If the above two conditions are not satisfied, he is NonResident. Note: The day on which he enters India as well as the day on which he leaves India shall be taken into account as the stay of the Individual in India. Special Exceptional Situations:
For the following persons, condition mentioned in 1(a) above only shall apply to determine their Residential Status (a) Individual, Indian citizen, leaving India for employment outside India, or (b) Indian Citizen being a crew member of an Indian ship leaving India, or (c) Individual, Indian citizen or person of Indian origin, visiting India. Additional Conditions: Sec. 6(6)(a)
1. Resident in India for at least 2 years out of the preceding 10 previous years. 2. Physically present in India for at least 730 days during the 7 preceding previous years. Status of an Individual
Basic condition
Additional condition/(s)
Resident and ordinarily Resident u/s 6(6)
Satisfies
Satisfies both the conditions
Resident but not ordinarily Resident u/s 6(6)
Satisfies
May or may not satisfy any of the additional condition
Non Resident
Fails to satisfy
Not required to check
3.3 RESIDENTIAL STATUS OF HUF/FIRM/AOP/EVERY OTHER PERSON [Sec. 6(2), SEC.6(4)] Control and Management is
Residential Status
1. Wholly or partly in India
Resident
2. Wholly outside India
Non-resident
3.4 RESIDENTIAL STATUS OF A COMPANY [SECTION 6 (3)] 1.
Indian Company
Resident
2.
Other Companies - Control and management is (a) Wholly in India (b) Wholly or partly outside India
Resident Non-resident
If a person is a resident for one source of income in a previous year, he shall be deemed to be a resident for all other sources of income also. [Section 6(5)]
3.5 STATUS AND INCIDENCE OF INCOME-TAX The incidence of tax on a tax-payer depends on his residential status as well as on the place and time of accrual or receipt of income. A suitable table is given below :
Applied Direct Taxation
13
SYLLABUS
OBJECTIVES
To gain knowledge about the tax laws in force for the relevant accounting year and to provide an insight into procedural aspects for filing tax returns for various assesses. Learning Aims
The syllabus aim totest the student’s ability to: • • • • •
Explain the basic Explain basic principles principles underly underlying ing the Incom Incomee tax Act Act and Wealth tax Act, Act, Compute Comp ute the income of an individ individual ual and busin business ess under under various various heads heads of of income income Understand Unde rstand Proced Procedure ure for for tax return return preparat preparation, ion, filing, filing, assessmen assessmentt and tax tax refund refund for for various assesses. Underst Und erstand and the the powers powers of vario various us assess assessing ing autho authoriti rities. es. Understand Unde rstand appe appellate llate procedu procedure re under under various various provi provisions sions of these these Acts Acts
Skill set required
Level B: Requiring the skill levels of knowledge, comprehension, application, and analysis 1. Direct Taxes- Comprehensive Study. (50%)
• • • • •
•
• • • • • • • • • •
Overvi Over view ew of Di Dire rect ct Tax Tax Law Lawss Direct Dir ect ver versus sus ind indirec irectt taxes taxes,, taxab taxable le pers person on Basic Conc nceepts ts.. A comprehen comprehensive sive study study of the the Income-tax Income-tax Act, Act, 1961; 1961; case laws laws governing governing capita capitall andrevenue andrevenue expenditure, deemed income, residence concept. Special problem problemss centering centering on the the concept concept of asses assessees, sees, registere registered d firm, firm, Hindu Hindu Undivided Undivided Association of persons and trust, minors, cooperatives, non-resident Indians and avoid ance of double taxation. Salaries,, perquisites, Salaries perquisites, gratuity gratuity and retiremen retirementt benefits, benefits, income income from from house house property, property, capital capital gains, income from other sources, income from business and profession, problems arising from aggregation of income and set off and carry forward of losses, Computatio Comp utation n of income income and and Return Return of Income Income Tax, Tax, Filing Filing procedure, procedure, Principles Principles of of valuavaluation of movable and immovable property. Advance payment of Tax. Deduct Ded uction ion and col collect lection ion of tax tax at at sour source. ce. Tax incentive incentivess and export export promot promotion ion schemes, schemes, other benefits benefits and tax tax exemptio exemptions. ns. Assessment Asses sment,, appeals, appeals, revisions revisions,, review, review, rectification rectification and applic application ation to Centra Centrall Board of Direct Taxes. Penalt Pen alties ies ,Fi ,Fine ness and and pros prosecu ecutio tion. n. Refunds. Secu Se curit rities ies Tr Tran ansac sacti tion on Ta Tax. x. Frin Fr inge ge Be Bene neffit Ta Tax x. Bank Ba nkin ing g Cash Cash Tr Trans ansact actio ion n Tax. Tax. Wealth Tax.
