Ch.1 BASIC CONCEPTS
Financial Year: The year starting from April 1 and ending on March 31 of the next year is known as a financial year. Assessment Year: AY is a financial year in which the income earned during the previous year is taxed. Previous Year (sec 3): The year in which the income is earned is called the previous year. E.g.: 1. Income earned by XYZ Ltd in the year 2007-2008 will be taxed in the year 2008-2009. The same would be taxable irrespective of the accounting year followed by the assessee. In the aforesaid the year 2007-08 is the previous year and the year 2008-09 is the assessment year. 2. The income of X comprises of only property income till March 10, 2006. On March 10, 2006 he starts a new business of computer hardware. From the date given below, find out the taxable income of X or the assessment years 2005-06 to 2007-08. Property income: Rs. 42,000/- every year. Business income: Rs 10,000/- for the period ending 31 March 2006 and Rs.56000/-for the period ending 31 march 2007. What would be the taxable income of X for the AY 05-06, 06-07, 07-08? Income earned during the previous year is taxed during the assessment year. Therefore a year is an assessment year and previous year simultaneously. However in certain cases the income is taxed in the year in which it is earned. The exceptions to the rule are as under: 1. Income of non-resident from shipping. (sec172) 2. Income of persons leaving India either permanently or for long period of time (sec174) 3. Income of bodies formed for short duration. (sec174A) 4. Income of persons trying to alienate his assets with view to avoiding payment of his tax. (sec 175) 5. income of discontinued business.(sec176)
“Person “sec 2(31): The term persons include: a) an individual b) a Hindu undivided family c) a company d) a firm e) an association of persons and a body of individuals whether incorporated or not f) a local authority g) Every artificial jurisdictional person not falling under any of the preceding category. The aforesaid is an inclusive list and the last category covers all those that do not fall in any of the preceding classification.
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Assessee [sec2 (7)]: Assessee means a person by whom any tax or any other sum of money (i.e. penalty or interest is payable under the act. It includes: 1. Every person in respect of whom any proceeding under the act has been taken for the assessment of his income or loss or the amount of refund due to him. 2. any person who is deemed to be an assessee.(representative assessee) 3. an assessee in default ( advance tax and TDS not deducted) Overview of tax on income: Income Tax is an annual Tax charged at the tax rates applicable for the assessment year, which are fixed by the annual finance act. Basic concept of Income: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
11. 12.
13. 14. 15. 16. 17. 18. 19. 20. 21.
Regular and definite source Different form of income (cash/kind) Receipt v/s accrual Illegal income Disputed title Relief or reimbursement of expense is not income Diversion of income by over riding title v/s application of income Surplus from mutual activity not an income. Temporary or permanent income tax free income Receipt on account of dhrmada, gaushala etc is not an income. devaluation of currency Income includes loss. Appropriation of payment between capital and interest. same income cannot be taxed twice income should be real and not fictional charge on person Award receipt by sports man revenue receipts v/s capital receipts voluntary payment prize of winning
Extended meaning of income sec 2(24): 1. profits and gains 2. Dividend: dividend declared by domestic company is taxable in the hands of company and not shareholders 3. Voluntary contribution received by trust. 4. Perquisites in the hands of employee 5. Any special allowance and benefits 6. City compensatory allowance 7. Benefits or perquisites of director 8. Benefit or perquisites to a representative assessee 9. Any sum chargeable u/s 28, 41 and 59 10. Capital gains 11. Insurance profit 12. banking income of a cooperative society 13. winning from lottery 14. employees contribution towards provided fund
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15. amt received under keyman insurance policy 16. amount exceeding 50,000 by way of gift
Gross total income As per section 14, the income is computed under five heads: Rs Computation of total income: Income from salaries Income from House properties profit and gains from business and profession Capital gains Income from other sources Gross Total Income Less: deductions u/s 80 C to 80 U Net total Income (rounded off)
Rs
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Computation of Tax Liability:
Tax on total income Less: rebate u/s 88E Balance Add: surcharge Total Add: education cess
-----
Tax Less: Prepaid taxes ( TDS, self assessment and Advance tax) Tax Liability Rounding off total Income: The total income is to be rounded off to the nearest multiple of ten rupees.
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Ch.2 RESIDENTIAL STATUS AND ITS TAX EFFECT Different Taxable Entity: 1. 2. 3. 4. 5.
Individual Hindu Undivided Family A firm or an association of persons a joint stock company every other person
Residential status: 1. Resident and ordinary resident in India 2. Resident but not ordinary resident in India 3. Non-resident in India. Different residential Status for different Taxable entity: Individual/ Hindu undivided Family Category
Firm/association of persons, joint stock company and every other person.
Category 1 Ordinary resident
Resident in India
Resident In India Non-ordinary resident Category 2
Non resident in India
Non resident in India
Residential status is to be determined for each previous year. A person can be a resident of two countries at once. Whether a person is a resident or non-resident is a question of fact and its duty of the assessee to place all relevant fact in front of the assessing officer
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Residential status of individual (sec 6): Basic conditions: To be an Indian resident a person should satisfy atleast one of the two conditions as under: 1. He is in India in the previous year for a period of 182 days or more. 2. He is in India for 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year. Exceptions: In the following two cases a person will be a resident if he satisfies only the first condition, the second condition is not applicable. 1. In case of an Indian citizen who leaves India for the purpose of employment or as a member of the crew of an Indian ship. 2. In the case of an Indian citizen or a person of Indian origin who comes on a visit to India in the previous year. Additional Conditions: For a resident to be classified as an ordinary resident the following two additional conditions should be fulfilled. In case any one of them is not fulfilled then the person will be under the category of resident but not an ordinary resident. 1. He should be resident in India for at least 2 years out of the preceding 10 years. 2. He should be in India for at least 730 days out of the immediately preceding 7 years. Eg:
X foreign citizen comes to India for the first time on March 20, 2006. On Sep 1, 2006 he leaves for Nepal on a business trip. He comes back on February 26, 2007. Determine the residential status of X for the AY 2007-08. X left India for the first time on May 20, 2004. During the FY 2007-08, he comes back to India on May 27 for a period of 53 days. Determine the residential status for the AY 2008-09. X a foreign citizen leaves India for the first time in the last 20 years on Nov20, 2004. During the calendar year 2005, he comes to India on Sep 1 for 30 days. During the calendar year 2006, he does not visit India at all but come on January 16, 2007. Determine the residential status for the AY 07-08.
Residential Status of a Hindu undivided Family sec 6(2): HUF is classified as a resident and non resident according to its control and management status. Control and management means the de facto control and management and not just the right to control and manage. Place of control
Residential status of HUF
Ordinary resident or not
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Control and mangt is wholly in India Control and mangt is wholly outside India Control and mangt is partly in India and partly outside India
Resident
Next table
Non-resident
--
Resident
Next table
Condition for being ordinary resident: Add condition 1
Karta has been resident in India at least 2 out of 10 previous years immediately preceding the relevant previous year.
Add condition 2
Karta has been present in India for a period of 730 days or more during the 7 years immediately preceding the previous year.
If karta or manager of a resident HUF does not satisfy the above two conditions then it would be treated as resident but not ordinary resident. Eg:
X an individual, is resident but not ordinary resident in India for the AY 07-08. During the previous year 06-07, the affair of X (HUF), whose Karta is X is partly managed from India and partly from Nepal. Determine the residential status of X (HUF) for the financial year 07-08? Residential status of firm and association of persons: sec6 (2) Place of control
Residential status
Control and management of the affairs of a firm/association of persons is• Wholly in India • Wholly outside India • Partly in India and Partly outside India
Resident Non-resident Resident
Residential status of a company sec 6(3): Place of control Control and management of the affairs of the company is situated• Wholly in India • Wholly outside India • Partly in India and Partly outside India
Residential status Indian Company
Other company
Resident Resident Resident
Resident Non resident Non resident
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The term control and management refers to head and brain that directs the affair of policy, finance, disposal of profits and vital things regarding the management of a company. Residential status of every other person sec 6(4): Place of control Control and management of his affairs are situated• Wholly in India • Wholly outside India • Partly in India and Partly outside India
Residential status
Resident Non- resident Resident
Incidence of Tax for different Taxpayers: Incidence of tax on taxpayers depends on his residential status and also on the place and time of accrual and receipt of his income. Tax incidence on Individual and HUF is as under: Resident and ordinary resident Indian Income Taxable in India Foreign Income • Business is controlled wholly or party from India • Income from profession set up in India • Business is controlled from outside India • Profession is set up outside India • Any other foreign Income
Resident but not ordinary resident Taxable in India
Non resident
Taxable in India
Taxable in India
Not taxable in India
Taxable in India
Taxable in India
Taxable in India
Not taxable in India
Taxable in India Taxable in India
Not taxable in India Not taxable in India Not taxable in India
Not taxable in India Not taxable in India Not taxable in India
Taxable in India
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Tax incidence on any other taxpayer (company, firm etc) as under: Resident in India
Non- resident in India
Indian Income
Taxable in India
Taxable in India
Foreign income
Taxable in India
Not Taxable in India
Ch3. Income that is exempt from Tax
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Agriculture Income: Agriculture income is exempt from tax by virtue of sec 10(1). By virtue of sec 2(1A) the expression Agriculture Income means: 1. Any rent or revenue derived from land, which is situated in India and is used for agriculture purpose. • Rent or revenue should be derived from land (may be in cash or kind). • The land should be in India • The land should be for agriculture purpose. 2. Any income derived from such land by agricultural operations including processing of the agriculture produce, raised or received as rent-in- kind so as to render it fit for the market or sale of such produce. 3. Income attributable to a farmhouse subject to certain conditions. • The building should be occupied by a cultivator (as a landlord or tenant). • He should be in immediate vicinity of agriculture land. • The building is used as a dwelling house or as a store house or other out building. • The land is assessed to land revenue or local rates or alternatively the land is situated outside “urban areas” i.e. any area which is comprised within the municipality jurisdiction having a population of not less than 10,000 persons or within 8 kms from the limits of any such municipality. If the above conditions are satisfied then, income from a farm building is exempt from tax. Agriculture income is included for tax rate purposes only.
Special Provisions in respect for newly established undertaking Sec 10(A): Eligibility: Any undertaking which satisfy the following conditions is eligible to get deduction: 1. It must begin manufacture or production in free trade Zone 2. It should not be formed by splitting/ reconstruction of business. 3. It should not be formed by transfer of old machinery. (Second hand imported and 20%) 4. Sale consideration should be remitted to India in convertible foreign exchange. 5. Books of account should be audited 6. Return of income should be submitted on Time.
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Amount of deduction The deduction under sec 10A is as under: Profit of the business of the undertaking
x
Export turnover . Total turnover of the business carried on by the undertaking
Export turnoverIt means the consideration in respect of export by the undertaking of articles or things or computer software received in or bought in India by the assessee in convertible foreign exchange within the prescribed period.
Period of Deduction: The assessee can claim deduction for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. The aforesaid deduction is not available to any undertaking from the assessment year 2010-11. Special Provisions: Incase of an undertaking, which begins to manufacture or produce things or computer software between 1April 2002 to March 31 2005 in any special economic zone, is available as follows for 10 assessment years: First 5 years-100% of profit derived from the export of such articles or things or computer software. (First 5 consecutive years). Next 2 years- 50% of such profits and gains in deductible. Next 3 years- a further deduction is available to the extent of 50% of the profit provided an equivalent amount is created as Special Economic Zone re-investment Allowance Reserve. Charitable and Religious trusts and institutions: Income of a charitable trust is exempt according to the provisions of section 11, 12 and 13. The trust should be one established in accordance with law and its objects should fall within the definition of the term “ charitable purpose”. Here the charitable purpose includes relief to the poor, education, medical relief and the advancement of any other object of general utility. Income of the trust: • Income means the real income, which has been received by the assessee. • The amount deducted as tax at source cannot be considered as income for this purpose. • Depreciation should be allowed while computing income for this purpose. • Voluntary contribution or donations are deemed to be a part of income derived from property held under trust.
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•
If a voluntary contribution is made with a specific direction than it shall form a part of the corpus of the trust and not deemed as the income of the trust.
Application of the income of the trust: If the income applied to charitable or religious purposes, during the previous year fall short of 85% of the income derived during the year due to below mentioned reasons then the trust can us the income as below: Reason for less than 85% application of income
When the income can be spend
Income has not been received during the previous year
The year in which the income is received or the following subsequent year.
Any other reason
During the previous year immediately following the year in which the income is derived.
If the income is not applied during the extended time then the income will be taxable in the next year. Accumulation of income: The trust or institution may accumulate or set apart either the whole or part of its income for future application for such purposes. Such income so accumulated will not form the income of the trust. Forfeiture of exemption: If the benefits of any amenities or services are derived by any specified persons as per section 13 then the exemption given to trust stand forfeited. The following income do not qualify for exemption: 1. Income for private religious purposes only 2. Income for the benefit of particular religious community 3. Income for the benefit of interested persons 4. Funds not invested in specified securities/ deposits Eg: During the previous year 2006-07, a charitable trust gets the following income: a. Voluntary contribution (with specific direction that they Rs shall form part of the corpus of trust 12,90,000 b. Voluntary contribution (without specific direction) 18,30,000 c. Income from property held in trust During the previous year 2006-07, the trust spends Rs. 8,90,000 for charitable purpose in India. Besides it gives donation of Rs. 85,480/- to the charitable trusts. It sets apart Rs. 14,00,000 for the purpose of construction of a charitable hospital up to March 31,2012.
