Tax Unit-I A tax is a financial charge or other levy other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, secessionist movements or revolutionary or revolutionary movements). Taxes are also imposed by many subnational entities. entities. Taxes consist of direct of direct tax or indirect or indirect tax, tax, and may be paid in money or as its labour equivalent (often but not always unpaid). A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government […] a payment exacted by legislative authority."[1] authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tall age, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."[1] name."[1] In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics in politics and economics economics.. Tax collection is performed by a government agency such as Canada Revenue Agency, Agency, the Internal Revenue Service (IRS) in the United States, States, or Her Majesty's Revenue and Customs (HMRC) in the UK . When taxes are not fully paid, civil penalties (such as fines or forfeiture or forfeiture)) or criminal penalties (such as incarceration incarceration))[2] may be imposed on the non-paying entity or individual. Contents 1 Purposes and effects 1.1 The Four "R"s 1.2 Proportional, progressive, and regressive 1.3 Direct and indirect 1.4 Tax burden
2 Kinds of taxes 4.1 Ad valorem 4.2 Environment Affecting Tax 4.3 Capital gains tax 4.4 Consumption tax 4.5 Corporation tax 4.6 Income tax 4.7 Poll tax 4.8 Property tax 4.9. Sales tax 4.10Tariffs 4.11 Toll 4.12 Transfer tax 4.13Value Added Tax / Goods and Services Tax 4.14 Wealth (net worth) tax Purposes and effects Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law of law and public and public order , protection of property, property, economic infrastructure (roads (roads,, legal tender , enforcement of contracts, etc.), public etc.), public works, works, social engineering, engineering, and the operation of government itself. Most modern governments also use taxes to fund welfare and public and public services. services. These services can include education systems, systems, health care systems, systems, pensions for the elderly, unemployment benefits, benefits, and public and public transportation. transportation. Energy Energy,, water water and and waste management systems are also common public utilities. utilities. Colonial and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into cash economies. Governments use different kinds of taxes and va ry the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business as business,, or to redistribute resources
1
between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign and military aid, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy - see also tax exemption), exemption ), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive. a ttractive. A nation's tax system is often a reflection of its communal v alues or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community which the public wishes to create. In countries where the pu blic does not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power. The resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation hypothecation.. This practice is often disliked by finance ministers, ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since (in reality) money is fungible fungible.. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general gene ral fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls. Some economists, especially neo-classical economists, economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion. Also, one of every government's most fundamental duties is to administer possession and use of land in the geographic area over which it is sovereign, and it is considered econ omically efficient for government to recover for public purposes the additional value it creates by providing this unique service. Since governments also resolve commercial disputes, especially in co untries with common law, law, similar arguments are sometimes used to justify a sales tax or value or value added tax. tax. Others (e.g. libertarians libertarians)) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism anarcho-capitalism,, in which the provision of all social services should be a matter of voluntary private contracts contracts.. The Four "R"s Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation. The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation or justice systems. This is the most widely k nown function. A second is redistribution . Normally, this means transferring wealth from the richer sections of society to poorer sections. This function is widely accepted in most democracies democracies,, although the extent to which this should happen is always controversial. A third purpose of taxation is repricing . Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax. tax.[3] A fourth, consequential effect of taxation in its historical setting has been representation representation..[3] The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability of accountability and better governance, while indirect taxation tends to have smaller effects. Proportional, progressive, and regressive An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms describe a distribution effect, which can be applied
2
to any type of tax system (income or consumption) that meets the definition. A progressive A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, tax, where the effective tax rate decreases as the amount to which the rate is applied increases. In between is a proportional a proportional tax, tax, where the effective tax rate is fixed as the amount to which the rate is applied increases. The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption. Direct and indirect Taxes are sometimes referred to as direct tax or indirect tax. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll to poll taxes and property and property taxes, taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, bu t can be important under the law. Kinds of taxes 1. Ad valorem An ad valorem tax is one where the tax base is the value of a good, service, or property. When the tax is imposed on a commodity to its value it is called ad valorem tax. Whatever may be the size of the unit of the commodity, the tax is charged to its value. Sales taxes, tariffs, property property taxes, inheritance taxes, and value added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs).
2. Capital gains tax A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. In many cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax. However, in an inflationary environment, capital gains may be to some extent illusory: if prices in general have dou bled in five years, then selling an asset for twice the p rice it was purchased for five years earlier represents no gain at all. Partly to compensate for such changes in the value of money over time, some jurisdictions, such as the United States, States, give a favorable capital gains tax rate based on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. In Canada, 50% of the gain is taxable income. In India, Short Term Capital Gains Tax (arising before 1 year) is 10% flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year y ear or more and 20% for any an y other assets held 3 years or more. If such a tax is levied on inherited property, it can act as a de facto probate or inheritance tax. 3. Consumption tax A consumption tax is a tax on non-investment spending, and can be implemented by means of a sales tax or by modifying an income tax to allow for unlimited deductions for investment or savings. 4. Corporation tax Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations and often includes capital gains of a company company.. Earnings are generally considered gross revenue less expenses. Corporate expenses that relate to ca pital expenditures are usually deducted in full (for example, trucks are fully deductible in the Canadian tax system, while a corporate sports car is only partly ded uctible). They are often deducted over the useful life of the asset purchase. Notably, accounting rules about deductible expenses and tax rules about deductible expense will differ at times, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a temporary difference, which then creates deferred tax assets and liabilities for the corporation, which are carried on the balance the balance sheet. sheet. 3
5. Excises Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, the Federal government imposes an excise tax of 18.4 cents per U.S. gallon (4.86¢/L) of gasoline, while state governments levy an additional 8 to 28 cents per U.S. gallon. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-R's for data archival should not have to subsidize the producers of popular music. Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). For example, a high excise is used to discourage alcohol consumption, relative to other goods. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse. Similar taxes may exist on tobacco, pornography, etc., and they may be collectively referred to as "sin taxes". A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on vehicle ownership. 6. Income tax An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or corporation tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). 7. Property tax A property tax is a tax imposed on property by reason of its ownership. A property tax is usually levied on the value of property owned. There are three species of property: land, improvements to land (immovable manmade things, e.g. buildings) and personal property (movable things). Real estate or realty is the combination of land and improvements to land. Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property. For a period of over 150 years from 1695 a window tax was levied in England, with the result that one can still see listed buildings with windows bricked up in order to save their owners money 8. Sales tax Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions would make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on nonexempt (i.e. luxury) items pay the tax. Tariffs An import or export tariff (also called customs duty or impost) is a ch arge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a 4
common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union. 9. Toll A toll is a tax or fee charged to travel via a road, bridge, tunnel or other route. Historically tolls have been used to pay for state bridge, road and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes. 10. Value Added Tax / Goods and Services Tax A value added tax (VAT), also known as 'Goods and Services Tax' (G.S.T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process. 11. Wealth (net worth) tax Some countries' governments will require declaration of the tax payers' balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons". Tax Planning and Management Scheme of Taxation: Every person, whose total income of the previous year exceeds the maximum amount which is not chargeable to income tax, is an assessee and chargeable to income-tax at the rate or rates prescribed in the Finance Act for the relevant assessment year (2008-09). However, his total income shall be determined on the basis of his residential status in India. An analysis of the above statement would reveal the following important concepts, which are necessary for understanding the framework of the Income-tax Act.
Definition of Income Tax Taxes in India are of two types, Direct Tax and Indirect Tax. Direct Tax, like income tax, wealth tax, etc. are those whose burden falls directly on the taxpayer. The burden of indirect taxes, like service tax, VAT, etc. can be passed on to a third party. Income Tax is all income other than agricultural income levied and collected by the central government and shared with the states. According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.
The total income of an individual is determined on the basis of his residential status in India.
TAXATION - USEFUL AND IMPORTANT DEFINITIONS Income There is no specific definition of income but for statutory purposes there are certain items which are listed under the head income. These items include those heads also which normally will not be termed as income but for taxation we consider them as income. These items are included under section 2(24) of the income tax act, 1961. As per the definition in section 2(24), the term income means and includes: profits and gains dividends voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes the value of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17 of the act any special allowance or benefit, other than those included above any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profits are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living
5
capital gains any sum chargeable to income tax under section 28 of the income tax act any winnings from lotteries, crossword puzzles, races, including horse races, card games and games of any sort or from gambling or betting of any form or nature whatsoever any received as contribution to the assessee provident fund or superannuation fund or any fund for the welfare of employees or any other fund set up under the provisions of the employees state insurance act profits on sale of a license granted under the imports (control) order, 1955 made under the imports and exports (control) act, 1947 Person The income tax is charged in respect of the total income of the previous year of every ‘person’. Here the person means— 1. an individual : a natural human being i.e male, female minor or a person of sound or unsound mind 2. a Hindu undivided family (HUF) 3. a company : any Indian company any body corporate incorporated by under the laws of a country outside India any institution, association or body whether Indian or non Indian, which is declared by general or special order of the board to be a company any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income tax Act, 1922 or which is or was assessable or was assesses under this act as a company for any assessment year commencing on or before the 1st day of April. 1970 4. A firm i.e a partnership firm 5. An association of persons or a body of individuals whether incorporated or not 6. A local authority— means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the government with the control and management of a municipal or local fund. 7. Every artificial, juridical person, not falling within any of the above categories Assessment year Assessment year means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act. Company Section 2(17) of the act defines company. The term company includes: 1. any indian company 2. any corporate incorporated by or under the laws of country outside India 3. any institution, association or body which is or w as assessable or was assessed as a company for any assessment year under the 1922 Act or under the 1961 act 4. any institution, association or body, whether incorporated or not and whether Indian or non Indian, which is declared by general or special order of the board to be a company only for such assessment year or assessment years Indian company Indian company means a company formed and registered under the companies act, 1956. Any company formed and registered under any law relating to companies formerly in force in any part of India, other than Jammu and Kashmir and the union territories as specified or a corporation established by or under a central, state or provincial act or any institution, association or a body which is declared by the board to be company under section 2 (17) are referred as Indian company. In the case of state of Jammu and Kashmir, a company formed and registered under any law for the time being in force in the state. Similarly in case of union territories. Principal Officer Any public body or association of persons or any body of individuals or a company or a local authori ty is referred as the principle officer. They include the secretary, treasurer, manager or agent of the authority, company, association or body. Also any person connected with the management or administration of the local authority, company, association or body upon which the assessing officer has served a notice of his intention of treating him as the principal officer. Convertible Foreign exchange It means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the F oreign Exchange Regulation Act, 1973 and any rules made there under. Foreign Exchange Asset It means any specified asset which the assessee has acquired, purchased with or subscribed to, in convertible foreign exchange. Investment Income It means any income other than dividends derived from a foreign exchange asset. Long term Capital Gains
6
It means income chargeable under the head “capital gains relating to a capital asset being a foreign exchange asset which is not a short term capital asset. Non Resident Indian Indian (NRI) It means an individual being a citizen of India or a person of Indian origin who is not a resident. A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. Specified Asset This includes any of the following assets— 1. Shares in an Indian company 2. debentures issued by an Indian company which is not a private company as defined in the companies act, 1956 3. deposits with an Indian company which is not a private company 4. any security of the central government 5. units of the unit trust of India ] Such other assets as the central government may specify in this behalf by notification in the official gazette Under the Income-tax act, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year. But the total income of an individual is determined on the basis of his residential status in India. Resident and Non Residents Having established the ‘source of income of the ‘person, the next step is to define the residential status.
RESIDENTIAL STATUS CONCEPT OF RESIDENTIAL STATUS:-
Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year. An individual or HUF assessee who is resident in India may be further classified into (1) resident and ordinarily resident and (2) resident but not ordinarily resident. Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident and lowest on a nonresident. Therefore, it is in the assesses advantage that he claims nonresident status if he satisfies the conditions for becoming a non-resident. Types of Residents Resident Ordinary Resident
Non-Resident
Not Ordinarily Resident
Residential Status of an Individual Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies any one of the following Basic conditions :a. He is in India in the previous year for a period of at least 182 days or, b. He is in India for a period of at least 60 days during the relevant previous year and at least 365 days during the four years preceding that previous year. The aforesaid rule of residence is subject to the following exceptions:1. Where an individual, who is a citizen of India, leaves India in any year for the purpose of employment ( or where an individual, who is a citizen of India, leaves India as a member of the crew of an Indian ship), he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days. 2. Where an Indian citizen or a person of Indian Origin, who has settled abroad, comes on a visit to India in the previous year, he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.
7
In other words, such individuals do not become resident in India if they are less than 182 days in India. For such individuals, the conditions mentioned in clause (b) above do not apply. Therefore, such individuals may stay in India up to 181 days in a given previous year without becoming resident in India for that previous year. An individual who does not satisfy neither condition (a) nor condition (b) is non-resident for that previous year. A resident individual may either be an “Ordinarily Resident” OR “Not Ordinarily Resident ” in India for a given previous year. In order to determine whether a resident individual is ordinarily resident (ROR) or not ordinarily resident (RNOR), the tests laid down under section 6(6) have to be applied. A resident individual is treated as ROR in India in a given previous year if he satisfies the following additional conditions:Additional conditions:1. He has been resident in India in at least 9 out of 10 previous years (according to basic conditions noted above) preceding the relevant previous year; and 2. He has been in India for a period of at least 730 days during 7 years proceeding the relevant previous year. In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of basic conditions and both the two additional conditions. An individual who is resident in India but does not satisfy both the additional conditions is RNOR for that previous year. Let us understand the above provisions with the help of a simple example. Mr. X, resident of Mumbai left India for the first time for USA for higher studies on 7th June, 1996 and returned on 25th March, 1997. For the previous year 1996-97 (Assessment Year 1997-98), X was in India for 73 days ( From 1st April, 96 to 6th June, 96 and 26th March, 97 to 31st March, 97) X has satisfied the condition of being at least 60 days in India in P. Y. 1996-97 and of being at least 365 days in the preceding four previous years (i.e. P. Y. 1992-93, 1993-94, 1994- 95 and 1995-96) Therefore, he is resident in India for previous year 1996-97. Since he has gone outside India for the first time, he satisfies the additional two conditions also for becoming ROR. Accordingly, he is resident in India for P. Y. 1996-97. Let us take another example. Mr. X, a citizen of India goes abroad for employment on 15th August, 1996 and comes back on 10th June, 1997. For the previous year 1996-97, X was in India for 136 days ( From 1st April, 1996 to 14th August, 1996) Since X was not in India for at least 182 days in PY. 1996-97, he is non-resident in India for PY. 1996-97. The second condition of 60 days in the relevant PY and 365 days in the preceding four previous years is not applicable to him since he is an Indian citizen who has gone abroad for employment. The following points are very important in determining the residential status of an assessee:1. The residential status may change from year to year depending on whether the condition for residency is satisfied in that year or not. 2. The residential status under the Income Tax Act, 1961 have no connection with the provisions for residency under the Foreign Exchange Regulation Act or any other law in India. A person may be resident under FERA and yet be nonresident under the Income Tax Act and vice versa. 3. Residential status must not be confused with the nationality or citizenship of the assessee. These are entirely different concepts.
Residential Status of a Hindu Undivided Family (HUF) A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A resident Hindu undivided family is ordinarily resident in India if the karta or manager of the family is a ROR in India in the relevant previous year. If karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India. By implication, an HUF becomes non-resident if the control and management of its affairs is entirely from outside India in the given previous year. Residential Status of Partnership Firms or Association of Persons A partnership firm or an association of persons are is said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. By implication, they will be treated as nonresident in India if control and management of their affairs are situated wholly outside India. Residential Status of company An Indian company is always resident in India irrespective of where the control or management of the company is situated. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. By implication, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India. Residential status of “every other person ”
8
Every other person is resident in India if control and management of his affairs is wholly or partly situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India. Scope of Total Income and Incidence of Tax As already discussed, the incidence of income tax is highest in the case of ROR and lowest in case of NR. While the residential status of an assessee will determine the scope of his income the legal status (i.e. individual, HUF, firm, company, AOP, etc) will determine the rate of income tax applicable to the assessee. The following chart indicates the tax incidence on income in different situations depending on the residential status of the assessee:Whether tax incidence arises in the case of ROR RNOR NR Income Income Income Income Income India
received in India deemed to be received in India accruing or arising in India deemed to accrue or arise in India received/ accrued outside India from a business in
Income received/ accrued outside India from a business controlled outside India
Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes
Yes Yes Yes Yes No
Yes
No
No
Income deemed to be received refers to income, which is not actually received in the hands of the assessee but is nevertheless his income and is to be treated as if it has been actually received by him. The following incomes are deemed to have been received in India:1. Income Tax deducted at source from income received by the assessee 2. Annual accretions to the balance of an employee-assessee with a recognized Provident Fund to the extent such accretions are taxable. Any contribution by the employer in excess of 12 per cent of the employee’s salary to the PF and interest payable on the balance in excess of 12 per cent paid accordingly deemed to be received in India and taxed though there is no actual receipt. Income deemed to accrue refers to income, which has not actually accrued in the hands of the assessee but is nevertheless his income and is to be treated as if it has actually accrued in his favor. The following types of incomes are deemed or assumed to accrue or arise in India: 1. All income accruing or arising, whether directly or indirectly: 2. Through or from any business connection in India 3. Through or from any property in India 4. Through / from an asset / source of income in India 5. Through transfer of capital asset in India 6. Salaries earned in India or for services rendered in India. 7. Salaries payable by the government to an Indian citizen for service outside India. However any allowance or perquisite paid abroad is fully exempt from tax u nder section 10(7) 8. Dividends paid by an Indian Company outside India. 9. Interest/Royalty/Fees for Technical Services payable by:the government any resident person, (unless the interest is payable on any debt for a business or profession carried on by him outside India or for earning earning any income from from any source outside India), India), or any non-resident person, when the interest is payable on any debt incurred or moneys borrowed and used for a business or profession carried on by him in India. For example : A has the following income during financial year 1999-2000. Compute his taxable income if he is (i) ROR (ii) RNOR (iii) NR for that year. • •
• •
Interest from Bank Deposit in UK (1/3 received in India) - Rs.6,000 Rent from property in UK received in India - Rs.12,000 Pension from a former Indian employer received in UK - Rs.50,000 Income earned from a business set up in UK and controlled from UK - Rs.25,000
Income earned from a business set up in UK and controlled from India- Rs.50,000 • Taxable Income in India will be as follows:ROR RNOR NR Interest from Bank Deposit in UK 6000 2000 2000 Rent from property in UK 12000 0 0 Pension from Indian employer 50000 50000 50000
9
Income from business in UK and controlled from UK Income from business in UK but controlled from India Total income
25000
0
0
50000
50000
0
143000
102000
52000
The income tax to be paid by an individual is determined by his residential status. An individual can be termed as a ‘resident’ if he stays for t he prescribed period during a fiscal year i.e. 1st April to 31st March either for— 182 days or more, or 60 days or more (182 days or more for NRIs) and has been in India in aggregate for 365 days or more in the previous four years. Any person who does not satisfy these norms is termed as a ‘non-resident’. Taxation of Non-Residents • •
Introduction
In recent times Government of India has opened the Indian market and economy to attract more and more foreign capital and technical know-how. The foreign investors may be Indian Nationals who resided outside India and other foreign investors including corporations. A person who resides outside India is technically known as ‘non-residents’. The residential status of an individual does not depend upon the nationality or domicile of that person but it depends upon his stay in India during the previous year. In case of an assessee, other than an individual, the residence depends upon the place from which its affairs are controlled and managed. If the control and management of the affairs of a foreign company is, during the previous year, located wholly in India, it shall be treated as resident in India. Where part of the control and management of the affairs of a foreign company is situated outside India, it shall be treated as non resident company. Resident and Non Residents
An individual can be termed as a ‘resident’ if he stays for the prescribed period during a fiscal year i.e. 1st April to 31st March either for— 182 days or more, or 60 days or more (182 days or more for NRIs) and has been in India in aggregate for 365 days or more in the previous four years. Any person who does not satisfy these norms is termed as a ‘non-resident’. A resident individual is considered to be ‘ordinarily resident’ in any fiscal year if he has been resident in India for nine out of the previous ten years and, in addition, has been in India for a total of 730 days or more in the previous seven years. Residents who do not satisfy these conditions are called individuals ‘not ordinarily resident’. The table below gives the taxability of the individuals: STATUS INDIAN FOREIGN INCOME INCOME Resident and ordinarily resident Taxable Taxable Resident but not ordinarily Taxable Not taxable resident Non Resident Taxable Not taxable • •
Total income of Non-resident includes
Income received or deemed to be received in India in such year by him or on his behalf income which accrues or arises or is deemed to accrue or arise to him in India during such year income which is received in the first instance outside India and is subsequently remitted or otherwise transferred to India is not treated as income received in India for taxation purposes “Residents” and “ordinarily resident” individuals pay tax in India on Indian and foreign incomes; “non-residents” and “ordinarily not residents” pay tax in India on Indian incomes only. A non resident is not liable to pay tax on his foreign income until and unless it is received in India. Remuneration for work done in India is taxable irrespective of the place of receipt. Remuneration includes salaries and wages, pension, fees, commissions, profits in lieu of or in addition to salary, advance salary and perquisites. Allowances, deferred compensation and tax equalization are also taxable. Remittances to India in any previous year out of earlier year’s income are not charged to Indian income tax. If a person is a non resident for any year whether he is an Indian national or not, he is not liable to pay tax on remittances to India out
10
of his income earned outside India during that year. If a non resident has dealings with any person resident in India at arm’s length and on principle to principle basis and all operations are carried outside India, no income will accrue or arise to him on such dealings. No Income is deemed to arise to him in India if he purchases goods in India for export even if he maintains an office in India for the purpose. The income tax act also grants exemption to certain incomes in hand of the nonresidents. In case of a non-resident being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for the transmission outside India.
