Taxation

1.1 INTRODUCTION In India, the Constitution is the parent law. All other laws should be enacted without violating the framework of the Constitution and subject to the norms laid down therein. The constitution of India authorises the Central Government to levy tax on income. By virtue of this power and to achieve this goal, the Income Tax Act-1961 was enacted and it extends to entire India.

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousandfold" - Kalidas in Raghuvansh eulogising King Dalip.
It is a matter of general belief that taxes on income and wealth are of recent origin but there is enough evidence to show that taxes on income in some form or the other were levied even in primitive and ancient communities. The origin of the word "Tax" is from "Taxation" which means 'estimate'. The rapid changes in administration of direct taxes, during the last decades, reflect the history of socioeconomic thinking in India. From 1922 to the present day, changes in direct tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act as it stands amended to date. It was but natural, in these circumstances that the set up of the department should not only expand but undergo structural changes as well. 1.2 DEFINITIONS UNDER ACT Every person whose total income of the previous year exceeds the maximum amount which is not chargeable to income tax, is an Assessee and chargeable to income tax at the rate or rates prescribed in the Finance Act for the relevant Assessment Year. However, his total income shall be determined on the basis of his residential status. Assessment Year and Previous Year According to Section 2(9), Assessment Year (AY) is the period of 12 months which starts from 1 st April and ends on 31 st March. According to Section 2(34), Previous Year means the Previous Year as defined in Section 3 of the Act. Section 3 of the Act defines Previous Year as the financial year immediately preceding Assessment Year, e.g. income earned during previous year 1.4.2006 to 31.3.2007 will be assessed or charged to tax in A.Y. 2007-208.

Definitions Under Income Tax Act, 1961 Umi \

Significance of these two terms is that the income earned by a person during the Previous Year is subjected to tax during the Assessment Year. The term Previous Year should not be confused with the Accounting Year for financial accounting purposes. There may be a possibility that an organisation may have the Accounting Year for financial accounting purposes which does not end on 31 st March. However, for income tax purposes, Previous Year essentially ends on 31st March.

Person
According to Section 2(31), the term Person includes: a. b. An Individual A Hindu Undivided Family (HUF) - The term has not been defined under the Act. However, HUF means a family consisting of all persons ideally descended from a common ancestor including their wives and unmarried daughters. A Company - A Company means a company formed as per the provisions of Companies Act, 1956.

c.

d. A Firm-A Firm means a partnership firm.

e.

An As soc iati on of Per so ns (A OP ) or A Bo dy of Ind ivi du als (B OI )A OP is for me d wh en tw o or mo re per so ns co me tog eth er to ear

n the income. BOI is formed when more than two individuals come together to earn the income. f. A Local Authority

g. Every Artificial Person not falling under any of the preceding sub-clauses. We will restrict our discussions in respect of taxability of an individual, a company and a firm Assessee According to Section 2(7), Assessee means a person by whom any tax or any other sum of money (say interest and/or penalty) is payable under the Act and includes the following a. Every person on whom any proceeding under the Act has been taken for the assessment of his income or the income, of any other person in respect of which he is

Taxation

assessable to determine the loss sustained by him or by such other persons to determine the amount of refund due to him or to such other person. b. c. A person who is deemed to be an Assessee under the provisions of this Act. This would include the legal representative of a deceased person or agent of a person. Every person who is deemed to be an Assessee in default as per the provisions of the Act. A person is said to be Assessee in default if he fails to comply with the provisions of the Act. E.g. A person who fails to deduct the tax at source and pay the same to the Central Government.

1.3 TOTAL INCOME For calculating the Total Income of the Assessee, the income is required to be classified under the following five heads of income. a. b. c. d. e. Income from Salaries Income from House Property Profits from Business and Profession Income from Capital Gains Income from Other Sources

For calculating the income from the heads of incomes stated above, the deductions available for each of the above heads of income are considered. E.g. while calculating the Income from Salaries, deductions under Section 16 are considered or while calculating income from House Property, deductions under Section 24 are considered. Combined amount of all the above five heads of income gives the amount of Gross Total Income (GTI). From GTI, the amounts available as deductions as per the provisions of Chapter VI-A of the Act are deducted. These deductions are as per the provisions of Section 80CCC to Section SOU of the Act. Gross Total Income duly reduced by the deductions as per the provisions of Chapter VIA of the Act gives the Total Income.

Unit 1

Definitions Under Income Tax Act, 1961

^Activity A; Define the following provisions Assessment Year_________

Previous Year Income Tax Assessee

1.4 RATES OF TAXES The rates at which the tax is payable are not prescribed in the Income Tax Act, 1961. The rates of tax are prescribed by the Finance Act. For the Assessment Year 2007-2008, the income tax will be payable as per the following Provisions For Individuals-

Income

Rates of Taxes NIL 10% 20% 30%

Income less than Rs. 1,00,000 Income Rs. 1,00,000 to 1, 50,000 Income Rs. 1,50,000 to 2,50,000 Income above Rs. 2,50,000

II-

Note - If the Total Income of an individual exceeds Rs. 10,00,000, a surcharge @ 10% of the tax payable will be applicable. In case of other individuals, no surcharge is applicable. The tax so computed will be increased further by Education Cess payable @ 2% on the total amount of tax and surcharge, if applicable.

Taxation

For Firms Firms are required to pay tax at a flat rate of 30% of the Total Income, irrespective of the amount of Total Income. In other words, no basic exemption limit applies to partnership firms. The amount of tax payable will be increased by a surcharge @ 10% of the tax liability. The amount of tax payable will be further increased by Education Cess payable @ 2% of the tax and surcharge payable. For Companies Domestic Companies are required to pay tax at a flat rate of 30% of the Total Income, irrespective of the amount of Total Income. In other words, no basic exemption limit applies to domestic companies. The amount of tax payable will be increased by a surcharge @ 10% of the tax liability. The amount of tax payable will be further increased by Education Cess payable @ 2% of the tax and surcharge payable. Note - If the income from other sources consists of the income by way of winning from lotteries, cross word puzzles, horse races, gambling, betting etc., it will attract the tax at the flat rate of 30% as per the provisions of Section 115BB of the Act. 1.5 RESIDENTIAL STATUS The tax liability of an Assessee under the tax is affected due to the Residential Status of the assessee. There are different rules for deciding the residential status of an individual, a firm and a company. Let us discuss the same in detail. Individual As per the provisions of Section 6 of the Act, an Individual is classified basically as Resident and Non-Resident. Resident Individual is further classified as Ordinarily Resident and Not ordinarily Resident. Resident and Ordinarily Resident (ROR) An individual is treated as Resident and Ordinarily Resident if he satisfies Any One of the following Basic Conditions and Both the following Additional Conditions -

Unit

Definitions Under Income Tax Act, 1961

Basic Conditions
a. He is in India for a period or periods amounting in all to at least 182 days in the relevant Previous Year.

b. He is in India for 60 days or more during the relevant Previous Year and has been in India for 365 days or more during four Previous Years immediately preceding the relevant Previous Year.

Note a. In case of an individual who is a citizen of India and who leaves India in any Previous Year for the purpose of employment out of India or as a crew member of an Indian ship, the period of 60 days stated above shall be substituted by 182 days.

b. In case of an individual who is a citizen of India or is a person of Indian origin, who comes on a visit to India, the period of 60 days stated above shall be substituted by 182 days. Aperson is considered to be of Indian origin if he or either of his parents or any of his grandparents (maternal or paternal) was born in undivided India. c. While calculating the period of stay in India, it is not necessarily a continuous period

or tha t the sta y sho uld be at one pla ce onl y. Additio nal Conditi ons a. He has bee n Re sid ent in Ind ia for at lea st 2 out of 10 Pre vio us Ye ars im me dia tel y pre

ceding the relevant previous year b. He has been in India for 730 days or more during 7 Previous Years immediately preceding the relevant previous year. Resident but Not-Ordinarily Resident (RNOR) An individual is treated as Resident but Not-Ordinarily Resident if he satisfies Any One of the Basic Conditions and One or None of the Additional Conditions. The basic conditions and the additional conditions are the same as applicable to a Resident and Ordinarily Resident. Non-Resident (NR) An individual will be considered to be a NonResident if none of the Basic Conditions are satisfied by an individual. Partnership Firms A partnership Firm is said to be a Resident in India in any previous year if the control and management of the affairs of the firm are situated in India.

Taxation

A partnership Firm is said to be a Non-Resident in India in any previous year if the control and management of the affairs of the firm are situated outside India. The management and control of the firm will be assumed to be in India if the partners of the firm are residents of India and the principal place of business of the firm is situated in India Company A Company is said to be a Resident in India in any Previous year ifa. b. It is an Indian Company or The control and management of the affairs of the Company are situated in India.

A Company is said to be a Non-Resident in India in any Previous Year if a. b. It is not an Indian Company and The control and management of the affairs of the Company are situated outside Irufo

Incidence of Tax and Residential Status - Section 5 As per the provisions of Section 5 of the Act, the incidence of tax of the assessee depends upon his residential status and also on the place and time of accrual of income. Resident and Ordinarily Resident - Section 5(1) A Resident and Ordinarily Resident is taxable in respect of a. b. Income which is received or deemed to be received in India in the previous year Income which accrues or arises or is deemed to accrue or arise in India during the previous year
->

c.

Income which accrues or arises outside India

Resident but Not-ordinarily Resident - Section 5(1)

A Resident but Not Ordinarily Resident is taxable in respect of a. b. Income which is received or deemed to be received in India in the previous year Income which accrues or arises or is deemed to accrue or arise in India during the previous year

Unit 1

Definitions Under Income Tax Act, 1961

c. d.

Income which accrues or arises outside India from a business controlled or profession set up in India. Income received outside India from a business controlled or profession set up in India.

Non-Resident
A Non-Resident is taxable in respect of a. b. Income which is received or deemed to be received in the previous year Income which accrues or arises or is deemed to accrue or arise in India during the previous year

The taxability as discussed above is summarised in the table shown below : Table 1.1 Types of Income / Status Income received in India, whether accrued in India or outside India Income deemed to be received in India, Whether accrued in India or outside India Income accruing or arising in India, whether received in India or outside India Income deemed to accrue or arise in India, Whether received in India or outside India Income received or accrued outside India from a business controlled in or profession set up in India Income received or accrued outside India from a business controlled from outside India or a profession set up outside India Income (other than business or profession) received and accrued outside India Income earned and received outside India and remitted to India ROR RNOR

NR Yes Yes Yes Yes

Yes Yes Yes Yes

Yes Yes Yes Yes

Yes

Yes

No

Yes Yes No

Yes No No

No No No

Taxation

Note
ROR indicates Resident and Ordinarily Resident RNOR indicates Resident but Not Ordinarily Resident NR indicates Non-Resident 1.6 ACCRUAL OF INCOME

a.

10 Income received in India - Section 7

Any income received by the assessee in India is liable for the payment of tax irrespective of the residential status of the assessee and place of accrual of such income. Income deemed to be received in India Section 7 The following incomes are deemed to be received in India even if they are not actually received a. Annual accretion to the balance of an employee who is the member of a Recognised Provident Fund. As a result, following amounts will be deemed to be the income in the hands of employee -

t h e p r o f i t s o n f. w h i c h t h e a s s e s s e e i s r e q u i r e d t

o p a y t h e t a x .

Employer's contribution to the provident fund in excess of 12% of the salary of the employee.

D e e m e d p r o f i t s o n w h i c h t h e a s

Interest credited on the balance at the rate exceeding 9.5%

b. Transferred balance in a Recognised Provident Fund c. Any contribution made by the Central Government to the account of an employee under pension scheme referred to in Section 80 CCD. Tax deducted at source from the several incomes shall be deemed to be received in the hands of the payee. In simple words, for deciding the tax liability, the income will be grossed up by adding the tax deducted at source to the net income received. Unexplained investments or unexplained cash credits are deemed to

d.

e.

sess ee is req

uired to pay the tax as per the provisions of Section 41 of the Act. The provisions are discussed in the later units.

Unit 1

Definitions Under Income Tax Act, 1961

Incomes which are deemed to accrue or arise in India - Section 9

In case of resident assessee, the place where the income is deemed to accrue or arise is not material. However, in case of a Non-Resident assessee, the income is subjected to tax only if it accrues or arises in India. However, the following are some of the incomes which are deemed to have accrued or arisen in India, even if they accrue or arise outside India : a. b. Income from a business connection in India Any income which arises from any tangible property situated in India, whether movable or immovable Income from transfer of any capital asset situated in India Any salary earned in India, even if it is paid outside India Salary paid by Government to an Indian citizen or Indian national for services rendered outside India

ive
c. d. e.

ctivity B:
Define the following provisions : Resident But Ordinarily Resident
R-NOR

Non resident What will be the tax payable if total Income of an Individual is Rs. 12,00,000?

1.7 ILLUSTRATIONS____________________________________________
Mr. A, a citizen of UK, comes to India for the first time during the financial year 2000-2001. His stay in India during the financial years 20012002,2002-2003,2003-2004,

11

Taxation

2004-2005 and 2005-2006 is as below :

2001-2002 2002-2003

55 days
63 days

2003-2004 2004-2005 2005-2006

75 days 166 days

65 days

Determine his residential status for the Assessment Year 2006-2007. Solution Mr. A has been in India for a period of 65 days during the previous year 2005-2006. However, his stay in India during the previous 4 previous years is 359 days. As such, he does not satisfy both the conditions that his stay should be minimum 60 days during the previous years and should be 365 days during the preceding four previous years. As he does not satisfy any of the basic conditions, his status will be that of a Non-Resident. Illustration Mr. Ashok provides the following details about his stay in India Year 1994 -1995 1997-1998 2000-2001 2003-2004 Duration of Stay 365 days 115 days 180 days 059 days Year 1995-1996 1998-1999 2001-2002 2004-2005 Duration of Stay 365 days 080 days 067 days 105 days Year 1996-1997 1999-2000 2002-2003 2005-2006 Duration of Stay 366 days 050 days 160 days 120 days

Determine the residential status of Mr. Ashok for the Assessment Year 2007-2008. Solution Mr. Ashok has been in India for more than 60 days during the previous year and for 391 days during the preceding four previous years. As such, he is Resident. However, as he is in India for a total period of 701 days during the preceding seven previous years, he is a Resident but Not-Ordinarily Resident.
12

Unit 1

Definitions Under Income Tax Act, 1961

Illustration Mr. Ashok is the member of crew of an Indian ship. He leaves India for the first time on 15th November, 2002. Without returning to India, he takes up employment in USA. He comes back to India on a visit on 10th July, 2004 and stays for 196 days. Determine his residential status for the Assessment year 2005-2006. Solution During the previous year 2004-2005, Mr. Ashok was in India for a period of 196 days. As such, he is a Resident. Moreover, his stay in India during the preceding four previous years exceeds 365 days. As such, Mr. Ashok will be a Resident and Ordinarily Resident. Illustration Mr. Ashok submits the details of his income for the Assessment Year 2004-2005. Particulars Profit from business carried on in India Profit from consultancy set up in India Profit from business earned on in U K (income is earned in UK and the business is controlled from UK) Pension for services rendered in Sweden and received in Sweden but remitted to India Interest on bank deposits received in UK Capital Gains on a property situated in Mumbai, received in UK Calculate the Gross Total Income of-Mr. Ashok assuming that he is

Rs, 1, 00,000 0, 45,000 4,50,000

6,00,000
2, 00,000 3, 00,000

Resident and Ordinarily Resident Resident but Not-Ordinarily Resident Non-Resident

Solution Calculation of Gross Total Income of Mr. Ashok

1 3

Taxation

ROR Profit from business carried on in India Profit from consultancy set up in India Profit from the business carried on in UK (income is earned in UK and the business is controlled from UK) Pension for services rendered in Sweden and received in Sweden but remitted to India Interest on bank deposits received in UK Capital Gains on a property situated in Mumbai, received in UK Gross Total Income Note ROR - Resident and Ordinarily Resident RNOR Resident but Not Ordinarily Resident NR - NonResident 1.8 SUMMARY 1, 00,000 0, 45,000 4,50,000

RNOR 1, 00,000 45,000

NR
1, 00,000 45,000

Nil Nil Nil

Nfl Nil Nil

Nil
2, 00,000

3, 00,000 3, 00,000 3, 00,000 10, 95,000 4, 45,000 4, 45,000

In this unit, we have looked at the special meanings attached to certain terms in the Indian Income Tax Act of 1961. Understanding of those terms is imperative to the correct computation of income tax. Learners of Taxation need to familarise themselves with meanings of words such as 'person', 'assessee', 'total income', 'residential status' etc. This unit has also explained how different types of income are perceived in the Income Tax Act. 1.9 KEYWORDS___________________________________________________ Note: All the definitions are already given in 1.2 of this unit. 1.10 SELF-ASSESSMENT QUESTIONS________________________________ Q1. Discuss the conditions for deciding the Residential Status of an individual. How does the tax liability of the individual get affected due to his residential status?
14

Unit 1

Definitions Under Income Tax Act, 1961

Q2. Write short notes on the following-

Assessment Year and Previous year Assessee Person Rates of Tax

Problems
Q1. Mr. Ashok, an Indian citizen, left India for the first time as a member of crew of an Indian ship on 10th November 2003. After he left India, he took up employment in UK and settled down in UK. He comes to India on a visit on 15th June 2004 and

st ne the residential status of Mr. Ashok for the AY 2006-2007 and 2007-2008. ay ed Q2. Mrs. Alaka Joshi, an Indian citizen, took up an employment in Canada and left India for the first time on 20th September 2003. During the financial year 2004-2005, in she came to India and stayed in India for 170 days. Determine her residential status In for the AY 2007-2008. di a Q3. Mr. Ashok was born in Karachi in 1947. He has been staying in Canada since fo 1975. He came to visit India on 4th October 2004 and stayed in India till 31st ra March 2005. Determine his residential status for the AY 2006-2007 and 2007pe 2008. ri od Q4. Following are the details of income earned by Mr. Ashok during the financial year of 2006-2007. 19 5 a. Profits earned from a business in Mumbai which is managed from Dubai da Rs. 1,00,000 ys b. Interest on investments made in UK, half of which is received in India . Rs. 50,000 D et c. Income from property situated in Bangla Desh and received there - Rs. 75,000 er mi d. Income from agriculture in Nepal and remitted to India - Rs. 50,000

1 5

t a

2.1 INTRODUCTION Generally an assessee is required to pay tax on all the receipts made by him which give rise to the income, unless it is specifically considered to be the income which is not included while calculating the total income, in other words the income which is considered to be the exempt income. Following incomes do not form a part of Total Income: a. b. c. d. Incomes exempt as per the provisions of Section 10 of the Act. Incomes of newly established industrial undertaking in Free Trade Zones (FTZ)Section 10A. Incomes of newly established 100% Export Oriented Units (EOUs) - Section 10B. I Income of political parties - Section 13 A. b. c. *;
*$&

2 A c. a. b.

4 5 F A

2.2. INCOMES EXEMPT UNDER SECTION 10 OF THE ACT While calculating the total income of the Assessee, certain incomes will not be considered as the incomes chargeable to tax. Following are some of the important incomes which are exempt from tax: 2.2.1 Agricultural Income - Section 10(1) The tax treatment of the Agricultural Income is specified in the Annexure. 2.2.2 Share of profit of a partner from a Firm - Section 10(2A) The share of profit earned by a partner from a partnership firm is exempt from tax. The detailed discussion is given in the unit on Taxation of Partnership Firms. Interest on securities or bonds held by a Non-Resident or interest on Non-Resident (External) Account - Section 10(4) In case of any assessee who is a Non-Resident in India, income by way of interest on specified securities or the premium on the redemption of specified securities is exempt from tax. Foreign Allowance - Section 10(7) Any allowance or perquisite paid outside India by the Government to a citizen of India for rendering services outside India is exempt from tax.