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Ch.4 INCOME UNDER THE HEAD SALARIES Meaning of salary 1. 2. 3. 4.
Relationship of an employer and employee Salary and wages not conceptually different Salary can be from more than one source It can be in cash or kind
Salary Sec 17(1): Salary under 17(1), is defined to include the following: 1. wages 2. any annuity or pension 3. any gratuity 4. any fees, commission, perquisites, or profits in lieu of or in addition to any salary or wages. 5. any advance on salary 6. any payment received by an employee in respect of any period of leave not availed by him. 7. the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable. 8. the contribution made by the central government to the account of an employee under a pension scheme. Basis of Charge Sec 15: 1. Any salary due from an employer whether actually received or not. 2. Any salary received in the previous year whether actually due or not. 3. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer, if not charged to income tax for any previous year. Computation of income from Salary: Rs. ----
Income from Salary Income by way of allowance Taxable value of perquisites
Rs. --
Gross Salary Less: deductions u/s 16 Entertainment Allowance Professional Tax Income from salaries
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Leave Salary:
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Leave Salary refers to the encashment of the leave standing to the credit of an employee either at the time of his retirement/ or leaving his job or at any time during his service. Tax treatment: Nature of Leave encashment Leave encashment during continuity of employment
Status of employee Government/ non government employee
Whether it is taxable Chargeable to Tax
Leave encashment at the time of retirement / leaving the job
Government employee
Fully exempted
Leave encashment at the time of retirement / leaving the job
Non government employee
Fully or partly exempted from tax in some cases.
Non government employee getting Leave encashment at the time of retirement / leaving the job: In case of a non-govt employee including a local authority or public sector undertaking, leave salary is exempt from tax on the basis of following: 1. Period of earned leave (in no. of months) to the credit of employee x Average Salary per month. (cannot exceed more than 30 days in a year) 2. 10 x average monthly salary (Avg monthly salary= basic salary+ dearness allowance+ commission on turnover) 3. Amt specified by Govt. (300,000) 4. Leave encashment actually received Note: Any part of the year is to be ignored. Eg:
1. Mr. Pradeepkumar retires on 1st July 2007 after serving 18yrs of service and receives Rs. 80,000 as amount of leave encashment for 15 months. His employer allows 45 days leaves for every completed year of services. During service he has encashed leave for a period of 12 months. Calculate the taxable amount of leave encashment if his salary during 1/7/06 to 1/7/07 is Rs. 5000/- per month. Gratuity Sec 10(10): Gratuity is a retirement benefit and is generally payable at the time of cessation of employment and on the basis of duration of service. Status of employee
Tax treatment
Government Employee
Fully exempted from Tax
Non government employee covered by the payment of Gratuity Act, 1972
Exempted to the Least of the following: 3,50,000/ Gratuity actually received 15 days last drawn salary x length of service/26 Exempted to the Least of the following: 3,50,000/14 Gratuity actually received Half-month average salary for each completed year of service.
Non government employee not covered by the payment of Gratuity Act, 1972
Note: 1. In case where the employee is covered by gratuity Act, 1972 then the year is to be rounded off to the nearest whole. (above 6 months the year to be rounded off to one.) 2. In case where the employee is not covered by the gratuity Act, 1972 then the years are the completed years of service( any fraction is to be ignored). Eg: 1) X, an employee of PQ Co. Ltd, receives Rs. 78,000 as gratuity. He is covered by the payment of gratuity Act, 1972. He retires on December 12, 2006 after rendering services of 38 years and 8 months. At the time of retirement his monthly basic salary and dearness allowance was Rs.2,400/- and Rs. 800 respectively. Calculate the amount of exemption. 2) In the above example calculate the amount of exemption if X was not covered by the Gratuity Act, 1972. 3) Mr. X retired on 1st April 2007 after serving for 30 years and 7 months. He was getting salary Rs. 5,000/- pm from 1/1/2006 to 31/12/2006 and thereafter Rs. 5,200/- pm. He received DA @ Rs. 1,000 pm (forming part of salary for computation of retirement benefits) and 2%commission on sales achieved by him. Turnover achieved by him during 10 months (preceding the month in which he retired) Rs. 8,00,000. He received a gratuity of Rs. 1,56,000. Compute the exempted amount of gratuity. Pension Sec 17(1)(ii): Uncommuted Pension: Periodical payment of pension. Commuted Pension: Lump sum payment in lieu of periodical payment. Taxability of commuted pension: Status of employee Government Employee
Non-Government Employee
Gratuity received/ not received Gratuity may or may not be received
Exemption Exempted from Tax
Gratuity is received
One-third of the pension, which he is normally entitled to receive, is exempt from tax.
Gratuity is not received
One-half of the pension, which he is normally entitled to receive, is exempt from tax.
Uncommuted Pension is always chargeable to tax for both government and non-government employee.
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Eg:
1. X retires from a private company on 30th April 2007. He gets a pension of Rs. 24000/- per month. Upto 30th June 2007. From 1st July 2007 onwards he gets two-third of his pension commuted for Rs. 1,50,000/-. He was not in receipt of any gratuity at the time of retirement. Compute the taxable amount of pension for the assessment year 2008-09. 2. Calculate the taxable pension of X for the AY 2008-09, in the above ex. if X was in receipt of Gratuity as per gratuity Act 1972. Pension Scheme for an employee joining Central Government on or after Jan 1, 2004: Under the new scheme it is compulsory for an employee to contribute 10% of salary every month towards their pension account and a matching contribution will be made by the government. Such contribution will be deductible under u/s 80 CCD. When the pension is received out of the aforesaid amount it will be taxable in the hands of recipient. Different form of Allowances: Allowances is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions for that service. It is fixed, predetermined and given irrespective of actual expenditure. House rent Allowance: The least of the following amount would be taxable: 1. An amount equal to 50% of the salary, where the residential house is situated at Mumbai, Kolkatta, Delhi or Chennai and an amount equal to 40% of salary where residential house is situated at any other place. 2. House Rent Allowance received by the employee. 3. The excess of rent paid over 10% of the salary. Salary means basic salary and includes dearness allowance and commission based on the fixed percentage of turnover. Eg:
Mr. X is employed in a company in Agra. He is getting a basic salary of Rs. 5000/- pm, Dearness allowance @10% of basic pay, commission based on fixed percentage of turnover Rs. 24,000/- pa. Actual rent paid by the assessee Rs. 2,500/- pm. Compute the taxable amount of HRA.
Entertainment Allowance: Entertainment Allowance is first included in the salary income and thereafter a deduction is given on the following basis:
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Status of Employee
Exemption Amount
Government Employee
Least of the following is deductible: a) Rs. 5000 b) 20% of basic salary c) actual amount of entertainment allowance
Non-government employee
Entertainment allowance is not deductible
E.g.: X, a government employee gets Rs. 40,000 per annum as basic pay. In addition, he receives Rs. 8,500 as entertainment allowance. His actual expenditure on entertainment for official purpose however exceeds Rs. 9000/-. What would be the amount of deduction? Special Allowances: When exemption depends upon actual expenditure by the employee: In these below mentioned cases the amount of expenditure is the least of the Amount of allowance The amount utilized pertaining to allowance List of the allowances is as under: 1. Traveling Allowance/ transfer allowance 2. Conveyance allowance 3. Daily allowance 4. Helper allowance 5. Research Allowance 6. Uniform Allowance When exemption does not depend upon the expenditure: These allowances are exempt to the least of the following: Amount of allowance ‘Amount specified in rule 2BB Name of allowance Tribal Area/ scheduled area allowance
Children Allowance
Education
Hostel Expenditure Allowance
Nature of allowance
Exemption
This allowance if given in Madhya Pradesh, Tamil Naidu, Uttar Pradesh, Karnatka, Tripura, Assam, West Bengal, Bihar, Orrisa. Given for children education
Rs. 200 pm
This allowance is granted to an employee to meet the hostel expenditure on is child
Exemption limited for Rs. 300/per month per child limited to a maximum of two children.
Exemption limited for Rs. 100/per month per child limited to a maximum of two children.
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Transport Allowance
It is given to an employee to meet his expenditure for commuting from his office to his residence.
Exempted to the extent of Rs. 800/- per month
Special Compensatory ( Hill Areas) Allowance
It includes any special allowance in the nature of special compensatory (hill areas) allowance or high altitude allowance or uncongenial climate allowance or avalanche allowance. Underground allowance is granted to an employee who is working in uncongenial, unnatural climate in underground mines.
Amount exempt varies from Rs. 300 per month to Rs. 7000 per month.
Underground allowance
Exemption limited to Rs.800 per month.
Perquisites: Perquisites can be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. Therefore a perquisite to be taxable under the head salaries: a. allowed by an employer to an employee b. allowed during the continuance of his employment c. directly dependent upon service d. resulting in the nature of personal advantage to the employee e. derived by virtue of employers authority Perquisites: Sec 17(2) The term perquisite is defined to include the following: 1. The value of rent –free accommodation provided to the assessee by his employer. 2. The value of any concession in rent for accommodation provided by the employee 3. Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the below cases: a) by a company to an employee who is a director thereof b) by a company to an employee, having an substantial interest in the company c) any person not included in any of the above two categories having a cash salary of more than 50,000/4. any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee 5. any sum payable by the employer, to effect an assurance on the life of the assessee or to effect a contract for an annuity 6. the value of any other fringe benefits or amenity as may be prescribed. Taxability of perquisites: When it is an obligation of Employee: If the employer meets an obligation of an employee then the perquisite is always chargeable to tax. If the employer, pays any bills which are in the name of employee, then they are taxable in the hands of employee. When not an obligation of employee: In any other case, where it is not an obligation of an employee, the below table list all perquisites which are taxable in the hands of the employee, Remaining perquisites are not taxable in employees hands regardless of the expenditure incurred by the employer.
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Taxable Perquisites in the hands of the employee
Exceptions
Furnished/ unfurnished house without rent or at concessional rent
Exceptions are: A rent free house in a remote area, hotel accommodation in case of transfer for not exceeding 15 days.
Services of a sweeper, gardener, watchman or personal attendant Supply of gas, electricity or water for household purpose Education Facility to employee’s family members
Taxable in the hands of Specified person only Taxable in the hands of Specified person only Taxable in the hands of Specified person only
Leave travel Concession
Exempted if it is given twice in a block of four years.
Amount payable by an employer directly or indirectly to effect an assurance on the life of employee or to effect a contract of an annuity Interest free or concessional loan
Any contribution to recognized provident fund or super annuation fund is exempted. Following are exempted: Loan not exceeding 20,000, Loan for medical treatment
Providing use of movable asset
Providing use of computer/ laptop or motor car None
Transfer of movable asset Medical expenditure reimbursement in excess of Rs. 15,000
Following are exempted: In employer/ govt hospital Expenditure in case of specified treatment Health insurance premium Medical facilities outside India
Specified/ Non specified Employee: The following are specified employees: a) An employee who is a director b) An employee, having a substantial interest in the company: 20% or more voting power in the employer-company. c) any person not included in any of the above two categories having a salary (excluding the value of all benefits/ amenities not provided by way of monetary payment) of more than 50,000/-. Valuation of rent-free unfurnished accommodation: a) Central and State Government Employees: The value of such accommodation provided to employee is equal to the license fee, which would have been determined by the central or state government.
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b) Private sector or other employees: Value of the perquisite depends on salary of the employee and lease rent of the accommodation. Population of city as per 2001 census where accommodation is provided
Where the accommodation is owned by the employer
Exceeding 25 lakhs
15% of salary in respect of the period for which the accommodation is occupied by the employee 10% of salary in respect of the period for which the accommodation is occupied by the employee
Exceeding 10 Lakhs but not exceeding 25 lakhs
Any other
7.5% of salary in respect of the period for which the accommodation is occupied by the employee
Where the accommodation is taken on lease or rent by the employer Lower of amount of lease rent paid/ payable or 15% of the salary Lower of amount of lease rent paid/ payable or 15% of the salary
Lower of amount of lease rent paid/ payable or 15% of the salary
SALARY: For the purpose of valuation the salary includes a) Basic salary b) Dearness allowance, if terms of employment so provide c) Bonus d) Commission e) Fees f) All other taxable allowance (excluding amount not taxable) g) Any monetary payment which is chargeable to Tax Eg: X, an employee of ABC(P) Ltd is posted in Ajmer( population 18 Lakhs), draws Rs. 300,000 basic salary, Rs. 10,000 as dearness allowance(forming part of salary), and Rs. 5000 as commission . Besides, the company provides a rent free accommodation in Ajmer. The house is owned by company and has a fair rent of Rs. 50,000 p.a. Determine the taxable value of perquisite. Valuation of rent-free furnished accommodation: Accommodation is not in a hotel: a) Find out the value of the perquisite on the assumption that the accommodation is unfurnished. b) Valuation of furniture is done: 10% per annum of the original cost of the furniture if the furniture is owned by the employer actual hire charges payable, if furniture is hired by the employer.