Certain Incomes of non-residents Taxable in India : Profits of Business Income from property in India Income form any assets or source India Income form money brought into India and lent on interest Fees for technical services and royalties Double taxation relief— to avoid double taxation on the same income in two countries, the central government may enter into an agreement with the government of any country outside India. a. for grants of relief in respect of income on which income tax has been paid both under this act and income tax has been paid both under this act in that country b. for the avoidance of double taxation of income under this act and under the corresponding law in force in that country • • • • • •
Taxation - Tax Treaties: Withholding Tax Rates India has signed tax treaties with various countries, most of which are based on the Organisation of Economic Cooperation and Development (OECD) Model. These treaties provide a favorable method of computing taxable business profits. India has tax treaties with over 40 countries including USA, UK, Japan, Germany and France, with whom it has significant economic relationships. This results in a relatively lower tax cost for foreign companies doing business in India. Rates for Dividends, Interest, Royalties and Technical Fees (in %)
Principal Officer
Any public body or association of persons or any body of individuals or a company or a local authority is referred as the principle officer. They include the secretary, treasurer, manager or agent of the authority, company, association or body. Also any person connected with the management or administration of the local authority, company, association or body upon which the assessing officer has served a n otice of his intention of treating him as the principal officer. Income Tax - Definition of Income Tax
Income tax is levied on the 'total income' of the assessee. Income of the 'previous year' is taxed in the 'assessment year.' Income is classified into and compted under five categories called 'heads of income.' The basic scheme of income tax is the principle 'pay as you earn.' One must pay his taxes in advance and by the due dates, in the prescribed percentages. Deferment in the payment of advance tax would result in the payment of interest. The income tax basic scheme is explained in brief as: Income tax is levied on the 'total income' of the assessable entity which is computed under the provisions of the Act. The income which are pertaining to the 'previous year' is taxed, but in the 'assessment year.' Income tax is charged at the rates being fixed by the for the year by the annual Finance Act. But the liability to pay the tax is based on the principle 'pay as you earn.' Also check Taxable Heads of Income for the definition of salary, wages, pension, allowance, etc. 11
Pay as you Earn A persone is not allowed to wait until 31 March to pay his/her taxes. The Income Tax Act has the provision of 'pay as you earn.' This do not pinch a tax payer at the end of the year making a lump sum payment. Such payments are done during the previous year in the form of 'TDS', 'TCS' and 'advance tax.' TDS (Tax deducted at source) This tax is deducted at the source of encome, by the employer or the payer and paid to the government. It includes salary, interest, commission and contract fees, rent, professional fees, etc. This type of deduction is popularly known as TDS. Such tax is subject to certain limits and certain conditions. For example if the earning up on fixed deposit is Rs. 5,000 in a bank, TDS at 10% and education cess at 2% i.e. a total of 10.2% will be deducted at the time of credit or at the time of payment, whichever is earlier. In case of senior citizen, if he/she estimates that the tax on the income is nil, Form No.15H duly filled and signed is to be submitted in duplicate to the bank. So, no TDS will be deducted. If the total income is less than the threshold limit, Form No.15G is to be submitted to the payer to prevent TDS from such interest. TCS (Tax collected at source) Unlike tax deducted at source, TCS is collected by a seller of certain specified goods at the specified rates on the purchase of the goods and it is remitted to the trasury on behalf of the buyer. In the same way, a person granting a lease or licence in a parking lot, toll-plaza, etc. collects the taxes at the specified rates as tax paid on behalf of the lessee. Income Tax Rates/ Slabs PERSONAL TAX RATES For individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI): For the Assessment Year 2009-10 Taxable income slab (Rs.)
Rate (%)
Up to 1,50,000 Up to 1,80,000 (for women) Up to 2,25,000 (for resident individual of 65 years or above)
NIL
1,50,001 – 3,00,000
10
3,00,001 – 5,00,000
20
5,00,001 upwards
30*
*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs 1,000,000 . Note : - •
Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
•
A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs
•
1,000,000 is limited to an amount by which the income is more than this mentioned amount. Agricultural income is exempt from income-tax.
Tax Planning
To understand the meaning of tax planning, tax avoidance and tax evasion, one can go through the following caseCase- X is an individual. For the assessment year 2008-09, his gross total income is Rs. 2,40,000. Tax on Rs. 2,40,000 is Rs. 23,460. To reduce his tax liability, he deposits Rs. 50,000 in public provident fund account.
12
Consequently, his taxable income and tax liability thereof will be reduced to Rs. 1,90,000 and Rs. 13,260 respectively. As the tax liability has been reduced within the legal framework, it is tax planning. Tax Planning: Tax planning can be defined as an arrangement of one’s financial and economic affairs by taking complete legitimate of all deductions, exemptions, allowances and rebates so that tax liability reduced to minimum. Methods used by Taxpayer to minimize Tax Liability 1. Tax avoidance: Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although it is within the four corners of the taxation laws bu t the advantages is taken by finding out loopholes in the laws. In short Tax avoidance is the art of dodging tax without breaking the law. 2. Tax Evasion: When a person reduces his total income by making false claims or by withholding the information regarding his real income, so that his tax liability is reduced, is known as Tax Evasion. Tax evasion is not only illegal but it is also immoral, anti-national practice. Tax avoidance vs. Tax EvasionTax avoidance Tax evasion 1. Any planning of tax which aims at reducing or 1. All methods by which tax liability is illegally negating tax liability in lagally recognized avoided is termed as tax evasion. permissible ways, can be termed as an instance of tax avoidance. 2. Tax avoidance takes into account the loopholes of 2. Tax evasion is an attempt to evade tax liability with law. the help of unfair means/methods. 3. Tax avoidance is tax hedging within the 3. Tax evasion os tax omission. framework of law. 4. Tax avoidance has legal sanction 4. Tax evasion is unlawful and an assessee gulty of tax evasion may be punished under the relevant laws. 5. Tax avoidance is intentional tax planning before 5. Tax evasion is intentional attempt to avoid payment the actual tax liability arises. of tax after the liability to tax has arisen. Tax planning vs. Tax managementTax planning 1. The objective of tax planning is to reduce the tax liability to the minimum. 2. Tax planning is futuristic in its approach.
3. Tax planning is very wide in its coverage and includes tax management.
4. The benefits arising from tax planning are substantial particularly in the long run.
Tax management 1. The objective of tax management is to comply with the provision of law. 2. Tax management relates to past (i.e. assessment proceeding, rectification, revision, appeals etc.), present (filing of return of income on time on the basis of updated records) and future (corrective action). 3. Tax management has a limited scope, i.e. it deals with specific activities such as filing of returns of income on time, drafting appeals, deduction of tax at source on time, updating records from time to time, etc. 4. As a result of effective tax management, penalty, penal interest, prosecution, etc, can be avoided.
Needs for tax planning:-
13
1. Reduction in Tax liability : The basic need of tax planning is to reduce tax liability so that enough surpluses out of profits remain with the earner of it for his personal and social needs and also for future investments in his business. 2. Reduction in cost : - incidence of tax forms a part of cost of production. The reduction of tax by tax planning reduces the overall cost. It results in more sales, more profit and more tax revenue. 3. Minimization of litigation : There is always a tug-of-war between taxpayers an d the tax administrators. The taxpayers try their best to pay the least tax and the tax administrators attempt to extract the minimum. 4. Healthy growth of economy : The growth of a nation’s economy depends upon the growth of its citizens. Saving through tax planning devices foster the growth of economy while saving through tax evasion lead to generation of black money, the evils of which are obvious.
Residential Status And Tax Liability In India, as in many other countries, the charge of income tax and the scope of taxable income varies with the factor of residence. There are two categories of taxable entities viz. (1) residents and (2) non-residents. Residents are further classified into two sub-categories (i) resident and ordinarily resident and (ii) resident but not ordinarily resident. The law prescribes two alternative technical tests of residence for individual taxpayers. Each of the two tests relate to the physical presence of the taxpayer in India in the course of the "previous year" which would be the twelve months from April 1 to March 31. A person is said to be "resident" in India in any previous year if he (a) is in India in that year for an aggregate period of 182 days or more; or (b) having within the four years preceding that year been in India for a period of 365 days or more, is in India in that year for an aggregate period of 60 days or more. The above provisions are applicable to all individuals irrespective of their nationality. However, as a special concession for Indian citizens and foreign citizens of Indian origin, the period of 60 days referred to in Clause (b) above, will be extended to 182 days in two cases: (i) where an Indian citizen leaves India in any year for employment outside India; and (ii) where an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India. In the above context, an individual visiting India several times during the relevant "previous year" should note that judicial authorities in India have held that both the days of entry and exit are counted while calculating the number of days stay in India, irrespective of however short the time spent in India on those two days may be. A "non-resident" is merely defined as a person who is not a "resident" i.e. one who does not satisfy either of the two prescribed tests of residence. An individual, who is defined as Resident in a given financial year is said to be "not ordinarily resident" in any previous year if he has been a non-resident in India 9 out of the 10 preceding previous years or he has during the 7 preceding previous years been in India for a period of, or periods amounting in all to, 729 days or less. Till 31st March 2003, "not ordinarily resident" was defined as a person who has not been resident in India in 9 out of 10 preceding previous years or he has not during the 7 preceding previous years been in India for a period of, or periods amounting in all to, 730 days or more. Section 6 of the Income-tax Act, 1961, prescribes the tests for determining the residential status of a person. S ection 6, as amended, reads as follows: For the purposes of this Act, (1) An individual is said to be resident in India in any previous year, if he a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or b) [* * *] c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
14
INCOME UNDER THE HEAD SALARY
UNIT II
COMPUTATION OF TAXABLE INCOME UNDER VARIOUS HEAD OF INCOME An understanding of the Income-tax law requires a study of the following: A. The Income-tax Act, 1961 (amended up-to-date) B. The Income-tax Rules, 1962 (amended up-to-date) C. Circulars, clarifications issued from time to time by the CBDT D. Judicial decisions The Income-tax Act, 1961 (Amended up to date): The provisions of income-tax are contained in the Incometax Act,1961 which extends to the whole of India1 and became effective from 1-4-1962(Section 1). Scope of Income-tax Act: The Income-tax Act contains provisions for determination of taxable income, determination of tax liability, procedure for assessment, appeals, penalties and prosecutions. It also lays down the powers and duties of various Income-tax authorities. Since the Income-tax Act, 1961 is a revenue law, there are bound to be amendments from time to time in this law. Therefore, the Income-tax Act has undergone innumerable changes from the time it was originally enacted. These amendments are generally brought in annually along with the Union Budget. Besides these amendments, whenever it is found necessary, the Government introduces amendments in the form of various Amendment Acts and Ordinances. Annual amendments: Every year a Budget is presented before the Parliament by the Finance Minister. One of the most important components of the Budget is the Finance Bill, which declares the financial proposals of the Central Government for the next financial year. The Bill contains various amendments which are sought to be made in the areas of direct and indirect taxes levied by the Central Government. The Finance Bill also mentions the rates of income-tax and other taxes which are given in the First Schedule attached to such Finance Bill. The First Schedule gives the rates of income-tax in 4 parts:
Part-I : It gives the rates of income-tax for various assesses for the current assessment year e.g. the Finance Act, 2003 has given t he rates of Income-tax for the assessment year 2003-04 and the Finance Act, 2004, shall give the rates of Income-tax for assessment year 2004-05. Part-II : It gives the rates for deduction of tax at source from the income earned in the current financial year e.g. the Finance Act, 2003 has given the rates at which tax is to be deducted at source in the financial year 2003-04. Similarly, Finance Act, 2004 shall give the rates of TDS on the income earned during the financial year 2004-05. Part-III : It gives the rates for calculating income-tax for deducting tax from income chargeable under the head ‘Salaries’. The same rates are applicable for computation of advance tax to be paid in the current Financial year, e.g., Finance Act, 2003 has given the rates for the computation of advance tax for the assessment year 2004-05 and the Finance Act, 2004 shall give the rates of advance tax for assessment year 200506. 1. When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the President, it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in the Income-tax Act. 2. Part-III of Schedule I of a particular Finance Act, which gives the rates for computation of Advance Tax and TDS on salary, etc., generally becomes Part-1 of the subsequent Finance Act. e.g., Finance Act, 2003, Part-III has given the rates for computation of Advance tax for Assessment Year 2004-05. The same rates shall become the rates of income-tax for Assessment Year 2004-05, in the Finance Act, 2004. Similarly, rates given under Part III of Schedule I of Finance Act, 2004 will become Part I of Schedule I of Finance Act, 2005 and these will be the rates of income-tax for Assessment Year 200506. 3. Besides the rates which are given in the Finance Act every year, there are certain incomes which are taxable at the special rates given in the Income-tax Act itself e.g. long-term capital gain is taxable @ 10%/20% and income from lotteries, crossword puzzles, etc. are taxable @ 30% for assessment year 2004-05. Existing Finance Act to have effect pending legislative provision for charge of tax [Section 294]: If on the first day of April in any assessment year, the provision has not yet been made by a Central Act for the charging of income-tax i.e. the Finance Act has not been enacted, the provisions of the previous Finance Act would continue to be effective. In case the Finance Bill is before the Parliament but has not yet been passed, then the rates at which the income is to be taxed shall be the rates prescribed in such Bill or the rates prescribed in the preceding Finance Act, whichever are more favorable to the assessee. Income-tax Rules, 1962 (amended up to date): Every Act normally gives power to an authority, responsible for implementation of the Act, to make rules for carrying out purposes of the Act. Section 295 of the Income-tax Act has given power to the Central Board of Direct Taxes to make such rules, subject to the control of Central Government, for the whole or any part of India. These rules are made applicable by notification in the Gazette of India. Circulars and Clarifications by CBDT: The CBDT in exercise of the powers conferred on it under section 119 has been issuing certain circulars and clarifications from time to time, which have to be followed and applied by the Income-tax
15
Authorities. Such circulars or clarifications are binding upon the Income-tax Authorities, but the same are not binding on the assessee and ITAT, although the assessee can claim benefit under such circulars. [UCO Bank v CIT (1999) 237 ITR 889 (SC)]. Judicial decisions: Any decision given by the Supreme Court becomes a law which will be binding on all the Courts, Appellate Tribunals, the Income-tax Authorities as well as on all the assessees. Where there are apparently contradictory rulings by the Supreme Court, the decision of larger bench (whether earlier or later in point of time) should always prevail. However, where the apparently irreconcilable decisions are given by benches having equal number of judges, the principle of the later decision being applicable would be attracted. Decisions given by a High Court, Income-tax Appellate Tribunal, etc. are binding on all the assessees as well as the Income-tax Authorities which fall under their jurisdiction, unless it is over-ruled by a higher authority. The decision of a High Court is binding on the Tribunal and the Income-tax Authorities situated in the area over which the High Court has jurisdiction.
Scheme of Taxation Every person, whose total income of the previous year exceeds the maximum amount which is not chargeable to income tax, is an assessee and chargeable to income-tax at the rate or rates prescribed in the Finance Act for the relevant assessment year. However, his total income shall be determined on the basis of his residential status in India. An analysis of the above statement would reveal the following important concepts, which are necessary for understanding the framework of the Income-tax Act. 1. Person; 2. Assessee; 3. Assessment year; 4. Previous year; 5. Rate or rates of tax; 6. Charge of income-tax; 7. Maximum amount which is not chargeable to income-tax; 8. Total income; 9. Residential status. Important Concepts Person [Section 2(31)]: Person includes : i. An Individual; ii. A Hindu Undivided Family (HUF); iii. A Company; iv. A Firm; v. An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not; vi. A local authority; vii. Every artificial juridical person not falling within any of the preceding sub-clauses. An association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not, such person or body or authority or juridical person, was formed or established or incorporated with the object of deriving income, profits or gains. [Explanation to section 2(31)]. a. An individual means a natural person i.e. a human being. It includes a male, female, minor child and a lunatic or idiot. However, the income of a minor is now generally included in the income of parent. The assessment of lunatic or idiot or minor whose income is taxable in his own hands is done in accordance with the provisions of section 160 i.e. through representative assessee. b. A Hindu undivided family has not been defined under the tax laws. However, as per the Hindu law, it means a family which consists of all persons lineally descended from a common ancestor including their wives and unmarried daughters. c. Association of persons: The Income-tax Act does not define what constitutes an association of persons which under section 2(31)(v) of the Income-tax Act, 1961 is an entity or unit of assessment. In the absence of any definition, the words must be construed in their plain ordinary meaning. Association of persons means two or more persons who join for a common purpose with a view to earn an income. [CIT v Indira Balkrishna (1960) 39 ITR 546 (SC)] It need not be on the basis of a contract. Therefore, if two or more persons join hands to carry on a business but do not constitut e a partnership, they may be assessed as an
Association of Persons (AOP). An Association of Persons does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. Co -heirs, co-legatees or co-donees joining together for a common purpose or action would be chargeable as an association of persons. In t he case of an association of persons, th ere were conflicting judgments whether the Assessing Officer has the option, to assess the tax either on the association itself as a unit of assessment or on the members of the association as individuals in respect of their respective share of the profits made by the association. The Supreme Court in the case of ITO v Ch. Atchaiah (1996) 218 ITR 239 has held that no such option is provided to the Assessing Officer under the 1961 Act. If it is the income of the Association of Persons in law, the Association of Persons alone has to be taxed; the members of the Association of Persons cannot be taxed individually in respect of the income of the Association of Persons. d. Body of individuals (BOI) means a conglomeration of individuals who carry on some activity with the objective of earning some income. It would consist only of individuals. Entities like companies or firms cannot be members of a
16
body of individuals. Income-tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI and on which the tax has already been paid by such BOI. Distinction between AOP and BOI
1. An AOP may consist of non-individuals but a BOI has to consist of individuals only. If two or more persons (like firm, company, HUF, individual etc.) join together, it is called an AOP. But if only individuals join together then it is called a BOI. For example, where X, ABC Ltd. and PQ & Co. (A firm) join together for a particular venture then they may be referred to as an AOP. If X, Y and Z join together for a particular venture, but do not constitute a firm then they may be referred to as a body of individuals. 2. An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activities, whereas a BOI may or may not have such common design or will. e. A local authority: The expression local authority means: i. Panchayat as referred to in clause (d) of Article 243 of the Constitution; or ii. Municipality as referred to in Article 243P of the Constitution; or iii. Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local funds; or iv. Cantonment Board as defined in section 3 of the Cantonments Act, 1924. f. Artificial juridical persons are entities which are not natural persons but are separate entities in the eyes of law. Though they may not be sued directly in a court of law but they can be sued through persons managing them. Therefore, God, idols and deities are artificial persons. Though they may not be sued directly they can be legally sued through the priests or the managing committee of the place of worship, etc. They are persons and their income, like offerings, are taxable. However, under the Income-tax Act, they have been provided exemption from payment of tax under separate provisions of the Act, if certain conditions mentioned therein are satisfied. Similarly, all other artificial persons, with a juristic personality, will also fall under this category, if they do not fall within any of the preceding categories of persons e.g., University of Delhi is an artificial person as it does not fall in any of the six categories mentioned above. Computation of total income Now, we are going to study how the total income is computed:
Heads of income Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :— Salaries. Income from house property. Profits and gains of business or profession. Capital gains. Income from other sources.