2. Practical problems and case studies under Direct Taxes. (50%)
Paper 7 APPLIED DIRECT TAXATION Contents Study Note
Particulars
Page No.
1.
Types of Taxes
1
2.
The Source of Income Tax Law
3
3.
R e si de nt i a l St atus and Ta x Inc ide nce
12
4.
Income from Salaries
28
5.
Income From House Property
77
6.
Profits and Gains of Business or Profession
96
7.
Capital Gains
1 66
8.
Income from other sources
20 4
9.
Clubbing of Income
2 16
10 .
Set Off or Carry Forward and Set Off of Losses
2 22
11 .
Deduction in Computing Total Income
23 3
12 .
Incomes which do not form part of Total Income
28 7
13 .
Agricultural Income and Aggregation of Incomes
32 1
14 .
Minimum Alternate Tax (MAT)
3 30
15 .
Return of Income
3 34
16 .
Assessment Procedure
3 41
17 .
Assessment of Various Entities
351
18 .
Grievances Redressal Procedure
491
19 .
Interest
405
20 .
Advance Payment of Tax
412
21 .
Collection and Recovery of Tax
319
22 .
Deduction and Collection of Tax at source
4 23
23 .
Penalties & Prosecution
433
24 .
Refund
439
25 .
S ettlement of Cases
4 43
2 6.
Tax Administration
450
2 7.
Taxation of International Transactions
45 5
28 .
Double Taxation Relief
4 63
2 9.
Wealth T ax
470
STUDY NOTE - 1 TYPES OF TAXES This Study Note includes
•
Basis For Taxation
•
Direct Taxes and Indirect Taxes
1.1 BASIS FOR TAXATION India is a socialist, democratic and republic state. Constitution of India is supreme law of land. All other laws, including the Income-tax Act, are subordinate to the Constitution of India. The Constitution provides that ‘no tax shall be levied or collected except by authority of law’. The Constitution includes three lists in the Seventh Schedule providing authority to the Central Government and the state governments to levy and collect taxes on subjects stated in the lists. Powers of Central or State Government to levy tax Article
Empowers
246(1) 246(1) 246(3) —
Central or or St State Go Government Central Government State Go Government Central an and St State Go Government
Fo r
Levy of various taxes. Levy taxes in in List I of the Severnth Schedule of of the co constitution. Levy taxes in List II of the Seventh Schedule of the Constitution. List III of Seventh Schedule.
List Li st I : Unio Union n List List
Entry No. Entry No. 82 82 Entr En try y No. 83 83 Entry Ent ry No. No. 84 84 Entr En try y No No.. 85 Entry Ent ry No. 92A Entry No. 92B 92B Entr En try y No. No. 92C 92C Entry Ent ry No. No. 97 97
: : : : : : : :
Income Tax oth Income other er tha than n Tax Tax on Agr Agricu icultu ltural ral Inc Income ome Cust Cu stom omss dut dutie iess inc inclu ludi ding ng ex expo port rt du duti ties es Union Uni on Exc Excise ise Dut Duty y (oth (other er tha than n liqu liquor, or, opi opium, um, etc etc.) .) Cor orpo pora rati tion on Tax Taxes Tax es on Int Interer-Sta State te Sal Sales es (C (CST) ST) Tax on Inter Inter-Stat -Statee Consignm Consignment ent of Goods (not yet consid considered ered by GOI) Taxe Ta xess on on ser servi vice cess Any oth other er matt matter er not inc includ luded ed in Lis Listt II II or or List List III [Levy of Service Tax through Finance Act, 1994]
List II : State State Lis Listt
Entr En try y No. No. 46 46
: Ag Agri ricu cult ltur ural al In Inco come me Ta Tax x
Entr En try y No. No. 51
: St Staate Ex Exci cise se Du Duty ty
Entry No. 52
: Tax on Entry Entry of Goods Goods into into local local area for consu consumptio mption n or use or or sale sale (called (called octro octroi) i)
Entry Ent ry No. No. 54
: Tax on int intra ra Sta State te Sal Sales es (Lo (Loca cal/G l/Gene eneral ral Sal Sales es Ta Tax) x)
Applied Direct Taxation
1
TYPES Of TAXES
List III : State State Lis Listt
Entr En try y No No. 17 17A : Fo Fore rest stss Entry No No. 25 25
: Education
1.2 DIRECT TAXES AND INDIRECT TAXES Tax
Direct Tax
Income Tax
Indirect Tax
Wealth Tax
Central Excise Duty
Customs Duty
Service Tax Tax
Central Excise Duty Purchase Tax
Basic of difference between Indirect Tax and Direct Tax
1.Ta .Tax xabl blee Ev Event
Purchase / Sale / Manufacture of of go goods and provision of services
Taxable In Income / Taxable We Wealth of of th the Assessees.