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Accommodation in a hotel: The perquisite is valued at the lower of the two amounts: a) 24% of salary paid or payable for the period during which such accommodation is provided in the previous year. b) Actual charges paid or payable by the employer to the hotel. Eg: X received during the previous year ending March 31,2007, emolument consisting of basic pay: Rs. 162,000: special allowance: Rs 17,000 and reimbursement of medical expenditure: Rs. 3800/-. His employer has also provided a rent-free furnished flat in Mumbai. Lease rent of the unfurnished flat is Rs. 50,000. Some of the household appliance provided to X (with effect from June1 ,2006) are owned by the employer ( cost price Rs. 36000). Employer pays Rs. 10,000 as hire purchase charges for the three air conditioners installed. Compute the value of perquisite if: a) X is a Secretary in the ministry of Law and Rs. 4000 is the license fee of unfurnished flat as per the Central Government rules. b) X is the managing director of ABC(P) Ltd. What difference would it make if X was provided a hotel accommodation through out the year (tariff being Rs. 120,000 per annum) Valuation provided at concessional rent: The below rules will apply for furnished as well as unfurnished accommodation: Find out the value of perquisites on the assumption that no rent is charged by the employer. From the value so arrived deduct the rent charged by the employer from the employee. Valuation of perquisite in respect of free domestic servant: The value of benefit to the employee (or any member of his household) resulting from the provision by the employer for services of a sweeper, a gardener, a watchman or a personal attendant, shall be the actual cost to the employer, that is, the total amount of the salary paid or payable by the employer (or any other person on his behalf) for such services as reduced by the amount paid by the employee for such services. Valuation of perquisite in respect of gas, electricity or water provided free of cost: This perquisite is taxable in the hands of specified employees only provided the connection is in the name of employer. If in the name of employee then the employer would be paying on behalf of the employee and is taxable in all cases. Mode of valuation
If purchased from outside
If supplied by the employer from own sources
Cost to employer (A)
Amount paid /payable by the employer to the outside agency
Manufacturing cost per incurred by the employer
Sub: Amount recovered from the employee (B)
Recovery from the employee
Recovery from the employee
Taxable Value perquisite (A-B)
Balancing amount
Balancing amount
of
unit
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Valuation in respect of free education: This perquisite is taxable in the hands of a specified employee only and only in those cases where the educational institute is owned and maintained by the employer or where such education facility is provided in any institute by reason of employee’s employment with the employer. The valuation of the facility would be as under: Different Situations
Amount chargeable to tax
Where the education facility is provided to employees children • Where the cost/ value of benefit does not exceed Rs. 1000 per child per month • Where such amount exceeds Rs. 1000/-
NIL
Where education facility is provided to other members of the household
Cost of education in a similar instituted in a similar locality – Rs 1000 – amount recovered by employee Cost of education in a similar instituted in a similar locality – amount recovered by employee
If the fee is paid by the employer for employees children then there is no exemption available for both specified and non-specified employees. Similarly reimbursement of school fees is also taxable in the hands of both specified and non-specified employees. Valuation in respect of providing use of movable assets: The value of benefit to the employee resulting from the use by the employee (or any member of his household) of any movable asset (other than car, computer and laptop) belonging to the employer shall be determined at 10% per annum of the actual cost of such asset. It is taxable in the hands of all employees i.e. specified and non specified. The taxable amount shall be reduced by the amount, if any, recovered by the employee.
Mode of Valuation
Perquisite in respect of movable asset Owned by employee
Taken on hire by employee
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A. Find the cost to the employer
10% p.a of actual cost
Amount of rent paid or payable
B. Amount recovered from the employee
Recovery from the employee
Recovery from the employee
Taxable Value perquisite (A-B)
Balancing amount (if positive)
Balancing amount (if positive)
of
Valuation in respect of Transfer of movable Asset: The valuation will be done as follows: Mode of Valuation
Perquisite in respect of sale of movable assets to employee Electronic computers
Items/
Motor car
Any other asset
Find out the cost to the employer (A)
Actual cost to the employer
Actual cost to the employer
Actual cost to the employer
Normal wear and tear for completed years for which the asset was used by the employer for his business. (B)
50% for each completed year by reducing balance method
20% for each completed year by reducing balance method
10% for each completed year of actual cost.
Amount recovered by the employee (C)
Paid by employee for acquiring such asset
Paid by employee for acquiring such asset
Paid by employee for acquiring such asset
Taxable Value (A-B-C)
Balancing amount (if positive)
Balancing amount (if positive)
Balancing amount (if positive)
Electronic Items refer to data storage and handling devices like computer, digital diaries and printers. They do not include household appliances. Valuation of Medical Facilities: Fixed medical Allowance is always chargeable to tax. But Medical expenditure reimbursed in excess of Rs. 15,000 is chargeable to tax. The following are the exemptions to the rule that is in the following cases there is no monetary ceiling: In employer hospital government hospital Expenditure in case of specified treatment Health insurance premium Medical facilities outside India Foreign Medical Facility: For medical treatment outside of the employee or any member of the employee shall be excluded to the extent it is permitted by the Reserve Bank of India. However the cost of travel of the employee/ any member of his family and his one attendant shall be excluded only for those employee whose gross total income excluding such traveling expenditure does not exceed Rs. 200,000/-.
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Leave travel concession: The leave travel concession is exempted twice in a block of four years. And the exemption is available to both Indian citizen and foreign citizen. Exemption is based on actual expenditure and is available only in respect of fare. If the journey is performed by the circuitous route then the amount of exemption is available in respect of the shortest route. The exemption is available for the family meaning spouse and two children, parents, brothers and sisters of individual who are mainly or wholly dependent on him. Any other Facility provided to employee: Any other facility or perquisite like car, lunch, refreshment, traveling, touring gift, credit cards, clubs etc provided to employee is not taxable in the hands of employee. Permissible deduction from Salary Income: The following deductions are permitted from the head Income form salaries : 1. Entertainment Allowance As discussed earlier the entertainment allowance is first included in the salary and then allowed as deduction. 2. Professional Tax Professional Tax also known as tax on employment is allowed as deduction in the year in which it is paid. If the employer pays the professional tax, it is first included in the salary of the employee as a perquisite as it is an obligation of the employee and then allowed as deduction from the gross salary. Provident Fund: Provident Fund scheme is a retirement benefit scheme. Under this scheme, stipulated sum of money is deducted from the employee’s salary and an equal matching contribution is made by the employer. The contribution is invested in gilt-edged securities and interest is earned thereon. Thus the balance of provident fund consist of: a) Employers contribution b) Interest on employers contribution c) Employees contribution d) Interest on employees contribution Kinds of Provident Fund: Employees provident fund ca be divided into three a) Statuary Provident Fund: It is set up under the provisions of Provident Fund Act, 1972. This fund is maintained by the Government, semi government organization, local authority, railway, university and recognized educational institutions.
b) Recognized Provident Fund: A provident fund to which the provident Fund Act,1972 applies is a recognized provident fund. This fund is recognized by the commissioner of Income Tax. c) Unrecognized Provident Fund: If the commissioner of Income Tax does not recognize a provident fund then it will be under the category of unrecognized provident fund. Public Provident Fund: The central government has established a public provident fund with a view to benefit the general public and mobilize saving. Any person whether salaried or self employed can invest in the same.
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Taxability of contribution to Provident fund. Statutory Fund
Recognized Provident Fund
Unrecognized Provident Fund
Exempt from tax
Exempt upto12% of salary. Excess is taxable
Exempt from tax
Deductions u/s 80C on employees contribution
Available
Available
Not Available
Interest credited to provident fund
Exempt from tax
Exempt from tax up to 9.5%; excess of interest over this is taxable
Exempt from tax
Lump sum payment at the time of retirement
Exempt from tax
Exempt from tax in some cases, when not exempt provident fund will be treated as unrecognized provident fund
Employers contribution provident fund
provident
to
Employees contribution exempt Interest on employee contribution taxable under income from other sources Employer’s contribution and interest thereon is taxable under the head income form salaries.
Note: 1. Salary includes basic salary, dearness allowance/ dearness pay, if terms of employment so provide and commission if received as fixed percentage of turnover achieved by employee. 2. The accumulated balance due and becoming payable to an employee participating in a recognized provident fund will be excluded from his total Income in the following cases: If he has rendered continuous service with his employer for a period of 5 years or more. If the employee is not able to fulfill the conditions of such continues service due to his service having been terminate by reason of his ill health or by reason of the contraction or discontinuance of the employers business or any other reason beyond the control of assessee. If on the occasion of his retirement, the employee obtains employment, to the extent the accumulated balance due is transferred to another recognized provident fund maintained by such employer. Eg:
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For the previous year 2006-07, X submits the following information- Basic Salary: 120,000; dearness allowance: 40,000 (46% forming part of salary for retirement benefits); commission: 6000 (i.e. 1% of turnover 600,000 achieved by him) and children education allowance for his 2 children Rs. 7200. The employer contributes Rs. 20,000 towards provident fund to which a matching contribution is made by X. Interest credited in the provident fund account on March 15, 2007 @ 11%comes to 93,500. Income of X from other source is Rs. 86,000. Find the net income of X for the assessment year 2007-08 if the provident fund is (a) statutory provident fund, (b) recognized provident fund, (c) unrecognized provident fund. Deduction u/s 80C: Section 80C is introduced from assessment year 2006-07 and it provides deduction in respect of specified qualifying amount paid or deposited by the assesses in the previous year. • •
Deduction would be available from gross total income It is available for Hindu undivided family and individuals
•
Deduction is available on the basis of specified qualifying investment/ contribution/ deposit/ payment made by the assessee during the previous year. Maximum amount deductible is Rs. 100,000 under sec 80C, 80CCC and 80 CCD.
•
Practical Problems: Mrs. X (age 51 years) is a part time college lecturer in Delhi. During the year 2006-07. she gets basic salary of Rs. 12300 up to June 30,2006 and Rs. 12,700 afterwards. Besides she gets 30% of Basic salary as house rent allowance, Rs. 1630 per month as dearness allowance (71% of it forming part of salary for computation of retirement benefits and Rs. 500 per month as conveyance allowance which is entirely for personal purpose. On July 10,2006 the employer transfer a music system to Mrs. X on her completing 10 years of service( cost of music system purchased on sep 1, 2005: 22470) for Rs. 7500. She is a member of statuary provident fund to which both the employer and employee contributes @ 12% of basic salary. Apart from the minimum contribution, she makes an additional contribution of Rs. 600 per month to the provident fund. During the previous year 2006-07, Rs. 65698 is paid to her for checking answer sheet for different universities. Determine the taxable income and tax liability on the assumption that she is paying a rent of Rs. 4000/- per month. X( age 26) is an employee of a cooperative society at Varanasi. During the previous year 200607, he gets Rs. 6500 per month as basic salary, Rs, 800 per month as bonus and Rs. 450 per month as dearness allowance( 32% is forming part of the salary for computation of retirement benefits) and Rs. 200 per month as medical allowance ( medical expense is however more than Rs 200 per month). He is a member of a recognized provident fund to which the employer contributes 11,162 (X also makes a matching contribution). X gets an interest free loan (repayable within 8 years) of Rs. 82,330 from the employer for purchasing a house. Besides he gets Rs. 10,30,760 as interest on company deposits from a private sector undertaking. Determine the taxable income and tax liability of X for the assessment year 2007-08. Ch.5 INCOME FROM HOUSE PROPERTY This chapter deals with any income falling under the head income from house property. Basis of Charge (Sec 22) Income is taxable under this head “Income from House property” if the following three conditions are satisfied: 1. The property should consist of any building or land appurtenant thereto. 2. The assessee should be the owner of the property
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3. he property should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which are chargeable to income tax. All the above conditions should be satisfied for a property income to be made taxable under the head income from house property. Exceptions: In the below mentioned cases rental income is not charged to Tax: a. Income from farmhouse. b. Annual value of ay one palace of any ex-ruler. c. Property income of any local authority. d. Property income of an approved scientific research association. e. Property income of any educational institution and hospital f. Property income of a trade union. g. House property held for charitable purposes. h. Property income of a political party i. Property income used for own business or profession j. One self occupied property. Basis of computing income for a let out house property: Income under the head house Property
Rs.
Gross Annual Value Less Municipal Taxes
------------
Net Annual Value Less: Deduction u/s 24 - Standard Deduction - Interest on borrowed capital Income under the head house property
----------
Gross Annual Value: Sec 23(1) Tax under the head income from house property is a tax on the inherent capacity of the building to yield income and not a tax on rent. The standard selection of the measure of the income is the annual value. Gross annual value depends upon the following factors: a) Municipal Valuation b) Fair rent c) Standard rent d) Annual Rent (i.e. rent for the previous year or that part of the previous year when the property is available for letting out and there is no vacancy and unrealized rent) e) Unrealized rent f) Loss of rent because of vacancy g) Actual rent received/ receivable (d-e-f)
27
Steps for determining the gross Annual Value: .1 Determine the reasonable expected rent as a) or b) whichever is higher. If the amount so determined is higher then the amount in c) limit the amount to c). .2 If Annual rent less unrealized rent is higher then the amount specified under step 1 then Annual rent less unrealized rent is substituted for the value in step 1. .3 In case of vacancy the gross annual value so determined is adjusted for the period for which the house is occupied. E.g.: Particular
B
(Rs. In thousand) D E F
C
A Municipal valuation (a) Fair rent (b) Standard rent (c) Annual rent if property is let out through the year 06-07 (d) Unrealized rent (e) Period for which property remains vacant Loss due to vacancy (f)
140 145 142
180 185 175
180 185 175
140 145 142
231 262 241
140 150 120
168 14
168 -
168 1
168 70
252 42
96 --
1 7
-
½ 14
3 42
5 105
10 80
When unrealized rent shall be excluded: Unrealized rent shall be excluded from rent received/ receivable only if the following conditions are satisfied: 1. The tenancy is bona fide. 2. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property. 3. The defaulting tenant is not in occupation of any other property of the assessee. 4. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceeding would be useless. Deduct municipal taxes: From the gross annual value municipal taxes have to be deducted to arrive at net annual value. Municipal value are deductible only if 1. these taxes are borne by the owner. 2. are actually paid by him during the previous year. Deductions u/s 24: The list of deductions u/s 24 is exhaustive that is no other deduction is allowed except whatever are explicitly mentioned. The following two deductions are allowed:
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1. Standard deduction 2. Interest on borrowed capital Standard deduction: 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer. Interest on borrowed capital: Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewable or reconstruction of the house property. Interest of pre-construction period: Interest of pre-construction period is allowed as deduction in five equal installments.
