CA Final Paper 7 Direct Tax Laws Ch13 Unit1 CA Sudhindra Kumar Jain

Definition Section 2(17) In Which Public Are Substantially Interested Section 2(18) Indian Company Section 2(26) Domestic Company Section 2(22A) Foreign Company Section 2(23A) 3

Income From House Property Income From Business Or Profession Capital Gains Income From Other Sources 5

Section 4 Charge Of Income Tax Section 5 Scope Of Total Income Section 6 Residence In India Section 9 Income Deemed To Accrue Or Arise In India Section 8 Dividend Income And Section 2(22) Deemed Dividend read with Section 115-O And Section 194 7

Section 2(1B) - Definition of Amalgamation Section 2(19AA) - Definition of Demerger Section 32 Allowability of Depreciation Section 35 DD - Amortisation of Expenditure in the case of : Amalgamation, Or Demerger 9

a) Transfer of Capital Assets in the scheme of Amalgamation [Section 47(vi)] b) Transfer of Shares in the scheme of Amalgamation [Section 47(via)] c) Transfer of Banking Company in the scheme of Amalgamation [Section 47(viaa)] d)transfer of Capital Assets by demerged company [Section 47(vib)] e)transfer of Shares by the demerged Foreign Company [Sections 47(vic)] f)transfer of Shares by resulting Co. to shareholders of Demerged Company [Sections 47(vid)] COST OF ACQUISITION OF A CAPITAL ASSET OR SHARES [Section 49(2), (2C), (2D)] 10

Carry Forward & Set off Of Losses in case of certain Companies Section 79 In The Case of Amalgamation or Demerger Section 72A In The Case of Amalgamation of A Banking Company Section 72AA Loss in Purchase and Sale of Shares in a Company Explanation to Section 73 12

Section 41(1) Cessation Of Liability Section 40A(2)(a) & (b) Expenditures held as Not Reasonable Section 68 Unexplained Cash Credit And Share Application Money Section 69 Unexplained Investments Section 140 Who Can Sign The Return Of Income? 14

Company in Liquidation [Section 178] Lifting of Corporate Veil Liability of Directors of a Private Limited Company [Section 179] Who Can Be Punished For An Offence Of A Company Speculative Transactions [Section 43(5)] And Speculative Business [Explanation 2 To Section 28] 15

Assessment Procedure Preparation Before Filing Of Return Of Income Obtaining Tax Audit Report (Section 44AB R/W Form 3CA + 3CD) Method of Accounting (Section 145 & 145 A) Computation Of Income Chargeable To Tax Computation Of Book Profit For The Purpose Of MAT (Section 115JB) Payment Of Self Assessment Tax (Section 140A) E-filing Of I.T. Return [Section 139(1), (3), (4) & (5)] 17

PROCESSING OF ROI [SECTION 143(1)] SELECTION OF CASE FOR SCRUTINY a) If No ROI is filed u/s 139(1)/(3), then issue notice u/s 142(1) / 148 b) If ROI is filed, then issue notice u/s 142(1) / 143(2) c)checking limitation, jurisdiction & compliance of notice 18

d) Scrutiny assessment Section 143(3) e) If satisfied with the assessment then pay the demand or receive the refund, if not satisfied, then file an appeal u/s 246A f) Compliance of show cause notice for penalty, if any g) Payment of demand or file application u/s 220(3) / (6) 19

If ROI is Not Filed Within the time prescribed u/s 139(1) / (3) If ROI is Filed, Intimation Issued u/s 143(1) & the Time for Issue of Notice u/s 143(2) has Lapsed Or Expired If Assessment is Completed u/s 143(3) & the Period of 4 / 6 Years has Not Expired, &, if A.O. has Reason to Believe that some Income has Escaped Assessment : 21

i) A.O. will record reasons (Section 147) ii) Take appropriate sanction (Section 151) iii) Issue notice u/s 148 within the time prescribed u/s 149. iv) Assessee will file R.O.I. in compliance to the notice u/s 148 v) Assessee may ask for the reasons recorded by the A.O. and file objections, if required vi) A.O. will dispose off the objection(s) first and then complete the assessment / re-assessment u/s 143(3) / 147 22

A) If Return of Income is not filed or no Compliance of Notice u/s 142(1) or 143(3) is made, Then: i) A.O. may issue final notice intimating that if compliance is not made, as required then the assessment shall be completed on merits / best judgement on the basis of information and evidence on record ii) Issue summons u/s 131 iii) Conduct survey of business premise(s) iv) Call for information from concerned parties u/s 133(6) B) Complete the Assessment Ex-parte 24