2.Levy 2.Le vy & Col Colllec ecti tion on
Levi Le vied ed & co coll llec ecte ted d fro from m th the co cons nsu ume merr but paid / deposited deposited to the Exchequer Exchequer by the Assessee / Dealer
Lev evie ied d an and col colle leccte ted d fro from m th the Ass Asses esse seee
3.Shifti 3.Shif ting ng of Bu Burd rden en
Tax bu Tax burd rden en is sh shif ifte ted d to th thee sub subse sequ quen entt / ultimate user
Direct Dire ctly ly bo born rnee by by the the As Asse sess ssee ee.. Hence, cannot be shifted.
4. Co Collected
At the time of sale of purchases or rendering of services
after the income for a year is earned or valuation of assets is determined on the valuation date.
2
Applied Direct Taxation
STUDY NOTE - 2 THE SOURCE OF INCOME TAX LAW This
Study Note includes
• • • •
Basic Concepts Rates of Income Tax for A.Y. 2010-11 Definition Heads of Income
2.1 BASIC CONCEPTS THE ELEMENTS / SOURCES OF INCOME TAX LAW 1. The Income Tax Act, 1961
(a) Income Income tax in India India is governed governed by the Income Income Tax Act,19 Act,1961 61 (b) (c) (d) (e)
It came came into into force force w.e. w.e.f.1 f.1.4. .4.196 19622 The Act Act contain containss 298 sectio sections ns and XIV XIV Schedul Schedules es The Financ Financee Act shall shall bring bring amend amendment ment to to this Act. Act. The Law provides for determination determination of taxable taxable income, tax liability liability and procedure for assessment, appeal, appeal, penalties and prosecutions.
2. Finance Act
(a) (b) (c) (d)
Finance Minister presents this this as Finance Finance Bill Bill in both the Houses of of Parliament. Parliament. Part A of the Budget Budget contains contains proposed proposed polici policies es of the Government Government in fiscal fiscal areas. areas. Part B contai contains ns the detailed detailed tax propo proposals sals.. Once the Finance Bill Bill is approved approved by the Parliament and gets the the assent of the President, it becomes the Finance Act. (e) The rate of of tax at which income income shall shall be charged charged is prescribed prescribed in the Schedule I of Finance Finance Act. (f) The Finance Act brings amendments amendments to both the Direct Tax Tax Laws (i.e. Income Tax, Tax, Wealth Tax Tax etc.) and Indirect Tax Laws (i.e. law relating to Central Excise, Customs Duty, Service Tax etc.)
3. The Income Tax Rules, 1962
(a) The administration administration of Direct Taxes Taxes is vested vested with Central Central Board Board of Direct Direct Taxes (CBDT). (CBDT). (b) Under Section Section 295 295 of IT Act, CBDT CBDT is empowered empowered to frame rules rules from time to time time to carry out out the purpose and proper administration of the Act. (c) All forms, procedures procedures and and principles principles of valuation valuation of perquisites perquisites prescribed prescribed under the the Act are provided provided in the Rules framed by CBDT. 4. Circulars / Notifications from CBDT
(a) In exercise of the powers powers u/s 119, 119, CBDT issues circulars circulars and notificatio notifications ns from time time to time. time. (b) (c) (d) (e)
These circulars circulars clarify doubts regarding regarding the scope scope and meaning of of the various various provisions provisions of the the Act. These These circulars circulars act act as guidanc guidancee for officers officers and assesse assesses. s. These circulars circulars are binding on Assessing Officers but but not on assesses and Courts. Courts. The circula circulars rs issued issued by the CBDT shall shall not not be in contrary contrary to the provis provisions ions of the the Act.
