognised Provident Fund (RPF) Particulars SPF PPF RPF URPF Employees Contribution Deduction u/s 80C available Deduction u/s 80C available Deduction u/s 80C available Deduction u/s 80C not available Employer s Contribution Employer given full deduction Interest on Provident Fund Repayment of lump sum amount on retirement/ resignation/ termination Not Applicable as there is no employer's contribution Employer given full deduction Amount exceeding 12% of Salary is taxable in employee's hands Not taxable in employee's hands Fully exempt Fully exempt Interest credited in excess of 9.5% p.a. is taxable Fully exempt u/s 10(11) Fully exempt u/s 10 (11) Exempt subject to certain conditions u/s 10(12) (See conditions below) No deduction to employer as per Section 40A(9) Not taxable in employee's hands at the time of contribution Taxable under IFOS each year Accumulated employee s contribution is not taxable. Accumulated employer s contribution + interest on employer s contribution taxable as salary P a g e 28

29 Conditions for accumulated balance of RPF to be exempt in the hands of the employee The employee has rendered continuous service with his employer for a period of 5 years or more (to calculate this period, employment with past employers where RPF was maintained also to be included) Conditions of 5 years or more in not applicable in the following cases Termination of employment by reason of such employee s ill health Termination of employment due to discontinuance of the employer s business Termination of employment due to any other cause beyond the control of the employee Where balance in RPF is transferred due to the change in employer, provided the new employer also maintains an RPF Section 10(12A) - Payment from the National Pension Systems Trust to an employee on closure of account or opting out of pension scheme referred to in Sec 80CCD is exempt to the extent of 40%. However, on death of employee, amount received by nominee is fully exempt. Section 10(12B) - Payment from the National Pension Systems Trust to an employee on partial withdrawal out of pension scheme referred to in Sec 80CCD is exempt to the extent of 25% of the contribution made by him. Section 10(13) - Approved Superannuation Fund Any payments made from an approved superannuation fund on the death of the beneficiary or on retirement or in commutation of an annuity is exempt. Section 10(13A) - Housing Rent Allowance (HRA) Particulars Eligible Amount Lowest of a) Actual amount received Exemption b) 50% of "salary" if accommodation in Metro's, otherwise 40% of "salary" c) Excess of rent paid over 10% of "salary" Meaning of "salary" Other conditions Salary = Basic + DA which is included in retirements benefits + Commission 1. Accommodation should be rented (Assessee should not live in his own house) 2. Assessee should pay rent 3. Exemption available to assessee who owns a house (even in the same city) but lives in a rented accommodation 4. If assessee has more than 1 employer during the PY, calculation to be done for each P a g e 29

30 employer separately 5. Metro's means Mumbai, Delhi, Chennai and Kolkata and it DOES NOT INCLUDE Bangalore 19. Mrs Anita works in a private limited company in Mumbai. She draws a basic salary of Rs 12,500 and dearness allowance of Rs 1,500 per month. She is also entitled to commission on turnover achieved by her. Commission is payable at 4% and she has achieved a turnover of Rs 15,00,000. HRA of Rs 1,800 per month is also paid as part of the salary. She lives in a rented accommodation and pays rent of Rs 2,500 per month. Calculate taxable HRA. 20. Mr Murthy was working in A Ltd till June 2017 after which he moved to B Ltd as a finance officer. He received a basic salary of Rs 3,000 p.m from A Ltd as well as HRA of Rs 600 p.m. After he moved to B Ltd his basic salary was increased to Rs 3,500 p.m and his HRA was Rs 1,000 p.m. B Ltd also gave him commission on turnover achieved by him which amounted to Rs 3,000. He lived in Bangalore at a rented accommodation for which he paid Rs 1,250 p.m. Mr Murthy also owns an ancestral house in Bangalore in his own name as well as another apartment in the name of his wife. Calculate the taxable HRA. Section 10(14) - Special Allowances A. Allowances which are exempt to the extent spent for the purpose given Particulars Travel allowance Daily allowance (Per Diem Allowance) Conveyance allowance Helper allowance Academic allowance Uniform allowance Description of allowance Granted to meet the cost of travel on tour or on transfer Granted on tour or on transfer to meet the ordinary daily charges Granted to meet the expenditure incurred on conveyance in the performance of official duties Granted to meet the expenditure on a helper for official duties Granted for encouraging academic, research and training pursuits Granted to meet expenditure on purchase or maintenance of uniform Important Tip If the above allowances are not spent, they will be fully taxable to the extent not spent. For eg, if Rs 3,000 helper allowance is received and only Rs 2,000 is spent, Rs 1,000 will be taxable P a g e 30

31 B. Allowances which are exempt to the extent of limit specified or amount received, whichever is lower Particulars Transport allowance Children Education allowance Children Hostel allowance Allowance to person working in a transport system to meet his personal expenses Tribal area allowance Underground allowance - given to persons working in coal mines etc Hill compensatory allowance Statutory limit Blind or disabled persons - Rs 3,200 p.m Others- Rs 1,600 p.m Rs 100 p.m upto a maximum of 2 children Rs 300 p.m upto a maximum of 2 children Rs 10,000 p.m or 70% of allowance, whichever is lesser Rs 200 p.m Rs 800 p.m Rs 300 p.m (if place 1,000 mts above sea level) Important Tip The above allowances need not be spent to claim exemption 21. Mrs Amreen works in a private limited company in Pune. She receives the following during the year: Basic Salary Entertainment Allowance HRA Helper Allowance (Rs 250 p.m actually spent) Uniform Allowance Transport Allowance Education Allowance Hostel Allowance Rs 10,000 p.m Rs 750 p.m Rs 1,200 p.m ( rent paid Rs 1,000 p.m) Rs 400 p.m Rs 7,400 p.a (fully spent towards uniform) Rs 2,000 p.m Rs 300 p.m per child (for her 2 children) Rs 400 p.m per child (for her 2 children) She requests you to calculate her taxable salary for the year. P a g e 31

32 22. Mr. M is a area manager of M/s. N. Steels Co. Ltd. During the financial year, he gets following emoluments from his employer. Compute taxable salary of Mr. M Basic Salary - Up to From Transport allowance Contribution to recognized provident fund Children education allowance City compensatory allowance Hostel expenses allowance Tiffin allowance (actual expenses Rs. 3700) Tax paid on employment Rs. 20,000 p.m. Rs. 25,000 p.m. Rs. 2,000 p.m. 15% of basic salary and D.A Rs. 500 p.m. for two children Rs. 300 p.m. Rs. 380 p.m. for two children Rs. 5,000 p.a. Rs. 2, Mr. Dhawan, a Government employee serving in the Ministry of External Affairs, left India for the first time on due to his transfer of High Commission of Canada. He did not visit India any time during the previous year. He has received the following income i. Salary Rs 5,00,000 ii. Foreign Allowance Rs 4,00,000 iii. Interest on fixed deposit from bank in India Rs 1,00,000 iv. Income from agriculture in Pakistan Rs 2,00,000 v. Income from house property in Pakistan Rs 2,50,000 Compute his gross total income. P a g e 32

33 7. Perquisites CA Gaurav Rajaram A perquisite is defined in the Oxford English Dictionary as any casual emolument, fee, or profit, attached to an office or position in addition to the salary or wages. In simple words, perquisites are the benefits in addition to normal salary to which the employee has a right, by virtue of his employment. As per Section 17(2), Perquisites include: the value of rent free accommodation provided to the assessee by his employer the value of concessional accommodation provided to the assessee by his employer the value of any benefit or amenity granted or provided free of cost or at concessional rate in the case of specified employees any sum paid by the employer in respect of any obligation on behalf of the employee any sum payable by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity the value of specified securities or sweat equity shares allotted or transferred, by the employer, or former employer, free of cost or at concessional rate to the assessee any contribution made to an approved superannuation fund by the employer in respect of an employee exceeding Rs 1.5 lakh The value of any other fringe benefit or amenity as may be prescribed P a g e 33

34 a. Rent free and concessional accommodation (furnished/ unfurnished) Valuation of Rent Free Unfurnished Accommodation Government Owned by Govt Leased by Govt In a hotel Licence Fees 7.5% of salary Type of Employee Owned by employer Location is in a place where population as per 2001 census 10 % of salary 15% of salary Lease Rent Non Government Leased by employer OR 15% of salary WIL Provided in a hotel Room Charges OR 24% of salary WIL P a g e 34

35 Valuation of Rent Free furnished and concessional accommodation Particulars Value of unfurnished rent free accommodation Add: Cost of furniture (only if furniture provided) If owned by employer = 10% of original cost If hired by employer = Actual hire charges Value of rent free furnished accommodation Less: Amount recovered from employee Value of concessional furnished accommodation Amount xxx xxx XXX (xxx) XXX Important Tip Salary consists of all forms of remuneration given to employee excluding the following Dearness allowance which is not included in retirement benefits Exempt allowances (under Section 10) Employers contribution to PF Value of perquisites Lump-sum payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments Hotel accommodation provided for upto 15 days on transfer from one place to another not a perquisite Where an employee is transferred from one place to another due to which he has 2 rent free/ concessional rent accommodations, upto 90 days, only the accommodation which has lower perquisite value is taxable. After 90 days, the value of perquisites from both accommodations are taxable Furniture includes TV, Radio, Refrigerators, AC and other household appliances No Taxable perquisite in the case of an employee working at a mining site, power generation site, oil exploration site or project execution site located in a remote area (population less than 20,000) or not less than 8 kms away from a municipality or cantonment board P a g e 35

36 24. Mr Ram works in Omega Ltd earning a basic salary of Rs 15,000 pm, Dearness Allowance of Rs 1,250 pm (not included in retirement benefits) and Rs 2,000 pm as commission. He gets a travel allowance of Rs 1,000 pm towards which he does not spend 60% of the allowance and balance towards official purposes. Bonus paid is Rs 12,000. He is also given a rent free accommodation where the population is 15 lakhs. Original cost of furniture provided in the house Rs 30,000 (WDV Rs 6,000) and hire charges of hired furniture is Rs 450 pm. His employer also pays Rs 3,000 as income tax and Rs 1,000 as professional tax on his behalf. Calculate taxable salary. b. Value of benefit or amenity provided free of cost or at a concessional rate to a 'Specified Employee' or any member of the household Specified employee means: Director of a company Employee who has at least 20% voting rights in the employer company An employee not covered by the above whose income from salaries exceeds Rs 50,000 (while calculating the above, exclude all non monetary benefits, exempt allowances and provide deduction u/s 16) Benefit or amenity Sweeper, Gardener, Watchman or Personal attendant Gas, Electricity & Water Education facility to members of the household * Members of the household include spouse, children and their spouses, servants and dependants Amount paid by employer Taxable perquisite If supply is from employer's own sources, manufacturing cost to employer Otherwise, amount paid by employer If employer owns the educational institution, then cost of such education in a similar institution in or near the locality. If such cost does not exceed Rs 1,000 p.m per child, there will be no taxable perquisite In any other case (other schools), amount paid by employer Important Tip Any amount recovered from the employee should be reduced from the calculated perquisite Members of the household are spouse, children and their spouses, parents and servants c. Any sum paid by the employer in respect of any obligation on behalf of the employee The employer must pay an amount towards an obligation of an employee P a g e 36

37 For example, payment of interest towards loan taken by employee, payment for groceries, telephone expenses of landline in the name of employee, income-tax or professional tax paid by employer etc The payment may be in the form of reimbursement to the employee or may be paid on his behalf for discharging the monetary obligation of the employee The same shall be taxable in the previous year in which it is actually paid by the employer d. The value of specified securities or sweat equity shares allotted to employee The employer must allot specified securities or sweat equity shares free of cost or at a concessional price The taxable perquisite in respect of such specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares on the date of exercise of option as reduced by the amount paid by the employee Value on date of grant or vesting does not matter e. Other taxable perquisites taxable in the hands of all employees a. Interest Free or concessional loan Interest charged by SBI on the 1st day of the relevant PY Less Interest recovered from employee Such interest to be calculated on the monthly outstanding balance No taxable perquisite if loan does not exceed Rs 20,000 Nature of Loan Amount SBI Rate of Interest Housing Loan Car Loan Education Loan (0.5% concession for girl students) For Women borrowers Upto Rs 75 Lakhs > Rs 75 Lakhs Others Upto Rs 75 Lakhs > Rs 75 Lakhs For Women borrowers Others 8.60% 8.65% 8.65% 8.70% 9.75% 9.80% Upto Rs 4 Lakhs % Rs Lakhs % Greater than Rs 7.5 Lakh % Personal Loan % Two Wheeler Loan % P a g e 37

38 25. Goldie Ltd. has advanced an interest free loan of Rs 5,00,000 to its employee Ramesh for purchase of car on 1st May, Ramesh has been regularly repaying the loan in installments of Rs 20,000 per month at the end of each month. Compute the value of perquisite on account of interest assuming that SBI rate of interest for such loan as on 1st April, 2017 is 9.8% per annum. b. Usage of movable assets by employee or members of the household Type of asset Laptops and computers Other assets except laptops and computers except assets already covered in the rules (like motor car) Value of perquisite NIL 10% per annum of the actual cost if it is owned by the employer, or Actual rental charge paid or payable by the employer Any amount recovered from employee should be reduced Members of the household are spouse, children and their spouses, parents and servants c. Transfer of movable assets to employee or members of the household Computers & Electronic Items Motor Car Other Assets Actual Cost Less: 50% for every completed year under WDV method. Actual Cost Less: 20% for every completed year under WDV method. Actual Cost Less: 10% for every completed year under SLM. Assets more than 10 years old do not attract taxability Electronic gadgets do not include household appliances like washing machines, ACs, ovens, mixers etc Members of the household are spouse, children and their spouses, parents and servants d. Credit card expenses of employee or member of the household The taxable perquisite is the amount of expenses paid including annual maintenance fees and membership fees paid by employer towards the credit card (including add on card) No taxable perquisite if used fully for official purposes and employer maintains completed details of expenditure and issues certificate that the expenses were incurred wholly and exclusively for official purposes Members of the household are spouse, children and their spouses, parents and servants 26. Mr Raghu is employed with ITC in Bangalore. He is provided with the following in addition to Rs 26,000 p.m as salary. a. Rent Free Accommodation b. The company has given him a housing loan of Rs 4 lakh repayable in 8 years at 3% p.a P a g e 38

39 c. The company purchased a car on 1/5/2015 for Rs 2,50,000. They sold it to Mr Raghu for Rs 1,20,000 on 1/7/2017 d. He used his credit card to purchase office gifts of Rs 19,000. This along with annual fee of Rs 1,500 was reimbursed by the company. e. He was allowed to use video camera costing Rs 40,000 and laptop costing Rs 1,00,000 belonging to the company f. He took a loan from RPF maintained by ITC Rs 20,000 Compute taxable salary. e. Travelling, touring and accommodation of employee or members of the household Particulars If facility maintained by employer and it not available uniformly to all employees In any other case Value of taxable perquisite Cost of such facility offered by other agencies to the public Cost borne by employer Members of the household are spouse, children and their spouses, parents and servants f. Free or concessional transport tickets to employee or members of the household Particulars In case of employee of airline or railways In any other case Value of taxable perquisite NIL Value of such benefit or amenity offered to the public Members of the household are spouse, children and their spouses, parents and servants g. Free or concessional meal Cost incurred by employer is the value of perquisite However, the following are exempt: Free meals provided during office hours upto a cost of Rs 50 per meal to the employer Free meals provided through non transferrable vouchers usable only at eating joints upto Rs 50 per meal Tea or snacks during office hours Free meals during working hours in a remote area or an offshore installation h. Gift to employee or member of the household Gifts not exceeding Rs 5,000 during the year received from employer not a perquisite When the gifts exceed Rs 5,000 during the year, the total amount of gifts received are taxable Gift include cash gifts, gift vouchers, other tokens irrespective of the occasion Members of the household are spouse, children and their spouses, parents and servants P a g e 39

40 i. Motor Car Owner of Car Expenses met by Purpose Taxable Value of Perquisite Employer Employer Fully official Not a perquisite provided prescribed documents are Employee Employer Fully official maintained Employer Employer Fully private use Aggregate of- Actual expenditure on car (including hire charges) Remuneration to chauffeur 10% of the cost of car (normal wear & tear) Less: Amount charged from employee Upto 1.6 lt Rs 1,800 p.m Employer Employer Partly for official and > 1.6 lt Rs 2,400 p.m partly for personal If driver provided Rs 900 p.m Employer Employee Partly for official and partly for personal Upto 1.6 lt Rs 600 p.m > 1.6 lt Rs 900 p.m If driver provided Rs 900 p.m Actual expenditure incurred less Employee Employer Partly for official use and partly for personal Upto 1.6 lt Rs 1,800 p.m > 1.6 lt Rs 2,400 p.m If driver provided Rs 900 p.m Other than car Employer Fully official use Other than car Employer Partly for official and partly for personal Not a perquisite provided prescribed documents are maintained Actual Expenditure incurred by employer Less: Rs. 900 p.m. P a g e 40

41 j. Club membership of employee or member of the household Particulars Club facility available to all employees uniformly Employer pays annual or periodical fee to club for facilities used by employee Employer has obtained corporate membership of a club where employees use facilities Value of taxable perquisite NIL Cost borne by employer Annual membership fees paid to club (does not include initial payment to obtain membership) No taxable perquisite if fully for official purposes and employer maintains complete details of expenditure and issues certificate that expenses were incurred for official purposes Employer will have to justify business expediency. For eg, taking a potential client to dinner in a club may be considered as a business expense and there will be no taxable perquisite. However, expenses for use of spa, swimming pool etc will not be considered as business expenditure and will be taxed in the hands of the employee as a perquisite Members of the household are spouse, children and their spouses, parents and servants k. Medical treatment in India The following provided to employee or family member are not taxable in the hands of the employee Medical treatment of prescribed diseases or ailments in hospitals approved by the CCIT Medical facilities provided to the employee in a hospital maintained by employer Reimbursement of medical treatment in Government hospitals or hospitals maintained by local authority Reimbursement of medical treatment in hospitals approved under Central Govt Health Scheme Group medical insurance taken by employer Reimbursement of medical expenses not covered above, upto Rs 15,000 (only if bills provided by employee ie., based on actual expenses only) l. Medical Treatment outside India The following provided to employee or family member are not taxable in the hands of the employee Medical treatment abroad To the extent permitted by RBI Stay abroad for patient and one attendant To the extent permitted by RBI Travel of patient and one attendant If the Gross Total Income of employee after including the taxable treatment and stay abroad but before including travel expenditure is less than Rs 2 Lakh P a g e 41

42 Important Tip If the Gross Total Income after including the taxable treatment and stay abroad but before including travel expenditure is more than Rs 2 Lakh, then the entire travel expenditure will become taxable 27. The following expenses were incurred on Mr Adarsh's son and the same was reimbursed by the company. 1. Medical expenses Rs 70,000 (permitted by RBI Rs 50,000) 2. Stay expenses in USA for medical treatment Rs 65,000 (permitted by RBI Rs 45,000) 3. Travelling expenses of Mrs Adarsh and Mr Adarsh's son Rs 1,20,000 Calculate the taxable perquisite if the gross total income before considering the above is a. Rs 1,50,000 b. Rs 1,90, Mr. X retired from the services of Y Ltd on after completing service of 30 years and one month. He and received the following on his retirement: (i) Gratuity of Rs. 6,00,000. He was covered under the Payment of Gratuity Act, 1972 (ii) Leave encashment of Rs 3, 30,000 for 330 days leave balance in his account. He was credited 30 days of leave for each completed year of service. (iii) As per the scheme of the company, he was offered a car which was purchased on by the company for Rs. 5,00,000. Company has recovered Rs. 2,00,000 from him for the car. Company depreciates the vehicles at the rate of 15% on Straight Line Method. (iv) An amount of Rs. 3,00,000 as commutation of pension for 2/3 of his pension commutation. (v) Company presented him a gift voucher worth Rs. 6,000 on his retirement. (vi) His colleagues also gifted him a Television (LCD) worth Rs. 50,000 from their own contribution. Following are the other particulars: i) He has drawn a Basic Salary of Rs. 20,000 and 50% Dearness allowance per month for the period to ii) Received pension of Rs. 5,000 per month for the period to after commutation of pension. Compute his taxable salary from the above data. P a g e 42

43 29. Shri Bala employed in ABC Co Ltd. as Finance Manager gives you the list of perquisites provided by the company to him: i) Medical facility given to his family in a hospital maintained by the Company. The estimated value of the benefit because of such facility is Rs. 40,000. ii) Domestic servant was provided at the residence of Bala. Salary of domestic servant is Rs. 1,500 per month. The servant was engaged by him and the salary was reimbursed by the company iii) Free education was provided to his two children Arthy and Ashok in a school maintained and owned by the company. The cost of such education for Arthy is computed as Rs. 900 per month and for Ashok as Rs. 1,200 per month. No amount was recovered by the company for such education facility from Bala. iv) The employer has provided movable assets such as television, refrigerator and air-conditioner at the residence of Bala. The actual cost of such assets provided to the employee is Rs. 1,10,000. v) A gift voucher worth Rs. 10,000 was given on the occasion of marriage anniversary. It is given by the company to all employees above certain grade. State the taxability or otherwise of the above said perquisites and compute the total value of taxable perquisites. 30. Following benefits have been granted by Ved Software Ltd. to one of its employees Mr. Badri : (i) Housing 6% per annum. Amount outstanding on is Rs. 6,00,000. Mr. Badri pays Rs. 12,000 per month, on 5th of each month. (ii) Air-conditioners purchased 4 years back for Rs. 2,00,000 have been given to Mr. Badri for Rs. 90,000. Compute the chargeable perquisite in the hands of Mr. Badri. The lending rate of State Bank of India as on for housing loan may be taken as 8.65% p.a. 31. Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following information for the year: Basic Salary up to 31/10/2017 Basic Salary from 01/11/2017 Rs. 50,000 p.m. Rs. 60,000 p.m. Note: Salary is due and paid on the last day of every month i. Dearness 40% of basic salary ii. Bonus equal to one month salary. Paid in October 2017 on basic salary and dearness allowance applicable for that month iii. Contribution of employer to recognized provident fund account of the 16% of basic salary P a g e 43

44 iv. Professional Tax paid Rs. 2,500 of which Rs. 2,000 was paid by the employer CA Gaurav Rajaram v. Facility of laptop and computer was provided to Balaji for both official and personal use. Cost of Laptop is Rs. 45,000 and computer Rs. 35,000 were acquired by the company on 01/12/2017. vi. Motor car owned by the employer (cubic capacity of engine exceeds 1.60 ltrs) provided to the employee from 01/11/2017 meant for both official and personal use. Repairs and running expenses of Rs. 45,000 from 01/11/2017 to 31/03/2018 were fully met by the employer. The motor car was self driven by the employee. vii. Leave travel concession given to the employee, his wife and three children (one daughter age 7 and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer Rs. 30,000 for adults and Rs. 45,000 for three children. Balaji is eligible for availing exemption this year to the extent it is permissible in law. Compute the salary income chargeable to tax in the hands of Mr. Balaji. 32. Atul is working as Accounts Officer with Badri Steels Ltd., Ghaziabad drawing a salary of Rs.40,000 per month. He gets 12% of salary and entertainment Rs.800 per month. He spends 40% of entertainment allowance on entertaining the customers of the company. The company has provided him the facility of rent-free unfurnished house for which the company pays Rs.3,000 per month. The company has provided the services of a cook at the house of Atul for which the company pays Rs. 1,000 per month as salary. The facility of free refreshment and free meal for 300 days is provided to Atul costing Rs.25 per day and Rs.120 per day respectively during working hours in the office. Atul and the company both contribute 15% of basic pay and D.A. towards recognised provident fund; Rs. 10,000 is credited to provident fund account by way of 9% per annum. Compute taxable income from salary of Atul. 33. Mr. Mohit is employed with XY Ltd on a basic salary Rs 10,000 p.m. he is also entitled to Dearness 100% of basic salary, 50% of which is included in salary as per terms of employment. The company gives him house rent allowance of Rs 6,000 p.m. which was increased to Rs 7,000 p.m. with effect from He also got an increment of Rs 1,000 p.m. in his basic salary with effect from Rent paid by him during the previous year is as under: April and May 2017 June to October 2017 November to March Nil, as he stayed with his parents - Rs. 6,000 p.m. for an accommodation in Ghaziabad - Rs. 8,000 p.m. for an accommodation in Delhi. Compute his gross salary. P a g e 44

45 34. Mr. Anand an employee of XYZ Co. Ltd. at Mumbai and covered by Payment of Gratuity Act, retires at the age of 64 years on after completing 33 years and 7 months of service. At the time of retirement, his employer pays Rs 20,51,640 as Gratuity and Rs 6,00,000 as accumulated balance of Recognised Provident fund. He is also entitled for monthly pension of Rs 8,000. He gets 75% of pension Commuted for Rs 4,50,000 on 1 st February, Determine the salary chargeable to tax for Mr. Anand with the help of following information: Basic Salary (Rs 80,000 x 9) 7,20,000 Bonus 36,000 House Rent Allowance (Rs 15,000 x 9) 1,35,000 Rent paid by Mr. Anand (Rs 10,000 x 12) 1,20,000 Employer contribution towards Recognized Provident Fund 1,10,000 Professional Tax paid by Mr. Anand 2,000 Note: Salary and Pension falls due on the last day of each month. 8. Profits in lieu of salary Profits in lieu of salary to includes :- the amount of compensation due to or received by an assessee from his employer or former employer at or in connection with- (a) termination of employment; or (b) modification of the terms and conditions of employment any payment due to or received by the assessee from his employer or former employer or from provident fund or any other fund or any sum received under a key man insurance policy including the sum allocated by way of bonus on such policy (subject to exemptions u/s 10) any amount due to or received whether in lump sum or otherwise, by any assessee from any person (a) before his joining any employment with that person or (b) after cessation of his employment with that person P a g e 45

46 HEADS OF INCOME INCOME FROM HOUSE PROPERTY P a g e 46

47 1. Chargeability under this head - Section 22 CA Gaurav Rajaram Annual value of any property comprising of building or land appurtenant thereto of which the assessee is the owner Important Tip Under this head, notional income may be taxed (Section taxes 'Annual Value', not rent received) Assessee must be the 'owner' of the property. Therefore, when income is derived from subletting, such income is taxed under the head 'Income from other sources' The annual value of any building or portion of a building occupied by the assessee for the purposes of business or profession carried on by him is not chargeable to tax When land appurtenant to building can be used enjoyed/ used separately, income received from the same is taxable under the head 'Income from Other Sources' Where a partner of a firm allows the firm to use building owned by him and receives rent, it is taxable under the head 'Income from Other Sources' 2. Types of house properties Nature of property Let out Self occupied Deemed let out When given on rent When not given on rent When assessee has more than one self occupied properties - Assessee should choose only one as self occupied - Others to be taken as let out P a g e 47

48 When the following conditions are satisfied, a property will be considered as an Unoccupied Property: 1. It cannot be occupied by the owner 2. Such unoccupation is due to employment or business or profession carried on at another place 3. The assessee has to reside at another place in a building not belonging to him 3. Method of calculation of Annual Value Calculation of Gross Annual Value (GAV) Step 1 - Calculation of Fair Rent Rent of similar house in same locality Step 1a - Choose HIGHER of the below Municipal Value Value in Step 1a Step 1b - Choose LOWER of the below Standard Rent Actual Rent > Fair Rent GAV = Actual Rent Step 2 - Compare Actual Rent and Fair Rent Actual Rent < Fair Rent Due to vacancy GAV = Actual Rent Due to other reasons GAV = Fair Rent Notes to compute GAV GAV of Deemed Let Out property will be value of Step 1. There is no Step 2 for Deemed Let Out GAV of Self-Occupied and Unoccupied Property shall be NIL Annual Value of a property which is held as "Stock in Trade" and has not been let out at any time during the year shall be NIL (for the year of completion and subsequent year) Actual Rent shall be rent received or receivable during the relevant previous year When the house is vacant, rent for such period should be ignored while computing actual rent P a g e 48

49 Unrealised Rent may be deducted from Actual Rent if the following conditions are satisfied Tenancy is bonafide (genuine) Defaulting tenant has vacated or steps have been taken to evict him The defaulting tenant is not in occupation of any other property of the assessee Legal proceedings have been initiated to recover rent (or process has begun) or assessee satisfies assessing officer that legal proceedings would be useless Calculate GAV in the following cases: 1. Ajay let out his house property for a rent of Rs. 24,000 p.m. Municipal valuation of the property is 3.6 lakhs 2. The following particulars are given (assume no vacancy) Particulars Municipal valuation A (Rs.) 1,00,000 B (Rs.) 80,000 C (Rs.) 1,20,000 Fair Rent (rent which similar property would fetch) 1,20,000 60,000 1,10,000 Standard Rent 1,25,000 1,00,000 Not fixed Actual Rent 1,00,000 1,00,000 1,00, Ram has a property whose municipal valuation is Rs. 2.4 lakhs. He let it out to a Bank for Rs. 30,000 p.m. from July For the months of April, May and June the property was vacant 4. Ramani owns a flat which is assessed by the local authority with annual value of Rs. 90,000. The property was let out for Rs. 7,500 p.m. However the tenant vacated the property on For the months of October 2017 to January 2018 the flat was vacant as no proper tenant could be identified. In February 2018, a new tenant occupied at a rent of Rs. 10,000 p.m. 5. Srikrishna Rao owns a house in Alleppey. Municipal value of the property is Rs. 84,000 During the year, the property was self occupied for 2 months and let-out for Rs. 9,000 p.m. from June 2017 onwards. The tenant vacated on 30th November 2017 and the property remained vacant during December and January. From February again it was let out for Rs. 10,000 p.m. 6. Srikrishna Rao owns a house in Alleppey. Municipal value of the property is Rs. 84,000 During the year, the property was self occupied for 2 months and let-out for Rs. 9,000 p.m. from June 2017 P a g e 49

50 onwards. The tenant did not pay rent for December and January and he finally left on January 31st without paying rent due. From February again it was let out for Rs. 10,000 p.m. 7. Srikrishna Rao owns a house in Alleppey. Municipal value of the property is Rs. 84,000 During the year, the property was self occupied for 2 months and let-out for Rs. 9,000 p.m. from June 2017 onwards. The tenant vacated on November 30th and the property was self occupied in December and January. From February again it was let out for Rs. 10,000 p.m. 8. Hamsa owns a flat since 2014 and was let out to a private finance company from the beginning. The annual value assessed by the municipal corporation was Rs. 60,000. The property was let out for Rs. 10,000 in April 2014 and interest free rental advance equivalent to 3 months rent was collected, There is a stipulation in the lease agreement that 25% increase shall be made in the rent on completion of the 3 year tenancy period. From April 2017, the company paid Rs. 12,500 p.m. as per the terms of the agreement. The company ran into financial crisis in June 2017 and no rent was paid thereafter. Notice has been given to evict the company and other steps taken to realise the rent were not fruitful. Rental advance has been adjusted towards rent due for June, July and partly for August. The balance amount of rent is not realisable. Ultimately, the company vacated in March Ramadurai owned a flat, (Municipal Value Rs. 1,20,000) in which he was living with his family for several years. By end of July 2017 he completed construction of a Bungalow and on 1st August 2017 shifted to the new house. From August 2017, the flat was let out to his sister s family for a rent of Rs. 8,000 p.m. 10. Murugan let out his house (municipal value Rs. 60,000) to a Chit fund company at Rs. 6,000 p.m. Due to defaults committed by the company to the subscribers, there were court proceedings and the house was sealed. No rent has been received since January 2017 till date. Rental advance was sufficient only to be adjusted for rent due from Jan to Mar Liquidator appointed has been approached for realisation of arrears of rent. P a g e 50

51 4. Calculation of Net Annual Value and Income from House Property Case 1: Let out Property (LOP) and Deemed Let out Property Particulars Gross Annual Value (as per method given above in point 3) Less: Municipal Taxes paid Net Annual Value (NAV) Less: Standard Deduction 30% of NAV Less: Interest on loan taken for house property Income from House Property Amount xxx xxx XXX (xxx) (xxx) XXX Case 2: Self Occupied Property (SOP) or Unoccupied Property (UP) Particulars Annual Value Less: Interest on loan taken for house property Income from House Property Amount NIL (xxx) XXX 5. Municipal Taxes (available only to Let Out and Deemed Let Out) - Proviso to Section 23 Municipal taxes paid by tenant cannot be deducted Municipal taxes due but not paid cannot be deducted Municipal taxes paid even for earlier years can be taken as deduction if paid during the PY Cannot be given for Self Occupied Property 6. 30% Standard Deduction (available only to Let Out and Deemed Let Out) - Section 24(a) Automatic deduction - Deduction to be given even if no expenses incurred No specific deduction for expenses such as insurance premium, maintenance charges, painting etc Cannot be given for Self Occupied Property P a g e 51

52 11. Mr. X owns a house property which is let-out for Rs. 5,000 per month. The fair rent of the property is Rs. 72,000. Municipal taxes paid during the year for each half year is Rs. 3,600. Tax only for the first half has been paid. The tenant has undertaken to do the repairs. Insurance premium paid is Rs. 1,500. Collection charges incurred is Rs. 100 per month. Compute the Income from HP. 12. Calculate NAV for the following cases Particulars Municipal valuation A (Rs.) 2,00,000 B (Rs.) 1,60,000 C (Rs.) 2,40,000 Fair Rent (rent which similar property would fetch) 2,40,000 1,20,000 2,20,000 Standard Rent 2,50,000 2,00,000 Not fixed Actual Rent 2,00,000 2,00,000 2,00,000 Municipal Taxes 30,000 24,000 15, Interest on loan - Section 24(b) General Points Loan can be taken for construction, acquisition, repairs, renovation or reconstruction Interest on loan taken to repay original loan also available as deduction Actual payment not necessary - As long as interest is payable, deduction can be claimed Interest on pre-construction period can be claimed as a deduction in 5 equal installments from the year in which construction is completed Interest for the year of completion of construction is fully deductible in the same year In the case of interest on loan borrowed payable outside India, deduction will not be allowed if tax is not deducted at source or tax is not paid (Section 25) Interest on unpaid interest which is in the nature of penalty cannot be claimed as deduction Interest on loan taken for house property Let Out Property and Deemed Let Out No limit on amount of interest which can be claimed as a deduction Loan can be taken for construction, acquisition, repairs, renovation or reconstruction Interest for the year in which construction is completed and thereafter can be claimed fully in that year P a g e 52

53 Interest on loan taken for house property Self Occupied Property Max limit of Rs 30,000 If the following conditions are satisfied, deduction available up to Rs 2,00,000 Analysis Loan taken for construction or acquisition on or after AND Construction or acquisition is complete within 5 years from the end of the financial year in which loan was borrowed AND Certificate from person to whom interest is payable should be furnished If loan borrowed for renovation, reconstruction or repair, limit is Rs 30,000 If construction or acquisition not completed within 5 years, limit is Rs 30,000 If certificate is not furnished when asked for, limit is Rs 30,000 Inadmissible Expenses - Sec. 25 In the case of interest on loan borrowed payable outside India, deduction will not be allowed if tax is not deducted at source or tax is not paid. 13. Ms. Shama owns a house property the construction of which was completed in November The house is let-out for a rent of Rs. 9,000 per month. On 1 April 2013 she borrowed a loan of Rs. 3 lakhs for the purpose of 18% interest. Property taxes paid is Rs. 15,000. Compute the income from house property. 14. Naveen owns a house at Indore. Its municipal valuation is Rs.24,000. He incurred the following expenses in respect of the house property : Municipal 20%, fire insurance premium Rs.2,000 and land revenue Rs.2,400. He took a loan of per annum on 1st April, The whole amount is still unpaid. The house was completed on 1st April Find out the income from house property for the year in respect of the following options: (i) If the house is let-out for residential purposes on monthly rent of Rs.2,000 from 1st April, 2017 to 31st January, 2018 and self-occupied for the remaining period. (ii) If the house is used by the assessee throughout the previous year for his residential purpose. P a g e 53