Unit 2

Income Exempt from Tax

2.2.3Amount received under a Life Insurance Policy - Section 10(10D) Any sum received under a Life Insurance Policy, including the amount of bonus on such policy shall be exempt from tax. However, the section does not apply toa. any sum received under Section 80DD (3) or Section 80DDA (3)

b. any sum received under a Keyman Insurance Policy c. any sum received in respect of an insurance policy issued after 1 st April 2003 in respect of which the premium payable for any of the years during the term of policy exceeds 20% of the actual sum assured. However, this provision will not apply to any sum received on the death of the person. 2.2.4 Interest, premium or bonus on specified investments - Section 10(15) a. Any income by way of interest, premium on redemption or any other payment on the notified securities, bonds, annuity certificates, saving certificates etc. issued by the Central Government are exempt from tax. b. In case of the individuals and HUF, the interest on notified Capital Investment Bonds and Relief Bonds is exempt from tax. 2.2.5 Educational Scholarship - Section 10(16) Scholarships granted to meet the cost of education are exempt from income tax. 2.2.6 Payments to MPs, MLAs etc. - Section 10(17) i tax. The Resident
%

Following incomes are exempt from income tax a. Daily allowance received by a Member of Parliament (MP) or a Member of Legislative Assembly (MLA) or any committee thereof. b. Any other allowance received by a MP under the Members of Parliament (Constituency Allowance) Rules, 1986. c. All allowances (to the extent of Rs. 2,000 per month in aggregate) received by any person by reason of his membership of any state legislature or any committee thereof. o

iterest on | is exempt

22

Taxation

Pensi on to gallan try awar d winne rs Sectio n 10(18)

Any pensi on receiv ed by an indivi dual who was the emplo yee of the State Gover nment or Centr al Gove rnme nt and has been award ed Para m Vir Chakr a or Maha Vir Chakr a or Vir

Chakra or any such gallantry award as may be specified by the Government, is exempt from tax. The pension received by the family of such an individual is also exempt for tax,

Family pension under certain circumstances - Section 10(19)

Family pension received by the widow or children or legal heirs of a member of armed forces (including Para-military forces) of the Union, where the death has occurred during the course of operational duties, in the specified circumstances as specified by Central Board of Direct Taxes (CBDT), will be exempt from tax.

Property in possession of a former ruler - Section 10(19A)

Annual Value of any one palace in possession of a former ruler is exempt from tax. a. b. Income by way of Income from House Property, Capital Gains and Income froi Other Sources. Income arising from a trade or business of supplying a commodity or service (except water and electricity) within its own jurisdiction.

2.2.7 Income of a Local Authority - Section 10(20) Following income of a local authority like Panchayats, Municipalities or Cantonment Boards is exempt from tax c. Income from the supply of water and electricity within or outside its own jurisdiction. In other words, entire ineome of a local authority is exempt from tax except the income arising from a trade or business of any commodity or service (except water and electricity) outside its own jurisdiction.

Income of a specified news agency - Section 10(22B)

Any income of the notified news agencies set up in India for collection and distribution of news is exempt from tax, provided that the said agency applies its income for collection and distribution of news and does not distribute its income to its members. For the purpose of this section, following news agencies have been notified by the Central Government -

Unit 2

Income Exempt from Tax

Press Trust of India (PTI) United News of India (UNI)

Income of Professional Institutions - Section 10(23A)

Any income (other than Income from House Property or any income received for rendering specific services or income by way of dividend or interest on investments) of an association or institution in India having as its objective the supervision, control, regulation and encouragement of certain specified professions is exempt from tax. The various professions which are specified for this purpose are -

Law Medicine Accountancy Engineering Architecture Company Secretaryship Chemistry Materials Management Town Planning

2.2.8 Income of a Mutual Fund - Section 23D

Any income of the following mutual funds is exempt from tax a. A mutual fund registered under Securities and Exchange Board of India Act, 1992 or the regulations made thereunder.

b. Any other mutual fund set up by a public sector bank or public financial institution or authorised by RBI.

2.2.9 Income of a Venture Capital Fund - Section 10(23FB)

This section applies to a Venture Capital Company or a Venture Capital Fund which has been granted the certificate by Securities and Exchange Board of India (SEBI) and which fulfils the terms and conditions as may be specified by SEBI. The deduction under this section is available if the Venture Capital Company or Venture Capital Fund is set up to

23

Taxation

raise funds for investment in a Venture Capital Undertaking where the term Venture Capital Undertaking as a company a. which is a domestic company,

b. whose shares are not listed in a recognised stock exchange in India. If the above conditions are satisfied, any income of such Venture Capital Company Venture Capital Fund is exempt from tax, even if the shares of the Venture Capital Undertaking in which the Venture Capital Company or Venture Capital Fund has made the initial investment, are subsequently listed on the stock exchange. 2.2.10 Income of Trade Unions - Section 10(24)

24

Any income chargeable under the heads "Income from House Property" and "Income from Other Sources" of a trade union, registered under the Trade Unions Act, 1926 formed for the purpose of regulating the relationship between workmen and employers or between workmen and workmen is exempt from tax. 2.2.11 Income of Certain Funds - Section 10(25)

T h e

ated below is exempt from income tax a. Interest on securities held by a statutory provident fund and any capital gains arising from the transfer of such securities. Any income received by the trustees on behalf of a recognised provident fund, approved superannuation fund and approved gratuity fund. Any income received by the Board of Trustees of the Deposit Linked Insurance Fund.
*,*-

b. i n c o m e c.

2.2.12 Income of Employees State Insurance Fund - Section 10(25A) Any income received by the Employees State Insurance Fund set up under Employees' State Insurance Act (ESI Act) is exempt from tax. 2.2.13 Capital Gains arising from the transfer of units of UTI - Section 10(33)

s t

Any amount of Capital Gains arising from the transfer of units of Units Trust Scheme, 1964 is exempt from tax, provided that the transfer takes place after 1st April 2002.

Capital

I
pmpany or fce Capital lhas made . "Income 16 formed r between

Unit 2

Income Exempt from Tax

2.2.14 Dividend received from a Domestic Company - Section 10(34) Any amount of dividend received by the assessee from a domestic company is exempt from tax. 2.2.15 Some other Exemptions Income from Mutual Fund - Section 10(35) Any income received in respect of the units of the specified Mutual Funds or the specified Company is exempt from tax. Long term capital gains on the transfer of listed equity shares - Section 10(36) Long Term capital gains arising from the transfer of certain equity shares are exempt from tax if the following conditions are satisfied a. The assets transferred must be a long term capital asset being an eligible equity share in a company b. The shares must have been purchased after 1 st March 2003 and before 1 st March 2004 and must have been held for a period of more than 12 months. c. Eligible Equity Shares means (i) any equity shares in a company which is a constituent of BSE-500 Index of the Mumbai Stock Exchange as on 1 st march 2003 and is traded on the stock exchanges in the country or (ii) any share allotted through the public issue made after 1 st March 2003 and is traded on the stock exchanges in the country. Capital Gains due to compulsory acquisition of agricultural land - Section 10(37) Any capital gains arising due to thecompulsory acquisition of an agricultural land situated within the jurisdiction of a municipality or a cantonment board will be exempt from tax if such land was being used by the individual if or his parents for agricultural purposes for a period of two years immediately preceding the date of such acquisition. Long Term Capital Gains from the transfer of securities - Section 10(38) Long Term Capital Gains arising out of the sale and transfer of securities through the recognised stock exchange will be exempt from tax. The securities for the purpose of this exemption consist of 25

ins arising dent fund, Insurance

Employees m 10(33) ist Scheme, 112002.

Taxation

Shares, debentures or bonds Units of mutual funds Government securities

2.2.16 Occasional Incomes or Gifts - Section 10(39)

Following incomes will be exempt from tax -

Any income referred to in Section 2(24)(xiii), to the extent that the aggregate of such incomes does not exceed Rs. 25,000. The amount not exceeding Rs. 1,00,000 received by an individual on the occasiq of his marriage.

Note - Section 2(24)(xiii) provides as below -Following amount will be considered to be income Any sum received by an individual in cash or a cheque or a draft or by way of credit or a amount received otherwise than by way of consideration for goods or services. Howeve following amounts will not be covered by the above section -The amount received ( credited from a relative out of natural love and affection.

The amount received or credited under a will or inheritance. The amount received by an employee or dependant of the deceased employee frol the employer, by way of bonus or gratuity or pension or insurance solely in recognition^ of the services rendered by the employee.

For this section the term "relative" means i. ii. Spouse of the individual Brother or sister of the i ndi vidual

26

iii. Brother or sister of the spouse of the individual iv. Brother or sister of either of the parents of the individual v. Any lineal ascendant or descendant of the individual

Unit 2

Income Exempt from Tax

vi. Any lineal ascendant or descendant of the spouse of the individual vii. Spouse of the person referred to in "ii" to "vi" above.

^Activity A;
Write Short Notes on: Amount received under a Life Insurance Policy - Section 10( 1OD)

Payments to MPs, MLAs etc. - Section 10(17) Occasional Incomes or Gifts - Section 10(39) Income of a Venture Capital Fund - Section 10(23FB) Income of a Mutual Fund - Section 23D

2.3 NEWLY ESTABLISHED UNDERTAKINGS IN FREE TRADE ZONES, SOFTWARE TECHNOLOGY PARK ETC. - SECTION 10A
Section 10A applies to all the assessees who derive the profits or gains from an undertaking engaged in the export of an article or things or computer software which are established in the following areas: a. yee from cognition Free Trade Zones - For the purpose of this section, following are the Free Trade Zones

Kandla Free Trade Zone Santacruz Electronics Export Processing Zone Falta Export Processing Zone Madras Export Processing Zone Cochin Export Processing Zone Noida Export Processing Zone

b. Electronic Hardware Technology Park - Electronic Hardware Technology Park means any park set up according to Electronic Hardware Technology Park Scheme notified by the Central Government, Ministry of Commerce and Industry.

27

TaxaSxov x

Unit 2

c. S o a. ft b. w c. a r e T e c h n o l o g y P a r k S o ft w a r e T e c h n o l o g y P a r k m e

a.
28

I
ch means |d by the > section, following ted out of ssessee in is from the vious year efore 30th iNo.56F ! claimed. [existing

Unit 2

Income Exempt from Tax

a. 100% of the profits or gains derived from the export of such articles or things or computer software for a period of 5 consecutive assessment years commencing from the assessment year relevant to the previous year in which the assessee begins to manufacture or produce articles or things or computer software, and thereafter 50% of the profits or gains for further two consecutive assessment years. b. For the next three consecutive assessment years, 50% of the profits provided that the same profits are debited to Profit and Loss Account and credited to ("Special Economic Zone Re-Investment Allowance Reserve Account"). The amount credited to this account should be used for acquiring new machinery within the period of three years following the year in which the reserve was created. If the assessee uses the amount in this reserve account for any other purpose or does not use the amount within the specified period, the amount so used or not used shall be deemed to be the profit and shall be subjected to tax. 2.4 INCOME OF 100% EXPORT ORIENTED UNITS - SECTION 10B Section 10B applies to all the assessees who derive any profits or gains from 100% Export Oriented Units by the export of articles or things or computer software. For claiming the exemption under this section, the assessee should satisfy the following conditions a. The sale proceeds of the articles or things or computer software exported out of India must have been received in or must be brought in India by the assessee in convertible foreign exchange during the previous year or within six months from the end of the relevant previous year. Eg. For the exports made during the previous year ending on 31 st March, 2006, the proceeds must be brought into India before 30th September 2006. b. The assessee should enclose a certificate of a chartered accountant in Form No. 56G along with the return of income certifying that the deduction has been correctly claimed. c. The undertaking should not be formed by splitting up or reconstruction of existing business. If the above conditions are satisfied, the amount of deduction under Section 1 OB will be 29

side India ed within i will be -

Hiunencin g j begins to ibegins to deduction

1e deduction wiF6e avaiS5/e for a penocfoffO consecutive assessment years coi from the assessment year relevant to the previous year in which the assesses be&vas^ manufacture or produce articles or things or computer software.
2.5 INCOME OF A POLITICAL PARTY - SECTION 13A_______

c.

30

Following types of incomes earned by a political party are exempt from tax a. Income from House Property, Capital Gains or Income from Other Sources b. Any income by way of voluntary contributions For claiming the deduction under this section, the political party needs to satisfy the following conditions i. The political party maintains such books of accounts and documents so as to enable the assessing officer to calculate the amount of income of the political party therefrom.

ii. The political party maintains the records of each voluntary contribution in excess of Rs. 10,000 and the name and address of each person who has made such contribution. iii. The accounts of the political party are audited by a Chartered Accountant. Specific Incomes Exempt from Tax Following incomes exempt from tax have been discussed in detail in the unit "Income from Salaries": Section 10(5) Particulars 10(10) Leave Travel Concessions or Leave Travel 10(10A) Allowance 10(10AA) 10(10B) 10(10C) Death-Cum-Retirement Gratuity Pensions Leave Encashment Retrenchment Compensation Compensation on Voluntary Retirement Scheme

Unit 2

Income Exempt from Tax

)mmencing ebegins to

10(11) 10(12) irces 10(13) 10(13A)

I 2.6 ANNEXURE tie following

any payment from a Provident Fund Accumulated balance in a Provident Fund

Agricultural Income Payment from a Superannuation Fund

House Allowance As per Rent the provisions of Section 2( 1 A) of the Income Tax Act, 1961, the term Agricultural Income meansa. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. b. Any income derived from such land by agricultural operations including processing of the agricultural produce c. Income attributable to a farm house provided that the building is situated on or is in immediate vicinity of the land and is used as dwelling house, store house or other outbuilding and the land is assessed to land revenue or a local rate or alternatively, the building is situated on or is in immediate vicinity of the land (which though not assessed to land revenue or local rate) is situated outside the urban areas. Urban area is defined as any area which is included within the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more or in any area within 8 kilometers from the local limits of such municipality or cantonment board.

3 as to enable % therefrom. n in excess of [contribution.

come from

llowance

Tax treatment of Agricultural Income

For deciding the tax treatment of agricultural income, following steps are involved a. Calculate Total Income including Agricultural as well as Non-agricultural Income b. Calculate the total tax liability on the Total Income described above. c. Consider the Agricultural Income and increase the same by first slab of income on which the tax rate is Nil i.e. Rs. 50,000

tieme

31

Taxatio n

Unit 2

d . C a l c u l a t e t h e t o t a l t a x o n t h e a m o u n t s t a t e d

i n " c " a b o v e . e . D i f f e r e n c e b e t w e e n " b " a n d " d " a b o f.

v e i s t h e G r o s s T a x P a y a b l e .

T h e G r o s s T a x P a y a

b l e c a l c u l a t e d i n " e " a b o v e s h a l l b e r e d u c e d b y

t h e T a x R e b a t e s a s p e r t h e p r o v i s i o n s o f S e c t i

o n 8 8 , 8 8 B a n d 8 8 C . ^ A c t i v i t y B : T h e t o t a l i n c o m

e e a r n e d b y M r . A s h o k f o r t h e A Y 2 0 0 7 2 0 0 8 w o r k s

o u t t o R s . 3 , 0 0 , 0 0 0 a n d t h e a g r i c u l t u r a l i n c o m e

e a r n e d b y h i m w o r k s o u t t o b e R s . 8 0 , 0 0 0 . C a l c u

l a t e h i s t a x l i a b i l i t y f o r t h e A Y 2 0 0 7 2 0 0 8 .

> g T A c t i v i t y C ; M r . A s h o k c a l c u l a t e d h i s i n c o m e f o

Sol C a l a . b . c . d . e . C o n c l u s i
32.7 2ILL

UST RAT ION 1 . D u r i n g t h e A s s e s s m e n t Y e a r 2 0

0 7 2 0 0 8 , A g r i c u l t u r a l I n c o m e o f M r . A s h o k w a s R s

. 1 , 5 0 , 0 0 0 a n d t h e N o n A g r i c u l t u r a l I n c o m e w a s R s . 2 , 2 0 , 0 0 0 . C a l c u l a t e t h e t a x l i a b i l i t y o f M

r . A s h o k f o r t h e A Y 2 0 0 7 2 0 0 8 . S o l u t i o n C a l c u l a t i

on of Tax Liab ility of Mr.