Appl Appl ied ied Dir Dir ect Taxation
3
THE SOURCE OF INCOME TAX LAW
Subordinate Legislation
The Government enacts the law in the Parliament, Parliament, there e.g. Income Tax Act, Central Excise Excise Act, etc. where is a need for detailed rules and regulations, the enactment is to be done by either CBDT or CBEC. The rules and regulations enacted by CBDT or CBEC i.e. Income Tax Rules, Cenvat Credit Rules, the Notifications and Circulars issued by CBDT, CBEC is called Subordinate Legislation. 5. Supreme Court and High Court Decisions
(a) The Supreme Supreme Court Court and the the High High Court Court can can give judgment judgment only on the question of law. (b) The Law Law laid laid down by the Supreme Supreme Court Court is is the law law of the land. land. (c) The decision decision of High High Court Court will apply in the respective respective States, States, within within its jurisdicti jurisdiction. on. DETERMINING THE RATES OF TAX UNDER THE INCOME TAX ACT, 1961
1. Income Tax shall be charged at the rates fixed for the year by the Annual Finance Act. 2. The First Schedule to the Finance Act provides the following rates of taxation. Part I Part Part II II
The tax rates rates appl applica icable ble to inco income me of of vario various us types types of asses assessee seess for the assessm assessment ent year year Rate Ratess of of TDS TDS for for the the curre current nt Fina Financ ncia iall yea yearr
Part III III
Rates Rates of TDS TDS for salary salary and advan advance ce tax tax (which (which becomes becomes Part Part I of the the next assessment assessment year) year)
2.2 RATES OF INCOME-TAX FOR ASSESSMENT YEAR 2011-12 2.2.1 (A) For woman, resident in India and below the age of 65 years at any time during the previous year:
Upto
`
1,90,000
Rs. 1,90,001 to `
5,00,000 to
Above
`
Nil
`
`
5,00,000
8,00,000
8,00,000
10% 20% 30%
(B) For an individual (man or woman), resident in India who is of the age of 65 years or more at any time during the previous year.
Upto `
`
`
2,40,000
2,40,001 to 5,00,000 to
Above
`
`
`
Nil 5,00,000
8,00,000
8,00,000
10% 20% 30%
(C) Individuals, [other than those mentioned in para 2.2.1(A) and (B) above] HUF, AOP/BOI (other than cooperative societies, whether incorporated or not)
Upto `
`
`
1,60,000
1,60,001 to 5,00,000 to
Above
`
`
`
Nil
5,00,000
10%
8,00,000
20%
8,00,000
30%
Note Note : Surcharge Nil. ‘Education Cess’ @ 2%, and ‘Secondary and Higher Education Cess (SHEC)’ @ 1% on income tax shall be chargeable.
4
Appl Appl ied ied Dir Dir ect Taxation
2.2.2 Other Assessees : Assessee
Rate of Tax
Surcharge
For Firms (including limited liability partnership)
Total Income × 30% + EC @ 2% + SHEC @ 1%.
Surcharge — NIL
Domestic Companies
Total Income × 30% + EC @ 2% + SHEC @ 1%.
Surcharge @ 7.5% if the total turnover exceeds 1 crore `
Foreign Companies Total Income x 40%+ EC Other Income @ 2% + SHEC @ 1% Royalty received from Indian Government or an Indian concern in pursuance of an agreement 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 and where such agreement has, in either case been approved by the Central Government
Surcharge @ 2.5% if the total turnover exceeds 1 crore
For Local Authorities
Total Income × 30% + EC @ 2% + SHEC @ 1%.
(Surcharge is not applicable) Nil
For Co-operative Societies
For First 10,000 @ 10% For Next 10,000 @ 20% For the Balance @ 30% EC @ 2% and SHEC @ 1% are applicable.
Surcharge is not applicable. Nil
18% of Book Profit + EC 2% + SHEC 1%
Surcharge if Book Profits exceed 1 crore.