Interest of the current period: a. Capital is borrowed on or after April 1, 1999: Interest on borrowed capital is allowed as deduction to the extent of Rs. 150,000/provided the loan is taken for the acquisition or construction of the property. However the loan is taken for the any other purpose (e.g. Reconstruction, repair etc) the maximum amount deductible is Rs. 30,000.
b. Capital is borrowed before April 1, 1999: The interest on borrowed capital is allowed as deduction up to Rs. 30,000/Interest on borrowed capital is allowed as deduction even in those cases when the annual value of the house property is nil.
Taxable income from self-occupied property: When the property consist of: a. Any house which is occupied for own business b. One house which is self occupied c. A house property which is not actually occupied by the owner owing to employment or business/ profession, carried on at any other place. In the aforementioned cases the annual value of the house property shall be taken as nil. When more than one property is occupied for residential purpose: When more than one house is occupied by a person during the previous year for is residential purpose, only one house is treated as self- occupied and all other houses will be deemed to be let out. In case of deemed to be let out the gross annual value is taken to be the higher of municipal valuation or fair rent whichever is higher to the maximum of standard rent. When a part of property is self-occupied and a part is let out or a house is self- occupied for the part of year and let out for the part of the year:
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In computing the income in the aforesaid situation the fair rent attributable to the self- occupied period/ portion should be excluded in determining the annual value. Similarly the house tax and interest in loan attributable to ®elf-occupied period/ portion should be ignored. It means the house tax and interest on loan attributable to self-occupied portion/period cannot be deducted to arrive at income from house property. E.g.: From the following information, compute the annual value of the house for AY 07-08 Municipal Value- Rs. 90,000 Municipal taxes paid- Rs. 20,000 House was occupied for the first six months and for remaining six months it was let out @ Rs. 8000 p.m. Special provisions when unrealized rent is recovered subsequently: When a deduction has been allowed to the assessee for any unrealized rent during the previous year and realized subsequently then that amount shall be deemed to be the income of the previous year and shall be chargeable to tax under the head “income from house property” as per the provisions of the act whether the assessee is an owner of that property or not.
Problems: 1. From the information given below, find out the income under the head “ Income under the house property” for the assessment year 2007-08 and 2008-09. X (Rs) Municipal valuation Fair rent Standard rent Annual rent Unrealized rent for the previous year 2006-07 Unrealized rent for the previous year 2007-0¸ Unrealized rent of 2006-07 realized during 2007-08 Interest on borrowed capital
Y (Rs)
1;0,000 185,000 170,°00 216,000 30,000 NIL 28,000
190,000 195,000 170,000 175,000 30,000 Nil 28,000
36,000
36000
The above properties have been let out throughout the previous years 2006-07 and 2007-08. Municipal taxes are paid at the rate of 20%.
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Ch.6 Income under the head Business & Profession This head is covered by sec 28 to sec 44D. This chapter deals with provisions which have a bearing on the computation of taxable income. Basis of charge (sec 28): The following income is chargeable to tax under the head “Profit and gains from business and profession”: 1. Profit and gain of any business and profession 2. any compensation or other payment due or received by any person specified in sec 28(ii) • any compensation received on termination of a managing agency of a foreign company • any compensation received on termination of a managing agency of a Indian company • Any compensation received on termination of any agency or modification of terms of agency. • Any compensation received from government or a corporation on taking over of management of property or business. 2. Income derived by a trade, professional or similar association from specific services performed for its members. 3. The value of any benefit or perquisites, whether convertible into any money or not, arising from the business or the exercise of any profession. 4. Profit on sale of license (export/ import license) 5. Cash assistance (subsidy received by any person against exports under any scheme of government 6. Any drawback of any duty of customs or excise. 7. Any interest, salary, bonus, commission or remuneration received by a partner from firm. 8. Any sum received for not carrying out any activity in relation to any business or not to share any know-how, patents, copyrights, trademarks etc. 9. income from a speculative transaction 10. Profits from an illegal business.
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Meaning of term business: The term business refers to any economic activity carried out with a view to earn profit. As per section 2(13) term business is defined as “any trade, commerce, manufacture or any adventure in the nature of trade, commerce or manufacture”. The definition covers every facet of an occupation carried on by a person with a view to earn profit. The term business is a word of wide import and in terms of fiscal statue it must be construed in a broad rather than in a restricted sense. Thus Production of goods from raw material, buying and selling of goods to make profits and providing services to others are different form of business. Profession and Vocation: As per sec 2(36) profession includes vocation. The term profession is an occupation of requiring purely intellectual skill or manual skill attained in special knowledge. While the term vocation implies natural ability of a person for some work. The distinction between the term business, profession or vocation is not important for the purpose of income tax. Basic Principles for arriving at business Income: One has to keep in mind the following general principles for arriving at business income: 1. Business or profession should be carried on by assessee. 2. Business or profession should be carried on during the previous year. 3. Income of the previous year is taxable during the following assessment year. 4. Tax incidence arises in respect of all business or profession. 5. Legal ownership v/s beneficial ownership. 6. Real profit v/s anticipated profit 7. Recovery of sum already allowed as deduction. 8. Mode of book entries not relevant. Loses incidental to business: General commercial principles have to be kept in view while determining the real and true profits of a business and profession. Capital receipts are not taxable. Profits can only arise out of the trading receipts and only the profit element of such receipt can be made taxable. Business losses can be allowed as deduction if the following conditions are satisfied: 1. Losses are revenue in nature. 2. Losses should be incurred during the previous year. 3. Losses should be incidental to the business and profession carried on by assessee. 4. It should not be notional or fictitious 5. It should have been actually incurred and not merely anticipated to incur in future. 6. There should not be any direct or indirect restriction under the act against the deductibility of such loss.
Specific deductions under the Act : Section 30 to 37 cover expenses which are expressly allowed as deduction while computing business income, section 40, 40A and 43B cover expenses which are not deductible. Rent, rates taxes repairs and insurance for building (Sec 30): Under this section following deductions are allowed for premises used for business or profession:
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1. The rent of premises, the amount of repair (not being capital expenditure), if he has undertaken to bear the cost of repair. 2. Any sum on account of land revenue, local rates or municipal taxes. ** 3. Amount of any premium in respect of insurance against risk of damage or destruction of the premises. ** The amount is deductible as per the provision of sec 43B. Repairs and insurance of machinery, plant and furniture (sec31): The expenditure incurred on current repair (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purpose is allowed as deduction u/s 31. Depreciation Allowance (Sec 32) In order to avail depreciation u/s 32, the following conditions need to be satisfied: 1. Asset must be owned by the assessee. 2. It must be used for the purpose of business or profession 3. It should be used for the relevant previous year 4. Depreciation is available on tangible as well as intangible asset. Use of the asset in the previous year: The asset in respect of which depreciation is claimed must have been used for the purpose of the business. Normal depreciation (i.e. full year depreciation) is available if an asset is used is put to use at least for sometime during the previous year. Depreciation allowance is limited to 50% of normal depreciation, if the following two conditions are satisfied: • Where an asset is acquired during the previous year • It is used for the purpose of business or profession for less than 180 days during that previous year. If the above conditions are satisfied, the assessee would be entitled to 50% of normal depreciation, even if the asset is used for a single day.
Depreciation Available: Under the Indian Income Tax, one can claim depreciation on the following assets: Tangible Asset
Building, Plant, machinery or furniture
Intangible Assets acquired after March 31, 1998
Know-how, patents, copyrights, trade marks, licenses, franchise, or any other business or commercial rights of similar nature.
Block of Assets sec 2(11): The term block of assets means a group of assets falling within a class of assets comprising of: • Tangible assets, being building, machinery, plant or furniture • Intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchise, or any other business or commercial rights of similar nature In respect of which the same percentage of depreciation is prescribed. Written down Value sec 43(6): Written down value for the year is determined as under:
33
1. Find out the depreciated value at the beginning of the year as on 1st of April. 2. To this value add actual cost of the asset acquired during the year. 3. From the resultant year, deduct money received/ receivable (together with scrap value) in respect of that asset which is sold, discarded, demolished or destroyed during that year. 4. The resulting amount is the written down value of the block for that year. 5. The amount of reduction under step 3 cannot exceed the value of asset computed under step 1 and step 2. Computation of depreciation Depreciation is calculated at the prescribed rate on the written down value. However the following exceptions are there for the aforesaid: Exception 1: When the written down value of a block of assets is reduced to zero. No depreciation is admissible where written down value has been reduced to zero, though the block of assets does not cease to exist on the last day. Exception 2: If the block of asset ceases to exist If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such case.
Ex: X owns the following assets on April 1, 2006: Assets Furniture Building Plant and Machinery Plant and Machinery Plant and Machinery
Written down value on April 1, 2006 (Rs.) 20,170 900,500 210,000 6400,000 205,000
Rate of depreciation (%) 10 10 20 15 40
During the previous year 2006-07, the following assets are purchased by X: Date Purchase
of
1/10/2006 20/06/2006 30/11/2006 6/12/2006
Date when the asset is put to use 9/10/2006 22/06/2006 1/12/2006 10/12/206
Asset Trade Mark Plant Furniture Books for professional use
Cost Rs. 15,000 190,000 140,000 2700
Rate of depreciation (%) 25 40 15 100
Determine the amount of depreciation for the assessment year 2007-08. Unabsorbed Depreciation: When in the assessment of the assessee full effect cannot be given to depreciation allowance in any previous year owing to there being no profit/ gain or there being insufficient profit/ gain, the balance of depreciation allowance is called unabsorbed depreciation. Steps for dealing with unabsorbed depreciation:
34
Step 1
Depreciation allowance of the previous year is first deductible from the income under the head “Profit & gains from business and Profession”.
Step 2
If depreciation cannot be fully deducted under the head “Profit & gains from business and Profession” because of inadequate or no profit, it is deductible from income chargeable under the other head of income (except income from salary) for the same assessment year.
Step 3
If depreciation allowance, is still unabsorbed then it can be carried forward to the subsequent assessment year(s).
There is no time limit for the purpose of carrying forward of unabsorbed depreciation, it can be carried forward for indefinite period. The following priority order is to be followed when the unabsorbed depreciation is to be set off in subsequent year: a. Current depreciation b. Brought forward business loss c. Unabsorbed depreciation For the above setoff continuity of the business is not necessary. Ex: X submits the following details Previous years 2006-07 Income from salaries Business Profit (before depreciation) Current depreciation Income from other sources
100,000 16,000 134,000 10,000
2007-08 200,000 18,000 132,000 80,000
Determine the taxable income of X for the assessment year 2007-08 and 2008-09. Tea/ coffee/ rubber development account (Sec33AB) To claim the deduction under this section the following conditions need to be satisfied: 1. The assessee must be engaged in tea, coffee or rubber plantation. 2. It must make a deposit in special Account opened with NABARD( National bank for Agriculture and rural development) 3. The amount has to be deposited within 6 months from the end of the previous year or before the due date of furnishing the return of income, whichever is earlier. 4. The accounts of the assessee should be audited. Amount of deduction: The least of following is allowed as deduction: 1. A sum equal to the amount deposited in the special account as discussed above. 2. 40% of profit of such business computed under the head “profit and gains of business and profession” before making any deduction under section 33AB and also before adjusting any bought forward losses. The below points are also to be kept in mind: 1. When a deduction is claimed under this section, no deduction shall be allowed in respect of such amount in any other year.
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2. When a deduction is allowed and claimed under this section to an association of persons or body of individuals no deduction shall be allowed to any member of the association or body in respect of the same. 3. Any excess deposit in special account made during the previous year is not treated as deposit in any other year. Withdrawal of amount: The amount standing to the credit of the special account may be withdrawn only in case of: 1. closure of business 2. dissolution of firm 3. death of an assessee 4. partition of HUF 5. liquidation of company Amount cannot be utilized for certain purpose: No deduction can be claimed in respect of any amount utilized for the purpose of 1. Any machinery or plant installed in the residential houses or a guest house. 2. Any office appliances except computer 3. Any plant or machinery whose full cost is allowed to be debited to P& L account. 4. Any new plant or machinery to be installed for setting up of a new unit to produce any article included in eleventh schedule. Site restoration fund (Sec 33ABA): An assessee can claim deduction u/s 33ABA if he satisfies following conditions: 1. The assessee must be engaged in production of petroleum/ natural gas in India. 2. The assessee has an agreement with the agreement with the central government. 3. It must make a deposit in special account to be opened with SBI or deposited in an account named site restoration fund to be opened in accordance with Government of India with the ministry of Petroleum. 4. The deposit should be made within specified time limit i.e. before the end of previous year. 5. The accounts of assessee should be audited. Amount of Deduction: a) Sum equal to amount deposited in the special account. b) 20% of the profit of the business as computed under the head profit and gains from business and profession before this deduction. Whichever is less is allowed as deduction. The below points are also to be kept in mind: 1. When a deduction is claimed under this section, no deduction shall be allowed in respect of such amount in any other year. 2. When a deduction is allowed and claimed under this section to an association of persons or body of individuals no deduction shall be allowed to any member of the association or body in respect of the same. Withdrawal of amount: The amount can be withdrawn only for the purpose specified in the scheme or deposit scheme. Amount cannot be utilized for certain purpose: No deduction can be claimed in respect of any amount utilized for the purpose of 5. Any machinery or plant installed in the residential houses or a guest house. 6. Any office appliances except computer 7. Any plant or machinery whose full cost is allowed to be debited to P& L account.