54 15. Mr. Ram owns a house property the construction of which was completed in May The house is let-out for a rent of Rs. 20,000 per month. On 1 April 2013 he borrowed a loan of Rs. 10 lakhs for the purpose of 18% interest. On 30th November 2016, he borrowed a loan of Rs. 8 15% interest and utilised this amount along with interest free rental advance of Rs. 2 lakh obtained from the tenant and repaid the original loan of Rs. 10,00,000. The house is insured and the premium of Rs. 20,000 is regularly paid each year. Property taxes paid is Rs. 45,000. Compute the income from house property. Also, if the property is self-occupied full year, what would be the income from house property? 16. Mr. Sharma constructed 8 flats of similar nature and let out each flat on a rent of Rs. 5,000 per month. For the construction which commenced during January 2013, he borrowed a loan of Rs. 6 lakhs on 24% interest. The construction was completed in August The municipal taxes paid during the year Rs. 40,000 includes arrears relating to earlier years Rs. 10,000. Out of the loan borrowed, a sum of Rs. 3 lakhs has been repaid on 31st December Repairs incurred for the flats during the current year amounted to Rs. 58,000 and Insurance premium paid is Rs. 16,000. Of the eight flats, two flats remained vacant for a period of 3 months and one flat remained vacant for a period of 9 months. Determine the income from house property. 17. Anurag owns three houses, the particulars of which are given below (Amounts in Rs) House-A House-B House-C Municipal value 80,000 1,20,000 1,00,000 Fair rent 90,000 1,00,000 1,10,000 Monthly rent 8,000 9,000 12,000 Rent collection charges 8,000 10,000 6,000 Repair expenses 5,000 6,000 4,000 Interest on Loan - For construction 40,000 - For marriage of son 30,000 - For repairs 38,000 Start of construction End of construction Use by tenant Residential Office Residential Municipal tax is 10%. Anurag paid municipal tax of House-A but did not pay municipal tax of House-B. The tenant paid the municipal tax of House-C which remained vacant for 3 months. Compute income from house property of Anurag. P a g e 54

55 18. Mr. Arvind owns 2 houses and both are used for own residence. The relevant details for the previous year are as follows: (in Rs.) Particulars House I House II Municipal Valuation Fair rent (rent which similar property would fetch) Standard rent Municipal taxes paid Repairs Insurance premium Interest on loans (borrowed on ) 24,000 34,000 30,000 6,000 12,000 1,500 12,000 42,000 36,000 45,000 8,000 4,000 1,800 60,000 Compute the income from house property. 19. Mr. Vasanth is owner of two house properties, one at Bangalore and another at Pune. The particulars regarding both the properties are furnished here below: Particulars Bangalore House Rs. Pune House Rs. Municipal Valuation 36,000 60,000 Fair Rent Standard Rent Interest on loans (loan taken prior to ) Insurance Premium Property taxes paid 50,000 42,000 20,000 2,000 6,000 72,000 80,000 36,000 Not Insured 9,000 Advice him in choosing the house property to be treated as self occupied property. 8. Co-ownership - Section 26 The share of income of each such co-owner should be determined and included in his individual assessment The manner of computation remains the same except for the fact that he is assessed only in respect of his share of income/ annual value Each co-owner is entitled for the concessional computation relating to one self-occupied property with reference to his share of property under his occupation. Accordingly, actual interest incurred by each co-owner in respect of loans borrowed shall be allowed subject to an independent limit of Rs 30,000/ Rs. 2,00,000 each. P a g e 55

56 20. Mr. Raman is a co-owner of a house property along with his brother Particulars Municipal value of the property Fair Rent Standard Rent under the Rent Control Act Rent received Amount in Rs. 1,60,000 1,50,000 1,70,000 15,000 p.m. The loan for the construction of this property is jointly taken and the interest charged by the bank is Rs. 25,000 out of which Rs. 21,000 has been paid. Interest on the unpaid interest is Rs To repay this loan, Raman and his brother have taken a fresh loan and interest charged on this loan is Rs. 5,000. Municipal Taxes of Rs. 5,100 has been paid. Compute the income from this property chargeable in the hands of Mr. Raman. 21. Two brothers Arun and Bimal are co-owners of a house property with equal share. The property was constructed during the financial year The property consists of eight identical units and is situated at Cochin. During the year, each co-owner occupied one unit for residence and the balance of six units were let out at a rent of Rs. 12,000 per month per unit. The municipal value of the house property is Rs. 9,00,000 and the municipal taxes are 20% of municipal value, which were paid during the year. The other expenses were as follows: Particulars Rs. i) Repairs 40,000 ii) Insurance premium (paid) 15,000 iii) Interest payable on loan taken for construction of house 3,00,000 One of the let out units remained vacant for four months during the year. Arun could not occupy his unit for six months as he was transferred to Chennai. He does not own any other house. The other income of Mr. Arun and Mr. Bimal are Rs. 2,90,000 and Rs. 1,80,000 respectively for the current year. Compute the income under the head Income from House Property and the total income of two brothers for the year. 22. Mr. A and B constructed their house on a piece of land purchased by them at New Delhi. The built up area of each house was 1,000 sq.ft. Ground Floor and an equal area in the first floor. A started construction on and completed on B started the construction on and completed the construction on A occupied the entire house on B occupied the Ground Floor on and let out the first floor for a rent of Rs. 15,000 per month. However, the tenant vacated the house on and B occupied the entire house during the period to P a g e 56

57 Following are the other information: Particulars CA Gaurav Rajaram Amount (i) (ii) (iii) (iv) (v) (vi) Fair rental value of each unit (Ground floor/first floor) Municipal value of each unit (Ground floor/first floor) Municipal taxes paid by A Municipal taxes paid by B Repairs & Maintenance charges paid by A Repairs & Maintenance charges paid by B 1,00,000 72,000 8,000 8,000 28,000 30,000 A has availed a housing loan of Rs % p.a. on B has availed a housing loan of Rs % p.a. on No repayment was made by either of them till Compute income from house property for A and B. 23. Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the house is self occupied by Mr. X and another unit is rented for Rs. 8,000 p.m. The rented unit was vacant for 2 months during the year. The particulars of house are as under: Standard Rent Rs 1,62,000 p.a Municipal Valuation Rs 1,90,000 p.a Fair Rent Rs 1,85,000 p.a Municipal Tax 15% Light and Water Rs 500 p.m Interest Rs 1,500 p.m Compute income from house property of Mr. X 24. Mrs. Indu, a resident individual, owns a house in U.S.A. She receives $2,000 per month. She paid municipal taxes of $ 1,500 during the year. She also owns a two storied house in Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of Rs. 10,000. Standard rent for each floor is Rs. 11,000 per month. Municipal taxes paid for the house amounts to Rs. 7,500. Mrs. Indu had constructed the house by taking a loan from a nationalized bank on She repaid the loan of Rs. 54,000 including interest of Rs. 24,000. The value of one dollar is to be taken as Rs. 45. Compute total income from house property of Mrs. Indu. 9. Unrealised rent or arrears of rent subsequently received - sec. 25A It's a case where the assessee cannot realise rent from a property let to a tenant in an earlier PY and subsequently the assessee has realised any amount in respect of such rent in the current PY 30% shall be allowed as deduction and consequently 70% alone shall be chargeable to tax The deduction of 30% is irrespective of the actual expenditure incurred Chargeable to tax even if the assessee is no longer the owner of such property P a g e 57

58 Illustration CA Gaurav Rajaram Fair rent of the property is Rs. 1,50,000. The property has been let-out at Rs. 17,500 p.m. However, 2 months rental income is not realisable and therefore, gross annual value has been adopted at Rs. 1,75,000 being the actual rent. He would like to know the treatment of the sum of Rs. 35,000 if it is realised in a later year (conditions prescribed under Rule 4 are satisfied). Ans: The amount of rent attributable to 2 months Rs. 35,000 has been treated as unrealised and adjusted in the actual rent for determining annual value. Subsequently, as and when it is realised, it shall be deemed to be income from house property and accordingly charged to tax in the year of realisation. 30% deduction shall be given and consequently only 70% of Rs 35,000 shall be chargeable to tax 10. Deemed Owner - Section 27 In certain cases the legal ownership may vest with one person whereas the taxability is cast on another person who is deemed to be the owner. Sec. 27 enumerates such cases, which are given hereunder: i. An individual who transfers otherwise than for adequate consideration, any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, is deemed to be the owner of the house property so transferred; ii. iii. iv. The holder of an impartible estate is deemed to be the individual owner of all the properties comprised in the estate; A member of a Co-operative society, Company or other AOP to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, shall be, deemed to be the owner of that building or part thereof, even though co-operative society / company / association is a legal owner; A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in sec. 53A of the Transfer of Property Act, 1882, is deemed to be the owner of that building or part thereof; v. A person who acquires any rights in or with respect to any building or part thereof, by virtue of any of the following transactions shall be deemed to be the owner of the property: Transfer of any land or any building or part of a building by way of sale or exchange or lease for a term not less than twelve years. (including the extendable lease periods); Transfer of any rights in or with respect to any land or building or part of or building (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other AOP or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of, such property. P a g e 58

59 HEADS OF INCOME PROFITS AND GAINS FROM BUSINESS OR PROFESSION P a g e 59

60 1. Basic Structure CA Gaurav Rajaram Definition of income chargeable Method of computation Section 28 Section 41 Section 176 Section 30 to 37 read with Section 40 to 43DB Business deductions Conditions for certain deductions Maintenance of books and audit Presumptive taxation Other provisions 2. Income chargeable under this head Under Section 28 Profits and gains from business or profession carried on during the previous year Compensation received or receivable received in connection with a) Termination or modification of contract relating to management of affairs of any company b) Termination or modification of agency contract for business activity in India c) Vesting of the management of any business and property in favour of government or any corporation owned by the government under any law in force Income of any trade, professional or similar association from specific activities performed for members In case of an assessee carrying on export business, the following: Profit on sale of import entitlements or EXIM scrip Cash Compensatory Support or CSS Duty drawbacks Profit on transfer of Duty Entitlement Pass Book Scheme (DEPB Scheme) Profit on transfer of Duty Replenishment Certificate P a g e 60

61 Value or benefit arising in the course of carrying on business or profession Salary, bonus, commission, remuneration or interest to a partner of a firm [to the extent disallowed u/s 40(b)] Non compete fee received for (i) for not carrying out any activity related to business or profession (ii) for not sharing know-how, patent, copyright, trademark, license, business or commercial rights or information or techniques likely to assist in the manufacture of goods or provision of services Amount received under a Key Man insurance policy including sum allocated by way of bonus Amount received in relation to capital asset for which deduction u/s 35AD has been given and which has been demolished or discarded or transferred or sold Important Tip If assessee derives business income from speculative transactions, then such business will be considered as a separate business Purchase or sale of any commodity including shares These are not speculative transactions 1. Forwards, Futures and Options By actual delivery or transfer Non Speculative Otherwise than by actual delivery or transfer Speculative i. For Raw Material or merchandise in the normal course of business ii. By a dealer or investor in respect of shares iii. By a member of forward market or stock exchange in the course of jobbing or arbitrage 2. Eligible Derivative transactions 3. Eligible transaction in respect of trading in commodity derivatives in a recognised association which is chargeable to Commodities Transaction Tax P a g e 61

62 Section 41 - Deemed Income CA Gaurav Rajaram Taxable event Amount taxable Conditions, if any Amount should have been Remission or cessation of trading Amount of such remission or allowed as a deduction/ loss in an liability - Section 41(1) cessation earlier PY Amount on sale of asset by an To the extent of depreciation assessee engaged in generation or Applies only if SLM is followed already allowed generation or distribution of power by the assessee (Known as 'Balancing Charge') - Section 41(2) Sale of asset used for scientific Same as above research - Section 41(3) Amount should have been Recovery of bad debts - Section Amount of bad debts recovered allowed as a deduction u/s 36 in 41(4) an earlier PY Amount should have been Withdrawal from reserve created Amount of withdrawal allowed as a deduction u/s 36 in u/s 36(i)(viii) - Section 41(4A) an earlier PY Section 41(5) - Where there is any income received by an assessee u/s 41(1), (3), (4) or (4A), who has discontinued his business or profession, he will be allowed to set off losses of the year of discontinuance and which could not be set off against any other income of the assessee Important Tip Section 41 taxes incomes even if business has been discontinued by the assessee Refund of sales tax is chargeable u/s Definition of 'Business' and 'Profession' Section 2(13) defines business to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture P a g e 62

63 Adventure in the nature of trade, commerce or manufacture CA Gaurav Rajaram Even a stray transaction which has the character of trade, commerce or manufacture is taxable under this head. Factors which will be considered to determine whether such activity is in the nature of trade, commerce or manufacture are: Nature of the items or goods dealt with Intention of the person Periodicity of the transactions The efforts taken by the person Value addition made by the person Section 2(36) defines profession to include vocation Profession therefore includes the following: Carrying on any activity based on a skill or knowledge acquired through study, degree or diploma Eg: A Chartered Accountant providing consulting services to clients Carrying on any activity based on inborn talent, skill and attributes Eg: A singer performing in concerts 4. Method of accounting Section 145 allows the assessee to compute income under this head according to the method of accounting regularly followed by the assessee. There are 2 methods of accounting: 1. Cash basis - Transactions are recorded only when money is paid or received 2. Accrual basis - Transactions are recorded as and when they occur and not when money is paid or received Important Tip The Act follows the generally accepted accounting principles except when a specific treatment is provided in the Act. For specified areas, ICDS' have been issued. Refer to the end of book. P a g e 63

64 For example, voluntary retirement benefits may be taken as an expenditure fully in the year of payment as per the regular books of accounts maintained by the assessee but the Act allows the expenditure to be charged to revenue over a period of 5 years Similarly, preliminary expenses may be charged off against Securities Premium in the books of accounts but Section 35D allows deduction over a period of 5 years Books entries are not final and conclusive to decide the allowability or taxability of a particular item of expense or income - Kedarnath Jute Mfg Co Ltd vs CIT 82 ITR 363 (SC) 1. Determine the taxability of certain receipts and the heads of income under which it is taxable in respect of the following cases: a) A patient who was treated in the year 2000 by a surgeon was completely cured of his ailment and a sum of Rs.20,000 was paid as professional charges. Later in the current PY, the patient executed a will by which he gifted an area of 3 acres of land indicating therein that the gift was made in order to show his feeling of gratitude to the doctor who had shown him kindness. Upon the demise of patient, the doctor received the asset. The Assessing Officer included a sum of Rs. 1,00,000 being the assessable value of the land gifted as income arising to the assessee out of his profession. Advice. Answer: Assessing Officer s action is not justified since there is no nexus between the professional service rendered and the land received in settlement. Land is settled in appreciation of and in gratitude for the kindness shown by the doctor. Therefore, the land received has to be treated as gift and the value cannot be treated as professional income u/s. 28. By virtue of sec. 56(2), any value of immovable property received otherwise than for consideration shall be taxed under the head Income from Other sources. However, where a transaction of gift is executed through a will or inheritance, the same shall not be taxed in the hands of the recipient of such immovable property. Accordingly, the doctor, in this case is not subject to tax under the head Income from Other Sources also. b) The assessee carried on a vocation of practicing against atheism and is engaged in a movement for the spread of religion. In the course of such vocation and for practicing the same he received donations from his friends in USA who believed in the cause which he sponsored. The said receipts are sought to be taxed as business income by the Assessing Officer. Advice. Answer: Taxable under the head Business or profession since the nexus between the vacation carried on by the assessee and the receipts are clearly established. 5. Section 30 - Rent, rates, taxes and repairs for buildings The following are allowable under this Section: Rent for such premises (if assessee is a tenant) Current repairs Land revenue, municipal taxes etc Insurance premium to insure building against damages or destruction P a g e 64

65 Capital Expenditure shall not be allowed under this Section CA Gaurav Rajaram Any expenditure incurred to preserve and maintain an asset is current repairs Any expenditure which brings into existence a new asset is Capital Expenditure 6. Section 31 - Repairs and Insurance of plant, machinery and furniture The following are allowable under this Section: Current repairs Insurance premium to insure against damages or destruction Capital Expenditure shall not be allowed under this Section Note: Hire charges paid towards Plant, Machinery and Furniture will not be deductible under this section. It will however be allowed u/s 37 Tests to justify as Current Repairs (indicative) 1. What is replaced is only a part 2. What is replaced is defective or old so as to justify replacement 3. There has been no significant increase in production capacity after replacement If the expenditure incurred brings into existence a new asset or enduring benefit in the capital field, it cannot be taken as a deduction u/s 31 or 37. Depreciation can be availed if eligible u/s 32. Analyse whether these are current repairs or capital expenditure Case 1 - Assessee incurred expenditure to replace petrol engines fitted in jeeps to diesel engines in view of the old and defective condition of existing engines and price differences between petrol and diesel. Case 2 - Assessee engaged in restaurant business replaces decorative displays, linen materials and incurred Rs 10 lakh. P a g e 65

66 7. Section 32 - Depreciation CA Gaurav Rajaram A. Conditions for claiming depreciation 1. Assessee should be owner of asset 3. Asset must be used in the previous year 2. Asset should be used for his business or profession Exceptions to ownership of asset 1. If assessee is occupying any building as a tenant, capital expenditure incurred by him on the building like renovation, extension etc can be treated as 'Building' and depreciation can be claimed 2. Hire Purchase transactions - Depreciation may be claimed although ownership passes only on payment of last installment. Cash Price is considered as Cost of Asset. 3. When only registration is pending but assessee enjoys all benefits of ownership like possession, control, usage etc, depreciation can be claimed on such asset Analyse whether the asset is eligible for depreciation! Assessee has constructed a temple in the office campus for the purpose of employees and spent Rs 10 Lakhs. Assessee is engaged in manufacturing of cigarettes. B. Rates of Depreciation CLASS OF ASSET Rate I BUILDING % (1) Building which are used mainly for residential purpose except hotels & boarding houses 5 II (2) Building which are not used mainly for residential purposes 10 and which are not covered by sub-item (1) above and subitem (3) below (3) Buildings acquired for installing machinery and plant forming 40 part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities under clause (i) of sub-section (4) of section 80-IA (4) Purely temporary erections such as wooden structures 40 FURNITURE AND FITTINGS (1) Furniture and fittings including electrical fittings 10 P a g e 66

67 III MACHINERY AND PLANT Rate (1) Motor Car - Used in hiring business/ taxi business 30 - Any other business 15 (2) Books 40 (3) Windmills - Installed on or after 1/04/ (4) Aeroplanes and Aeroengines 40 (5) Life Saving Medical equipment 40 (6) Containers made of glass or plastic used as re-fills 40 (7) Computers including computer software 40 (8) Machinery installed in water treatment plants, water supply 40 project, Air and Water pollution control equipments, Solid Waste control equipments (9) Energy saving devices, devices used in Sugar and Renewable 40 energy industries (10) Plant other than those covered above 15 IV SHIPS, VESSELS, BARGES, BOATS etc 20 V INTANGIBLE ASSETS (Goodwill, Trademarks, licenses, 25 know-how etc) C. Important meanings and definitions for depreciation Where an asset is used for both business and personal expenses, depreciation can be claimed in respect of the proportion used for business purposes (Section 38) When assets are put to use for less than 180 days during the year, only 50% depreciation can be claimed Buildings include roads, bridges, wells etc Machinery includes any asset required for the production of article or thing or processing of a product Furniture includes assets used for decoration and convenience Plant includes ships, vehicles, books, scientific and surgical equipments but does not include tea bushes, live stock, building or furniture (Plant has a residual definition) Electrical fittings include electrical wiring, switches, sockets, fans etc P a g e 67

68 D. Enhanced Depreciation CA Gaurav Rajaram Extra 20% depreciation on plant and machinery acquired and installed in addition to normal depreciation if it satisfies the following conditions Plant or machinery is new and not used previously within or outside India (ie., not second hand) It should not be installed in office or residence including guest house It should not be an office appliance or road transport vehicle It should not be a plant or machinery which is eligible for 100% deduction while computing the profits from business or profession in any one previous year Only an assessee engaged in manufacture or production of an article or thing OR generation of power OR generation and distribution of power OR transmission of power can claim such enhanced deprecation 10% enhanced depreciation if such asset is put to use for less than 180 days during the year Balance 50% of the additional depreciation on new plant and machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant and machinery, shall be allowable in the immediately succeeding previous year (i.e, the next FY). Additional Depreciation in the case of notified backward areas - Sec. 32(i)(iia) In order to incentivize acquisition and installation of plant and machinery for setting up of manufacturing units in the notified backward area in Andhra Pradesh, Bihar, Telengana or West Bengal, the scheme of additional depreciation has been modified to allow higher additional depreciation at the rate of 35% (instead of 20% as provided u/s. 32(1)(ii))in respect of new plant and machinery (other than a ship or aircraft) acquired and installed during the period 1 st April 2015 to 31 st March If however the new plant and machinery is put to use for less than 180 days in the year of acquisition, then additional depreciation will be limited to 17.5% (being 50% of 35%) of actual cost in that year. The balance of 17.5% will be allowed in the immediately succeeding previous year. E. Block of Assets concept Under the Act, individual assets do not have separate identity and similar assets are clubbed together. 'Block of Assets' means a group of assets falling within a class of assets comprising of i. 'tangible assets' being buildings, machinery, plant or furniture ii. 'intangible assets' comprising of know-how, patents, copyrights, trademarks, licenses etc in respect of which the same percentage of depreciation is prescribed. P a g e 68

69 F. Format for depreciation under Block of Assets concept CA Gaurav Rajaram Type of Asset Building Plant Furniture Intangibles Total Rate WDV on 1/4/2017 Actual cost of additions >= 180 days < 180 days Sale Proceeds Total Depreciable value Depreciation WDV on 31/3/2018 No depreciation in the following circumstances: 1. No asset is left in the Block, although value exists (All assets sold for less than WDV) 2. The amount of deletions exceed WDV of the Block (Block has negative WDV) G. Calculation of 'Actual Cost of Asset' in general scenarios Cost of purchase or construction of the asset Less Excise Duty in respect of which CENVAT Credit is allowed Less Subsidy or grant received (Even if not directly relatable, such proportion which is relatable to the asset purchased) Add Interest on loan borrowed for acquiring the asset, payable up to the date of commencement of production - M/s.Challappaji Sugars Ltd. case (1975) 98 ITR 167 Add Direct expenses for brining the asset to its current location or condition (freight, transportation, erection, commission, technical fees for installation, loading, unloading etc) Actual Cost of Asset XXX (XXX) xxx xxx XXX H. Actual Cost in certain specific scenarios SECTION 43(1) Actual Cost Actual Cost means the actual cost of the asset to the assessee, reduced by that portion of the cost which has been directly or indirectly met by any other person or authority. Provided further that where the assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost. (Proviso Added by Finance Act, 2017 from Assessment Year ) P a g e 69

70 Illustration 1 CA Gaurav Rajaram Assessee purchases plant & machinery of Rs 4,00,000 on and pays Rs 4,00,000 by cash. Since payment of Rs 4,00,000 is made by cash, it shall not be considered as part of actual cost of plant & machinery. The actual cost of plant & machinery shall be taken to be NIL and NIL shall be added to WDV of Block of assets Also Note: As per section 269ST introduced by Finance Act, 2017, the seller of machinery is liable to pay penalty of Rs 4,00,000 for accepting cash of Rs 2,00,000 or more. The Penalty shall be under section 271 DA. Suppose in Illustration 1, assessee makes payments as under: Dates Mode of Payment Amount Tax Treatment Cash Rs 5,000 x 10 times Rs 50,000 Payment made on of Rs 50,000 shall not be considered for determining actual cost since aggregate payments in cash in a day exceeds Rs 10, to Cash Rs 10,000 every day x 15 days Rs 1,50,000 Payment of Rs 1,50,000 made by cash from to shall be considered for determining actual cost since aggregate payments in a day do not exceed Rs 10, Cheque Rs 2,00,000 Payment of Rs 2,00,000 shall be added into actual cost of asset. Therefore Rs 3,50,000 shall be considered as actual cost and Rs 3,50,000 shall be added to WDV of Block of assets. Note: Seller shall pay penalty of Rs 2,00,000 under section 271DA as he has violated section 269ST since the cash payments received by him for a single transaction are Rs 2,00,000 or more. Penalty is equivalent to cash accepted by him. Expl. To Sec. 43(1) 1 Mode of acquisition Asset acquired for scientific research subsequently brought into business use Actual cost Actual cost less deduction availed u/s. 35.Therefore in this case the actual cost shall be Nil 2 Asset acquired by way of gift or inheritance WDV to the previous owner. 3 Asset acquired from any other person using the Assessing Officer can decide after P a g e 70

71 4 4A 5 asset for his business or profession with a view to claim depreciation on enhanced cost and reduce tax liability Asset transferred by the assessee and reacquired by him Asset acquired by an assessee from another person given on lease to the same person who had earlier claimed depreciation on such asset. (Sale and Lease Back transactions) Building used for private purpose subsequently brought into business use. 8 Asset acquired out of borrowed funds Asset acquired subject to levy of GST in respect of which credit is availed. A portion of the cost of an asset acquired is met directly or indirectly by government or any statutory authority or any other person in the form of a subsidy or grant or reimbursement. Asset brought into India by a Non-resident assessee for use in his business or profession. Asset acquired from specified business activities as referred to u/s.35ad (i) by way of gift or will of irrevocable trust; (ii) on any distribution on liquidation of the company; (iii) transfer through any specified business CA Gaurav Rajaram seeking prior approval of JCIT The WDV at the time of original transfer or the price paid for reacquiring the asset, whichever is less. The written down value of the asset to the transferor at the time of transfer to the assessee. The cost of purchase or Construction of the building as reduced by the notional depreciation calculated up to the year of bringing the asset to business use at the depreciation rate applicable to the year in which the asset is brought into business. Interest on loan after the asset is first put to use shall not form part of actual cost. So much of the duty in respect of which a claim of credit has been made and allowed shall be reduced from the actual cost. So much of the cost as is relatable to such subsidy or grant or reimbursement shall not form part of the actual cost. If it is not directly relatable to the asset acquired, proportionate amount calculated by considering all assets shall be excluded. Actual cost as reduced by the amount of depreciation notionally calculated at the rate in force as if the asset was used in India since the date of acquisition. Actual cost shall be adopted as Nil P a g e 71

72 reorganization as referred to in Sec. 47. CA Gaurav Rajaram I. Depreciation for Power Sector Power Sector assessees have an option to choose SLM. Other assessees must follow block of assets concept When SLM is chosen and there is a sale, then the following apply: - Where sale consideration is lesser than WDV Difference is written off as 'Terminal Deprecation' - Where sale consideration is more than WDV but lesser than original cost Chargeable as 'Balancing Charge u/s 41 - Where sale consideration is more than original cost Upto original cost, chargeable as 'Balancing Charge' u/s 41 Above original cost, chargeable as Capital Gains u/s 50A Problems 2. In the case of M/s. X Ltd. the written down value of the following assets as on stood as follows: Motor cars A 60,000 B 50,000 Motor Taxis C 80,000 D 1,50,000 Motor Buses E 1,00,000 F 90,000 During the previous year motorcar A is sold for Rs. 70,000 and motorbus F is sold for Rs.60,000. One motor taxi G has been purchased on for Rs. 1,20,000 and motorcar H for Rs. 1,10,000 on The rate of depreciation for motorcars is 15% and for motor taxis and motorbuses is 30%. i) Group the above assets into Block of assets and compute the depreciation ii) If the motor car A is sold for Rs. 1,20,000 instead of Rs. 70,000, what will be the depreciation that can be claimed in respect of block I comprising of motor cars? 3. In the case of Amrish, there are 2 lorries at the beginning of the year used in transport business. The written down value as on of lorry A is Rs.7,00,000 and lorry B is Rs.5,00,000. During the year lorry C is purchased on for Rs. 10,00,000. Rate of depreciation applicable is 30%. On , lorry A is sold for Rs. 8,00,000. Determine the amount of depreciation available to P a g e 72

73 the assessee for the assessment year. What will be your answer if instead of selling lorry A, lorry C is sold for Rs.8,00,000 on ? 4. GEA India Ltd., manufacturers of equipments for power projects as EPC Contractor furnish the following information Particulars W.D.V of Plant & Machinery as on Additions made to Plant & Machinery during the year (Out of this assets put to use for more than 180 days is Rs. 1.5 crores) Rs. 10 Crores 2 Crores Compute the depreciation admissible. 5. M/s. Dollar Ltd, a manufacturing concern furnishes the following particulars: Sl. No. Particulars Rs. (i) (ii) (iii) Opening written down value under Income Tax of block plant and machinery Purchase of plant and machinery (put to use before ) Sale proceeds of plant & machinery which became obsolete- the plant and machinery was purchased on for Rs. 5,00,000. 5,00,000 2,00,000 5,000 Further, out of purchase of plant and machinery: a) Plant and machinery of Rs. 20,000 has been installed in office. b) Plant and machinery of Rs. 20,000 was used previously for the purpose of business by the seller. Compute depreciation and additional depreciation as per Income Tax Act 6. Gopichand Industries furnishes you the following information: Particulars Block I Plant & Machinery (consisting of 10 looms) (Rate of Depreciation 15%) Rs. 5,00,000 (WDV) P a g e 73

74 Block II Buildings (consisting of 3 buildings) (Rate of depreciation 10%) Acquired on looms for Sold on looms for Acquired on looms for 12,50,000 (WDV) 4,00,000 10,00,000 3,00,000 Compute the eligible depreciation claim. 7. An existing assessee engaged in trading activities, can claim additional depreciation u/s. 32(1)(iia) in respect of new plant acquired and installed in the trading concern. Decide whether this is correct. 8. A car purchased by S on for Rs.3,25,000 for personal use is brought into the business of the assessee on , when its market value is Rs. 1,50,000. Compute the actual cost of the car and the amount of depreciation assuming the rate of depreciation to be 15%. 9. Mr.A, transfers plant and machinery used in his business for several years for a consideration of Rs. 20,00,000 to Mr.B. The written down value in the books of Mr.A for the said asset was Rs.5,00,000. The market value of the asset on the date of transfer was Rs.4,00,000. Determine the actual cost of asset in the case of Mr.B for computing depreciation u/s Dr. Binu Ninan purchased a house property on for Rs. 10,00,000. Till , the same was self-occupied as a residence. On this date, the said building was brought into use for the purpose of his medical profession. What would be the depreciation allowable assuming that he owns no other building and the rate of depreciation is 10%. Will your answer be different if the house property had been gifted to him by his mother, who had purchased the same on for Rs. 9,00,000? P a g e 74

75 11. A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the following assets in his office during the year at the cost shown against each item. Calculate the amount of deprecation that can be claimed from his professional income Sl. No. Description Date of acquisition 1. Computer 27 Sept Computer software Computer printer Books (of which books being annual publications are of Rs. 12,000) 2 Oct 17 2 Oct 17 1 April 17 Date when put to use 2 Oct 17 5 Oct 17 3 Oct 17 1 April 17 Amount Rs. 35,000 8,500 12,500 13, Office Furniture (Acquired from practicing C.A.) 1 April 17 1 April 17 3,00, Laptop 26 Sept 17 5 Oct 17 43, Fire extinguisher 1 April 17 No instance 2,500 arose to use during the year 8. Purchased practicing CA s office in April 2017 who had run it for 4 years, for Rs. 5 lacs which includes Rs, 2 lacs for goodwill and Rs. 3 lacs for cost of furniture (included in 5 above) 12. M/s. Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co.Ltd. with effect from November 29, The written down value of assets as on April 1st is as follows Item Rate of Depreciation WDV on April 1st Building 10% Rs. 3,50,000 Furniture 10% Rs. 50,000 Plant and Machinery 15% Rs. 2,00,000 Further, on October 15, 2017, M/s Sidhant & Co. purchased a plant for Rs. 1,00,000 (rate of depreciation 15%). After conversion, the company added another plant worth Rs. 50,000 (rate of depreciation 15%). Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant & Co. Ltd. P a g e 75

76 13. Compute the written down value at the end of the year from the following information: (Ignore Enhanced Depreciation) Block Rate Value as on 1/4/2017 (Rs) 1. Plant A, B and C 15 10,40, Plant D and E 40 2,60, Vehicle A 15 70, Building A, B, C and D 10 10,90, Building E, F and G 5 7,10, Furniture H, I, J and K 10 16,90,000 Details of additions during the year Particulars Rate Date of addition Amount 1. Plant X 15 30/04/ , Plant Y 40 31/10/2017 1,90, Vehicle B 30 01/04/2017 1,20,000 Details of sales during the year Particulars Amount 1. Plant B 8,90, Vehicle B 1,00, Building A 30,00, M/s. Xansa Ltd., purchased a machinery on for Rs. 10 cr. by availing a 80% loan facility from Bank. This machinery was put to use on into effective production. The interest on loan works out to 10%. Advise Xansa Ltd., on the treatment of interest payments made on this loan. 15. A Ltd., engaged in the business of generation and distribution of power has claimed depreciation on straight line method for income-tax purposes. You are informed that Diesel Electric and Gas Plant was acquired for Rs. 60,00,000 and depreciation at 8.24% was claimed for 2 years on straight line method. Decide the treatment under the Act assuming that the said Plant is sold for a consideration of (i) Rs.36,00,000 (ii) Rs.55,00,000 (iii) Rs.62,00,000 P a g e 76

77 8. Sec 32 AD - Special Deduction in respect of notified backward areas CA Gaurav Rajaram Deduction under Section 32AD by way of additional investment allowance is provided to an assessee (Company or Non-company) setting up manufacturing operations in the notified backward areas of the states of 1. Andhra Pradesh 2. Bihar 3. West Bengal 4. Telengana The deduction shall be 15% of the actual cost of the new assets acquired and installed between 1st April 2015 and 31st March The deduction shall be allowed in the assessment year relevant to the previous year in which the new asset is installed. Note: Even if put to use for less than 180 days, full deduction of 15% can be claimed. Note: Available to any 'person' not just a company Additional Conditions 1) If any such new asset is sold or otherwise transferred within a period of 5 years from the date of its installation, the amount of deduction allowed under this provision in respect of such new asset shall be deemed to be business income chargeable in the year of such sale or transfer. This chargeability shall be in addition to the taxability of gains arising on account of such sale or transfer. 2) There is no violation of the section if any asset is sold or transferred - In a scheme of amalgamation; or In a scheme of demerger; or By a firm to a company and conditions of section 47(xiii) are satisfied; or By a proprietor to a company and conditions of section 47(xiv) are satisfied; or By a company to LLP and conditions of section 47(xiiib) are satisfied. In the above cases if amalgamated company /resulting company /successor company/ successor company/ LLP transfers or sells the asset within 5 years from the date of its installation by amalgamating company/ demerged company/ firm/ proprietor/ company, then the amount of deduction allowed under section 32AD in respect of asset sold shall be deemed to be the income of amalgamated company/ resulting company/ successor company/ successor company/ LLP of the previous year in which asset is sold/transferred. This is in addition to taxability of gain if any on the transfer of such asset. P a g e 77