MAT = Minimum Al Alternate Ta Tax
`
`
`
`
2.3 DEFINITION Assessee means: [Section 2(7)] Any person who is liable to pay any tax or any other sum under the Income Tax Act, 1961, and Assessee includes
(a) Every person in respect respect of whom any proceedings proceedings has been taken taken for the assessment of • His income or Fringe Benefits or of the income of any other person. • Loss sustained by him or other person. • Refund due to him or such other person. (b) Every Every perso person n who who is deemed to be an assessee under the Act. (c) (c) Every Every perso person n who who is deemed to be an assessee in default under the Act. Assessment Year [Section 2 (9)]
1. Assessme Assessment nt Y Year ear means means the the period of twelve months commencing on the 1st day of April every year. 2. The year for for which tax tax is paid is called called Assessment Year. The present Assessment Year is 2011-12 relating to previous year 2010-11.
Appl Appl ied ied Dir Dir ect Taxation
5
THE SOURCE OF INCOME TAX LAW
Previous Year [Section 3]
1. Previous Year means Financial Year immediately preceding the Assessment Year. 2. The year in respect of the income of which tax is levied is called Previous Year. The present previous year 2010-11 and its Assessment Year is 2011-12. Note: Previous Year for Newly established business From the date of setting up of the business to the end of the Financial year in which business was set up. Example : X Ltd. Started business on 1.11.10. So for X Ltd. Previous year will be considered as 1.11.10 to 31.3.11. Income [Section 2(24)] includes:
1. Profits or gains of business or profession. 2. Dividend. 3. Voluntary Contribution received by a Charitable / Religious Trust or University / Education Institution or Hospital 4. 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 performance of duties of an office or an employment of profit. 5. Export incentives, like Duty Drawback, Cash Compensatory Support, Sale of licences etc. 6. 7. 8. 9.
Interest, salary, bonus, commission or remuneration earned by a partner of a Firm from such Firm. Capital Gains chargeable u/s 45. Profits and gains from the business of banking carried on by a cooperative society with its members. Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. 10. Deemed income u/s 41 or 59. 11. Sums received by an assessee from his employees towards welfare fund contributions such as Provident Fund, Superannuation Fund etc. 12. Amount received under Keyman Insurance Policy including bonus thereon. 13. Amount received under agreement for (a) not carrying out activity in relation to any business, or (b) not sharing any knowhow, patent, copyright etc. 14. 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. 15. Gift as defined u/s 56 (2)(vi) (w.e.f. A.Y 2008-2009). Any sum of money exceeding 50,000, received by an Individual or a HUF from any person during the previous year without consideration on or after 1.4.2007, then the whole of aggregate of such sums will be taxable. `
PREVIOUS YEAR & ASSESSMENT YEAR WILL BE SAME in the following cases: 1. Shipping business of nonresident [Section 172] 2. Persons leaving India [Section 174] 3. AOP or BOI or Artificial Juridical Person formed for a particular event or purpose 4. Persons likely to transfer property to avoid tax [Section 175]
[Sec. 174A]
5. Discontinued business [Section 176] UNDISCLOSED SOURCES OF INCOME 1. Unexplained Cash Credits u/s 68 2. Unexplained investments u/s69 3. Unexplained money, bullion or jewel or valuable article u/s 69A
6
Appl ied Dir ect Taxation
4. Undisclosed investments u/s 69B 5. Unexplained expenditure u/s 69C 6. Amount borrowed or repaid on hundi, other than by way of account payee cheque u/s69D. Application of Income
An obligation to apply income, which has accrued or has arisen or has been received amounts to merely the apportionment of income. Therefore the essentials of the concept of application of income under the provisions of the Income Tax Act are : 1. Income accrues to the assessee 2. Income reaches the assessee 3. Income is applied to discharge an obligation, whether self-imposed or gratuitous. Diversion of Income
An obligation to apply the income in a particular way before it is received by the assessee or before it has arisen or accrued to the assessee results in diversion of income. The source is charged with an overriding title, which diverts the income. Therefore the essentials are the following : 1. Income is diverted at source, 2. There is an overriding charge or title for such diversion, and 3. The charge / obligation is on the source of income and not on thereceiver. Examples of diversion by overriding title are (a) Right of maintenance of dependants or of coparceners on partition
(b) Right under a statutory provision (c) A charge created by a decree of a Court of law. TOTAL INCOME [Sec. 2(45)]
“Total income” means the total amount of income as referred to in sec. 5 and computed in the manner laid down in the Act. Total income constitutes the tax with reference to which income tax is charged. GROSS TOTAL INCOME [Section 80B] Gross Total Income means total income computed in accordance with the provisions of the Income Tax Act before making any deduction under Chapter VIA. ROUNDING OFF TOTAL INCOME AND TAX Rounding Off Income [Section 288A] : The Total Income computed under this Act, shall be rounded off to the nearest multiple of 10. `
Rounding Off Tax [Section 288B] : The amount of Tax including Tax Deducted at Source (TDS) and advance tax, interest, penalty, fine or any other sum payable, and the amount of refund due under the Income Tax Act, shall be rounded off to the nearest Ten Rupees. BOOKS OF ACCOUNT [Sec. 2(12A)]
It includes ledgers, day books, cash books, account-books and other books, whether kept in the written form or as printouts or data stored in a floppy, disc, tape or any other form of electromagnetic data storage device. DOCUMENT [Sec. 2(22AA)]
It includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000).