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8. Any new plant or machinery to be installed for setting up of a new unit to produce any article included in eleventh schedule. Reserve for shipping business (Sec 33AC): No deduction under section 33AC is available from the assessment year 2005-06. The quantum of deduction is an amount not exceeding 100% of the total income ( computed before making any deduction under this section and u/s 80) as is debited to the profit and loss account of the previous year in respect of which the deduction shall be allowed shall be admissible. The amount of deduction to be claimed must be transferred to a reserve account. The amount to be credited to such reserve account must not exceed twice the amount of the paid up share capital (excluding the amount capitalized from reserves) of the assessee company. In the year in which the reserve exceeds this limit deduction u/s 33AC will be restricted to the amount which is sufficient to reach this limit. The amount credited to the reserve account shall be utilized by the assessee company before the expiry of 8 succeeding previous yrs for a. Acquiring a ship for the purpose of business of assessee. b. Until the acquisition of a new ship, such reserve may be utilized for the business of the assessee but not for distribution by way of dividends or profits or remittance outside India as profits or for the creation of any asset outside India.
In case amount of reserve is not utilized in the aforesaid manner the amount of reserve shall be treated in the following manner: a. In case amount of reserve is utilized for a purpose other than as given above, the amount so utilized for other purpose shall be deemed as profit of the previous year in which it is so utilized. b. In case amount of reserve is not utilized to acquire a ship within 8 exceeding previous, the amount so unutilized shall be deemed as income of the previous year next following the period of 8 succeeding previous years. c. In case ship is acquired within succeeding previous years, it cannot be sold or otherwise transferred for 8succeding previous years from the previous year in which it s acquired. In case it is sold or transferred before the expiry of 8 succeeding previous years, the amount of reserve utilized in acquiring the ship shall be deemed as profit of previous year in which ship is sold or transferred. Expenditure on Scientific Research (Sec 35): Scientific research means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Under this section amount deductible in respect of scientific research may be classified as under: Expenditure on research carried on by Contribution to outsiders assessee 1. Revenue expenditure 1. Contribution to an approved scientific 2. Capital expenditure research association. 3. Expenditure on an approved in-house 2. Payment to National Laboratory research Revenue expenditure incurred by assessee: Revenue expenditure incurred by assessee himself on scientific research, a deduction is allowed only if the research is related to the business.
37
Pre-commencement period expense: Any pre-commencement expenditure being revenue in nature (other than expenditure providing perquisites to employee) incurred before the commencement of business on scientific research related to the business are deductible in the previous year in which the business is commenced. Capital expenditure incurred by assessee himself: Where the assessee incurs any expenditure of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any previous year is allowable as deduction for that year. The deduction is available even if the relevant asset is not put to use for research and development in that particular year. The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land. And no depreciation is allowable on such capital asset. Expenditure on approved in-house research: A weighted deduction is allowed in respect of expenditure on in-house research and development expense incurred by the assessee. However the following points need to be kept in view: 1. The taxpayer is a company 2. It is engaged in the business of bio-technology or in the business of manufacture or production of articles or things notified by the board. 3. The research and development facility is approved by the prescribed authority and sufficient provision for audit is done for the accounts maintained by the facility. Amount of deduction A sum equal to one-one half times of expenditure so incurred shall be allowed as deduction. Carry forward and set off deficiency shall be done in the same manner as for the unabsorbed depreciation. Contribution made to outsiders: Where the assessee does not himself carry on scientific research but makes contributions to other institutions for this purpose, a weighted deduction is allowed. The amount of deduction is equal to one and one fourth times of any sum paid to a scientific research association or to a university, college or other institution or to a national laboratory. Scientific research carried on above may or may not be related to the business of the assessee. Amortization of telecom license fees (sec 35ABB): Deduction under this section is available if the following conditions are satisfied: 1. The expenditure is capital in nature. 2. It is incurred for acquiring any right to operate telecommunication services. 3. The expenditure is incurred either before the commencement of business or thereafter at any time during any previous year. 4. The payment for the above has been actually made to obtain license. The payment will be allowed as deduction in equal installment over the period for which the license is valid. Any profit or loss on sale of telecom license is to be taken into consideration while computing business income. Expenditure on eligible product or scheme Sec. 35AC: Deduction is available under this section for promoting social and economic welfare. Any taxpayer can claim deduction by making a payment of any sum to a public sector company or a local authority or to an association or institution approved by a national committee for carrying out eligible project or scheme. A company can also directly incur expenditure in respect of eligible project and claim the same as deduction.
38
Payment to associations and institutions for carrying out rural development programmes: This section provides deduction of sums paid by assessee to: 1. Any association or institution which has its object for carrying out any program of rural development approved. 2. Any association or institution which has its object the training of persons for implementation of a rural development program. 3. The national fund for rural development set up by the government. 4. The national Urban Poverty Eradication Fund set up and notified by the government. Amortization of preliminary expenses (Sec35D): Those expenses which are incurred before commencement of business for setting up any undertaking or business are termed as preliminary expenditure. Deduction under this section is available to an Indian company or a resident non corporate assessee. Qualifying Expenditure: • Legal charges for drafting any agreement between the assessee any other person relating to setting up of business of the assessee. • Legal charges for drafting the memorandum and articles of association if the taxpayer is a company. • Printing expenses of the memorandum and article of association if the taxpayer is a company. • Registration fees of a company under the provisions of the company’s Act. • Expenses in connection with the public issue of shares or debentures of a company, underwriting commission, brokerage and charges for drafting, typing, printing and advertising of the prospectus. Maximum ceiling: The aggregate expenditure cannot exceed the followingIn the case of corporate Assessee
In the case of non-corporate Assessee
• •
5% of the cost of project. 5% of cost of project 5% of capital employed, whichever is more Cost of Project means the actual cost of fixed assets which are shown in the books of assessee as on the last day of the previous year in which the business of the assessee commences. Amount of deduction: One fifth of the qualifying expenditure is allowable as deduction in each of the five successive years beginning with the year in which the business commences. Amortization of expenditure in the case of amalgamation / demerger (Sec 35DD) The provisions of the section are as under: 1. The taxpayer is an Indian company. 2. The expenditure is incurred for the purpose of amalgamation or demerger. 3. The expenditure is allowed as deduction in five successive years in five equal installments. 4. The first installment is deductible in the year in which amalgamation or demerger takes place. Amortization of expenditure under voluntary retirement scheme (Sec 35 DDA)
39
1. Expenditure is incurred in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement. 2. Such expenditure is allowed as deduction in five equal installments beginning with the year in which the expenditure was incurred. Where the undertaking of an Indian company entitled to deduction for amortization of voluntary retirement expenses is transferred before the expiry of 5 years in a scheme of amalgamation or demerger, the deduction for the remaining period shall be available to the resulting company. Similar provisions are applicable in the case of succession of firm or proprietary concern. However, in the year of transfer and subsequent years, no deduction will be available to the amalgamating company, demerged company, firm or proprietary concern. Amortisation of Expenditure on prospecting etc for certain minerals (Sec35E): This section provides for the amortisation of expenditure incurred wholly and exclusively on any operation relating to prospecting for the minerals or group of associated minerals or on the development of a mine or other natural deposit of any such minerals or group of associated minerals as specified in the seventh schedule. The expenditure which is incurred during the 4 years prior to the commercial production is allowed as deduction in 10 equal installments over a period of 10 years. In case where the installment of amortized expenditure relating to a given year cannot be wholly absorbed by the profit against which the amortisation is to be allowed, the unabsorbed amount is to be carried forward to the subsequent year. Such carry forward is permitted till the tenth year from the commercial production after which it will lapse. Other deductions (Sec 36): The following deductions are provided under this section: 1. Insurance premium: The amount of any premium paid in respect of insurance of stock or stores used for the purpose of business or profession is allowed as deduction. 2. Insurance premium by federal milk cooperative society: Insurance on the life of cattle owned by the members are allowed as deduction. 3. Premium on the health of employee Insurance premium paid on the health of employee is allowable as deduction. 4. Bonus or commission to employee Any bonus or commission paid to employee is allowable as deduction on payment basis and the amount given should not be otherwise payable as profit or dividend. 5. Interest on borrowed capital If the money is borrowed for the purpose of business or profession then the interest thereon is allowed as deduction. 6. Discount on zero coupon bonds Discount on zero coupon bonds (being the difference between the amount received and amount payable on the redemption/ maturity of bonds) is allowed as deduction on prorata basis over the life of bond. These are issued by any infrastructure capital company or a public sector company on or after June 1, 2005. 7. Employer contribution to Provident Fund and Superannuation fund: The deduction is allowed as per the limits laid down for the same. 8. Contribution towards approved gratuity fund. 9. Employees contribution towards staff welfare scheme Any sum received from employee towards contribution for Provident fund or staff welfare scheme is allowed as deduction provided it is paid on or before date. 10. Write off allowance for animals Provided the animals are used for business or profession then loss on sale. Theft or death is allowed as deduction.
40
11. Bad Debt. A bad debt is allowable as deduction subject to the following conditions: • There must be a debt • Debt must be incidental to the business or profession of the assessee. • It must have been taken into account in computing assessable income. • Debt must have been written off in the books of account of the assessee. • Transfer to provision for bad and doubtful debts shall not be taken into account. 12. Transfer to Special reserve: Under this section deduction is available to a financial corporation including a public and government company which is engaged in providing the long term finance for industrial or agriculture development. Amount of Deduction: • The amount transferred during the previous year to the special reserve account. • 40% of the profits derived from the business activities. • 200% of (paid up share capital and general reserve as on the last day of the previous year) minus the balance of the special reserve account. Whichever is lower of the above. 13. Family Planning Expenditure: Any bona fide expenditure incurred by a company for the purpose of promoting family planning among its employees, is allowable as deduction. If the expenditure is of capital nature, one-fifth of such expenditure is allowable as deduction for the previous year in which it was incurred and the balance in four equal installments. Any expenditure which could not be allowed as deduction due to inadequate profit shall be set off and carried forward as unabsorbed depreciation. 14. Any amount paid by employer as premium under keyman’s insurance scheme is fully allowed. Advertising Expense Deduction is not available in respect of expenditure incurred by an assessee on advertising in any souvenir, brochure, tract, pamphlet or the like published by political party. General Deduction (Sec37) This is a residuary section in order to claim deduction under this section; the following conditions need to be satisfied: 1. The expenditure should not be in the nature prescribed by section 30 to 36. 2. It should not be in the nature of capital expenditure. 3. It should not be personal expenditure of the assessee. 4. It should have been incurred in the previous year. 5. It should have been incurred with respect to the business carried on by the assessee. 6. It should have been expended wholly and exclusively for the purpose of business. 7. It should not have been incurred for any purpose which is an offence or prohibited by law.
Specific disallowances under the Act: The following expenses given by sections 40,40A and 43B are expressly disallowed under the act. Amount not deductible under sec 40 The following amounts are not deductible from the income as per this section: 1. Any sum paid for which TDS was deductible but was not deducted or was deducted but paid to the government within the previous year or in subsequent year within the prescribed time.
41
2. 3. 4. 5. 6.
However if the tax is paid subsequently then the deduction is allowed in the year in which it is paid. Securities transaction tax Fringe Benefit Tax Income tax Wealth Tax Tax on non monetary perquisites paid by the employer.
Amount not deductible under sec 40A 1. Any payment made by an assessee to a relative or a person having substantial interest in the company is disallowed to the extent it is excessive or unreasonable. Hence if the expenditure is excessive or unreasonable having regard to the fair market value of the goods, services, facilities etc, then the excessive portion shall be disallowed. 2. Amounts not deductible in respect of the expenditure exceeding Rs.20,000/If an assessee makes any payment in respect of any expenditure for an amount exceeding Rs. 20,000/- by way of cash or by a bearer cheque then 20% of the said payment will be disallowed as deduction. However, in some cases payment in excess of Rs. 20,000/- is allowed as deduction like when the payment is to government or bank, or in a place where no banking facility exist, payment made for agriculture produce, horticulture or animal husbandry etc. 3. Amount not deductible in respect of contributions to non-statuary funds.