1. Salaries A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.
The following income shall be chargeable to income-tax under the head “Salaries”— a. any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not; b. any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; c. any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.]
SALARY Salary includes wages, annuity or pension, gratuity, fees, commission, perquisites or profits in lieu of or in addition to any salary or wages, advance salary, leave encashment, the portion of the annual accretion in any previous year to the balance at the credit or any employee participation in a recogonised provident fund to the extent it is taxable, transferred balance in a recogonised provident fund to the extent it is taxable. Salary is taxable on accrual basis, whether received or not. Leave salary: In case of central or state government employees, leave salary is exempt from tax. In case of others least of the following:
17
Cash equivalent of leave salary in respect of the period to the credit of an employee only at the time of retirement or superannuation (leave cannot exceed more than 30 days of leave for every year of actual service). 10 months average salary. Amount not chargeable to tax as specified by the government (if date of retirement is after July 1, 1997 Rs. 2,40,000. Leave encashment actually received by the employee. Gratuity: # For central or state government employees, gratuity is exempt from tax. # In case of employees covered under Payment of Gratuity Act, 1972. 15 days salary for every completed year in service. more than six month’s service shall be treated as full year. Gratuity shall be calculated as 15/26 x salary x nos of years of completed service. # In case of others least of the below - Rs. 3,50,000 - ½ x salary x nos of years of completed service. (part year shall not be included). gratuity actually received. Pension: Uncommuted pension is taxable in hands of all employees Commuted pension is not taxable in the hands of employees of central or state government or local authority or statutory corporation. In case of other persons receiving gratuity, 1/3 rd value of commuted pension is exempt. In case of other persons not receiving gratuity, 1/2 value of commuted pension is exempt. DEDUCTIONS FROM SALARY: S. 16(i) Standard deduction S. 16(ii) Entertainment allowance S. 16(iii) Professional tax or tax on employment S. 16(i) Standard deduction: Salary < Rs. 1,00,000.
Rs. 25000 or 1/3 rd of the salary.
Salary > Rs. 1,00,000 and less than < Rs. 5,00,000.
Rs. 20000 or 1/3 rd of the salary.
Salary > Rs. 5,00,000.
NIL
S. 16(ii) Entertainment allowance: In case of government employee least of Rs. 5,000. 20% of salary. Actual amount received as entertainment allowance. For others entertainment allowance is taxable.
S. 16(iii) Professional tax or tax on employment: As levied by the state under article 276(2) of the Constitution is allowed deduction. Tax on salary of non – resident technicians: (u/s 10(5B): The following conditions must be satisfied in order to get the benefit of exemption: The employee should render services as a technician, i.e., the employee should have specialized knowledge and experience of either, construction or manufacturing op erations, or in mining or in the generation of electricity or any other form of power or agriculture, animal husbandry, dairy farming, deep sea fishing or ship building, grading and evaluation of diamonds for diamond export or import trade, cookery and information technology including computer architecture systems, platforms and associated technology, software development process and tools or electrical engineer employed for the purpose of providing pager and cellular networks or any field which is notified by the Central Government. Allowance:
18
Allowance is generally defined as fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the service renderd by the employee or as compensation for unusual conditions of that service. Tax treatment of different allowances is given below: 1. City compensatory allowance: City compensatory allowance is taxable. 2. House Rent allowance[sec.10(13A) and rule 2A] : House rent allowance least of the following is exempt: a. An amount equal to 50% of salary if residential house is situated in Bombay, Calcutta, Delhi or Madras. And 40% of salary if residential house is situated in o ther places. b. HRA received by the employee or c. The excess of rent paid in over of 10% of the salary. The exemption is not available where an employee lives in his own house or in a house for which he does not pay any rent. (Salary includes DA, commission)
3. Entertainment allowance [sec 16(ii)]: In case of government employee least of(a) Rs.5,000; (b) 20% of salary; (c) amount of entertainment allowance granted during the previous year, is deductible. In case of non- Government employees’ entertainment allowance deduction will not be available from the assessment year 2002-03. 4. Special allowance prescribed as exempt under sec.10(14) :
GRATUITY Gratuity is a lump sum amount that your employer pays you when you retire or resign from the organization. An Employee does not contribute any portion of his salary towards this amount. Gratuity is paid out at the time of superannuation (if you retire at the age of 58), when you retire (at any other age) or resignation, and in the event of your death or being rendered disable because of an accident or illness. You need to have at least five full years of service with an employer to qualify for gratuity. This rule is relaxed in the last instance. In the event of your death, the gratuity will be paid to your nominee. For the purpose of exemption of gratuity under sec.10 (10) the employees are divided under three categories :
TAX TREATMENT OF GRATUITY: Status of employee Govt. employees Non-government employee by the payment of Gratuity Act,1970 Non-government employee not covered by the payment of Gratuity Act,1970
Whether gratuity is taxable It is fully exempt from tax under section 10(10)(i). It is partly exempt from tax under section 10(10)(ii). It is fully or partly exempt from tax under section 10(10)(iii).
Non-government employee by the payment of Gratuity Act, 1970 sec.10 (10) (ii):Any gratuity received by an employee, covered by the payment of Gratuity Act, 1972, is exempt from tax on the following basis:1. 15 days’ salary ( 7 days’ salary in the case of employees of a seasonal establishment) based on salary last drawn for each year of service( i.e.,15 days’ salary X length of service), 2. Rs. 3,50,000. 19
3. Gratuity actually received. What is exempt from tax: The least of the above three is exempt from tax. How to find out length of service? Consider the following case The difference between date of Length of service for the purpose of retirement and date of joining sec. 10(10) (ii) Case 26 years, 5 months and 29 days 26 years 1 Case 26 years, and 6 months 26 years 2 Case 26 years, 6 months and 1 day 27 years 3 Case 26 years, 11 months and 29 days 27 years 4
In case of other employee:- Any other gratuity received by an employee on retirement, death, termination, resignation or on his becoming incapacitated prior to the retirement, is exempt from tax on the following basis1. Rs. 3,50,000. 2. Half month’s average salary for each completed year of service. 3. Gratuity actually received. What is exempt from tax: The least of the above three is exempt from tax.
Pension A pension is a steady income given to a person upon retirement, typically in the form of a guaranteed annuity. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also fund pensions. Pension [sec. 17 (1) (ii)]: Pension covered under casePension Uncommuted pension
Status of employee Government employee/ Non-Government employee
It is chargeable to tax. It is chargeable to tax.
Commuted pension Commuted pension
Government employee
It is fully exempt from tax under sec.10 (10A) (i).
Non-Government employee
It is fully or partly exempt from tax under sec.10 (10A) (ii).
Uncommuted pension : It is periodical payment of pension. Commuted pension: It is lump sum payment in lieu of periodical payment. Commuted pension is taxable as underStatus of employee Gratuity received/ not received Exemption Government employee Gratuity may (may not) be Entire pension is exempt from tax under received sec.10(10A)(i). Non-Government employee Gratuity is received. One-third of the pension which he is normally entitled to receive is exempt from tax under
20
Non-Government employee
Gratuity is received.
sec.10 (10A) (ii). One-half of the pension which he is normally entitled to receive is exempt from tax under sec.10 (10A) (ii).
PERQUISITE “Perquisite”[Sec.17(2)] includes— The term perquisite is defined as “a gain or profit incidentally made from employment in addition to regular salary or wages, specially one of kind expected or promised”. or “Any casual emolument or benefit attached to an office or position in addition to salary or wages”. i. the value of rent-free accommodation provided to the assessee by his employer[sec.17(2)], ii. the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer[sec.17(2)], iii. the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:— a. by a company to an employee who is a director thereof; b. by a company to an employee being a person who has a substantial interest in the company; c. by any employer (including a company) to an employee to whom the provisions of paragraphs d. (a) and (b) of this sub clause do not apply and whose income under the head “Salaries” (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceedsRs.50,000[sec.17(21)(iii)]]. For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this
21
iv. the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person : Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. For the purposes of this clause,— a. “cost” means the amount actually paid for acquiring specified securities and where no money has been paid, the cost shall be taken as nil; b. “specified security” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees’ stock option and sweat equity shares; Substituted for ‘under the head “Salaries”, exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds eighteen thousand rupees;’ by the Finance Act, 1985, w.e.f. 1-41986. c. “sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; and d. “value” means the difference between the fair market value and the cost for acquiring specified securities;
Valuation of perquisites Valuation of Rent free unfurnished accommodation [Rule 3(1)]:For government and state government employees including services lent to public undertaking or government bodies value of rent-free accommodation is equal to rent fixed by the rules framed by the government. For semi government employees 10% of salary. Includes employees of RBI, Corporation established by a central, state or provincial act or its wholly owned subsidiary company,
A company in which all shares are held by the government or RBI or a corporation owned by the RBI, or its wholly owned subsidiary company, A body or undertaking, including a society registered under the Societies Registration Act 1860, financed wholly or mainly by the government and A company (other than a corporation referred to in b or c above) in which not less than 40% of the shares are held by the government or RBI, provided the employee is a retired government officer or a government officer on deputation For private sector employees In case of accommodation in Delhi, Bombay, Calcutta, Madras If fair rent is <10% of salary, fair rent is taxable value. If fair rent is > 10% and < 60% of salary 10% of salary. If fair rent is > 60% value is fair rent less 50% of salary. In case of accommodation in places other than in Delhi, Bombay, Calcutta, Madras If fair rent is <10% of salary, fair rent is taxable value. If fair rent is > 10% and < 50% of salary 10% of salary. If fair rent is >50% value is fair rent less 40% of salary. Salary includes basic, bonus, commission, fees and taxable allowances. Value of furnished accommodation : First calculate value of unfurnished accommodation as above then add value of furnishings as: 10% p.a. of original cost of furniture if the furniture is owned by the employer. Actual hire charges if the employer hires the furniture. Value of accommodation provided at concessional rent: 22
First calculate value of unfurnished accommodation as above then reduce from the calculated amount the rent paid. Valuation of perquisite in respect of motor car: Private purpose •
Not a perquisite
Not a perquisite
Expenditure of private purpose it taxable
Car is owned/ hired by the employer and expenses met by the employer
Expenses + depreciation/ hire charges is perquisite
•
Not a perquisite
Car owned by the employee and expenses are reimbursed by the employer
Actual expenses of employer
•
Private and official purpose
Car owned by the employee and expenses met by him
Not a perquisite •
Official Purpose
Not a perquisite
Expenses + depreciation/ hire charges of private use is a perquisite. If difficult to attribute private and official use, if car hp < 16, perquisite is Rs.600 p.m., if hp>16 Rs.800 p.m. with Rs.300 p.m. chauffeur salary.
Car is owned/ hired by the employer and expenses met by the employee
Depreciation/ hire charges + chauffeur salary.
Not a perquisite
Expenses + depreciation/ hire charges of private use is a perquisite. If difficult to attribute private and official use, if car hp < 16, perquisite is Rs.200 p.m., if hp>16 Rs.300 p.m. with Rs.300 p.m. chauffeur salary.
Valuation of gas, electricity or water supply provided free of cost: When employer provides the mentioned facilities out of his own supply, value is NIL. When employer provided the facilities purchased from outside agency: If used for official purpose, value of perquisite is NIL. If used for private purpose, the amount actually spent. If used for official and private purpose, amount actually spent or 6.25% of salary (salary includes, DA, commission, but excludes other allowances and perquisites), whichever is less. Valuation in respect of free education: Providing training facility to employees, no perquisite. Cost of education and hostel charges of 2 children, Rs. 100 and Rs. 300 respectively is not a perquisite. Above this limit is perquisite. The employer directly pays fees to school. Valuation in respect of free transport: If employer is transport undertaking, it is not a perquisite, in other cases the amount actually spent. Transport allowance of Rs.800 per month to an employee to meet his expenditure for the purpose of commuting between place of his residence and place of duty is exempt. For an employee who is blind or orthopaedically handicapped with disability of lower extremities the amount of exemption is Rs.1,600 per month.
23
Valuation in respect of free domestic servant : Sweeper, watchman, gardener, Rs. 120 p.m. per person is taxable. If the sweeper, watchman, gardener is employed by the employee and the salary is paid by the employer, entire salary is taxable. Any other domestic servant, entire salary paid to servant is taxable. Valuation of employee share option : When shares held by the government are transferred to the employee, no perquisite. When shares are offered at the same rate as to other shareholders, no perquisite. When shares are offered at a discount to the price offered to the shareholders, the difference is perquisite. When the shares are offered only to the employees, value of perquisite is the difference between the market price at the date of acceptance and the price at which the shares are offered. Form AY 2001 - 2002 employee share options are taxable only at the time of sale of shares under the head capital gains. Valuation of interest free advance/ loan: It is not a perquisite, hence not taxable. Valuation of Leave travel concession in India (LTC): When the journey is performed by air
Amount of air economy fare of the National Carrier by the shortest route, or amount actually spent, whichever is less.
When journey is performed by rail.
Amount of air-conditioned first class fare by the shortest route, or amount actually spent whichever is less.
Where place of journey is performed are connected by rail and journey is performed by other mode of transport
Amount of air-conditioned first class fare by the shortest route, or amount actually spent whichever is less.
Where place of journey is performed are not connected by rail and recognised public transport exits.
First class or deluxe class fare by the shortest route or the amount spent whichever is less.
Where place of journey is performed are not connected by rail and no recognised public transport exits.
Amount of air-conditioned first class fare by the shortest route (as if the journey had been performed by rail), or amount actually spent, whichever is less.
Valuation of medical facility: the following shall not be treated as perquisite: Medical facility provided in a hospital, clinic, dispensary or nursing home maintained by the employer. Reimbursement by the employer of expenditure incurred by the employee on his or his family members medical treatment in any hospital maintained by the government, local authority or approved by the government for its employees. Payment made by the employer directly or reimbursement of expenditure to a hospital which is approved by the chief commissioner for prescribed diseases for himself or his family subject to attachment of certificate from the hospital. Group medical insurance obtained by the employer for his employees or reimbursement of insurance premium to the employees who take such medical insurance. Reimbursement by employer of amounts spent by the employee in obtaining medical treatment for himself or any member of his family from any doctor not exceeding Rs. 15000 in a year. Any expenditure/ reimbursement incurred by the e mployer on medical treatment of the employee outside India subject to conditions below:
Medical treatment of employee or any member of his family outside India.
As permitted by RBI is exempt.
24
Cost of travel of the employee, any member of his family, one attendant who accompanies the patient in connection with treatment outside India.
The expenditure is exempt if the gross total income without including medical expenditure is less than Rs. 2,00,000.
Cost of stay abroad of employee, family member, one attendant.
As permitted by RBI is exempt.