78 For this purpose new asset means any new plant or machinery (other than ship or aircraft) but does not include i) Any plant or machinery already used either in India or outside India. ii) Any plant or machinery installed in office premises or residential accommodation including a guest house. iii) Any office appliances including computers or computer software. iv) Any vehicle. v) Any plant or machinery for which 100% deduction of the actual cost was allowed in any previous year. Problems 16. A Ltd, a new Bangalore based manufacturing company acquired assets being eligible plant and machinery for the following values Rs 22 Crore (Put to use for less than 180 days) Rs 30 Crore (Put to use for more than 180 days) Compute the eligible deduction u/s 32 and 32AD for AY In the above question, if the assessee set up the manufacturing plant in Telangana, how would your answer change? 18. B Ltd, a company in Bangalore engaged in the business of manufacture of sports equipment furnishes the following details: Opening WDV of Plant and Machinery (15%) Plant and Machinery sold on Second hand plant and machinery purchased on New computers purchased on New plant and machinery acquired on New plant and machinery acquired on crores 4 crores 12 crores 0.4 crores 50 crores 40 crores Compute the eligible deduction u/s 32 and 32AD. 19. PAG Ltd set up a manufacturing unit in a notified backward area in the state of West Bengal on A new plant and machinery was acquired and installed on for Rs 26 crore. Further, it acquired plant and machinery of Rs 30 crores on and the same was installed on Compute the depreciation and investment allowances for AY Would your answer change if the unit is set up by Mr P, an individual instead of PAG Ltd? P a g e 78

79 9. Section 33AB - Tea, coffee or rubber development account Assessee should be in the business of growing and manufacturing of tea, coffee or rubber in India Assessee should deposit money with NABARD or a deposit account in accordance with the scheme specified by the CBDT Amount to be deposited within 6 months from the end of the PY or before due date for filing of return of income, whichever is earlier Deduction available for the lower of the following amounts: Amount deposited OR 40% of profit computed under the head PGBP (before considering set off of losses brought forward) Permissible withdrawals (no income chargeable on these withdrawals) For purchase of eligible items (See definition of non eligible items) On closure of business On death of assessee On partition of HUF On dissolution of firm On liquidation of company Non eligible items Plant and Machinery used in office, residence or guest house Plant and Machinery used for manufacture of eleventh schedule items Plant and Machinery which are 100% deductible in one year Office appliances excluding computers Chargeability to income tax in the following scenarios under the head Business or Profession Amount withdrawn and used for ineligible items/ assets Amount withdrawn for eligible purpose but not utilised within that PY P a g e 79

80 The eligible item/ asset acquired is transferred within 8 years from the end of the PY in which it was acquired except to the Government, Government Company, Local Authority or in a scheme of succession of a firm by a company The accounts must be audited by a CA and report in Form 3AC must accompany the return of income 10. Section 33ABA - Site Restoration Fund Assessee should be in the business of prospecting, extraction or production of petroleum or natural gas in India in relation to which the Central Government has entered into an agreement with such assessee Assessee should deposit money in a special account with SBI or in an account called 'Site Restoration Account' opened under a scheme framed by the ministry Amount to be deposited within the end of the PY Deduction available for the lower of the following amounts: Amount deposited OR 20% of profit computed under the head PGBP (before considering set off of losses brought forward) Permissible withdrawals (no income chargeable on these withdrawals) For purchase of eligible items (See definition of non eligible items) Non eligible items Plant and Machinery used in office, residence or guest house Plant and Machinery used for manufacture of eleventh schedule items Plant and Machinery which are 100% deductible in one year Office appliances excluding computers Chargeability to income tax in the following scenarios under the head Business or Profession Amount withdrawn on closure of account Amount withdrawn and used for ineligible items/ assets Amount withdrawn for eligible purpose but not utilised within that PY P a g e 80

81 The eligible item/ asset acquired is transferred within 8 years from the end of the PY in which it was acquired except to the Government, Government Company, Local Authority or in a scheme of succession of a firm by a company The accounts must be audited by a CA and report in Form 3AC must accompany the return of income 11. Section 35 - Scientific Research Type 1: Assessee carrying out R&D activity Section Type of expenditure Deduction 35(1)(i) Revenue expenditure laid out or expended in scientific research related to 100% the business 35(1)(iv) Capital expenditure incurred during the year (other than on land) 100% Benefit for expenditure incurred before commencement of business Following expenditure incurred 3 years prior to commencement of business is eligible for deduction: 1. Salary to an employee engaged in scientific research 2. Purchase of raw materials used in scientific research 3. Capital expenditure (other than land) Type 2: Contribution to approved R&D institutions Section Person to whom contribution is given Deduction Company which is registered in India and has as its main object scientific 35(1)(iia) research and development 100% 35(1)(iii) 35(1)(ii) 35(2AA) University, college or other institution to be used by it for research in social science or statistical research 100% Scientific research association or to a university, college or other institution to be used by it for scientific research 150% National laboratory or a University or an IIT or a specified person for an approved scientific research program 150% Type 3: In-house R&D of a manufacturing entity[u/s 35(2AB)] Deduction of 150% of expenditure (other than land and building) P a g e 81

82 Companies engaged in the business of biotechnology or manufacture/production (except articles in the Eleventh Schedule) can claim deduction In order to have a better and meaningful monitoring mechanism for weighted deduction u/s.35(2ab), the Act has been amended to provide that deduction under this section shall be allowed only if the company: (i) enters in to an agreement with the prescribed authority for cooperation in such research and development facility;(ii) fulfills such other conditions with regard to maintenance of accounts; and (iii) audit of accounts and furnishing of reports in such manner as may be prescribed. 20. The following are the details furnished by Orchid India Ltd. engaged in the business of pharmaceuticals products for the year ending : Particulars a. Sales for the year b. Manufacturing & Administration Expenses (including depreciation on research equipments - Rs.5 L) c. Charges paid for acquiring know-how d. Research & Development for in-house training i) Research Equipments acquired during the year ii) Remuneration to Scientists iii) Expenses for research & development iv) Contribution to approved scientific research institution Rs. In Laksh Compute the taxable income of the company 21. Mr.Praveen Kumar has furnished the following particulars relating to the payments made towards scientific research for the year ended Particulars i. Payments made to K Research Ltd ii. Payments made to LMN College iii. Payments made to OPQ College iv. Payment made to national laboratory v. Machinery purchased for in-house scientific research vi. Salaries to research staff engaged in in-house scientific research (Rs. In Lakhs) Note: K Research Ltd and LMN college are approved research institutions and these payments are to be used for the purpose of scientific research. Compute the amount of deduction available u/s. 35 of the Income tax Act, 1961 while arriving at the business income of the assessee. 22. The following P&L Account is given to you for ABC Biotechnology Pvt Ltd. Compute the profit or gain from business or profession and explain the answer you get: P a g e 82

83 Debit Rs Credit Rs To Administrative Expenses 110 By Revenue 100 To Finance Expenses 20 By Net Loss 65 To Scientific Research expenses 20 To scientific research capital expenditure - On land On building 10 Total 165 Total Section 35 ABA - Expenditure for obtaining right to use spectrum for telecommunication service Deduction available = Expenditure incurred to acquire right to use spectrum No. of relevant previous years Deduction shall be allowed as per the method of accounting regularly followed by assessee (Accrual/Cash) The deduction shall be available from the of year of commencement of business or year of payment whichever is later, for such number of years the spectrum shall be in force 13. Section 35 ABB - Telecommunication license expenditure Allowed as a deduction over the lifetime of the license Deduction starts from year of commencement of business or year of payment whichever is later No deduction can be claimed u/s 32 (this eliminates chance of double deduction) Taxability on sale of license - Illustration Year of obtaining license for Rs 90 Lakhs Validity of license 10 years Pattern of deduction will be as follows: Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs Rs 9 Lakhs P a g e 83

84 Scenario 1: Let us assume that a part of the license is sold for Rs 28 Lakhs in Balance left in (90-27 lakhs) Less: Sale Consideration Balance allowed over the remaining period Revised deduction from Rs 63 Lakhs (Rs 28 Lakhs) Rs 35 Lakhs Rs 35 Lakh/ 7 years = Rs 5 Lakh Revised Pattern of deduction will be as follows: Rs 5 Lakhs Rs 5 Lakhs Rs 5 Lakhs Rs 5 Lakhs Rs 5 Lakhs Rs 5 Lakhs Rs 5 Lakhs Scenario 2: Let us assume that a part of the license is sold for Rs 100 Lakhs in Balance left in (90-27 lakhs) Less: Sale Consideration Surplus Rs 63 Lakhs (Rs 100 Lakhs) (Rs 37 Lakhs) Chargeable as Business Income = Amount allowed as deduction till date = Rs 27 Lakh Chargeable as Capital Gains = Balance surplus = Rs 10 Lakh Scenario 3: Let us assume that whole of the license is sold for Rs 33 Lakhs in Balance left in (90-27 lakhs) Less: Sale Consideration Balance to be allowed Rs 63 Lakhs (Rs 33 Lakhs) Rs 30 Lakhs The above balance is allowed as a deduction in the year of sale Scenario 4: Let us assume that whole of the license is sold for Rs 100 Lakhs in Balance left in (90-27 lakhs) Less: Sale Consideration Surplus Rs 63 Lakhs (Rs 100 Lakhs) Rs 37 Lakhs Chargeable as Business Income = Amount allowed as deduction till date = Rs 27 Lakh Chargeable as Capital Gains = Balance surplus = Rs 10 Lakh 23. M/s.RCL Ltd., obtained a 10 year license for operating the International telephonic/ voice mail services, from Telecom Regulatory Authority of India. This license was obtained on However, the commencement of business took place effectively only from The total commitment includes a down payment of Rs.110 crores, for license fees and an operating fee of 60 paise per minute usage time. i) On , 30% of the license was sold by M/s.RCL Ltd., to another company. The total consideration received was Rs. 40 crores. P a g e 84

85 ii) On , another 50% of total license was sold by M/s.RCL Ltd., to Vodafone for a consideration of Rs.75 crores. Compute the deduction allowable u/s.35abb to M/s.RCL Ltd., from AY to AY What would be the position if on the sale consideration received is Rs.125 crores. 24. Swadeshi Ltd., which follows mercantile system of accounting, obtained licence on from the Department of telecommunication for a period of 10 years. The total licence fee payable is Rs. 18,00,000. The relevant details are: Year ended 31 st March Licence fee Payable for the year 10,00,000 8,00,000 Payments made Date Amount ,70, ,30, ,40,000 Balance of Rs.2,60,000 is pending as on Compute the amount of deduction available to the assessee u/s. 35ABB for the AY and Can any deduction be claimed u/s. 32 also? 14. Section 35 AC - Expenditure on eligible projects/ scheme Project should be for promoting social and economic welfare or upliftment of public It should be notified by Central Government in the official gazette Deduction given for expenditure incurred or contribution given P a g e 85

86 15. Section 35 AD - Capital expenditure of specified business Cold Chain Facility Warehouse for storing agricultural produce Warehouse for storing sugar Housing Project under scheme for affordable housing Specified Business Housing Project under scheme for slum redevelopment New Hospital with 100 beds New 2 Star or above hotel Fertilizer production Inland Container Depot or Container Freight Depot Bee Keeping Prodution of honey Prodution of bee wax P a g e 86

87 Laying and operating Cross Country 1. Natural Gas 2. Crude 3. Petroleum Oil CA Gaurav Rajaram Specified Business Slurry Pipeline for Iron Ore Semi-Conductor wafer fabrication manufacturing unit Infrastructure facility Additional Conditions 1. The business should not be formed by splitting up or reconstruction of already existing business 2. It is not set up by transfer of machinery or plant previously used for any purpose (second hand machinery or plant). However, exceptions to this are: - Such machinery or plant was not used in India - Such machinery or plant is imported from outside India - No depreciation has been claimed in respect of such machinery or plant - Value of such machinery or plant does not exceed 20% of total value of machinery and plant 3. No deduction under Chapter VIA shall be allowed in respect of income derived from specified business 4. Expenditure on land, goodwill and financial instruments not allowed u/s 35AD 5. Condition for Retention of Assets for 8 Years (7A) Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the specified business, for a period of eight years beginning with the previous year in which such asset is acquired or constructed. (7B) Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a purpose other than the specified business during the period specified in sub-section (7A), otherwise than by destruction/ demolition/ discarding/ sale / transfer, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance P a g e 87

88 with the provisions of section 32, as if no deduction under this section was allowed, shall be deemed to be the income of the assessee chargeable under the head Profits and gains of business or profession of the previous year in which the asset is so used. Provided that where any capital asset in respect of which deduction or part of deduction allowed under section 35AD is deemed to be the income of the assessee in accordance with the provisions of sub-section (7B) of the said section (the above paragraph), the actual cost of the asset to the assessee shall be the actual cost to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used for the purposes of business since the date of its acquisition. (Added by Finance Act, 2017) Illustration: Plant & machinery purchased and put to use on for Rs 200 crores for warehouse facilities for storage of agricultural produce. 150% of Rs 300 crores was allowed in Assessment Year Now on , this machinery is ceased to be used for the specified business and is used for some other non-specified business. Now following shall be taxable as P/G/B/P in Assessment Year : Deduction allowed in Assessment Year Less: 15% for Assessment Year Less: 15% for Assessment Year P/G/B/P in Assessment Year crores 30 crores crores crores Had the specified business being of manufacture of fertilizers, then following shall be taxable as P/G/B/P in Assessment Year Deduction allowed in Assessment Year Less: 15% for Assessment Year Less: Additional 20% for Assessment Year crores 30 crores 40 crores Less: 15% for Assessment Year crores crores As per amendment made by Finance Act, 2017 in Explanation 13 to section 43(1), Rs crores / will be added to block of assets for Assessment Year and depreciation be allowed on that amount % of expenditure incurred is given under Section 35AD. Benefit is also given for expenditure incurred before commencement of business (given in the year of commencement) P a g e 88

89 Any expenditure in respect of which the payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs 10,000. (Added by Finance Act, 2017) 25. MNP Ltd commenced operation of the business of a new four-star hotel in Chennai on The company incurred capital expenditure of Rs 40 lakh during the period January 2017 to March 2017 exclusively for the above business, and capitalized the same in its books of accounts as on 1st April, Further, during the previous year, it incurred capital expenditure of Rs 2.5 crore (out of which Rs. 1 crore was for acquisition of land) exclusively for the above business. Compute the income under the heading Profits and Gains of Business or Profession for the AY , assuming that MNP Ltd has fulfilled all the conditions specified for claim of deduction u/s. 35AD and has not claimed any deduction under Chapter VI- A under the heading Deductions in respect of certain incomes. The profit from the business of running this hotel (before claiming deduction u/s. 35 AD) for the is Rs. 80 lakhs. Assume that the company also has another existing business of running a four - star hotel in Kanpur, which commenced operations 10 years back, the profits from which was Rs. 130 lakhs for AY Win Limited commenced the business of operating a three star hotel in Tirupati on It furnishes you the following information: Particulars (i) Cost of land (acquired in June 2015) (ii) Cost of construction of hotel building Financial year Financial year (iii) Plant and Machinery (all new) Acquired during financial year Amount (Rs.) 60 lakhs 30 lakhs 150 lakhs 30 lakhs [All the above expenditures were capitalized in the books of the company] iv) Net profit before depreciation for the financial year Determine the amount eligible for deduction u/s. 35AD of the Income-tax Act, lakhs 16. Section 35 CCA - Contributions to rural development programme Deduction given for contributions to - Approved institutions for implementation of rural development programmes P a g e 89

90 - Approved institutions for training of persons for implementing rural development programmes training of persons for implementing rural development programmes - National Fund for rural development - National Urban Poverty Eradication Fund 17. Section 35 CCC - Expenditure on agricultural extension project 150% deduction given for expenditure incurred on notified agricultural extension project 18. Section 35 CCD - Expenditure on skill development project 150% deduction given for expenditure incurred on notified skill development project. Expenditure towards land or building do not qualify 19. Section 35 D - Preliminary expenditure Eligible expenses incurred before commencement of business Eligible expenses after commencement of business - On expansion of existing undertaking - On setting up of new unit Eligible Expenses Legal expenses towards drafting of agreements, preparation of MoA and AoA Cost of printing MoA and AoA Cost of feasibility report, project report, market survey, engineering services etc Incorporation fees Expenses on issue of shares and debentures P a g e 90

91 Quantum of deduction (Maximum Limit) CA Gaurav Rajaram Non Company Assessee Company Assessee 5% of Cost of Project 5% of Cost of Project OR 5% of Capital employed Cost of Project Actual Cost of Fixed Assets in the B.S on the last day of year of commencement of business Capital Employed Issued Share Capital Debentures Long Term Liability (> 7 yrs) on the last day of the PY 20. Section 35 DD - Expenses on amalgamation or demerger Available only to an Indian Company Deduction available in 5 equal installments starting from the year in which amalgamation or demerger takes place 21. Section 35 DDA - VRS compensation Deduction available in 5 equal installments starting from year in which expenditure is incurred If VRS payments are made in parts, each payment will be deductible over 5 years 27. M/s.A Co., pays VRS compensation of Rs.10 lakhs for 2 of its employees. M/s.A Co., pays the same Rs.10 lakhs in 3 installments - Rs.5 lakhs in the year ; Rs.3 lakhs in the year ; and Rs.2 lakhs in year Compute the deduction allowable. Show the pattern of allowable deduction u/s 35DDA. 22. Section 36(1) - Other deductions 1. Insurance Premium a. Insurance premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession P a g e 91

92 b. Insurance Premium paid by a federal milk co-operative society for insurance on the life of the cattle owned by a member of a primary co-operative society c. Insurance Premium paid by an employer to Central Government or IRDA approved insurer in respect of health insurance of employees, otherwise than by way of cash 2. Bonus or Commission Bonus or commission paid to employees for services rendered, where such sum would not have been payable as profits or dividends to such employees (subject to Section 43B) 3. Interest on Loan borrowed Deduction allowed if all of the following conditions are satisfied (subject to Section 43B): 1. The assessee must have borrowed money 2. The loan should be borrowed for business or profession of assessee 3. Interest is payable on such borrowing Important Tip Business/ Commercial expediency must be satisfied if borrowed loan lent to another person Assessee borrowed interest bearing loan and lent the same to its sister concern for zero interest. Assessee allowed interest deduction because the business of the assessee had interest in the business of sister concern and there was commercial expediency in granting such interest free loan (Supreme Court decision in the case of SA Builders) Interest paid or payable under the Micro, Small and Medium Enterprises Development Act, 2006 shall not be allowed Interest borrowed on loan taken for purchase of fixed asset, upto the date on which such asset was first put into use not allowable as it needs to be capitalised (See Section 32 for problem) 4. Discount on Zero Coupon Bonds (ZCBs) Discount on ZCB = Amount repayable - Amount received Discount allowed during the year = Discount on ZCB/ Life of ZCB 5. Contribution to RPF or Approved Superannuation Fund (Subject to Section 43B) P a g e 92

93 6. Contribution towards Pension Scheme referred to u/s 80CCD upto 10% of salary of employee (Salary = Basic + DA) 7. Contribution towards approved gratuity fund 8. Amount received from employees towards contribution to their welfare funds provided it is remitted within the due dates provided under the respective laws covering the welfare funds Important Tip Any amount deducted from the employee's salary is first treated as income u/s 2(24) and a deduction is given under this section if the employer remits the same within the due date prescribed The Delhi HC in the case of CIT vs AIMIL Ltd 321 ITR 508 has held that as long as the employer has remitted the amounts within the due date of filing of return u/s 139(1) of the Act, it should be allowed under Section 36. This is not strictly as per the wordings of the above section 9. In respect of animals used for business or profession otherwise than as stock, the difference between actual cost and amount realised if any in respect of carcasses of such animals, if such animals have died or become permanently useless 10. Bad Debts written off To get a deduction of bad debts, the following conditions should be satisfied: 1. The sale revenue in respect of which such bad debt is incurred must have been offered for income tax earlier or it represents amounts lent in the ordinary course of banking or money lending business 2. The debt must incidental to business 3. The debt should be actually written off in the books of account Important Tip Provision for bad debts is not allowed (Section says bad debts should be written off) Provision for bad debts allowed only in the case of Banks and Financial Institutions To claim a deduction, assessee need not prove that debt is actually irrecoverable. Write off in books is sufficient to claim a deduction There are two methods to write off bad debts. Both are allowed as a deduction: Method 1- Closing each and every debtor account P a g e 93

94 Bad Debts To Individual Debtors A/c -Dr Method 2- Reducing the total debtors in the Balance Sheet Bad Debts To Debtors A/c 11. Provisions for Bad Debt -Dr (Not individual debtor account) Allowed only for Banks and Financial Institutions Allowed at the following percentages Type of Bank 1. Incorporated outside India 2. Public Financial Institution 3. State Financial Corporation 4. State Industrial Investment Corporation 5. Non-Banking Financial Companies 1. Scheduled and Non Scheduled Banks 2. Cooperative Banks other than primary agricultural credit society and primary co-operative agricultural and rural development bank Percentage allowed 5% of GTI Rural Branches - 10% of aggregate average advances Other branches - 8.5% of GTI 12. Special Reserve Account Allowed for the following assessees Type of assessee ICICI, IFCI, IDBI, LIC, UTI, Financial Corporation, Banking Company, Cooperative Society other than primary agricultural credit society and primary co-operative agricultural and rural development bank Housing Finance Company Any other financial corporation including a public company Eligible business Providing long term finance for industrial or agricultural or infrastructure or housing development in India Providing long term finance for development of housing in India Providing long term finance for development of infrastructure in India Deduction allowed is 20% of profits from eligible business or amount transferred to special reserve whichever is lower If aggregate amount transferred is more than twice of paid up capital and general reserves, no deduction available in respect of such excess amount Long Term means > 5 years P a g e 94

95 13. Expenses on family planning CA Gaurav Rajaram Revenue Expenses fully allowed in the year in which it is incurred Capital Expenditure incurred allowed over a period of 5 years (20% each year) 14. Securities Transaction Tax paid in respect of taxable securities transactions entered into in the course of business of the assessee 15. Commodities transaction tax (CTT) paid by the assessee in respect of the taxable commodities transactions entered in to in the course of the business during the previous year 16. The amount of expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government shall be deductible P a g e 95

96 23. Section 37 - General deductions CA Gaurav Rajaram Conditions 1. It should not be an expenditure covered u/s 30 to It should not be a capital expenditure 3. It should not be a personal expenditure of the assessee 4. It should be incurred wholly or exclusively for the business or profession of assessee 5. It should be incurred in the PY 6. It should not be expenditure incurred for any purpose being an offence under any law or which is prohibited under any law 7. Amount spent towards Corporate Social Responsibility referred to in Sec 135 of the Companies Act 2013 is not allowable as a deduction (unless it is covered u/s 30-36) Certain cases where 37(1) deduction allowed Discount on issue of debentures (over the life time of the debenture) Expenses on loan borrowed or debentures issued Expenses on issue of bonus shares Foreign Exchange losses with respect to stock in trade Interest for delayed payment of sales tax/ service tax etc (Interest is not penal in nature, it is compensatory in nature) Penalty paid for default of agreement to supply goods Personnel, administrative and marketing expenses Assessee had taken premises on lease for 39 years and spent money to demolish the existing building and constructed new building. Ownership of the building with lessor and assessee only benefitted from a low rent during the lease period. Held, the amount spent on construction is deductible as Revenue Expenditure (CIT vs Associated Cement Cos Ltd 172 ITR 257- Supreme Court) Assessee was an employer. One of his employees was kidnapped and a ransom was paid by assessee employer. Assessee claims deduction u/s 37(1) as business expenditure. Allowable as business expenditure as incidental to business Assessee was a medical practitioner and was illegally manufacturing and selling heroin. The heroin was seized by CBI and assessee claimed the same as a business loss. Held, the loss is allowed while computing income under the head 'Business and Profession' as it is a loss incurred during the ordinary course of conducting business. (This is as per ordinary commercial principles) P a g e 96

97 Certain cases where 37(1) deduction NOT ALLOWED CA Gaurav Rajaram Discount on issue of shares (possible to take deduction u/s 35D) Underwriting Commission on issue of shares (possible to take deduction u/s 35D) Expenses on increasing authorised capital Foreign Exchange losses with respect to fixed assets Bribes paid to government officials Penalty for contravention of any Act or Law 24. Section 37(2B) - Advertisement in publications of a political party The entire amount paid shall be disallowed The assessee can claim deduction u/s 80GGB or GGC, as the case may be P a g e 97

98 25. Section 40(a) - Disallowance in relation to taxes CA Gaurav Rajaram Sec 40(a)(i) Royalty, FTS, interest or any sum chargeable under the Act to non residents Disallowance if: 1. Tax not deducted 2. Deducted but not deposited within due dates u/s 139(1) (See due dates below) Disallowance if: Sec 40(a)(ia) 1. Tax not deducted 2. Deducted but not deposited within due date u/s 139(1) For Non Deduction of Taxes at Source Any sum on which Tax is deductible at Source under the Act to residents Sec 40(a)(iii) Salary paid outside India or to Non Resident if tax not deducted or not paid Due dates u/s 139(1) July 31st Individuals without tax audit Firms without tax audit September 30th Companies, Individuals and Firms with tax audit November 30th - Assessees who have to file TP report u/s 92E Sec 40(a)(iv) Payments from employee welfare fund if taxes not deducted Income must be chargeable under 'Salary' P a g e 98

99 Other disallowances (Permanent disallowances) CA Gaurav Rajaram Income tax and Wealth tax (Sec 40(a)(ii and iia) 2. Tax on non-monetary perquisites borne by employer on behalf of the employee (such tax paid by employer is exempt in the hands of the employee u/s 10(10CC) Sec 40(a)(v) 3. Payments by way of Royalty, License Fee, Service Fee, Privilege Fee etc paid by a State Government Undertaking to the State Government Important Tip Where disallowance is made for non deduction of taxes in a PY, the expenditure shall be allowed in the year in which such taxes are paid Payments to Residents (Very important) Earlier 100% of the specified expenditure was liable to be disallowed whereas now, only 30% of any sum payable to a resident shall be disallowed. Again, if the tax is deducted and paid beyond the due date specified in Sec. 139(1), 30% of the expenditure earlier disallowed shall be allowed for the previous year in which such tax has been paid. Where an assessee fails to deduct taxes at source and suffers disallowance u/s 40(a)(ia), the taxes will be deemed to be have been paid on the date of furnishing of return by the resident payee if the following conditions are satisfied - Expl to Section 40(a)(ia) 1. The resident payee should have filed his return of income u/s The income in question must have been included while computing income in the return 3. Tax must have been paid by him on such income declared 28. M/s.Matrix Pvt. Ltd., furnishes the details of the following expenditure incurred during the year Nature of payment Amount Rs. Details of tax deduction a. Contract payment 2,40,000 Tax not deducted at source b. Salary to a resident 5,00,000 Tax not deducted at source c. Rent 10,00,000 Tax deducted at source on Actual remittance made on d. Interest 2,00,000 Tax deducted on and remitted on e. Professional charges 5,00,000 Liability towards this expense was accounted in the books on and TDS was remitted on f. Non-compete fee 10,00,000 Tax not deducted at source Advise the company on the allowability of the above expenses for the AY P a g e 99

100 29. XYZ Ltd furnishes the following information based on the E- TDS returns in connection with tax deduction at source for the year ended 31st March, 2018: Rent for office building paid to landlord, Mr. Agarwal amounting to Rs. 2,00,000 was paid on and tax was not deducted on the payment made; TDS on salary payments to residents and non residents amounting to Rs.5,00,000 and Rs. 10,00,000 not made. Audit fee of Rs. 1,00,000 has been credited to the account of CWP & Co., a firm of Chartered Accountants on TDS of Rs.2,500 was remitted on ; Payment made on to Taj India Ltd amounting to Rs.5,00,000 on catering contract for employees get-together. Tax of Rs. 10,000 was deducted and remitted on ; Interest on loan borrowed from sister concern, Sujatha Publications Pvt. Ltd amounting to Rs.10,00,000 was credited on TDS of Rs.1,07,500 was remitted on in the name of the payee. Assuming that the assessee is deemed to be in default u/s. 201(1), with the above information, advice on the amount of disallowance u/s. 40(a)(ia) for the AY Also examine the possibility of adjustment of excess deduction in interest against the short deduction in professional charges to mitigate the disallowance u/s. 40(a)(ia). 30. During the financial year , the following payments/expenditure were made/incurred by Mr. Yuvan Raja, a resident individual (Whose turnover during the year ended was Rs. 39 lacs). (i) Interest of Rs. 12,000 was paid to Rehman & Co., a resident Partnership firm, without deduction of tax at source; (ii) Interest of Rs. 4,000 was paid as interest to Mr. R.D.Burman, a non resident, without deduction of tax at source; (iii) Rs. 3,00,000 was paid as salary to a resident individual without deduction of tax at source; (iv) He had sold goods for Rs. 5 Lacs to Mr. Deva. He gave Mr. Deva a Cash discount of Rs. 12,000 later. Commission of Rs 15,000 was paid to Mr. Vidyasagar on In none of these transactions, tax was deducted at source. Briefly discuss whether any disallowance arises under the provisions of sec. 40(a)(i)/40(a)(ia) of the Income-tax, P a g e 100

101 26. Section 40(b) - Disallowance in case of firms CA Gaurav Rajaram Interest paid to partners allowable only if the following conditions are satisfied Condition 1- It should be authorised by the deed Condition 2 - It should relate to a period after the date of partnership Condition 3 - It should not exceed 12% p.a (simple interest) Exceptions to the above disallowance of interest (no disallowance in the following cases) 1. When a partner in a firm is in his representative capacity and receives interest in his individual capacity 2. When a partner in a firm is in his individual capacity but receives interest for and on behalf of someone else Salary, bonus, commission, remuneration etc paid to partners allowable only if the following conditions are satisfied Condition 1- It should be authorised by the deed Condition 2 - It should relate to a period after the date of partnership Condition 3 - It should be paid only to a working partner Condition 4 - It should be within the following limits Book Profits On the first Rs 3,00,000 or in case of loss Allowed % of book profits 90% or Rs 1,50,000 whichever is higher On the balance 60% How to calculate Book Profit Step 1- Consider the Profit as per P&L Account Step 2 - Disallow any remuneration, fees, commission etc paid to partners already considered in the P&L Step 3- Compute profits as per 'Business or Profession' normally. Result is Book Profit Important Tip Rent paid to partner by firm in respect of building owned by him but used by the firm does not fall under Section 40(b) and hence is fully deductible 27. Section 40(ba) - Disallowance in case of AOP or BOI Interest, salary, bonus, commission or remuneration paid by an AOP or BOI to its members is disallowed in the hands of the AOP or BOI Where a member who has received interest also pays interest to the AOP or BOI, only the net amount shall be disallowed P a g e 101

102 Exceptions to the above disallowance (no disallowance in the following cases) 1. When a member is in his representative capacity and receives interest, salary, bonus, commission or remuneration in his individual capacity 2. When a member is in his individual capacity but receives interest, salary, bonus, commission or remuneration for and on behalf of someone else 28. Section 40A Section 40A(2) - Excessive and unreasonable expenditure Disallowance for excessive and unreasonable expenditure towards goods supplied, services rendered or facilities provided by 'specified persons' The AO can determine the extent of excessive and unreasonable expenditure by considering FMV of goods, services or facilities shall be considered by the AO before making any disallowance Further, the legitimate needs of the business or profession shall be considered to determine whether an expenditure is excessive or unreasonable Specified Persons Category 1: Individual Relative + Any person in whose business or profession the assessee or his relative has a substantial interest Examples 1. Mr A's wife. Mr A's wife is Mr A's relative and therefore a specified person 2. Mr A has a substantial interest in AB Ltd. AB Ltd is a specified person for Mr A 3. Mr A's wife has a substantial interest in AB Ltd. AB Ltd is a specified person for Mr A Category 2: Company, Firm, HUF, AOP, BOI Director, partner or member + Relative of such person + Any person in whose business or profession the assessee or director, partner or member or any relative of such persons has a substantial interest Examples 1. Mr A is a director in AB Ltd. Mr A is a specified person of AB Ltd 2. Mr A is a director in AB Ltd. Mrs A (relative of Mr A) is a specified person of AB Ltd 3. Mr A is a director in AB Ltd. Mr A has a substantial interest in XY Ltd. XY Ltd is a specified person of AB Ltd P a g e 102

103 4. Mr A is a director in AB Ltd. Mrs A (relative of Mr A) has a substantial interest in XY Ltd. XY Ltd is a specified person of AB Ltd 5. AB Ltd has a substantial interest in XY Ltd. XY Ltd is a specified person of AB Ltd 6. AB Ltd has a substantial interest in XY Ltd and YZ Ltd. XY Ltd and YZ Ltd are specified persons among themselves Category 3: All assessees Individual, HUF, Company, Firm, AOP or BOI which has a substantial interest in the assessees business or profession + Director, partner or member of such person mentioned above + Relative of such person above + A company, Firm, HUF, AOP or BOI, whose director, partner or member has a substantial interest in the assessees business + Any director, partner or members of such company, firm, HUF, AOP or BOI + Relative of such person above Examples 1. AB Ltd has a substantial interest in XY Ltd. AB Ltd is a specified person of XY Ltd 2. AB Ltd has a substantial interest in XY Ltd. Mr A, director of AB Ltd is a specified person of XY Ltd 3. AB Ltd has a substantial interest in XY Ltd. Mr A is director of AB Ltd. Mrs A (relative of Mr A) is a specified person of XY Ltd 4. Mr A, director in AB Ltd has a substantial interest in XY Ltd. AB Ltd is a specified person of XY Ltd 5. Mr A, director in AB Ltd has a substantial interest in XY Ltd. Mr B is a director in AB Ltd. Mr B is a specified person of XY Ltd Note: Substantial interest means atleast 20% voting power or 20% share of profit Note: Relative means any linear ascendant or descendant of assessee P a g e 103

104 Section 40A(3) - Payments otherwise than by way of A/c Payee Cheque or Account Payee Draft or use of electronic clearing system through a bank account exceeding Rs 10,000 Where a payment or aggregate of payments during the day is made in respect of expenditure exceeding Rs 10,000 to a person, otherwise than by way of A/c Payee Cheque or Account Payee Draft or use of electronic clearing system through a bank account, such expenditure is not allowed (Note that entire expenditure is disallowed) Where payment is made for plying, hiring or leasing of goods carriages, limit shall be Rs 35,000 Where any expenditure has been allowed in a preceeding previous year on an accrual basis, and payment has been made above Rs 10,000/ Rs 35,000 during the previous year otherwise than by way of A/c Payee Cheque or Account Payee Draft, such expenditure shall be treated as income of the previous year Analysis of cases where Section 40A(3) disallowance not attracted due to the framing of section 1. Expenditure incurred is capital expenditure 2. Invoice amount exceeds Rs 10,000/ Rs 35,000 but payment is made below Rs 10,000/ Rs 35, Invoice amount Rs 60,000. Payments of Rs 10,000 made in cash on 6 different dates Exceptions to Section 40A(3) - Rule 6DD Payments made to Banks and LIC or payments made on a banking holiday or on day of strike Payments made to Government and which is required to be made in cash Payments made towards Letter of Credit, Bills Payable to bank, debit card, credit card etc Payments made towards agricultural or forest produce, fish products, animal husbandry products, poultry or dairy farming or horticulture, apiculture to the cultivator, grower or producer Payments made on Bank Holidays or days of strike/ bandh etc when banks are not open Payments made to an agent who is required to pay in cash Payment of gratuity, retrenchment compensation etc if the income chargeable under 'Salaries' does not exceed Rs 50,000 Salary paid after deducting taxes at source to an employee who is posted to a new place or on a ship for a continuous period of 15 days or more and he does not maintain any bank account in the new place P a g e 104