Amount not deductible under (sec 43B) The following expenses are allowed as deduction only on payment basis: 1. any sum payable by way of tax, cess, duty or fees 2. Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employee. 3. Any sum payable as bonus or commission to employee for service rendered. 4. Any sum payable as interest on any loan or borrowing from a public financial institution or a state financial corporation or a state industrial investment corporation. 5. Interest on any loan or advance taken from a scheduled bank including co-operative bank. 6. Any sum payable by an employer in lieu of leave at the credit of his employee. The above expenses are deductible in the year in which the payment is made. However if payment is made before the due date of filing of return then the deduction will be allowed in the year in which the expense is incurred. Deemed profits and their chargeability: The following receipts are chargeable to tax as business income: 1. Recovery against deduction In any earlier years a deduction was allowed to the taxpayer in respect of loss of expenditure or against trading liability incurred by the assessee will be taxable in the current year if he has obtained a refund of such trading liability whether the concerned business is being carried on or not. 2. Sale of assets used for scientific use: Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds to the extent of deduction earlier allowed u/s35 will be chargeable to tax as profits from business and profession whether the business for which the deduction was allowed is in existence or not. 3. Recovery of Bad Debts:
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Similarly any bad debts allowed as deduction which was recovered subsequently will be assessed as income to the extent of deduction allowed whether the business is in existence or not. 4. Recovery after discontinuance of business or profession: Where any business or profession is discontinued by reason of the retirement or death of the person carrying on such business, any sum recovered after the discontinuance of the business or profession will be deemed to be the income of the recipient and charged to tax in the year of receipt.
Taxability of undisclosed Income / Investment: 1. Cash Credit (Section 68: ) Under the section 68 unexplained cash credit in the books of the assessee for which the assessee is unable to offer any explanation or if the explanation offered is not to the satisfaction of the assessing officer, the same will be treated as income of the previous year in which such credit appears in the books of accounts of assessee. 2. Unexplained Investment (Section 69: ) Under section 69 unexplained investment for which the assessee is not able to offer satisfactory explanation or which is not recorded in the books of the assess will be deemed to the income of the assessee in the financial year. 3. Unexplained money (Section 69A): Any unexplained money, bullion or jewellery which is not recorded in the books of assessee for which the assessee is not able to offer explanation to the satisfaction of assessing officer will be treated as the income of the assessee in the financial year in which the assessee is found to be the owner of the same. 4. amount of investment etc not fully disclosed in the books of account (Section 69B) Any investment in bullion, jewellery or other valuable articles the value of which is not fully recorded in books for which assessee do not give any satisfactory explanation will be treated as income of the financial year for which it is found 5. Unexplained Expenditure (Section 69C): Any unexplained expenditure in any financial year for which the assessee offers no satisfactory explanation about the source is taxable as income in the financial year where such unexplained expenditure is incurred. 6. Amount borrowed or repaid on hundi (Section 69D): Money borrowed by hundi and repayment of it otherwise through an account payee cheque or bank draft will be treated as income in the previous year in which such borrowing or repayment is made otherwise than through account payee cheque. Section 44 A For the purpose of this section specified profession means a profession of medicine, engineering, architecture, film artiest, accountancy, authorized representative, company secretaries. In the case of specified profession if the gross receipt from profession do not exceed Rs 1,50,000 no specified books have been prescribed and the assessee has to maintain such books to enable the assessing officer to assess the income of the assessee. In case of specified profession if the gross receipt from profession exceeds Rs 1,50,000 prescribed books like a. Cash Book b. Journal if accrual System of accounting is followed c. Ledger
43
d. Serially numbered receipt for any receipt exceeding Rs 25 e. Original bill and receipt for any payment exceeding Rs 50 to be maintained In the case of non specified profession or business where the gross income do not exceed Rs 1,20,000 or gross receipt do not exceed Rs 10,00,000 no requirement for maintaining any books of accounts In the case of non specified profession or business where the income exceeds Rs 1,20,000 or gross receipt exceeds Rs 10,00,000 such books which may enable the assessing offices to compute the income should be maintained Section 44 AB Following person are required to get their accounts Audited Different Tax payers When they are covered by the provisions of compulsory audit under section 44AB. A person carrying on If the total sales, turnover or gross receipt in business for the business previous year(s) relevant to the assessment year exceed or A person carrying on exceeds Rs 40 Lakhs. profession If his gross receipt in profession for the previous year(s) relevant to the assessment year exceeds Rs 10 Lakhs. A person covered under section 44AD, 44 AE, 44AF, 44BB or 44BBB
If such person claims that the profits and gains from the business are lower than the profits and gains computed under this section (irrespective of his turnover).
Special Provisions for computing income on estimated basis Taxpayers engaged in the business of civil construction (Sec44AD) 1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co-operative Society or any other person who is engaged in the business of civil construction or supply of labor for civil construction work is covered under the section. 2. Any person whose gross receipt from Business does not exceed Rs 40 Lac. 3. Income from above mentioned business is estimated at 8% of the gross receipt and all deduction under section 32 to 38 including depreciation is deemed to have been already allowed and no further deduction is allowed. 4. If he so assessed than he is not required to maintain books of accounts as per section 44 AA and is also not required to get his books of accounts audited under section 44 AB. 5. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain books of accounts as per section 44 AA and is also required to get his books of accounts audited under section 44 AB. Taxpayer engaged in the business of plying, leasing or hiring trucks (Sec 44AE) 1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co-operative Society or any other person who is engaged in the business of plying, hiring or leasing goods carriages. The taxpayer owns not more than 10 goods carriage at any time during the previous year. 2. Income from above mentioned business is calculated as below:
44
Type of goods Carriage Heavy goods Vehicle Other than Vehicle
heavy
goods
Estimated Income Rs 3500 for every month (or part of a month) during which the goods carriage is owned by the tax payer. Rs 3250 for every month (or part of a month) during which the goods carriage is owned by the tax payer.
3. All deduction under section 32 to 38 including depreciation is deemed to have been already allowed and no further deduction is allowed. 4. If he so assessed than he is not required to maintain books of accounts as per section 44 AA and is also not required to get his books of accounts audited under section 44 AB. 5. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain books of accounts as per section 44 AA and is also required to get his books of accounts audited under section 44 AB. Taxpayers engaged in the business of retail traders (Sec44AF) 1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co-operative Society or any other person who is engaged in the business of retail trade of any goods or merchandise is covered under the section. 2. Any person whose gross receipt from Business does not exceed Rs 40 Lac. 3. Income from above mentioned business is estimated at 5% of the gross receipt and all deduction under section 32 to 38 including depreciation is deemed to have been already allowed and no further deduction is allowed. 4. If he so assessed than he is not required to maintain books of accounts as per section 44 AA and is also not required to get his books of accounts audited under section 44 AB. 5. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain books of accounts as per section 44 AA and is also required to get his books of accounts audited under section 44 AB. E.g.: Sri Nebukumar is the proprietor of a business. His profit and loss account for the year ended March 31, 2003 is as follows. Particulars To establishment To Rent, rates and taxes To General charges To Household expenses To Commission To discount and allowance To provision for bad debts To Postage and telegrams To Law Charges To advertisement To Gifts and Presents To Fire Insurance Premium (for goods) To Sale Tax To Repairs and renewals (not for business premises) To Loss on sale of motor car (used for private purpose) To life Insurance Premium on life of his grandson To Wealth tax To Interest on Capital
Amount 4,800 2,900 750 51,730 1,500 450 1,200 270 450 1550 150 360
Particulars By Gross profit By Interest on govt securities By Rent from house property
Amount 1,50,840 5,400 5,400
1,450 480 1,800 1,790 740 350
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To Audit Fee To Interest on Bank Loan To provision for depreciation To provision for Income Tax To Net profit transferred to Capital Total
300 1,380 2,500 3,900 80,840 161,640
161,640
Following further information is given: (a) Actual Bad debts written off during the year amount to Rs 550. (b) Amount of income tax actually paid during the year is Rs 4,200. (c) Advertisement expenses include Rs 550 spent on special advertisement campaign to open a new shop in the market. (d) Depreciation allowable is Rs 1,700 as per Income Tax Rules. (e) Law Charges are in connection with a Trademark. (f) Sri Nebukumar carries on his business from rented premises, half of which is used as his residence. Rent, rates and taxes include Rs 2,400 paid as rent of the premises during the year. Compute the Business Income of Sri Nebukumar. Working notes are to form part of your answer. Mr. X gives you the following particulars from his account for the year ended 31st March, 2003. All items except (iii) have been debited to P & L A/c. Particular (1) Net profit s per Profit and Loss A/c
Amount 200,000
(2) Contribution to un recognized provident fund
40,000
(3) Lump sum consideration paid during 1997-98 For acquiring know – how, nothing has been deducted To P & L account this year on this account
120,000
(4) Provision for Income Tax and Wealth Tax
50,000
(5) Advertisement expenses (This includes Rs 4,000 on Advertisement in a souvenir published by a political party)
20,000
(6) Provision for excise duty
30,000
(7) Amount paid to ambedkar university for research in 10,000 Social science. The research does not relate to the business of assessee. (8) Holiday home Expenses
35,000
(9) Premium paid to the general insurance corporation 10,000 Of India by cheque for the Insurance of health of employees (10) Penalty imposed by costumes authority for breach of law 25,000 (11) Interest on late payment of sale tax
1,000
Compute income from Business
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Ch.7 INCOME UNDER THE HEAD CAPITAL GAIN Any profit and gain arising on Transfer of a capital asset is chargeable under sec 45. Sec 46, 47 gives such transactions which are not considered as Transfer. While Sec 54, 54 B, 54 D, 54 EC, 54 F, 54 G, 54 GA & 54H gives the list of exemptions. Basis of charge sec 45: Capital gain’s gain tax liability arises only when the following conditions are satisfied: • There should be a capital asset • The capital asset is transferred by the assessee • Such Transfer takes place during the previous year • Any profit or gain arises as a result of transfer • Such profit or gain is not exempt from tax under Sec 54, 54B, 54D, 54EC, 54F, 54G, 54GA. Capital Assets: A capital asset is defied to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. The following assets are, however, excluded from the definition of “Capital Assets”. 1. Any stock and Trade, consumable or raw material held for the purpose of Business or profession. 2. Movable property including wearing apparels and furniture held for his personal use or for the use of any member of is family. 3. Agricultural land in India, which is situated in rural area. 4. 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or national defense Bonds, 1980 issued by Central Government. 5. Special bearer bonds, 1991. 6. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999. Short term / Long Term Capital Asset: Short Term capital assets means a capital asset held by an assessee for not more than 36 months immediately prior to its date of Transfer. Any asset which is held by assessee for more than 36 month is known as Long Term Capital Asset. Exception: In the following cases an asset held for not more than 12 months is treated as short term capital asset. • Equity or preference share in a Company. • Securities (like debentures, government securities) • Units of UTI • Units of a mutual fund specified under section 10(23D) • Zero Coupon bonds Transfer of Capital Assets: Transfers in relation to capital assets include sale, exchange or relinquishment of asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law {Sec 2 (47)}. Following transactions are not regarded as Transfer: 1. Distribution of capital assets at the time of liquidation of a Company. 2. Distribution of assets at the partition of HUF. 3. Transfer of a capital asset under a gift or will or under an irrevocable trust. 4. Transfer of a capital asset by a Company to its 100% subsidiary.
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5. Transfer of share of Indian Company held by a foreign company to another foreign company in case of amalgamation. 6. Transfer of capital asset of a banking Company to another banking company n case of amalgamation. 7. Transfer in a demerger of capital assets by the demerged company to the resulting company. 8. Transfer of capital assets (being FCCB or GDR) by a non resident to another non resident. 9. Transfer of agricultural land in India march 1, 1970. 10. Transfer of a capital asset (being work of art, manuscript, painting etc) to government / university / national museum etc. 11. Transfer by way of conversion of bonds or debentures into shares. 12. Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company. 13. Transfer of land by a sick Industrial Company which is managed by its workers Cooperative. 14. Transfer of a capital asset by a firm to Company in case of conversion of firm into Company. 15. Transfer of a capital asset, being a membership right held by a member of recognized stick exchange in India. 16. Transfer of a capital asset to a Company in the case of conversion of preparatory concern into a Company. 17. Transfer involved in a scheme of lending of securities.
Mode of computation of capital gains (Sec48): Computation of Short Term Capital Gain • Find out full value of consideration • Deduct the following Expenditure incurred wholly and exclusively in connection with such transfer Cost of acquisition Cost of improvement • From the resulting sun deduct the exemption provided by section 54B, 54D, 54G and 54GA • The balancing amount is short term capital gain.
Computation of Long Tern Capital Gain • Find out full value of consideration • Deduct the following Expenditure incurred wholly and exclusively in connection with such transfer Index cost of acquisition Index cost of improvement • From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA. • The balancing amount is long term capital gain.
Cost of Acquisition (Sec 49): Cost of Acquisition of an asset is the value for which it was acquired by the assessee. Expenses in the capital nature for completing the title for the property are included in the cost of acquisition.