Valuation of other perquisites: Amount spent by the employer to pay club fees and subscription on behalf of the employee is taxable u/s 17(2)(iv). If the amount is spent for the benefit of the employer and not for providing personal amenity to the employee, the expenses are not taxable. Life insurance policy premium is taxable in the year of payment of premium under section 17(2)(iv). Premium paid by the employer for taking an accident insurance policy on employees is not taxable if the employer is beneficiary under such policy; otherwise it is taxable
TAX DEDUCTED AT SOURCE
Tax deducted at source is one of the modes of collecting Income-tax from the assessees. Such collection of tax is effected at the source when income arises or accrues. Hence where any specified type of income arises or accrues to any one, the Incometax Act enjoins on the payer of such income to deduct a stipulated percentage of such income by way of Income-tax and pay only the balance amount to the recepient of such income. The tax so deducted at source by the payer has to be deposited in the Government treasury to the credit of Central Govt. within the specified time. The tax so deducted from the income of the recipient is deemed to be payment of Income-tax by the recipient at the time of his assessment. Income from several sources is subjected to tax deduction at source. Presently this concept of T.D.S. is also used as an instrument in enlarging the tax base. Some of such income subjected to T.D.S. are salary, interest, dividend, interest on securities, winnings from lottery, horse races, commission and brokerage, rent, fees for professional and technical services, payments to non-residents etc. INTRODUCTION
Assessee pays tax in the assessment year on the income earned in previous year. Due to this rule the tax collection is delayed till the completion of the previous year. Even sometimes people conceal there income and the tax is not paid at all. In order to overcome these problems, government started deducted some amount of tax from the amount which is receivable by the assessee. The amount of tax so deducted is called as “Tax Deducted at Source”, i.e., TDS. OBJECTIVE
25
After going through this lesson you will be ale to understand what is the scheme of tax deduction at source. How tax is deducted from salary income, interest and dividend income, winning from lottery, crossword puzzle, races including horse races, gambling, betting etc., and payments of Rent, Contractors and Professional fees. TDS ON SALARY
TDS on salaries [Sec 192] Any person responsible for paying Salaries (i.e. employer) is required to deduct tax on the salaries payable by him. Tax is to be deducted at the prescribed rate applicable for P.Y. TDS is deducted after considering the following: 1. If salary exceeds minimum non-taxable limit (Rs 1,00,000/Rs. 1,35,000/Rs. 1,85,000) 2. Value of perk is to be included in salary. 3. Employee can claim deduction u/s 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80G, 80GG and 80U. 4. Salary shall be rounded off in multiple of Rs 10 and tax in multiple of Rs 1 5. Income from any other heads if disclosed by assesses shall be considered 6. If employee was earlier employed somewhere else during the P.Y. then the present employer should consider the amount of income & TDS on that for computing the TDS on total income of employee 7. TDS shall be deducted on monthly basis. TDS ON INTEREST ON SECURITIES
TDS on Interest on securities [sec 193] Any person responsible for paying interest on securities shall deduct interest at the prescribed rates. Tax is to be deducted at the time of:1. Payment of interest or 2. Making interest due; which ever is earlier No TDS on following: (a) 4 ½ % National Defence bonds (b) National development bonds (c) 7 yrs National Saving Certificates (d) 6 ½ % or 7% Gold Bonds (e) National Development Bonds (f) Debentures of Co-operative society No TDS on interest on debentures issued by a listed public company if following conditions are satisfied: 1. Interest is paid by A/c payee cheque 2. Interest is paid to an resident Individual and 3. If interest is less then Rs.2, 500 p.a. 4. Debentures are listed in a stock exchange The rate of T.D.S is: 10% plus surcharge plus education cess - for Listed Debentures 20% plus surcharge plus education cess - for Non- Listed Debentures
TDS ON DIVIDEND
TDS on Dividends [Sec 194] The principal officer is required to deduct tax at prescribed rates on dividend (including Deemed dividend) payment to a resident individual shareholder (both preference & equity) No TDS on dividend paid by a Co in which public is substantially interested i.e. a public company, if following conditions are satisfied: 1. Dividend is paid by an A/c payee cheque 2. Dividend is paid to a resident Individual 3. Dividend is less than Rs 5000 p.a. However from 1.6.97 no TDS is required in case of dividend paid by a domestic company. Thus this section is now relevant only for non-Indian company declaring dividend in India and domestic company declaring deemed dividend Now Indian Companies are required to pay corporate dividend tax @ 10% on dividends paid or declared u/s 115-O. The rate of T.D.S is 10% plus surcharge plus education cess. TDS ON WINNING TDS on winning from lottery or crossword puzzle [Sec 194 B] Any person responsible for paying income on winning from lottery or crossword puzzle shall deduct tax @ 30% plus surcharge plus education cess. TDS is payable if the amount of
26
winning exceeds Rs 5,000. Thus, no TDS on payment of Rs 5,000 or less. TDS on winning from Horse Races [Sec 194 BB] Same provisions as in lottery & crossword puzzle. Only difference is Rs 5,000 to be read as Rs 2,500. TDS ON CONTRACTORS Payment to contractors and subcontractors [Sec 194 C] 1. If payment is made to an OR contractor. 2. Payment should be made as a part of contract. 3. Payment should be made by: a) Govt. f) Trust b) Local Authority g) A statutory cooperation c) Company h) A firm d) Co-Operative Society I) University established under Act e) Society j) Authority established under Act 4. Tax to be deducted if payment exceeds Rs. 20,000. 5. Tax to be deducted at the time of making due or making payment, whichever is earlier 200 6. TDS rate is 2 % plus surcharge plus education cess of contract amount (1 % in case of advertising contract) TDS on payment to Sub Contractors [Sec 194 C] 1. If payment is made to an OR subcontractor 2. Payment should be made as a part of contract 3. Payment should be made by any person, except HUF & individuals 4. Tax to be deducted at the time of making due or making payment. 5. Tax to be deducted @ 1% plus surcharge plus education cess of contract amount TDS ON PROFESSIONAL FEES TDS on Professional or Technical Fees [Sec 194 J] 1. Payment should be made by any person, except HUF & individuals 2. Tax to be deducted at the time of making due or making payment, whichever is earlier. 3. Tax to be deducted @ 5 % plus surcharge plus education cess of total amount. 4. No TDS on payment made due before 1.7.95 5. TDS only if amount exceeds Rs. 20,000 TDS ON RENT TDS on Rent [Sec 194 I] 1. Payment should be made by any person, except HUF & individuals 2. Tax to be deducted at the time of making due or making payment, whichever is earlier. 3. Tax to be deducted @ 20 % plus surcharge plus education cess of total amount (15% in case payment is made to Individual or HUF) 4. TDS only if amount exceeds Rs. 1, 20,000. LET US SUM UP T.D.S stands for tax deducted at source, which literally means the tax required to be paid by the assessee, is deducted by the person paying the income to him. Thus, the tax is deducted at the source f income itself. Although it is worth mentioning here that whole of tax is not deducted at the source but only a certain part is deducted. In some cases it may also get excess while in other cases it may be less then the total tax liability. However, in case of salary the total tax liability can be deducted at source itself. The intention behind T.D.S is fast collection of tax and to avoid tax evasion, by concealing income. . SELF ASSESSMENT EXCERCISE 1. Discuss the provisions of the T.D.S on income from salary in the income tax act. 2. Compare the T.D.S provisions of professional and contractors.
How to Compute Total Income: The steps in which the Total Income, for any assessment year, is determined are as follows: 1. Determine the residential status of the assessee to find out which income is to be included in the computation of his Total Income (Residential status and the need for determining the residential status are discussed in the next chapter) 2. Classify the income under each of the following five heads. Compute the income under each head after allowing the
27
Deductions prescribed for each head of income. a Income from Salaries
b.
c.
d.
e.
Salary/Bonus/Commission, etc. ——— Taxable Allowance ——— Value of Taxable perquisites ——— Gross Salary ——— Less: Deductions under section 16 ——— Net taxable income from Salary ——— Income from House Property Net annual value of House Property ——— Less: Deductions under section 24(1) ——— Income from House Property ——— Profit and Gains of Business and Profession Net profit as per P & L Account ——— Less/Add: Adjustments required ——— to be made to the profit as per provisions of Income-tax Act. Net Profit and Gains of Business and Profession ——— Capital Gains Capital Gains as computed ——— Less: exemptions under section 54/54B/54D, etc. ——— Income from Capital Gains ——— Income from Other Sources Gross Income ——— Less: Deductions ——— Net Income from Other Sources —————— Gross Total Income [(a) + (b) + (c) + (d) + (e)] Less: Deduction available under Chapter VIA ——— (Sections 80CCC to 80U) —————— Total Income
Employees Provident Fund The Government has set up the Employees Provident Fund (EPF), a social security organization that provides retirement benefits to private sector employees and non-pension able public service employees. The Government has set up the Employees Provident Fund (EPF), a social security organization that provides retirement benefits to private sector employees and non-pension able public service employees. Provident fund scheme is a retirement benefit scheme. Under this scheme, a stipulated sum is deducted from the salary of the employee as his contribution towards the fund. The employer also gene rally contributes simultaneously an equal amount out of its pocket to the fund. Types of provident fund: 1. Statutory Provident Fund. 2. Recognized Provident Fund 3. Unrecognized Fund. Besides, an employee can also become member of the public provident fund. 28
1. Statutory Provident Fund:- This fund is maintained by Government and semi-Government organizations, local authorities, railways, universities and recognized educational institutions. 2. Recognized Provident Fund: A provident fund is recognized by the Commissioner of Income Tax in accordance with the rules contained under Part A of the Fourth Schedule to the Income-Tax Act, it becomes recognized provident fund. 3. Unrecognized provident fund: - If a provident fund is not Recognized by the Commissioner of IncomeTax, it is known as unrecognized provident fund. 4. Public Provident Fund: -
CORPORATE TAXTATION
Unit-III
APPEALS AND REVISION Objectives · To know nature of appeals · To know when appeal can be made. · To know authorities with whom appeal can be filled. · To know time limit for filling appeals. Appeals ! what is this–are we studying law–. Yes my friends we are studying a legal subject. Its an Act. It has legal bifurcations and effects. We need to be very careful while we deal with it. Many a times either we or the department (i.e. the Income Tax department )is not satisfied by each others actions and we, both, look for an other third person , who can give us better rulings and which will be binding on both of us. Keeping this in mind the Act has given powers to both the assessee and he department to go in for Appeals to the Higher Authority. The Constitution of India guarantees the citizens of the country certain fundamental rights. Therefore, under any system of rule of Law, the right to appeal for redressal of one’s grievances is g enerally in built. However, there is no inherent right to appeal. The right to appeal must be given in the law under the express enactment. A
29
person can appeal against an order of the authority only if the right to appeal has been statutorily provided in the statute. This is because an appeal is a statutory right and, if the concerned law does not specifically provide for an appeal, no one can prefer an appeal. [CIT v Ashoka Engineering Co. (1992) 194 ITR 645 (SC)]. Just as an appeal being a creature of the statute would not lie unless it is provided by the statute, the right so conferred cannot be taken away merely because some other remedy is also available to the assessee. [Shantibai (Smt.) v CIT(1984) 148 ITR 49 (MP)]. Under the Income-tax Act, following two alternatives are available to the assessee, if he is not satisfied with the order passed by the Assessing Officer; i. Appeal : W.e.f. 1-10-1998, first appeal against the order o f the Assessing Officer shall, in all cases, lie with the Commissioner (Appeals). OR ii. Revision: Alternatively, if the appeal is not preferred, or if it could not be filed within the time limit allowed, the assessee can apply under section 264 to the CIT for revision of the order of the Assessing Officer. This is known as revision in favour of the assessee. The CIT can also take up suo motu the case for revision u/s 264. In some cases, the CIT can also take up the case for revision u/s 263. This is known as revision of the order of the Assessing Officer, which is erroneous and prejudicial to the interest of revenue.The first appeal can only be made by the assessee. The Assessing Officer cannot appeal to any higher authority against his own order. Remedy available against the order of the Commissioner (Appeals)/Revision orders: The assessee can file an appeal against the orders of the Commissioner (Appeals) or the revision orders of the CIT in the following cases: a. Second Appeal: If the assessee is not satisfied with the order passed by the Commissioner (Appeals), he can appeal against that order to the Appellate Tribunal. Similarly, the CIT may also direct the Assessing Officer to file an appeal against that order with the Appellate Tribunal if the Revenue is not satisfied with the order of the Commissioner (Appeals). b. Appeal against revision : If the revision of the order of Assessing Officer is done u/s 264 , by CIT which is revision in favour of the assessee, no appeal can be filed against this order under the Income-tax Act. However, writ under article 226/227 is possible. On the other hand, if the revision order is passed u /s 263, by CIT which is known as revision of orders prejudicial to the interest of revenue, the assessee can file an appeal with the Appellate Tribunal. Appeal against the revision order under section 263 can only be preferred by the assessee. The Commissioner of Income-tax cannot file an appeal against his own order. Remedy against orders of Appellate Tribunal If the assessee or the CIT is not satisfied with the order of the Appellate Tribunal, the appeal lies to the High Court, if the High Court is satisfied that the case involves a substantial question of law. Appeal Against order of High Court to Supreme Court If the assessee or the CIT is not satisfied with the order passed by the High Court, they may file an appeal against the order of the High Court to the Supreme Court, provided it is treated as a fit case by the High Court. The Supreme Court is the final appellate authority. First Appeal As already discussed, the first appeal against the order o f Assessing Officer shall lie to the Commissioner (Appeals). a. Appealable orders before Commissioner (Appeals) [Section 246A]: Any assessee aggrieved by any of the following orders, may appeal to the Commissioner (Appeals) against– a. An order against the assessee, where the assessee denies his liability to be assessed under this Act; or b. Any order of assessment under section 143(3) or 144, where the assessee objects: i. To the income assessed, or ii. To the amount of tax determined, or iii. To the amount of loss computed, or iv. To the status under which he is assessed; c. An order of assessment, reassessment or re-computation under section 147 o r section 150; d. An order of assessment or reassessment under section 153A (w.e.£: 1-6-2003); e. An order of rectification made under section 154 or order under section 155 having the effect of:
30
i. Enhancing the assessment, or ii. Reducing a refund, or iii. Order refusing to allow the claim made by the assessee under either of these sections; f. An order u/s 163 treating the assessee as the agent of a nonresident; g. An order under section 170(2) or (3) relating to assessment on successor when the predecessor cann ot be found or recovery of tax of the predecessor from the successor in case of succession to business otherwise than on death; h. An order u/s 171 refusing to recognize partition of a HUF; i. An order u/s 201 treating the assessee deemed to be assessee in default for failure to deduct the whole or any part of the tax or pay tax after deduction; j. An order u/s 237 relating to refunds; k. An order imposing penalty under sections 221,271, 271A, 271B, 271F, 272AA and 272BB; l. An order made by Joint Commissioner imposing a penalty under sections 271C, 271D, 271E and 272AA; m. An order of Joint Commissioner/Joint Director imposing a penalty under section 272 A; n. An order imposing a penalty under Chapter XXI i.e. under sections 270 to 275; O. An order of assessment made by an Assessing Officer under clause (c) of section 158BC i.e. Block Assessment, in respect of search initiated under section 132 or books of account, other documents or any asset requisitioned under section 132A, on or after 1.1.1997; p. An order imposing a penalty under section 158BFA(2) for concealment of income in case of Block Assessment; q. An order made by an Assessing Officer other than a Joint Commissioner under the provisions of this Act in the case of such person or class of persons, as the Board may, having regard to the nature of the cases, the complexities involved and other relevant considerations direct. It may be noted that no appeal lies under the Income-tax Act against the following order: i. Order levying interest under sections 234A, 2348 and 234C. However in some special cases there can be waiver of interest by the Chief Commissioner or the Director General of Income-tax; ii. Revision order under section 264; iii. Order of Authority for Advance Rulings; iv. Order of Appropriate Authority in case of a cquisition of immovable property; v. Order of Settlement Commission The above p rocedure of redressal of grievances may be summarized in the following chart: b. Appeal by person denying liability to deduct tax (Section 248): Any person having in accordance with the provisions of sections 195 and 200 deducted and paid tax in respect of any sum chargeable under this Act, other than interest, who denies his liability to make such deduction, may appeal to the Commissioner (Appeals) to be declared not liable to make such deduction.
Illustration 1 The assessee made an application under section 195(2) stating that the payment to be made by him to the nonresident is not chargeable to tax in the hands of such recipient and as such he is not liable to deduct the tax at source. The Assessing Officer passed an order under the said section on 5-4-2002 directing the assessee to deduct T.D.S. @ 21 % on the payment being made to the non-resident. Discuss what steps the assessee should take in this case. Solution As per section 248, the assessee, shall have to first deposit the T.D.S. on such payments. Howev er the assessee in ‘this case, after depositing the tax, may file an appeal to the Commissioner (Appeals) within 30 days of the date of payment of such tax denying his liability to deduct tax. c. Procedure for filing appeal (Section 249 and Rules 45 and 46): Form of appeal : The appeal is to be filed in Form No. 35, verified in the prescribed manner
31
Signing of appeal : Form No. 35, grounds of appeal and the form of verification appended thereto shall be signed and verified by the person who is authorised to sign the Return ofIncome un der section 140. Time limit for filing appeal [Section 249(2)]: The appeal should be filed within a period of 30 days of1. The date of service of notice of demand relating to assessment or penalty if the appeal relates to assessment or penalty; or 2. The date of payment of tax, if it relates to any tax deducted under section 195(1) in respect of payment to non-resident in certain cases; or 3. The date on which intimation of the order sought to be appealed against is served if it relates to any other cases. Exclusion of time for calculating time lima for filing appeal [Section 2 68]: For this purpose, the date on which the order complained of is served is to be excluded. Further, if the assessee was not furnished with a copy of the order when the notice of the order (say notice of demand) was served upon him then the time required for obtaining a copy of the order should be excluded, i.e. period taken for obtaining the order shall be added to the time limit of 30 days. Condonation of delay in filing appeal [Section 249(3)]: The Commissioner (Appeals) may admit an ap peal after the expiration of the prescribed period, if he is satisfied that theappellant had sufficient cause for not presenting it within that period. If the Commissioner (Appeals) refuses to admit appeal after the prescribed period, then the assessee has a right to file an appeal against such order. Amount of tax payable before filing appeal [Section 249(4)]: No appeal shall be admitted unless at the time of filing of theappeal: 1. Where a return has been filed by the assessee, the assessee has paid the tax due on the income returned by him; or 2. Where no return has been filed by the assessee, the assessee has paid an amount equal to the amount of advance tax which was payable by him. i.e. tax which is payable on income assessed under section 144 or 147. However, in the case mentioned under clause (b) above, on an application made by the appellant in this behalf, the Commissioner (Appeals) may, for any good and sufficient reason to be recorded in writing, exempt him from the payment of such tax. The order passed by the Commissioner (Appeals) rejecting the application for exemption from payment of tax which resulted into non-admittance of the appeal amounted to an order disposing of the appeal under section 250 and, therefore appeal lies to the Appellate Tribunal. [CIT v Nanhibiai Jaiswal (1988) 171 ITR 646 (MP)]. It may be noted that it is not necessary to pay the assessed tax demanded in an order against which an appeal is filed. The assessee is required to pay the tax only on the returned income Documents to accompany Form No. 35: Appeal is required to be made in duplicate. The memorandum of appeal, statement of facts and the grounds of appeal should be accompanied by a copy of the order appealed against and the notice of demand in original, if any. Fee for filing appeal : The memorandum of appeal shall be accompanied by a fee as under: 1. Where assessed income in a case to which appeal relates is Rs. 1,00,000 or less Rs. 250 2. Where assessed income in a case to which appeal relates exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000 Rs.500 3. Where assessed income in a case to which appeal relates exceeds Rs. 2,00,000 Rs. 1,000 4. Where the subject matter of appeal relates to any matter other than specified in clauses (a), (b) and (c) above Rs. 250 The fee should be credited in a branch of the authorised bank or a branch of the State Bank of India or a branch of the Reserve Bank of India after obtaining a challan from the Assessing Officer and a copy of challan sent to the Commissioner of Income-tax (Appeals). An Appeal once Filed cannot be Withdrawn d. Procedure in hearing appeal (Section 250 ) 1. The Commissioner (Appeals) shall fix a day and place for the hearing of the appeal and shall give notice of the same to the appellant and to he Assessing Officer against whose order the appeal is preferred. 2. The following persons shall have a right of being heard at the hearing of the appeal:a. The appellant, either in person or through authorized representative; b. The Assessing Officer, either in person or through a representative. 3. The appellate authority shall have the power to adjourn the hearing of the appeal from time to time.