105 Illustration: A Bill is raised for expenditure of Rs 2,00,000. CA Gaurav Rajaram Cash Payments are made as under: , , , , ,60,000 Rs 1,60,000 shall be disallowed under section 40A(3) Note: In this case section 269ST as introduced by Finance Act, 2017, will be attracted in hands of receiver of cash since he receives Rs 2,00,000 or more in cash in respect of a single transaction. He shall be liable to pay penalty of Rs 2,00,000 under section 271DA. SECTION 40A(4) - Payments Made by Account Payee Cheque or Bank Draft or Use of Electronic Clearing System Through a Bank Account in Violation of a Contract Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account in order that such expenditure may not be disallowed as deduction under section 40A(3), then such payment may be made by such cheque or draft or electronic clearance system, and where the payment is so made, no person shall be allowed to raise, in any suit or proceeding a plea on the ground that the payment was not made in cash or in any other manner. Illustration: An assessee enters into a contract for the purchase of goods with Mr. Y. The contract provides that the assessee will make the payments to Mr. Y only in cash, and if the payment is made otherwise than by cash, then it shall be considered as breach of contract and the assessee shall be liable to pay a penalty of Rs 1,00,000. The assessee makes a payment of Rs 2,00,000 by account payee cheque so that section 40A(3) is not attracted. Mr. Y wants to sue the assessee and recover penalty of Rs 1,00,000. Advise. Ans: In view of section 40A(4), Mr. Y cannot sue the assessee. 31. Muthu Pvt. Ltd., provides the following information for the year: a. Payment in cash for a bill amounting to Rs. 1 lakh on a single day. b. Payment in cash on Rs.9,000/- and on Rs.81,000/- towards one single bill. P a g e 105

106 c. Payment in cash on , a sum of Rs. 1,00,000/- for different bills each Rs.12,500/- to a single creditor. d. Payment of Rs. 32,500 is made in cash to Anandhi Transport Agencies on towards lease charges for goods carriage. e. An amount of Rs. 35,000 stood as audit fees payable, claimed on accrual basis for the AY was paid through crossed cheque during the current previous year. Discuss the allowability of the above payments in the hands of Muthu Pvt. Ltd. SECTION 269ST - Mode of Undertaking Transactions (Inserted by Finance Act, 2017) No person shall receive an amount of two lakh rupees or more (a) (b) (c) in aggregate from a person in a day; or in respect of a single transaction; or in respect of transactions relating to one event or occasion from a person otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account: Provided that the provisions of this section shall not apply to (i) any receipt by (a) Government; (b) any banking company, post office savings bank or co-operative bank; (ii) transactions of the nature referred to in section 269SS; (iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify. SECTION 27IDA - Penalty for Failure to Comply with Provisions of Section 269ST (Inserted by Finance Act, 2017) (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt. Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention. (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner. P a g e 106

107 Section 40A(7) - Provision for Gratuity CA Gaurav Rajaram Provision for Gratuity is disallowed except in the following cases: Provision is made for contribution to approved gratuity fund Provision is made for gratuity which has become payable during the year Therefore, provision made towards contribution to unapproved gratuity fund is disallowed Section 40A(9) - Contributions to unrecognised/ non statutory welfare funds Any contribution to unrecognised/ non statutory welfare funds (like URPF) is always disallowed Note: Where payments are made towards recognised statutory welfare funds, deduction is given u/s 36 but subject to payment within the due date of filing of return (as per Section 43B) 29. Section 43B This section describes expenses which are deductible only if paid within the due date for filing of return u/s 139(1) If such payments are made beyond the due date for filing of return, it will be disallowed and allowed in the year of actual payment The expenditure which are allowed on payment basis are as follows: Any tax, cess, duty under any law Contribution to RPF, superannuation fund, gratuity fund or any other fund for the welfare of the employees Bonus or commission to employees Interest on loan borrowed from - Scheduled Banks - PFI - SFC - SIIC - Co-operative Banks (excluding primary agricultural credit society and primary co-operative agricultural and rural development bank) Leave salary to employees Payment made to Indian railways for use of railway assets Important Tip Sales tax under deferred sales tax scheme will be deemed as paid P a g e 107

108 Interest outstanding to financial institutions which are converted into loan will not be deemed as paid until the converted loan is repaid. Hence, the interest shall continue to be disallowed and shall be allowed only in the year when the converted loan is paid 30. Section 43A - Exchange Rate Fluctuation Conditions Asset should be acquired from abroad Liability towards the same increases or decreases due to exchange fluctuation Exchange fluctuation is added/ reduced to the cost of the asset on payment basis Method of accounting followed by assessee does not matter Analysis of forex gains/ losses under the Act Foreign exchange loss is related to Revenue items (Raw Materials, Sales) Capital items Forex gain Forex Loss Forex gain Forex Loss Taxable as Business Income Deductible u/s 37 Not Taxable If related to depreciable assets, check Sec 43A Not Deductible If related to depreciable assets, check Sec 43A P a g e 108

109 32. M/s.RAN Ltd. purchased an asset worth US $ 1 Million from Germany. The asset was delivered in India on The sum was paid in 4 equal installments, each falling due on a 6 month interval starting from the date on which the asset was delivered in India. The exchange rates prevailing on each of the installments are Rs.43.56, Rs.43.89, Rs and Rs respectively. The asset was put to use on Compute the cost of asset and the depreciation allowable for AY and AY Sec. 43CA: Special provision for full value of consideration for transfer of assets (land and building) other than capital assets Note: Where an assessee holds land and building as a capital asset and then transfers, the provisions of Sec. 50C shall apply in computing Capital Gains. On the other hand, if land and building are held as stock in trade and then transferred, the provisions of Sec.43CA shall apply in computing business income which provides as follows: 1. Where the consideration for transfer of an asset (other than capital asset), being building or land or both, is less than the stamp duty value, the stamp duty value so adopted or assessed or assessable shall be deemed to be the full value of consideration for the purpose of computing business income. P a g e 109

110 2. Where the assessee claims that the stamp duty value exceeds the fair market value of the asset on the date of transfer, the assessing officer may refer the valuation of the capital asset to a valuation officer. However such reference shall be made only if the stamp duty value has not been disputed in any appeal or any other proceeding. 3. Where the value ascertained by reference to a valuation officer is more than the stamp duty value, then the stamp duty value shall be adopted as the full value of consideration. This implies that if the value so ascertained is less than the Stamp duty value but more than the consideration as per the agreement, then the stamp duty value shall be ignored and the value so ascertained shall be adopted as the full value of consideration. 4. Where the date of agreement fixing the value of consideration for the transfer of the asset and the date of registration of such transfer of asset are not the same, the stamp duty value assessable on the date of the agreement shall be adopted. This deviation from adopting the stamp duty value on the date of registration shall be applicable in a case where the amount of consideration or a part thereof has been received by any mode other than cash on or before the date of agreement for transfer of the asset. 33. Determine the taxability u/s 43CA in the following cases: 1. The SD Value is Rs 100 Lakhs. Sale Price is Rs 70 Lakhs 2. Sale Agreement entered into on for Rs 200 Lakhs. SD Value on that date is Rs 210 Lakhs. Advance of Rs 20 Lakhs was received on by way of DD. Sale Deed was registered on and the SD Value on that date is Rs 300 Lakhs 3. Sale Agreement entered into on for Rs 500 Lakhs. SD Value on that date is Rs 500 Lakhs. Advance of Rs 50 Lakhs was received on by way of DD. Sale Deed was registered on and the SD Value on that date is Rs 800 Lakhs 4. Sale Agreement entered into on for Rs 500 Lakhs. SD Value on that date is Rs 500 Lakhs. Advance of Rs 50 Lakhs was received on by way of cash. Sale Deed was registered on and the SD Value on that date is Rs 800 Lakhs. 32. Section 44AA - Maintenance of books of accounts For assessees carrying on business or profession except those specified under rule 6F Income under this head exceeds Rs 1,20,000 in any of the three preceeding previous years or is likely to exceed Rs 1,20,000 during the current previous year in case of a newly set up business or profession (In case of an individual and HUF, the limit is enhanced to Rs 2,50,000) Turnover or gross receipts exceeds Rs 10,00,000 in any of the three preceeding previous years or is likely to exceed Rs 10,00,000 during the current previous year in case of a newly set up business or profession (In case of an individual and HUF, the limit is enhanced to Rs 25,00,000) P a g e 110

111 CA Gaurav Rajaram Where the profits and gains from business are deemed to be the profits and gains of the assessee u/s 44ADA, 44AE, BB and BBB and the assessee has claimed his income to be lower than the income prescribed under these sections Where the provisions of Section 44AD(4) are attracted and income exceeds basic exemption limit For assessees carrying on business or profession specified under rule 6F Income under this head exceeds Rs 1,50,000 in all of the three preceeding previous years or is likely to exceed Rs 1,50,000 during the current previous year in case of a newly set up profession Assessees carrying on the profession of law, medicine, accountancy, architecture, interior decoration, authorised representative, film artist, engineering, technical consultancy, IT or company secretary are notified professions u/r 6F The following books have to be maintained by the above: a. Cash Book b. Ledger c. Journal d. Copies of bills > Rs 25 e. Original bills > Rs 50 f. In case of a medical practitioner, the following additional books: - Daily Case Register - Record of inventory of medicines etc The books have to be maintained at the place of business or profession 34. Anand, is a person carrying on profession as film artist. His income from profession are as under: Financial year Amount (Rs) 1,50,000 1,60,000 1,80,000 2,00,000 Is he required to maintain any books of account u/s. 44AA of the Income-tax Act? If so, what are these books? Answer: In order to invoke Sec. 44AA, the income from profession should have exceeded Rs. 1,50,000 for all the 3 immediately preceeding previous years. In the given case, though in the immediately preceeding two years, the income has exceeded Rs. 1,50,000, for the financial year the income has not exceeded Rs. 1,50,000. Thus, Anand is not required to maintain books of accounts u/s. 44AA. (Note: Current Previous Year is excluded for analysis) P a g e 111

112 33. Section 44AB - Audit of accounts CA Gaurav Rajaram Applicability only to the following persons Carrying on business whose total sales, turnover or gross receipts exceeds Rs 1 crore Carrying on profession where gross receipts exceeds Rs 50 lakh Where the profits and gains from business are deemed to be the profits and gains of the assessee u/s 44ADA, 44AE, BB and BBB and the assessee has claimed his income to be lower than the income prescribed under these sections Where the provisions of Section 44AD(4) are attracted and income exceeds basic exemption limit Requirement under the section Compulsory audit of accounts by a CA for the above applicable persons to be completed with the due date of Return of Income (September 30th, November 30th) Where audit under another Act is required, it is sufficient to report in the specified form (Form 3CD) Important: While computing monetary limits u/s 44AA and 44AB, receipts from business u/s 44AE shall be excluded 34. Section 44AD - Presumptive Taxation Applicability to Individual, HUF and Firm (excluding LLP) carrying on business whose gross receipts from such business does not exceed Rs 2 Crore Non Applicability to # Person claiming deduction u/s 10AA or under Chapter VI-A relating to income based deductions # Person carrying on profession notified u/r 6F # Person earning income in the nature of commission or brokerage # Person carrying on agency business # Person carrying on business of plying, hiring or leasing goods carriages referred to u/s 44AE Rate of Presumptive Income 6% or 8% of gross receipts or such higher sum as declared by the assessee in the return of income (See note below) P a g e 112

113 Deemed Income at 6% on Payments received through banking channels (Finance Act, 2017) In order to promote digital transactions and to encourage small unorganized business to accept digital payments, it is proposed to amend section 44AD of the Act to reduce the existing rate to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year. Note: However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in any other mode. Illustration 1 for changes in the rate of presumptive income Gross Receipts = Rs 1.5 Crore Break up of above receipts 0.7 crore in the form of Account Payee Cheque 0.2 crore in the form of Online Bank Transfer 0.1 crore in the form of Account Payee Draft 0.5 crore in the form of Cash Income will be calculated as follows: (assuming all receipts are made before July 31 st ) 8% * 0.5 Crore = Rs 4 lakh 6% * 1 Crore = Rs 6 lakhs Income as per Section 44AD = Rs 10 lakh Note: Before this change, income would be 8% * 1.5 crore = Rs 12 lakh Illustration 2 for changes in the rate of presumptive income The assessee is covered by provisions of section 44AD and his turnover is Rs 1,60,00,000 for the year ended The breakup of turnover is as under: Cash Sales Rs 70,00,000 Sales through banking channel (Including Account payee cheques) Rs 90,00,000 P a g e 113

114 The due date of filing of return of income is 31st July, Out of Rs 90,00,000, the cheques of Rs 82,00,000 are received by and cheques of Rs 8,00,000 are received after Now, income on presumptive basis shall be as under: On Rs 8% 5,60,000 On Rs 6% 4,92,000 On Rs 8% 64,000 (Since received after the due date of filing of return of Income) Income from Business as per Section 44AD 11,16,000 Important Tip Assessee claiming Chapter VIA deductions cannot take benefit u/s 44AD It will be deemed that expenses u/s 30 to 38 have been claimed WDV of assets shall be computed as if the depreciation has been allowed Section 44AD(4) - Where an assessee has declared income as per this Section (6%/8% of gross receipts) for any AY and the assessee has not declared income in accordance with this Section in any of the next 5 consecutive AY's, the assessee shall not be eligible to claim the benefit of this Section for the next 5 AY's from the year of violation. Example: AY u/s 44AD AY u/s 44AD AY u/s 44AD AY NOT u/s 44AD Therefore, he cannot declare income u/s 44AD for 5 AY's from to (Plus if income exceeds the BEL, assessee has to maintain books of accounts u/s 44AA and get it audited u/s 44AB.) P a g e 114

115 35. Section 44ADA - Presumptive Taxation for assessees carrying on profession u/s 44AA Rate of Presumptive Income 50% of gross receipts or such higher sum as declared by the assessee in the return of income Important Tip It will be deemed that expenses u/s 30 to 38 have been claimed Gross Receipts should not exceed Rs 50 lakhs WDV of assets shall be computed as if the depreciation has been allowed 36. Section 44AE - Business of plying, hiring or leasing goods carriages Applicability to Assessee carrying on business of plying, hiring or leasing goods carriages not owning more than 10 goods carriages at any time during the year Rate of Presumptive Income - Rs 7,500 per goods vehicle (No difference between heavy and light vehicles) Or such higher sum as may be declared by the assessee in the return of income Important Tip It will be deemed that expenses u/s 30 to 38 have been claimed WDV of assets shall be computed as if the depreciation has been allowed Assessee who has taken goods carriage on hire purchase or instalment scheme shall be considered as owner for the purpose of this section While checking applicability of audit u/s 44AB, income u/s 44AE must be excluded P a g e 115

116 35. Mr. Ram is having following three businesses: CA Gaurav Rajaram Particulars Turnover during Business I Industrial parts lakhs Business II Retail trade of cloth Business III Plying of 3 lorries lakhs 8.00 lakhs He wants to know whether he has to get his books of account audited u/s. 44AB. Answer. Though the aggregate turnover of all the three businesses exceeds Rs.1 crore, according to Sec.44AE, for the purpose of computing monetary limit u/s 44AB, the gross receipts from the business referred to in Sec 44AE shall be excluded. Accordingly, Rs.8 lakhs shall not form part of the computation of limits for the purpose of Sec. 44AB. The aggregate turnover of other two businesses is less than Rs. 1 crore (Rs. 95 lakhs in the given case). Hence, the books of accounts of Mr. Ram is not subject to tax audit u/s 44AB. 36. Mr. Praveen engaged in retail trade, reports a turnover of Rs.98,50,000 for the financial year His income from the said business as per book of accounts is computed at Rs.2,90,000. Retail trade is the only source of income for Mr. Praveen. (i) Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to tax for the AY ? (ii) If so, determine his income from retail trade as per the applicable presumptive provision. (iii) In case, Mr. Praveen does not opt for presumptive taxation of income from retail trade, what are his obligations under the Income-tax Act, 1961? (iv) What is the due date for filing his return of income, under both the options? 37. Ramamurthy had 4 heavy goods vehicles as on He acquired 7 light goods vehicles on He sold 2 heavy goods vehicles on Assuming that he opts for presumptive taxation of income as per sec. 44AE, compute his total income chargeable to tax for the AY Section 44B to BBA - Business of non residents Particulars Sec 44B - Shipping Business Sec 44BB - Prospecting for, extraction or production of mineral oils Sec 44BBA - Operation of aircraft Rate of profit on turnover 7.5% 10% 5% P a g e 116

117 38. Section 44BBB- Foreign Company carrying on construction business or erection of P&M Assessee should be engaged in the business of civil construction or erection, testing or commissioning of P&M in connection with a turnkey power projects approved by the CG Deemed income = 10% of gross amount Practice Problems on Income from Business or Profession 38. Ramji Ltd, engaged in manufacture of medicines (Pharmaceuticals) furnishes the following information for the year ended : (i) Municipal tax relating to office building Rs. 51,000 not paid till (ii) Patent acquired for Rs. 20,00,000 on and used from the same month. (iii) Capital expenditure on scientific research Rs. 10,00,000 which includes cost of land Rs.2,00,000. (iv) Amount due from customer X outstanding for more than 3 years written off as bad debt in the books Rs. 5,00,000. (v) Income tax paid Rs. 90,000 by the company in respect of non-monetary perquisites provided to its employees. (vi) Provident fund contribution of employees Rs.5,50,000 remitted belatedly. (vii) Expenditure towards advertisement in newspaper of political party Rs. 1,50,000. (viii) Refund of Sales tax Rs.75,000 received during the year, which was claimed as expenditure in earlier year. State with reasons the taxability or deductibility of the items given above under the Income-tax Act, Computation of total income is not required. 39. Rao & Jain, a Partnership Firm consisting of two partners, reports a net profit of Rs.7,00,000 before deduction of the following items: 1) Salary of Rs.20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership). 2) Depreciation on plant & machinery u/s.32 (computed) Rs.1,50,000. 3) Interest on p.a (as per the deed of partnership).the amount of capital eligible for interest Rs.5,00,000. Compute the taxable income of the firm. P a g e 117

118 40. X & Co., a partnership firm as such, furnishes the following Profit and Loss Account for the previous year ending 31st March, 2018: Particulars Rs. Particulars Rs. To Cost of Goods 2,80,000 By Sales 2,92,000 To Other Expenses 91,000 By Net Loss 1,72,000 To Interest to Partners 25,000 To Remuneration to Partners 68,000 4,64,000 4,64,000 The other expenses debited include Rs. 13,600 not allowable u/s. 37(1) of the Act. Interest to partners is in excess by Rs.7,100 (not statutorily allowable). You are required to compute the taxable income of the firm. 41. Sanjay furnishes following particulars of income from his business for the previous year: (i) Net profit as per profit and loss account Rs.72,000 after charging the following: (a) Depreciation on building Rs.31,000 (b) Provision for discount on debtors Rs.40,000 (c) Private household expenses Rs.50,000 (d) Bribe paid to Income Tax department Rs.7,000 (e) Computer for scientific research Rs.60,000 (f) Payment of expenses made through crossed cheque Rs.25,000 (g) Security deposit Rs. 16,000 (h) Audit fee paid in cash Rs.25,000 (i) Patent purchased during the year Rs.75,000 (j) Market survey feasibility report expenses on new project costing Rs 6,00,000 Rs 50,000 (ii) Opening stock Rs.66,000 valued at 10% above cost and closing stock Rs.72,000 valued at 10% below cost. (iii) Income credited to profit and loss account include (a) Bank interest on fixed deposits Rs. 9,000 (b) Refund of excise duty Rs. 18,000 earlier allowed as deduction (c) Bad debts recovered Rs.5,000. Compute the total income of Mr Sanjay. P a g e 118

119 42. Ram and Shyam are partners in Mozart Co., a partnership firm, which is engaged in manufacturing carpets. They share profits and losses in the ratio of 2:3. The profit and loss account of the firm for the year ended 31st March, 2018 is as follows : Particulars Rs Particulars Rs To Cost of Goods Sold 10,00,000 By Sales 23,00,000 To Depreciation 50,000 By Dividends 28,200 To Salary to staff 1,00,000 By Winnings from lottery 1,40,000 To Remuneration to partners Ram Rs. 2,50,000 Shyam Rs. 1,20,000 3,70,000 To Interest on capitals at 15% Ram Rs. 45,000 Shyam Rs. 67,500 1,12,500 To Sundry expenses 1,00,500 To Net Profit 7,35,200 The firm paid Rs.30,000 to Ram's wife towards the marriage of Ram's son and this amount is included in sundry expenses. Depreciation admissible under the income-tax rules is Rs.68,000. The firm is evidenced by partnership deed which allowed interest on capital and remuneration. Both partners are working partners. Compute total income of the firm. 43. Amit is a cloth merchant in Ghaziabad. From the following profit and loss account for the year ended 31st March, 2018, compute his taxable income: Particulars Rs Particulars Rs To Opening Stock 1,00,000 By Sales 40,00,000 To Purchases 25,00,000 By Closing Stock 3,00,000 To Depreciation 20,000 By gift from brother 80,000 To Provision for bad debts 10,000 By gift from friend 70,000 To Household expenses 20,000 To Advertisement 40,000 To Salaries 1,20,000 To Reserve for future losses 20,000 To Travelling expenses 15,000 Expenditure on scientific research 50,000 To Net Profit 15,55,000 P a g e 119

120 Additional information CA Gaurav Rajaram Depreciation admissible as per the income-tax rules is Rs.30, Advertisement costing Rs.10,000 appeared in a newspaper owned by a political party is included in the total amount spent on advertisement 3. Expenditure on scientific research relates to the money spent by Amit on conducting research relating to the business of cement which he proposes to undertake in future 44. Following is the Profit and Loss account of Mr. A for the year ended : Particulars Rs. Particulars Rs. 1,30,000 51,000 To Repairs on buildings To Advertisement To Amount paid to Scientific Research Association approved u/s 35 To Interest To Travelling To Printing & Stationery To Net Profit Total Following additional information is furnished: 1,00,000 1,10,000 1,30, ,950 6,15,500 By Gross profit By I.T. Refund By Interest from Company deposits By Dividends Total 1. Repairs on building includes Rs.95,000 being cost of raising a compound wall for the own business premises. 6,01,000 4,500 6,400 3,600 6,15, Interest payments include interest payable outside India to a resident Indian on which TDS has not been deducted of Rs.12,000 and penalty for contravention of Central Sales Tax Act of Rs.24, Assessee has incurred expenditure relating to exempt income and the same was charged to personal account and not debited to the P & L account. Compute the income chargeable under the head Profits and gains of business or profession' of Mr. A for the year ignoring depreciation. P a g e 120

121 45. Mr.Sivam, a retail trader of Cochin gives the following Trading and Profit & Loss Account for the Year ended 31st March, 2018 To Opening Stock Purchases Gross profit Particulars Rs. Particulars Rs. 90,000 10,04,000 3,06,000 14,00,000 By Sales Income from UTI Other business receipts Closing Stock 12,11,500 2,400 6,100 1,80,000 14,00,000 To Salary Rent & rates Interest on loan Depreciation Printing & Stationery Postage & Telegram Loss on sale of shares (short term) Other general expenses Net profit 60,000 36,000 15,000 1,05,000 23,200 1,640 8,100 7,060 50,000 3,06,000 By Gross Profit b/d. 3,06,000 3,06,000 Additional Information: i) It was found, some stocks were omitted to be included in both the Opening and Closing Stock; the values of which were Opening Stock - Rs.9,000; Closing Stock - Rs.18,000 ii) Salary includes Rs.10,000 paid to his brother, which is unreasonable to the extent of Rs.2,000. iii) The whole amount of printing and stationery was paid in cash. iv) The written down value of plant and machinery is Rs. 4,20,000. A new plant falling under the same block of depreciation of 15% was bought on for Rs.70,000 Two old plants were sold on for Rs.50,000. v) Rent and rates includes sales tax liability of Rs.3,400 paid on vi) Other business receipts include Rs.2,200 received as refund of sales tax relating to vii) Other general expenses include Rs.2,000 paid as donation to a public charitable trust. viii) Assessee has incurred expenditure relating to exempt income and the same was charged to personal account and not debited to the P & L account. You are required to advice Mr.Sivam whether he can offer his business income u/s.44ad i.e., presumptive taxation. P a g e 121

122 46. Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2017, he owns 10 trucks (out of which 6 are heavy goods vehicles). On 2nd May, 2017, he sold one of the heavy goods vehicles and purchased a light goods vehicle on 6th May, This new vehicle could however be put to use only on 15th June, Compute the total income of Mr. Sukhvinder taking note of the following data: Freight Charges collected Less: Operational expenses 6,25,000 Depreciation as per Sec. 32 1,85,000 Other Office expenses 15,000 Profit Other business and non-business income 8,70,000 8,25,000 45,000 70,000 P a g e 122

123 HEADS OF INCOME CAPITAL GAINS P a g e 123

124 1. Income chargeable under this head CA Gaurav Rajaram Any profits or gains arising from the Transfer of a Capital Asset effected in the PY shall be chargeable to Income Tax under the head Capital Gains However, exemptions under Section 54, 54A, 54B, 54EC etc are given for eligible transactions 2. Meaning of Capital Asset Capital Asset means 1. Property of any kind held by an assessee, whether or not connected with his business or profession 2. Any securities held by an FII which has invested in such securities in accordance with SEBI guidelines The definition of 'Capital Asset' excludes the following (i) Stock in trade, consumable stores or raw materials held for the purpose of business or profession (ii) Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes : (a) Jewellery (includes precious stones in any form and ornaments made of precious metals) (b) Archaeological collections (c) Drawings (d) Paintings (e) Sculptures (f) Any work of art Articles which are intimately and commonly used by the assessee are called personal effects. Accordingly FD s and Cash Certificates are not personal effects. (iii) Agricultural land other than land which is situated outside the specified area as follows: Population of the municipality or cantonment board according to last preceding census More than 10,000 upto 1 Lakh More than 1 Lakh up to 10 Lakhs More than 10 Lakhs Distance from the limits of Municipality or Cantonment board 2 Kms 6 Kms 8 Kms Hence, if the land lies beyond the above distances, it will be outside the specified area and hence not a capital asset. It is also clarified that the distance has to be measured aerially. P a g e 124

125 (iv) Deposit Certificates issued under Gold Monetisation Scheme, 2015 notified by CG. 3. Meaning of Transfer - Section 2(47) Sale, exchange or relinquishment of the asset The extinguishment of any right therein Compulsory acquisition thereof under any law In a case where the asset is converted by the owner thereof into or is treated by him as stock-in-trade of business carried on by him, such conversion or treatment The maturity or redemption of a zero coupon bond Any transaction involving, the allowing of the possession of any immovable property, to be taken or retained in part performance of a contract covered by Section 53A of the Transfer of Property Act Any transaction (whether by way of becoming a member of, or acquiring shares in a co- operative society, company or other association of persons or by way of any agreement or any arrangement or in other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property Important Tip In case of redemption of preference shares, the shareholders give up shares and receive in lieu thereof a sum of money. This is a transfer within the meaning of Section 2(47), as it amounts to extinguishment of rights - Anarkali Sarabhai v CIT [1997] 90 Taxman 509 (SC) (Exemption has been introduced for the above transaction u/s 47 now) Where the shareholders receive any amount on Reduction of share capital, even though the shareholder remains a shareholder, his right as a holder of those shares stands reduced, therefore this extinguishment of right is transfer and distribution of amount is capital receipt subject to capital gain tax. However, where such distribution can be correlated with accumulated profits, it shall be dividend u/s 2(22) to the shareholders. Any amount paid over and above accumulated profits shall be capital receipts P a g e 125

126 4. Year of taxability of capital gains - Section 45(1) to (6) CA Gaurav Rajaram Transactions Year of chargeability Taxable amount Transfer of a capital asset - Section 45(1) PY in which transfer takes place Consideration for transfer Damage or destruction to any capital asset - Section 45(1A) Conversion of capital asset into stock in trade - Section 45(2) Transfer of securities made by the depository who is deemed to be the registered owner under the Depositories Act, Section 45(2A) Transfer of a capital asset by a partner to the firm or by a member to the AOP or BOI by way of capital contribution or otherwise - Section 45(3) Transfer of a capital asset by way of dissolution or otherwise of a firm, AOP or BOI on dissolution or otherwise of a firm or AOP or BOI - Section 45(4) Transfer of a capital asset by way of compulsory acquisition under any law - Section 45(5) Joint Development Agreement Section 45(5A) PY in which money or other asset is received from the insurance co. PY in which the stock in trade is sold or transferred PY in which such transfer takes place (using FIFO) PY in which transfer takes place PY in which transfer takes place PY in which compensation is received Enhanced Compensation If the enhanced compensation is received in pursuance of an interim court order, it will be deemed to be income in the year of passing the FINAL ORDER PY in which the certificate of completion for the whole or part of the project is issued by the competent authority Amount of money or FMV of asset received FMV on date of conversion (See important tip) Consideration for transfer (Taxable in the case of beneficial owner and not depository) Value of asset recorded in the books of the firm or AOP or BOI FMV on date of transfer Initial compensation or enhanced compensation, as the case may be The stamp duty value of his share, being land or building or both, in the project on the date of issuing of said certificate of P a g e 126

127 Repurchase of mutual fund units referred to in Section 80CCB - Section 45(6) CA Gaurav Rajaram completion as increased by any monetary consideration received, if any PY in which such repurchase takes Repurchase Price place Important Tip In case of enhanced compensation received on compulsory acquisition, cost of acquisition and improvement is NIL. If compensation for compulsory acquisition is received in installments, the entire amount of capital gain is chargeable in the year of the first installment. Enhanced compensation is taxable only in the year of receipt. However, if the enhanced compensation is received in pursuance of a court order, it will be deemed to be income in the year of passing the order Damage or destruction of a capital asset covers the damages due to flood, typhoon, hurricane, cyclone, earthquake, or other convulsion of nature; or riot or civil disturbance or an action by or against an enemy; or accidental fire or explosion Conversion of a Capital Asset into Stock in Trade gives rise to Capital Gains as well as Business Income, which is explained as follows: Capital Gains is the difference between FMV and Indexed Cost of Acquisition as on the date of conversion Business Income is the difference between the sale proceeds of the stock and said FMV Proviso to Section 45(5A) Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer. P a g e 127

128 5. Types of Capital Assets and the respective capital gains I. Short Term Capital Asset - Section 2(42A) It means a Capital Asset held by an assessee for not more than 12/24/36 months immediately before the date of transfer. No. Capital Assets Holding period to qualify as short-term capital asset 1. Shares / Debentures of a company listed on a recognised stock exchange in India 2. Shares of Companies not listed on stock exchange in India (Includes shares of foreign companies listed on stock exchange outside India). 12 months or less 24 months or less (Finance Act, 2016) 3. Units of equity oriented mutual funds 12 months or less 4. Units of debt oriented mutual funds 36 months or less 5. Units of Business Trust 36 months or less 6. Immovable property being land or building or both (Located in India or in foreign country) 24 months or less (Finance Act, 2017) 7. Other assets 36 months or less Any gain from the transfer of a short term capital asset is taxable as 'Short Term Capital Gains' - Section 2(42B) Important Tip Capital gain arising on transfer of depreciable assets shall always be Short Term Capital Gain irrespective of the period of holding Debt oriented mutual funds are short term capital assets if they are held for not more than 36 months before their sale Unlisted shares (shares of private companies and unlisted public companies) are short term capital assets if they are held for not more than 24 months before their sale P a g e 128

129 II. Long Term Capital Asset - Section 2(29A) (Period of holding is more than 12/24/36 months) Any Capital Asset other than a Short Term Capital Asset is a Long Term Capital Asset. Any gain from the transfer of a long term capital asset is taxable as 'Long Term Capital Gains' Section 2(29B) 6. Calculation of period of holding Normally, period of holding commences from the date on which the asset if acquired by an assessee. However, in certain cases, this can't be applied (for example, gift, amalgamation etc). Specified cases are explained under Explanation 1 to Section 2(42A) as under: Transaction By way of gift, inheritance, partition of HUF By way of amalgamation, demerger etc Shares of a company in liquidation Renouncement of right to subscribe to shares Sweat equity shares Purchase of shares through stock market Private transfer of securities Issue of shares (including bonus, rights etc) Equity shares issued towards convertible preference shares Period of holding Period of holding of previous owner also included Period of holding of shares in the amalgamating/ demerged company also included Period post the company going into liquidation to be excluded Considered from date of offer of such right Date of allotment of sweat equity shares From date of brokers note From date of contract of sale declared by parties From date of allotment From date of holding preference shares 7. Mode of calculation of Capital Gains For Short Term Capital Gain Particulars Full Value of Consideration Less: Expenses in relation to transfer (no deduction for STT) Net Consideration = A- B Less: Cost of Acquisition and Cost of Improvement Gross Capital Gains = C - D Less: Exemption u/s 54B, 54D, 54G and 54GA, if applicable Net Capital Gains = E - F Amount A (B) C (D) E (F) G P a g e 129

130 For Long Term Capital Gain CA Gaurav Rajaram Particulars Full Value of Consideration Less: Expenses in relation to transfer (no deduction for STT) Net Consideration = A- B Less: Indexed Cost of Acquisition and Indexed Cost of Improvement Gross Capital Gains = C - D Less: Exemption u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB Net Capital Gains = E - F Amount A (B) C (D) E (F) G If the assessee paid the tenant or otherwise any amount to get the land vacated before its sale to any third party, the amount so paid is allowable as deduction u/s 48 Any payment made by a person for the purpose of clearing off the Mortgage created by the previous owner is to be treated as Cost of acquisition Only cost of improvement incurred after can be claimed Any sum of money received as an advance or otherwise in the course of negotiations for the transfer of a capital asset shall be treated as an income and taxed under "Income from Other Sources" if: (From AY 15-16) 1. such sum is forfeited; and 2. the negotiations do not result in transfer of such capital asset. Position if advance was received and forfeited before AY The advance shall be deducted from the cost of acquisition of such asset 8. Concept of indexation of cost Indexed cost of acquisition = Cost of acquisition X Cost inflation index in the year of transfer Cost Inflation Index for the year in which the asset was acquired or for the year Indexed cost of acquisition = Cost of improvement X Cost inflation index in the year of transfer Cost Inflation Index for the year in which the improvement took place Note: No indexation benefit for bonds and debentures other than capital indexed bonds issued by the Govt or sovereign gold bonds issued by RBI P a g e 130

131 Notified Cost Inflation Indices(w.e.f. AY 18-19) CA Gaurav Rajaram Financial Year Cost Inflation Index Financial Year Cost Inflation Index Financial Year Cost Inflation Index Deemed Sale Consideration u/s 50C (Similar to Sec 43CA) Normally, sale consideration represents actual sale proceeds received by the assessee. However, if the following conditions are satisfied, then the sale consideration shall be deemed to be the stamp duty value Capital Asset transferred is land or building or both Computation is under Section 48 Sale consideration is less than stamp duty value Where the date of agreement fixing the value of consideration for the transfer of the asset and the date of registration of such transfer of asset are not the same, the stamp duty value assessable on the date of the agreement shall be adopted. This deviation from adopting the stamp duty value on the date of registration shall be applicable in a case where the amount of consideration or a part thereof has been received by way of account payee cheque or account payee bank draft or electronic clearance system through a bank account on or before the date of agreement for transfer of the asset. 10. Special Provision for Full Value of Consideration for Transfer of Share Other Than Quoted Share - Sec 50CA Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined as per Rule 11UAA, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. P a g e 131