Appl ied Dir ect Taxation
7
THE SOURCE OF INCOME TAX LAW
RELATIVE [Sec. 2(41)]
In relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual. RESULTING COMPANY [Sec. 2(41A)]
It means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger. INSURER [Sec. 2(28BB)]
It means an insurer being an Indian insurance company, as defined under clause (7A) of section 2 of the Insurance Act, 1938 (4 of 1938), which has been granted a certificate of registration under section 3 of that Act. SUBSTANTIAL INTEREST [Sec. 2 (32)]
Person who has a substantial interest in the company, in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. In the case of a non-corporate entity, a person can be said to have substantial interest if 20% or more share of profit is held. INFRASTRUCTURAL CAPITAL COMPANY [Sec.2(26A)]
“Infrastructure capital company” means such company which makes investments by way of acquiring shares or providing long-term finance to any enterprise or undertaking wholly engaged in the business referred to in subsection (4) of section 80 –IA or sub-section (1) of section 80-IAB or an undertaking developing and building a housing project referred to in sub-section (10) of section 80- IB or a project for constructing a hospital with at least one hundred beds for patients.[ Sec. 2(26A)]. INFRASTRUCTURAL CAPITAL FUND [Sec.2(26B)]
“Infrastructure capital fund” means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 established to raise monies by the trustees for investment by way of acquiring shares or providing long-term finance to any enterprise or undertaking wholly engaged in the business referred to in subsection (4) of section 80-IA or sub-section (1) of section 80- IAB or an undertaking developing and building a housing project referred to in sub-section (10) of section 80-IB or a project f or constructing a hotel of not less than three star category as classified by the Central Government or a project for constructing a hospital with at least one hundred beds for patients. [ Sec 2(26B)]. CHARGE OF INCOME TAX [Sec. 4]
According to sec. 4 of the Income-tax, 1961 the following basic principles are followed while charging incometax— (i) income-tax is a tax on the annual income of an assessee, (ii) usually, the income of the Previous Year (PY) is charged to the following Assessment Year (AY) at the prescribed rate fixed by the relevant Financial Act, and (iii) tax is levied on the total income of every assessee RECEIPT OF INCOME - DEEMED INCOME [Sec. 7]
The following income shall be deemed to be received in the Previous Year : (i) Employers contribution to recognized provident fund in excess of 12% of salary and interest credited to the recognized provident fund in excess of 9.5%
8
Appl ied Dir ect Taxation
(ii) The transfer balance in a recognized provident fund, to the extent provided in sub rule (4) of rule 11 of part A of fourth schedule. DIVIDEND INCOME [Sec. 8]
Dividend include— (a) any distribution by a company of accumulated profits whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits 85 which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder , being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; But “dividend” does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause ( e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company) Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.