32
4. The appellate authority may, before disposing off any appeal, make such further inquiry as he thinks fit and maydirect the Assessing Officer to do so and report the same. 5. The appellate authority may, at the hearing of the appeal, allow the appellant to go into any ground of appeal not specified in the grounds of appeal, if he is satisfied that omission of such ground of appeal was not wilful or unreasonable. 6. The order of the appellate authority disposing off the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision. 7. The order passed by the Commissioner (Appeals) shall be communicated to the assessee and to the Chief Commissioner/Commissioner. W.e.f. 1-6-1999 Section 250(6A) has been inserted to provide that in every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financi~1 year in which such appeal is filed before him under sub-section (1) of section 246A. e. Powers of the Commissioner (Appeals) (Section 251): In disposing off an appeal, the Commissioner (Appeals), shall have the following powers: a. In an appeal against an order of assessment, i. He may confirm, reduce, enhance or annul the assessment; or ii. He may set aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment in accordance with the directions given by the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Assessing Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment; However, p ower to set aside the order given under clause (ii) above has’ been omitted by the Finance Act, 2001 w.e.f. 1-62001. Now instead of setting aside the order the Commission (Appeal) may make further enquiry or direct the Assessing Officer to make further enquiry and report the result of the same to him, which can be made use of in appeals needing further enquiry or gathering of additional facts or evidence; b. In an appeal against an order imposing a penalty - he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; c. In any other case - he may pass such orders in the appeal as he thinks fit. The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. In disposing of an appeal, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Commissioner (Appeals) by the appellant. Appellate Tribunal (Section 252) The Central Government shall constitute an Appellate Tribunal consisting of as many judicial and accountant members as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate Tribunal by this Act. A judicial member shall be a person who has for at least ten years held a judicial office in the territory of India or who has been a member of the Indian Legal Service and has held a post in Grade II of that Service or any equivalent or higher post for at least three years or who has been an advocate for at least ten years. However, in certain cases, his past experience may also be considered for computing the period of 3 years\l0 years. An accountant member shall be a person who had for at least ten years been in the practice of accountancy as a chartered accountant under the Chartered Accountants Act, 1949, or as a registered accountant under any law formerly in force or partly as a registered accountant and partly as a chartered accountant, or who has been a member of the Indian Income-tax Service, Group A, and has held the post of Additional Commissioner of Incometax or any equivalent or higher post for at least three years. The Central Government shall ordinarily appoint a judicial member of the Appellate Tribunal to be the President thereof. The Central Government may appoint one or more members of the Appellate Tribunal to be the Vice-President or, as the case may be, Vice-Presidents thereof and may also appoint one of the Vice-Presidents of the Appellate Tribunal to be the Senior Vice-President thereof.. The senior Vice-President or a Vice-President shall exercise such of the powers and perform such of the functions of the President as may be delegated to him by the President by a general or special
33
order in writing. The Central Government shall appoint Senior Vice-President or one of the Vice-- Presidents of the Tribunal to be the President of the Tribunal. Appeals to Appellate Tribunal (Section 253(1) & (2) a. As per section 253(1), any assessee may file an appeal before the Appellate Tribunal against the following orders: a. An order passed by Commissioner (Appeals): i. Under section 250 i.e. order passed on the appeal filed before him; ii. Imposing penalty under sections 271, 271A and 272A; iii. Inder section 154 regarding rectification of mistakes in an order passed under section 250 or in an order imposing penalty under the above sections, if the rectification has not been done/satisfactorily done by him. b. An order passed by a Commissioner: i. Under section 12AA relating to registration of a trust or institution; ii. Under section 263 relating to revision of erroneous order passed by Assessing Officer iii. Imposing penalty under section 271 or section 272A; or(iv) under section 154 amending his order u/s 263 or order of penalty. c. Order passed by a Chief Commissioner, Director General or Director u/s 272A imposing penalty. B. The Commissioner may also, if he objects to any order passed by the Commissioner (Appeals) u/s 154/250, direct the Assessing Officer to appeal to the Appellate Tribunal against the order [Section 253(2)]. 1. In case of appeal filed against the order of Commissioner/ Chief Commissioner passed under section 12AA or 263 or 272A or section 154, the appeal can only be filed by the assessee. 2. No appeal is possible to Appellate Tribunal against an order passed by CIT under section 264 as it is a final order. Procedure for appeal to Appellate Tribunal [Section 253(3), (4), (5) & (6)] · Time limit for filing appeal : The appeal to the Appellate Tribunal shall be filed within 60 days of the date on which the order sought to be appealed against, is communicated to the assessee or to the CIT, as the case may be. [Section 253(3)] · Filing of cross objections and time limit : The Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of Commissioner (Appeals) has been filed by the other party, may, notwithstanding that he has not appealed against such order or any pan thereof, file a memorandum of cross objections with the Appellate Tribunal. The memorandum of cross objections shall be in Form No. 36A and shall be disposed of by the Appellate Tribunal as if it were an appeal before it. The memorandum of cross objections has to be filed within 30 days of the receipt of above said notice. No fees is payable in case of memorandum of cross objections. [Section 253(4)] · Condonation of delay of time limit : The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of cross objections after the expiry of 60/ 30 days, if it is satisfied that there was sufficient cause for not presenting it within the specified period. [Section 253(5)] · Prescribed forms and documents to. accompany : The appeal to the Appellate Tribunal shall be in Form No. 36 and memorandum of cross objections in Form No. 36A. The appeal and memorandum etc. are to be filed in triplicate and shall be accompanied by two copies (atleast one of which should be a certified copy) of the order appealed against and two copies of the order of the Assessing Officer. Two copies o f the grounds of appeal and statement of facts before the first appellate authority are also to be filed. In case the appeal is against an order levying penalty, two copies of the relevant assessment order should also be filed. [Section 253 (6) Rule 47] · Signing of appeal : Form No. 36, grounds of appeal at the verification should be signed by the person authorised to sign the return of income under section 140. · Fee for filing appeal : An appeal to the Appellate Tribunal shall be accompanied by a fee of a. Where the total income of the assessee as computed by the Assessing Officer in the case to which the appeal relates is Rs. 1,00,000 or less Rs. 500. b. Where the total income of the assessee as computed aforesaid is more than Rs. 1,00,000 but does not exceed Rs. 2,00,000 Rs. 1,500. c. Where it exceeds Rs. 2,00,000 1 % of the assessed income (subject to a maximum of Rs. 10,000)
34
d. Where the subject matter of the appeal relates to any matter other than specified in clauses (a), (b) and (c) above Rs. 500 However, no Such fee shall be Payable in Case i. The appeal is filed by the Commissioner, or ii. Where the memorandum of cross objections is filed either by the assessee or the department. [Section 253(6) Orders of Appellate Tribunal (Section 254) 1. The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders as it thinks fit [Section 254(1)]. 2. In an appeal filed by the assessee, the Appellate Tribunal, where it is possible, may hear and decide such appeal within a period of four years from the end of the financial year in which such appeal is filed under sub-section (1) or (2) of section 253. [Section 254(2A»). 3. Where an order of stay is made in any proceedings relating to an appeal filed under section 253(1), the Appellate Tribunal shall dispose of the appeal within a period of 180 days from the date of such order. However, if such appeal is not so disposed of within this period, the stay order shall stand va cated after the expiry of the said period. 4. The cost of any appeal to the Appellate Tribunal shall be at the discretion of that Tribunal. [Section 254 (2B)] 5. The Appellate Tribunal shall send a copy of any orders passed by it to the assessee and to the Commissioner. [Section 254(3)]. 6. The order passed by Appellate Tribunal shall be final unless appeal is made under section 260A. On a question of fact, the Appellate Tribunal order is a final order and no appeal can lie to High Court against this order. However, if the fact finding had not been done properly by the Appellate Tribunal, the assessee can file a writ petition to the High Court challenging the fact finding process. If the High Court is satisfied that the claim of the assessee is correct then it will direct the Appellate Tribunal to conduct the fact finding as per the proper procedure. On a quest of law also, the Appellate Tribunal order should be final if no appeal is preferred to High Court. The Appellate Tribunal does not have any power to review its own order. Mistake apparent from record in the order of Appellate Tribunal can be rectified by Appellate Tribunal. Remedy Against the Order of Appellate Tribunal a. Direct Appeal to High Court (Section 260A): An appeal shall lie to the High Court for every order passed in appeal by the Appellate Tribunal on or after 1-10-1998, if the High Court is satisfied that the case involves a substantial question of law. The Delhi High Court in the case of Good Year India Ltd. v CIT (2000) 246 ITR 116 observed that, the scope of an appeal under section 260A of the Income-tax Act, 1961, is very limited and is restricted to adjudication of substantial questions of law. The expression “substantial question of law” has not been defined anywhere in the state. The Supreme Court in Santosh Hazar v Purushottam Tiwari (2001) 251 ITR 84 pointed out that ‘substantial question of law’ has not been defined and inter alia held that in order that a question may be a substantial question of law, it is not necessary that it should be matter of general importance, where the matter involved in one in second appeal. The word substantial as qualifying ‘question o f law’ means having substance, essential, real of sound worth, important or considerable. It is to be understood as something in contradiction with technical, of no substance or consequence, or academic merely.
Procedure for Filing Appeal 1. The Chief Commissioner/Commissioner or assessee aggreived by any order passed by the Appellate Tribunal may file an appeal to the High Court. 2. The appeal should be filed within 120 days from the date on which the order appealed against received by the assessee or the Chief Commissioner/ Commissioner.
35
3. It should be accompanied by such fee as may be specified in the relevant law relating to Cou rt fees for filing appeals to the High Court. 4. It should be in the form of a memorandum of appeal precisely stating therein the substantial question of law involved. Procedure in Hearing Appeal 1. If the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. 2. The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question. However the High Court may, for reasons to be recorded, hear the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. 3. The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. 4. The High Court may determine any issue which: a. Has not been determined by the Appellate Tribunal; or b. Has been wrongly determined by the Appellate Tribunal on such substantial question of law. 5. W.e.f. 1-6-1999, the relevant provisions of Code of Civil Procedure, 1908 shall apply mutatis mutandis to appeals under section 260A to the High Court. National Tax Tribunal National Tax Tribunal Ordinance, 2003 has been promulgated by the President. As per this Ordinance, an appeal against the order of the Income-tax Appellate Tribunal involving substantial question of law shall now lie to the National Tax Tribunal to be constituted by the Central Government, instead of the High Court. The provisions of the Ordinance shall be applicable on and from the appointed date i.e. from the date on which the National Tax Tribunal is established by the Central Government. However, the Kolkatta High Court has granted a stay against the above Ordinance. Appeal to the Supreme Court (Section 261) The assessee or the Commissioner may prefer an appeal to the Supreme Court from any judgement of the High Court in an appeal made to it under section 260A. However, the appeal can lie to Supreme Court only if the High Court certifies the case to be a fit case for appeal to the Supreme Court. Thus, this certificate of fitness is a must for preferring an appeal to the Supreme Court. If, however, the High Court decides not to give such a certificate, then the aggrieved party may make an application to the Supreme Court under Article 136 of the Constitution for Special Leave to Appeal against the decision of the judgement. Hearing and Judgment by Supreme Court [Section 262]: The Supreme Court upon hearing any such case shall decide the question of law raised therein and shall d eliver its judgement thereon containing the grounds on which such decision is founded. Where the judgment of the High Court is varied or reversed in appeal, effect shall be given to the order of the Supreme Court in the manner provided in section 260A in the case of a judgment of the High Court. The cost of the appeal shall be in the discretion of the Supreme Court. Revision by the Commissioner a. Revision of orders prejudicial to Revenue (Section 263): The Commissioner may call for and examine the record of any proceedings under the Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue. He may pass such orders thereon as the circumstances of the case justify. He may pass an order enhancing or modifying the assessment or canceling the assessment and directing a fresh assessment. However, he has to pass an order only after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary. However, the Commissioner can revise the order passed by the Assessing Officer only if he considers that the order passed is prejudicial to the interests of the revenue. For removal of doubts, it is provided that the Commissioner can revise the following orders also: i. An order of assessment made by the Assistant Commissioner/Deputy Commissioner or the Income-tax Officer on the basis of directions issued by Joint Commissioner under section 144A. ii. An order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of Assessing Officer conferred on him under the orders or directions issued by CBDT or Chief Commissioner or 36
Director General or Commissioner authorised by CBDT under section 120. “Record” shall include all records relating to any proceedings under this Act available at the time of examination b y the Commissioner.It may be noted that under section 263. the CIT can revise the order of Assessing Officer only.The CIT cannot revise intimation or deemed intimation under section 143(1) as such intimation is not an order. Time Limit for Passing the Revision Order Under (Section 263) The Commissioner cannot revise the order of the Assessing Officer after the expiry of 2 years from the end o f the financial year in which the order sought to be revised was passed. In computing the period of limitation of 2 years, the following period shall be excluded: a. The time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129, and b. Any period during which any proceeding under this section is stayed by an order or injunction of any court. No time limit in the following cases: An order of revision may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court. Commissioner’s power of revision extends to matters not covered in appeal [Clause (c) of Explanation to Section 263]: Where an order passed by the Assessing Officer has been subject matter of any appeal, it cannot be revised by the Commissioner. However, in respect of such matters, which have not been considered and decided in appeal, the Commissioner has powers under section 263 for revision. b. Revision of Orders in Favour of Assessee (Section 264) Revision of orders not covered by Section 263, can be made by the Commissioner either on his own motion or on an application made by the assessee, provided orders have been passed by an authority subordinate to him. The application made by the assessee shall be accompanied by a fee of Rs. 500 (Rs. 25, up to 31-5-2001). The Commissioner may call for the record of any proceeding under this Act on the basis of which such order has been passed and may make such inquiry or cause such inquiry to be made. He may pass such orders thereon as he thinks fit as are not prejudicial to the assessee. The Commissioner, under this section can cancel the assessment and direct the Assessing Officer to make a fresh assessment. The Commissioner shall not revise any order under this section in the following cases: 1. Where the order has been made more than one year previously, the Commissioner shall not, on his own motion, revise such an order; or 2. Where the application for revision by the assessee has been made after one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier. However if the Commissioner is satisfied that the assessee was prevented by sufficient cause from making the application within the prescribed period he may admit an application made after the expiry of that period. 3. Where an appeal against the order lies to the Commissioner (Appeals) but it has not been made and the time within which such appeal may be made has not expired; and the assessee has not waived his right of appeal; or 4. Where the order has been made the subject of an appeal to the Commissioner(Appeals). Time Limit for Passing the Revision Order Under Section 264 On application made by the assessee under this section on or after 1-10-1998, the Commissioner shall pass an order within one year from the end of the financial year in which the application is made by the assessee. In computing the period of limitation of one year, the following period shall be excluded: a. The time taken in giving an opportunity to the assessee to be re-heard under the proviso to section 129, and b. Any period during which any proceeding under this section is stayed by an order or injunction of any court. No time limit in the following case: However, an order of revision may be passed at any time in consequence of or to give effect to any finding or direction contained in an order of the Appellate Tribunal, High Court or the Supreme Court. 1. Where application for revision uts 264 is made before 1-10- 1998, then there is no limit for passing the order as the time limit of one year for passing the order is applicable on application made on or after 1-10-1998. 2. An order by the Commissioner under this section whereby he declines to interfere shall not be deemed to be an order prejudicial to the assessee. Special provision for avoiding repetitive appeals (Section 158A and Rule 16): Where an assessee claims that any question of law arising in his case for an assessment year which is pending before the Assessing Officer or any Appellate authority, is identical with a question of law arising in his case for 37
another assessment year which is pending, on a reference/appeal, before the High Court or appeal before Supreme Court, he may furnish to the Assessing Officer or the Appellate authority, as the case may be, a declaration on Form No.8, that if the Assessing Officer or the Appellate authority, as the case may be, agrees to apply to the relevant case the final decision on the question of law in the other case, he shall not raise such question of law in the relevant case in appeal. Where such declaration is furnished to any Appellate authority, it shall call for a report from the Assessing Officer on the correctness of the claim made by the assessee. Where the Assessing Officer makes request to the Appellate authority to give him an opportunity of being heard in the matter, it shall allow him such opportunity. The Assessing Officer or the Appellate authority, as the case may be, may by an order in writing admit the claim of the assessee if he or it is satisfied that the question of law arising in the relevant case is identical with the question of law in the other case; or reject the claim if not satisfied. Any such order shall be final and shall not be called in question in any proceeding by way of appeal, reference or revision under this Act. Where a claim is ad mitted, the Assessing Officer or the Appellate authority, as the case may be, may make an order disposing off the relevant case without awaiting the final decision on the question of law in the other case. The assessee shall not be entitled to raise in relation to the relevant case, such question of law in appeal before any Appellate authority or court. When the decision on the question of law in the other case becomes final, it shall be applied in the relevant case and the Assessing Officer or the Appellate authority, as the case may be, shall, if necessary, amend the order passed as above in the relevant case confirming to such decision. “Appellate Authority” means the Commissioner (Appeals) or the Appellate Tribunal. The declaration in Form No.8 shall be a. In duplicate. if furnished to Commissioner (Appeals); b. In triplicate. if furnished to Appellate Tribunal.
DEPRECIATION Objective · Meaning of depreciation. · Provisions for depreciation to avail the ded uction under the Act. · To know method of depreciation under the Act. · To know types of depreciation and rates of depreciation given by the Act. · To know how to calculate depreciation under the Act. Here we will discuss about depreciation. Do yo u know what are the reasons for depreciation. Don’t worry I will tell you –see the basic reasons are time value, normal wear and tear of the asset due to use, change in technology, obselence etc. So its obvious its our loss or expenditure so we need to have a deduction in this case. The provisions for depreciation are given in section 32 of the Act. Depreciation [Section 32] Section 32 allows a deduction in respect of depreciation resulting from the diminution or exhaustion in the value of certain capital assets. An important Explanation has been introduced in the section by Finance Act, 2001 which provides that deduction on account of depreciation shall be made compulsorily whether or not the assessee has claimed the deduction in computing his total income. The allowance of depreciation which is regulated by Rule 5 of the IT Rules, is subject to the following conditions which are cumulative in their ap plication. a. The assets in respect of which depreciation is claimed must belong to either of the following categories, namely: i. Buildings, machinery, plant or furniture, being tangible assets; ii. Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st April, 1998. The depreciation in the value of any other capital assets cannot be claimed as a deduction from the business income. b. The assets should be actually used by the assessee for purposes of his business during the previous year - The asset must be put to use at any time during the previous year. Asset used for less than 180 days - However, it has been provided that where any asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than 180 days, depreciation shall be allowed at 50 per cent of the allowable depreciation according to the percentage prescribed in respect of the block of assets comprising such asset. It is significant to note that this restriction applies only to the year of acquisition and not for subsequent years. c. The assessee must own the assets, wholly o r partly - In the case of buildings, the assessee must own the 38
superstructure and not necessarily the land on which the building is constructed. In such c ases, the assessee should be a lessee of the land on which the building stands and the lease deed must provide that the building will belong to the lessor of the land upon the expiry of the period of lease. Thus, no depreciation will be allowed to an assessee in respect of an asset which he does not own but only uses or hires for purposes of his business. d. In case of succession of firm/sole proprietary concern by a company or amalgamation or demerger of companies – In order to restrict the double allowance under the proviso to section 32, in the cases of succession or amalgamation or demerger, the aggregate deduction in respect of depreciation allowable in the hands of the predecessor and the successor or in the case of amalgamating company and the amalgamated company or in the case of the demerged company and the resulting company, as the case may be, shall not exceed the amount of depreciation calculated at the prescribed rates as if the succession/amalgamation, demerger had not taken place. It is also provided that such deduction shall be apportioned between the two entities in the ratio of the number of days for which the assets were used by them. Computation of Depreciation Allowance – Depreciation allowance will be calculated on the following basis: i. In the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost to the assessee as prescribed by Rule 5(1A). Rule 5(1A) - As per this rule, the depreciation on the above mentioned assets shall be calculated at the percentage of the actual cost at rates specified in Appendix IA of these rules. However, the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the asset. It is further provided that such an undertaking as mentioned above has the option of being allowed depreciation on the written down value of such block of assets as are used for its business at rates specified in Appendix I to these rules. However, such option must be exercised before the due date for furnishing return under section 139( 1) for the assessment year relevant to the previous year in which it begins to ,generate power. It is further provided that any such option once exercised shall be final and shall apply to all subsequent assessment years. ii. In the case of any block of assets, at such percentage of the written down value of the block, as may be prescribed by Rule 5(1). Block of Assets - 1. A “block of assets” is defined in clause (11) of section 2 of the Act as a group of assets falling within a class of assets comprisinga. Tangible assets, being buildings, machinery, plant or furniture; b. Intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same p ercentage of depreciation is prescribed. Know-how - In this context, ‘know-how’ means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil- well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto). iia. Additional depreciation on Plant & Machinery acquired by an Industrial Undertaking: Under the existing provisions of section 32, depreciation on assets used for the purpose of business or profession is allowable on the written down value of the block of assets at the rate prescribed in the Rules. The Finance Act, 2002 has inserted clause (iia) in section 32(1) w.e.f. 1.4.2003 to allow additional depreciation on any new machinery or plant (other than ships and aircraft) acquired or installed by an assessee after 31.3.2002 in the business of manufacture or production of a ny article or thing at the rate of 15% of the cost of such machinery or plant. However, this additional depreciation is available only to i. A new industrial undertaking for the year in which such undertaking begins to manufacture or produce any article or thing on or after 1.4.2002. ii. Any industrial undertaking existing prior to 1.4.2002 for the year in which it achieves the substantial expansion by way of increase in its installed capacity of at least 25%. “Installed Capacity” means the capacity of production as existing on the 31st day of March, 2002. Splitting up or the reconstruction of existing business or transfer of any machinery or plant previously used for any purpose is excluded from the scope of “New Industrial Undertaking”. Such additional depreciation will not be available in respect of: i. Any machinery or plant already used within or outside India by any other person. ii. Any machinery or plant installed in office premises, residential accommodation, or in any guest house. iii. office appliances or road transport vehicles or iv. Any machinery or plant, the whole or part of the actual cost of which is allowed as a deduction under the head “Profits and Gains of Business or Profession”. 39
To claim this additional depreciation, it will be mandatory to furnish along with the Return of Income the details of machinery or plant and increase in the installed capacity of production in the prescribed form along with a report of an accountant, as defined in the Explanation below sub-section (2) of section 2 88, certifying, the correctness of the claim under this Section. (Effective from A. Y. 2003-04) Written down value [Section 43 (6)] - (1) In the case of assets acquired by the assessee during the previous year the written down value means the actual cost to the assessee. 2. In the case of assets acquired before the previous year, the written down value would be the actual cost to the assessee less the aggregate of all deductions actually allowed in respect of depreciation. For this purpose, any depreciation carried forward is deemed to be depreciation actually allowed [section 43(6)(c)(i) read with Explanation (3)]. a. In the case of block of assets in regard to the assessment year 1988 -89, being the year of transition to the system of depreciation allowance on blocks of assets, the written down value shall be arrived at in the following manner: i. The aggregate of the written down value of all the assets falling within that block at the beginning of the previous year shall first be calculated. ii. The aggregate of the written down value arrived at as above, shall be increased by the actual cost of any asset acquired during the previous year. iii. The sum so arrived at shall be reduced by the moneys receivable by the assessee together with the amount of the scrap value with regard to any asset falling within that block which is sold, discarded, demolished or destroyed during the previous year. iv. In the case of slump sale, the written down value of any block of asset shall be decreased by the amount of actual cost as reduced by the depreciation actually allowed. b. The written down value of any asset in relation to the assessment year 1989-90 and any subsequent assessment year shall be worked out as under in accordance with section 43(6)(c)(ii) i. The written down value of the block of assets in the immediately preceding previous year shall be reduced by the depreciation actually allowed in respect of the block of assets in relation to the said preceding previous year. ii. The sum arrived at as above shall be increased by the actual cost of any asset falling within that block which is acquired by the assessee during the previous year. iii. The sum so arrived at shall be reduced by the sale-proceeds and other amounts receivable by the assessee with regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous -year. 3. When in the case of a succession to business or profession, an assessment is made on the successor under section 170(2), the written down value of an asset or block of assets shall be the amount which would have been taken as the written down value if the assessment had been made directly on the person succeeded to [Explanation 1 to section 43(6)(c)]. 4. Where in any previous year any block of assets is transferred by a holding company to a subsidiary company or vice versa and the conditions of clause 47(iv) or (v) are satisfied or by an amalgamating company to an amalgamated company the latter being an Indian company then the actual cost of the block of assets in the case of transferee- company or amalgamated company as the case may be, shall be the written down value of the block of assets as in the case of the transferor company or amalgamating company, as the case may be, for the immediately preceding year as reduced by depreciation actually allowed in relation to the said previous year. [Explanation 2 to section 43(6)(c)]. 5. Where in any previous year any asset forming part of a block of assets is transferred by demerged company to the resulting company, the written down value of the block of assets of the demerged company for the immediately preceding year shall be reduced by the written down value of the assets transferred to the resulting company. [Explanation 2A to section 43(6)(c)]. 6. Where any asset forming part of a block of assets is transferred by a demerged co mpany to the resulting company: the written down value of the block of assets in the case of resulting company shall be the Written down value of the transferred assets as appearing in the books of account of the demerged company immediately before the demerger. 40
[Explanation 2B to section 43(6)(c)] 7. Where any asset forming part of a block of assets is transferred in any previous year by a recognised stock exchange In If\dia to a (‘ompany under a scheme for corporatisation approved by SEBI, the written down value of the block shall be the written down value of the transferred assets immediately before the transfer. [Explanation 5 to section 43(6)(c)] 8. Under the new system of block of assets the written down value of any block of assets, may be reduced to nil for any of the following reasons: a. The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired or, b. All the assets in the relevant block may be transferred during the year.