A s h o k

Unil 2

Income Exempt from Tax

a. Total Income (Agricultural and Non-Agricultural) 3,70,000 b. Tax on above 61,000 Tax Rebates c. Agricultural Income + Basic Exemption Limit i.e. Rs. 1,00,000 d. Tax on above 25,000 e. Difference Tax Payable Rs. 36,000(b-d) jRs. 3,00,000 Iculate his tax 2. During the Assessment Year 2007-2008, Agricultural Income of Mr. Ashok was Rs. 58,000 and the Non-Agricultural Income was Rs. 1,20,000. Calculate the tax liability of Mr. Ashok for the AY 2005-2006. Solution Calculation of Tax Liability of Mr. Ashok a. Total Income (Agricultural and Non-Agricultural) 1,78,000 b. Tax on above: 10,600 ind calculated i his agricultural is tax liability for c. Agricultural Income + Basic Exemption Limit= 58,000+1,00,000 d. Tax on above: 6,600 e. Difference between b and d i.e. Gross Tax Payable 4,000 Conclusion Had the agricultural income been totally exempt from tax, the tax liability of Mr. Ashok would have been Rs. 2,000 (i.e. tax payable on Rs. 1,20,000). However, as the agricultural income is considered for deciding the tax slabs, the gross tax payable by Mr. Ashok works out to Rs. 4,000 I. Ashok was Rs. Iculate the tax 2.8 SUMMARY __________________________________________________ Although an assessee is required to pay tax on all income, there are certain categories of income that are free from Income tax. Such categories have been discussed in this unit. They are dealt with in section 10 of the income tax act.

33

Taxation

The following incomes are exempt from Income Tax:

6, 7, 8, 9,
2.9

Incomes exempt as per the provisions of Section 10 of the Act. Incomes of newly established industrial undertaking in Free Trade Zones. Incomes of newly established 10% EOUs. Income of Political parties. KEYWORDS

Income Exempt from Tax: While calculating the total income of the Assessee, certain incomes will not be considered as the incomes chargeable to tax. Newly Established Undertakings in Free Trade Zones, Software Technology Park: Section 10A- applies to all the assessees who derive the profits or gains from an undertaking engaged in the export of an article or things or computer software are exempt from tax. Income of 100% Export Oriented Units : SECTION 10B- applies to all assessees who derive any profits or gains from 100% Export Oriented Units by the export of articles or things or computer software. 2.10 SELF-ASSESSMENT QUESTIONS Q1. State and discuss any fifteen types of incomes which are exempt from tax as per the provisions of Section 10 of the Income tax Act, 1961. Q2. Discuss the provisions of Section 10A in respect of exemption available to undertakings situated in Free Trade Zones etc. Q3. Discuss the provisions of Section 1 OB in respect of exemption available to 100% Export Oriented Units. Q4. Write short notes on the following:

Income of a political party Agricultural Income

34

Taxatio n

Unii .>

. j

d.

*.'

3 . 1 M E A N I N G O F S A L A R Y [ I N C L U S I V E D

Te
rec ern the A m fu n unr int ei

c.

A mi th ea ta xa l N

Unit 3

Income from Salaries

yea r,

a. Terminal Compensation : This includes any amount of compensation received or receivable by the employee from the employer at the time of termination of his employment or at the time of modification of terms and conditions in connection with the employment. b. Amount from an unrecognised provident fund or unrecognised superannuation fund : This includes the amount received from the unrecognised provident fund or unrecognised superannuation fund representing the employer's contribution and interest thereon. c. Amount received under Keyman Insurance Policy : Any amount received by the assessee under a Keyman Insurance Policy including the bonus on such policy is taxable under the head salaries. Note: Keyman Insurance Policy is taken by a person (usually employer) on the life of another person (usually a senior employee) where the employee pays a key role in the organisation of the employer. If the maturity proceeds of such policy are received by the employee, the same are taxed as Income from Salaries. Basis of Charge (Section 15) As per section 15, the following income shall be chargeable to income-tax under the head "salaries":
12, Any salary due from an employer (or a former employer) to an assessee in the previous year, whether paid in that previous year or not; 13, Any salary paid or allowed to him in the previous year by or on behalf of an employer (or a former employer) though not due in that previous year or before it become due to him; 14, Any arrears of salary paid or, allowed to him in the previous year by or on behalf of an employer (or a former employer) if not charged to Income-tax in any earlier previous

W he re an y sa la ry is pa id in th e ad va nc e is in cl ud ed in th e to ta l in co m e of an y pe rs on fo r an y pe

rvious, year, it shall not be included again in the total income of the person when the salary becomes due.

If the salary is payable on a monthly basis, it normally become due at the end of the month although it is paid in the next month. In this case, it will be taxable on

39

Taxation

'due' basis because 'due' is earlier than 'receipt'. Therefore, salary is normally taxable from April to March as the salary of March becomes due at the end of the month. However, in some cases the salary becomes due on the 1 st day of the next month, In that case we shall tax the salary from March to February because salary of the month of March of current year will be due only in the next financial year and salary of the month of March of previous year became due only on 1 st April of the current year. The head of income in the form of Income from Salaries is applicable in respect of the remuneration received by an employee from the employer. For charging the income in the form of salaries, there needs to be an employer-employee relationship between the payer and the payee. E.g. Remuneration received by a University Teacher received from his college will be treated as his salary. However, similarly, any remuneration received by a Member of Parliament or a Member of Legislative Assembly is taxable as Income from Other Sources. If an employee receives the salary from more than one employer during the previous year, salary from each source will be clubbed together to calculate Income from Salaries.

Exceptions 15, A Member of Parliament or of state legislature is not Government employee and therefore, remuneration received by him is not taxable as salary income, but as income from other sources. 16, Partner's Salary: Any salary, bonus, commission or remuneration due to or received by an assessee from a firm, in which he is partner, shall not be taxable under the head "Salaries" as there is no employer-employee relationship. It will, however, be taxable under the head "Profits and gains of business or profession." Important Concept 1 ] Surrender of Salary
Any salary surrendered by the employee to the Central Government, under the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, will not k %:*"~1 included while computing his taxable income, whether he is a private sector/ public sector or Government employee.

1
40

Unit 3

Income from Salaries

2] Foregoing of Salary Once salary has been earned by an employe e, it becomes taxable in his hands though he may subsequ ently waive the right to receive the same from the employe r. The waiver of salary by the employe e would be treated as applicati on of the income and salary though waived would be taxable

in his han ds.

3 ] P l a c e o f A c c r u a l [ S e c t i o n 9 ( 1 ) ]
The gold en rule is that salar

y w i l l b e d e e m e d t o a c c r u e o r a r i s e , a t a p l a c e w h e r e s e

or arise in India. If a person retires and settles abroad, and receives any pension on account of the same, such pension shall be an income which is deemed to accrue or arise in India as the services on account of which pension accrues were rendered in India.
4] Arrears of Salary

Althou gh salary is taxable on 'due'

or' recei pt whic heve r is the earlie r basis , but if there are arrea rs of salar y whic h have not been taxed in the past, such arrea rs will be taxed in the year in whic h these arrea rs are paid or allo wed to the

e m p l o y e e . F p r e x a m p l e , i f t h e g o v e r n m e n t a n n o u n

rs of salary relate to past periods in the past year. In such cases the assesse e can claim relief of income tax under section 89(1).

ee becau se salary is taxabl e when it becom e due or when it is paid, which ever is earlier.

5] Basis of Accountin g
The provisi ons of section 145 which relate to the metho d of accoun ting are not attracte d in the salary incom e of the assess

6] Ex em pt Inc om e
Incom e which does not form part of total income is called as income exempt from tax as per sectio n 10 to 13 A, certain

i n c o m e a r e e it h e r t o t a ll y e x e m p t f r o m t a x o r e x e m p t 41 u p t o a c

Taxation

Therefore, these incomes, to the extent they are exempt, are not included in the total income of an assessee for computation of his total Income.

7]

Bonus

Bonus is taxable on receipt basis. Therefore, it will be included in the gross salary only in the year in which the bonus is received. If bonus is received in arrears, the assessee can claim relief u/s 89(1).

3.2 EXEMPTIONS; SECTION 10 (5) TO 10(14)_________________________ 3.2.1 Section 10(5): Leave Travel Concession (Read with Rule 2B)
Value of travel concession or assistance received by an individual from his employer or former employer for himself and his family in connection with his proceeding:

Non

17, On leave to any place in India 18, To any place in India after retirement from service or after the termination of his service shall be exempt
"Family", for the purpose of this provision means:

19, The spouse and children; and 20, Parents, brothers and sisters of the individual wholly or mainly dependent on the individual. Note : 21, The exemption shallnctf be available to more than two surviving children of an individual after 1 October 1998. This restriction shall not apply in respect of children bora before 1st October, 1998 and also in case of multiple births after one child. 22, The exemption shall be available in respect of 2 journey s performed in a block of 4 calendar years commencing from the calendar year 2002 to 2005. The block of 4 calendar years is uniform for all the employees. Where an individual does not avail such travel concession or Assistance during any such block of 4 calendar years, the value of travel concession or assistance first availed during first calendar year of the immediately succeeding block. This exemption shall be in addition to the exemption that will be available in respect of two journeys for that succeeding block. Therefore,
42

(i)
(ii)

Unit 3

Income from Salaries

.block of 4 block of 4 H avail iyears, the year of the - exemption , Therefore.

1 only one trip can be carried forward to be availed in the immediately succeeding block. The next block of calendar year is 2006-09. e.g. Mr. Ashok can claim the exemption for two journeys in the block of four years i.e. 1998-2001. If Mr. Ashok has availed the exemption only once or has not availed any exemption at all, he can carry over the exemption to the next block of four years i.e. 2002-2005 provided that he avails the exemption of LTC in the first calendar year of the next block i.e. 2002. In Note: he deduction under this section is applicable to the expenses incurred in connection with the travel by air, by rail or by road. It does not cover any other expenses like lodging and hoarding in connection with the travel.

3.2.2 Section 10(10); Gratuit y: This is the amoun t payabl e by the emplo yer to

the employee as recognition for the long !p rm association of the employee with the employer. The gratuity may be payable by the iiiployer-

Salaries" while the amount paid by the employer on the death of the employee is xed as "Income from Other Sources". aj Government employee: Any death cum retirement gratuity received by government employees is wholly exempt from tax. h] Employees covered by The Payment of Gratuity Act, 1972: Any gratuity received by an employee covered by the said Act, is exempt from the tax to the extent' of the least of the following: (i) Rs.3,50,000 (ii) 15 days salary (out of 26 days) based on last drawn salary for each completed year of service or part of the year-in excess of 6 months; however in case of an employee who is- employee in a seasonal establishment & is not so employed

To the employee on his retirement To the legal heirs of the employee on the death of the employee
The amount paid by the employer to the employee on his retirement is taxed as "Income from

43

Taxation

throughout the year, the exemption shall be for 7 days wages for each season; or v, (iii) Gratuity actually received. *Salary means basic + Dearness Allowance (D.A.) c] Any other employee: Any gratuity received by any other employee on retirement, death, termination or resignation is exempt from tax to the extent of the least of the following: i) Rs.3, 50,000-; or . ii) Half month's salary (on the basis of last 10 months average # salary immediately preceding the month in which any such event occurred) for each completed year of service; or iii) Gratuity actually received. # Salary means Basic + D.A. (if provided in terms of employment) + Commission (as% of turnover achieved by the employee)

I.

Jv)

3.2.3 Pension SectionlO (10A)

Pension indicates a periodical payment received by the employee from the employer he ceases to be the employee. Pension received is taxed as salary for all practical purposes.

Calculation of pension can be done in basically two forms :

Uncommuted Pension: Uncommuted pension refers to regular periodical pensi employee, which is taxable to all kinds of employees. Commuted Pension: Commuted Pension is a lump-sum payment in lieu of periodii pension:

23, In case of commuted pension received by government employee is wholly exempt including judges of High courts and Supreme Court. 24, Non-government employees can avail exemption to the following extent:
i) If employee is in receipt of gratuity, 1/3 of commuted value (i.e. 100%)

ii) If not, then one-half of commuted value.

44

Unit 3

Income from Salaries

s nsion to f

t o y e r a f t e r 1 p u r p o s e s .

periodica l lolly exempt, ;nt: 100 %)

p e

(c) i)

ieof s' 10 in% C thof on e the tri h sal bu a ary tio n of n dsthe by ofem ce e plo nt myee ral pl) go o und ve y er rn eesect m . ion en 80 t ii) CC to S D. th u e iii) c pe h Em ns c plo io o yee n nts sc ri con he b trib m ututio e ion to is n the ispen fir d sio st en in d sch cl u em ud cte ed ib(to un lethe de (t ext r o ent th thof e e 10 he e% ad xtof 'S e the al ntsala ar

r y o f t h e e m p l o y e e ) i s d e d u c t i b l e u n d e r s e c t i o n

ham 0 np C dl C ofo D. rey . cie pie iv) en: W t. he A n 3. n pe 2. y ns 4 io L a ea m n v o is re e u ce S n iv al t ar ed y r ou [S e t ec of ti c th o e i e n af 1 v e or 0 d es (1 0 ai A a d A s a )] m c ou25, In a nt c s it as h wi e ll of e be G q ch o u ar v i ge er v ab n a m l le e e in nt n th e t e

of leave at the time of retire ment whet her on super annu ation or other wise is exem pt. , 26, Othe r Employe es: least of the following exempt: i) C a s h e q u i v a l e n t o f

th e lea ve (o n the ba sis of the av era ge of las t 10 mo nth s' *sa lar y) to the cre dit of the em plo ye e at the tim e of reti re me nt (ca lcu lat ed

atsalar 30 day); ysor cr iii) ed it Rs. for 3000 ea ch00; coor miv) pl Actu ete d al ye amo ar ofunt ser recei vi ceved. ): *Sala orry = ii)Basic + 10 D.A. (if mo provi nth ded s' in terms sal of ary empl (av oyme nt) + era Com ge missi ofon (as las %,of t Turn 10 over achie mo ved) nth s^ A

ctivity A: 1. Mr. Ani l reti red fro m A Ltd . aft er co mp leti ng ser vic e of 39 yea rs and 9 mo nth s. His sal ary dra wn at the tim e of reti re me nt wa s

R s . 1 0 , 5 0 0 p e r m o n t h w h i l e t h e a v e r a g e s a l a r y d r a

w. n 9, 8 f0 o0 rp er t m ho e nt h. pT rh ee c ac e tu d al i a nm go u 1 nt 0 of gr mat o ui n ty t re h ce s iv e wd ob ry k hi em d at th oe u ti t m e t re o tir e Rm se

nt wa s Rs. 2,8 0,0 00. Cal cul ate the am oun t of gra tuit y exe mp t fro m tax ass um ing that he is cov ere d by the pro visi ons of Pay me nt of Gra tuit y Act ,

1 9 7 2 . W i l l t h e c a l c u l a t i o n s b e d i f f e r e n t i f h e i s n

o? t
45

c o v e r e d b y t h e P a y m e n t o f G r a t u i t y A c t , 1 9 7 2

T a

2. Mr. Ashok retired from A Limited, a private sector organisation, from 30th Jui 2006. He receives the pension of Rs. 6,000 per month till 31st December 2005, Since 1st January 2006, he gets 60% of his pension commuted for Rs. 90,000, Calculate the amount of pension includible in the salary income for the AY 20072008. Assume that Mr. Ashok is not in receipt of the gratuity. Will calculations be different if Mr. Ashok retires as a Central Government employee?

3. R

46

retirement of a

workman for an: dinary action but

Unit 3

Income from Salaries

ii. Retirement of a workman on reaching the age of superannuation. iii. Termination of service of workman as a result of non-renewal of contract of employment iv. Termination of service of workman on the grounds of continued ill health. Compensation received by workman at the time retrenchment is exempt to the extent least of the following-: a. * Amount calculated under Industrial Dispute Act, 1947; or 130th June nber2005. Rs. 90,000. e AY 2007julations be b. Rs. 500000/-; or c. Actual amount received. * under the said Act a workman is entitled to retrenchment compensation equal to 15 days' average pay for every completed year of service or any part thereof in excess of 6 months. 3.2.6 Voluntary Retirement/Separation scheme [Section 10(10C)] This Section deals with the amount paid by the following types of employers at the time of Voluntary Retirement Scheme: ince Manager ,0 years and 7 e encashment ear of service. -<^e terms of ie got the i. Calculate the 07-20080.

A Public Sector Company Any other company An authority established under a Central or State Act ALocalAuthority

A Co-operative Society AUniversity

Exemption: Least of the following is exempt a. Higher of i) Last drawn #salary x 3 x completed year of service ii) Last drawn salary x remaining months of service; or

47

Taxation

b. c.

Rs. 500000/-; or Actual Compensation received. # Salary = Basic + D.A.(if provided in terms of employment) + Commission(as% of Turnover achieved)

Guidelines provided in Rule 2BA

i) It applies to all employees of the company who have completed 10 years of service or completed 40 years of age. if) Directors of Company or a Co-Operative Society are not eligible for exemption under section 10(10C). lii) The scheme has been drawn up to result in overall reduction in existing strength of the employees of the company. iv) The vacancy caused by the scheme is not to be filled up. v) The retiring employee shall not be employed in another company or concern belonging to the same management. vi) The amount received on account of voluntary separation of the employee, does not exceed amount equivalent to 3 months salary for each completed year or Salary at the time of retirement x Balance month of service left.
c.

3.2.7 Provident Fund

Provident Fund (hereinafter referred to as "PF') Scheme is an employee welfare scheme, According to this scheme, a certain amount is deducted from the salary of the empl< v which is referred to as Employee's Contribution to PF. In some cases, the employer al* t contributes as equal amount, which is referred to as Employer's Contribution to PF. Su< Provident Fund is called Contributory Provident Fund. Both employees' contributions! well as employer's contribution is invested. The interest earned on such investment! credited to the PF Account of the employee. The amount accumulated to the credit of i employee's account is paid at the time of retirement or resignation. In case of death of t| employee, the same is paid to the legal heirs of the employee. Rebate under section | (discussed in later units) is allowed on Employee's Contribution to PF.