Section 30 Section 31 Section 32 Section 33AB 33B Section 33ABA Section 35 Rent, Rates, Taxes, Repairs And Insurance For Buildings Repairs And Insurance Of Machinery, Plant And Furniture Depreciation And Additional Depreciation [Section 32(1)(iia) Special Allowance For Specified Business Deduction On Account Of Site Restoration Fund Expenditure On Scientific Research/ specified expenditure at prescribed rate(s) 26

Section 35CCD Section 35ABB Section 35 AC Section 35CCA Section 35DD Section 35E Deduction For Specified Expenditure relating to skill development @ 150% of expenditure. Expenditure For Obtaining License To Operate Telecommunication Service ( In proportion to no. of years) Expenditure On Eligible Projects Or Schemes @ 100% of expenditure Expenditure By Way of Payment to Association or Institutions For Carrying on Rural Development Programmes @ 100% of expenditure Amortisation of Expenditure In The Case Of Amalgamation Or Demerger @ 20% of the eligible expenditure (1/5 th in each of the five yrs.) Amortisation for eligible Expenditure on prospecting etc. for certain minerals @ 1/10 th each in 10 years 27

Section 36 Other Deductions : Interest on Borrowed Funds Bad debts [SECTION 36(vii)] Provisions for Bad / Doubtful debts for banks and Financial Institutions [SECTION 36(viia)] Bonus Commission paid to employees, PF, ESI Section 37 General Any Expenditure Wholly & Exclusively Incurred for the Purpose of Business & / or Loss (Not Being Capital Loss) Incidental to carrying on the Business Activities Section 38 Proportionate Allowance Of An Expenditure Relating to Any Building Not Fully & Exclusively Used for the Purpose of Business. 28

Section 40(a)(i) - Payment of interest, royalty, F.T.S., etc. to non residents Section 40(a)(ia) - Payment of interest, commission, royalty, rent, F.T.S. to a resident Wealth Tax, Income Tax Salary paid to a Non Resident or outside India without deduction of tax u/s 192 [Section 40a(iii)] 29

Section 40A(2)(a) Any expenditure which is not reasonable / excessive having regard to the F.M.V. (w.e.f. 01.04.2013 A.Y. 2013-14) in respect of a Specified Domestic Transaction [Section 92BA r/w Section 92F] Section 40A(3) Cash Payment in excess of the threshold limit of Rs.20,000/- (Rs.35,000/- payment towards freight goods carriages) Section 40A(7) Provision for Gratuity Section 40A(9) Contribution to any Fund, Trust, Company, A.O.P., B.O.I., Society, etc as an Employer except P.F. or Gratuity Trust 31

Actual Cost Paid Plant Scientific Research Speculative Transactions Written Down Value [Section 43(1)] [Section 43(2)] [Section 43(3)] [Section 43(4)] [Section 43(5)] [Section 43(6)] Special Provision Consequential to Changes in Rate of Exchange of Currency Certain Deductions to be Made Only On Actual Payment [Section 43B] 33

Deduction in respect of Profits & Gains from Industrial undertakings, etc. engaged in Infrastructure development (Section 80- IA) Deduction in respect of Profits & Gains from Industrial undertakings other than Infrastructure development undertakings (Section 80- IB) Deduction in respect of Profits & Gains in respect of certain undertakings or enterprises in certain special category States (Section 80- IC) 35

Deduction in respect of Profits from business of collecting & processing of Bio-degradable waste (Section 80 JJA) Deduction in respect of employment of new workmen (Section 80 JJAA) 36

8% of Gross Receipts or Total Turnover of Eligible Business [Section 44AD] 10% of Gross Payments made / received by a Non-Resident in carrying on business of exploration etc. of Mineral Oils [Section 44BB] 5% of Gross Payments made / received by a Non-Resident in carrying on business of operation of Air Craft [Section 44BBA] 10% Gross Payments made / received by a Non-Resident in carrying on business of Civil Constructions in certain Turn Key Projects [Section 44BBB] 38

Deduction of Head office expenditure in the case of non-residents [Section 44C] Special provision for computing income by way of royalties etc. in the case of Foreign Companies [Section 44D] 39