132 11. Cost of acquisition CA Gaurav Rajaram Normally, cost of acquisition represents amount actually paid towards acquiring the asset. However, in certain special cases given u/s 49, 51 and 55, the cost will be determined as under: Cost to previous owner shall be deemed as cost Assets received on total/partial partition of HUF Assets acquired under a gift/will Assets acquired by succession, inheritance or devolution Assets acquired on liquidation of a company Assets acquired under a transfer to a trust Assets acquired by a 100% Indian Subsidiary from its holding company or by Indian holding company from its 100 % subsidiary Assets received by an Amalgamated Indian Co. from the Amalgamating Co Shares in Indian Co. received by amalgamated foreign company from amalgamating foreign company Assets received by an amalgamated banking institution from the amalgamating banking company Assets received by the successor cooperative bank from the predecessor cooperative bank pursuant to business reorganization of the cooperative bank Shares in the successor cooperative bank received by the shareholder pursuant to transfer of shares in the predecessor cooperative bank in course of business reorganization of the cooperative bank Assets received by a LLP pursuant to conversion of a private company / unlisted public company to LLP Cost in case of Amalgamation If shares of the amalgamated Indian Company are allotted to the shareholders of the amalgamating company, cost of shares in the amalgamated company will be deemed to be the cost of shares in the amalgamating company Cost in case of conversion of Securities Where the capital asset, being a share or debenture of a company, became the property of the assessee by way of conversion of debenture/bonds into shares, conversion of deposit certificate into debenture, P a g e 132

133 the cost of acquisition shall be deemed to be the cost of the share/ debenture originally purchased which has now been converted Cost of shares acquired under ESOP where earlier taxed as perquisite If the values of any shares, debentures or warrants has been taken into account while computing perquisite value under section 17(2)(vi), the cost of acquisition of such shares, debentures or warrants shall be the fair market values as considered while calculating perquisite amount under section 17(2)(vi) Cost of partners right in an LLP on conversion from a company If the capital asset being rights of a partner became the property of the assessee by conversion in terms of section 47(xiiib), the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the company immediately before its conversion Cost in case of shares in Resulting Company Cost of acquisition of shares in the Resulting Company shall be Net Book Value of Assets transferred to the Resulting Company Net Worth of Demerged Company immediately before such transfer X Cost of Acquisition of shares in the Demerged Company The original cost of acquisition of the shares in the demerged company shall be deemed to have been reduced by the above computed figure Net Worth = Paid up Capital + General Reserves (being balances immediately before demerger) Property received by way of gift earlier taxed as IFOS u/s 56 If the value of any property has been considered for calculating income under section 56(2)(x), the cost of acquisition of such property shall be deemed to be the value which has been taken into account for calculating income under section 56(2)(x) Cost in case of special category of assets The cost will be NIL in the below cases, if nothing has been paid towards acquisition of the same: Self generated goodwill Tenancy Right Stage Carriage Permits Loom hours Bonus Shares Trademark or brand name Right to subscribe to shares Right to manufacture, produce or process an article or things P a g e 133

134 Right to carry on business CA Gaurav Rajaram Cost in the case of financial assets The cost of acquisition of original shares shall be the amount actually paid for acquiring the original shares. In relation to right entitlement when such right entitlement is renounced by the assessee in favour of any other person, cost of such entitlement shall be deemed to be NIL in case of such assessee. In relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, cost means the amount actually paid by him for acquiring such asset. Cost of capital asset acquired before Irrespective of the mode of acquisition, if the capital asset was acquired by the assessee prior to , then at the option of the assessee the fair market value of the same as on , shall be deemed to be cost of acquisition of the asset In case of special category of assets (self generated goodwill etc), this option is not available and the cost will be deemed as NIL. 12. Tax on short term capital gains (Section 111A) Short Term Capital Gain at 15% Applicability 1. Sale of equity share in a company or a unit of an equity oriented fund on which STT has been levied 2. Transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre (even if STT is not levied) In the above cases, the tax payable on the total income will be aggregate of: Income tax payable on the total income as reduced by such STCG, had the total income so reduced, been his total income. Income 15% on such STCG In case of a resident individual and HUF, if the total income reduced by such STCG is below maximum tax free limit then such STCG would be reduced by the balance of maximum tax free limit, left over and above the total income so reduced, and tax would be on the balance of STCG. If the GTI of the assessee includes income by way of STCG, the GTI is to be reduced by such STCG and deduction under chapter VI-A is to be allowed with reference to the reduced GTI. P a g e 134

135 Short Term Capital Gain at slab rates CA Gaurav Rajaram Short term Capital Gains which has not suffered STT, would be treated as other normal income and ` would suffer tax as applicable to other general income. As it is suffering normal rate of tax, STCG in turn would be eligible for Chapter VI-A benefit. It would be eligible for adjustment with maximum tax free income like any other normal income. Important Note The mode of acquisition of securities is not relevant, hence all modes of acquisition including allotment/acquisition in unlisted companies going public subsequently, bonus shares, allotment pursuant to conversion of convertible securities, amalgamation or demerger, inheritance, etc. are covered. There is no amendment in section 111A by Finance Act, 2017 although there is an amendment in section 10(38) by Finance Act, 2017 regarding condition of payment of STT on acquisition of equity shares. Therefore, section 111A shall apply even if no STT was paid on acquisition of shares. 13. Tax on long term capital gains (Section 111A) Long Term Capital Gains chargeable to tax at a flat rate of 20% In case of a resident individual and HUF, if the total income reduced by such LTCG is below maximum tax free limit then such LTCG would be reduced by the balance of maximum tax free limit, left over and above the total income so reduced, and tax would be on the balance of LTCG Note: LTCG on transfer of equity shares which have suffered STT are exempt u/s 10(38). Further, the exemption is also extended to LTCG arising from a transaction on recognised stock exchange located in any International Financial Services Centre in Foreign Currency even if STT is not charged. Where the LTCA transferred is: Listed security Units of UTI ZCB assessee has option to choose LTCG at 10% without indexation or at 20% with indexation Where a non resident or a foreign company transfers unlisted long term securities, the LTCG will be taxed at 10% without benefit of indexation 14. Capital Gain in case of distribution of Assets by a Company in Liquidation - Section 46(2) On liquidation, difference between money or FMV of assets received by a shareholder and the deemed dividend u/s Section 2(22)(c) is deemed as full value of consideration P a g e 135

136 15. Buy back of shares or securities - Section 46A, Section 115QA and Section 10(34A) Where a listed company purchases its own shares or securities, the difference between the value of consideration and the cost of acquisition to the shareholder or holder of securities will be deemed to be the capital gain and is taxable in the year of buy back. If the shares were held for more than 12 months, benefit of indexation will be available (Section 46A) Sec 115QA Any amount distributed by an unlisted company to its shareholders on buyback under the Companies Act shall be subjected to a tax at the rate of 20% plus applicable surcharge and cess (called as Buyback tax or BBT ) BBT to be paid within 14 days from date of payment of consideration on Distributable Income or DI DI = Buyback consideration less Amount received by company for issue of shares Sec. 10(34A) Any income arising to an assessee, being a share holder, on account of buy back of unlisted shares by a company as referred to in Sec. 115QA shall be exempt in the hands of the share holder. 16. Transactions not regarded as 'transfers' - Section 46(1) and 47 Following transaction do not constitute transfer i.e. they override Section 45. (i) Any distribution of assets made by a Company to its shareholders in the event of liquidation (ii) Distribution of Capital Assets in the event of total/partial partition of HUF. [Clause i] (iii) Distributions of Capital Asset under a gift/will/irrevocable trust. This clause however, shall not apply to shares, debentures or warrants allotted by a company directly or indirectly to its employees under the ESOP Clause [iii] (iv) Transfer of any Capital Asset in the nature of works of art, books, manuscripts, photographs, prints, paintings, drawing, scientific/art collection, to Government, University, National Museum, National Art Gallery, National Archives or any other notified public museum/institution of national importance. (v) Transfer by way of conversion of bonds/debenture/debenture stock/deposit certificates of a Company into shares or debentures of that company. [Clause x] (vi) Transfer of Capital assets or Intangible Assets by a firm (including LLP) to a company where the firm (including LLP) is succeeded by a company in the business carried on by it or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India where an AOP / BOI is succeeded by a company, shall not be regarded as transfer to attract capital gain tax, subject to the following conditions: P a g e 136

137 All the assets and liabilities of the firm (including LLP) relating to the business or of the AOP/BOI, immediately before the succession became the assets and liabilities of the company. All the partners of the firm (including LLP) immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm (including LLP) on the date of succession. The partners of the firm (including LLP) shall not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. The shareholding in the Company by the partners of the firm (including LLP) is not less than 50% of the voting power and their shareholding continues to be as such for a period of 5 years from the date of succession. (vii) Transfer of Capital assets or Intangible assets by a private company or unlisted public company (the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a LLP, shall not be regarded as transfer to attract capital gain tax, subject to the following conditions: All the assets and liabilities of the company, immediately before the succession became the assets and liabilities of the LLP; All the shareholders of the company immediately before the conversion become the partners of the LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion. The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in LLP; The aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion; The total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs. 60 lakhs; The total assets of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs. 5 crores; and No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. [Clause xiiib] P a g e 137

138 (viii) Transfer of capital assets or intangible asset by a sole proprietorship concern to a company where the sole proprietorship is succeeded by a company in the business carried on by it, shall not be regarded as transfer to attract Capital Gain tax, subject to the following conditions : All the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession became the assets and liabilities of the company. The shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the Company and his shareholding continues to remain as such for a period of 5 years from the date of succession. The Sole Proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company.. (ix) any transfer by way of conversion of preference shares of a company into equity shares of that company. P a g e 138

139 17. Section 50B - Slump Sale CA Gaurav Rajaram Profits arising under slump sale of any Capital Asset being one or more undertakings, owned and held by an assessee for a period of more than 36 months, (i.e. a Long Term Capital Asset) shall be deemed to be Long Term Capital Gain income of the P.Y. in which the transfer took place. However, if the above period of holding is less than or equal to 36 months, immediately preceding the date of transfer, the above income shall be deemed to be STCG. The net worth of the transferred undertaking or division shall be deemed to be the cost of acquisition and cost of improvement. Slump sale according to Section 2(42C) means the sale of one or more undertakings, for a lump sum consideration without assigning values to the individual assets and liabilities in such sale. Determination of the value of an asset or liability for the sole purpose of payment stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. The Net Worth of the undertaking shall be the aggregate value of, total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in the books of accounts. For this purpose aggregate value of total assets shall be: Nature of Asset Depreciable Asset Capital Asset, the cost of which has been fully allowed as deduction under section 35AD Any other Asset Value to be considered WDV of the asset calculated under the provisions of Income tax Act. As per section 43(6)(c)(i)(C), value shall be calculated assuming each asset to be the only asset in the relevant block Nil Value of the assets as per books. For this purpose any change in the value of assets on account of revaluation of assets shall be ignored Indexation benefit under second proviso to section 48 shall not be available. Thus, the mode of Computation for both Long Term and Short-Term capital assets shall be same. P a g e 139

140 18. Exemptions u/s 10 in relation to capital gains CA Gaurav Rajaram Section 10(33) - Exemption from Capital Gains on transfer of capital asset being unit of Unit Scheme 1964 of UTI Section 10(38) - Any income arising from the transfer of a long-term capital asset being an equity share in a Company or a unit of an equity oriented fund or a unit of a business trust where the transaction of sale of such equity share or unit is entered into on or after Further, the exemption is also extended to LTCG arising from a transaction on recognised stock exchange located in any International Financial Services Centre in Foreign Currency even if STT is not charged. Provided also that the exemption shall not apply to any income arising from the transfer of a long-term capital asset, BEING AN EQUITY SHARE IN A COMPANY, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance Act, Note: Equity oriented fund is a mutual fund whose the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund. Logic behind the above change in the exemption Law makers observed that exemption under section 10(38) was being misused by certain persons. These persons, normally promoters of Shell Companies (Shares of such companies not frequently traded on stock exchanges) used to allot shares of such companies on preferential basis to people who wanted to convert black money into white money. No STT was paid on acquisition of shares by these persons who wanted to convert black money to white money since acquisition was not through stock exchange. Say the preferential allotment was made for 10 Lakh shares Rs 10 each. Later on, after a year the promoters used to manipulate price at stock exchange and used to take the price to say Rs 30/-. The black money converters used to sell the shares on stock exchange at Rs 30/- and pay STT on sale and claim exemption of Rs 2 crores under section 10(38). Therefore, Finance act, 2017 provides that exemption under section 10(38) on equity shares shall be available if the shares sold: (i) Were acquired before in any manner (STT came into force from ) (ii) Were acquired on or after and STT was paid on the acquisition of these shares. However Central Governments has notified certain acquisitions made on or after which will be eligible for exemption under section 10(38) even if STT is not paid on the acquisition. Equity oriented fund is a mutual fund whose the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund. P a g e 140

141 Section 10(43) - Any amount received by an individual as a loan, either in lump sum or in installment, in a transaction of reverse mortgage Section 10(37) - Exemption in respect of sale of urban agricultural land (i) Such land is situated in the specified area (see definition of 'capital asset') (ii) such land, during the period of 2 years immediately preceding the date of transfer, was being used for agricultural purposes by such HUF or individual or a parent of his; (iii) such transfer is by way of compulsory acquisition under any law, or a transfer, the consideration for which is determined or approved by the Central Government or the Reserve Bank of India; (iv) such income has arisen from the compensation or consideration (including enhanced or further enhanced compensation or consideration by any court, Tribunal or other authority) for such transfer received by such assessee Note: Exemption u/s 10(34A) has already been covered in the earlier buy-back discussion Section 10(37A) - Special Exemption to Specified People of Andhra Pradesh (Introduced by Finance Act, 2017 Retrospectively from Assessment Year ) Any income chargeable under the head Capital gains in respect of transfer of a specified capital asset arising to an assessee, being an individual or a Hindu undivided family, if he transfers that specified capital asset under the Land Pooling Scheme of Andhra Pradesh Government shall be exempt from tax. Explanation. For the purposes of this clause, specified capital asset means, - (a) The land or building or both owned by the assessee as on the 2nd day of June, 2014 and which has been transferred under the scheme; or (b) The land pooling ownership certificate issued under the scheme to the assessee in respect of land or building or both referred to in clause (a); or (c) The reconstituted plot or land, as the case may, received by the assessee in lieu of land or building or both referred to in clause (a) in accordance with the scheme, if such plot or land, as the case may be, so received is transferred within two years from the end of the financial year in which the possession of such plot or land was handed over to him. Where tax is attracted Where the capital gain arise from the transfer of a specified capital asset referred to in clause (c) of the Explanation to section 10(37A), which has been transferred after the expiry of two years from the end of the financial year in which the possession of such asset was handed over to the assessee, the cost of acquisition of such specified capital asset shall be deemed to be its stamp duty value as on the last day of the second financial year after the end of the financial year in which the possession of the said specified capital asset was handed over to the assessee. P a g e 141

142 19. Exemptions under the head 'Capital Gains' CA Gaurav Rajaram Section 54 - Capital Gains on Sale/Transfer of Residential House Property Exemption available to Individual & HUF only Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption. 1. The house property transferred is a Long Term Capital Asset. 2. The assessee has purchased residential H.P. within one year before or two years after the date of transfer, or has constructed a residential house within 3 years after the date of transfer (Exemption is given only for reinvestment in ONE HOUSE 1. If the cost of new H.P. is equal to or more than Capital Gain on transfer of old house the entire Capital Gain is exempted 2. If the cost of the new house is less than Capital Gain on transfer of the old house, the difference between Capital Gain and cost of new house is taxable U/s 45. If new H.P. is transferred within 3 Years from the date of its purchase or Construction, then for the purpose of Computing Capital Gain on transfer of new house: Cost of new house shall be reduced by the amount of Capital Gain on old house exempted earlier U/s 54. The Capital Gain on transfer of new house within IN INDIA) 3 years of purchase or construction is a STCG Section 54B - Capital Gains on Sale/Transfer of Agricultural Land Exemption available to Individuals. Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption 1. Transferred land must have been used by the assessee or his parents for agricultural purposes, 1. If the cost of new land is equal to or more than Capital Gain on transfer of old land, the entire If new land is transferred within 3 Years from the date of its purchase, then for the purpose of for 2 years immediately Capital Gain is exempted Computing Capital Gain on preceding the date of transfer. transfer of new land: 2. The assessee has to purchase another agricultural land within 2 years from the date of such transfer. 2. If the cost of the new land is less than Capital Gain on transfer of the old land, the difference between Capital Gain and cost of Cost of new land shall be reduced by the amount of Capital Gain on old land exempted earlier U/s 54B. P a g e 142

143 new land is taxable U/s 45. CA Gaurav Rajaram The Capital Gain on transfer of new land within 3 years of purchase is a STCG. Section 54D - Capital Gains on Compulsory Acquisition of Land & Building Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption 1. Such land or building must have been used by the assessee for the purpose of industrial 1. If the cost of new land or building is equal to or more than Capital Gain on acquisition of If new land or building is transferred within 3 Years from the date of its purchase or undertaking for 2 years old land or building, the entire construction, then for the purpose immediately preceding the date of transfer Capital Gain is exempted of Computing Capital Gain on transfer of new land building: 2. The assessee has to purchase another land or building or construct building within 3 years from the date of compulsory acquisition. 3. New land or building should be used for shifting or reestablishing the said undertaking or setting up a new industrial undertaking. 2. If the cost of the new land or building is less than Capital Gain on acquisition of the old land or building, then the difference between Capital Gain and cost of new land or building is taxable U/s 45. Cost of new land or building shall be reduced by the amount of Capital Gain on old land or building exempted earlier U/s 54D and the resulting capital gain is STCG Section 54EC and 54EE (similar sections) - Capital Gains on transfer of Long Term Capital Asset Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption 1. Asset transferred must be a If bonds are transferred within 3 Long Term Capital Asset years from date of acquisition 2. Within 6 months from date of transfer, the amount of capital gains must be invested in 54EC - specified bonds issued by Rural Electrification Corporation (REC) or National Highways Authority of India (NHAI) or Power Finance Corporation Ltd or Indian Railways Finance Corporation Ltd 1. If the cost of bonds is equal to or more than Capital Gain on acquisition of old land or building, the entire Capital Gain is exempted 2. If the cost of the bonds is less than Capital Gain, then the difference between Capital Gain and cost of bonds is taxable U/s 45. If loan or advance is availed against the security of the bonds within 3 years from date of acquisition The LTCG exempted earlier shall be taxed as LTCG in the year of violation P a g e 143

144 54EE - units of notified fund on or before CA Gaurav Rajaram Maximum amount cannot exceed Rs 50 lakh in any financial year or subsequent financial year Section 54F - Capital Gains on transfer of any Long Term Capital Asset (other than H.P.) Exemption available to Individual or HUF Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption. 1. The assessee has purchased residential H.P. within one year before or two years after the date of transfer, or has constructed a residential house within 3 years after the date of transfer. 1. If the entire net consideration on sale of long term capital asset is invested in new residential house property the entire Capital Gain shall be exempted (Exemption is given only for reinvestment in ONE HOUSE IN INDIA) 2. The assessee shall not own more than one residential house, other than the new asset, on the date of transfer of the original asset. 3. The income from new residential house is chargeable to tax under the head house property. 2. lf part of net consideration is invested in new residential house property, the amount of exemption is as follows: Amount Invested X Capital Gain Net Consideration 1. lf the assessee purchases another residential house property, within the period of 2 years or construct another residential house within 3 years after the date of transfer, then the capital gain earlier exempt u/s 54F shall be deemed to be the capital gain of the previous year in which such residential house is purchased or constructed. 2. lf the new asset being the house property is transferred within the period of 3 years either from the date of purchase or construction, the capital gain exempt earlier u/s 54F shall be deemed to be the capital gain of the previous year in which such new asset is transferred. 3. The Capital Gain on transfer of new house within 3 years of purchase or construction is a STCG. Section 54G - Capital Gains on transfer of Assets in case of shifting of Industrial Undertaking Conditions to be fulfilled. Amount of exemption Withdrawal of exemption. 1. The transferred capital asset 1. If the cost of new asset is equal 1. lf new asset is transferred being Plant, Machinery, Land or to or more than the Capital Gain, within 3 years from the date of its P a g e 144

145 Building or any rights in building or land) must be used for the purpose of Industrial Undertaking situated in an urban area. 2. The transfer is effected in course of or due to shifting of such industrial undertaking to any area other than urban area. the entire Capital Gain is exempted 2. lf the cost of the new asset is less than Capital Gain arisen, then the difference between Capital Gain and cost of new asset is taxable U/s 45 CA Gaurav Rajaram purchase or construction, for the purpose of computing Capital Gain on transfer new asset: Cost of new asset shall be reduced by the amount of Capital Gain on old asset exempted earlier U/s 54G. 2. The Capital Gain on transfer of new asset within 3 years of purchase is STCG 3. The assessee must within a period of one year before or 3 years after the date of transfer: (a) Purchase new Plant or Machinery for the purpose of business of the industrial undertaking in new area; (b) Acquire Land/Building or construct Building for the purpose of business in the said area; (c) Shifted other original assets and transferred the establishment to new area; (d) Incurred expenses on such other purposes as may be specified by the Govt. in the scheme. Section 54GA- Exemption from Capital Gains in relation to shifting to SEZ Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption. 1. The transferred capital asset (being Plant, Machinery, Land or 1. If the cost of new asset is equal to or more than the Capital Gain, 1. lf new asset is transferred within 3 years from the date of Building or any rights in the entire Capital Gain is its purchase or construction, for building or land) must be used exempted the purpose of computing for the purpose of Industrial Undertaking situated in an urban Capital Gain on transfer new asset: area. 2. The transfer is effected in course of or in consequence to 2. lf the cost of the new asset is less than Capital Gain arisen, then Cost of new asset shall be reduced by the amount of Capital P a g e 145

146 shifting of such industrial undertaking to any SEZ, whether developed in any urban area or any other area. 3. The assessee must within a period of one year before or 3 years after the date of transfer: CA Gaurav Rajaram the difference between Capital Gain on old asset exempted Gain and cost of new asset is earlier U/s 54GA. taxable U/s The Capital Gain on transfer of new asset within 3 years of purchase is STCG. (a) Purchase Plant or Machinery for the purpose of business of the industrial undertaking in the SEZ; (b) Acquire Land/Building or construct Building for the purpose of his business in the SEZ; (c) Shifted other original assets and transferred the establishment of such undertaking to the SEZ; (d) Incurred expenses on such other purposes as may be specified by the Govt. in the scheme. Section 54GB- Exemption for investment in eligible company Exemption available to Individual or HUF Conditions to be fulfilled. Amount of exemption. Withdrawal of exemption. 1. Asset transferred must be a long term residential property (being house or plot of land) 1. If the entire net consideration is invested, the entire Capital Gain shall be exempted 2. Investment must be made by way of subscription to equity shares of eligible company within due date of filing return of income 2. lf part of net consideration is invested, the amount of exemption is as follows: 1. If assessee sells or transfers shares of the eligible company within 5 years from date of acquisition 2. If eligible company sells or transfers new asset within 5 years from date of acquisition 3. The eligible company must utilise the money to purchase a Amount Invested X Capital Gain Net Consideration P a g e 146

147 new asset within 1 year from date of subscription CA Gaurav Rajaram The following conditions must be satisfied by the eligible company: a. It must be incorporated on or after April 1st but before the return filing due date of the PY in which such capital gain arises to assessee b. It is engaged in manufacturing of an article or thing or in an eligible business c. Assessee should hold more than 50% voting power or share capital d. It is a small or medium enterprise under MSMEA, 2000 or is an eligible start-up Asset purchased must not be: Used previously (second hand) Installed in office or residence including guest house An office appliance including computer or computer software or vehicle a plant or machinery which is eligible for 100% deduction while computing the profits from business or profession in any one previous year (i) "eligible business" means a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property; P a g e 147

148 (ii) "eligible start-up" means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely: (a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019; (b) the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021; and (c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government Section 54H - Extension of time for acquiring new asset or investing the amount of Capital Gains If the transfer of original asset is by way of compulsory acquisition under any law and the amount of compensation awarded for such acquisition is not received by the assessee on the date of such transfer, the period of acquiring the new asset by the assessee (U/s 54, 54B, 54D, 54EC, 54F) or the period for depositing or investing the amount of capital gain shall be extended in relation to such amount of compensation as is not received on the date of transfer. The extended period will be reckoned from the date of receipt of the amount of compensation. 20. Capital Gains Account Scheme (CGAS) (i) If the amount of Capital Gain is not utilised by the assessee for purchase or construction of the new house before the due date of submission of return, the amount may be deposited by him on or before the due date for submission of the return in any branch of Public Sector Bank as per Capital Gain Account Scheme, The amount already utilised for purchase/construction together with the amount of such deposit will qualify for exemption u/s. 54. (ii) Any amount deposited in CGA should be utilised within the prescribed time limit, the unutilised amount will be taxable in the P. Y. in which the period of 3 years from the date of transfer of the original assets expires. However, assessee can withdraw such amount in accordance with the scheme. (iii) CBDT in Circular no. 743 dated 6 May 1996 clarified that in case of an individual who dies before the expiry of 3 years, the unutilized amount cannot be taxed in the hands of the deceased. Further, the unutilized amount is also not taxable in the hands of the legal heirs as the unutilized portion does not partake the character of income. P a g e 148

149 Problems on taxability and computation of Capital Gains CA Gaurav Rajaram Mrs. Anita, has furnished the following details for computation of capital gains: i) Sale proceeds on sale of BMW car for Rs.90 lakhs, which was used exclusively for personal purposes. This car was acquired for Rs. 50 lakhs; ii) Sale proceeds of Benz car used for her profession was sold for Rs. 10 lakhs. The W.D.V. of the car as on the date of sale was Rs.7.5 lakhs; iii) Sale of personal jewels made of platinum and paintings for Rs. 1 crore, which were acquired for Rs. 25 lakhs. (iv) She owns a business called Jain Builders, a construction company. Jain Builders sold 25 flats for a sum of Rs 25 crores. Decide the taxability in her case. 2. Mr.A purchased a house property in 2000 for Rs. 2,00,000. He is selling the house during December 2017 for Rs. 60,00,000. The fair market value of the house property as on was Rs. 5,00,000. Compute the capital gains for the AY Also, analyse the taxability if Mr. A gifts his house property to Mr. B, his son during April 2012 and Mr.B sells the house property in Dec Rohit Ltd installed a new plant for Rs.20,00,000 on Dec. 30, They received a grant from the Central Government exclusively for buying the new plant amounting to Rs.5,00,000. In September 2017 the new plant was destroyed by fire. The company realized Rs.10,00,000 from the insurance company and Rs.2,50,000 from scrap sale. Calculate the profit /loss for this plant for the AY Vinod sells the following assets on 10th January, 2018 Equity Shares Jewellery Plot of land Self generated Goodwill Sales consideration (Rs) 6,00,000 7,50,000 25,00,000 25,00,000 Cost of acquisition 40,000 80,000 2,50,000 Nil Transfer expenses 4,000 25,000 Date of acquisition Compute income from capital gains of Vinod for the AY taking into consideration the facts that the business was set-up in November, P a g e 149

150 5. Rupesh acquired a residential house on 1st September, 1979 for Rs. 1,00,000. He spent Rs.25,000 on 1st July, 1999 for improvement of this house property. A further amount of Rs.50,000 was spent by him on 15th November, 2006 on improvement of the house. Rupesh gifted the said property to his son Bhupesh on 12th October, Bhupesh also spent the following amounts on improvement of the house: Date of Expenditure Amount (Rs) 15th July, ,000 15th June, ,000 Bhupesh sold the above house on 30th November, 2017 for a sum of Rs. 65,00,000. Expenses on transfer were 2% of the sale consideration. Compute the capital gains for AY , assuming the fair market value of the house as on 1st April, 2001 to be Rs. 10,00, Ms. Nidhi residing in Chennai acquired a residential house on 28th May 2002 for Rs.15,00,000. This house was sold for a consideration of Rs.2 crores in May, Brokerage and other expenses in connection with transfer amounting to Rs. 3 lakhs was spent. In March 2018, the sale consideration was invested in a residential property for Rs. 60,00,000 and a sum of Rs.50 lakhs was invested in the bonds issued by NHAI and REC at Rs.25 lakhs each. Compute the taxable capital gain. 7. Ms. Sivapriya inherited a vacant land during , which was purchased in 1980 by her father. The market value as on of the vacant land was Rs.2 lakhs. During April 2017 she entered into agreement to sell the land and received an advance of Rs. 14 lakhs. She purchased a house property in September 2017 for Rs. 15 lakhs. Registration and stamp duty expenses for purchase amounted to Rs.1,66,000/-. She ultimately sold the land in August 2017 and received the balance consideration of Rs.20 lakhs out of which brokerage of Rs.68,000/- was paid. Find out the taxable Capital Gain. 8. On 31st December, 2000, Goverdhan purchased a plot for Rs 40,000. The fair market value of the plot on 1st April, 2001 was Rs 97,800. On 15th October, 2017, Goverdhan sells the plot for Rs 14,30,000 and paid brokerage, 2% on sales consideration. He invested Rs 6,87,000 in the construction of residential house which was completed before 31st May, Compute the taxable amount of capital gains for the AY of Goverdhan assuming that he already owns one residential house on the date of transfer of plot. 9. Anurag sells a plot of land on 8th July, 2017 for Rs.40 lakh and paid brokerage on its He purchased this plot on 19th December, 2001 for Rs.4,20,000. He has spent Rs 10,000 on certain improvements on the land on On 1st February, 2018, he purchased a residential house for Rs.15 lakh. He owns one residential house on 8th July, Find out the amount of capital gains chargeable to tax for the AY Suppose Anurag sells the new residential within 6 months, what will be the taxable amount of capital gains and in which year it will be charged to tax? P a g e 150

151 10. Mr Vaibhav sold his property to Mr Dhanush on1st December 2017 for a consideration of Rs 25 Lakhs. The sub-registrar refused to register the document saying that the stamp duty value was Rs 45 lakhs. Mr Vaibhav preferred an appeal to the revenue divisional officer who fixed the value as Rs 35 lakh (Rs 22 lakh for land and balance for building) which was accepted by Mr Vaibhav. It was also determined that the land which was purchased on 1st June 2008 was valued at Rs 5,19,000 and the building on it was finished on 1st October 2016 costing Rs 14,00,000. Discuss the tax implications in the hands of Mr Vaibhav. 11. Mr A owns a land which was compulsorily acquired by NHAI on and he was compensated with Rs 1 Crore on Since the market value was much higher, Mr A challenges NHAI in the court and on , the court passed an interim order granting an additional compensation of Rs 1.5 Crore. The same was received on However, the final order was passed in Determine the taxability and year of taxability of the above amounts. 12. Rakshit whose house property was compulsorily acquired in the year 2009 received compensation of Rs 10,00,000 on 10th October 2012 and enhanced compensation of Rs 9,00,000 on 15th November, 2013 which includes Rs 2,40,000 as interest on such enhanced compensation. Final order passed on Discuss the taxability of all the above amounts. 13. Sriram holds 25,000 shares in XYZ Pvt. Ltd. which was purchased on for a sum of Rs.2,50,000. This represents 15% of the paid up capital of the company. The company went into liquidation on and paid Rs.4,00,000 by cash and partly by assets whose market value is Rs.6,00,000. The accumulated profits of the company was Rs.10,00,000. Compute the amount of capital gains chargeable to tax for the AY Mr. Naveen is a shareholder in D Ltd. holding 1000 shares acquired for a consideration of Rs. 12 lakhs. D Ltd. transfers the assets and liabilities of one of its undertakings to R Ltd. In consequence of such a demerger, Naveen is issued certain shares in R Ltd. in lieu of certain shares held in D Ltd. You are informed that the book value of assets transferred is Rs. 175 lakhs; book value of liabilities transferred is Rs.75 lakhs; paid up share capital is Rs. 400 lakhs and general reserves Rs. 100 lakhs as appearing in the books immediately before the demerger. You are required to compute the cost of acquisition of the shares held in R Ltd. and D Ltd. by Naveen after demerger. 15. Mr. X purchases convertible debentures for Rs. 4,88,000 during May The debentures were converted into shares in June These shares were sold for Rs.10,00,000 in August The brokerage expenses are Rs. 30,000. Compute the capital gain taxable for the AY in the case of Mr.X. 16. Mr. Dilip. an individual purchased unlisted shares in Indian companies as investments on for Rs. 30 lacs. On June 1, 2012 he started a business as a dealer in shares and transferred 50% of such shareholding to the business. The fair market value of the entire shares as on that date was Rs. 60 lacs. The shares held in business were sold by Dilip for Rs. 34 lacs on October 20, Compute the taxable income of Mr.Dilip under the relevant heads of income indicating the relevant assessment year. P a g e 151

152 17. In May 2009 a partnership firm has been formed in which Mr.Vimal became a partner by introducing land as his capital contribution. In the books of account of the firm the value of the asset was adopted at Rs. 3,98,000. The fair market value of the land as on that date was Rs. 5,00,000. Mr.Vimal bought that land for Rs. 1,25,000 in May Subsequently the firm was dissolved in May 2017 when the land was transferred to Mr.Mehtha, another partner, towards settlement of his capital account which had a credit balance of Rs. 7,50,000. The fair market value as on the date of such transfer was Rs. 9,00,000. Compute the applicable capital gains on all the above transactions. 18. Mr.A acquired 2000 shares in AB Ltd, a listed company for Rs. 5 lakhs during Company allotted him equal value of bonus shares on , Second bonus issue was made on 1st March 2017 where he received 1 bonus share for every 2 shares held by him. The entire shares held in the company have been sold by him on 8th of August Rs. 1,100/- per share. Determine the taxable capital gain indicating the nature of capital gain. 19. Ashraf acquired 800 shares of AB Pvt Ltd for Rs.34,800 during The company allotted him equal number of bonus shares during and 400 bonus shares during March Entire shares have been sold by Ashraf on at the rate of Rs.150 per share. Determine Capital Gains indicating Long-term and Short-term separately. Also, calculate tax payable assuming he earns no other income during the year. 20. Mr Subramaniyam submits the following information and asks you to calculate his total income: a) Rental income from Chennai Property - Rs 3 Lakhs. Standard Rent Rs 2,50,000 and Fair Rent Rs 2,80,000. Municipal and water tax paid to municipality - Current Year Rs 35,000, Arrears Rs 1,50,000 b) Interest on loan for major repairs on property Rs 1,50,000 c) Arrears of rent from Hyderabad house Rs 20,000 (it was sold on ) d) Assessee's father acquired property in April 2003 for Rs 1,25,000. Assessee acquired this property after the demise of his father on 1st December e) Sale Price is Rs 25,00,000. Stamp duty paid by purchaser at the time of registration at 13% (on guideline value) is Rs 3,90,000 without protest. f) Assessee has invested Rs 15 lakhs in one residential flat and Rs 10 lakhs in another residential flat within 1 month from sale. Also, he has invested Rs 10 lakhs in bonds issued by REC. Compute his taxable income. P a g e 152