48

Unil 3

Income from Salaries

Of

Types of Provident Fund

a. Statutory Provident Fund - This is set up as per the provisions of the Provident Fund Act, 1925. This is maintained by Government organisations, local authorities, universities and educational institutions. h. Recognised Provident Fund - This is the provident fund to which the provisions of Employees Provident Fund and Miscellaneous Provisions Act, 1952 apply. c. Unrecognised Provident Fund - The provident fund which is not recognised by the income tax authorities is called as unrecognised provident fund.

irvice nption h of the

! ax Treatment
a. Statutory Provident Fund - Employer's Contribution to PF as well as interest credited to the employee's account is not liable to any tax payment. Similarly, the lump sum received at the time of retirement or resignation or death is also exempt under section 10(11) and 10(12). b. Recognised Provident Fund - Employer's Contribution to PF is not taxable if it does not exceed 12% of the salary, where "salary" includes basic salary plus dearness allowance, if the terms of employment so provide. Interest credited to employee's account is not taxable if the rate of interest does not exceed the prescribed percentage, which is 9.5% per annum at present. Lump sum received at the time of retirement or resignation or death is exempt from tax if certain conditions are satisfied. The basic condition in this case being that the employee should have rendered continuous service of minimum 5 years. c. the Unrecognised Provident Fund - Employer's contribution to PF is not taxable in year of contribution. Interest credited to the account of employee is not taxable in the year of credit. Taxability of the Lump sum received on the retirement or resignation or death is as below: Employee's contribution to PF is exempt from tax. * Interest on employee's contribution is taxable as "Income from Other Sources." Employer's Contribution to PF and interest thereon is taxable as "Income from Salaries".

fongtng does not

; scheme employee lover also > PR Such ibution ;<v estment; -edit of the eathofthe section 88

49

Taxation

3.2.8

Superannuation Fund - Section 10(13)

Superannuation Fund is an employee welfare scheme which is usually applicable in case of very senior employees. Employer may be contributing to the superannuation fund along with the contribution of the employee. When the employee ceases to be the employee. employee's contribution, employer's contribution and the interest thereon is paid to the employee and in case of death of the employee, to the legal heirs of the employee. The lax treatment in case of an Approved Superannuation Fund is as below: a. b. c. d. Employee's contribution to the superannuation fund is eligible for rebate under 80C of the Act. The provisions relating to tax rebate are discussed in the later ui Employer's contribution to the superannuation is exempt from tax. Interest on the accumulated balance in the superannuation fund is exempt from According to the provisions of Section 10(13) of the Act, following payments recei1 from an Approved Superannuation Fund are exempt from tax:

The amount paid to the employee in lieu of or in commutation of an annuity on; his retirement on or after the specified age or on his becoming incapacitated prior to such retirement. The amount paid by way of refund of contribution to the legal heirs on the death of the beneficiary.

3.2.9 House Rent Allowance (H.R.A) [Section 10(13A) read with rule 2A] H.R.A. granted to an assessee by his employer is exempted to the extent least of the following: i) Excess of rent paid over 10% of salary* due for relevant period; or

a) e)
0

ii) If the accommodation is in: Mumbai, Kolkatta, Delhi and Chennai - 50% of salary and in any other places - 40% of the salary due in relevant period; or iii) Actual allowance received for the relevant period. *Salary = Basic + D.A. {if provided in terms of employment) + Commission (as?-of Turnover achieved)

a)

Notes:
Salary is calculated only for the period of rental accommodation of house duringtfc
50

b)

Unit 3

Income from Salaries

previous year and only for the period for which allowance (H.R. A.) has been provided No exemption if employee stays in his own house.. No exemption if rent is paid by employee up to ten percent of above said salary. Exemption of H.R.A depends upon the following.

a) Ch ild ren Ed uca tio n All ow anc e: Rs 10 0 per mo nth per chi ld up to ma xi mu m tw o c h i l d r e n . b) Ch ild

und along employe e, paid to the he tax ider Section later units.

salary of the employee; H.R.A. Rent paid by the employee The place where the house is taken on rental basis.
If any of the above changes, the H. R.A. is calculated on a monthly basis. 3.2,10 Special Allowances [Section 10(14)]

pt from tax. jnts received m annuity on r.capacitated

SVMI the death

(A) Allowances which are exempt to the extent amount received or the amount spent whichever is less:
27, Travel on tour or on transfer 28, Ordinary daily charges incurred on account of absence from normal

place of duty
ist of th

29, Conveyance allowance granted to meet the expenditure incurred on conveyance, performance of duties, provided free conveyance is not provided by the employer 30, Expenditure incurred on a helper in the performance of duties
;

house during the J a of salarv

31, The academic, research and training pursuits in educational and research institutions

omission {as Vc t

f) Purchase or maintenance of uniform for wear during the performance of duties (B) Allowances which are exempt to the extent of amount received or the limit specified in Rule 2BB whichever is less:

ren Hostel Allowance: RsSOO per month per child up to maximum two children.

51

Taxation

32, Transport allowance: Rs. 800 per month tor the purpose of commuting between
the place of his residence and the place of his duty. In case of blinder orthopaedically handicapped with disability, Rs. 1600 per month.

33, Under ground allowance granted to an employee in coal mines in uncongenial

unnatural climate underground, Rs.800 per month.

34, Allowance granted to an employee working in any transport system to meethis

persona expenses during his duty performed in course of such transport from one place to another place, is exempt to the extent of 70% of such allowance ot RS.6000 per month whichever is less.

35, Tribal area allowance at Rs.2(X) per month is exempt if the place of employment
is Assam, Bihar, Karnataka, Madhya Pradesh. Orissa. Tripura, TamilNadu,Uttai Pradesh, and West Bengal.

36, Composite hill compensatory allowance Rs. 300 p.m. is exempt provided the
place is located at a height of 1000 mtrs or more above the sea level. (C) Allowances that are fully taxable:

37, Deamess Allowance 38, City Compensatory Allowance 39, Medical Allowance 40, Lunch/Tiffin Allowance
e) i) g) h) i) Servant Al lowance Family Allowance Warder Allowance Overtime Allowance Family Allowance
4.

JS$ Activity B: 1. Mr. Zakaria, Staying at Chennai, receives Rs. 12,500 monthly as basic salary,Rs, 1,500 as D. A. provided in terms of employment and 4% as commission on turnova achieved by him. He is paid house rent allowance of Rs. 1,800 p.m. The turnover
52

Umt3

Income from Salaries

achieved by him for the year is Rs. 15 lakhs. House rent paid by him is Rs. 2,500 p.m. He received advance salary of Rs. 50,000/in March 2006 relating to the period April to July 2006. Determin e the taxable quantum of house rent allowance .

R s . 1 5 , 0 0 0 p . m . H e i s p a i d D . A . o f

R s 2. Mr. . Kurien resides at 2 Bangalor , e, and 5 draws a 0 remunera 0 tion of

p. m . p r o vi d e d in th e te r m s o f e m pl o y m e nt . I n a d di ti o n h e is p ai d H R A o f

is also paid HRA of Rs. 4,000/p.m. and he is Ra eligible mu for a resi commiss des ion in at respect Hyd of the erab turnover ad, achieved and by him dra at 3 %. ws The a turnover rem achieved uner by him atio during n of the year 12,5 is Rs. 007 62,00,00 07- He is p.m. staying He in a is rented paid house for D.A which he . of pays Rs. Rs. 9,00071,50 p.m. 0/Calculate p.m the . as taxable per income the under this ter head. ms of emp loy men t. He 4. Mr.

K a pi l is in re c ei pt o f th e f ol lo w in g al lo w a n c e s a n d s e e k s y o u r a d vi c e a

elper allo wanc e Rs. t 300 h p.m. e Mr. Kapi t l a appo x inted a a b helpe l r for e 9 mont q hs u durin a g n year, t to u who m he m paid Rs. o 200 f p.m. b o u t t h e s e a l l o w a n c e s . H Conv eyan ce allow ance - of Rs. 750 p.m. Mr. Kapil owns a car whic h is used both for

person al purpos es and official purpos es. Total monthl y expens es amount s to Rs. 1,200 of which 40% is attribut able to office use. ;

5 3

Taxation

During the year Mr. Kapil received as education allowance for his 3 children a sum of Rs. 250 per month each towards education and hostel expenditure. All the children are staying in hostels. During the year for six months Mr. Kapil was posted at Khandala, a hilly area located at a height of 1,200 mts. above sea level. Hill compensatory allowance of Rs. 2,400 has been received by him at Rs. 4007- per month. Please advise him.

5. Mr. Arvind is working as a pilot in Indian airlines and apart from basic salai 150007-, he is paid the following allowances: Entertainment allowance Rs. 1200p.m. Uniform allowance Rs. 800 p.m. Actual amount spent Rs. 500 p.m. Conveyance allowance Rs. 2000 p.m. spent for office purposes Rs. 1200p.ii; Special allowance to meet personal expenses while on duty Rs. 5000 p.m. Educal, and hostel expenditure allowance : Rs. 500 pm. He has two children studyin| school who stay in hostel. Determine the taxable amount of the above allowances.

3.3 PERQUISITES - SEC.17 (2) AND RULE 3

Perquisites indicate benefits or amenities provided by the employer to the employee, ei free of cost or at a concessional rate. The value of these perquisites is taxed in thehai of the employee as the taxable salary.

For the purpose of income tax, the perquisites can be classified into two categories:
54

Unit 3

Income from Salaries

iumof lildren i located is. 2,400

a.

Perquisites which are taxable in case of all types of employees - In practical circumstances, these perquisites include the rent-free accommodation provided to the employee.

b. Perquisites which are taxable only in the hands of specified employee - In practical circumstances, these perquisites include the following categories of perquisites:

Motor Car Services of sweeper, gardener, watchman or personal attendant Gas, electricity and water provided for personal consumption Free or concessional educational facilities

For the above purpose, a specified employee means: A. the person who is the director of a company (Income from Salaries 45) B. the employee who has substantial interest in the company by having 20% or more of the voting power )0 p.m. Education studying in C. the employee whose income under the head salaries (including all the taxable monetary payments of salary but excluding the value of any non-monetary benefits or perquisites) after allowing deductions under Section 16, exceeds Rs. 50,000. While computing the limit of Rs. 50000, the following are deducted/ excluded:
41, All non-monetary benefits 42, Monetary benefits which are exempt under Sect.10 43, Deduction under section 16(1), (ii), & (iii)

3.3.1Employees Stock Option Plan (ESOP):

If the shares, debentures or warrants are issued in accordance with the guidelines prescribed by the Central Government, the value thereof or the concession given thereof is not taxable as a perquisite.

ployee, eithei tin the hands

3.3.2Rent Free Unfurnished Accomodation: Section 17(2) (i) [Rule 3(1)] The accommodation includes a house, flat, farm house or part thereof, or accommodation
55

ategories:

Taxation

in a hotel, motel, service apartment, guest house, mobile home, ship or other floati structure. Hotel accommodation Where the accommodation is provided by any employer in a hotel, then 24 % of & paid or payable for the previous year or the actual charges paid or payable to such at whichever is lower, shall be the value of perquisite, the value shall be reduced by ther if any, actually paid or payable by the employee if the accommodation for a period is exceeding 15 days on transfer of employee from one place to another place, there \ no taxable perquisites. In short there will be no taxable perquisite if the accommodation is provided in a ho the following conditions are fulfilled44, Such accommodation is provided for a period not exceeding 15 days and 45, It has been provided on the transfer of the employee from one place to another! Sr. No . 1 Particulars Central and State Government Employees Place of Accommodation Any where Valuation of I

Perquisite I License Fee (commonly

I referred as 'Standard Rent') J respect of such accommodation fixedV in accordance with rules framed* by that Government. 20% of Salary (#) 1 15% of Salary (#)

Other employees Accommodation owned by the employer. Accommodation taken on lease or rent by employer

Big Cities Small cities Any where

1 Lease rental payable or

paid 20% of the (#) salary, whichisB lower

Big Cities: Cities having population exceeding 4 lakhs as per 1991 census. Small cities: Other than big cities. 56

Unit 3

Income from Salaries

#. Salary includes: All pay, allowance, bonus or commission payable monthly or otherwise or and monetary payment by whatever name called from one or more employers but excludes:i. Dearness allowance not forming part in computation of superannuation or retirement hotel if benefit. ii. Employer's contribution to the PF a/c of the employee. i Allowances which are exempt from tax iv. Value of taxable perquisites under section 17(2) v. Any payment or expenditure in the nature of allotment of shares, debentures or warrants under ESOP or any other scheme.
Si! Mil

vi. Any allowances i n the nature of medical facility to the extent not taxable. 3.3.3 Furnished Accommodation Where the accommodation is provided with furniture, (including household appliances and fittings) the value is first worked out as if accommodation is unfurnished and to that value the following is added.

in

Source Where the furniture is owned by the employer. Where the furniture is hired by the employer

Value of Perquisite 10% p.a. of the original cost of furniture The actual hire charges payable by the employer for such furniture.

paid or vhich is

Furniture includes radio sets, television sets, refrigerators, air conditioners and other household appliances. 3.3.4 Accommodation at concessional rate [Section 17 (2) (ii) Where the employer provides the employee with an accommodation but charges certain rent, the taxable value of perquisite shall be calculated as follows:

57

Taxation

ii) Less: Rent payable by the employee under section iii) Balance [(i)-(ii)]: Taxable perquisite u/s 17(2) (ii) Note: III) Section 17 (2) (iii) Value of any Benefit or Amenity & Section 17(2) (iv)j sum made by the employer in respect of any obligation of the employee

3.3.5 Domestic servant 46, The value of benefit to the employee or any member of his household resulting f the provision by the employer of the services of a sweeper, a gardener, a wati or a personal attendant, shall be the actual cost to the employer. The actual co such a case shall be the total amount of salary borne by the employer as reduc the amount borne by the employee for such services. 47, If the employer pays salary for the domestic servants employed by the employee,! actual amount borne by the employer is chargeable to tax as perquisite in the c all employees. 48, In case the attendant is provided by the employer, the same is taxable perquisite hand of all employees. 49, If an employer provides a rent free house (owned by the employer) to his emplo expenses (inclusive of salary of gardner) incurred by the employer on the mainte of garden and ground attached to the house is not taxable separately. 3.3.6 Gas, Electric Energy and water supply for household consumption 50, In case of supply from own sources: taxable perquisites shall be manufacturing c incurred by the employer. 51, In case the supply is from outside agencies: - taxable perquisites shall be amountp by the employer to such agencies.
Note:
58

52, Above taxable perquisites shall be reduced by the amount recovered from I employee. 53, If gas connection, water connection, electricity connection is in the name of ll

e v). Unit 3 Income from Salaries m pl oy 3.3.7 Perquisites in respect of Educational facilities ee , Sr. Particulars Valuation of Perquisite it No. be co Educational facility for any member of employee Actual expenditure incurre 1 m household (other than children of employee) by employer es Education facility provided in institution which is 'NIL' is cost of such 2 ob maintained and owned by the employer or where education in a similar li free educational facilities for such member of institution in or near the ga employees' household are allowed in any other locality provided it does n to educational institution by reason of his being in exceed per child Rs. ry employment of that employer. 10007 - PM pa y m en ts ch ar ge ab le in ha 3.3.8 Other fringe benefits or amenities [Section 17(2) nd (VI)] s ng of It includes the value of any other fringe benefits or amenities all (excluding the fringe benefits chargeable to tax under Chapter e cost XII-H) as may be prescribed. m pl a) Interest Free or concessional loan made available for oy tnt employee or any member of his household: The taxable e! perquisites shall be the sum equal to interest computed at the un rate charge per annum as on the 1 st day of relevant previous de naid year in respect of loan for the same purpose advanced by it. r se Table 3.1: Nature of loan & Rate of interest cti on 17 (2 ) (i

Nature of loan

Housing 5 years up to 15 years 15 years

Car
Up to 3 years up to 7 years Personal

59

Taxatio n

Unit 3

Imp orta nt Poin ts

w h re re c to m x m m o s n n m n y b a e

T e a o e ta a e p q s e s // b re u e b th

s
If an y m o ve ab le as se t (e xc lu di n g th e as se ts al re ad y co ve re d ab o ve an d al so la pt o ps an d co m

b ) U

pute rs) own ed or hire d by the emp loye r is. use d by the emp loye e or any me mbe r of his hou seh old, 10 % per ann um of the actu al a. b. cost of suc h asse t or the amo unt of hire char ges

in c rr e b y th e e m p o y r s a b th e v lu e o p rq u s e

3 I

3 F

I H o w 54, T e *'F v an ei th 56, e r h a 57, n d I s

tl

M e d a. i b. c a l J M e d i c a l t o u t s i d e
60

F
c.

A m o ui fo r se n e x p e n s d e m pl o y

-aent of the employee or any member of tne * family of sucn employee iide India and travel, and stay abroad of the patient and one attendant subject to the fthathat: The expenditure on medical treatment on stay abroad will be exempt to the extent permitted by the Reserve Bank of India. The expenditure on travel shall be exempt only in the case of an employee whose gross total income, as computed before including therein the said travel expenditure does not exceed Rs, 2,00,000. In other words, if the employees' gross total income bei'ore including taxable travel expenditure exceeds Rs. 2,00,000 the expenses on travel of the patient and the attendant shall become taxable. *'Family means (a) The spouse and children (h) Parents, brothers and sisters of the individual, wholly or mainly dependent on the individual. PERQUISITES EXEMPT FROM TAX lowing are some of the perquisites which are generally exempt in the hands of the 'ployees: Tea or other non-alcoholic beverages and snacks (in the form of light refreshments) provided during the office hours.
"f

Free meals provided by the employer during the office hours provided that the value per meal does not exceed Rs. 50. Amount spent for training the employees and amount spent by the employer as fees for sending the employee to refresher courses (including the lodging and boarding expenses incurred by the employee).
1

Annual premium paid by the employer for the accident insurance policy taken by the employer in the name of the employee.

61

Taxation

e.

The amount of telephone bills (including the mobile phone bills) of the employee reimbursed by the employer. Any recreational facility provided by the employer to a group of employees (not being restricted to a select few employees) is exempt from tax.

f.

3.5 DEDUCTIONS - [SECTION16] The income chargeable under the head "Salaries" shall be computed after making the following deductions from gross salary :-

3.5.1 Entertainment Allowance 16 (ii)

Entertainment allowance is not eligible for exemption but it only qualifies for deduction. Therefore, entertainment allowance is first included in gross salary and then deduction is allowed under section 16(ii). The deduction is available only in the case of government employees to the extent of the least of following: i) ii) Rs 5000 or 1/5* of salary; [20% of Basic Salary]

iii) Actual entertainment allowance received for the previous year.

3.5.2 Professional Tax 16 (iii)

Deduction is allowed in respect of any sum paid by the assessee on account of a tax on| employment. In case the profession tax is paid by the employer on behalf of the employee, J the amount so paid should be included in Gross salary as perquisite and then deductic under section 16(iii) can be claimed.