TAX RATES The following Rates of Income Tax are applicable for the A.Y. 2012-2013 & 2013-2014 Company Rate of incometax ( %) In the case of a Domestic Company 30 In the case of a Foreign Company royalty received from Government or an Indian concern in pursuance of an agreement 50 made by it with the Indian concern after March 31, 1961, but before April 1, 1976, or fees for rendering technical services in pursuance of an agreement made by it after February 29, 1964 but before April 1, 1976 and where such agreement has, in either case, been approved by the Central Government other income 40 41

If Net Income does not exceed Rs. 1 crore If Income exceeds Rs. 1 crore Domestic company Nil 5%* Foreign company Nil 2%* *It is 2% or 5% of Income-Tax. Marginal relief is available which is given below- 42

Marginal relief - In the case of a company having a net income exceeding Rs. 1 crore, the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore. Education cess - It is 2 % of Income-tax and Surcharge. Secondary and Higher Education Cess - It is 1 % of Income-tax and Surcharge. 43

MINIMUM ALTERNATE TAX (MAT) - For the assessment years 2012-13 and 2013-14. Book Profit does not exceed Rs. 1 crore Book Profit exceed s Rs. 1 crore IT SC EC SHEC Total IT SC EC SHEC Total Dome stic CO. Foreig n CO. 18.5-0.37 0.18 19.06 18.5 0.93 0.39 0.19 20.08 18.5-0.37 0.18 19.06 18.5 0.37 0.38 0.19 19.44 Note - If book profit of a company for the assessment years 2012-13 and 2013-14 exceeds Rs. 1 crore, the MAT u/s 115JB cannot exceed the following : (Rs. 18.5 lakh + book profit - Rs. 1 crore) + EC + SHEC. Note- D.C. = Domestic Company F.C. = Foreign Company 44

Every company is liable to compute tax on normal income as per Chapter IV-D (Sec. 28-44) & tax on Book Profits computed u/s 115JB. Higher of the two is payable in the respective year. In case MAT is paid,as above, then MAT paid is allowed to be carried forward & set off against the tax on normal income payable(over & above MAT in that year) by the company in that year. The carry forward & set off of MAT is allowed upto 10(Ten) succeeding assessment years. 45

Section 115A Section 115AB Special Rate (20%) For Taxing Dividends, F.T.S. And Royalties Offshore Fund Income By Way Of Units Purchased In CFC* Or Capital Gain Arising On their Sale To Be Taxed @ 10% Section 115AC Income Of Non Resident By Way Of Interest On Bonds Purchased In CFC*, Dividend On GDR s And LTCG Arising On Bonds To Be Taxed @ 10% Section 115 BBD Concessional Rates of Taxes on Div. recd. by Indian Companies from Specified Foreign Companies @ 15% of gross dividend i.e. no expenditure would be allowed. 47

Section 115AD - Income of FII s Shall Be Taxed as Under : @ 20% Income on Securities (other than div. u/s 115-O & units u/s 115AB) @ 30% STCG on Securities @ 15% STCG on Shares (Section 111A) @ 10% LTCG on transfer of Securities Tax on distributed profit of Domestic Companies (Section 115 O) & Income of Mutual Fund (MF) (Section 115 R) - Distributed Profit / Income is called Dividend - Dividend is taxable in the hands of the payer i.e. Domestic Co. or MF distributing Profit / Income. - Dividend covered u/s 115 O or 115R is not taxable in the hands of the Resident recipient (single point tax) 48

- Dividend received by a Holding Co. from its Subsidiary Co. is excluded from Distributed profits for computing tax on distributed profit (to provide relief from Double taxation / cascading effect) - D.D.T. is to be paid within 14 days from the date of declaration of Dividend. - Interest @1% p.m. for delay in payment of D.D.T. - Rate of Tax : PAYER PAYEE / RECEIPIENT INDL. & HUF OTHERS 1) Domestic Co. 15% 15% 2) Money market MF/ Liquid fund 25% 30% 3) Debt Fund [other than(2) above] 12.5% 30% 4) Equity oriented Fund Exempt Exempt 49