Appl ied Dir ect Taxation
9
THE SOURCE OF INCOME TAX LAW
Explanation 2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e ), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation,[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 3.—For the purposes of this clause,— (a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern; CAPITAL AND REVENUE RECEIPTS
The objective of the Income-tax Act is to tax only income generally revenue receipts unless specifically exempted. On the other hand capital receipts are not chargeable to tax except when specifically provided in the Act. The distinction between a capital receipt and a revenue receipt should be perceived based on the facts and circumstances of each case. There is no specific provision in the Act to distinguish between a capital receipt and revenue receipt. It may be observed that : A receipt in substitution of a source of income is a capital receipt while a receipt in substitution of an income is a revenue receipt. An amount received as a compensation for surrender of certain rights under an agreement is a capital receipt whereas an amount received under an agreement as compensation for loss of future profit is a revenue receipt. CAPITAL AND REVENUE EXPENDITURE
In computing taxable income normally revenue expenditure incurred for the purpose of earning income is deductible from revenue receipt unless the law provides specific rules to disallow such expenditure wholly or partly. On the other hand capital expenditure is not deductible while computing taxable income unless the law expressly so provides. Neither the capital expenditure nor revenue expenditure has been defined in the Act. However, from the facts and circumstances of each case and from the judicial decisions the following general principles to be kept in mind : (i) Capital expenditure is incurred in acquiring, extending or improving a fixed asset whereas revenue expenditure is incurred in the normal course of business as a routine expenditure. (ii) Capital expenditure incurred for enduring benefits whereas revenue expenditure is consumed within a Previous Year . (iii) Capital expenditure makes improvement with earning capacity of a business whereas a revenue expenditure maintains the profit making capacity of a business. (iv) Capital expenditure is a nonrecurring expenditure whereas revenue expenditure is normally a recurring one.
2.4 “HEADS OF INCOME” [Sec 14] Significance of Heads of Income :
1. The income chargeable under a particular head cannot be charged under any other head. 2. The Act has self contained provisions in respect of each head of income. 3. If any income is charged under a wrong head of income, the assessee will lose the benefit of deduction available to him under that head.
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Appl ied Dir ect Taxation
Relevance of method of accounting for heads of income : Heads of Income
Relevance of Method of Accounting
Chapter IV-A Salaries (15 - 17)
1. Taxable on due basis or on receipt basis, whichever is earlier. 2. Method of accounting is irrelevant.
Chapter IV-C
1. Income from house property is taxable only on accrual basis.
House Property (22 - 27)
2. Method of accounting is not relevant.
Chapter IV-D Business Income
1. U/s 145 assessee may follow either Cash or Mercantile system of accounting regularly employed by the assessee.
(28-44DB)
2. Exceptions : Certain payments are allowable only on actual payment basis. Accrual concept does not hold good -
(a) Employer’s contribution to PF, ESI, Tax, Duty, Cess, Fees to Government, Interest on loans and advances from banks and financial institutions, provision for leave encashment, bonus or commission etc. (b) Telecommunication Licence Fee is allowable in instalments only from the year of payment. (c) Preliminary Expenses distributed over five years. (d) Amalgamation / Demerger Expenses distributed over five years. (e) Amount paid in connection with Voluntary Retirement Scheme distributed over five years. Chapter IV-E Capital Gains (45 - 55A)
1. Income from capital gains shall be taxable during the previous year Capital Gains in which the Capital Asset is transferred (i.e) year of accrual. 2. The method of accounting is not relevant for taxing the income under the head capital gains.
Chapter IV-F OtherSources (56 - 59)
U/s 145 assessee may follow either on Cash or Mercantile system of accounting regularly employed by the assessee.
Appl ied Dir ect Taxation
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RESIDENTIAL STATUS AND TAX INCIDENCE
STUDY NOTE - 3 RESIDENTIAL STATUS AND TAX INCIDENCE This Study Note includes z
Introduction
z
Residential status of Individuals
z
Residential status of Hindu Undivided Family
z
Residential status of a Company
z
Residential status of Firm and Association of Persons
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Residential status of Every Other Person
z
Status and Incidence of Income-Tax
3.1 INTRODUCTION 3.1.1 Residential Status
The residential status of a person as refered in Sec. 2(31) of the Act. for each assessment year under consideration to determine the scope of total income. 3.1.2 Importance
• Total income of an assessee cannot be determined without knowing his residential status. • The residential status shall be determined for every person for each previous year independently. • The onus of responsibility to prove the residential status is on the assessee.
3.2 RESIDENTIAL STATUS OF INDIVIDUALS [SEC.6(1)] Residential Status – Classification
Resident
Resident and Ordinarily Resident (ROR)
Non-Resident
Resident but not Ordinarily Resident (R NOR)
1. Basic Conditions: (a) If the Individual stayed in India for a period of 182 DAYS OR MORE during the Relevant Previous Year (RPY) he is Resident of India (OR) (b) If he stayed in India for a period of 60 DAYS OR MORE during Relevant Previous Year (RPY) and 365 DAYS OR MORE during the four preceding previous years he is Resident of India.
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Applied Direct Taxation