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Cost of asset for the previous owner Sec 49(1): The cost of previous owner is deemed to be the cost of acquisition to the assessee in cases where capital asset becomes the property of assessee under any of the mode described below: 1. Acquisition of property in case of partial or total partition of HUF 2. Acquisition of property in case of gift or will 3. Acquisition of property in case of : • Succession or inheritance • Any distribution of assets on the dissolution of a firm, BOI or AOP • Distribution of assets on the liquidation of a company • Under a transfer of revocable trust or an irrevocable trust. • Any transfer from a wholly owned subsidiary to its holding company or vice versa. • Under any scheme of amalgamation. The holding period of the previous owner is also counted for determining whether the amount is short term or long term capital asset nut indexation will be allowed from the time when the asset is acquired by the assessee. Cost of Acquisition being the fair market value as on April1, 1981: In the following cases, the assessee may take at his option, either actual cost or the fair market value of the asset ( other than a depreciable asset) as on April 1, 1981 as cost of acquisition: a) Where the capital asset became the property of the assessee before April 1, 1981. b) Where the capital asset became the property of the assessee by any mode referred to in sec 49(1) and the property was originally acquired before Aril 1, 1981. In case of depreciable asset cost of acquisition is taken as the WDV at the end of the previous year along with any expenses on transfer of the asset. Any such capital gain is treated as short term capital gain. Determination of indexed cost of Acquisition/ indexed cost of improvement: Indexed Cost of Acquisition= Cost of Acquisition Cost inflation index for the year in which the asset is acquired/1980-81
x
Cost inflation index for the year in which the asset is sold/ transferred
Indexed cost of improvement= Cost of improvement incurred x Cost inflation index for the year in Cost inflation index for the year in which which the asset is sold/ transferred the improvement took place E.g.: 1. From the following information compute the capital gains for the assessment yearv200809 House I
House II
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Date of Purchase Cost of Acquisition Cost of Add Construction in 1980 Fair market value on 1-4-1981 cost of add construction in 1993-94 Sale of property in 2006-07 Cost inflation index are: 1981-82= 100 1993-94= 244 2006-07= 519
May 1976 190,000 10,000 175,000 48,800 1050,000
Dec 1979 250,000 25,000 350,000 73,200 19,00,000
X Ltd owns the following assets: Units of UTI House Property Cost of Acquisition 140,000 70,000 Date of Acquisition March10, 2004 March 10, 2004 These capital assets (no depreciation is claimed) are transferred by X Ltd to its wholly owned subsidiary company S Ltd on April 1, 2005. On July 7, 2006 these assets are transferred by S ltd for a consideration of Rs. 450,500 (i.e. units Rs.215700, house property Rs.234,800). Compute the capital gain chargeable to tax in the case of S Ltd for the assessment year 2007-08. Capital Gain in case of conversion of capital asset into stock in trade: The fair market value of the capital asset on the date on which it was converted or treated as stock in trade shall be deemed to be full value of the consideration received or accruing as a result of the transfer of the capital asset. Transfer of capital asset by a Partner to a firm: In case an asset is transferred by a partner to a firm then the capital gain is chargeable to tax in the previous year in which such transfer takes place and the amount recorded in the books of account of the firm as the value of asset shall be taken as full value of consideration received as a result of such transfer. Distribution of capital asset on dissolution: In case a firm is dissolved and the asset is given/sold to a partner than the capital gain will be calculated as taxable in the hands of firm and it is taxable as income in the year it is transferred. For computing capital gain the fair market value is taken of the asset is taken as the full value of consideration. Capital gain in case of self generated assets: If any self generated assets like goodwill or right to carry on business, tenancy right route permit etc is sold then the cost of acquisition is taken as nil. Only the cost of transfer is allowed as deduction. Capital Gain on transfer of Bonus share: Different Situations Cost of Acquisition of bonus shares allotted before April 1, 1981 Cost of Acquisition of bonus shares allotted on or after April 1, 1981
Special Provisions Fair market value on April1, 1981 is taken as cost of acquisition Cost of Acquisition is taken as Zero
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Period of holding bonus shares
The period of holding shall be determined from the date of allotment of bonus shares (and not from the date of acquisition of original shares)
CAPITAL GAIN- EXEMPTIONS Capital Gain arising form the transfer of the residential Property (Sec 54) Exemptions under following conditions are met. 1. Only and individual and HUF can claim exemption under this section. 2. Exemption is available only if the capital asset which is transferred is a residential house property, whose income is taxable under the head Income from house property. 3. House property should be a long term Assets. 4. A new house property should be purchased / acquired within a specified time limit. Particular Time limit For purchasing a new residential property Within One year before or within 2 years after date of Transfer of house property. For constructing a new residential property The Construction should be Complete within 3 years from the date of Transfer of house property. 5. Amount of Exemption: The amount of capital gain generated on Transfer of Residential house property. The amount invested in purchasing or constructing new residential property, Which ever is lower. 2. If the amount is not utilized for purchase / construction of the new property till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. 3. If the new residential property is transferred within a period of three years from the date of acquisition or completion of construction the amount of assumption given earlier will be taken back. Example: From the following information compute the capital gains liable to tax in the A.Y 2003-04. (A) Cost of acquisition of residential house in 1983 -84 -384000 (B) Sale consideration on 2-06-2002 - 17,00,000 ( C) Cost of Construction of the new residential house by - 300,000 The due date of filing the return for AY 2003-04 The cost of inflation Index in 1983-84 was 116 and 2002-03 it was 447. Capital Gain arising form the transfer of Agricultural land (Sec 54B) Exemption under this section are available if following provisions are met: 1. The tax payer is an individual 2. he transfers an agricultural land it may be a long term / short term capital assets 3. Agricultural land was used by the taxpayer or his parents for agricultural purpose for a period of two years immediately preceding the date of Transfer. 4. The tax payer has purchased another land of agricultural purpose within a period of two years from the date of transfer. 5. Land may be in urban or rural area. 6. Amount of exemption: a. The amount of capital gain generated on Transfer of agricultural land. b. The amount invested in purchasing a new agricultural land.
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Which ever is lower. 2. If the amount is not utilized for purchase of the new agricultural land till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. 3. If the new agricultural land is transferred within a period of three years from the date of acquisition the amount of exemption given earlier will be taken back. Example: Agricultural land purchased in 1984-85 for Rs 46500 is sold for Rs 380000 on 01-052002. The assessee purchased another piece agricultural land on 1-08-2003 for Rs 70000 and deposited Rs 30000 on 24-06-2003 in capital gain account scheme 1998.Calculate capital gain chargeable to tax in to tax for AY 2003-04. The cost Inflation Index in 1984 – 85 was 125 and 2003-04 was 447. Capital Gain under compulsory acquisition of land and building forming part of industrial undertaking (section 54D) Exemption under this section is available if following provisions are met: 1. The taxpayer may be an individual, HUF, Firm, Company or any other person 2. The asset may be short term / long term 3. Capital gain arises on transfer by way of compulsory acquisition of land or building which forms a part of an industrial undertaking belonging to the taxpayer. 4. Such land or building was used by the assessee for the purpose of the industrial undertaking for at least two years preceding the date of compulsory acquisition. 5. Assessee has purchased nay other land or building within a period of three years from the date of receipt of compensation or constructed a building within such period. 6. Newly acquired land or building should be used for the purpose of shifting or reestablishing the said undertaking or setting up another industrial undertaking. 7. Amount of Exemption: a. The amount of capital gain generated on Transfer by way of Compulsory acquisition of land or building. b. The amount invested in new land of building. Which ever is lower. 2. If the amount is not utilized for purchase / construction of the new land of building till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. 3. If the new land or building is transferred within a period of three years from the date of its acquisition or completion of construction the amount of exemption given earlier under section 54 D would be taken back. Capital Gain not to be charged on investment in certain bonds (sec 54 EC) The salient features of section are as under: 1. The taxpayer may be an individual, Firm, Company or any other person 2. A long term capital asset is transferred by an assessee during the previous year. 3. Within six month from the date of transfer of the assets the assessee should invest the whole or any part of the capital gain in long term specified assets. 4. from the assessment year 2006-07 this specified assets are any bonds redeemable after three years issued after march 31, 2006 by National highway authority of India Rural Electrification Corporation Ltd. 5. Amount of Exemption: i. The amount of capital gain generated on Transfer of capital asset. ii. The amount invested in specified asset as discussed above. Which ever is lower. 2. The cost of specified assets shall not be eligible under section 88 and deduction under section 80C. 3. The investment made on or after 01-04-2007 can not exceed Rs 50 lacs.
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4. If the specified asset is transferred / converted into money or any loan or advance is taken on the security of specified asset within 3 year from the date of acquisition than the exemption given will be charged to tax in the year in which it was so transferred / converted into money or any loan or advance is taken Capital Gain on transfer on a long term capital asset other than a house property (Sec 54 F): Exemption under this section is available if following provisions are met: 1. Only and individual and HUF can claim exemption under this section. 2. Exemption is available only if the capital asset which is transferred is a long term capital asset but other than a residential house property (e.g. a plot of land, gold, share etc) 3. A new house property should be purchased / acquired within a specified time limit.
Particular For purchasing a new house
Time limit Within One year before or within 2 years after date of Transfer of original asset. For constructing a new house The Construction should be Complete within 3 years from the date of Transfer of house property. 4. The exemption is available only if on the date of transfer of the original asset, the taxpayer does not own more than one residential house other than the new house. 5. Amount of exemption will be calculated as under: Cost of new house x Capital gain Net sales consideration 6. If the amount is not utilized for purchase / construction of the new property till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. 7. If the new residential property is transferred within a period of three years from the date of acquisition or completion of construction the amount of assumption given earlier will be taken back. 8. If the assessee purchases a new house, within a period of two years of the date of transfer of original asset, or construct within a period of 3 years of the transfer of such asset, a residential house other than the new house then the exemption will be withdrawn. Capital Gain on transfer of assets in cases of shifting of industrial undertaking from urban area (Sec 54G): To claim exemption under this section following conditions need to be fulfilled: 1. A capital asset used for the purpose of an industrial undertaking situated in an urban area is transferred. 2. The transfer is effected in the course of, or in consequence of, the shifting of such industrial undertaking to any area other than an urban area. 3. The assessee has within a period of one year before or 3 years after the date on which the transfer took place: a) Purchased a new machinery or plant for the purpose of business of the industrial undertaking in the area to which the said undertaking has shifted. b) Acquired building or land or constructed building for the purpose of his business in the said area. c) Shifted the original asset and transferred the establishment of such undertaking to such area. d) Incurred expenses on such other purposes as may be specified in a scheme framed by the central government. 4. The amount of exemption is equal to-
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•
The amount of capital gain generated on transfer of capital assets in case of shifting of an industrial undertaking • The cost and expenses incurred in relation to all or any of the purposes mentioned in point 3. Whichever is lower. 5. If the amount is not utilized for purchase / construction /acquisition of the new asset till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. 6. If the new asset is transferred within a period of three years from the date of its purchase/construction/acquisition the amount of exemption given earlier under section 54 G would be taken back. E.g.: The following information is given by Mrs. X (26 years) and Mrs. Y (32 years) for the assessment year 2007-08
Sales consideration of equity shares Indexed cost of acquisition of equity shares Sales consideration of Gold Indexed cost of acquisition of gold Other income PPF contribution
Mrs. X (Rs) 70,000 380,000
Mrs. Y (Rs) 95,000 145,000
800,000 60,000 420,000 20,000
600,000 40,000 600,000 10,000
Find out the net income and tax liability of Mrs. X for the assessment year 2007-08 firstly on the assumption that equity shares are transferred on October 31,2006outside a recognized stock exchange and secondly on the assumption that equity shares are transferred on February 27,2007in the NSE.
Ch.8 Income from other sources “Income from other sources” is the last head of income specified under sec 14. Section 56 gives the scope of income chargeable under this head; section 57 and 58 specifies the basis of computation of such income. Besides this the chapter deals with all the provisions of the act which have a bearing on the computation of income taxable as income from other sources.
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Basis of charge: Special Provisions Sec56 (2): The following incomes are always chargeable under the head Income from other sources: 1. dividend 2. Any winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. 3. Any sum received by the assessee from his employees as contribution to any staff welfare scheme. 4. Interest on securities. 5. Income from machinery. Plant or furniture let out on hire. 6. Where any sum of money received during a previous year without consideration by an individual or a HUF from any person or persons exceed Rs. 50,000, the whole of such sum. General Provisions Sec56 (1): Income from other sources is the last and residual head of income. A source of income which does not fall under any of the other four heads of income is to be computed and brought to charge under section 56. For e.g.: income from subletting, interest on bank deposit and loans, interest on royalty, directors fees, ground rent, agricultural income from outside India etc. Dividend and its taxability: Any dividend declared, distributed or paid by a company to its shareholders is chargeable to taxed under the head “Income from other sources” irrespective of the fact whether the shares are held by the assessee as investment or stock in trade. If dividends are distributed after March 31, 2003: For dividend declared by a domestic company any dividend declared and distributed or paid after March 31, 2003, then it is not taxable in the hands of shareholders. On such dividends the company declaring dividend will pay dividend tax under section 115O. If a loan or advance given is deemed as dividend under sec 2(22) (e) then such loan or advance is taxable u/s56 a dividend in the hands of recipient. However the above exemption is not applicable in the hands of non-domestic company and consequently, such dividend is chargeable to tax in the hands of recipient. Interest on securities Sec 56(2) (id): Income by way of interest on security is taxable under the head “Income from other sources”, if the same is not taxable as business income under section 28. Interest on securities sec 2(28B): Interest on securities means: 1. interest on any security of the central government or state government 2. Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation. Basis of Charge: Interest on security is charged to tax on cash basis if the assessee maintains his books of account on cash basis. It is taxable on due basis if the assessee maintains his books of account on mercantile basis. Interest exempt from Tax: Interest on the following is exempt from Tax: Interest on notified securities, bonds or certificates.
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Interest on 7% Capital Investment Bonds in the hands of individual and HUF. Interest received by a non resident Indian from notified Bonds. Interest payable to any foreign bank performing central banking functions outside India. Interest on deposit made by a retired government employee or an employee of a public sector company out of money due to him on retirement. Interest on securities held by welfare commissioner, Bhopal gas victim. Interest on gold deposit bonds issued under the gold deposit Scheme, 1999.