3.6 ILLUSTRATIONS
1. Mr. Ashok works in the Central Government. Details of his salary are as under: Basic Salary - Rs. 6,000 per month Entertainment Allowance - Rs. 1,000 per month The employer has deducted an amount of Rs. 2,100 from his salary towards his contributi to the professional tax.

62

Unit 3

Income from Salaries

Calculate the deductions available to Mr. Ashok under Section 16 of the Act for the AY 2007-2008. If Mr. Ashok is not a Government Employee, will the calculations be different for him If yes, how?

l a r y 8 4 , 0 0 0 D e d u c t i o n s S e c t i o n 1

Solution
Calculation of deduction u/s 16 for Mr. Ashok
Basic Salary 72,000 Entertainment Allowance 12,000 T o t a l S a

6(ii) Ente rtain ment Allo wan ce as per the Wor king show n belo w 05,0 00 Secti on 16(ii i) Prof essio nal Tax 02,1 00

H o entertainme l nt allowance e : will be least

T h e of the following amounts a. Rs. a m o u n t o f d e d u c t i 5,000 b. Actual amount received i.e. Rs. 12,000 c. l/5th of salary of Rs. 72,000 i.e. Rs. 14,400 As Rs. 5,000 is the least, the same will

be deducted Taxa b from the ble l salary. Sala e ry If Mr. Ashok is 46,9 not a 00 Governme

nt e m pl o y e e, th e d e d u ct io n u n d er S e ct io n 1 6( ii ) fo r e nt er ta in m e nt al lo w a n ce w

ill not be ava ilab le to hi m. In oth er wo rds, the ent erta in me nt allo wa nce will be full y taxa ble.

l o y e d a s t h e F i n a n c e M a n a g e r o f A L t d. 1 si Mn r c . e 1 A st n J i a l n u wa a r s y 1 e 9 m8 p 5.

His salary was fixed at Rs. 26,600 in the grade of Rs. 25,000 - 800 33,000 with effect from 1st July 2006. In additio n to the basic salary, he was paid dearne ss allowa nce, 20% of which is not treated as a part of salary for the comput ation of

6 3

Taxation

retirement benefits. He retired from service with effect from 1st December 2006. He received Rs. 3,30,000 as gratuity from A Ltd. Calculate the Income from Salaries of Mr. Anil for the Assessment Year 2007-2008 ifa. b. Payment of Gratuity Act, 1972 applies to Mr. Anil Payment of Gratuity Act, 1972 does not apply to Mr. Anil

Solution Calculation of taxable gratuity for Mr. Anil Service completed - 21 years and 11 months Salary for the period from February 2006 to June 2006 - Rs. 27,400 per month Salary for the period from July 2006 to November 2006 - Rs. 28,200 per month Total salary for the past 10 months - Rs. 27400 x 5 months + 28200 x 5 months = Rs. 2, 78,000 Average salary for the past 10 months - Rs. 27,800 If Payment of Gratuity Act, 1972 applies to Mr. Anil Least of the following amounts will be exempt from tax: a. 15 days' salary for each completed year of service based upon last salary drawn assuming 26 days in a month i.e. Rs. 28,200 x 15/26 = Rs. 16,269 per completed year and for 22 years Rs. 3,57,918 Rs. 3,50,000 Rs. 3,30,000 being the amount of gratuity actually received.

b. c.

As Rs. 3,30,000 is the least, the entire gratuity received shall be exempt from tax. If Payment of Gratuity Act, 1972 does not apply to Mr. Anil

64

Least of the following amounts shall be exempt from tax: a. Half month's salary based upon the average salary for the last 10 months for every completed year of service i.e. Rs. 27,800 / 2 x 21 = Rs. 2,91,900

Unit3

Income from Salaries

b. Rs. 3,50,000 c. Rs. 3,30,000 being the amount of gratuity actually received. As Rs. 2,91,900 is the least, the same will be exempt and the balance amount of Rs. 38,100 shall be taxable.

w a s R s . 1 8 , 0 0 0 p e r

m o 3. Mr. Anil n t was working h , as Finance Manager w of A h Ltd. He i c retired from the h job with w effect from 1 st a s January 2007 after completi ng the service of 24 years and 4 months. His last salary n o t i n c r e a

s e d f r o m t h e p a s t t w o y e a r s . H e w a s a l s o e n t i t l e d t o d e a r n

e th and 60% portion of Hthe pension i was s commuted for Rs. p 3,00,000. In e addition to n this, he s received Rs. i 3,60,000 as o gratuity and n Rs.2,80,000 as the leave wencashment a for a period s of 360 days. The terms of d employment e provide for c 40 days' i earned leave d for every e completed d year of service. a Calculate s the Income from RSalaries for s Mr. Anil for . the Assessment 1 Year 20070 2008. Mr. , Anil is not 0 covered by 0 the Payment 0 of Gratuity Act, 1972. p e Solution r Calculation mof Income o n from

S a l a r i e s f o r M r . A n i l
B a s i c S a l a r y i. e . R s

. 18,0 00 x 9 mon ths 1, 62,0 00 Dear

0 ess: % of 0 (300000 x

C o

10/6) being exempt 2, 50,000 0, 50,000

m m u

t Gratuity e Least of the d following

amounts P will be ness exempt e Allo a. Half n month's wan s salary ce for i i.e. every o comple Rs. n ted year 2,00 of r 0x Service e i.e. Rs. 9 20,000 c mon x 24 e years ths i x !/2 = 0, Rs. 2, v 18,0 40,000 e 00 d

Pens 3 ion
Unc om mute d i.e. Rs. 4,00 0x 3 mo nths 0, 12,0 , 0 0 , 0 0 0

6 5

Taxation

b. c.

Maximum ceiling amount i.e. Rs. 3,50,000 - Gratuity actually received i.e. Rs.

3,60,000 Hence, taxable gratuity 1, 20,000

Leave encashment
Least of the following amounts will be exempt a. Lease encashment received i.e. Rs. 2,

80,000 b. c. Maximum ceiling amount = Calculation for unavailed leave Total entitlement (24 years x 40 days) = 960 days Unavailed leave 360 days Availed leave 600 days Leave entitlement on the basis of 30 days = 720 days Unavailed leave on the basis of 30 days = 120 days Cash equivalent for 120 days (Rs. 20,000 x 120/30) = Hence, taxable leave encashment 00,000 Income from Salaries 5,62,000 4. Mr. Ashok is working as the General Manager of a manufacturing company. Details of his salary for the Assessment Year 2007-2008 are as below a. b. Basic Salary = Rs. 90,000 per annum Dearness Allowance = Rs. 2,000 per month (Rs. 500 per month is considered for retirement benefits) Education allowance for two children = Rs. 150 per month per child Travelling allowance for his official traveling = Rs. 40,000. However, he has actually spent only Rs. 30,000. Rs. 80,000 2, Rs. 3,00,000

66

c. d.

e. H e st ay s in an fu rn is he d fla t pr ov id ed by th e co m pa ny . C os t of th e fu rn itu re ^ R s. 1, 50 ,0 00 . H

e pays Rs. 2,000 per month from his salary towards ther

Unit 3

Income from Salaries

He is also provid ed with a watch man and a servan t whose salary is Rs. 400 per month and Rs. 300 per month respect ively and is paid by the compa ny. f. The compa ny has contri buted Rs. 18,000 to his RPR Interes t credite d to his accoun t@

14 % tion of Income per from S alaries an nu for Mr. Ashok m am Basic Salary ou nte Dearness Allowance d Education Allowance Received to Rs. Less: Exempt Rs. 100 per month per 14, child for 2 children 00 Furnished Accommodation 10% of Salary 0. Add: 10% of cost of furniture ' Less: Recovered from salary Calcula Salary of Servant and Watchman te the TravellingAllowance Income Employer's Contribution to Provident Fund from Salarie s for Mr. Ashok for the Assess ment Year 20072008. Solutio n Calcula Actual Contribution Less: 12% of Salary Interest on Provident Fund i Taxable interest in excess of 9.5% j Total Salary

90,000 24,000 3,600 2,400 9,000 15,000 24,000 01,200

NIL
08,400 10,000

18,000 11,520 06,480

04,500 1,70,980

3.7 SUMMARY
This unit has explained the concept of 'salary' in the Income Tax Act. It also explains the different deductions and exemption under salary. Under these are discussed

the follo wing heads:

Taxation

Leave travel concession (LTC) Gratuity Pension VRS Provident fund HRA Certain special allowances and perquisites are also examined and explained. E.g. ESOPs, Accommodation, Domestic Servants, Educational Facility, Entertainment Allowance and others. 3.8 KEYWORDS Salary : As per the provisions of Section 17( 1) of the Act, Salary is defined to include mainly the following items: a. b. c. d. Wages Annuity or Pension Gratuity Fees, commission, perquisites or profits in lieu of salary or in addition to salary or wages Advance of Salary Payment received from the employer for the period of leave not availed

e. f.

Q4.

The Central Government has introduced a new pension scheme for the employees employ on or after 1 st January, 2004. These employees are required to contribute 10% of the salaries to this pension scheme and the Central Government will make an equal contribution. ] Any contribution made by the Central Government to this pension scheme will be considered| to be the salary income in the hands of the employee. Salary for this purpose includes dearness allowance if the terms of employment so provides but excludes all other allowances and perquisites Perquisites: Perquisites indicate benefits or amenities provided by the employer to the employee, either free of cost or at the concessional rate. The value of these perquisites is taxed in the hands of the employee as the taxable salary.

Q5. Q6.

68

Taxation

4.1

SCOPE-SECTION 22

"The Annual Value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portion of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head "Income from House Property". The above definition reveals that for income to be treated as the Income from House i Property, following conditions should be satisfied: a. b. The property must consist of buildings and land appurtenant thereto. If the asses earns some income from only a vacant piece of land, it will not be taxed as Incc from House Property but it will be taxed as Income from Other Sources. The assessee must be the owner of the property. If the assessee receives any incon from a property which is not owned by him, it cannot be taxed as Income i House Property. Eg. Mr. A takes a house on rent paying the rent of Rs. 10,000 \ month to the landlord. He sublets the same to Mr. B for a rent of Rs. 12,000 j month. The rent received by Mr. A will be taxed as Income from Other Sources i not as Income from House Property. The property should not be used by the assessee for any business or professiont profits of which are chargeable to income as Income from Business & Profession.]

c.

Related Case Law

Chelmsford Club V CIT [2002] (SC)

Subject matter: Chargeability to tax under section 22 (Mutual Club) The assessee, a club, provided recreational and refreshment facilities to its members 8 their guests. Its facilities were not available to non-members. The club was run on 'n profit no loss' basis. The members were not entitled to share profits. Surplus, if any, \ used for the maintenance and development of the club. Held that the assessee wasi liable to income tax in respect of the clubhouse under section 22. The business of the assessee was governed by the principles of mutuality; even the deemed income from its property was governed by that principle.

76

Unit 4

Income from House Property and Other Sources

\sential conditions for taxing income under this head ,, The property must consist of buildings and lands appurtenant thereto, B. The assessee must be the owner of such house property, . The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on him, the profit of which is chargeable to tax (Even if in a particular year income from Business or Profession is NIL or there is a loss) I Important Points: In case of Individual /H.U.F (R-OR) foreign property is treated the same as Indian property, ; If any income is derived from vacant land then this income would not be taxed under the head 'house property' because there is no building.

S u b l e tt i n g o f h o u s e p r o p e r t y i s n o t c o v e r e d u n d e r t h

e he ad ho us e pr op ert y bu t ch ar ge ab le un de r th e he ad 'In co m e fr o m Ot he r So ur ce s'.. T he pe rs on w ho o

wn s the Bu ildi ng ne ed not be ow ner of lan d up on wh ich the Bu ildi ng stands. Ev en if it is th e bu sin es s of th e as se ss ee to o w n an d

give houses on rent or to irade in houses, the annual value of the houses owned by him during the previc would be taxable as 'Income From House Property'. The letting out of the property if incidental to the main business of the assessee and in the case deductions/allowances, would have to be calculated as relating to profits/ gains business and not as relating to-house property. Ownership includes both free hold and lease hold rights and also includes deemed ownerships. In case of disputed ownership, the person who is in receipt of income or the person who enjoys the possession of a H.P. is treated as Owner.

77

Taxation

4.2 DEEMED OWNERSHIP UNDER SECTION 27 _______________________

58, Transfer to a spouse and child [section 27 (i)] : An individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart or to minor child not being a married a daughter, is deemed to be the owner of the house property so transferred. 59, Holder of an impartible estate [section 27 (ii)] : The holder of the impartible estate deemed to be the individual owner of all the properties comprised in the estate. 60, Members of co-operative Society, etc. [section 27 (iii)]: A member of cooperative society, company or other association of persons to whom building or part thereof is allotted lease under a house building 'scheme of the society, company, or association, as the case may be, is deemed to be the owner of that building or part thereof. 61, Person in possession of a property [Section 27 (iiia)]: a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, is deemed to be the owner of that building or part thereof.
e) Person having Right in a property for a period not less than 12 years Section (iiib)]: A person who acquires any right in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) that is transfer by way of lease for not less than 12 years shall be deemed to be the owner of that building or part thereof. This will not cover the case where any right by way of, a lease is acquired from month to month basis or for a period not exceeding one year, j
78

4.3 DETERMINATION OF ANNUAL VALUE Annual Value: As per section 23(1) (a) the annual value of any property shall be thes for which the property might reasonably be expected to let from year to year. In deti the

annual value there are four factors, which are normal ly taken into consid eration . A) Ac tu al re nt re cei ve d or re cei va bl e: Re nt rec eiv ed or rec eiv abl e do es no t inc

lij rent of the period for which the property remains vacant. Moreover, it does 1 include the unrealised rent (if conditions prescribed under Rule 4 are satisfied)* *Rule 4:

Unit 4

Income from House Property and Other Sources

i.

The tenancy is bona fide;

ii. The defaulting tenant has vacated or steps have been taken to compel him to' vacate the property; iii. The defaulting tenant is not in occupation of any other property of the assessee; iv. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of unpaid rent or satisfies the Assessing Officer (A.O.) that legal proceedings would be useless.
62, Municipal value: This is the value as determined by the Municipal Authorities for levying Municipal taxes on house property. 63, Fair rent of the property: Fair rent is the rent, which a similar property can fetch in this same or similar locality, if it is let out. 64, Standard rent: The standard rent is the rent, which is fixed under the Rent Control Act.

How to compute Expected Reasonable Rent (ERR): Steps Comparison of 1. i Municipal value with Fair Rent Standard Rent with A (calculated in Step 1 ) $ Activity A: I. Mr. Ashok owns four house properties (1,2,3,4) in Pune. The particulars in respect of the said properties are as below: Particulars Municipal Value Fair Rental Value Standard Rent Rent Received 1 40,000 48,000 N.A. 36,000 2 48,000 48,000 48,000 72,000 3 72,000 80,000 100,000 96,000 4 84,000 84,000 60,000 72,000 79 Result Whichever is higher is A Whichever is Lower is ERR

Calculate the Gross Annual Value of the properties.

_ wit-

Taxation

The Gross AnrmaYVa\\\e of the properties wi\\\>e as\>e\ow Property 1 -Rs. 48,000 being the Fair Rental Value Property 2 - Rs. 72,000 being the Rent Received Property 3 - Rs. 96,000 being the Rent Received Property 4 - Rs. 72,000 being the Rent Received, as the Standard Rent is Rs. 60,000

2. Mr. Ashok owns four house properties (1,2,3,4) in Pune. The particulars in respect of the said properties are as below: Particulars Municipal Value Fair Rental Value Standard Rent Rent Received Calculate the Gross Annual Value of the properties. Solution The Gross Annual Value of the properties will be as below : Property 1 - Rs. 88,000 being the Fair Rental Value

1
84,000 88,000 N.A. 79,000

2
96,000 98,000 97,500 97,800

3
75,000 80,000 82,000 79,000

4
1, 04,000 1, 08,000 N.A. 1,09,000

Property 2 - Rs. 97,500 being the Rent Received Property 3 - Rs. 80,000 being the Fair Rent Received Property 4 - Rs. 1,09,000 being the Rent Received

80

Unit 4

Income from House Property and Other Sources

a.

4.4 CLASSIFICATION OF THE HOUSE PROPERTIES ___________________ For the purpose of calculation of Annual Value, the term House Property can be categorised in the following forms:
65, House Property which is let out for rent throughout the Previous Year 66, House Property which is let out but remains unoccupied for the whole or part of the

Fair rent -Rs. 2,00 ,000 b.

year.
67, House Property which is self-occupied by the assessee for residential

purposes.
68, House Property which is let for part of the year and is self-occupied for part of

the year. e) The assessee holds more than one House Property for selfoccupation, a) House Property which is let out throughout the year As per the provisions of Section 23( 1) of the Act, Annual Value of the House Property which is let out throughout the year shall be deemed to be higher of the following two amounts: i) The sum for which the property might reasonably be expected to let from year to year. This amount in turn will be the higher of the following two amounts:

Mun icipa l Valu ation - Rs. 1,90, 000

Municipal Valuation Fair Rental Value

However, if the property is governed by Rent Control Act, the Annual Value cannot exceed the standard rent under the Rent Control Act. ii) The amount of rent received or receivable by the owner in respect of the

property. Illustration Mr. Ashok own a house property the particulars of which for the AY 2007-2008 are as below:

81

Taxation

c.
i '

Standard Rent - Rs. 1,75,000 Actual Rent received - Rs. 16,000 per month Municipal Taxes paid - Rs. 36,000 which includes the arrears for AY 20032004 and 2004-2005 amounting to Rs. 23,000 Calculate the Annual Value of the property

d. e.

&

Solution As fair rent is greater than the municipal valuation, higher of the two will be considered i.e. Fair rent of Rs. 2,00,000 As standard rent is less than the fair rent, lower of the two will be considered i.e. Standard Rent of Rs. 1,75,000 As actual rent received is greater than the standard rent, higher of the two will be considered i.e. Actual Rent received of Rs. 1,92,000 Hence, the NAV will be calculated as below: Gross Annual Value Less: Municipal Taxes paid Net Annual Value Rs. 1,92,000 Rs. 36,000 Rs. 1,56,000

b) Property which is let out but remains vacant for whole or part of the year The Annual Value in such cases will be calculated as below i) The Gross Annual Value will be calculated as higher of the Municipal Valu the Fair Market Value (restricted to Standard Rent) compared to Actual 1 received or Receivable. If the Actual Rent Received is higher in spite of d vacancy period, Rent Received will be considered to be the Gross Annual Vald

; ;

ii) The Gross Annual Value will be calculated as higher of the Municipal Valu the Fair Market Value (restricted to Standard Rent) compared to Actual 1 received or Receivable. If the Actual Rent received is less than the other i due to the vacancy, Rent Received will be considered to be the Gross Annual j Value.