Owing atleast one Qualifying Ship with a minimum tonnage of 15 tons & a valid certificate. Must be an Indian Co. whose effective management is in India with its main object of carrying on the business of Operating Ships. Daily Tonnage Income : Q.S. NET TONNAGE (i) Upto 1000 Capacity (ii) From 1000 to 10000 capacity (iii) From 10000 to 25000 capacity (iv) Exceeding 25000 tonne capacity DAILY TONNAGE INCOME Rs. 70 per tonne Rs. 700 plus @ Rs. 53 per 100 tonnes Rs. 5470 plus @ Rs. 42 per 100 tonnes over 10000 tonnes Rs. 11770 plus @ Rs. 29 per 100 tonnes over 25000 tonnes 50

(Deemed Tonnage / Tonnage to be rounded off to nearest multiple of 100 tonnes) If a company has other business(es) where Q.S. is used &/or common expenses are incurred then such common expenses & depreciation shall be allocated proportionately on a reasonable basis. Cost/W.D.V. in the first year for computing Depreciation @ No further deduction u/s 30 to 43B for the year or earlier previous years would be deemed to have been given full effect to in that previous year itself. 51

Initial period: 30th Sep.,2004 to 31st Dec.,2004, any company qualifying or incorporated after initial period has to apply for T.T.C. within 3 months before J.C.I.T. having jurisdiction over such company. T.T.C. option shall be valid for 10 years from the date when it was exercised, unless renewed & / or foreclosed. 20% of Income(Book Profit) of T.T.C. from core shipping business to be set apart in a separate Tonnage Tax Reserve A/c for / upto 8 years for acquisition of a new ship 52

A) AMALGAMATION (SECTION 115VY) Provisions of Tonnage Tax Scheme applies to Amalgamated Company If Amalgamated Company is not a Tonnage Tax Company, then it has to apply within 3 months If Amalgamated Companies are T.T.C. then Tonnage Tax Scheme shall apply till longer(est) unexpired period in force, of any amalgamating company. B) DEMERGER (SECTION 115VZ) In demerger if Qualifying Shipping Business is transferred to the resulting company, then T.T.S. would apply to the resulting company for the unexpired period provided it is a Qualifying company or makes an application for T.T.S. before or within 3 months of Demerger. If Demerged Co. retains Qualifying Shipping Business & it continues to be a Qualifying Co. then T.T.S. will remain in force for the unexpired period. 53

C) CONVERSION OF AN INDIAN BRANCH OF A FOREIGN BANK INTO AN INDIAN SUBSIDIARY CO. (SECTION 115 JG) Conversion in accordance with the Scheme framed by R.B.I. Subject to satisfying the conditions notified by the Central Government Capital Gains arising from such conversion shall not be taxable. Subject to exceptions, modifications and adaptions as specified in the notification, following shall be dealt with accordingly: (a)income of foreign and Indian company. (b)set off of unabsorbed depreciation and carry forward of losses (c)tax credit on deemed income, if any. In case of default in complying with the conditions notified by the Central Government, the exemption, benefits and reliefs shall be withdrawn and shall be deemed to have been wrongly allowed, and dealt with accordingly. 54

TIPS FOR ATTEMPTING QUESTIONS IN THE QUESTION PAPER : No. of questions to be attempted Optional & compulsory questions Average time available for each question Additional information given at the end of each question Whether the figure of profit or loss includes various items of income & expenditure given in the question or not. Whether expenditure or income referred in the question is normal or special i.e. weighted deduction or exemption is available. Whether the expenditure referred in the question is revenue or capital in nature. 56

TIPS FOR COMPUTATION OF INCOME : Certain expenses to be allowed on actual payment only Certain expenses to be allowed only after deduction of TDS in accordance with Chapter XVII- B Bad-debt to be allowed only if actually written off in the books of account Depreciation on assets discarded during the year but forming part of Block of assets carried over from earlier yrs. Cessation of liability u/s 41(1) in the hands of the successor in business Deemed dividend u/s 2(22)(e) Interest on borrowed funds for acquisition of assets. Income in the hands of Non residents 57

TIPS FOR COMPUTATION OF BOOK PROFITS FOR THE PURPOSE OF MAT ( MINIMUM ALTERNATE TAX): Additions required in the profit determined under Part II of Schedule VI of Companies Act,1956 Deductions required in the profit determined under Part II of Schedule VI of Companies Act,1956 Carry forward of MAT 58

NOTE :- THE CONTENTS OF EACH SLIDE CAN BE EXPANDED ACCORDING TO THE REQUIREMENT / SYLLABUS. REPRESENTATION GIVEN ABOVE IS ONLY INDICATIVE AND NOT EXHAUSTIVE. 59