A taxpayer may have 18 different blocks of assets as given below-. While blocks 1 to 11 are in respect of tangible assets, blocks 12 to 18 are in respect of intangible assets. Number Nature of Asset Rate of Depreciation Block 1 Block 2
Buildings - Residential buildings other than hotels and boarding houses Buildings -Office, factory, godowns or buildings which are not mainly used for residential purpose [it covers hotels and boarding houses but does no cover those which are covered under Blocks 1 and 3] Buildings –The following buildings: a. buildings acquired. on or after September 1, 2002 for installing machinery and plant forming 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 section 80-IA(4)(z). b. temporary erections such as wooden structures
5% 10%
Block 4 Block 5
Furniture - Any furniture/fittings including electrical fittings Plant and machinery - Any plant or machinery [not covered by Block 6,7,8,9, 10 or 11] and any ship or vessels
15% 25%
Block 6
Plant and machinery - Motor cars (other than those used in a business of running them on hire) acquired or put to use on or after April 1, 1990
20%
Block 7
Plant and machinery - Buses, lorries and taxies used in the business of running them on hire, aeroplanes, machinery used in semi-conductor industry, moulds used in rubber and plastic goods factories, and plant an d machinery which satisfy conditions of rule 5(2) - see Problem 91-P5. Further it includes commercial vehicle acquired after September 30, 1998 but before April 1, 1999 and put to use before April 1, 1999 (and from the assessment year 2004-05 life saving medical equipment)
Block 3
Block 8
100%
40%
Plant and machinery - Containers made of glass or plastic used as refills and the 50% following- a. new commercial vehicle acquired during 2001-02 and put to use before March 31, 2002 for the purpose of business or profession; and b. machinery I p lant used in weaving, processing and garment sector of textile industry which is purchased under Technology Upgradation Fund Scheme during April 1, 2001 and March 31, 2004 and put to use up to March 31, 2004
41
Block 9
Block 10
Plant and machinery - Computers including computer software and new commercial vehicle acquired in replacement of condemned vehicle of 15 years of age which is put to use before April 1, 1999 (if acquired during October 1, 1998 and March 31, 1999) or before April 1, 2000 (if acquired during 1999-2000). It also includes boo ks (other than annual publications) owned by a professional
60%
Plant and machinery - Energy saving devices; renewal energy devices; rollers in flour mills, sugar works and steel industry; gas cylinders; plant used in field operations by mineral oil concerns; direct fire glass melting furnaces 80%
Block 11
Block 12
Plant and machinery - Air pollution control equipment’s, water pollution control equipment’s; solid waste control equipment’s, recycling and resource recovery systems; machinery acquired and installed on or after September 1,2002 in a water supply project or water treatment system or for the purpose of providing infrastructure facility; wooden parts used in artificial silk manufacturing machinery; cinematograph films, bulbs of studio lights; wooden match frames; some plants used in mines, quarries and salt works; and books (being annual publications) owned by assessee carrying on a profession or books (mayor may not be annual publications) owned by a person carrying on business in running lending libraries Know-how- Know-how acquired after March 31,.1998["Know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oilwell or other sources of mineral deposits (including searching for discovery or testing Of deposits for the winning of access thereto)] .
100%
25%
Block 13
Patents - Patents acquired after March 31,1998
25%
Block 14
Copyrights - Copyrights acquired after March 31, 1998
25%
Block 15
Trade marks - Trade marks acquired after March 31,.1998
25%
Block 16
Licenses - Licenses acquired after March 31, 1998
25%
Block 17
Franchises - Franchises acquired after March 31, 1998
25%
Block 18
Other rights - Any other business or commercial rights of similar nature acquired after 31 march 1998.
25%
42
SET OFF AND CARRY FORWARD OF LOSSES
Set off of loss from one source against income from another source under the same head of income Where the net result for any assessment year in respect of any source, falling under any head of income other than “capital gains”, 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.
Mode of set off and carry forward- The three steps The process of setting off of losses and their carry forward may be converted in the following steps: Step 1: Inter -source adjustment under the same head of income. Step 2: Inter- head adjustment in the same assessment year ( step 2 is applied only if a loss cannot be set off under step-1. Step 3: Carry forward of a loss. Step 3 is applied only if a loss cannot be set off under step 1 and 2. Inter-source adjustment- How made [ Sec.70] If the net result for any assessment year, in respect of any source under any head of income, is a loss, the assessee is entitled to have the amount of such loss set off against his income from any source under the same head of income for the same assessment year. Exceptions- The following are – Loss from speculation business:- Loss in a speculation business can be set off o nly against the profit in a • speculation business. Long- term capital loss- Long-term capital loss can be set off only against long-term capital gain. • Loss from the activity of owning and maintaining race horses- Loss incurred in the business of owning and • maintaining race horse cannot be set off against any income except income from such business. Loss cannot be set off against winnings from lotteries, crossword puzzles, etc.:- By sec.58(4), a loss cannot • be set off against 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. Loss from purchase and sale of securities. • Intra-head adjustment [ Sec.71] Where the net result of computation made for any assessment year in respect of any head of income ia a loss, the same can be set off against the income from other heads. 43
Exceptions:Loss from speculation business: - Loss in a speculation business cannot be set off against any other income. • Loss under the head “Capital gains”:- Losses under the head “Capital gains” cannot be set off against • income under heads of income. Loss from the activity of owning and maintaining race horses :- A loss from the business of owning and • maintaining race horses cannot be set off against any other income. Loss cannot be set off against winnings from lotteries, crossword puzzles, etc.:- By sec.58(4) a loss cannot • be set off against 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. Loss from purchase and sale of securities. • Business loss cannot be set of against salary: - Loss from business or profession cannot be set off against • income under head “Salaries”. Carry forward of a loss If the losses could not be set off under the same head or under different heads in the same assessment year, such losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years. All losses are not allowed to be carried forward. The following losses are only allowed to be carried forward and set off in the subsequent assessment years: (a) House property loss (w.e.f. assessment year 1999-2000); (b) Business loss; (c) Speculation loss; (d) Capital loss; (e) Loss on account of owning and maintaining race horses. Compulsory filing of loss returns (sec. 80) : Although the above losses are allowed to be carried forward, but the carry forward is allowed only when such loss has been determined in pursuance of a return of loss submitted by the assessee on or before the due date for filing of the returns prescribed under section 139(1). However loss under the head Income from house property can be carried forward even if the return is not filed within the due date mentioned under section 139(1). 1. Although submission of return of loss, on or b efore the due date mentioned under section 139(1) is compulsory for carry forward of losses mentioned in clause (b) to (e) abo ve, but this provision is not applicable for carry forward of unabsorbed depreciation which is covered under section 32(2). 2. There are two conditions which are to satisfied before loss is allowed to be carried forward. Firstly the return o f loss must be submitted on or before the due date and secondly such loss has been determined by the Assessing Officer. Carry forward and set off of loss from house property A loss under the head house property, if could not be set off or was not wholly set off in the same assessment year from other heads of income, will be allowed to be carried forward for 8 assessment years to c laim it as a set off in the subsequent years under the head ‘Income from house property’. Therefore, if the loss of house property of the previous year 2000-01 which could not be set off because of absence or inadequacy of the income of previous year 2000-01, it may be carried forward for 8 assessment years succeeding assessment year 2001-02 to be set off from income under the head house property. (1) As the provisions of section 71B have been inserted with effect from 1-4-1999, carry forward and set off as per the provisions of the new section 71B shall be available only in respect of loss from house property computed for and from assessment year 1999-2000. (2) Provisions of section 80 and 139(3) are not applicable to section 71B and as such, loss under the head income from house property can be carried forward even if return is not submitted under section 1 39(1). (3) Although, the loss is allowed to be carried forward for 8 assessment years but it must be set off in the subsequent
44
assessment year if there is income under the head house property and the balance in the next immediately succeeding subsequent assessment year and so on. Carry forward and set off of business losses Where the loss under the head ‘profits and gains of business or profession’ other than loss from speculation business, could not be set off in the same assessment year because either the assessee had no income under any other head or the income was less than the loss, such loss which could not be set off in the same assessment year, can be carried forward to the following assessment years and it shall be set off against the profit and gains of business or profession subject to the following conditions: (I) Business losses can be adjusted only against business income : The loss can be carry forward to the subsequent assessment year and set off only against business income of the subsequent year. It may be observed that in the same assessment year, loss from a business can be adjusted against income from any other head of income. However, when the loss is to be carried forward to the subsequent year, it can be adjusted only against business income. Business income may be from the same business in which he loss was incurred, or may b e any other business. Can carried forward business loss be set off against income from hiring out commercial assets: If there are two businesses, whether these result in the same business or not has to be found out by judging whether there is sufficient inter-lacing or inter-connection or dovetailing between the two activities so as to be linked up and considered as the same. But this principle does not apply where income is derived by the exploitation of a commercial asset. In the case of latter type of income, there is only a difference in the manner of exploitation, that is to say, instead of the user of the asset by the assessee himself, there is a leasing out of the asset. The income derived from such leasing is to be considered to be of the same nature, viz., business income. Unabsorbed depreciation and losses incurred when the asset was exploited by the assessee himself can be carried forward and set off against the income derived from leasing ou t the commercial asset. Certain income, though taxable under other heads, constitutes business income for set off of brought forward business loss: The carried forward business loss is to be adjusted against income from any business activity. Such an income may generally be taxed under the head, “profits and gains of business or profession”. However, in some cases income from a business activity may be taxed under other heads also. For example if the shares are held by an assessee as stock-in-trade, dividends on such shares would still form part of the income from business and brought forward business loss can well be set off against such dividend income. The above case relates to setting off the brought forward business loss from the dividend income although dividend was taxable under the head other sources but w.e.f. assessment year 2004-05 the dividend income is exempt and hence, there is no question of set off. However, the same analogy can be drawn from the above case and brought forward business loss can be set off from income from house property if such letting of house property was the business of the assessee but such income was taxable under the head income from house property. (II) Business in respect of which a loss is incurred may or may not be continued: The business loss can be carried forward and set off in the subsequent assessment year(s) even if the business in respect of which the loss was originally computed is not carried on by him in the previous year in which such loss is sought to be carried forward and set off. (III) Losses can be set off only by the assessee who has incurred loss [Section 78(2)]: Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter (relating to set off and carry forward of loss) shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. In other words, the brought forward business losses can be set off only by the same assessee. The assessee, who has suffered the loss and in whose hands the loss has been assessed, is the person who can carry forward the loss and set off the same against his business income of the subsequent year. The following are the exceptions: 45
(a) Where a business carried on by one person, is acquired by another person through inheritance. For example: X is carrying on a business and there are losses to the extent of Rs. 5,00,000 which can be carried forward and set off against the income of the subsequent years. X dies and his son S inherits his business. The losses incurred by X can be set off by his son S against the income from a business activity carried on by S. However such loss can be carried forward by the son for the balance number of years for which the father could have carried forward the loss. However, the unabsorbed depreciation c annot be carried forward by the legal heir as inheritance is not covered under section 32(2). (b)Business losses and unabsorbed depreciation of an amalgamating company can be set off against the income of the amalgamated company if the amalgamation is within the meaning of section 72A of the Income-tax Act. If the amalgamation is not of the nature specified in section 72A, the business loss and unabsorbed depreciation of the amalgamating company cannot be carried forward by the amalgamated company. (c) Where there has been reorganization of business whereby a proprietary concern or a firm is succeeded by a company and certain conditions mentioned in section 47(xiii) or (xiv) are fulfilled, the accumulated b usiness loss and the unabsorbed depreciation of the predecessor firm/proprietary concern shall be deemed to be the loss or allowance for depreciation of the successor company for the previous year in which business reorganization was effected and carry forward provisions shall be ap plicable to the successor company. (d)loss of the demerged company can be carried forward by the resulting company subject to fulfillment of certain conditions which the Central Government may for this purpose notify, to ensure that the demerger is for genuine business purposes.
Illustration : Can the brought forward loss in the following cases be set off: 1. Brought forward loss of the business, of HUF where the business of the HUF has been taken over by one of the members of HUF. 2. Brought forward loss of a firm succeeded by another firm 3. Brought forward loss of amalgamating company where such company has amalgamated with another company 4. Brought forward loss of proprietary business taken over by a firm consisting of the sole proprietor as partner also. 5. Partnership firm taken over by one or more partners. Solution 1. No 2. No 3. Yes, if amalgamation is as per section 72A 4. No 5. No Period of carry forward : Each year’s loss is a separate loss and no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, a loss of previous year 1995-96 i.e. assessment year 1996-97 can be carried forward till assessment year 2004-05. Besides the above, the following can also be carried forward indefinitely although these are not business losses as per Income-tax law: (i) unabsorbed depreciation; (ii) unabsorbed capital expenditure on scientific research; (iii) unabsorbed expenditure on family planning. Order of set off: Unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed expenditure on family planning are not parts of business losses and they can also be carried forward. However, as per section 72(2), the business loss should be set off before setting off unabsorbed depreciation, etc. Such carried forward business loss will be set off against business head only after the cu rrent year’s depreciation, current capital expenditure on scientific research and expenditure on family planning have been claimed. Therefore, the order of set off will be as under: (i) current year depreciation [Section 32(1)]; (ii) current year capital expenditure on scientific research and current year expenditure on family planning to the extent
46
allowed; (iii) brought forward business or profession losses [Section 72(1)]; (iv) unabsorbed depreciation [Section 32(2)]; (v) unabsorbed capital expenditure on scientific research [Section 35(4)]. (vi) unabsorbed expenditure on family planning [Section 36(1)(ix)]; Return of loss : The return of loss must have been furnished before due date prescribed u/s 139(1), otherwise the loss cannot be carried forward. A case where a business loss can be carried forward for more than 8 assessment years [Section 41(5)]: Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under subsection (1), sub-section (3), sub-section (4) or sub-section (4A) in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that pervious year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid. Cary forward and Set Off of Speculation Loss (Sec 73): If a speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to be claimed as asset off in the subsequent year, assessment year, but only against the income of any speculation business. Such loss is also allowed to be carried forward for 8 assessemnt years immediately succeeding the assessment year for which the loss was first computed. It may be observed that it is not necessary that the speculation business must continue in the assessment year in which the loss is set off. Cary forward of losses under the Head ‘Capital gains’ (Sec 74): The net result of the computation under the head “Capital gains” is a loss to the assessee, whether short-term or long-term, such a loss shall be carried forward to the following assessment years and set off against the income under the head “ Capital gains” of the subsequent years. Such capital loss can not be forward to maximum of 8 assessment years, immediately succeeding the assessment year for which the loss first computed. Here also, it is necessary that a return of loss is furnished before the due date. Illustrations on Set Off and Carry Forward of Losses Illustration: R furnishes the following particulars of his income for the previous year 2003-04:
1. Income from salary (computed) 2. Income from house A 3. Loss from house B 4. Loss from house C 5. Profit from business A 6. Profit from business B 7. Profit from share business (speculative) 8. Loss from silver business (speculative) 9. Long-term capital gain on sale of shares 10. Short-term capital loss on sale of land 11. Income from card games 12. Winnings from lotteries (gross) 13. Income from horse races in Delhi (Gross) 14. Loss from horse races in Bangalore Compute the Gross Total Income of R for the assessment year 2004-05. Solution Rs.
Rs. 68,000 36,000 24,000 22,000 60,000 70,000 82,000 94,000 22,000 44,000 22,000 60,000 40,000 21,000
Rs.