82

Unit 4

Income from House Property and Other Sources

Illustration Mr. Ashok owns a property particulars of which are as below: Municipal Valuation Fair Rental Value Standard Rent Actual Rent agreed Municipal Taxes paid Calculate the Annual Value of the property for the assessment year 2005-2006 assuming that it remained vacant during the year for a period of one month or three months. Solution Higher of Municipal Valuation or Fair Market value restricted to Standard Rent Actual Rent Received Gross Annual Value Less: Municipal Taxes Paid Net Annual Value c) Self-Occupied Property The Annual Value of the Self-occupied Property which is occupied by the assessee for his own residence shall be taken as Nil. If the property cannot be actually occupied by the assessee due to his employment, business or profession at some other place, still the Annual Value of the property will be considered to be Nil. d) Property which is let out for part of the year and self-occupied for part of the year If the property is let out for part of the year and is self-occupied for part of the year, the Gross Annual Value of the property shall be calculated as if the property is let out throughout the year. The period for which the same is self-occupied shall be ignored. As a result, the expected rent shall be considered for the full 83 year, but the actual rent will be for the period for which it is let out. Vacant 1 Month Vacant 3 Months Rs. 45,000 Rs. 70,000 Rs. 60,000 ks. 6,000 per month Rs. 20,000

Rs. 60,000 Rs. 66,000 Rs. 66,000 Rs. 20,000 Rs. 46,000

Rs. 60,000 Rs. 54,000 Rs. 54,000 Rs. 20,000 Rs. 34,000

Taxation

Illustration Mr. Ashok is the owner of a property which has the municipal valuation of Rs. 60,000 and the fair rental value of Rs. 70,000. The property was used for his own residence for the period from 1 st April 2006 to 30th September 2006. From 1 st October 2006 it was let out for a monthly rent of Rs. 7,000. Municipal taxes paid during the year amounted toRs, 12,000. Calculate the income from house property for the Assessment Year 2007-2008. Solution Expected Rent (Being higher of municipal valuation of Rs. 60,000 and fair rental value of Rs. 70,000) Rent Received (Being Rs. 7,000 x 6 months) Hence, Gross Annual Value Less Municipal Taxes Net Annual Value Less Statutory Deduction (Being 30% of NAV) Hence, Income from House Property

Rs. 70,000

Rs. 42,000 Rs. Rs. Rs. 70,000 12,000 58,000

Rs. 17,400 Rs. 40,600

e) More than one Self-occupied Properties

84

If the assessee has more than one house properties for his own residence, the benefit of treating the Annual Value as Nil will be applicable to only one property, asperthe choice available to,the assessee. The other property or properties shall be assumed to be let out and the Annual Value will be

c in the manner discussed ;i! Naturally, the assessee should select that property as al self-occupied where the Uu,<-n income is minimum. Such option selected by c the assessee can be changed on \ear-to-year basis. ul at Illustration e d Mr. A owns two houses in Mumbai, both being self-occupied. Following particulars art | provided in respect of the houses.

Unit 4

Income from House Property and Other Sources

Which of the properties should be treated as self-occupied? Solution Assuming that both the properties are deemed to be let out, the income from house property will calculated as below -

Particulars Gross Annual Value Less: Municipal Taxes Net Annual Value Less: Statutory Deduction @30% Net Annual Value Interest on Housing Loan borrowed Taxable Annual Value

Property I Rs. 85,000 08,000 77,000 23,100 53,900 30,000 23,900

Property II Rs. 1, 20,000 09,000 1, 11,000 33,300 77,700 30,000 47,700

If Mr. A treats Property I as self-occupied, the income from house property will be: Property I Property II Rs. 23,900 Rs. Nil Rs. 23,900

85

Taxation

If Mr. A treats Property II as self-occupied, the income from house property will be: Property I Property II Total Rs. Nil Rs. 47,700 Rs. 47,700

As taxable Annual Value is less in the First option, Mr. A should select that option.

4.5

DEDUCTIONS FROM INCOME FROM HOUSE PROPERTY UNDER SECTION 24__________________

69, Statutory Deduction [section 24 (a): 30% of Net Annual Value (NAV) 70, Deduction for interest on borrowed capital:
i) Interest is deductible on the borrowed capital as and when it accrues.

ii) Interest attributable to the period prior to completion of construction. In such case interest paid/payable for the period prior to the previous year in which the property is acquired/constructed (as reduced by any part thereof allowed as deduction under any other provisions of the Income-Tax Act.) will be aggregated and allowed in five successive financial years starting from the year in which the acquisition/construction was completed. Interest will be aggregated from the date of the borrowing till the end of previous year prior to the previous year in which house is completed and not till the date of completion of construction.

Computation of income of a property which is self-occupied for residential purposes or could not actually be self-occupied owing to employment '[section 23(2)(a)

&(b)]
As the gross annual value of such House Property is NIL, hence there is question of deduction for Municipal taxes paid.

Deduction under section 24 71, Section24 (a) - As NAV is nil, deduction under this section is nil.

86

72, Section 24 (b) - Deduction for interest paid on borrowed capital (including 1/5* of the accumulated interest of pre-construction period) Subject to ceiling as under -

Unit 4

Income from House Property and Other Sources

Sr. No. 1 2

Particulars Interest on borrowed capital for specific purpose Interest on borrowed capital on property acquired or constructed after 1 .04. 1999 and such acquisition or construction is completed within three years from the end of financial year from the end of financial year in which the capital was borrowed.

Amount of Deduction (Rs.)

30,000

4.6 INADMISSIBLE EXPENSES [SECTION 25] 150000 In the case of loan borrowed payable outside India, deduction will be allowed only if TDS is done or tax is paid. A) Unrealised Rent if realised subsequently (up to A.Y.2001-02) [Section 25A] The amount of unrealised rent recovered is taxable in the previous year in which it is recovered irrespective of ownership (whether it is in existence). The amount realised is taxable to the extent it was allowed as deduction u/s 24(1 ) (x). B) Unrealised Rent if realised subsequently (A.Y.2002-03 onwards) [Section 25AA] Any amount realised in the previous year to the extent it has not been earlier included in Gross annual Value is taxable irrespective of ownership (i.e. whether it is in existence). C) Arrears of Rent Received [Section 258] Where the assessee receives any arrears of rent during the previous year (which was not previously charged as income) is chargeable to tax. However, the arrear of rent is eligible for standard deduction under section 24 (a) (i.e. 30%). D) Co-ownership [Section 26]
73, If two or more persons jointly own a property and if their shares are definite and ascertainable, then the income from such property cannot be taxed as income of association of person.

7 4 , T h e s h ar e in c o m e o f e a c h s u c h, c o o w n er s h o ul d b e d et er m in e d a

nd included in

87

Taxation

m*

the Individual assessment. Each co-owner is entitled for the concessional computation relative to one self occupied property with reference to his share of property under his occupation, 3) When property is owned by two or more persons whose shares are definite and ascertainable, the share of each such person in the income from property is includible in his respective total income under section 22 even if the co owners are also receiving charge from the lessee for air conditioning facility, which is assessable as income from other sources. 4.7 INCOME FROM OTHER SOURCES SEC. 56 Section 56(2) of the Act lists the following specific incomes which are taxable under this head: a. b. Winning from lotteries, cross word puzzles, card games and other games. If the employer deducts certain amounts from the remuneration payable to the employees as contribution to provident fund or any other welfare fund, such contribution is basically included as income from Other Sources. However, if the employer deposits the contribution with the respective authorities before the due date for filing the returns, it is allowed as a deduction. Interest on securities - This income includes the interest received on Central or State Government securities. This also includes the interest on debentures or bonds issued by a company or a local authority or a statutory corporation. Hire charges received by the assessee by letting out the assets like machinery, furniture etc. If the hire charges consist of the amount for letting out the assets like machinery, furniture etc. along with letting of the buildings, such hire charges should be spilt as the hire charges for letting out the building and hire charges for letting out the other assets. Hire charges for letting out the building are taxed as Income from House Property. It should be noted that repairs & maintenance, insurance expenses etc. incurred for the assets which are let out and the hire charges on which assets are considered as a income from other sources, can be deducted from such income. e. Any sum received under a Keyman Insurance Policy, including any amount of bonus

c.

d.

Unit 4

Income from House Property and Other Sources

inclu Note : a) If from any of the above incomes, tax is deducted at source, the said income should be grossed up for including in the total income as income from other sources. The grossing up of such income should be done as below: Net Income X 100 100-Rate of TDS b) If the income from other sources consists of the income by way of winning from lotteries, cross word puzzles, horse race, gambling, betting etc., it will attract the tax at the flat rate of 30% as per the provisions of Section 115BB of the Act. 4.8 DEDUCTIONS FROM INCOME FROM OTHER SOURCES As a general principle of the Act, any expenditure incurred for earning the income which is included under the head income from other sources will be allowed as a deduction from such income provided that the following conditions are satisfied: ding

The expenditure should not be capital expenditure The expenditure should not be personal expenditure The expenditure must have been incurred exclusively for earning the income chargeable under the head income from other sources. There should be a clear relationship between the expenditure incurred and the income earned.

4.9 INADMISSIBLE EXPENSES SECTION (58):__________________________ Personal Expenses

Wealth Tax Expenses in the nature of Sec. 40A

Interest and salary payable outside India without tax deducted at source No deduction is allowed in case of winning from lotteries, card games, races

89

Taxation

horse races etc, however, in respect of owning and maintaining race horses, expenses incurred shall be allowed even in the absence of stake money received. Such loss can be carried forward and set off in accordance with provisions under section 74 A 4.10 ILLUSTRATIONS ___________________________________________________________________ 1. On 1st June 2005,-Mr. Ashok borrowed an amount of Rs. 3, 00,000 for the construction of his residential house on interest @ 12% per annum. During the course of construction, due to lack of funds, he borrowed a further loan of Rs. 2,00,000 on 1 st April 2006 on interest @ 14% per annum. Construction of the property was completed in the month of December 2006. Since January 2005, Mr. Ashok has been staying in the property. Municipal valuation of the property was assessed as Rs. 1,00,000. He paid the municipal taxes assessed amounting to Rs. 12,000 in the month of April 2006. Calculate the Income from House Property for the AY 2007-2008. Solution Calculation of Income from House Property Annual Value Less: Deduction u/s 24 Interest for the pre-construction period Being l/5th of Rs. 30,000 Interest for the current year Income from house property Rs. 6,000 Rs. 64,000 (-) Rs. 70,000 Rs.Nil

b.

2.

90

Can the Income from House Property be Negative?

It is possible that the income from house property can be negative. It can happen due to the following reasons a. In case of self occupied property, the Annual Value is considered to be Nil. Howevt;. the deduction is available in respect of interest on loan borrowed for the purpose d' purchase or construction of the house property. Such deduction is available to the extent of Rs. 30,000 or Rs. 1,50,000 depending upon the date on which the loan was borrowed. As such, the deduction is available even if there is no income from

Unit 4

Income from House Property and Other Sources

house property. This results R into the negative income from house property to the en extent of Rs. 30,000 of Rs. t 1,50,000. R b. In case of let out property, the statutory deduction is available to the extent of 30% of the Net Annual Value and the municipal taxes paid. Similarly, the deduction is available in respect of the interest on loan borrowed for the purchase or construction of the house property and that too without any limit. If the amount of interest is greater than the statutory deduction and the municipal taxes paid, the income from house property can be negative. 2. Mr. Ashok is the owner of a house property, municipal valuation of which is Rs. 60,000. The property was let out on a monthly rent of Rs. 6,000. During the AY 20072008, Mr. Ashok paid the municipal taxes amounting to Rs. 30,000 which include the arrears for the last two years. Mr. Ashok borrowed the loan for the construction of the property on which he paid the interest of Rs. 30,000 during the AY 2007-2008. Calculate the income from house property. Solution Calculation of income from house property for Mr. Ashok Municipal Valuation ec ei ve d R s. 7 2, 0 0 0 A n n ua l V al ue (b ei n g hi g he r

Rs. 60,000 of

the two)

4 ory Deduction 30% " 2 Rs. 12,600 Rs.

Rs. , Interest on loan borrowed 72,00 0 30,000 0 Less: Munic

0 Income from house property (-) Rs. 0 600

Such negative income from house ipal L property can be set off against other positive heads of income as Taxes e per the provisions of the Act. This paid s has been discussed in the unit on Set Off and Carry Forward of Rs. s Losses. 30,00 : 0 N e t A n n u a l V a l u e R s . 2 4 S t a t u t 9 1 u / s D e d u c t i o n

Taxation

Illustrative Problems 1. Mr. Mehra and his family members have occupied three houses for their residential purpose. The houses were constructed by Mr. Mehra. The particulars of the houses are as under: Particulars Standard Rent Fair Rent Municipal Valuation Municipal Taxes Paid Repairs Fire Insurance Premium paid H.No. 1 Rs. 30,000 36,000 16,000 2,400 Nil 1,600

H.NO. 2
Rs. 36,000 45,000 30,000 3,000 3,000 2,400

H.No.3 Rs. 60,000 55,000 45,000 5,400 6,000 Nil

Mr. Mehra borrowed Rs. 1,00,000 @20% per annum for construction of House No. 3 (Date of borrowing 1.4.1997 and Date of Repayment of Loan in one installment 1.8.2004) Construction of all the houses was completed on 1.5.2002. Compute the taxable income of Mr. Mehra for the Assessment Year 2007-2008. His income from other sources is Rs. 25,000. He has given the option to treat the third house as his self-occupied house. Solution Calculation of Income from House Property for Mr. Mehra Particulars Standard Rent Fair Rent Municipal Valuation Gross Annual Value
92

H.NO. i

Rs.

H.NO. 2
Rs. 36,000 45,000 30,000 45,000

H.No.3 Rs. 60,000 55,000 45,000 Nil

30,000 36,000 16,000 30,000

Unit 4

Income from House Property and Other Sources

Municipal Taxes Paid Net Annual Value Deductions u/s 24 Statutory Deduction Interest on loan borrowed Income from House Property

2,400 27,600 8,280 Nil 19,320

3,000 42,000 12,600 Nil 29,400

N/A Nil Nil 26,667 (-) 26,667

Calculation of Taxable Income of Mr. Mehra:

Rs.

Rs .

Income from House Property House No. 1 House No. 2 House No. 3 Income from Other Sources
Taxable Income

22,053 19,320 25,000 29,400 47,053 (-) 26,667

Note :

Loan borrowed for House No. 3 on 1st April, 1997. Total Interest till 31.3.2002 i.e. for a period of 5 years Rs. 1,00,000 The interest for pre-construction period will be allowed as deduction in 5 equal installments. For AY 2007-2008, interest for the pre-construction period will be Rs. 20,000. As the loan is repaid on 1 st August, 2004, interest for the period of 4 months will be allowed as deduction i.e. Rs. 6,667. 2. Mr. Bhide is the owner of a house property in Kolkata which was occupied by him for his own residence. He was transferred to Mumbai in June 2005 and therefore he let out the house with effect from 1 st July 2005 on a monthly rent of Rs. 3,500. The corporation tax is Rs. 6,000 for the house. 50% of the corporation tax was paid by him on 14th April 2005. Interest on money borrowed for the construction of the house amounts to Rs. 25,000. Compute the income from house property for the Assessment Year 20062007.

9 3

Taxation

Solution
Calculation of Income from House Property Gross Annual Value: Higher of the following two amounts Expected Rent Rs. 3,500 x 12 months Actual Rent Rs. 3,500 x 9 months Hence Gross Annual Value Less: Municipal Taxes Paid Net Annual Value Less: Statutory Deduction 30% of NAV Interest on Loan borrowed Income from House Property Rs. 2,300 3. Mr. Basu owns a house property the details of which are as below: Municipal Valuation Fair Rental Value Standard Rent Actual Rent Received Municipal Taxes Municipal Taxes paid 40% of the above Repairs charges for the property 10,000 Insurance Premium Rs. 7,500 Rs. Rs. 1, 00,000 Rs. 1, 12,000 Rs. 90,000 Rs. 11,000 per month Rs. 15,000 Rs. 42,000 Rs. 31,500 Rs. 42,000 Rs. 3,000 Rs. 39,000 Rs. 11,700 Rs. 25,000

20 08 .

Mr. B asu has borrowed an amount of Rs. 5,00,000 @ 10% per annum from HDFC on 1st April 1999 and construction of the property was completed in April 2001. Calculate the income from house property for the Assessment year 2007-

4.

94

Unit 4

Income from House Property and Other Sources

Insurance premium

Solution
Calculation of Income from House Property for Mr. Basu Expected Rent 90,000 Higher of Municipal Valuation And Fair Rental Value But Restricted to Standard Rent Rent Received (Being Rs. 11,000 x 12 months) Hence, Gross Annual Value Less: Municipal Taxes Paid Net Annual Value Less: a. Statutory Deduction 37,800 (Being 30% of NAV) Interest for pre-construction period 20,000 (Being l/5thofRs. 1,00,000 i.e. @10% on Rs. 5,00,000 for 2 years) c. Interest for the previous year 50,000 Income from House Property Rs. 18,200 Rs. Rs. Rs. 1, 32,000 Rs. 6,000 Rs. 1, 26,000 Rs. 1,00,000 Rs. 1, 12,000 Rs. 90,000 Rs. 1, 32,000 Rs.

b.

Rs.

4. Mr. Deshpande owns a house in Pune. Construction of this house was completed in 1992. 50% of the portion of the house was let out for residential purposes for the monthly rent of Rs. 4,000 but this portion remained vacant for a period of 4 months from May 2004 to August 2004. Municipal valuation of the property is Rs. 45,000. Mr. Deshpande used 25% portion of the property for his practice as Company Secretary and he used balance 25 % of the portion for his own residence throughout the year. Other expenses incurred for the property are as below : Municipal Taxes paid Repairs Interest on loan borrowed for renovation of the house 16,000 8,000 50,000

Municipal Valuation Rent Receivable i.e. 4000 x 1 2 Rent Received Hence, Gross Annual Value Less: Municipal Taxes paid Net Annual Value Interest on loan Income from House Property Not e: 25 % of the port ion of the pro pert y whi ch is use d for his pra ctic e as co mp any secr etar y shal l not be c 6.