153 21. The following is the balance sheet of SS Ltd. as on on which date division III has been transferred by way of slump sale for a consideration of Rs. 1,060 lakhs. Balance Sheet as on is as follows: Liabilities Rs. in Lakhs Assets Rs. in Lakhs 2, Paid up capital Reserves Liabilities: Division I Division II Division III Total ,100 Fixed assets Division I Division II Division III Other assets Division I Division II Division - III Total ,100 Additional information: Fixed assets of division III includes land which was purchased at Rs. 40 lakhs in 2006 and revalued at Rs. 80 lakhs as on Fixed assets of division III reflected at Rs. 520 lakhs (Rs. 600 lakhs less land value Rs. 80 lakhs) is written down value of depreciable assets as per books. However, the written down value of these assets u/s. 43(6) computed under the Income-tax Act is Rs. 480 lakhs. Other assets of division III reflected at Rs. 570 lakhs represents book value of non depreciable assets. Division III is in existence since April Compute taxable capital gains 22. Mr. Thomas inherited a house in Jaipur under will of his father in May, The house was purchased by his father in January, 1999 for Rs. 2,50,000. He invested an amount of Rs. 7,00,000 in construction of one more floor in this house in July, The house was sold by him in November, 2017 for Rs. 37,50,000. The valuation adopted by the registration authorities for charge of stamp duty was Rs. 47,25,000 which was not contested by the buyer, but as per assessee s request, the Assessing officer made a reference to Valuation officer. The value determined by the Valuation officer was Rs. 47,50,000. 1% of sale consideration was paid by Mr. Thomas to Mr. Sunil. The market value of house as on was Rs. 2,70,000. You are required to compute the amount of capital gain chargeable to tax for AY with the help of given information. 23. Anshu transfers land and building on and furnishes the following information: (i) Net consideration received Rs 24,00,000 (ii) Value adopted by Stamp Valuation Authority Rs 30,00,000 (iii) Value ascertained by Valuation Officer on reference by the Assessing Officer Rs 34,00,000 (iv) This land was acquired by Anshu on Fair Market value of the land as on was Rs 1,10,000 (v) A Residential building was constructed on land by Anshu at a cost of Rs 3,20,000 (construction completed on ) (vi) Brought forward short term capital loss incurred on sale of shares during financial year Rs 1,00,000. P a g e 153

154 Anshu seeks your advice regarding the amount to be invested in NHAI bonds so as to be exempt from capital gain tax under the Income-tax Act, Mr. C inherited from his father 8 plots of land in His father had purchased the plots in 1996 for Rs 5 lakhs. The fair market value of the plots as on was Rs 8 lakhs. (Rs 1 lakh for each plot). On 1st June 2004, C started a business of dealer in plots and converted the 8 plots as stock-in-trade of his business. He recorded the plots in his books at Rs 45 lakhs being the fair market value on that date. In June 2008, C sold the 8 plots for Rs 50 lakhs. In the same year, he acquired a residential house property for Rs 45 lakhs. He invested an amount of Rs 5 lakhs in construction of one more floor in his house in June The house was sold by him in June 2017 for Rs 63,50,000. The valuation adopted by the registration authorities for charge of stamp duty was Rs 85,50,000. As per the assessee's request, the Assessing Officer made a reference to a Valuation Officer. The value determined by the Valuation Officer was Rs 87,20,000. Brokerage of 1 % of sale consideration was paid by C. Compute the taxable amounts for various assessment years above. P a g e 154

155 HEADS OF INCOME INCOME FROM OTHER SOURCES P a g e 155

156 1. Income chargeable under this head CA Gaurav Rajaram Income from other sources is a residuary head of income Any item which is chargeable to tax but does not fall within the ambit of the other four specific heads of income shall be included under this head of income In addition, there are items of income specifically taxed under this head 2. Method of Accounting Section 145 allows the assessee to compute income under this head according to the method of accounting regularly followed by the assessee. There are 2 methods of accounting: 1. Cash basis - Transactions are recorded only when money is paid or received 2. Accrual basis - Transactions are recorded as and when they occur and not when money is paid or received Exceptions to the above under this head Interest on enhanced compensation - Taxed in the year of receipt Deemed Dividend income - Taxed in the year of receipt Sec. 145(2): The Central Government may notify in the Official Gazette from time to time "income computation and disclosure standards" to be followed by any class of assessee or in respect of any class of income. CBDT has notified 10 ICDS as of now. They will come into effect in AY Specific items taxed under this head Dividends which are not exempt u/s 10(34) Income by way of winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort, gambling, betting, etc Interest on compensation or enhanced compensation received during the year Family Pension (Pension received by family member) P a g e 156

157 CA Gaurav Rajaram Interest on securities if the securities are held as investments (if held as stock, then taxable under 'Business or Profession') Interest on bank deposits and investments made (deduction u/s 80TTA upto Rs 10,000 may be given on savings bank interest) Income from letting of machinery, plant and furniture (if not business income) Income from letting of machinery, plant and furniture together with building, if the letting of the building is inseparable to the letting of other assets (if not business income) Key-man insurance proceeds, including bonus, received by a person other than employer or employee. For eg, a family member Salary of an MP or MLA For any person [Sec 56(2)(x)] Added by Finance Act, 2017 (applicable from ) Taxable event Money received without consideration, if such sum exceeds Rs 50,000 in aggregate during the year Movable property received without consideration, the FMV of which exceeds Rs. 50,000 Movable property received for a consideration which is less than the FMV by an amount exceeding Rs. 50,000 Immovable property received without consideration, the stamp duty value of which exceeds Rs. 50,000 Immovable property received for a consideration which is less than the stamp duty value by an amount exceeding Rs. 50,000 Taxable amount The whole of such amount The whole of the FMV The difference between the FMV and consideration The amount of stamp duty The difference between the stamp duty value and consideration Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of this sub-clause. Provided further that the provisions of the first proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee P a g e 157

158 cheque or an account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of agreement for transfer of such immovable property. Important Tip Rs 50,000 is not a deduction. For example, where a person receives any sum of money exceeding Rs. 60,000/-, which are not covered by exemptions, Rs 60,000 shall be subject to tax. Property means - (i) immovable property being land or building or both, (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion. The ceiling of Rs.50,000 is available separately in respect of each of the categories of gifts mentioned above viz., cash gift, immovable property gift or for inadequate consideration, movable property gift without consideration and movable property gift with inadequate consideration. In the following cases, no taxability even if received for no or inadequate consideration # From any relative # On the occasion of marriage of an individual # Under a Will or by way of inheritance # In contemplation of the death of the payer or donor, as the case may be # From a local authority # From any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in Sec.10(23C) # From trust or charitable institution registered u/s 12AA # By way of a transaction not regarded as transfer under certain clauses section 47 (discussed in detail in the next page) # From an individual by a trust created or established solely for the benefit of relative of the individual The definition of the term relative for this purpose: a) In the case of individual are: 1) spouse of the individual: 2) brother or sister of the individual; 3) brother or sister of the spouse of the individual; 4) brother or sister of either of the parents of the individual; 5) lineal ascendant or lineal descendant of the individual; 6) lineal ascendant or lineal descendant of the spouse of the individual; and 7) spouse of the relative listed at serial numbers (2) to (6). b) In case of a HUF, any member of HUF. P a g e 158

159 Clarification from Finance Ministry CA Gaurav Rajaram Section 56(2)(x) shall apply if property is in nature of Capital Assets in hands of recipient. If property is Stock in trade, raw material and consumable stores of the business in hands of recipient, then section 56(2)(x) has no application. For example, if an individual who is a jeweller buys jewellery from a customer for Rs 80 lakhs and FMV of jewellery is Rs 100 lakhs. Now, section 56(2)(x) shall not apply since jeweller receives jewellery as stock-in-trade. Transactions referred to in section 47 which are not-subject to section 56(2)(x) are as under: Receipt of capital assets on the total or partial partition of a HUF Receipt of a capital asset by amalgamated company from amalgamating company Receipt of capital asset being shares in Indian company by foreign company on amalgamation of another foreign company. Receipt of capital asset by banking institution on amalgamation of banking company. Receipt of capital asset by resulting company being Indian company on demerger from demerged company Receipt of capital asset being shares in Indian company by resulting foreign company on demerger of another foreign company. Receipt of capital asset by successor co-operative bank on business reorganisation. Allotment of shares in successor co-operative bank in lieu of shares in predecessor co-operative bank in business re-organisation Receipt of shares from resulting company on demerger of undertaking by shareholders of demerged company Receipt of shares from amalgamated company being an Indian company by shareholders of amalgamating company. SECTION 49(4) Cost of Acquisition Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under section 56(2)(x), the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of section 56(2)(x). P a g e 159

160 For a closely held company [Sec 56(2)(viib)] Where a closely held company receives consideration from a resident on shares issued which is more than face value, to the extent of excess received over and above the FMV (no limit of Rs 50,000) Key Note This section does not apply if a widely held company issues shares at a premium. The section applies only if a closely held company issues shares at a premium. The reason for not applying this section to a widely held company is that SEBI approves the price at which shares are issued by a widely held company. This section also does not apply where a closely held company issues shares to a Non-Resident at a premium in excess of FMV as money received from non-resident is regulated by FEMA and rules of RBI. P a g e 160

161 CA Gaurav Rajaram Sec. 56(2)(ix): Any sum of money received as an advance or otherwise in the course of negotiations for the transfer of a capital asset if: i. such sum is forfeited; and ii. the negotiations do not result in transfer of such capital asset. 4. Deductible expenses Any expenditure incurred by the assessee not being capital expenditure but laid out or expended wholly or exclusively for the purpose of making or earning any income chargeable under this head In respect of family pension, a sum equal to 33-1/3% of the pension or Rs.15,000 whichever is less In case of interest received on compensation or on enhanced compensation, 50% of such income In respect of income earned by way of lease rental on letting of machinery, plant and furniture with or without building, the following shall be deducted: a) Repairs b) Insurance c) Depreciation 5. Inadmissible expenses Personal expenses Interest and salary payable outside India, if tax has not been paid or deducted at source Wealth-tax Expenses of the nature described in Sec.40A to the extent applicable Any expenses or allowances in respect of winnings from lotteries, crossword puzzles, card games, races including horse race, gambling, betting, etc Where Tax has not been deducted u/s 40(a)(ia) Note: In respect of the activity of owning and maintaining racehorses, expenses incurred shall be allowed even in the absence of any stake money earned 6. Concept of taxability of dividend Sec. 2(22) defines Dividend to include - a) any distribution by a company to its shareholders to the extent of accumulated profits whether capitalized or not resulting in the release of all or any part of the assets of the company Sec. 2(22)(a) P a g e 161

162 b) any distribution by a company- CA Gaurav Rajaram i) to its shareholders, by way of debentures, debenture stock or deposit certificates with or without interest ii) by way of bonus shares to the preference shareholders, to the extent of accumulated profits, whether capitalised or not. Sec.2(22)(b) c) any distribution made to the shareholders by a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company, whether capitalised or not. Sec.2(22)(c) d) any distribution by a company to its shareholders on account of reduction of share capital to the extent to which the company possesses accumulated profits, whether capitalised or not Sec.2(22)(d) e) any payment to the extent of accumulated profits by a closely held company in the nature of any: i) loan or advance to a shareholder who holds beneficial ownership of equity shares carrying not less than 10% of the voting power ii) loan or advance to any concern (HUF, Firm, AOP, Body of individuals or a company) in which such shareholder is a member or a partner holding substantial interest (20% or more beneficial interest at any time during the previous year). iii) payment on behalf of or for the individual benefit of any such shareholder made to any person Sec.2(22)(e) P a g e 162

163 Illustration of application of Section 2(22)(e) Closely held company X Ltd. Holds 10% voting power Mr. A Shareholder Owes payment Z Holds substantial interest (20% interest) Another concern AB & Sons Exceptions to the above Distribution to non-participating shareholders: Any distribution made in pursuance of liquidation or reduction of capital in respect of shares issued for full cash consideration and the holder of such shares is not entitled to participate in the surplus assets upon liquidation of the company Loans or advances provided in the ordinary course of business of lending Setoff of deemed dividend: Any dividend paid by the company which is set off against the whole or any part of any sum previously paid by it and deemed as dividend within the meaning of Section 2(22)(e) to the extent to which it is so set off. Payment made on buy back of shares: Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of the Companies Act Distribution upon demerger: Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company P a g e 163

164 Implications of payments being treated as dividends CA Gaurav Rajaram Dividend under Section 2(22)(a) to (d) 2(22)(e) or by a Foreign Company Hands of Company Hands of Shareholder Hands of Company Hands of Shareholder DDT of 15% + Surcharge + Cess Exempt u/s 10(34)* TDS u/s 194 if dividend > Rs 2,500 Taxable under IFOS * A recent amendment makes dividends aggregating over Rs 10 lakh is taxable at 10% in the hands of the Share Holder 7. Concept of taxability of winnings from lottery, puzzles, race horse etc Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form, tax shall be chargeable u/s 115BB at the flat rate of 30% on such income plus education 3%. The taxability of income in the nature of winnings from any lotteries, crossword puzzles, race etc. are subject to the following: a) No expenditure or allowance can be allowed against such income b) No deduction under Chapter VI-A shall be allowed c) No benefit of carry forward and set off of loss /unabsorbed depreciation allowance is available against such income d) Even the benefit of basic non-taxable limit is denied as the lottery income is subject to tax at a flat rate P a g e 164

165 Note: See 115BB does not apply to income derived from owning and maintaining race horses as a business activity in respect of which normal rates of tax shall apply 8. Concept of taxability of interest earned before commencement of business Means interest income earned on deposits made out of surplus funds before commencement of business Such interest will normally be taxed under this head The interest income so derived from out of investment in the nature of deposit cannot be reduced from the cost of construction as it has no nexus with the construction of the plant - Tuticorin Alkali Chemicals and Fertilizers Ltd (Supreme Court) On the contrary, if the receipts during construction period have close nexus with such construction, the amount shall go to reduce the construction cost of the plant (Supreme Court, in the case of CIT vs. Bokaro Steel Ltd) Instances of receipts during construction period which has close nexus with construction i) rent charged from its contractors for housing workers and staff employed by contractor for construction work of assessee ii) hire charges for plant & machinery given to contractors for use in construction work iii) interest from advances made to contractors for the purpose of facilitating the work of construction Problems 1. 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. 2. Mr. Ashok received a sum of Rs. 5,00,000, as gift, the details of which are as follows. You are required to calculate the amount of income chargeable to tax: a) from relatives on the occasion of birthday - Rs.1,00,000 b) from an unregistered charitable institution in connection with compensation for floods - Rs 50,000 c) Rs. 1,50,000 received from friends on the occasion of birthday d) Rs.2,00,000 received from a neighbour, who is on his death bed 3. Arun receives a motor car as gift from his friend on the occasion of birthday on The fair market value of the motor car is Rs.25,00,000. Compute the sum taxable in the hands of Arun. P a g e 165

166 4. Raman received Rs.5 lakhs from his relatives and the parents of his wife on the occasion of his marriage on He also receives a car and 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 taxability 5. 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 in the hands of Mr.Ketan 6. Mr.A, Mr.B and Mr.C are members of a HUF. For the year ended 31st March 2018, Mr.C has gifted his commercial building, whose FMV on the date of transfer was Rs. 25 Lakhs to a HUF. Examine the tax implication in the hands of HUF and Mr.C 7. On , Mr. Govind (a bank employee) received Rs. 5,00,000 towards interest on enhanced compensation from State Government in respect of compulsory acquisition of his land effected during the financial year Out of interest, Rs. 1,50,000 relates to the financial year ; Rs. 1,65,000 to the financial year ; and Rs. 1,85,000 to the financial year He incurred Rs.50,000 by way of legal expenses to receive the interest on such enhanced compensation. Determine the taxability of interest. Decide the following transactions in the context of the Income-tax act, Mr. B transferred 500 shares of Reliance Industries Ltd to M/s. B Co. (P) Ltd on for Rs.3,00,000 when the market price was Rs.5,00,000. The indexed cost of acquisition of shares for Mr. B was computed at Rs.4,45,000. The transfer was not subject to securities transaction tax. 9. Ms. Chhaya transferred a vacant site to Ms. Dayama at Rs. 4,25,000. The stamp valuation authority fixed the value of vacant site for stamp duty purposes at Rs. 6,00,000. The total income of Chhaya and Dayama before considering the transfer of vacant site are Rs.50,000 and Rs.2,05,000 respectively. The indexed cost of acquisition for Ms.Chhaya in respect of vacant site is Rs.4,00,000 (computed). 10. Mr. P, a shareholder of a closely held company, holding 16% shares, received advances from that company which is to be deemed as dividend from an India Company, hence exempted under section 10(34) of the Income-tax Act, Comment. 11. M Ltd gives a gift of Rs. 7,500 to its employee Mr. Ganesh on his birthday. The taxable value of gift in the hands of Ganesh is 12. The following details have been furnished by Mrs. Hemali pertaining to the year: (i) Cash gift of Rs 51,000 received from her friend on the occasion of a wedding function celebrated on her husband completing 60 years of age. This was also her 25th wedding anniversary. P a g e 166

167 (ii) On the above occasion, a diamond necklace worth Rs 2 lacs was presented by her sister living in Dubai. (iii) When she celebrated her daughter's wedding on , her friend assigned in Mrs. Hemali s favour, a fixed deposit held by the said friend in a scheduled bank; the value of the fixed deposit and the accrued interest on the said date was Rs. 51,000. Compute the income if any assessable as income from other sources. 13. From the following particulars of Pankaj from the previous year ended 31st March, 2018 compute the Income under the head Income from other sources": Sl. No. Particulars Rs Directors Fee from a company Interest on Bank deposits Income from undisclosed source Winnings from Lotteries (Net) Royalty on a book written by him Lectures in Seminars Interest on loan given to a relative Interest on Debentures of a Company (listed in a Recognized Stock Exchange) Net of Taxes Interest on Post office Savings Bank Account Interest on Monthly Income Scheme of Post office Interest on government securities He paid Rs. 1,000 for typing the manuscript of book written by him. 10,000 3,000 12,000 33,500 9,000 5,000 7,000 3, ,000 2, Shravan, a property dealer sold land to Samyukta, a dealer in automobiles for Rs 110 lakh on The SD value of the property was Rs 170 lakh on this date. Shravan had purchased the land on for Rs 95 lakh. The agreement to sale was entered into on when the stamp duty value was Rs 160 lakhs and an advance was received for Rs 35 lakhs by way of account payee cheque on the same date. Briefly discuss the tax implications of the above in both their hands. What would be your answer if: a. Shravan was a stock broker instead of property dealer and Samyukta was an automobile dealer b. Advance received was by way of cash c. Both were dealers in property P a g e 167

168 SET OFF AND CARRY FORWARD OF LOSSES P a g e 168

169 1. Concept of set off and carry forward of losses CA Gaurav Rajaram Set off of losses Intra-head adjustment Where the net result of computation for any assessment year in respect of any source of income falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head (subject to certain conditions) For eg, Income from House Property 1 is Rs 10,00,000. Loss from House Property 2 is Rs 1,50,000. Income chargeable under the head 'Income from House Property' is Rs 10,00,000 - Rs 1,50,000 = Rs 8,50,000 Inter-head adjustment Where the net result of the computation under any head of income in respect of any assessment year is a loss, the assessee shall be entitled to have such amount of loss set off against his income assessable for that assessment year under any other head of income (subject to certain conditions) For eg, Income from House Property 1 is Rs 10,00,000. Loss from business is Rs 4,00,000. Income chargeable to tax is (under the head 'Income from House Property') Rs 10,00,000 - Rs 4,00,000 = Rs 6,00,000 Carry forward of losses Where there is no income to set off losses against for a particular AY, then such loss can be carried forward and set off against income of the future years For eg, Loss from House Property 1 is Rs 10,00,000. Loss from business is Rs 4,00,000. Income chargeable to tax is Rs 0. Loss under both heads can be carried forward and set off against income in the future years (subject to certain conditions) P a g e 169

170 2. Intra head adjustment of losses CA Gaurav Rajaram Where the net result of computation for any assessment year in respect of any source of income falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. However, the following are the exceptions to the above rule: i) Loss from speculative business can be set off against income from other speculative business (Sec 73) ii) Loss from specified business u/s. 35AD can be set off against income from other specified business u/s 35AD (Sec 73A) iii) Long term capital loss can be set of against other long term capital gain (Sec 74) iv) Loss from the activity of owning and maintaining race horses can be set off against income from the activity of owning and maintaining race horses (Sec74A) v) Any loss from a source which is exempt from tax shall not be eligible for set off or carry forward- CIT vs. Hariprasad & Co. P. Ltd. (1975) 99 ITR 118 (SC). For eg, loss from sale of listed equity shares through a stock exchange 3. Inter head adjustment of losses Where the net result of the computation under any head of income in respect of any assessment year is a loss, the assessee shall be entitled to have such amount of loss set off against his income assessable for that assessment year under any other head of income. This rule of inter head adjustment is subject to the following exceptions: i) Loss under Profits & Gains of Business or Profession against salary income (Sec 71(2A)) ii) Loss from speculative business can be set off only against other speculative business (Sec 73) iii) Loss from specified business u/s. 35AD can be set off only against income from other specified business u/s 35AD (Sec 73A) iv) Loss under capital gains can be set off only against income from capital gains (further subject to intra head adjustment restrictions) (Sec. 74) v) Loss from the activity of owning and maintaining race horses can be set off against income from the activity of owning and maintaining race horses (Sec.74A) vi) Loss under the head Income from House Property may be set-off against other heads of income only to the extent of Rs 2 lakhs (from AY 18-19) P a g e 170

171 4. Carry forward of losses Section Nature of loss Number of years To be set-off against 71B Loss from house property 8 years Income from house property 32(2) Unabsorbed depreciation Indefinite period Any head of income other than salaries 35 Unabsorbed scientific research expenses Indefinite period Any head of income other than salaries 36 Unabsorbed family planning expenses Indefinite period Any head of income other than salaries 72 Unabsorbed business loss 8 years Profits and gains of business or profession 73 Speculation business loss 4 years Income from speculation business 73A Losses of specified business u/s 35AD Indefinite period Income from any specified business Loss under 'Capital Gains' 74 a) Short term capital loss 8 years Short term or long term capital gains 74A b) Long term capital loss 8 years Long term capital Gains Loss from the activity of owning and maintaining race horses 4 years Income from same activity 5. Special cases of carry forward of losses where fresh period of 8 years is given for business losses On amalgamation, amalgamated company gets a fresh period of 8 years to carry forward and set off losses of the amalgamating company The following amalgamations fall under this: i) owning an industrial undertaking or a ship or a hotel with any another company ii) a public sector company engaged in the business of operation of aircraft with another public sector company engaged in the similar business iii) a banking company with specified bank (State Bank of India or its subsidiary) Conditions to be satisfied by the amalgamating company a. The amalgamating company has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for three or more years; b. The amalgamating company has held continuously as on the date of amalgamation atleast 3/4th of the book value of fixed assets held by it two years prior to the date of amalgamation. P a g e 171

172 Conditions to be satisfied by the amalgamated company a. The amalgamated company holds continuously for a minimum period of 5 years from the date of amalgamation atleast 3/4ths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; b. The business of the amalgamating company should be continued by the amalgamated company for a minimum period of 5 years from the date of amalgamation; c. The amalgamated company fulfills the following additional conditions prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose: i) The amalgamated company shall achieve the level of production of at least 50% of the installed capacity (capacity as on the date of amalgamation) of the said undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation. ii) The amalgamated company shall furnish to the assessing officer a certificate verified by a Chartered Accountant in this regard. In a case where any of the above conditions are not complied with, the set off of loss or depreciation made in any previous years in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with. Industrial undertaking means any undertaking which is engaged in (i) the manufacture or processing of goods; or (ii) the manufacture of computer software; or (iii) the business of generation or distribution of electricity or any other form of power; or (iv) the business of providing telecommunication services, whether basic or cellular including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or (v) mining; or (vi) the construction of ships, aircrafts or rail systems. On amalgamation of banking companies, amalgamated banking company gets a fresh period of 8 years to carry forward and set off losses of the amalgamating banking company Where a banking company has amalgamated with a banking institution under a scheme sanctioned by the Central Government u/s. 45(7) of the Banking Regulation Act, 1949, the accumulated losses and unabsorbed depreciation of the amalgamating banking company shall be deemed to be the loss or the unabsorbed depreciation of the banking institution with which the banking company has been amalgamated. On succession of firm/proprietary concern by company, company gets a fresh period of 8 years to carry forward and set off losses of the firm/proprietary concern The accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, shall be deemed to be the loss or depreciation of the successor company if such succession is in accordance with sections 47(xiii) & 47(xiv). While the accumulated loss can be carried P a g e 172

173 forward for fresh period of 8 years, unabsorbed depreciation can carried forward for an indefinite period. Accordingly, such loss or depreciation shall be deemed as the loss or depreciation of the successor company for the previous year in which business reorganization is effected.- Sec.72A(6) If the conditions laid down under sections 47(xiii) & 47(xiv) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor company shall be deemed to be the income of the company and chargeable to tax in the year in which such conditions are not complied with. Conversion of private company or unlisted public company to limited liability partnership (LLP) The accumulated loss and the unabsorbed depreciation of the predecessor private company or unlisted public company, as the case may be, shall be deemed to be the loss or depreciation of the successor LLP if such conversion is in accordance with section 47(xiiib). While the accumulated loss can be carried forward for fresh period of 8 years, unabsorbed depreciation can carried forward for an indefinite period. Accordingly, such loss or depreciation shall be deemed as the loss or depreciation of the successor LLP for the previous year in which conversion has taken place - Sec. 72A(6A). If the conditions laid down under section 47(xiiib) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor LLP shall be deemed to be the income of the LLP and chargeable to tax in the year in which such conditions are not complied with. 6. Special cases of carry forward of losses where balance period of 8 years is given for business losses Demerger In the case of a demerger, the accumulated loss and unabsorbed depreciation of the demerged company directly relatable to the undertakings transferred to the resulting company shall be allowed to be carried forward and set off for the unexpired period out of total permissible period of 8 years and for an indefinite period respectively in the hands of the resulting company. Where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, it shall be apportioned between the demerged company and the resulting company. The basis for such apportionment shall be in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company - Sec. 72A(4). Business Reorganization of Co-operative Banks In the case of business reorganization of co-operative banks, the unabsorbed losses of the predecessor cooperative bank shall be allowed to be carried forward and set off against the income of the successor cooperative bank for the unexpired period of 8 assessment years only. However, unabsorbed depreciation shall be carried forward and set off indefinitely. P a g e 173

174 7. Restrictions on carry forward and set off losses Change in Constitution and Succession - Sec.78 (1) Where a change has occurred in the constitution of a firm, the loss attributable to the share of a retired or deceased partner remaining unabsorbed shall not be allowed to be carried forward by the firm. This restriction shall not apply to unabsorbed depreciation. (2) Where any person carrying on business or profession has been succeeded in such capacity by another person otherwise than by inheritance, then the successor cannot have the loss of predecessor carried forward and set off against his income. Losses in Case of a Closely Held Company - Sec.79 On the last day of the previous year in which the loss is sought to be set off, 51% of voting power should be held by the persons who were holding not less than 51% of the voting power on the last day of the previous year in which the loss was incurred. If this is not satisfied, such loss cannot be set off. For eg, loss was incurred by A Ltd in Voting power held by A,B,C and D to the extent of 25% each. A Ltd wants to set off this loss in when only A and B are the shareholders. This is not allowed due to Section 79. Exceptions to Section The above restrictions do not apply to a case if the change in the said voting power takes place due to (i) death of the shareholder; or (ii) gift by a shareholder to his relative. 2. This restriction placed u/s.79 shall not apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company. However, 51% of the shareholders of the amalgamating or demerged foreign company should continue to be the shareholders of the amalgamated or the resulting foreign company. 3. The provisions of Sec. 79 are applicable only in the case of carry forward of losses. As carry forward of unabsorbed depreciation is covered by Sec. 32(2), its carry forward and set off is not affected by Sec. 79 CIT vs. Shri Subhulaxmi Mills Ltd (2001) 249 ITR 795 (SC). P a g e 174

175 4. Relaxation u/s 79 for losses incurred by start-up's CA Gaurav Rajaram In order to facilitate ease of doing business and to promote start-up Companies in India an amendment is proposed in section 79 of the Act, to provide that in respect of an eligible start-up Company as referred to in section 80 -IAC of the Act, loss incurred in any prior year shall be carried forward and set off against the income of the previous year, if following conditions are satisfied: i) all the shareholders of such Company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year; and ii)the loss has been incurred during the period of seven years beginning from the year in which such Company is incorporated. Further, the above requirement shall not apply in specified cases set out in the Section 79. This is a welcome move, whereby any change in shareholding of Start-ups due to capital infusions by new investors will not affect accumulated losses. Also, it needs to kept in mind that relaxation applies only to losses incurred during the period of 7 years from the date of incorporation. Loss returns - Sec. 80 i) Any loss in respect of (a) Business or profession (Sec. 72) (b) Speculation business (Sec. 73) (c) Specified business (Sec 73A) (d) Capital gains (Sec. 74) (e) Business of owning and maintaining race horses (Sec. 74A) shall not be eligible for carry forward where the return of income has not been filed within the prescribed time limit. However, this condition does not apply to: (a) Loss from house property (b) Unabsorbed depreciation (c) Unabsorbed scientific research expenditure (d) Unabsorbed family planning expenditure ii) The requirements of Sec. 80 to file the return of income on or before the due date prescribed u/s. 139(1) is applicable only for the carry forward of the loss suffered in that particular assessment year. It does not impact the status of carry forward of loss, if any, of the previous years. To illustrate A Ltd. filed its Return of Income for the assessment year on 29th September, 2012 returning a loss of Rs. 2 crores. Since the Return of Income was filed on time, the loss is eligible for carry P a g e 175

176 forward to subsequent year for set off. In case, the assessee files a belated return for the assessment year , the benefit of carry forward of loss pertaining to Assessment Year cannot be denied. 8. Problems 1. Compute the taxable income in the following situation: (Rs. In Lakhs) Particulars X Ltd. Y Ltd. Income from specified business (7,00,000) 7,00,000 Income from non specified business 10,00,000 (10,00,000) 2. The assessee furnishes the following information for year ended Loss from business of cold chain facility Rs. 10,00, Taxable income from business of warehousing Rs. 8,00, Taxable income from software consultancy Rs. 3,00, Taxable income from other sources Rs. 3,00, Loss from house property Rs. 5,00,000 Compute the taxable income for the AY Compute the taxable income for the AY Particulars Income from salaries (Rs. 5,000 p.m) Income from house property House 1 House 2 House 3 (self-occupied property) Rs. 60,000 16,000 (20,000) (12,000) Profits and gains of business/profession Business A Business B (Speculative) (25,000) 35,000 Capital gains Short term capital loss Long term capital gain Income from other sources Income from betting Loss on maintenance of race horses Interest on securities (gross) Interest on loan borrowed to invest in securities (18,000) 10,000 9,000 (12,000) 18,000 20,000 P a g e 176

177 4. Mr. Bharath submits the following information for the AY Salary income taxable Particulars Rs. 48,000 House property income House 1 income House 2 loss 37,000 (27,000) Business income Textile Business (discontinued on ) Brought forward loss of textile business - AY Chemical Business (discontinued on ) - b/f loss of previous year unabsorbed depreciation of previous year Bad debts earlier deducted recovered in July 2017 Leather Business Interest on securities held as stock in trade (20,000) (80,000) (25,000) (15,000) 40,000 62,000 10,000 Determine the gross total income for the AY and also compute the amount of loss that can be carried forward to the subsequent years. 5. Mr. Batra furnishes the following details for year ended : Particulars Short term capital gain Loss from speculative business Long term capital gain on sale of land Long term capital loss on sale of shares (securities transaction tax not paid) Income from business of textile (after allowing current year depreciation) Income from activity of owning and maintaining race horses Income from salary Loss from house property Amount in (Rs.) 1,40,000 60,000 30,000 1,00,000 50,000 15,000 6,00,000 2,40,000 Following are the carry forward losses: (i) Losses from activity of owning and maintaining race horses-pertaining to AY Rs.25,000 (ii) Carry forward loss from business of textile Rs.60,000. Loss pertains to AY Compute Gross Total income of Mr.Batra for the AY Also state the eligible carry forward losses. P a g e 177

178 6. Mr. Rajat submits the following for the financial year ending 31st March, He desires that you should: (a) Compute the Total Income and (b) Ascertain the amount of losses that can be carried forward (i) He has two houses: Particulars (a) House 1 - Income after all statutory deductions (b) House 2 - Current year loss Rs. 72,000 (30,000) Sl. No. Particulars Rs. (a) Textile Business: i) Discontinued from 31 st October, Current year loss 40,000 ii) Brought forward business loss of the AY ,000 (b) (c) (d) Chemical business: i) Discontinued loss from 1 st March, hence no Profit/Loss ii) Bad debts allowed in earlier years recovered during this year iii) Brought forward business loss of the AY Leather Business: Profit for the current year Share of profit in a firm in which he is a partner since 2010 Nil 35,000 50,000 1,00,000 16,550 (a) Short term capital gain (b) Long- term capital loss Particulars Rs. 60,000 35,000 Contribution to LIC towards premium 10, Mr. P, a resident individual, furnishes the following particulars of his income and other details for the year. Particulars (i) Income from Salary (ii) Net annual value taxable under income from house property (iii) Income from business (iv) Income from speculative business (v) Long term capital gain on sale of land (vi) Loss on maintenance of horse race (vii) Loss on gambling Rs. 18,000 70,000 80,000 12,000 15,800 9,000 8,000 P a g e 178

179 Depreciation allowable under the Income-tax Act comes to Rs. 8,000 for which no treatment is given above. The other details of unabsorbed depreciation and brought forward losses are: Particulars (i) Unabsorbed depreciation (ii ) Loss from speculative business (iii) Short term capital loss (iv) Unrealised rent Rs. 9,000 16,000 7,800 17,000 Compute the gross total income of Mr.P, for the AY and amount of loss that can or cannot be carried forward. 8. Ms. Geeta is a resident individual, provides the following details of her income/losses for the year ended : (i) Salary received as a partner from a partnership firm Rs.7,50,000 (ii) Loss on sale of shares listed in BSE Rs.3,00,000. Shares were held for 15 months and STT paid on sale (iii) Long-term capital gain on sale of land Rs. 5,00,000. (iv) Rs. 51,000 received in cash from friends in party (v) Rs. 55,000 received towards dividend on listed equity share of domestic companies (vi) Brought forward business loss of AY Rs. 12,50,000 Compute gross total income of Ms. Geeta for the AY and ascertain the amount of loss that can be carried forward 9. From the following particulars of Mr.Naresh for the previous year ending compute the income under each head and the taxable income with reasons and also explain the provisions of carry forward of such loss, that could not be absorbed: I II III Income from business (Proprietary concerns) (a) Net adjusted profit from Textile Trade (b) Net adjusted loss from Automotive Trade (c) Loss in shares traded (Shares were never taken delivery) Loss from House Property Capital Gain: (a) Short-term Loss (b) Long-term gain 20,000 30,000 40,000 (25,000) (20,000) 30,000 P a g e 179

180 10. Harish Jayaraj Pvt. Ltd is converted into Harish Jayaraj LLP on The following particulars are available to you: Particulars I. WDV of Land as on II. WDV of Machinery as on III. Patents acquired on IV. Building acquired on for which deduction was allowed u/s. 35 AD V. Above Building was revalued as on the date of conversion into LLP VI. Unabsorbed business loss as on (AY ) (Rs. in Lakhs) 5,00,000 3,30,000 3,00,000 7,00,000 12,00,000 9,00,000 Though the conversion into LLP took place on , there was disruption in business and the assets were put into use by the LLP only from 1 st March, 2018 onwards. The company earned the profits of Rs 8 lacs, prior to computation of depreciation. Assuming that the necessary conditions laid down in sec. 47(xiiib) of the Income tax Act, 1961 is complied with, explain the tax treatment of the above in the hands of the LLP. P a g e 180