Rs. 47
Income from Salary 6 Income from House Property Income from House A Loss from House B Loss from House C Income from Business Business A Business B Profit from speculation business Less: Loss from speculation business Carried forward speculation loss Capital Gains Long term capital gain Less: Short term capital loss Capital loss carried forward Income from other sources Incoming from card games Winning from lotteries Income from Horse races
8,000 36,000 (–) 24,000 (–) 22,000 60,000 70,000 82,000 (–) 94,000 (–) 12,000
(–) 10,000
1,30,000
22,000 (–) 44,000 (–) 22,000
Gross Total Income Loss from horse race in Bangalore cannot be set off against any income.
22,000 60,000 40,000 1,22,000 1,22,000 3,10,000
Unit-IV Wealth Tax Wealth tax is a direct tax, which is charged on the net wealth of the assessee. It is a tax on the benefits derived from ownership of property. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income. Wealth tax, in India, is levied under Wealth-tax Act, 1957. The Income tax department under the Department of Revenue in the Ministry of Finance administers the Wealth Tax Act, 1957 as well as the Wealth Tax Rules framed there under. Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons :Individual • Hindu Undivided Family(HUF) • Company • Chargeability to tax also depends upon the residential status of the assessee same as the residential status for the purpose of the Income Tax Act. 48
Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to wealth tax are :-
Guest house, residential house, commercial building Motor car • Jewellery, bullion, utensils of gold, silver etc • Yachts, boats and aircrafts • Urban land • Cash in hand(in excess of 50,000), only for Individual & HUF • The following will not be included in Assets :Any of the above if held as Stock in trade. • A house held for business or profession. • Any property in nature of commercial complex. • A house let out for more than 300 days in a year. • Gold deposit bond. • A residential house allotted by a Company to an employee, or an Officer, or a Whole Time Director ( Gross • salary i.e. excluding perquisites and before Standard Deduction of such Employee, Officer, Director should be less than Rs. 5,00,000). The Assets exempt from Wealth tax are :Property held under a trust. • Interest of the assessee in the coparcenary property of a HUF of which he is a member. • Residential building of a former ruler. • Assets belonging to Indian repatriates. • One house or a part of house or a plot of land not exceeding 500sq.mts,for individual & HUF assessee. Wealth tax is chargeable in respect of Net wealth corresponding to Valuation date.(Net wealth means all assets less loans taken to acquire those assets. Valuation date means 31st March of immediately preceding the assessment year). In other words, the value of the taxable assets on the valuation date is clubbed together and is reduced by the amount of debt owed by the assessee. The net wealth so arrived at is charged to tax at the specified rates. Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs.15 Lakhs. •
1. SHORT TITLE, EXTENT AND COMMENCEMENT. - (1) This Act may be called the Wealth-tax Act, 1957. (2) It extends to the whole of India 1 . (3) It shall be deemed to have come into force on the 1st day of April, 1957. 2. DEFINITIONS. - In this Act, unless the context otherwise requires, - (a) Omitted. (b) "Appellate Tribunal" means the Appellate Tribunal constituted under section 252 of the Income-tax Act; (c) "assessee" means a person by whom wealth-tax or any other sum of money is payable under this Act, and includes - (i) every person in respect of whom any proceeding under this Act has been taken for the determination of wealth-tax payable by him or by any other person or the amount of refund due to him or such other person; (ii) every person who is deemed to be an assessee under this Act; (iii) every person who is deemed to be an assessee in default under this Act;
49
(ca) "Assessing Officer" means the Deputy Commissioner of Income-tax or the Assistant Commissioner or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of the Income-tax Act which apply for the purposes of wealth-tax under section 8 of this Act and also the Joint Commissioner who is directed under clause (b) of sub-section (4) of the said section 120 to exercise or perform all or any of the powers and functions conferred on or assigned to the Assessing Officer under that Act; (cb) "Assessment" includes reassessment; (d) "assessment year" means a period of twelve months commencing on the 1st day of April, every year; (e) "assets" includes property of every description, movable or immovable, but does not include, - (1) in relation to the assessment year commencing on the 1st day of April, 1969, or any earlier assessment year (i) agricultural land and growing crops, grass or standing trees on such land; (ii) any building owned or occupied by a cultivator of, or receiver of rent or revenue out of, agricultural land : Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires as a dwelling house or a store-house or an out-house; (iii) animals; (iv) a right to any annuity in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant; (v) any interest in property where the interest is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee; (2) in relation to the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year but before the 1st day of April, 1993 - (i) animals; (ii) a right to any annuity (not being an annuity purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee) in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant; (iii) any interest in property where the interest is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee : Provided that in relation to the assessment year commencing on the 1st day of April, 1981, and the assessment year commencing on the 1st day of April, 1982, this sub-clause shall have effect subject to the modification that for item (i) thereof, the following item shall be substituted, namely :- "(i)(a) agricultural land other than land comprised in any tea, coffee, rubber or cardamom plantation; (b) any building owned or occupied by a cultivator of, or receiver of rent or revenue out of, agricultural land other than land comprised in any tea, coffee, rubber or cardamom plantation : Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of the rent or revenue by reason of his connection with the land requires as a dwelling house or a store-house or an out-house; (c) animals;" : Provided further that in relation to the assessment year commencing on the 1st day of April, 1983 or any subsequent assessment year, this sub-clause shall have effect subject to the modification that for item (i)
50
thereof, the following item shall be substituted, namely :- "(i)(a) agricultural land and growing crops (including fruits on trees), grass or standing trees on such land; (b) one building or one group of buildings owned or occupied by a cultivator of, or receiver of rent or revenue out of, agricultural land : Provided that such buildings or group of buildings is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires as store-house or for keeping livestock; (c) animals;" : Provided also that in relation to the State of Jammu and Kashmir, this sub-clause shall have effect subject to the modification that for the assets specified in item (i) of this sub-clause, the assets specified in items (i) to (iii) of sub-clause (1) shall be substituted and the other provisions of this Act shall be construed accordingly; (ea) "assets", in relation to the assessment year commencing on the 1st day of April, 1993, or any subsequent assessment year, means - (i) any building or land appurtenant thereto (hereinafter referred to as "house"), whether used for residential or commercial purposes or for the purpose of maintaining a guest house or otherwise including a farm house situated within twenty-five kilometres from local limits of any municipality (whether known as Municipality, Municipalilty Corporation or by any other name) or a Cantonment Board, but does not include - (1) a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than five lakh rupees; (2) any house for residential or commercial purposes which forms part of stock-in-trade; (3) any house which the assessee may occupy for the purposes of any business or profession carried on by him; (4) any residential property that has been let-out for a minimum period of three hundred days in the previous year; (5) any property in the nature of commercial establishments or complexes; (ii) motor cars (other than those used by the assessee in the business of running them on hire or as stock-intrade); (iii) jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals : Provided that where any of the said assets is used by the assessee as stock-in-trade, such assest shall be deemed as excluded from the assets specified in this sub-clause; (iv) yachts, boats and aircrafts (other than those used by the assessee for commercial purposes); (v) urban land; (vi) cash in hand, in excess of fifty thousand rupees, of individuals and Hindu undivided families and in the case of other persons any amount not recorded in the books of account. Explanation 1 : For the purposes of this clause, - (a) "jewellery" includes - (i) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel;
51
(ii) precious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel; (b) "urban land" means land situate - (i) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the valuation date; or (ii) in any area within such distance, not being more than eight kilometres from the local limits of any municipality or cantonment board referred to in sub-clause (i), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette, but does not include land on which construction of a building is not permissible under any law for the time being in force in the area in which such land is situated or the land occupied by any building which has been constructed with the approval of the appropriate authority or any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him or any land held by the assessee as stock-in-trade for a period of five years from the date of its acquisition by him; Explanation 2 : For the removal of doubts, it is hereby declared that "jewellery" does not include the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. (f) "Board" means the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963); (g) Omitted. (gg) Omitted. (h) "company" shall have the meaning assigned to it in clause (17) of section 2 of the Income-tax Act; (ha) "co-operative society" means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of cooperative societies; (hb) Omitted (i) "executor" means an executor or administrator of the estate of a deceased person; (ia) "High Court" in relation to the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, means the High Court at Bombay; (j) "Income-tax Act" means the Income-tax Act, 1961 (43 of 1961); (k) Omitted. (ka) "India" shall be deemed to include the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry - (i) as respects any period, for the purposes of section 6; and (ii) as respects any period included in the year ending with the valuation date, for the purpose of making any assessment for the assessment year commencing on the 1st day of April, 1963, or for any subsequent year; (lb) "legal representative" has the meaning assigned to it in clause (11) of section 2 of the Code of Civil Procedure, 1908 (5 of 1908);
52
(lc) "maximum marginal rate" means the rate of wealth-tax applicable in relation to the highest slab of wealth in the case of an individual as specified in Part I of Schedule I; (m) "net wealth" means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date which have been incurred in relation to the said assets 20a ; (n) "prescribed" means prescribed by rules made under this Act; (o) "principal officer", used with reference to a company, means the secretary, manager, managing agent or managing director of the company and includes any person connected with the management of the affairs of the company upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof; (oa) "public servant" has the same meaning as in section 21 of the Indian Penal Code (45 of 1860); (oaa) "registered valuer" means a person registered as a valuer under section 34AB; (ob) "regular assessment" means the assessment made under sub-section (3) or sub-section (5) of section 16; (p) "Ruler" means a Ruler as defined in clause (22) of article 366 of the Constitution; (q) "valuation date", in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in section 3 of the Income-tax Act, if an assessment were to be made under that Act for that year : Provided that - (i) Omitted. (ii) in the case of a person who is not an assessee within the meaning of the Income-tax Act, the valuation date for the purposes of this Act shall be the 31st day of March immediately preceding the assessment year; (iii) where an assessment is made in pursuance of section 19A, the valuation date shall be the same valuation date as would have been adopted in respect of the net wealth of the deceased if he were alive; (r) "Valuation Officer" means a person appointed as a Valuation Officer under section 12A, and includes a Regional Valuation Officer, a District Valuation Officer and an Assistant Valuation Officer; (s) the expressions "Chief Commissioner, Director-General, Commissioner, Commissioner (Appeals), Director, Additional Director of Income-tax, Additional Commissioner of Income-tax, Joint Director, Joint Commissioner of Income-tax, Deputy Director, Deputy Commissioner, Assistant Commissioner, Assistant Director, Incometax Officer, Inspector of Income-tax and Tax Recovery Officer" shall have the meanings respectively assigned to them under section 2 of the Income-tax Act. 3. CHARGE OF WEALTH-TAX. - (1) Subject to the other provisions (including provisions for the levy of additional wealth-tax) contained in this Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957 but before the first day of April, 1993, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual 24 , Hindu undivided family and 25 company at the rate or rates specified in Schedule I. (2) Subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1993, wealth-tax in respect of the net wealth on the
53
corresponding valuation date of every individual, Hindu undivided family and company, at the rate of one per cent of the amount by which the net wealth exceeds fifteen lakh rupees. NET WEALTH TO INCLUDE CERTAIN ASSETS. - (1) In computing the net wealth - (a) of an individual, there shall be included, as belonging to that individual, the value of assets which on the valuation date are held - (i) by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or (ii) by a minor child, not being a minor child suffering from any disability of the nature specified in section 80U of the Income-tax Act, or a married daughter, of such individual, or (iii) by a person or association of persons to whom such assets have been transferred by the individual directly or indirectly, otherwise than for adequate consideration for the immediate or deferred benefit of the individual, his or her spouse, or (iv) by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer, or (v) by the son's wife, of such individual, to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration, or (vi) by a person or association of persons to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration for the immediate or deferred benefit of the son's wife, of such individual or both, whether the assets referred to in any of the sub-clauses aforesaid are held in the form in which they were transferred or otherwise : Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958) or is not chargeable under section 5 of that Act, for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972 the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual : Provided further that nothing contained in sub-clause (ii) shall apply in respect of such assets as have been acquired by the minor child out of his income referred to in the proviso to sub-section (1A) of section 64 of the Income-tax Act and which are held by him on the valuation date : Provided also that where the assets held by a minor child are to be included in computing the net wealth of an individual, such assets shall be included, - (a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth (excluding the assets of the minor child so includible under this sub-section) is greater; or (b) where the marriage of his parents does not subsist, in the net wealth of that parent who maintains the minor child in the previous year as defined in section 3 of the Income-tax Act, and where any such assets are once included in the net wealth of either parent, any such assets shall not be included in the net wealth of the other parent in any succeeding year unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do; (b) of an assessee who is a partner in a firm or a member of an association of persons (not being a cooperative housing society), there shall be included, as belonging to that assessee, the value of his interest in the assets of the firm or association determined in the manner laid down in Schedule III : Provided that where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor in the firm, determined in the manner specified above, shall be included in the net wealth of the parent of the minor, so far as may be, in accordance with the provisions of the third proviso to clause (a).
54
(1A) Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computing the net wealth of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1972, - (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly; (b) the converted property or any part thereof shall be deemed to be assets belonging to the individual and not to the family; (c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the converted property or any part thereof which is received by the spouse of the individual on such partition shall be deemed to be assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly : Provided that the property referred to in clause (b) or clause (c) shall, on being included in the net wealth of the individual, be excluded from the net wealth of the family or, as the case may be, the spouse of the individual. (4) Nothing contained in clause (a) of sub-section (1) shall apply to any such transfer as is referred to therein made by an individual before the 1st day of April, 1956, and the value of any assets so transferred shall not be included in the computation of his net wealth. (4A) Notwithstanding anything in sub-section (4), nothing contained in clause (a) of sub-section (1) shall apply to any such transfer as is referred to therein made before the 1st day of April, 1963, by an individual who but for the extension of this Act to the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry, would not have been an assessee, and the value of any assets so transferred shall not be included in the computation of his net wealth. (5) The value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the net wealth of the transferor as and when the power to revoke arises to him. (5A) Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift or by an individual or a Hindu undivided family or a firm or an association of persons or body of individuals with whom or which he has business or other relationship, the value of such gift shall be liable to be included in computing the net wealth of the person making the gift unless he proves to the satisfaction of the Assessing Officer that the money has actually been delivered to the other person at the time the entries were made. (6) For the purposes of this Act, the holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate. (7) Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be, the assessee shall, notwithstanding anything contained in this Act or any other law for the time being in force, be deemed to be the owner of such building or part and the value of such building or part, shall be included in computing the net wealth of the assessee; and, in determining the value of such building or part, the value of any outstanding instalments of the amount payable under such scheme by the assessee to the society, company or association towards the cost of such building or part and the land appurtenant thereto shall, whether the amount so payable is described as such or in any other manner in such scheme, be deducted as a debt owed by him in relation to such building or part.
55
(8) A person - (a) 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 section 53A of the Transfer of Property Act, 1882 (4 of 1882); (b) who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act (43 of 1961), shall be deemed to be the owner of that building or part thereof and the value of such building or part shall be included in computing the net wealth of such person. Explanation : For the purposes of this section, - (a) the expression "transfer" includes any disposition, settlement, trust, covenant, agreement or arrangement; (aa) the expression "child" includes a step-child and an adopted child; (b) the expression "irrevocable transfer" includes a transfer of assets which, by the terms of the instrument effecting it, is not revocable for a period exceeding six years or during the lifetime of the transferee, and under which the transferor derives no direct or indirect benefit, but does not include a transfer of assets if such instrument - (i) contains any provision for the retransfer, directly or indirectly, of the whole or any part of the assets or income therefrom to the transferor, or (ii) in any way gives the transferor a right to reassume power, directly or indirectly, over the whole or any part of the assets or income therefrom; (c) the expression "property" includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property; EXEMPTIONS IN RESPECT OF CERTAIN ASSETS. - Wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee - (i) any property held by him under trust or other legal obligation for any public purpose of a charitable or religious nature in India : Provided that nothing contained in this clause shall apply to any property forming part of any business, not being a business referred to in clause (a) or clause (b) of sub-section (4A) of section 11 of the Income-tax Act in respect of which separate books of account are maintained or a business carried on by an institution, fund or trust referred to in clause (23B) or clause (23C) of section 10 of that Act; (ii) the interest of the assessee in the coparcenary property of any Hindu undivided family of which he is a member; (iii) any one building in the occupation of a Ruler, being a building which immediately before the commencement of the Constitution (Twenty-sixth Amendment) Act, 1971, was his official residence by virtue of a declaration by the Central Government 51 ] under Paragraph 13 of the Merged States (Taxation Concessions) Order, 1949, or Paragraph 15 of the Part B States (Taxation Concessions) Order, 1950; (iv) to (xiii) (iv) jewellery in the possession of any Ruler, not being his personal property, which has been recognised before the commencement of this Act, by the Central Government as his heirloom or, where no such recognition exists, which the Board may, subject to any rules that may be made by the Central Government in this behalf, recognise as his heirloom at the time of his first assessment to wealth-tax under this Act : Provided that in the case of jewellery recognised by the Central Government as aforesaid, such recognition shall be subject to the following conditions, namely :- (i) that the jewellery shall be permanently kept in India and shall not be removed outside India except for a purpose and period approved by the Board;
56
(ii) that reasonable steps shall be taken for keeping the jewellery substantially in its original shape; (iii) that reasonable facilities shall be allowed to any officer of Government authorised by the Board in this behalf to examine the jewellery as and when necessary; and (iv) that if any of the conditions hereinbefore specified is not being duly fulfilled, the Board may, for reasons to be recorded in writing, withdraw the recognition retrospectively with effect from the date of commencement of clause (b) of section 5 of the Rulers of Indian States (Abolition of Privileges) Act, 1972 (54 of 1972) and in such a case, wealth-tax shall become payable by the Ruler for all the assessment years after such commencement for which the jewellery was exempted on account of the recognition. Explanation : For the purposes of clause (iv) of the foregoing proviso, the fair market value of any jewellery on the date of the withdrawal of the recognition in respect thereof shall be deemed to be the fair market value of such jewellery on each successive valuation date relevant for the assessment years referred to in the said proviso : Provided further that the aggregate amount of wealth-tax payable in respect of any jewellery under clause (iv) of the foregoing proviso for all the assessment years referred to therein shall not in any case exceed fifty per cent of its fair market value on the valuation date relevant for the assessment year in which recognition was withdrawn; (xv) to (xxxii) (v) 105 in the case of an assessee, being a person of Indian origin or a citizen of India (hereafter in this clause referred to as such person) who was ordinarily residing in a foreign country and who, on leaving such country, has returned to India with the intention of permanently residing therein, moneys and the value of assets brought by him into India and the value of the assets acquired by him out of such moneys within one year immediately preceding the date of his return and at any time thereafter : Provided that this exemption shall apply only for a period of seven successive assessment years commencing with the assessment year next following the date on which such person returned to India. Explanation 1 : A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. Explanation 2 : For the removal of doubts, it is hereby declared that moneys standing to the credit of such person in a Non-resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any rules made thereunder, on the date of his return to India, shall be deemed to be moneys brought by him into India on that date; (vi) one house or part of a house or a plot of land belonging to an individual or a Hindu undivided family : Provided that wealth-tax shall not be payable by an assessee in respect of an asset being a plot of land comprising an area of five hundred square meters or le ss. VALUE OF ASSETS, HOW TO BE DETERMINED. - (1) Subject to the provisions of sub-section (2), the value of any asset, other than cash, for the purposes of this Act shall be its value as on the valuation date determined in the manner laid down in Schedule III. (2) The value of a house belonging to the assessee and exclusively used by him for residential purposes throughout the period of twelve months immediately preceding the valuation date, may, at the option of the assessee, be taken to be the value determined in the manner laid down in Schedule III as on the valuation date next following the date on which he became the owner of the house or the valuation date relevant to the assessment year commencing on the 1st day of April, 1971, whichever valuation date is later : Explanation : For the purposes of this sub-section, - (i) where the house has been constructed by the assessee, he shall be deemed to have become the owner thereof on the date on which the construction of such house was completed;
57
(ii) "house" includes a part of a house being an independent residential unit. 8. WEALTH-TAX AUTHORITIES AND THEIR JURISDICTION. - The income-tax authorities specified in section 116 of the Income-tax Act shall be the wealth-tax authorities for the purposes of this Act and every such authority shall exercise the powers and perform the functions of a wealth-tax authority under this Act in respect of any individual, Hindu undivided family or company, and for this purpose his jurisdiction under this Act shall be the same as he has under the Income-tax Act by virtue of orders or directions issued under section 120 of that Act (including orders or directions assigning concurrent jurisdiction) or under any other provisions of that Act. Explanation : For the purposes of this section, the wealth-tax authority having jurisdiction in relation to a person who is not an assessee within the meaning of the Income-tax Act shall be the wealth-tax authority having jurisdiction in respect of the area in which that person resides.