Less: Statutory Deduction @30%

95

ffi&ufarT

Rs.

I ffefoufporfion / 6e/foccupied'
Rs.

7.

96

Particulars Municipal Taxes charged Municipal Taxes paid Interest on loan borrowed

Property A 30,000 20,000 30,000

Property B 40,000 25,000 28,000

Calculate the Income from House Property for the AY 2007-2008.

Unit 4

Income from House Property and Other Sources

Solution
Calculation of Income from House Property of Mr. Prabhu. As both the properties are partly self occupied and partly let out throughout the year, the benefit of treating the Annual Value as Nil will not be applicable to both the properties.

ffl

Sfll 00 I

>any

Property A Rs. Fair Rent Actual Rent received Hence, Gross Annual Value Less: Municipal Taxes paid Net Annual Value Less: Statutory Deduction @30% Interest on loan borrowed Income from House Property 1,20,000 60,000 1,20,000 20,000 1,00,000 30,000 30,000 40,000

Property B Rs. 1,44,000 72,000 1,44,000 25,000 1, 19,000 35,700 28,000 55,300

>le for

tyB
',000 : nnn

Mr. Ashok invested Rs. 1,00,000 in debentures issued by XYZ Ltd. XYZ Ltd. paid the interest on the debentures after deducting the tax @20% and the amount of interest received by Mr. Ashok amounted to Rs. 12,000. Calculate the amount of interest includible in the total income of Mr. Ashok.

Solution
Interest which should be considered to the income is calculated as Rs. 12,000
----------------

X 100 = Rs. 15,000

100-20 Mr. Ashok can get the credit for the amount of TDS i.e., Rs. 15,000 - Rs. 12,000, Till the Assessment Year 2003-2004, Dividend received by the assessee used to be one of the major incomes chargeable under this head. However, with effect from Assessment Year 2004- 2005, dividend received by the shareholders will be treated as the income exempt from tax under Section 10(34) of the Act. 9 7

Taxation

In practical circumstances, following incomes may be included under the head of income from other sources: a. b. c. d. e. Bank Interest Interest on deposits with the companies Interest received on delayed refund of income tax Interest on loan Insurance commission

f.' Agricultural income received from a land situated outside India g. Sitting fees received by a director for attending board meetings h. Remuneration received by a Member of Parliament i j. Family Pension - The amount of pension received by the legal heirs of a deceased employee. Interest on Income Tax Refund

From the Assessment Year 2005-2006, the following amount will be considered to be income from other sources as per the provisions of Section 2(24) (xiii). Any sum received by an individual in cash or a cheque or a draft or by way of credit or any amount received otherwise than by way of consideration for goods or services. However, following amounts will not be covered by the above section:

The amount received or credited from a relative out of natural love and affection.
The amount received or credited under a will or inheritance. The amount received by an employee or dependant of the deceased employee from the employer, by way of bonus or gratuity or pension or insurance solely in recognition of the services rendered by the employee.

For this section the term "relative" means: i.

98

Spouse of the individual Brother or sister of the individual

ii.

iii. Brother or sister of the spouse of the individual

Unit 4

Income from House Property and Other Sources

iv. Brother or sister of either of the parents of the individual

v. Any lineal ascendant or descendant of the individual vi. Any lineal ascendant or descendant of the spouse of the individual vii. Spouse of the person referred to in "ii" to "vi" above. >eT Activity B ; 1. What are the incomes chargeable to tax under income from other sources ?

2. Is dividend exempt under the act for shareholders?

4.11 SUMMARY __________________________________________________ This unit explains the concept of House Property under the IT Act. There are 3 main conditions for taxability under house property. Ways in which to determine the Annual Value of a property, are discussed. House property can be classified into 5 types :
75, House Property which is let out for rent throughout the Previous Year 76, House Property which is let out but remains unoccupied for the whole or part of the year. 77, House Property which is self-occupied by the assessee for residential purposes. 78, House Property which is let for part of the year and is self-occupied for part of the year. 79, The assessee holds more than one House Property for self-occupation.

99

Taxation

Income from Other Sources is the fifth and the residual head of income. The income which cannot be taxed under any other heads of income is taxable under this head of income. If the assessee follows accrual system of accounting, such incomes will be taxed on accrual basis and if the assessee follows cash system of accounting, such incomes will be taxed on cash basis.

4.12 KEYWORDS

Income from House Property : The Annual Value of property consisting of any buildings or lands of which the assessee is the owner, other than such portion of such property as he may occupy for the purposes of any business or profession shall be chargeable to income tax under the head "Income from House Property". Income from other sources : Income from Other Sources is the fifth and the residua! head of income. The income which cannot be taxed under any other heads of income is taxable under this head of income. Interest Income : Any interest income received by person will be charged under this head of income. Dividend : Dividend is distribution of profits among shareholders by companies. It is exempt in the hands of shareholders. Grossing up of income : If from any of the incomes, tax is deducted at source, the said income should be grossed up for including in the total income as income from other sources

4.13 SELF-ASSESSMENT QUESTIONS

Q 1 . Explain the step-by-step process of calculating the Income from House Properties. Q2. What do you mean by Annual Value? Explain the significance of the term Annuai Value? How is it calculated in case of let out property and self occupied property ' Explain the deductions available for calculating the Net Annual Value. Q3 . State and explain the various deductions while calculating the Income from House Property. Q4. State and explain the provisions of Income tax Act, 1961 in respect of : Self occupied property More than one self occupied house properties

100

5.1 INTRODUCTION Section.2(\3) defines the term "Business" to include trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Section 2(%) indicates that the word' 'Profession'' will include vocation. General principles vAtile computog the Profits from Business & Profession: a. The business or profession must be carried on by the assessee. The business or profession must be carried out during the previous year. The profits earned from the business and profession, calculated according to the method of accounting employed by the assessee, is charged to the tax. The profits from business and profession shall be calculated for each and every business or profession carried on by the assessee and all such profits shall be combined calculate the profits from business and profession.

b.

AY

furP
5.2.3 Depw The tax Other Sect Allowables 35CC 5.2.4 Oth< Following business ai a. b. Any i destr Any force forC An> whe had No i av c cot d.
AT

b. c. d.

5.2 EXPENSES ALLOWED AS DEDUCTIONS - SECTION 30 TO SECTIONS? __________________________________________________________ 5.2.1 Rent, Rates, Repairs, Taxes and Insurance on Buildings - Section 30
In respect of building used for business and profession, following expenses are expressly allowed as deduction while calculating the profits from business and profession: a. b. c. d. When the premises used for business and profession is taken on rent, the rent paid or payable by the assessee to the landlord are allowed as expenses. The amount of current repairs incurred by the assessee for the purpose of maintaining an already existing building is allowed as expenses. The amount of municipal taxes paid by the assessee is allowed as expenses. Any insurance premium paid by the assessee for insuring the building against the risk of damage or destruction is allowed as expenses.

c.

5.2.2 Repairs and maintenance of machinery, plant & furniture - Section 31

following

N i f o

Unit 5

Profit and Gains from Business and Profession

a. The amount of current repairs incurred by the assessee for the purpose of maintaining already existing machinery, plant or furniture is allowed as expenses. b. Any insurance premium paid by the assessee for insuring the machinery, plant or furniture against the risk of damage or destruction is allowed as expenses.
5.2.3 Depreciation - Section 32

The tax implications of Depreciation are discussed in detail in the Annexure. Other Sections Allowability of expenses under sections 33AB, 33ABA, 33AC, 35, 35ABB, 35AC, 35CCA, 35CCD, 35D and 35E are discussed in the chapter on "Tax Audit".
5.2.4 Other deductions - Section 36

Following deductions are expressly allowed as expenses while calculating profits from business and profession: a. Any insurance premium paid for insuring stocks and stores against risk of damage or destruction. [Section 36(l)(i)j b. Any premium paid by the assessee by cheque as an employer to effect or keep in force insurance on the health of his employees. In normal language, insurance premium for Group Insurance Scheme. [Section 36(l)(ib)] c. Any amount paid to an employee as Bonus or Commission for services rendered where such amount would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. [Section 36(l)(ii)J Note: The above provision is to curtail the tendency on the part of companies to avoid the tax by showing their members as employees and paying them bonus or commission instead of paying them the dividend. d. Any amount of interest paid in respect of funds borrowed for the purpose of business. [Section 36(l)(iii)] Note: The amount of interest on funds borrowed for the extension of existing

b us in es s fo r a n y p er io d c o m m e n ci n g fr o m th e d at e o n w hi c h th e fu n ds w er e b or ro

wed till the date such asset was first put to use, shall not be allowed as deduction. In other

107

Taxation

words, the Profits & Gains from Business & Profession interest on funds borrowed for the period before the asset was first put to use needs to be capitalised. e. Any amount paid by the assessee as an employer by way of contribution to a recognised provident fund or a superannuation fund [Section 36( 1 )(iv)]. Any amount paid by the assessee as an employer by way of contribution to an approved gratuity fund created by him for the exclusive benefit of the employees. [Section 36(1 )(v)] In order to curb the tendency on the part of certain employers to deduct the amounts from the salaries and wages payable to the employees towards the various welfare schemes like PF, ESI etc. and not paying the same amounts to the respective authorities for a very long time, the Act provides that any amount deducted from the salary of the employees towards the employee's contribution to provident fund or ESI or superannuation fund or any other welfare scheme for the benefit of the employees is treated as the income of the employer. However, if such employees' contribution is actually paid on or before the due date for filing of return of income, the same will be allowed as deduction. [Section 36(1) (va)]

f.

g.

h. The amount of any bad debts which is written off by the assessee as irrecoverable in the books of accounts will be allowed as deduction if such debt has been taken into consideration as income in the previous year or any of the earlier previous year and such debt must be incidental to the business or profession carried on by the assessee. However, any provision made for the bad debts will not be allowed as the expenditure while calculating the profits from business and profession. [Section 36(1 )(vii)] i. Any bona fide expenditure incurred by a company for promoting the family planning among its employees is allowed as expenditure. If such expenditure is of capital nature, 1/5th of such expenditure is allowed in the year in which it is incurred and the balance is deductible in four installments in the next four years. [Section 36(l)(ix)]

108

5.2.5 ed wholly and exclusively for the purpose of business or profession is allowed as a Gener deduction while computing "Profits and Gains from Business or Profession". al Deduc tions Sectio n 37(1) Any other expen diture (not being the expen diture referr ed to in Sectio n 30 to 36 of the Act) and not being the expen diture in the natur e of capita l expen diture or perso nal expen diture of the assess ee and incurr

UnitS

Profit and Gains from Business and Profession

f u lf il l e d t o a a. The expenditure should not v a be capital expenditure. il d b. The expenditure should not e d be personal expenditure. u c. The expenditure should have c ti been incurred during the previous o n s year. ? d. The expenditure should have been incurred wholly and exclusively for the purpose of business or profession. The above description indicates that Section 37 is a residuary section. The expenditure which is not covered by Sections 30 to 36 gets covered by this section. Following basic conditions should be satisfied for claiming the deduction under this section. >gT Activity A: 1. Discuss deduction under section 30 of Income Tax Act. 5 . 3 C A P I T A L E X P E N D I T U R

2. What are the deductions under section 36 of Income Tax Act?

3. Define General Deductions. What are the conditions to be

E n VS. u REV e EN UE EXP EN DIT URE As capit al expe nditu re is not allo wed as a dedu ction whil e com putin g the Profi ts from Busi ness and Prof essi on, corr ect dete rmin atio n of capit al expe ndit ure and reve

109

'"""

Taxation

expenditure is of utmost importance. The terms are not specifically defined under the Act. It is a matter of interpretation based upon the basic accounting practices. Following are some of the types of expenditures which are held as capital expenditures and not allowed as deductible expenditures while calculating the profits from business and profession: a. b. c. d. e. 1
s

Expenditure incurred by a company in connection with the issue of new shares Registration charges in connection with the increasing of authorised share capital of the company Expenditure in connection with the issue of rights shares - CIT Vs. Motor Industries Company Limited Expenditure incurred in connection with the issue of bonus shares - CIT Vs. Ajit Mills Limited Expenditure incurred in connection with the issue of preference shares of the company - Bombay Burmah Trading Corporation Limited Vs. CIT Expenditure incurred for shifting of the registered office - CIT Vs. Jamshedpur Engineering and Machine Company Limited < Expenses for launching a new project-Indian Oxygen Limited Vs. CIT Expenses incurred for getting the proj ect report prepared even if the proj ect does not materialise. !

I * ;

f. g.

i
h.

Following are some of the types of expenditures that are allowed as revenue expenditures while calculating the profits from business and profession: a. b. c. Amount paid to the employees for inducing them to take premature retirement - CIT Vs. Assam Oil Company Limited Expenditure incurred on stamp duty, registration fees, legal expenses on the issue of debentures by the company - Premier Automobiles Limited Vs. CIT Expenditure incurred as discount on issue of debentures - Madras Industrial Corporation Limited Vs. CIT h i.

ty

110

Unit 5

Profit and Gains from Business and Profession

d. Premium on the redemption of debentures - CIT Vs. Tungabhadra Industries Limited Brokerage or commission paid to obtain certain premises on lease

e. f. Amount paid to the competitor in

order not to bid at auction sale to enable to get the stock at reasonable price A g. Legal expenses in connection ll o with resolving the winding up w a petition by the shareholders bl e Business Expenditure E x The basic requirement of Section p 37 is that the expenditure should e have been incurred by the n assessee wholly and exclusively di for the purpose of business. tu Unless this condition is satisfied, re the expenditure incurred will be considered to be disallowable expenditure. Whether the expenditure is incurred wholly E and exclusively for the business x or not is a matter of p interpretation. Following are e some of the cases of n expenditures which are di considered to be allowable tu business expenditure or re disallowable business in c expenditure: o

n n e c ti o n w it h t h e st a m p d u ty , r e g is tr a ti o n c h a r g e s, l e g a l e x p e n

s e s e t c c. . i n d.

paid by the assessee to the Government for legalising unauthorised construction - Jaswant Trading Company Vs. CIT Expenditure for stamp duty and registration charges for agreement with bank for overdraft facilities Interest paid to the sales tax

c department on arrears of sales o tax payable n n e. Interest paid on fixed e c deposits borrowed to pay the t excise duty i o f. Interest paid for delayed n remittance of provident fund wdues i t g. Interest paid on funds h borrowed for the payment of t dividend h h. Compensation paid by the e assessee for the breach of contract - CIT Vs. Todi Tea l Company Limited e a i. Damages paid to a worker ill s to dismiss him in the interest of e business j. Expenditure by way of bank guarantee commission - Vikram A Mills Limited Vs. CIT m o u n t

c.

Compensation paid by the assessee for the breach of contract in respect of purchai of a capital asset - Swadeshi Cotton Mills Company Limited Vs. CIT
d. Litigation expenses in connection with the recovery of a debt which is not a trading debt e. Penalty paid to the sales tax department for the delayed payment of sales tax dues CIT Vs. Jolly Steel Industries Private Limited Penalty paid for the delayed remittance of delayed PF dues

f.

5A EXPENDITURE NOT ALLOWED AS DEDUCTIONS________________

Following expenditures are expressly not allowed to be deducted while computing the Profits from Business and Profession: 5.4.1 Section 40(a) a. Any interest, royalty and fees for technical services which is payable outside India or in India to a non-resident (not being a company or a foreign company) on which tax has not been deducted or after deduction has not been paid before the expiry of time prescribed under the Act.

b. Any interest, commission or brokerage, professional fees or fees for technical services,

UnitS

Profit and Gains from Business and Profession

calculating the income from business or profession. However, the said amounts will be allowed as expenditure in the previous year in which they have been paid. c. Any sum paid on account of rate or tax on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains. Any payment which is chargeable under the head "Salaries" payable outside India or to a non-resident and if the tax has not been thereon or deducted therefrom.

d.

e. Any sum paid on account of wealth tax. 5.4.2 Section 40(b) This section refers to the interest on capital and salary/remuneration paid by a firm to its partners. The discussions about the extent to which these payments can be made by the firm to its partners have been made in the unit on "Taxation of Partnership Firms". Any payment in excess of the limits specified therein is not allowed while computing the Profits from Business and Profession. 5.4.3 Section 40A (2) If the assessee incurs any expenditure in respect of which

t h e p a y m e n t h a s b e e n m a d e o r is t o b e m a d e t o c e rt a i n s p e c if i e

d perso ns and the Asse ssing Offic er is of the opini on that the said expe nditu re is exces sive or unrea sona ble as comp ared to the mark et value of the good s, servi ces or facilit ies for whic h the paym ent has been made

o sessee therefrom, such r excessive or unreasonable expenditure shall not be allowed i as business expenditure. s For the purpose of this Section, t the term "Specified Persons" o may take the following forms b If the Assessee is an Individual e m a d e o r t h e b e n e f i t d e r i v e d b y t h e a s a. Any relative (i.e. spouse, brother, sister, lineal ascendant or descendant) of such individual. h. Any person (individual, company, firm etc.) having a substantial interest in the business or profession of the individual or any director or partner of such company or firm or any relative of such person.

11 3

Taxation

c.

Any person (company, firm etc.) of which a director or partner has a substantial interest in the business or profession of the individual or any director or partner of such company, firm etc. or any relative of such person. Any person who carries on a business or profession and in his business or profession, the assessee himself or his relative has a substantial interest.

d.

If the Assessee is a company a. b. Any director of the company or his relative Any person (individual, firm, company etc.) having a substantial interest in the business or profession of the company or any director or partner of such firm or company or the relative of such person. Any person (company, firm etc.) of which a director or partner has a substantial interest in the company or any director or partner of such company or firm or the relative of such person. Any person who carries on a business or profession and in his business the assessee or any director of such company or relative of such director has substantial interest.

c.

d.