181 ANTI AVOIDANCE AND RECOVERY OF TAX PROVISIONS PART A - INCOME OF OTHER PERSONS, INCLUDED IN ASSESSEE S TOTAL INCOME 1. Concept of clubbing of income Under the Income-tax Act, income of a person is chargeable to tax only in the case of that person and not in the case of any other person In certain cases, with a view to reduce the tax burden, persons having huge taxable income may shift a portion of their income to persons who do not have taxable income This may be achieved by transferring or gifting the income generating assets or by augmenting the revenue earning capacity of certain family members In view of these provisions, although the income may be derived by a person it is sought to be clubbed in the case of another person and taxed so as to protect the interest of the revenue Income on the asset transferred is clubbed but not the income on accretion to the asset 2. Clubbing where income is transferred - Section 60 When income alone is transferred without transfer of the asset giving rise to such income, it is deemed to be the income of the transferor It does not matter whether such transfer is revocable or irrevocable P a g e 181

182 3. Clubbing where Asset is transferred - Section 61 CA Gaurav Rajaram All income arising to any person by virtue of a revocable transfer of assets shall be included in the total income of the transferor and taxed accordingly In the following instances mentioned u/s 62, the provisions of Sec 61 do not apply: (a) If the transfer is by way of trust or otherwise and is not revocable during the life time of the beneficiary or transferee OR (b) If the transfer was made before and such transfer is not revocable for a period exceeding 6 years In both cases the transferor should not derive direct or indirect benefit from such income. A transfer is deemed to be revocable if it contains any provision for the re-transfer of the whole or any part of the income or assets to the transferor (or) it gives the transferor a right to re-assume power over the whole or any part of the income or the asset Transfer includes any settlement, trust, covenant, agreement or arrangement 4. Income arising to Spouse, Son s Wife, Minor child and HUF - Section 64 Income of Spouse and son s wife- Sec. 64(1) In computing the total income of any individual, there shall be included all such income arising directly or indirectly to the spouse/ son's wife in the following circumstances: a. Where salary, commission, fees or any other form of remuneration, whether in cash or in kind, from a concern in which such individual has substantial interest; b. Where asset is transferred to the spouse/ son's wife by that individual otherwise than for adequate consideration or in connection with an agreement to live apart, the income arising from such asset. However, where the remuneration is solely attributable to the application of technical or professional qualification, knowledge and experience of the spouse/ son's wife, such remuneration cannot be clubbed P a g e 182

183 Where both husband and wife have substantial interest in a concern and both are in receipt of income by way of salary etc from the said concern, such income will be included in the case of the husband or wife, whose total income excluding such income is greater Where any such income is once clubbed in the hands of either spouse, any such income arising in any succeeding year shall not be clubbed in the total income of other spouse unless the Assessing Officer is satisfied, after giving that spouse an opportunity to be heard, that it is necessary to do so. An individual shall be deemed to have substantial interest in a concern - a. in a case where the concern is a company, he by himself or along with his relative beneficially holds equity shares carrying not less than 20% of voting power; b. in any other case, he by himself or together with his relatives is entitled to 20% of the profits of such concern. Relative u/s 2(41) means the husband, wife, brother or sister or any lineal ascendant or descendant of the individual. Where the assets transferred by an individual to his spouse or son s wife are invested by the transferee a. in any business, (not being as capital contribution in a firm), proportionate income arising to the transferee attributable to the investment; and b. in the nature of capital contribution in a firm, any interest receivable by the transferee attributable to such investment, shall be included in the total income of the individual. For this purpose, the proportion shall be with reference to the value of investment as on the first day of the previous year to the total investment in the business by the transferee as on that day. Where an asset transferred by spouse is converted into another form, income derived from such converted asset shall be clubbed - CIT vs. SMT. Pelleti Sridevamma (1995) 216 ITR 826 (SC). For eg, Mr. A gifts a sum of Rs. 50,00,000 to Mrs. A on the occasion of wedding anniversary. Mrs. A invested this sum in a fixed deposit, which derives interest income of Rs. 25,000 p.m. The interest income so derived shall be clubbed in the hands of Mr. A, despite the fact that it is the income from converted asset The marital relationship (Husband - Wife) should exist both at the time of transfer of asset and at the time of accrual of income in order to attract clubbing provisions P a g e 183

184 Income of minor child - Sec. 64(1A) CA Gaurav Rajaram In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child. However, income shall not be clubbed if it arises or accrues to a minor child on account of any - a) manual work done by him; or b) activity involving application of his skill, talent or specialised knowledge and experience; or c) If the minor child is suffering from any disability of the nature specified in Sec.80U In all the above mentioned three situations, where clubbing fails, the income shall be chargeable to tax in the hands of the minor child Parent or guardian can prepare the return of income on behalf of the minor and file the return of income in the name of the minor All the deductions/exemptions available for an individual shall equally apply for such minor child, including basic exemption of Rs. 2,50,000 Where the marriage of the parents subsist, the income of the minor child shall be included with the income of that parent whose total income, excluding the income to be clubbed, is greater In a case, where the marriage of the parents does not subsist, the income of the minor child will be included in the income of the parent who maintains the minor child in the previous year Once clubbing of minor s income is done with that of one parent, it will not be clubbed with the other parent unless the Assessing Officer is satisfied, after giving the other parent an opportunity to be heard, that it is necessary to do so In the case of an assessee in whose total income the minor child s income is to be included u/s. 64(1A), exemption is given up to Rs. 1,500 per child under Sec. 10(32) Since Sec. 64 (1A) does not exclude minor married daughter - even income arising to minor married daughter would be clubbed Even though income derived by the minor from manual work or from any activity involving skill and talent cannot be clubbed, there is no provision to avoid clubbing of income earned on investment made out of such income "There is no child so bad that he/she can't be used as an income tax deduction" P a g e 184

185 Income of HUF - Sec. 64(2) CA Gaurav Rajaram Where a member of a HUF has converted or transferred self acquired property for inadequate consideration into joint family property or thrown it into the common stock of the family, income arising thereon is taxable as the income of the transferor member If the converted property is subsequently partitioned among the members of the family, the income derived from such converted property as is received by the spouse of the transferor will be taxable as the income of the transferor 5. Problems 1. Compute the total income of Mr. A & Mrs. A from the following information: Particulars (a) Salary Income (Computed) of Mrs. A (b) Income from profession of Mr. A (c) Income of minor son B from company deposit (d) Income of minor daughter C from special talent (e) Interest from bank received by C on deposit made out of her special talent (f) Gift received by C from friend of Mrs.A Rs. 2,30,000 3,90,000 15,000 32,000 3,000 45,000 Brief working is sufficient. Detailed computation under various heads of income is NOT required. 2. Mr. Sharma has four children consisting 2 daughters and 2 sons. The annual income of 2 daughters were Rs. 9,000 and Rs. 4,500 and the sons were Rs.6,200 and Rs.4,300 respectively. The daughter who has income of Rs.4,500 was suffering from a disability specified under section 80U. Compute the amount of income earned by minor children to be clubbed in hands of Mr. Sharma. 3. Mr. Vaibhav started a proprietary business on with a capital of Rs 5,00,000. He incurred a loss of Rs 2,00,000 during the year To overcome the financial position, his wife Mrs. Vaishaly, a software Engineer, gave a gift of Rs.5,00,000 on ,which was immediately invested in the business by Mr.Vaibhav. He earned a profit of Rs 4,00,000 during the year Compute the amount to be clubbed in the hands of Mrs. Vaishaly for the AY If Mrs. Vaishaly gave the said amount as loan, what would be the amount to be clubbed? 4. A Proprietary concern was started by Smt.Rani in the year As on her capital in business was Rs. 3,00,000/-. Her husband gifted Rs. 2,00,000 on , which Smt.Rani invested in her business on the same date. Smt. Rani earned profits from her proprietary business for the Financial years Rs. 1,50,000 and financial year Rs. 3,90,000. Compute the income to be clubbed in the hands of Rani s husband for the AY with reasons. P a g e 185

186 5. The following details are furnished in respect of Mr. X and his family members. Determine the gross total income: Income as a child artist in films Business Income (Own) Particulars Mr. X Mrs. X Minor Child Salary income from X Ltd. in which Mr. X holds 25% voting 2,500 p.m. Share of profit from Firm AB & Co. Commission from AB & Co. Interest income Rs. Rs. Rs (40,000) ---- (40%) 80, , , ,000 5,000 60, (10%) 20, ,000 Note: Mrs. X possesses B.Com degree and works as accountant of X Ltd. Mrs. X does not render any services to M/s. AB & Co., Interest income received by Mrs. X is from an investment of Rs. 40,000 gifted by Mr. X and Rs. 40,000/- invested from her own resource. 6. Mr A is an employee of L&T Ltd and has a substantial interest in the company. His salary is Rs 25,000 p.m. His wife Mrs A is also working in the company at a salary of Rs 10,000 p.m without any necessary qualifications. Mr A also received Rs 30,000 as income from securities. Mrs A owns a house property which she has let out and earned a rent of Rs 12,000 p.m. They have 3 minor children - twin daughters and a son. Income of twin daughters is Rs 2000 p.a and minor son is Rs 1200 p.a. Compute the total income of Mr A and Mrs A. P a g e 186

187 1. Taxability CA Gaurav Rajaram PART B - Unexplained amounts, expenditure, investment etc Unexplained Cash Credits - Sec. 68 Where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof, or, the explanation offered is not satisfactory, the sum so credited may be charged as income of the assessee for that previous year. For the purpose of avoiding the applicability of sec.68, the burden is on the assessee to prove that - a. the identity of the creditor is established; b. the capacity of the creditor is beyond doubt; and c. the transaction is genuine. Where the assessee is a closely held company and the sums credited consist of share application money, share capital or share premium or any such money by whatever name called, any explanation offered by such assessee company shall be deemed to be not satisfactory unless the person (being a resident) in whose name such credit is recorded in the books of such company also offers an explanation to the satisfaction of the assessing officer about the nature and source of such sum so credited. However, this shall not apply if the sum is recorded in the name of a venture capital fund or a venture capital company. Unexplained Investments - Sec. 69 Where in the financial year relevant to an assessment year, the assessee has made investments which are not recorded in the books of account, if any, maintained by him, and the assessee offers no explanation or unsatisfactory explanation, the value of the investments may be deemed to be the income of the assessee for such financial year. Unexplained Money, Jewellery etc. - Sec. 69A Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles which are not recorded in the books of account, if any, maintained by the assessee and the assessee offers no explanation or unsatisfactory explanation, the money and value of assets so found may be deemed to be the income of the assessee for such financial year. Investments not fully disclosed - Sec. 69B Where in any financial year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article and the assessing officer finds that the amount expended on making such investments exceeds the amount recorded in the books and the assessee offers no explanation or unsatisfactory explanation, the excess amount may be deemed to be the income of the assessee for such financial year. P a g e 187

188 Unexplained Expenditure - Sec. 69C Where in any financial year the assessee has incurred any expenditure and offers no explanation about the source of such expenditure, or the explanation offered is not satisfactory in the opinion of the Assessing Officer, then the expenditure to the extent it is not satisfactorily explained may be deemed to be the income of the assessee for such financial year. Such unexplained expenditure, which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. For eg., A Ltd. has paid Rs.1 crore to contractors in respect of jobs carried out and materials supplied. During the course of assessment proceedings, A Ltd. has not offered any proof or satisfactory explanation on the source of such expenditure to the assessing officer. Accordingly, the Assessing Officer proposes to add back this unexplained expenditure as income. At this juncture, it is not possible for A Ltd. to contend that the entire sum of Rs.1 crore shall be allowed as deduction, as it is solely and exclusively incurred relating to its business. Hundi loan borrowed or repaid otherwise than by account payee cheque or draft - Sec. 69D Where any amount is borrowed on hundi from any person or any amount thereon is repaid to such person otherwise than by 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/repaying the amount for the previous year in which it is borrowed or repaid. 1) Once an amount is deemed as income at the time of borrowal, it cannot be deemed as income at the time of repayment. 2) Amount repaid shall include the amount of interest paid on amount borrowed. Tax on income referred to in sec.68, 69, 69A, 69B, 69C OR 69D - SEC. 115BBE Where the total income of an assessee includes any income referred to in section 68, 69, 69A, 69B, 69C or 69D as discussed above, such income shall be taxed at the rate of 60%. In addition, surcharge of 25% will be applied plus Education Cess of 3% making the total tax rate at 77.25% No deduction in respect of any expenditure or allowance shall be allowed in the computation of such income. No loss shall also allowed to be set off. Illustration for change in the section Undisclosed income = Rs 10 lakh Tax on above = 60%*10 lakh = Rs 6 lakh Add: Surcharge at 25% (25%*6 lakh) = Rs 1.5 lakh Add: Cess at 3% (3%*7.5 lakh) = Rs lakh Total Tax Payable = Rs lakh P a g e 188

189 Deductions under Chapter VI-A Indian tax laws contain certain provisions, which are intended to act as an incentive for achieving certain desirable socio-economic objectives. These provisions are contained in Chapter VIA and are in the form of deductions (80C to 80U) from the Gross Total Income. By reducing the chargeable income, these provisions reduce the tax liability and thus induce the tax-payers to act in the desired manner. The aggregate amount of deductions under sections 80C to 80U cannot exceed gross total income (gross total income after excluding long term capital gains, short term capital gain under section 111A, winnings from lottery, crossword puzzles etc.) Section 80C (Max deduction is Rs 1,50,000) Particulars Life insurance premium Contribution to a Recognised PF, Public PF and Superannuation Fund Subscription to NSC Subscription to units of any Mutual Fund referred u/s 10(23D) or NABARD Payment of tuition fees whether at the time of admission or thereafter to any university, college, school or other educational institution situated within India Eligible Assessee Individual and HUF Individual Individual and HUF Individual and HUF Individual Quantum/ Remarks In case of individual: Insurance can be taken on the life of: Individual Spouse Any child (dependent or not) In case of HUF: Insurance can be taken on the life of any member of HUF Policy issued On or before 31/3/12-20% of Capital Sum Assured After 31/3/12-10% of Capital Sum Assured If insurance is on the life of a person with disability or severe disability u/s 80U or ailment u/s 80DDB 15% of Capital Sum Assured (on or after 1/4/13) Tuition fees exclude any payment towards any development fees or donation or payment of similar nature. Deduction shall be restricted to any two children P a g e 189

190 Principal repayment of housing loan taken for the purpose of acquisition or construction of house property. Fixed (Term) deposit for a period of not less than 5 years Subscription to Sukanya Samriddhi Account Scheme Additional points Individual and HUF Individual and HUF Specified Persons CA Gaurav Rajaram Repayment of the amount borrowed by the assessee from: Central or State Government Any bank including a cooperative bank LIC National Housing Bank Any Indian public company specified u/s 36(1)(viii) Assessee's employer where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act Assessee's employer where such employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society Specified Persons = Individual, girl child of such individual or girl child for which he/she is guardian 1. Where an assessee terminates his contract of Life insurance policy before the premium for 2 years have been paid or terminates his contract of insurance in case of any single premium policy, within two years after the date of commencement of insurance, then no deductions shall be allowed in respect of the premium paid in the year of termination. Further, the deduction allowed in the preceding previous year shall be deemed to be the income of the assessee for the previous year in which the insurance policy is terminated. 2. If the assessee transfers the house property, in respect of which deduction has been claimed, before the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, no deduction shall be allowed in the previous year in which the house property is transferred. The aggregate deductions allowed in the past years shall be deemed to be the income of the assessee for the previous year in which the house property is transferred. 3. Tuition fee paid for part-time education of children does not qualify for deduction. Similarly, tuition fee payments made for institutions situated abroad are not entitled for deduction. 4. Principal repayment on loan borrowed for acquiring commercial property is not eligible for deduction. Similarly, residential property under construction, for which principal has been repaid does not qualify for deduction. 5. Repayment of principal on loan borrowed for residential house (whether let-out or self occupied) only is entitled for deduction. However, where the loan is availed for any addition, alteration, repair, or renovation, no deduction can be claimed for principal repayment. P a g e 190

191 Section 80 CCC - Contribution to Pension Funds (Max limit Rs 1,50,000) Contribution to a notified pension scheme Sec 80CCD Nature of income In the case of an individual deriving salary income. In the case of an individual deriving other income. Deduction Limit 10% of salary 20% of GTI 80CCD (1B) - Additional deduction to NPS Rs 50,000 An assessee can claim deduction under this section even in respect of contribution made under the pension scheme by his employer so long as the contribution does not exceed 10% of his salary in the previous year. Limit on deductions under sections 80C, 80CCC and 80CCD - Sec. 80CCE Section Maximum Limit prescribed 80C Rs. 1,50,000 80CCC Rs. 1,50,000 Rs. 1,50,000 80CCD (1) Employee s contribution to NPS 10%/20% of Salary (Sec. 80CCE) 8OCCD(2) - Employer's - contribution 10% of Salary No Limit 80CCD (1B) - Additional deduction to NPS Rs 50,000 No Limit Note: In case assessee claiming deduction u/s. 80CCD (1) is self employed, then '10% of Gross total income' is to be considered. Sec. 80CCG - Deduction in respect of investment made under equity savings scheme (removed) Eligible assessee - Resident Individual. Eligible investment (a) Listed equity shares; or (b) listed units of an equity oriented fund, in accordance with the Rajiv Gandhi Equity Savings Scheme. P a g e 191

192 Quantum of deduction - To the extent of 50% of the amount invested, subject to a maximum amount of Rs. 25,000. Such a deduction can be availed for 3 consecutive assessment years, beginning with the assessment year in which the listed equity shares or listed units of equity oriented fund were first acquired. Conditions (i) Gross total income of the assessee shall not exceed Rs. 12 lakhs; (ii) The assessee is a new retail investor as may be specified under the scheme; (iii) The investment is made in such listed equity shares or listed units of equity oriented fund as may be specified under the scheme; and (iv) The investment is locked in for a period of 3 years from the date of acquisition. If the assessee fails to comply with any of the above mentioned conditions, the deduction originally allowed shall be deemed to be the income of the assessee and shall be taxed in the year of violation. Important Note: This section has been removed w.e.f 1/4/2018. However, if an assessee has already made an investment which was eligible under this Section in AY or before, he may be eligible to claim deduction under this Section till not later than AY No fresh assessee can, however, claim deduction from AY Illustration Mr. Ravi Verman, Director, X Pvt. Ltd., furnishes the following particulars for year ending : a) Investments in NSC - Rs. 60,000; b) Life insurance premium paid - Rs. 30,000; c) Deferred Annuity PIan - Rs. 30,000; d) ICICI Pension Plan - Rs. 15,000; e) Contribution to Pension Scheme of Govt. - Rs. 25,000 each by the employer and employee; f) Investment of Rs. 40,000 in Rajiv Gandhi Equity Savings Scheme. Compute the deduction admissible under Chapter VI-A for AY Assume that Mr Ravi Verman had earlier claimed deduction u/s 80CCG in AY Ans: Computation of deduction eligible under Chapter VI-A of Mr. Ravi Varman AY Particulars Rs. Rs. 1. Deduction u/s. 80C -NSC 60,000 - LIC Premium (Note 1) 30,000 - Deferred annuity plan (Note 2) 30,000 Gross amount eligible u/s. 80C 1,20, Deduction u/s. 80CCC - ICICI Pension Plan 15,000 P a g e 192

193 3. Deduction u/s. 80CCD CA Gaurav Rajaram Employee's Contribution to Central Govt. Pension Scheme 25,000 Gross amount eligible u/s. 80CCE 1,60,000 Deductions u/s. 80CCE restricted to 1,50, Deduction u/s. 80CCD - Employer's Contribution to Central Govt. Pension Scheme (Note 3) 25, Deduction u/s. 80CCG Notes: - Investment in Rajiv Gandhi Equity Savings Scheme (Note 4) 20,000 Total deduction eligible under Chapter VI-A 1,95, Since the amount of actual capital sum of the policy is not given, it is assumed that the amount of premium paid is less than 10% of the actual capital sum assured. 2. Assumed to have been taken in his name on a non cumulative deferred annuity plan. 3. It may be noted that employer's contribution to Central Government Pension Scheme u/s. 80CCD is not subject to the limit of Rs. 1,50,000 prescribed u/s. 80CCE. 4. Deduction u/s. 80CCG is available to the extent of 50% of amount invested subject to maximum investment of Rs. 50,000. Hence only Rs. 20,000 being 50% of Rs. 40,000 is allowed as deduction. Section 80D - Health insurance and contribution to Central Government Health Scheme P a g e 193

194 Individual: Insurance can be made on the health of the assessee, spouse, and dependent children Any payment made on account of preventive health check-up of the assessee or his family shall be eligible for deduction u/s 80D. Payment for preventive health checkup would fall within the overall limit of Rs 25,000 or Rs 30,000 as the case may be. However maximum deduction towards preventive health check up for the assessee, his family and parents cannot exceed Rs 5,000. Payments for preventive health checkup can be made in cash however all other mediclaim insurance payments shall be eligible for deduction only if the payment is made by any mode other than cash. Further, it is also provided that any payment made on account of medical expenditure in respect of a very senior citizen (resident only) not exceeding Rs. 30,000 shall also be allowed as deduction. However such deduction is available only if no payment has been made to effect or keep in force an insurance on the health of such persons. Illustration Mr. Praveen, aged 50 years furnishes the following information relating to premium on mediclaim policy paid by cheque for the year ending : a) for self - Rs. 10,000; b) for spouse, aged about 48 years - Rs. 9,000; c) for dependent mother, aged 70 years - Rs. 7,000; d) for dependent mother-in law, aged 62 years - Rs. 5,000; e) cash paid for preventive health check up of self and spouse - Rs. 6,000; f) medical expenditure for dependent father aged 82 years - Rs 30,000. Calculate the total deduction u/s 80D Answer 1. For self and spouse Medical insurance premium ( ) Rs 19,000 Preventive Health Check-up (Rs 6,000 but restricted to) Rs 5,000 Total deduction for self and spouse u/s 80D Rs 24, For parents Medical insurance premium of mother Rs 7,000 Medical expenditure of very senior father (Rs 30,000 but restricted to) Rs 23,000 Total deduction for parents u/s 80D Rs 30,000 Total deduction u/s 80D = ,000 = Rs 54,000 (No deduction for mother-in-law as she is not covered under 'family) P a g e 194

195 Sec 80DD - Maintenance of a dependant person with disability CA Gaurav Rajaram Fixed Deduction of Rs 75,000. In case of severe disability deduction is Rs 1,25,000 Note: The above are fixed amounts of deduction irrespective of the actual expenditure Other conditions 1. Disability to be certified by a medical authority and a copy of the same to be furnished when asked. 2. Relative is not dependant on any other person and does not claim deduction u/s 80U Sec 80U - Individual with disability (Similar to Sec 80DD) Fixed Deduction of Rs 75,000. In case of severe disability deduction is Rs 1,25,000 Sec 80DDB- Medical treatment for certain specified diseases or ailments If such expenditure is incurred in respect of the medical treatment of a very senior citizen then a deduction of upto Rs. 80,000 may be claimed. P a g e 195

196 Sec. 80E - Interest on loan taken for higher education CA Gaurav Rajaram Eligible assessee - Individual 1) Any amount paid towards interest on loan borrowed from any financial institution or any approved charitable institution for the purpose of pursuing higher education is deductible. 2) The higher education shall be pursued by the assessee himself or by any of the relative of the assessee. "Relative" in relation to an individual means the spouse and children of the individual or student for whom the individual is the legal guardian. 3) The amount shall be actually paid out of the income of the assessee chargeable to tax during the previous year. 4) This deduction is allowed for the initial year (year of commencement of payment of interest) and immediately succeeding 7 assessment years or until the interest is paid by the assessee in full, whichever is earlier. 5) "Higher education" means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government, State Government, Local authority or by any other authorized authorities. Section 80EE - Interest on loan taken for residential house property Conditions 1. Assessee should be an individual 2. Assessee should not own any residential house property (RH) on date of sanction 3. Value of RH for which loan is taken should not exceed Rs 50 lakh 4. Amount of loan sanctioned should not exceed Rs 35 lakh 5. Loan has been sanctioned by Bank or Housing Finance Company between to This deduction is in addition to deduction of interest u/s 24(b). However, double deduction is not possible. Maximum amount to be claimed is Rs 50,000 or amount of interest WIL P a g e 196

197 Section 80G - Donations to Certain Funds, Charitable Institutions, etc. Note: No deduction shall be allowed under this section in respect of donation of any sum exceeding TWO THOUSAND RUPEES if paid by way of cash Donations eligible for 100% deduction without qualifying limits 1. National Defence Fund 2. Prime Minister s National Relief Fund 3. Prime Minister s Armenia Earthquake Relief Fund 4. Africa (Public Contributions India) Fund 5. National Foundation for Communal Harmony 6. Approved University/ Educational Institution of National Eminence 7. Maharashtra CM s Earthquake Relief Fund 8. Any fund set up by State Govt of Gujarat, exclusively for providing relief to victims of earthquake in Gujarat 9. Zila Saksharita Samiti 10. National/ State Blood Transfusion Council 11. Fund set up by State Govt to provide medical relief to the poor 12. Army Central Welfare Fund / Indian Naval Benevolent Fund/ Air Force Central Welfare Fund 13. Andhra Pradesh CM's Cyclone Relief Fund, National Illness Assistance Fund 15. Chief Minister s Relief Fund 16. National Sports Fund set up by Central Govt 17. National Cultural Fund set up by the Central Govt 18. Fund for Technology Development and Application, set up by the Central Govt P a g e 197

198 19. National Trust for Welfare of persons with Autism, Cerebral Palsy, Mental retardation and Multiple Disabilities 20. National Children s Fund 21. National Fund for control of drug abuse 22. Swachh Bharat Kosh - Residents and Non residents 23. Clean Ganga Fund - Residents only Donations eligible for 50% deduction without qualifying limits 1. Jawaharlal Nehru Memorial Fund 2. PM s Drought Relief Fund 3. Indira Gandhi Memorial Trust 4. Rajiv Gandhi Foundation Donations eligible for 100% deduction WITH qualifying limits (max 10% of Adjusted Total Income) 1. Donation to Govt or any approved local authority or institution or association for promoting Family Planning 2. Donation by a company assessee, to Indian Olympic Association or to any such other similar association notified by Central Govt for the development infrastructure for sports and games or the sponsorship of sports and games in India. Donations eligible for 50% deduction WITH qualifying limits (max 10% of Adjusted Total Income) 1. Govt or any approved local authority/ institution or association to be utilized for any charitable purpose other than family planning 2. Approved Public Trust or Institution 3. To any authority constituted in India by or under any law for satisfying the need for housing accommodation or for the purpose of planning development or improvement of cities, towns and villages or both 4. Corporation promoting the interests of minority community ( SC/ ST/Backward Class) 5. Notified mosque, temple, church, gurudwara or other place notified by the Central Govt to be of historic, archaeological or artistic importance Determination of Adjusted Gross Total Income Gross Total Income Less: Long Term Capital Gains Short Term Capital Gains under section 111A Deductions u/s 80C to 80U excluding 80G Income u/s 115A/115AB/115AC/115AD Adjusted Gross Total Income XXX (xxx) (xxx) (xxx) (xxx) XXX P a g e 198

199 Sec 80GGA - Donations for Scientific Research or Rural Development Note: No deduction shall be allowed under this section in respect of donation of any sum exceeding ten thousand rupees if paid by way of cash Sec 80GGB - Contributions to Political Parties by Companies Note: No deduction if paid by way of cash Sec 80GGB - Contributions to Political Parties by any person other than a company Note: No deduction if paid by way of cash P a g e 199

200 Sec 80GG - Payments towards Rent CA Gaurav Rajaram Rs 5,000 per month Conditions a) The assessee should not be in receipt of house rent allowance exempt u/s. 10(13A) or rent free accommodation; b) The assessee should pay rent for the residential accommodation; c) The assessee, or spouse, or minor child or the HUF in which he is a member should not own any residential accommodation at that place where such an assessee ordinarily resides or at the place where he works or carries on business or profession; d) If the assessee owns any residential accommodation at any place other than place of residence or work of the assessee, then such property should not be assessed as a self occupied property P a g e 200

201 Sec. 80TT A - Interest On Deposits in Savings Account upto Rs 10,000 Eligible assessee: Individual or a HUF. Eligible Income: Any savings account interest from a bank, a co-operative society or a post office. Important Note: 1. Interest on Time Deposit, Recurring Deposit and Fixed Deposit not be eligible for deduction. Income based deductions 1. Sec. 80JJA - Profits and gains from business of collecting and processing of bio-degradable waste Eligible assessee: All assessees Eligible business Collecting and processing or treating of bio-degradable waste for generating power or producing biofertilizers, bio-pesticides or other biological agents or for producing biogas or making pellets or briquettes for fuel or organic manure. Quantum and period of deduction: 100% of profits and gains derived for 5 consecutive years 2. Sec. 80JJAA - Deduction in respect of Employment of New Workmen Eligible assessee: Any assessee to whom section 44AB applies and has profits and gains from business Quantum and period of deduction: An amount equal to 30% of additional employee cost incurred for a period of 3 years starting from the PY in which such employment is provided. (In total 90%) Conditions to be satisfied 1. Payment should be made through account payee cheque/draft or through online bank transfer. 2. There should be an actual increase in the number of employees compared to the last day of previous PY 3. Total payment to such employee must not be more than Rs 25, Employment should be for atleast 240 days (150 days in case of apparel business) 5. The government should not pay under the Notified Employees Pension Scheme 6. Employee should participate in RPF P a g e 201

202 Deduction for Royalty income CA Gaurav Rajaram Sec. 80QQB - For authors other than text books Eligible Assessee: Resident individual Nature of royalty Quantum eligible Rs. In case of Lump sum royalty Amount received or receivable XXX In case of royalty otherwise than by way of lump sum (i.e., as a percentage of sales) Eligible income Maximum 15% of the value of books sold shall be allowed XXX XXX Amount of deduction = Amount of eligible income computed as above or Rs. 3,00,000 WIL 4. Sec. 80RRB - Royalty on patents Eligible assesses: Resident individuals Deduction shall be allowed in respect of any income by way of royalty in respect of a registered patent to the extent of the whole of such income or Rs. 3 lakhs, whichever is less. Common Points For the purpose of Sec. 80QQB and Sec. 80RRB, where an assessee claims deduction under the respective section, no deduction in respect of the same income shall be allowed under any other provision in any assessment year. Problems 1. X is a Personal Secretary of a Managing director in a public sector undertaking. X suffers from severe physical disability. Monthly salary drawn is Rs. 12,000. Further, interest is earned on Fixed deposits with banks Rs. 15,000, interest on deposits with private companies Rs. 7,000 and income from UTI Rs. 2,000. You are required to compute the taxable income of X for AY The gross total income of Mr. Nepalia for the AY was Rs. 12,00,000. He has made the following investments/payments during the year: (a) LIC premium paid (Policy value Rs. 1,00,000) 25,000 (b) PPF amount paid 50,000 (c) Repayment of housing loan to Indian bank 1,00,000 (d) Payment made to LIC Pension fund 20,000 (e) Medical insurance premium for self, wife and dependent children 18,000 (f) Mediclaim premium for parents (aged over 80 years) 30,000 Compute eligible deduction under chapter VI-A for the AY P a g e 202

203 3. Mr. Chaturvedi having a gross total income of Rs. 6,35,000 for the AY furnishes you the following information: (i) Deposited Rs. 50,000 in tax saver deposit in the name of major son in a nationalized bank. (ii) Paid Rs. 25,000 towards premium on life insurance policy of his married daughter. (iii) Contributed Rs.10,000 to Prime Minister s National relief fund. (iv) Donated Rs. 20,000 to a Government recognized scientific research. (v) Contributed Rs 1,00,000 to Clean Ganga Fund Assume that gross total income of Mr. Chaturvedi does not include any income under the head "Profits and gains from business or profession". Compute the total income of Mr. Chaturvedi for the AY Mr. Kalpesh borrowed a sum of Rs. 30 lakhs from the National Housing Bank towards purchase of a residential flat (self-occupied) whose value was Rs 48 lakh (at 10% p.a). The loan amount was disbursed directly to the flat promoter by the bank. The construction was completed on 31/3/2018 and principal and interest repayments had begun. Principal repaid was Rs 10,000 along with applicable interest. In the light of the above facts, state: a) Whether Mr. Kalpesh can claim deductions u/s. 24 in respect of interest for the AY ; b) Whether deduction under Chapter-VIA can be claimed for the assessment year, even though the construction was completed at the end of the year. P a g e 203

204 FILING OF RETURN OF INCOME Due dates for filing return of incomes "Filing your own income tax returns is like robbing yourself" Assessees required to file TP Report u/s 92E Assessee Companies, Assessees liable for Tax Audit, Working Partner of a Firm liable for Tax Audit Other Assessees if GTI exceeds BEL before giving effect to deductions under Chapter VI-A and LTCG which is exempt u/s 10(38) Due Date 30 th November 30 th September 31 st July In the case of a resident and ordinarily resident, who is not required to furnish a return u/s. 139(1) and who during the previous year has the following, shall be required to furnish on or before the due date a return in respect of his income or loss. (i) any asset (including any financial interest in any entity) located outside India; or (ii) signing authority in any account located outside India, Returns by Trusts - Sec. 139(4A) Required to furnish a return of the total income if it exceeds the maximum amount which is not chargeable to tax i.e., Rs. 2,50,000, before giving effect to the provisions of sections 11 and 12. The due date for filing return of income of the trust would be 30 th September of the relevant assessment year. Returns by political parties - Sec. 139(4B) The Chief Executive Officer of every political party shall furnish a return of income in respect of which the political party is assessable if it exceeds the maximum amount which is not chargeable to tax i.e., Rs. 2,50,000 before giving effect to the provisions of Sec. 13A. Therefore, the due date for filing the return of income is 30 th September of the relevant assessment year. P a g e 204

205 Returns by certain associations/institutions - Sec. 139(4C) CA Gaurav Rajaram The following entities shall furnish their return of income in accordance with the Sec. 139(1) where the total income before giving effect to exemption u/s. 10, exceeds the maximum amount not chargeable to tax i.e., Rs. 2,50,000: (a) Research association covered u/s. 10(21); (b) News agency covered u/s. 10(22B); (c) Association or Institution referred to in Sec. 10(23A)/(23B); (d) Fund or Institution, University or other educational institution or hospital or other medical institution (e) Trade union or association covered u/s. 10(24); (f) Body or Authority or Board or Trust or Commission as referred u/s. 10(46); (g) Infrastructure debt fund covered u/s. 10(47); (h) Mutual Fund covered u/s 10(23D]; (i) Securitisation trust covered u/s 10(23DA); and (j) Venture capital company or venture capital fund referred to in section 10(23FB). ROI by approved research institutions - Sec. 139 (4D) Every University, College or other institutions approved under sections 35(1) (ii) or 35(1) (iii) (Research associations with the object of scientific research, social science or statistical research), which is not required to file return of income under any other provisions of sec. 139, shall furnish the return of income or loss for every previous year. The return so furnished shall be considered as return filed u/s. 139(1), Return by Business Trust - Sec. 139 (4E) Every business trust which is not required to furnish the return of its income or loss under any other provisions of this section, shall furnish the same in every previous year and all the provisions of this Act shall apply as if such return is required to be furnished under Sec. 139(1). Return by Investment Fund - Sec. 139 (4F) Every investment fund which is not required to furnish the return of its income or loss under any other provisions of this section, shall furnish the same in every previous year and all the provisions of this Act shall apply as if such return is required to be furnished under Sec. 139(1). 1. State whether filing of income tax return is mandatory for the AY : Particulars Income (i) Research association eligible for exemption u/s. 10(21) 2,10,000 (ii) Registered trade union eligible for exemption u/s. 10(24) Income from house property (computed) 60,000 Income from other sources (computed) 40,000 (iii) A charitable trust registered u/s. 12AA, having total income of 2,90,000 (iv) A Limited Liability Partnership (LLP) with business loss of (1,30,000) P a g e 205