Grossing up of Interest: Gross Interest (i.e. net interest plus tax deducted at source) is taxable. Net Interest is grossed up in the hands of recipient if tax is deducted at source by the payer. Gross Interest = net interest x 100 100- Rate of TDS Deduction u/s 80L: No deduction is available u/s 80L from the assessment year 2006-07. Avoidance of Tax (Sec 94) Interest on security does not accrue from day to day but on certain fixed dates. If, on the eve of due date of payment of interest, a person transfers security to another person and reacquires the same or similar securities after interest has been received by the transferee. The transferor would be able to evade tax in respect of such tax. To stop such malpractice the below two sections are introduced. BOND WASHING TRANSACTION (Sec 94 (1)) A transaction which consist of selling securities some time before the due date and acquiring the same/ similar after the due date of interest is over is called Bond washing transaction. This is done generally by the high income class assessee to evade the tax while transferring securities to low income class assessee on the eve of getting the interest as interest is charged in the hands of legal owner of securities on the due date of payment of interest. To prevent this sec 94(1) provides that when such transaction takes place then the income will be included in the hands or transferor and not of the transferee. SALES CUM INTEREST Sec (94 (2)) If an assessee having beneficial interest in securities during the previous year sells them in such a way that either no income is received or income received is less than the sum he would have received if interest had accrued from day to day, then income from such security for such year would be deemed as income of such person. Deductions Permissible: The income is computed after making the following deductions: 1. Commission or remuneration for realizing dividend or interest on securities. 2. Standard deduction in case of family Pension to the tune of Rs. 15,000/- or 331/3 % whichever is less. 3. Any other expense for earning income. Specific Disallowances: 1. Personal Expenses 2. Interest and salary payable outside India on which TDS is not deducted 3. Wealth Tax 4. Amount specified by sec 40A Ex:
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X holds the following securities on April 1, 2006: 5% UP government loan (date of payment of interest: January 1) Rs.1000,000 6% Non listed debenture of ABC Ltd. (dates of payment of interest: June 11 and December 11 every year) Rs.40, 000. 8% debenture of PQR Ltd. (dates of payment of interest: June 1 and December 15 every year) On December 1, 2006, X sells Rs. 25,000 8% debentures of PQR Ltd. Calculate the taxable income of X for the assessment year 2007-08 on the assumption that his business income is Rs.64,000 and he has received a gift of Rs.100,000 in foreign currency from a friend on December 1, 2006on his marriage anniversary.
Chapter 9: Clubbing of income Generally a person is taxed in respect of his own income. In some cases, however, the income tax deviates from this principle and a person is taxed under section 60 to 64, in respect of income which legally belongs to some other person. These sections have been introduced to counteract the practices of tax avoidance. Transfer of Income without transfer of asset (sec 60): Section 60 is applicable if following conditions are satisfied: 1. The taxpayer owns an asset which is not transferred by him. 2. The income from such asset is transferred by him to any other person.
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3. The above transfer may be revocable or irrevocable. If the above conditions are satisfied, the income from the asset would be taxable in the hands of transferor. Revocable Transfer of Asset (Section 61) By virtue of section 61, if an asset is transferred under a revocable transfer, income from such asset is taxable in the hands of the transferor. Revocable transfer: 1. A transfer containing any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor 2. A transfer which in anyway gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. When an individual is assessable in respect of remuneration of spouse: The provisions of section 64 are given below: 1. The taxpayer is an individual and has a substantial interest in a concern. 2. Spouse of the taxpayer is employed in the above mentioned concern... 3. Spouse is employed in the concern without any professional or technical knowledge or experience. 4. If the aforementioned conditions are satisfied then salary income of the spouse will be taxable in the hands of the taxpayer. When an individual is assessable in respect of income from asset transferred to spouse (sec64 (1) (iv)) The following conditions should be satisfied: 1. The taxpayer is an individual. 2. He/ she have transferred an asset (other than a house property). 3. The asset is transferred to his/ her spouse. 4. The transfer may be direct/ indirect. 5. The asset is transferred otherwise than For adequate consideration. In connection with an agreement to live apart. 6. The asset may be held by the transferee- spouse in the same form or in a different form. If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset. When an individual is assessable in respect of income from asset transferred to son’s wife (sec64 (1) (vi)) 1. The taxpayer is an individual. 2. He/ she has transferred an asset after May 31, 1973 3. The asset is transferred to his/ her son’s wife. 4. The transfer may be direct/ indirect. 5. The asset is transferred otherwise than for adequate consideration. 6. The asset may be held by the transferee in the same form or in a different form. If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset. When an individual is assessable in respect of income from asset transferred to a person for the benefit of spouse (sec64 (1) (vii)) 1. The taxpayer is an individual. 2. He/ she has transferred an asset. 3. The transfer may be direct/ indirect. 4. The asset is transferred to a person or an association of persons. 5. It is transferred for the immediate or deferred benefit of his/ her spouse. 6. The transfer is without adequate consideration.
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If the above conditions are satisfied, then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset. When an individual is assessable in respect of income from asset transferred to a person for the benefit of son’s wife (sec64 (1) (viii)) 1. The taxpayer is an individual. 2. He/ she has transferred an asset after May 31, 1973. 3. The transfer may be direct/ indirect. 4. The asset is transferred to a person or an association of persons. 5. It is transferred for the immediate or deferred benefit of his/ her son’s wife. 6. The transfer is without adequate consideration. If the above conditions are satisfied, then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.
Appropriation when transferred asset is invested in a business: An asset (whether in cash or kind) is transferred to a spouse or to a son’s wife directly or indirectly without adequate consideration and such asset is invested in the business. Then the amount of income that will be clubbed in the hands of the transferor will be as under: 1. If the amount is invested in the business but as a capital contribution in the partnership firm the amount shall be calculated as under: Value of the assets transferred by Transferor on the first day of PY Total investment on the 1st day Of PY by transferee
x the profit share of transferee from business
2. If the investment is in the nature of capital contribution as a partner in a firm the interest received or receivable from the firm on such capital contribution will be included in the income of the transferor. However the profit will not be included in the income of the transferor. Income of a minor child (Sec 64 (1A)): All income which arises or accrues to the minor child shall be clubbed in the hands of his parents. Clubbing in the hands of parent: 1. The income of the minor will be included in the income of that parent whose total income is greater. 2. Where the marriage of the parent does not subsist, the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year. When clubbing is not attracted: 1. Income of a minor child (from all sources) suffering from any physical disability. 2. Income of a minor child on account of any manual work. 3. Income of a minor child on account of any activity involving application of his skill, talent or specialized knowledge and experience. In case the income of an individual includes the income of his or her minor child then such individual is entitled to exception of Rs. 1500 in respect of each minor child as per section 10 (32). Cross-transfer:
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When there is cross- transfer of assets (for instance A gifts to B’s wife and vice versa) then as per the decision of Madras high court if the cross transfer are independent of each other and real, the income must be included in the hands of the recipient. If two transfers are interconnected and are parts of the same transaction adopted to avoid tax, then the transfer shall be regarded as an indirect transfer by the transferor and it will fall within sec 64. Income from converted property (Sec64 (2)): Where an individual being a member of HUF transfers is separate property after December 1969 to the family for common benefit of the family, otherwise than an adequate consideration, such property is known as converted property. The income derived from the converted property will be included in the hands of individual and not in the hands of the family. Cash Credit (Section 68): Under the section 68 unexplained cash credit in the books of the assessee for which the assessee is unable to offer any explanation or if the explanation offered is not to the satisfaction of the assessing officer, the same will be treated as income of the previous year in which such credit appears in the books of accounts of assessee. Unexplained Investment (Section 69): Under section 69 unexplained investment for which the assessee is not able to offer satisfactory explanation or which is not recorded in the books of the assess will be deemed to the income of the assessee in the financial year. Unexplained money (Section 69A): Any unexplained money, bullion or jeweler which is not recorded in the books of assessee for which the assessee is not able to offer explanation to the satisfaction of assessing officer will be treated as the income of the assessee in the financial year in which the assessee is found to be the owner of the same. Amount of investment etc not fully disclosed in the books of account (Section 69B) Any investment in bullion, jeweler or other valuable articles the value of which is not fully recorded in books for which assessee do not give any satisfactory explanation will be treated as income of the financial year for which it is found Unexplained Expenditure (Section 69C): Any unexplained expenditure in any financial year for which the assessee offers no satisfactory explanation about the source is taxable as income in the financial year where such unexplained expenditure is incurred. Amount borrowed or repaid on hundi (Section 69D): Money borrowed by hundi and repayment of it otherwise through an account payee cheque or bank draft will be treated as income in the previous year in which such borrowing or repayment is made otherwise than through account payee cheque. E.g.: The income of a family is as under: 1. Mr. Ram (from business)
Rs. 250,000
2. Mrs. Ram ( salary from a school computed) 140,000 3. Minor son ( from interest from a company) the amount for investment received from grand father 10,000 4. Minor son Y (from acting in films) 60,000 5. Minor daughter Z ( from lottery) The lottery ticket was gifted to her by her maternal uncle 6,000 6. Income of mentally handicapped minor child Rs. 40,000.
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The amount for investment received from his father, grand father and maternal uncle. Discuss in whose hands the incomes are assessable and to what extent?
Chapter 10. SET OFF AND CARRY FORWARD Tax is levied on assessee total income. To calculate total income, loss under any source or head of income is to be adjusted. Sec 70 -80 deal with various provisions regarding set off and carry forward of profit and losses. The process of setting off and carry forward of losses may be covered as under: 1. Inter source adjustment i.e. under the same head of income. 2. Inter- head adjustment in the same assessment year if a loss cannot be set off under step 1. 3. Carry forward of loss if the loss could not be set off under the above two steps. Inter-source adjustment (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 form income under any other source under the same head of income for the same assessment year. Exceptions: 1. Loss from a speculation business can be set off only against profit from a speculation business. 2. Long term capital loss can be set off only against long term capital gain.
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3. Loss from owing and maintain race horses can be set off only against income from such business. 4. Loss cannot be setoff against winning from lotteries, crossword puzzles etc. Inter- head Adjustment: Where the net result of computation made for assessment year in respect of any head of income is a loss, the same can be set off against the income from other heads. Exceptions: 1. Loss from a speculation business can be set off only against profit from a speculation business. 2. Losses under the head capital gain cannot be set off against any income except income under the head capital gain. 3. Long term capital loss can be set off only against long term capital gain. 4. Loss from owing and maintain race horses can be set off only against income from such business. 5. Loss cannot be setoff against winning from lotteries, crossword puzzles etc. 6. Business losses cannot be set off against salary income.
Carry forward of losses: Under the act following losses can be carried forward: 1. Losses under the head income from house property. 2. Loss under the head “Profit and gains of business and profession” 3. Loss under the head capital gain 4. Loss from the activity of owing and maintaining race horses. Other remaining losses cannot be carried forward. Carry forward and set off business loss other than speculation loss: 1. Loss can be set off only against business income. 2. Loss can be carried forward by the person who incurred the loss. 3. Loss can be carried forward for 8 years. 4. Return of loss should be submitted in time prescribed. 5. Continuity of business not necessary. 6. The above limit of 8 years is not applicable on unabsorbed depreciation, capital expenditure on scientific research and family planning expenditure. Carry forward and set off speculation loss: A Speculation transaction is that transaction in which a contract for the purchase or sale of any commodity, including stocks shares, is periodically settled, otherwise than by actual delivery or transfer of the commodity or scrip. 1. Loss can be set off only against speculation income. 2. Loss can be carried forward by the person who incurred the loss. 3. Loss can be carried forward for 4 years ( up to assessment year 2005-06 8 yrs) 4. Return of loss should be submitted in time prescribed. 5. Continuity of business not necessary. 6. The above limit of 8 years is not applicable on unabsorbed depreciation, capital expenditure on scientific research and family planning expenditure. Carry forward and set off capital loss: 1. Long term capital loss can be set off only against income of long term capital gain. 2. Short term capital loss can be set off against short-term or long term capital gain. 3. Such loss can be carried forward for eight assessment years immediately succeeding the assessment year in which the loss was first computed.
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Carry forward and set off loss from owing and maintaining race horses: 1. Such loss can be carried forward only if the activity of owing and maintaining race horses is carried on by the assessee in the previous year in which the brought forward loss is to be setoff. 2. Loss can be carried forward for four assessment year immediately succeeding the assessment year in which the loss was incurred. Carry forward and set off loss from house property: If the assessee incurs any loss under the said head and such loss could be setoff during the assessment year, then the loss can be carried forward and set off in subsequent previous year subject to a limit of 8 assessment years against income from house property. Loss on sale of shares, securities or units: In case a person is having securities as stock in trade and has bought forward business loss under the head profit and gains from business such loss can be adjusted from interest on securities. E.g.: Mr. Ram submits the following particulars of his income and loss for the assessment year 200304: 1. Income from House Property 18000 2. Profit and gains from personal business 25000 3. Share of Profit from AOP (AOP has paid tax at Maximum marginal rate) 10,000 4. Short term capital gain 8000 5. Long term capital gain on sale of building 17000 6. Long term capital loss on sale of shares 24000 The following items have been bought forward: Business loss AY 2002-03 Loss from house property - Loss on account of interest 1998-99 - Loss on account of interest 2002-03
30000 17000 21000
Compute his gross total income and deal with the carried forward losses.
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