WEALTH-TAX SETTLEMENT COMMISSION. - (1) The Central Government shall constitute a Commission to be called the Wealth-tax Settlement Commission for the settlement of cases under this Chapter. (2) The Settlement Commission shall consist of a Chairman and as many Vice-Chairmen and other members as the Central Government thinks fit. and shall function within the Department of the Central Government dealing with direct taxes. (3) The Chairman, Vice-Chairman and other members of the Settlement Commission shall be appointed by the Central Government from amongst persons of integrity and outstanding ability, having special knowledge of, and experience in, problems relating to direct taxes and business (accounts : Provided that, where a member of the Board is appointed as the Chairman, Vice-Chairman or as a member of the Settlement Commission, he shall cease to be a member of the Board. RETURN OF WEALTH. - (1) Every person, if his net wealth or the net wealth of any other person in respect of which he is assessable under this Act on the valuation date exceeded the maximum am ount which is not chargeable to wealth-tax, shall, on or before the due date, furnish a return of his net wealth or the net wealth of such other person as on that valuation date in the prescribed form and verified in the prescribed manner 162 setting forth particulars of such net wealth and such other particulars as may be prescribed. Explanation : In this sub-section, "due date" in relation to an assessee under this Act shall be the same date as that applicable to an assessee under the Income-tax Act under the Explanation to sub-section (1) of section 139 of the Income-tax Act. (2) Notwithstanding anything contained in any other provision of this Act, a return of net wealth which shows the net wealth below the maximum amount which is not chargeable to tax shall be deemed never to have been furnished :
Unit-V CONSUMER PROTECTION ACT Objectives
The object of the Consumer Protection Act Salient features of the Act The procedure and authorities for filing a complaint under the Act • • •
Introduction
The earlier principle of “Caveat Emptor” or “let the buyer beware” which was prevalent has given way to the principle of “Consumer is King”. The origins of this principle lie in the fact that in today’s mass production economy where there is little contact between the producer and consumer, often sellers make 58
exaggerated claims and advertisements, which they do not intend to fulfill. This leaves the consumer in a difficult position with very few avenues for redressal. The onset on intense competition also made producers aware of the benefits of customer satisfaction and hence by and large, the principle of “ consumer is king” is now accepted. The need to recognize and enforce the rights of consumers is being understood and several laws have been made for this purpose. In India, we have the Indian Contract Act, the Sale of Goods Act, the Dangerous Drugs Act, the Agricultural Produce (Grading and Marketing) Act, the Indian Standards Institution (Certification Marks) Act, the Prevention of Food Adulteration Act, the Standards of Weights and Measures Act, the Trade and Merchandise Marks Act, etc which to some extent protect consumer interests. However, these laws required the consumer to initiate action by way of a civil suit, which involved lengthy legal process proving, to be too expensive and time consuming for lay consumers. Therefore, the need for a more simpler and quicker access to redressal to consumer grievances was felt and accordingly, it lead to the legislation of the Consumer Protection Act, 1986. Object of the Consumer Protection Act, 1986
The main objective of the act is to provide for the better protection of consumers. Unlike existing laws, which are punitive or preventive in nature, the provisions of this Act are compensatory in nature. The act is intended to provide simple, speedy and inexpensive redressal to the consumers’ grievances, and reliefs of a specific nature and award of compensation wherever appropriate to the consumer. The act has been amended in 1993 both to extend its coverage and scope and to enhance the powers of the redressal machinery. The basic rights of consumers as per the Consumer Protection Act (CPA) are 1. The right to be protected against marketing of goods and services which are hazardous to life and property 2. The right to be informed about the quality, quantity, potency, purity, standard and price of goods, or services so as to protect the consumer against unfair trade practices 3. The right to be assured, wherever possible, access to variety of goods and services at competitive prices 4. The right to be heard and be assured that consumers’ interests will receive due consideration at appropriate forums 5. The right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulsous exploitation of consumers 6. The right to consumer education Extend and Coverage of the Act:-
The salient features of the Act are summed up as under:- The Act applies to all goods and services unless specifically exempted by the Central Government. - It covers all the sectors whether private, public or cooperative. - The provisions of the Act are compensatory in nature. It enshrines the following rights of consumers:- Right to be protected against the marketing of goods and services which are hazardous to life and property. -Right to be informed about the quality, quantity, potency, purity, standard and price of goods or services so as to protect the consumer against unfair trade practices; -Right to be assured , wherever possible , access to a variety of goods and services at competitive prices; -Right to be heard and to be assured that consumers’ interests will receive due consideration at appropriate forums; 59
-Right to seek redressal against unfair trade practices unscrupulous exploitation of consumers; and -Right to consumer education -The Act envisages establishment of Consumer Protection Councils at the Central a nd State levels, whose main objects will be to promote and protect the rights of the consumers The CPA extends to the whole of India except the State of Jammu and Kashmir and applies to all goods and services unless otherwise notified by the Central Government. Definitions of Important Terms
Before studying the provisions of the CPA, it is necessary to understand the terms used in the Act. Let us understand some of the more important definations. Complainant Means
1. A consumer; or 2. Any voluntary consumer association registered under the Companies Act,1956 or under any other law for the time being in force; or 3. The Central Government or any State Government, who or which makes a complaint; or 4. One or more consumers where there are numerous consumers having the same interest Complaint means any allegation in writing made by a complainant that :1. An unfair trade practice or a restricted trade practice has been adopted by any trader 2. The goods bought by him or agreed to be bought by him suffer from one more defects 3. The services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in any respect 4. The trader has charged for the goods mentioned in the complaint a price excess of the price fixed by or under any law for the time being in force or displayed on the goods or any package containing such goods. 5. Goods which will be hazardous to life and safety when used, are being offered for sale to the public in contravention of the provisions of any law for the time being in force, requiring traders to display information in regard to the contents, manner and effect of use of such goods ;with a view to obtaining any relief provided by law under the CPA. Goods means goods as defined in the Sale of Goods Act, 1930. Under that act, goods means every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Service is defined to mean service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purverying of news or other information but does not include the rendereing of any service free of charge or under a contract of personal service. Consumer dispute means dispute where the person against whom a complaint has been made, denies or disputes the allegation contained in the complaint. Restrictive Trade Practice means any trade practice which requires a consumer to buy, hire, or avail of any good or as the case may be, services as a condition precedent for buying, hiring or availing of any other goods or services. Who is a Consumer?
All of us are consumers of goods and services. For the purpose of the Consumer Protection Act,the word “Consumer” has been defined separately for “goods” and “services”. For the purpose of “goods”, a consumer means a person belonging to the following categories: 60
(i) One who buys or agrees to buy any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment; (ii) It includes any user of such goods other than the person who actualy buys goods and such use is made with the approval of the purchaser. Note :- A person is not a consumer if he purchases goods for commercial or resale purposes However, the word “commercial” does not include use by consumer of goods bought and used by him exclusively for the purpose of earning his livelihood, by means of self employment. - For the purpose of “services”, a “consumer” means a person belonging to the following categories: (i) One who hires or avails of any service or services for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment; I. It includes any beneficiary of such service other than the one who actually hires or avails of the service for consideration and such services are availed with the approval of such person. Who Can file a Complaint
The following can file a complaint under the Act:- A consumer - Any voluntary consumer organization registered under the Societies Registration Act,1860 or under the Companies Act,1956 or under any other law for the time being in force. - The Central Government - The State Government or Union Territory Administrations. - One or more consumers on behalf of numerous consumers who are having the same interest (Class action complaints) Structure
-To provide simple, speedy and inexpensive redressal of consumer grievances, the Act envisages a three- tier quasijudicial machinery at the National, State and District levels. National Consumer Disputes Redressal Commission - known as “National Commission”. Consumer Disputes Redressal Commissions known as “State Commission. Consumer Disputes Redressal Forums- known as “District Forum. -The provisions of this Act are in addition to and not in derogation of the provisions of any other law for the time being in force • • •
What Constitutes a Complaint?
Under the Act, a complaint means any allegation in writing made by a complainant in regard to one or more of the following:- Any unfair trade practice as defined in the Act or restrictive trade practices like tie-up sales adopted by any trader. - One or more defects in goods. The goods hazardous to life and safety, when used,are being offered for sale to public in contravention of provisions of any law for the time being in force. - Deficiencies in services. - A trader charging excess of price. (i) Fixed by or under any law for the time being in force; or (ii) Displayed on goods; or (iii) Displayed on any packet containing such good; Where to file a complaint
Consumer Protection Councils The interests of consumers are enforced through various authorities set up under the CPA. The CPA provides for the setting up of the Central Consumer Protection Council, the 61
State Consumer Protection Council and the District Forum Central Consumer Protection Council
The Central Government has set up the Central Consumer Protection Council which consists of the following members :(a) The Minister in charge of Consumer Affairs in the Central Government who is its Chairman, and (b) Other official and non-official members representing varied interests The Central council consists of 150 members and its term is 3 years. The Council meets as and when necessary but at least one meeting is held in a year. State Consumer Protection Council
The State Council consists of :(a) The Minister in charge of Consumer Affairs in the State Government who is its Chairman, and (b) Other official and non-official members representing varied interests The State Council meets as and when necessary but not less than two meetings must be held every year. Redressal Machinery under the Act The CPA provides for a 3 tier approach in resolving consumer disputes. The District Forum has jurisdiction to entertain complaints where the value of goods / services complained against and the compensation claimed is less than Rs. 5 lakhs, the State Commission for claims exceeding Rs. 5 lakhs but not exceeding Rs. 20 lakhs and the National Commission for claims exceeding Rs. 20 lakhs. District Forum
Under the CPA, the State Government has to set up a district Forum in each district of the State. The overnment may establish more than one District Forum in a district if it deems fit. Each District Forum consists of :(a) A person who is, or who has been, or is qualified to be, a District Judge who shall be its President (b) Two other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of or have shown capacity in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman. Appointments to the State Commission shall be made by the State Goverrnment on the recommendation of a Selection Committee consisting of the President of the State Committee, the Secretary - Law Department of the State and the secretary in charge of Consumer Affairs Every member of the District Forum holds office for 5 years or up to the age of 65 years, whichever is earlier and is not eligilbe for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. The District Forum can entertain complaints where the value of goods or services and the compensation, if any, claimed is less than rupees five lakhs. However, in addition to jurisdiction over consumer goods services valued upto Rs. 5 lakhs, the District Forum also may pass orders against traders indulging in unfair trade practices, sale of defective goods or render deficient services provided the turnover of goods or value of services does not exceed rupees five lakhs. A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction (a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office or personally works for gain at the time of institution of the complaint; or (b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on business or has a branch office or personally works for gain, 62
at the time of institution of the complaint provided that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in respect of such opposite parties; or (c) The cause of action arises, wholly or in part. State Commission
The Act provides for the establishment of the State Consumer Disputes Redressal Commission by the State Government in the State by notification. Each State Commission shall consist of:(a) A person who is or has been a judge of a High Court appointed by State Government (in consultation with the Chief Justice of the High Court ) who shall be its President; (b) Two other members who shall be persons of ability, integrity, and standing and have adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom must be a woman. Every appointment made under this hall be made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Commission, Secretary - Law Department of the State and Secretary in charge of Consumer Affairs in the State. Every member of the District Forum holds office for 5 years or up to the age of 65 years, whichever is earlier and is not eligible for re appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. The State Commission can entertain complaints where the value of goods or services and the compensation, if any claimed exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs; The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the State The State Commission also has the power to call for the records and appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State if it appears that such District Forum has exercised any power not vested in it by law or has failed to exercise a power rightfully vested in it by law or has acted illegally or with material irregularity. National Commission
The Central Government provides for the establishment of the National Consumer Disputes Redressal Commission The National Commission shall consist of :(a) A person who is or has been a judge of the Supreme Court, to be appoint by the Central Government (in consultation with the Chief Justice of India ) who be its President; (b) Four other members who shall be persons of ability, integrity and standing and have adequate knolwiedge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India, the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the Government of India. Every member of the National Commission shall hold office for a term of five years or upto seventy years of age, whichever is earlier and shall not be eligible for reappointment. The National Commission shall have jurisdiction :(a) To entertain complaints where the value of the goods or services and the compensation, if any, claimed exceeds rupees twenty lakhs: (b) To entertain appeals against the orders of any State Commission; and (c) To call for the records and pass appropriate orders in any consumer dispute which is pending before, or has been decided by any State Commission where it appears to the 63
National Commission that such Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity. Complaints may be filed with the District Forum by :1. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided 2. Any recognised consumer association, whether the consumer to whom goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided, is a member of such association or not 3. One or more consumers, where there are numerous consumers having the same interest with the permission of the District Forum, on behalf of or for the benefit of, all consumers so interested 4. The Central or the State Government. On receipt of a complaint, a copy of the complaint is to be referred to the opposite party, directing him to give his version of the case within 30 days. This period may be extended by another 15 days. If the opposite party admits the allegations contained in the complaint, the complaint will be decided on the basis of materials on the record. Where the opposite party denies or disputes the allegations or omits or fails to take any action to represent his case within the time provided, the dispute will be settled in the following manner :I. In case of dispute relating to any goods : Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, a sample of the goods shall be obtained from the complainant, sealed and authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any analysis or test whichever may be necessary, so as to find out whether such goods suffer from any other defect. The appropriate laboratory’ would be required to report its finding to the referring authority, i.e. the District Forum or the State Commission within a period of forty five days from the receipt of the reference or within such extended period as may be granted by these agencies. How to File a Complaint
Procedures for filing complaints and seeking redressal are simple. There is no fee for filing a complaint before the District Forum, the State Commission or the National Commission.( A stamp paper is also not required) There should be 3 to 5 copies of the complaint on plain paper. The complainant or his authorized agent can present the complaint in person. The complaint can be sent by post to the appropriate Forum / Commission. A complaint should contain the following information (a) The name, description and the address of the complainant. (b) The name , description and address of the opposite party or parties, as the case may be, as far as they can be ascertained; (c) The facts relating to complaint and when and where it arose; (d) Documents, if any, in support of the allegations contained in the complaint. (e) The relief which the complainant is seeking. The complaint should be signed by the complainant or his authorized agent. The complaint is to be filed within two years from the date on which cause of action has arisen. •
• • •
• •
Relief Available to the Consumers
64
Depending on the nature of relief sought by the consumer and facts, the Redressal Forums may give orders for one or more of the following reliefs:(a) Removal of defects from the goods, (b) Replacement of the goods; (c) Refund of the price paid; (d) Award of compensation for the loss or injury suffered; (e) Removal of defects or deficiencies in the services; (f) discontinuance of unfair trade practices or restrictive trade practices or direction not to repeat them; (g) Withdrawal of the hazardous goods from being offered to sale; or (h) Award for adequate costs to parties. Procedure for Filing the Appeal
Procedure for filing the appeal :- Appeal against the decision of a District Forum can be filed before the State Commission within a period of thirty days. Appeal against the decision of a State Commission can be filed before the National Commission within thirty days. Appeal against the orders of the National Commission can be filed before the Supreme Court within a period of thirty days. There is no fee for filing appeal before the State Commission or the National Commission. Procedure for filing the appeal is the same as that of complaint, except the application should be accompanied by the orders of the District/State Commission as the case may be and grounds for filing the appeal should be specified. • •
Speedy Disposal
The thrust of the Act is to provide simple, speedy and inexpensive redressal to consumers’ grievances. To ensure speedy disposal of consumers’ grievances, the following provisions have been incorporated in the Act and the rules farmed there under:It is obligatory on the complainant or appellant or their authorized agents and the opposite parties to appear before the Forum/Commission on the date of hearing or any other date to which hearing could be adjourned. The National Commission, State Commission and District Forums are required to decide complaints, as far as possible, within a period of three months from the date of notice received by the opposite party where complaint does not require analysis or testing of the commodities and within five months if it requires analysis or testing of commodities. The National Commission and State Commissions are required to decide the appeal as far as possible, within 90 days from the first date of hearing. Read the following questions for a better understanding of the Act: Q1. I have instituted a complaint before the Consumer Court against a Medical Practitioner. My complaint has been challenge on the ground that a Medical Practitioner cannot be sued under the Consumer Act. What does law provide? A. Yes, a medical practitioner can be sued under the Consumer Protection Act 1986 for his or her professional negligence resulting in damage to patient. Section 2 (d) in defining a consumer in Clause (ii) uses the expression ‘hires and avails of”. The word “hire” means employ of wages or fees”. Secondly the words “any service” in s. 2 (d) (ii) in Consumer Protection Act. A eloquent to bring the delinquent medical practitioners within the ambit of Consumer Protection Act. Thirdly, s. 2 (o), Consumer Protection Act which defines service exempts only two types of services, one “service free of charge” and another “contract of personal service” postulates •
•
•
65
a relationship of master and servant. A medical man whose service is requisitioned for a patient answers the clause “ contract of service” but never “a contract of personal service”. So, a negligent medical professional can be proceeded under the Consumer Protection Act 1986.
What is Tax Planning ?
Tax planning is an essential part of your financial planning. Efficient tax planning enables y ou to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals. What tax planning is not...
Tax Planning is NOT tax evasion. It involves sensible planning of your income sources and investments. It is not tax evasion which is illegal under Indian laws. Tax Planning is NOT just putting your money blindly into any 80C investments. Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances. Planning taxes this year
a. You will have certain needs and goals to meet. Understand what those are and then figure out how to maximize tax efficiency in your effort to meet them. Tax planning should be a part of the overall financial planning that you must do. For instance, you might be getting married and need to buy a house. In this situation you need to get insurance to protect you spouse if they are financially dependant upon you, as well as you need to get a home loan. What should you prioritize and what do you have the capacity to afford? If you blindly put money into an insurance policy, it might not even be sufficient to give you adequate insurance cover. However, if you choose to pay off the principal on your home loan, that could be a better option in this situation. b. Do not blindly invest money with the the first agent that you might come across. You might end up making mistakes. A lot of people end up buying insurance policies with minimal insurance coverage or putting money in instruments where they cannot access the money when they need it. c. Do not make last minute decisions just because your payroll department has reminded you that the internal deadline for submitting proofs is approaching. Tax planning involves planning in advance to avoid the last minute scramble. Selecting tax saving investments
You should think about the following criteria, before selecting your tax saving investments for the year: Liquidity: How quickly will you need the money? Will you need to access the money within the next year or two years or over what duration ? None of the above instruments let you withdraw your money quickly, in fact there is a minimum three year lock in for all tax saving investments. Risk and Return : How much risk do you want to take. There is a trade off between the two, some instruments are very low risk, but as a result they give low returns which are capped.
66