206 Section 139(3) Loss Return CA Gaurav Rajaram In order to carry forward losses under Business or Profession, Capital Gains and Other Sources, return needs to be filed within time limit u/s 139(1). Loss from specified business can also not be carried forward if return not filed within the due date u/s 139(1) The above mentioned condition does not apply to unabsorbed depreciation u/s. 32(2) and loss under the head "Income from house property" u/s. 71B. Section 139(4) Belated Return Belated returns may be filed within the end of the Assessment Year or within completion of assessment, whichever is earlier. (Also, refer to restriction on c/f of losses above) Further, penalty of Rs 5,000 will be levied u/s 271F + Interest u/s 234A Note: Assessee may make an application to the CBDT for relaxation of time to carry forward losses. CBDT has such powers u/s 119 Section 139(5) Revised Return A return may be revised can be filed if the following conditions are satisfied: Original Return is filed with due dates in Section 139(1) or u/s 139(4) Assessee discovers omission or mistake in the earlier return Such revised return is filed within the end of the Assessment Year or within completion of assessment, whichever is earlier The revised return effectively replaces the original return. A return may be revised any number of time before the above time limit. Earlier, you could not file revised return if original return was belated. Now this has also been made possible. 2. Mr. Yoganandh filed a return of income on (original return) for the AY returning a taxable income of Rs. 10,00,000. Later on, he filed a revised return declaring a loss of Rs. 6,00,000. Advise on the validity of the loss. Would your answer be different had the assessee filed the original return on ? Circumstances when a return can be treated as defective A return of income can be regarded as defective by the Assessing Officer under the following circumstances: (a) Annexures, statements and columns in the return of income have not been duly filled; (b) The tax together with interest, if any, payable in accordance with the provisions of Sec. 140A (Self-assessment tax), has not been paid on or before the date of furnishing the ROI (omitted) P a g e 206

207 3. Mr. Srikar deriving rental income, paid advance tax for quarter ending on but failed to pay interest on delayed payment of advance tax. On he furnished his ROI and later he realised and remitted interest on delayed remittance on Mr. Srikar contented that since the payment was made before the due date of furnishing return, the return is not a defective return. Examine the correctness. Procedure for rectifying the defect The assessee may be called upon to rectify the defect within 15 days from the date of service or within such extended time allowed on application by the assessee. If the defect is not so rectified then the AO shall treat the return of income as an invalid return However, if the assesse rectifies the defect after the time allowed but before the assessment is made, the AO is empowered to condone the delay and treat the return as valid. 4. An assessing officer finds a defect in the return of income and intimated the defect Vide letter dated , which was received by Mr. Ram on What is the date by which Mr. Ram has to rectify the defect, assuming that Mr. Ram has not applied for extension of time? Section 234F - Fee for default in furnishing return of income. (a) five thousand rupees, if the return is furnished on or before the 31st day of December of the assessment year; (b) ten thousand rupees in any other case: Provided that if the total income of the person does not exceed five lakh rupees, the fee payable under this section shall not exceed one thousand rupees. (2) The provisions of this section shall apply in respect of return of income required to be furnished for the assessment year commencing on or after the 1st day of April, Section 139AA - It is mandatory to quote Aadhar Number (or 28 digit enrolment number) in an application form for allotment of PAN and while filing return of income. If not done, PAN shall be deemed as invalid. P a g e 207

208 Mandatory quoting of PAN (Mandatorily required for RoI filing in addition to the following) A) Purchase or sale of Assets (i) Securities (a) Any contract for sale or purchase of securities of a value of exceeding Rs. 1 lakh; (b) Making an application for purchase of mutual fund units for an amount of Rs. 50,000 or more; (c) Making an application for an amount exceeding Rs. 50,000 for the following purposes: i. purchase of mutual fund; ii. acquiring shares of a company through public issue or rights issue; iii. acquiring debentures or bonds of a company or institution; and iv. acquiring bonds of Reserve Bank of India. (ii) Other assets (a) Sale or purchase of any immovable property valued at Rs. 5 lakhs or more; (b) Sale or purchase of motor vehicle or vehicle (c) Payment to a dealer - 1) of an amount of Rs. 5 lakh or more; 2) against a bill for an amount of Rs. 5 lakh or more for purchase of bullion or jewellery. B) Transactions with Banks/Post Office (a) Opening an account with a banking company: (b) A deposit, exceeding Rs. 50,000 in any account with Post Office Savings Bank; (c) A Time deposit with a banking company exceeding Rs. 50,000. (d) Cash deposits aggregating Rs. 50,000 or more with a banking company during anyone day; (e) Making an application to any bank or banking institution or company or any institution for issue of a credit card or debit card. C) Other Transactions (a) Making an application for installation of a telephone connection including a cellular phone connection; (b) Payments to hotels and restaurants against their bills for an amount exceeding Rs. 25,000 (c) Cash payment exceeding Rs. 25,000 in connection with travel to any foreign country (d) Payment of Life Insurance premium aggregating Rs. 50,000 or more in a year to an insurer. P a g e 208

209 Return By Whom To Be Verified - Sec. 140 Assessee CA Gaurav Rajaram Verified by 1. Individual Himself When absent from India; mentally incapacitated; His guardian or any other person for any other reason he is not able to sign. competent to act on his behalf duly authorized by him. 2. H.U.F. Karta Where Karta is absent from India or is Any other adult member of Mentally incapacitated the family 3. Company Managing Director Where M.D. is unable to sign or where no MD Any other director When company is not resident in India Any person who holds a valid Power of Attorney from the company When company is in liquidation When the company s management is taken Over by the Government. The liquidator The Principal Officer 4. Partnership firm Managing partner Where for any unavoidable reason, Any other partner not being a minor Managing partner is not able to sign or there is no managing partner 5. Limited Liability Partnership Designated partner Where for any unavoidable reason, designated Any other partner partner is not able to sign or there is no designated partner 6. Local Authority Principal Officer 7. Political party Chief Executive Officer 8. Association of Person Any member or Principal Officer 9. Any other person That person or some other person who is competent to act on his behalf 5. Mr. Vineeth submits his return of income on for AY consisting of income under the head house property and other sources. On , he realised that he had not claimed deduction u/s. 80 TTA in respect of his income on the savings bank account. He wants to revise his return of income. Discuss. P a g e 209

210 6. Where the Karta of a Hindu Undivided Family is absent from India, the return of income can be signed by any male member of the family? Give reasoning for the statement to be true or false. 7. State with the reasons whether you agree or disagree with the following statements: (a) Return of income of Limited Liability Partnership (LLP) could be signed by any partner. (b) Time limit for filing return u/s. 139(1) in the case of Mr. A having total turnover of Rs. 45 lakhs for the year ended , whether or not opting to offer presumptive income u/s. 44AD is 30 th September, 2018 P a g e 210

211 TAX DEDUCTION AT SOURCE Section Nature of Payment Limit Rate 192 Salaries Basic Exemption Limit As per slabs 192A Premature withdrawal from RPF Rs 50,000 With Pan - 10% If no PAN, then MMR 193 Interest on securities Rs. 5000/- 10% 194 Dividend Rs 2,500 10% 194 A Interest other than interest on securities Rs. 5,000 Rs 10000/- (Banking Cos) 10% 194 B Winnings from Lotteries / Puzzle / Game Rs /- 30% 194 BB Winnings from Horse Race Rs 10,00 30% 194 C Payment to Contractors for "work" No TDS on payment to goods transporters if they furnish PAN (See Note) Rs /- single Rs 1,00,000/- cumulative 1% Indi, HUF 2% Others 194 D Payment of Insurance Commission Rs. 15,000/- 5% 194 DA Proceeds from Life Insurance Rs 1,00,000 1% 194E Income for participation in any game or sport in India; income by way of advertisement; Income by way of remuneration for articles on sports - 20% 194 G Commission on Sale of Lottery tickets Rs. 15,000/- 5% 194 H Commission or Brokerage Rs. 15,000/- 5% 194 I Rent of Land, Building or Furniture Rs /- 10% 194 I Rent of Plant, Machinery and Equipment Rs /- 2% P a g e 211

212 194 IA Sale of immovable property Rs 50,00,000/- 1% 194 IB Rent paid by Individual or HUF who is not required to get audit u/s 44AB 50,000 per month or part of month 5% 194 IC Amount paid under a JDA NA 10% 194 J Professional, technical services, royalty, non compete fee Rs /- 10% (Call centre 2%) 194 J 194 LA Remuneration / commission to director of the company Compensation on acquisition of certain immovable property - 10% Rs. 2,50,000/- 10% 195 Any sum chargeable as income (other than salaries) to non residents NA NA Important Note for TDS Deduction of taxes at source will be required only if Individual or HUF is liable for Tax Audit in the immediately preceeding previous year If payment is made for personal purposes, individual and HUF need not deduct taxes at source If PAN not given to payer, TDS at 20% (206AA) Payments in respect of life insurance policy - Sec. 194DA Any person responsible for paying to a resident any sum under a life insurance policy which is not exempt u/s. 10(10D), shall deduct 2%/1% at the time of payment. However, this section shall not apply where the payment or aggregate of payments to- the payee during the financial year does not exceed Rs. 1 lakh. Exemption u/s 10(10D) is given for Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is fully exempt from tax. For the following however, there are no exceptions: (a) any sum received under a Keyman insurance policy; or (b) any sum received under an insurance policy issued in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured P a g e 212

213 (15% of insurance on life of any person, who is a person with disability or a person with severe disability as referred to in section 80U or suffering from disease or ailment as specified in the rules made under section 80DDB) Note: The above restriction shall not apply to any sum received on the death of a person Sec. 194C: The payments made to transporters carrying on the business of plying, hiring, or leasing of goods carriages is not liable for deduction of tax at source, if the transporter furnishes his Permanent Account Number to the payer. From 01 st June 2015, this exemption from deduction of tax at source will be available only to such transporters who fulfill the following conditions: a. owns not more than 10 goods carriages at any time during the previous year; b. is engaged in the business of plying, hiring or leasing goods carriages; and c. has furnished a declaration to this effect along with his PAN. Section 194-IB. (Newly inserted section w.e.f AY ) (1) Any person, being an individual or a Hindu undivided family (other than those covered by audit u/s 44AB), responsible for paying to a resident any income by way of rent exceeding fifty thousand rupees for a month or part of a month during the previous year, shall deduct an amount equal to five per cent of such income as income-tax thereon. (2) The income-tax referred to in sub-section (1) shall be deducted on such income at the time of credit of rent, for the last month of the previous year or the last month of tenancy, if the property is vacated during the year, as the case may be, to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. Problems 1. Compute amount of tax deduction at source on the following payments made by M/s. S Ltd. during the financial year as per the provisions of the Income-tax Act. Sl. Date Nature of Payment (i) Payment of Rs. 2,00,000 to Mr. R a transporter who is having PAN and he has 15 goods vehicles during the year (ii) Payment of fee for technical services of Rs. 25,000 and Royalty of Rs. 20,000 to Mr. Shyam who is having PAN. (iii) Payment of Rs. 25,000 to M/s. X Ltd. for repair of building. (iv) Payment of Rs. 2,00,000 made to Mr. A for purchase of diaries made according to specifications of M/s. S Ltd. However, no material was supplied for such diaries to Mr. A by M/s. S Ltd. P a g e 213

214 (v) Payment made Rs. 80,000 to Mr. Bharat for compulsory acquisition of his house as per Law of the State Government. (vi) Payment of commission of Rs. 6,000 to Mr. Y. Answer (i) Where the payee contractor is engaged in the business of plying, hiring or leasing goods carriages, any freight charges payable to such contractor shall not be subject to tax deduction at source in case he furnishes PAN to the person responsible for deducting tax (upto 1st June 2015) From 01 st June 2015, this exemption from deduction of tax at source will be available only to such transporters who fulfill the following conditions: a. owns not more than 10 goods carriages at any time during the previous year; b. is engaged in the business of plying, hiring or leasing goods carriages; and c. has furnished a declaration to this effect along with his PAN. Since, in this case, Mr. R has 15 goods vehicles and the payment is made after 1st June 2015, S Ltd needs to deduct 1% of the amount paid under the TDS Provisions. (as Mr R, the payee is an individual). (ii) The requirement to deduct tax at source in respect of fees for technical services or royalty is covered u/s. 194J in case the amount exceeds Rs. 30,000 in a financial year. The Proviso to section 194J contemplates independent limit of Rs. 30,000 each towards - a) fees for technical services and b) Royalty. Hence tax shall not be deducted. (iii) The payer is responsible to deduct tax at source u/s. 194C where the amount of any single sum credited or paid to the contractor exceeds Rs. 30,000. Hence tax shall not be deducted. (iv) In respect of manufacturing or supplying of product according to the specification or requirement of a customer, where a contractor uses materials purchased from any other person other than such customer, the same shall not be considered as work. Therefore, in the given case, responsibility to deduct tax does not arise. (v) No deduction u/s. 194LA shall be required where the aggregate amount of payments during the financial year does not exceed Rs. 2,50,000. Hence requirement to deduct tax at source does not arise (vi) Any person paying commission or brokerage exceeding Rs. 15,000 per annum is liable to deduct tax at source u/s. 194H. Hence tax shall not be deducted as amount is less than Rs 15, Ashwin doing manufacture and wholesale trade furnishes you the following info about his turnover: Year Rs ,05,00, ,00,000 P a g e 214

215 State whether tax deduction at source are attracted for the below said expenses incurred during the financial year : Particulars Rs. Answer Interest paid to UCO Bank 41,000 Contract payment to Raj (2 Contracts of Rs.12,000/- each) 24,000 Shop rent paid (One payee) 1,90,000 Commission paid to Balu 17,000 As the turnover of Ashwin for FY , i.e. Rs. 1,05,00,000, has exceeded the monetary limit of Rs. 1,00,00,000 u/s. 44AB, he shall be responsible to comply with the provisions of tax deduction during the FY Interest paid to UCO Bank TDS u/s. 194A is not attracted in respect of interest paid to a banking company. 2. Contract payment of Rs. 24,000 to Raj for 2 contracts of Rs. 12,000 each TDS provisions u/s. 194C would not be attracted if the amount paid to a contractor does not exceed Rs. 30,000 in a single payment or Rs. 1,00,000 in the aggregate during the financial year. Therefore, TDS provisions u/s. 194C are not attracted in this case. 3. Shop Rent paid to one payee Tax shall be deducted u/s. 194-I as the rental payment exceeds Rs. 1,80,000 (at 10%) 4. Commission paid to Balu Tax shall be deducted u/s. 194H as the commission exceed Rs. 15,000 (at 5%) 3. Mrs. Hemalatha has made payments of Rs. 5 lakhs to a contractor (for personal purposes) during the last two quarters of the year ended Her turnover for the year ended was Rs. 175 lakhs. Is there any obligation to deduct tax at source? P a g e 215

216 ADVANCE TAX It is a mechanism of collection of taxes in advance like TDS. Advance Tax required to be paid by all assessee where amount of tax payable by the assessee during that year is Rs 10,000 or more Exemption From Payment Of Advance Tax a) A resident senior citizen aged 60 years or more and does not have any income chargeable under the head "Profits and gains of business or profession" is not required to pay advance tax - Sec. 207; b) Advance tax need not be paid in case where the amount of such tax payable by the assessee during that year is less than Rs. 10,000. Method of Calculation of Estimated Advance Tax and installment dates Particulars Estimated taxable income for the year Tax on estimated income as per rates applicable Less: Taxes deducted at source Amount payable as advance tax Amount (Rs) XXX XXX (xxx) XXX Installment date % of tax to be deposited (no difference between Corporate or Non Corporate) 1) 15 th June Not less than 15% 2) 15 th September Not less than 45% 3) 15 th December Not less than 75% 4) 15 th March 100% of such advance tax If assessee opts for 44AD or 44ADA, he can pay full amount in one single installment on or before March 15th. Interest for default of payment of advance tax - Section 234 A, B and C Under Section 234A Interest for default in furnishing of return of income Applicable if return of income furnished after due date P a g e 216

217 Interest = 1% p.m or part of month x Tax on assessed income Credit can be taken for Advance Tax already paid and Taxes Deducted at Source No interest u/s 234A if full taxes paid before due date but only return filing is delayed Under Section 234B Interest for default in payment of advance tax Applicable if advance tax paid is less than 90% of assessed tax Interest = 1% p.m or part of month x Shortfall in advance tax paid on assessed income Credit can be taken for Advance Tax already paid and Taxes Deducted at Source Under Section 234C Interest for deferment of advance tax Applicable if advance tax paid is less than the specified percentages mentioned earlier Concession of 12% and 36% for 1 st and 2 nd instalment respectively If above not paid, then interest to be charged on tax calculated at 15% and 45% respectively Interest = 1% p.m or part of month x Shortfall of advance tax Credit can be taken for Advance Tax already paid and Taxes Deducted at Source If there is shortfall due to wrong estimation of dividend received which is taxable u/s 115BBDA, no interest u/s 234C. Calculate interest u/s 234 A, B and C for the following information 1. Total income of Vijay is Rs 3,40,000. No advance tax has been paid during the year. 2. Mr Anand had a total income of Rs 1,90,000. He filed his return on 31st December, 5 months after the due date. 3. Mr Sharma had earned income on which tax payable was Rs 1,00,000. He had not paid any advance tax during the year. He filed his return on 31 st July and paid taxes due on that date. 4. The tax payable for the assessment year by an individual is Rs.1,50,000. He has deposited the following amount as advance tax : Date Rs , , , ,000 Calculate the interest to be paid under section 234C. If the amounts were Rs 20,000, Rs 40,000, Rs 55,000 and Rs 30,000, show how the answer would change. P a g e 217

218 ALTERNATE MINIMUM TAX (AMT) (a) The provisions of Sec. 115JC dealing with Alternate Minimum Tax (AMT) shall apply in respect of all assessee, other than a company. (b) Where the regular income tax payable by a person is less than the alternate minimum tax payable for the previous year, then the adjusted total income shall be deemed to be the total income of that person for such previous year and he shall be liable to pay income tax on such total 18.5%. (c) Therefore for every assessment year two parallel computations are required to be made. The first being computation of total income in accordance with the normal provisions of the Act and another based on "adjusted total income" as stipulated u/s. 115JC. Applicability of AMT - Sec. 115JEE The provisions relating to AMT shall apply to any person who has claimed any deduction under- 1. Sections 80-IA, 80-IAB, 80-lB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80LA, 80QQB and 80RRB specified under Chapter VI-A and dealing with "Deductions in respect of certain incomes"; or 2. Section 10AA; or 3. Section 35AD. The provisions of AMT shall not apply to an individual or a HUF or an AOP or BOI or an artificial juridical person if the adjusted total income of such person does not exceed Rs. 20 lakhs. P a g e 218

219 Illustrations CA Gaurav Rajaram Sachin LLP has computed its taxable income at Rs. 16,00,000 after availing deduction u/s. 10AA to the tune of Rs. 1,30,00,000. You are required to advise the LLP on the tax payable for AY Ans: Computation of tax payable of Sachin, LLP Particulars Rs. Step - I: Total income as per normal provisions 16,00,000 Tax@ 30% (A) 4,80,000 Step - II: Total Income computed as per the normal provisions 16,00,000 Add: Adjustments u/s. 115JC-Deduction u/s. 10AA 1,30,00,000 Adjusted total income 1,46,00,000 Compute 18.5% of Adjusted total income (B) 27,01,000 Higher of (A) or (B) shall be the tax payable u/s 115JC (C) 27,01,000 Add: 12% 3,24,120 30,25,120 Add: Education 3% 90,754 Total tax payable 31,15,874 AMT Credit of Rs 27,01,000-4,80,000 = 22,21,000 can be carried forward for 15 Assessment Years P a g e 219

220 2. In the case of AB & Associates, a proprietary concern, compute AMT credit available u/s. 115JD at the end of the following years. Ans: Assessment Year Tax on total income Tax on Adjusted Total Income u/s. 115JC ,50,000 9,50, ,20,000 6,80,000 A. Computation of AMT credit u/s. 115JD of AB & Associates AY Particulars Rs. Tax on total income as per normal provisions 7,50,000 Tax on adjusted total income u/s. 115JC 9,50,000 Total tax payable - Higher of the above 9,50,000 Tax credit (9,50,000-7,50,000) u/s. 115JD 2,00,000 Tax credit of Rs. 2,00,000 is available for carry forward for a period of 15 assessment years. B. Computation of AMT credit u/s. 115JD of AB & Associates AY Particulars Rs. Tax on total income as per normal provisions 8,20,000 Tax on adjusted total income u/s. 115JC 6,80,000 Total tax payable - Higher of the above 8,20,000 Less: Tax Credit available Rs 2,00,000 (restricted to) 1,40,000 Notes: Final tax payable 6,80, As the tax payable on total income under normal provisions is more than the tax payable under Alternative Minimum Tax, the tax credit brought forward from the AY can be utilised for set off against the excess of tax payable under the normal provisions over the tax payable u/s. 115JC. The remaining tax credit, if any, can be carried forward. 2. Tax credit available for carry forward u/s. 115JD after set off is Rs. 60,000 (2,00,000-1,40,000) This shall be carried forward for subsequent 14 assessment years. P a g e 220

221 3. Mr. X, an individual, derived total income of Rs. 30,00,000 after claiming deduction u/s. 35AD for capital assets amounting to Rs. 2,00,000. Depreciation eligible u/s. 32 is Rs. 30,000. Compute the tax liability. Ans: Computation of Tax liability of Mr. X Step: 1 Total income computed as per normal provisions 30,00,000 Income tax on above as per normal provisions (2,50,000*5% + 5,00,000*20% + 20,00,000*30%) 7,12,500 (A) Step: 2 Total income computed as per normal provisions 30,00,000 Add: Deduction u/s. 35AD 2,00,000 Less: Depreciation u/s. 32 on above at 15% (30,000) Adjusted Total income 31,70, % of Adjusted Total income 5,86,450 (B) Higher of (A) or (B) shall be the Tax payable 7,12,500 Add: Education 3% 21,375 Final Tax Payable 7,33,875 Note: Since, tax payable as per the normal provisions exceeds 18.5% of Adjusted Total Income, Tax payable as per the normal provisions shall be the tax liability of Mr. X. No surcharge as income does not exceed Rs 50 lakh or 1 Crore. P a g e 221

222 EXEMPTIONS TO CERTAIN ASSESSEES Section 10AA - Exemption of export profits Condition 1: The assessee is an entrepreneur as defined in section 2(j) of SEZ Act, Condition 2: The unit in Special Economic Zone begins to manufacture or produce articles or things or provide services during the financial year or any subsequent year. Condition 3: The assessee has exported goods or provided services out of India from the Special Economic Zone by land, sea, air or by any other mode, whether physical or otherwise. Quantum of exemption Years Quantum % of export profits % of export profits Amount transferred to Special Economic Zone Re-investment Reserve Account or 50% of Profits whichever is lower Calculation of eligible exemption Export Turnover x Profit of undertaking Total Turnover Note: export turnover means the consideration in respect of export by the undertaking of articles or things or services received in, or brought into India by the assessee, but does not include the following: 1. freight and telecommunication charges 2. insurance attributable to the delivery of the articles or things or computer software outside India 3. expenses, if any, incurred in foreign exchange in providing the technical services outside India P a g e 222

223 Problems CA Gaurav Rajaram Mr. Pranay is running two industrial undertakings, one in a SEZ (Unit A) and another in a DTA (Unit B). The brief details for the year ended are as under: Particulars Amount (Rs in lacs) Unit A Unit B Domestic turnover Export turnover 120 Nil Gross Profit Less: Expenses and depreciation Profits derived from the units 13 5 The brought forward business loss pertaining to assessment year for Unit B is Rs 3.2 lacs. Briefly compute the business income of the assessee. 2. Y Co. Ltd. furnishes you the following information for the year ended : Particulars Rs (in lacs) Total turnover of Unit A located in Special Economic Zone 100 Profit of the business of Unit A 30 Export turnover of Unit A 50 Total turnover of Unit B located in Domestic Tariff Area (DTA) 200 Profit of the business of Unit B 20 Compute deduction under section 10AA P a g e 223

224 Section 11 - Charitable and Religious Trusts Conditions for exemption 1. Registration with CIT u/s 12AA as a Public Charitable Trust 2. If Total income exceeds Rs 2.5 lakh (BEL), accounts should be audited 3. 85% of income should be applied for approved purposes (corpus donations excluded) 4. The unapplied income or money set aside must be used for specified purposes (Form 10 must be filed on or before the due date for filing its return of income as specified u/s.139(1) Power to deny exemption Exemption of any income from the total income of the previous year as provided u/s. 11 shall be denied to a Trust or Institution, if; a) Form 10 is not furnished on or before the due date specified under Section 139(1) for furnishing the return of income for the previous year; or b) The return of income is not furnished by such person on or before the due date specified under Section 139(1) for furnishing the return of income. Cancellation of Registration At present, the Commissioner can cancel the registration granted to a trust or institution under the following two circumstances: i. The activities are not genuine; or ii. The activities are not being carried out in accordance with the objects of the trust or institution. It is further provided that the Commissioner may cancel the registration granted to a trust or institution if it is noticed that its activities are being carried out in such a manner that: i. its income does not ensure for the benefit of general public; ii. it is for benefit of any particular religious community or caste iii. any income or property of the trust is applied for benefit of specified persons like author of trust, trustees, etc or iv. its funds are invested in prohibited modes. However, no such cancellation can be done if such trust or institution proves that there was a reasonable cause for the activities to be carried out in the above manner. Note: Public Charitable Trust should have its objects falling within the meaning of 'Charitable Purpose' u/s 2(15) P a g e 224

225 Definition of Charitable purpose CA Gaurav Rajaram Relief of the poor 2. Education 3. Medical relief 4. Preservation of environment 5. Preservation of monuments or places or objects of artistic or historical interest 6. Yoga 7. Advancement of any other object of general public utility Note: For objects 1-6, the entity may earn business income and it would quality for exemption. But for Object 7 (Advancement of any other object of general public utility), aggregate receipts from such activity or activities in the nature of trade, commerce or business should not exceed 20% of the total receipts of the trust undertaking such activity, for the previous year. Clarification in application of funds In the case of a trust or an institution, exemption is available subject to fulfilment of the condition that 85% of the income shall be applied or accumulated. For this purpose, both revenue expenditure and capital expenditure relating to the objects shall be treated as application of income. No deduction or allowance by way of depreciation or otherwise, in respect of any asset which has been claimed as an application of income in any year shall be allowed in determination of the income of such trust or institution. Note that Corpus Donations are excluded while calculating 85% Taxability of anonymous donations Anonymous donations subject to tax at 30% after deducting 5% of total donations or Rs 1 Lakh, whichever is higher Note: Anonymous donations not taxable in the case of 1. Trust established for religious purposes 2. Trust established for charitable and religious purposes when such donation is for religious purposes 3. University, educational institutions and hospitals wholly financed by the Government P a g e 225

226 Illustration 1 CA Gaurav Rajaram KR Mission, an Association of Persons furnishes the following details for the year: 1. Voluntary Contributions received Rs 60,00, Amount spent for objects Rs 50,00,000 Examine the taxability of KR Mission if it is a Public Charitable Trust Answer Particulars Rs Rs Voluntary Contributions 60,00,000 Less: 15% exempt without being spent (9,00,000) Balance to be applied for objects 51,00,000 Less: Amount applied for objects (50,00,000) Taxable amount as per applicable rates 1,00,000 Illustration 2 Anand Mission, a religious trust furnishes the following details for the year. Examine the taxability 1. Voluntary Contributions received Rs 60,00, Amount spent for objects Rs 50,00, Anonymous donations included in 1 Rs 12,00,000 Answer Particulars Rs Rs Voluntary Contributions 60,00,000 Less: 15% exempt without being spent (9,00,000) Balance to be applied for objects 51,00,000 Less: Amount applied for objects (50,00,000) Taxable amount as per applicable rates 1,00,000 Illustration 3 Anand Mission, established for charitable and religious purpose furnishes the following details for the year. Examine the taxability 1. Voluntary Contributions received Rs 60,00, Amount spent for objects Rs 50,00, Anonymous donations included in 1 Rs 12,00,000 (received for religious purposes) P a g e 226

227 Answer CA Gaurav Rajaram Particulars Rs Rs Voluntary Contributions 60,00,000 Less: 15% exempt without being spent (9,00,000) Balance to be applied for objects 51,00,000 Less: Amount applied for objects (50,00,000) Taxable amount as per applicable rates 1,00,000 Illustration 4 Anand Mission, established for charitable purpose furnishes the following details for the year. Examine the taxability 1. Voluntary Contributions received Rs 60,00, Amount spent for objects Rs 50,00, Anonymous donations included in 1 Rs 12,00,000 Answer Particulars Rs Rs Voluntary Contributions 60,00,000 Less: Taxable anonymous donations (WN 1) (9,00,000) Balance to spent for objects 51,00,000 Less: 15% exempt without being spent (7,65,000) Balance to be applied for objects 43,35,000 Less: Amount applied for objects 50,00,000 restricted to (43,35,000) Taxable amount as per applicable rates WN 1 - Taxable anonymous donations Anonymous donations received Rs 12,00,000 Less: 5% of total donations or Rs 1 Lakh, WIH ie., 60 lakh * 5% = 3 lakh or 1 Lakh (Rs 3,00,000) Taxable Anonymous donations Rs 9,00,000 NIL Hence, tax payable = 9,00,000 * 30% = Rs 2,70, % cess = Rs 2,78,100 P a g e 227

228 Illustration 5 CA Gaurav Rajaram ABC Trust, a public charitable trust received income net of expenses of Rs 15,00,000 and corpus donations of Rs 8,00,000. The entire corpus donations have been kept in Fixed Deposits. Out of Rs 15 lakhs, Rs 10,00,000 has been accumulated after informing the assessing officer and filing of Form 10 within prescribed time. Of the balance, Rs 1,00,000 has been spent for the objects of the trust. Determine taxability Particulars Rs Rs Income net of expenses 15,00,000 Less: 15% exempt without being spent (2,25,000) Balance to be applied 12,75,000 Less: Amount accumulated (10,00,000) Balance to be applied for objects 2,75,000 Less: Amount applied for objects (1,00,000) Taxable amount as per applicable rates 1,75,000 Note: Corpus Donations are donations for a specified purpose and not included in "Income" and hence not taxable Note: Amount accumulated has to be applied within a period of 5 years, otherwise it will be taxable as income P a g e 228

229 Section 13A and 13B - Political Parties and Electoral Trusts Exemption to Political Parties (Sec 13A) Exemption available for income from HP, Capital Gains, Other Sources and Voluntary Donations Conditions for exemption 1. Party is registered under the Representation of the People Act 2. Books of accounts are maintained and audited 3. Return of income is filed, if, before claiming exemption, the party has taxable income 4. Records are maintained w.r.t name and address of contributors of more than Rs 20,000 Exemption to Electoral Trusts (Sec 13B) Conditions for exemption 1. It distributes 95% of its aggregate donations + surplus b/f from last year to Political Parties 2. The parties it distributes to are registered under the Representation of the People Act 3. The electoral trust functions as per rules of the Central Government If the Electoral Trust fails to distribute 95% of its voluntary contributions, entire income subject to tax P a g e 229

230 TREATMENT OF AGRICULTURAL INCOME Agricultural income is exempt from tax as per section 10(1). Agricultural income includes (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house which the receiver of the rent or revenue or the cultivator uses as a dwelling house, or as a store-house, or other out-building and the building is assessed to land revenue Note: Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. However, aggregation of agricultural and non-agricultural income is to be done No aggregation in the following cases The agricultural income is not more than Rs 5,000 The non-agricultural income is less than the basic exemption limit Such aggregation has to be done only if the tax-payer is an individual, Hindu Undivided Family, body of individual, association of persons or an artificial judicial person. P a g e 230

231 The process of aggregation can be understood in the following example Let us assume that Mr.A. (age below 60 years) earns agricultural Income of Rs 2,00,000 and Non Agricultural Income of Rs 4,00,000 Step 1 : Add the agricultural income with non-agricultural income and determine the tax Non agricultural Income + Agricultural income (4,00, ,00,000) = Rs 6,00,000 Tax on Rs 6,00,000 is as follows: From Rs 2,50,000 to Rs 5,00,000 = 2,50,000 * 5% 12,500 From Rs 5,00,000 to Rs 6,00,000 = 1,00,000 * 20% 20,000 Final Tax Payable 32,500 Step 2 : Add the agricultural income with the basic exemption and determine the tax Basic Exemption + Agricultural income (2,50, ,00,000) = Rs 4,50,000 Tax on Rs 4,50,000 is as follows: From Rs 2,50,000 to Rs 4,50,000 = 2,00,000 * 5% 10,000 Final Tax Payable 10,000 Step 3 : The difference between the tax computed in step 1 and step 2 will be the tax payable Hence, final Tax Payable = Rs 32,500-10,000 Rs 22,500 Add: Education Cess at 3% Rs 675 Final Tax Payable Rs 23,175 If an assessee is earning business income which cannot be split exactly, the following rule will be used P a g e 231

232 List of important Section 10 Exemptions not covered in earlier discussions 10(2) - Any sum received from Hindu Undivided Family (HUF) 10(2A) - Share of Income from a Partnership Firm 10(4) - Interest on balance in a NRE Account in any bank in India to a Non Resident Section 10(10CC) - Tax on non-monetary perquisites paid by the employer Section 10(10D) - Amount received on life insurance policy In respect of policies issued on or before March 31st, 2012, the exemption is available only if the amount of premium paid on such policy in any financial year does not exceed 20%. If issued on or after 1st April, 2012, if the amount of premium paid on such policy in any financial year should not exceed 10% of the actual capital sum assured No exemption on key-man insurance or policies covered u/s 80DD 10(11A): Any payment from the account opened in accordance with the Sukanya Samriddhi Account Rules, 2014 shall not be included in the total income of the assessee. As a result, the interest accruing on deposits in and withdrawals from any account under the scheme is exempt. 10(15) - Interest on Post Office Savings Bank Account to the extent of Rs 3,500 for an individual account (Rs 7,000 for joint account) 10(15) - Interest on deposit certificates issued under Gold Monetisation Scheme, 2015 notified by Central Government 10(16) - Scholarships granted to meet the cost of education 10(17) - Daily allowance and Constituency Allowance to MP and MLA 10(35) - Income from UTI or Mutual Fund P a g e 232

233 Income Computation and Disclosure Standards The Central Government under Sec. 145(2), notified Income Computation and Disclosure Standards (lcds) to be followed by all the assessees for the purpose of computation of income chargeable to income - tax under the head "Profits and gains of-business or profession" or "Income from other sources". In the case of conflict between the provisions of the Income-tax Act, 1961 ("the Act") and Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. ICDS I - Accounting policies (AS 1) a) Fundamental accounting assumption of going concern, consistency and accrual are recognised. However, the concepts of materiality and prudence are not recognised. b) Considerations in selection and change of accounting policies 1. Presents a true and fair view of income 2. Substance over form 3. Non-recognition of marked to market loss or any expected loss 4. Accounting policies not to be changed without reasonable cause P a g e 233