If the Assessee is a Firm a. b. c. Any partner of the firm or his relative Any person having the substantial interest in the business or profession of the firm or any director or partner of such company or firm or any relative of such person. Any person of which a director or partner has substantial interest in the business or profession of the firm or any director or partner of such company or firm or any relative of such person. Any person who carries on business or profession and in his business or profession the assessee or any partner of such firm or relative of such partner has substantial interest.
b.

d.

Meaning of "Substantial Interest" A person shall be deemed to have substantial interest in a business or profession ifa. If the business or profession is carried on by a company, such person is the beneficial owner of '20% of the shares carrying the voting rights.

114

Unit 5

Profit and Gains from Business and Profession

b.

In any other case, such person who is beneficially entitled to more than 20% of the profits of such business or profession.

5.4.4 Section 40A (3) - Read with Rule 6DD if an assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 20,000 otherwise than by a crossed cheque or a crossed demand draft, 20% of such expenditure shall not be allowed as deduction. However, Rule 6DD provides for certain exceptions stated below where the expenditure, even exceeding Rs. 20,000, shall be allowed as expenditure even though the same is not made by a crossed cheque or a crossed demand draft. Exceptions : a. Payments made to banks

b. If the payment is made in a village or a town which is not served by any bank, to any person who ordinarily resides or is carrying on any business or profession or vocation in any village or town. c. If payment is required to be made on a day on which banks were closed on account of holiday or strike.

5.4.5 Section 40A (7) Any amount of provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason shall not be allowed as expenditure while computing the Profits from Business and Profession, except when the provision has been made for the purpose of payment made as a contribution to an approved gratuity fund or when the payment has been made for any gratuity that has been payable during the previous year. In other words, the amount of gratuity will be allowed as deduction only when: a. the amount of gratuity has actually become payable to the employees during the previous year. b. the provision has been made for the payment of a sum by way of contribution to an approved gratuity fund. 5.4.6 Section 43B Section 43B of the Act provides that the following payments are allowed as deduction only if they are actually paid for. However, if the assessee follows mercantile system of

115

Taxation

accounting, the said payments can be claimed on "due" basis as well provided that the payment of the same is made on or before the due date of furnishing the return of income. The various payments which are referred to the said section are as below : a. Any sum payable by the assessee by way of tax, duty, cess or fee by whatever name it may be called. In practical situations, these amounts include taxes like sales tax, excise duty, customs duty, professional tax etc. It may happen in practical situations that some of these payments don't affect the profitability of the assessee. Eg. Indirect taxes like sales tax, excise duty etc. Still they are added back as disallowable expenditure as per the provisions of the said section. Any Employer 's Contribution payable by the assessee towards any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees. Any sum payable by the employer to the employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. Any sum payable by the assessee as interest on any loan or borrowed by him from any public financial institution or state financial corporation as per the terms on the agreement. Any sum payable by the assessee as interest on any loan or advances borrowed by him from any scheduled bank as per the terms of the agreement. Any sum payable by the employer in respect of any leave standing to the credit of the employee (i.e. in simple words, Leave Encashment)

A ct iv it y B : 1. What do you mean by disall owan ces under the Act?

b.

c.

d.

e.

f.

116

It goes without saying that if any of the above amounts are not allowed as deduction in any of the previous years but are paid during the current previous year, they will be allowed as deduction during the current previous year.

c.

Unit 5

Profit and Gains from Business and Profession

2. Discuss the conditions to be fulfilled under section 43B of Income Tax act.

3. If assessee incurs cash expenses of Rs. 50000, what will be amount which can be disallowed under Act?

4. Discuss Section 40A (2) of Income Tax Act.

5.5 ALLOWABILITY OF CERTAIN EXPENDITURES a. Following expenditures which were subject to certain restrictions earlier, are now allowed as expenditures without any limit -

Entertainment Expenditure Advertisement Expenditure Travelling Expenditure Expenditure on the maintenance of Guest House

Note: Expenditure incurred by an assessee on advertisement in any brochure, tract, pamphlet or like published by a political party shall not be allowed as business expenditure. b. Deposits made under "Own Your Telephone Scheme" and 'Tatkal Telephone Deposit Scheme" is allowed as business expenditure. c. Professional Tax by a person carrying on business is allowed as business expenditure.

117

Taxation

fr li;

d. e. f. g.

Expenditure incurred by way of fees etc. in connection with any proceedings under Income Tax Act are allowed as business expenditure. Sales tax and expenses in connection with the proceedings for the assessment of sales tax are allowed as business expenditure. Expenditure incurred in connection with the local festivals like Diwali etc. are allowed as business expenditure. Insurance premium paid for the Loss of Profit policy is allowed as business expenditure.

h. Any expenditure incurred by the assessee for any purpose which is an offense or which is prohibited by law shall not be allowed as business expenditure. i. As per the provisions of Section 35DD A of the income tax Act, if the assessee incurs any expenditure by way of payment of any amount to an employee at the time of voluntary retirement in accordance with any scheme of voluntary retirement, l/5th of the amount shall be deducted while calculating the profits from business and profession of that previous year while the balance shall be deducted in four equal installments during each of the following previous years. Computation of Profits from Business and Profession For the purpose of calculation of Profits from Business and Profession, Profit and Loss Account prepared as per the Financial Accounting is considered to be the starting point and after making the adjustments to the profit as per Profit and loss Account, Profits from Business and Profession as per the Income tax Act, 1961 is arrived at. Atypical format for such calculations is given below Profit as per Profit and Loss Account Add: Expenses debited to P & L Account, but disallowed for Income tax purposes a. b. c. d. e. f. g. Capital Expenditure Personal Expenditure Income Tax / Wealth Tax Expenditure disallowable under Section 40 Expenditure disallowable under Section 40A Other disallowable expenditure Depreciation as per Profit and Loss Account

118

UnitS

Profit and Gains from Business and Profession

Add: Income not credited to P & Salary to Mr. Pawar L Account but to be treated as Contribution to PF income Income tax Less: Amounts credited to P & L Previous year expenses Account but not taxable from Depreciation Income tax Purposes as Profits from Business and Profession: Net Profit a. b. Dividend Income (NonIncome by way of rent taxable) (Taxable as Income from House Property) c. d. e. f. Capital Gains (Taxable as Refund of Income tax Any other refund not Bad Debts recovered not Capital Gains)

0, 30,000 0, 15,000 0, 10,000 0, 03,500 0, 18,000 1, 51,000 7, 95,000 Total

Total

allowed as deduction earlier allowed as deduction in earlier years g. Depreciation as per Income tax rules 5.6 ILLUSTRATIONS _____________________________________________

1. Following is the Profit and Loss Account of Mr. Pawar for the year ending on 31 st March 2007. Expenditure Salaries & Wages Advertisement Expenses General Expenses Insurance Expenses Interest on Bank Loan Interest on Capital

4, 80,000 0, 28,000 0, 15,000 0, 04,500 0, 28,000 0, 12,000

119

Taxation

Additional Information a. b. Depreciation as per Income Tax rules (including the depreciation on sign board mentioned below) amounted to Rs. 24,500. Salaries and Wages include an amount of Rs. 60,000 being the salary paid to Mrs. Pa war, who is employed as Administration Manager. The salary is considered to be excessi veto the extent of Rs. 12,000. General Expenses include the expenditure incurred by Mr. Pawar for hosting a party in the honour of his friend who has returned from USA, amounting to Rs. 5,000. Interest on Bank Loan includes an amount of Rs. 8,000 being the interest for the quarter ending 31 st March, 2005 which is not paid till the date of filing the return. Advertisement Expenses include an amount of Rs. 3,000 towards fixing a permanent signboard on the office premises. Depreciation allowable on the signboard amounts to Rs. 750. An amount of Rs. 1,200 was disallowed in the immediately preceding previous year for the Employer's Contribution to PF which remained unpaid on the due date for filing the return of that year. The same was paid during the previous year ending on 31st March 2007.

c. d. e.

f.

g. Tax deducted at source on interest on debentures amounted to Rs. 3,000. Calculate the Profits from Business and Profession for Mr. Pawar for the AY 2007Solution
;

Calculation of Profits from Business & Profession Particulars Profit as per Profit and Loss Account Add: Inadmissible Expenses Depreciation (Considered separately) Salary to Mrs. Pawar (Considered excessive) General Expenses being Personal Expenditure Interest on Bank Loan allowed on payment basis Cost of signboard being Capital Expenditure

Rs.

Rs.
1,51,000 18,000 12,000 5,000 8,000 3,000

120

Units

Profit and Gains from Business and Profession

Contribution to PF allowable on payment basis Interest on Capital Salary to Mr. Pawar Income Tax Previous year expenses ,

1 2 0 0 1 2 , 0 0 0 3 0 , 0 0 0 1 0 , 0 0 0 3 , 5 0 0 80, 02,700

81, 53,700
Less: Income not taxable as Business Income I 12 ,0

0 2. Dr. B h al e, a m e di c al pr a ct it io n er , m ai nt ai n s hi s b o o k s of a c c o u nt s o n c as h

b a s i s . Receipts Balance b/fd FConsultation Fees o Visit Fees l l Sale of Medicines o Dividend Received wInterest on Securities i Bank Interest n Rent received g Bank Loan for Car

Account for the year ending on 31 st March 2007. Calculate the Gross Total Income of Dr. Bhale for the AY 2007-2008.

Rs.
18,000 40,000 70,000 65,300 20,000 18,000 12,300 24,000 80,000 12,000 22,000 26,200 12 1 59,600

i Honorarium as Paper s Setter Interest on Bank Loan Balance c/fd t Total h e R e c e i p t s a n d P a y m e n t

Taxation

Additional Information a. b. c. d. e. Rent of the clinic includes the rent paid for the quarter ending on 31 st March 2006, amounting to Rs. 7,500. Telephone in the clinic was used for personal purposes to the extent of 20%. Opening and closing stock of medicines amounted to Rs. 8,000 and Rs. 9,000 respectively. Rent received indicates the amount received from a sub-tenant who uses the clinic on table space basis. Car was purchased on 10th May 2006 and the equipment was purchased on 12th January 2007. 50% of the Medical Books were purchased on 18th April 2006 and the balance on 19th December 2006. g. A cash payment of Rs. 15,000 was given to him by one of his patients in appreciation of his services. The same were not accounted for in the books of accounts.

Solution Calculation of taxable income for Dr. Bhale Particulars Profits from Business and Profession Gross Receipts Consultation Fees Visit Fees Sale of Medicines Appreciation from patient Less: Admissible Expenses Rent Telephone Expenses Medicines Consumed Salary to Staff

Rs.

Rs.

2, 40,000 0, 70,000 0, 65,300 0, 15,000 3, 90,300 48,000 17,920 49,200 72,800

122

Unit 5

Profit and Gains from Business and Profession

Interest on Bank Loan Depreciation on Medical Books Depreciation on Car Depreciation on Equipment Profits from Business and Profession Income from Other Sources Interest on Securities Bank Interest Rent Received Honourarium as Paper Setter Income from Other Sources Gross Total Income
Notes :

22,000 11,250 40,000 10,000 2,71,170 1, 19,130 18,000 12,300 24,000 12,000 0, 66,300 1, 85,430

a.

As the records are maintained on cash basis, rent paid for the quarter ending on 31 st March, 2007 will be allowed as expenditure as the same is paid in the current year.

b.

M e d i c i n e s

c o n s u m e d

: O p e n i n g

a r e

S t o c

c a l c u l a t e d

P u r c h a s

a s

e s

c. C l o s i n g

200 - Rs. 9,000 = Rs. 49,200 Depreciation allowable on Medical Books will be @ 100% on books purchased on 18th April, 2006 and @50% on books purchased on 19th December 2006.

d. Depreciation allowable on Car will be @20% as the car was purchased on 10th May, 2006. e. Depreciation allowable on Equipments will be @ 12.5% as the equipments were purchased on 12th January, 2007. From the Profit and Loss Account given below, calculate the Profits from Business and Profession of Mr. Ashok for the year ending on 31 st March, 2007.

S t o c k R s. 8, 0 0 0 + R s. 4 8, 3.

123

Taxation

Expenditure Opening Stock Purchases Wages Salaries Bad Debts Rent Interest paid General Expenses Income Tax Legal Expenses Insurance Expenses Conveyance Depreciation Bad Debts Reserve Net Profit Total Additional Information a.

Rs.
01, 80,000 12, 60,000 01, 64,000 00, 46,000 00,06,000 00, 18,000 00, 20,000 00, 72,000 00, 21,000 00, 08,000 00, 03,000 00, 08,000 00, 30,000 00, 05,000 02, 80,000 21, 21,000

Income Sales Commission Interest received Closing Stock

Rs. 18, 00,000 0, 75,000 0,30,000 02, 16,000

Total

21,21,000

Salaries include Rs. 24,000 paid to the wife. She is a housewife and does not spend any time for the business. Depreciation as per Income Tax rules amounted to Rs. 34,000. (Including the depreciation on furniture mentioned below) Legal charges include Rs. 4,500 paid as penalty for violating the customs

b.

c.

rules. d. e. General Expenses include Rs. 3,000 paid for purchases of furniture. Half of the conveyance expenses are related to the private use of the

proprietor.
124

f.

Opening Stock and Closing Stock was valued at 10% below the cost.

Solution Calculation of Profits from Business and Profession

Unit 5

Profit and Gains from Business and Profession

R s . 0 2 4, 0 0 0 3 0, 0 0 0 0 4, 5 0 0 0 3, 0 0 0 0 4, 0 0 0 2 1, 0 0 0 0 5, 0 0 4 0 , 0 0 0

Profit as per Profit and Loss Account Add: Inadmissible Expenses Salary paid to wife Depreciation (Considered separately) Legal charges for violating customs rules Purchase of furniture being capital expenditure Conveyance expenses being personal expenditure Income Tax Bad Debts Reserve Stqck valuation difference Sub-Total Less: Depreciation as per Income Tax Rules Profits from Business and Profession

3, 77 ,5 00

I , 8 0 , 0 0 0

Expenditure Salaries 68,000 Rent 24,000 Printing and Stationery 05,700 Telephone expenses Travelling and Conveyance 0,12,800 25 Interest 72,000 Depreciation 24,000 Legal Fees 12,000 Auditor's Fees 10,500 Contribution to Provident Fund Net Profit 1,24,000 06,500 Total 85,000

1 M /s A sh o k Tr ad in g, a pr o pr ie ta ry co nc er n su b m its the foll owi ng Prof it and Los s acc ount for the year endi ng on 31 st Mar ch, 200 7.

12 5

Taxation

Additional Information
a. b. c. d. Salaries include Rs. 1,20,000 paid to the son of the proprietor. Reasonable salary would have been Rs. 60,000 Interest paid includes Rs. 10,000 being the interest paid on loan borrowed for personal purposes. Out of the contribution to Provident Fund, an amount of Rs. 8,000 was not paid till the date of filing the return. Purchases are made by issuing the crossed Cheques or demand drafts, except in the case of one bill for Rs. 65,000 for which the payment was made in cash. The said bill has been debited to Trading Account as the purchases. Depreciation as per Income tax Rules amounted to Rs. 21,000.

e.

Solution Calculation of Profits from Business and Profession

Particulars Profit as per Profit and Loss Account Add: Inadmissible Expenses Salary paid to son Depreciation (Considered separately) Interest on Loan Contribution to PF (allowable on payment basis) 8,000 Cash Purchases - 20% disallowed (Rule 6DD)
1, 06,500 60,000 24,000 10,000

Rs.

Rs.

c.

13,000

Sub-Total
Less: Depreciation as per Income Tax Rules Dividend from UTI (Exempt from Tax) 21,000 12,000

82, 5,000 83, 1,500

d.
2

e.

Profits from Business and Profession

0, 33,000 1,88,500

126

Note: As bad debts recovered were allowed as deduction in the earlier years, the same;, will be taxable in the current year.

Unit 5

Profit and Gains from Business and Profession

5. Following is the Profit and Loss Account of Mr. Pande for the year ending on 31 st March 2007. Expenditure Opening Stock Purchases Wages Rent Repairs & Maintenance of car Wealth Tax Paid Staff Welfare Expenses Miscellaneous expenses Depreciation on car Income Tax Net Profit c/fd Total Additional information a. Mr. Pande carries out the business from a rented house, half of which is used for his residence.

Rs.
30,000 80,000 40,000 12,000 06,000 04,000 06,000 20,000 08,000 02,000 52,000 2, 60,000

Income Sales Closing Stock Gift from father Sale of Car Income Tax Refund

Rs.
1, 60,000 0, 40,000 0, 20,000 0, 34,000 0, 06,000

Total

2, 60,000

b. Staff welfare expenses include Rs. 3,000 paid for the medical treatment of Mr. Pande's wife. c. Mr. Pande bought a car for Rs. 40,000. He charged the depreciation on the car @20% the said car was sold for Rs. 34,000 and the proceeds were credited to Profit and Loss Account. The car was" used 50% for personal purposes.

d. Wages and Salaries include Rs. 4,000 paid to the driver of the car and Rs. 2,000 paid to the domestic servant of Mr. Pande. e. Miscellaneous expenses include Rs. 3,000 paid as penalty for violation of octroi regulations. Calculate the profits from Business and Profession for the AY 2007-2008.

127

Taxation

Soluation
Calculation of Profits from Business and Profession

Particulars
Sales Less: Admissible expenditure Material consumed Wages and Salaries Rent Repairs and Maintenance of Car Staff Welfare Expenses Miscellaneous Expenses

Rs .
1,60,000 70,000 36,000 6,000 3,000 3,000 17,000

R s.

1, 35,000

Profits from Business and Profession

25,000

128 Notes : As the car was sold during the year,

no depreciation will be allowed on car. However, other expenses relating to the car i.e. repairs of the car and driver's salary will be allowed to the extent of 50%. 6. M/s Ashok Industries Limited, a manufacturing company, has prepared the Profit and Loss Account for the year ending on 31 st March 2005 showing the profit of Rs. 8,40,000 after debiting the following amounts a. Provision for gratuity payable to the employees - Rs. 29,000. b. Professional Fees payable to the Chartered Accountant - Rs. 50,000 out of which Rs. 25,000 is paid for representing the case before the Appellate Tribunal. c. During the year, the company made a public issue of debentures. The issue expenses relating to the issue amounting to Rs. 25 Lakhs have been debited to Profit and Loss Account entirely. An amount of Rs. 12 Lakhs was debited to Profit and Loss Account towards the excise duty payable. Out of this, an amount of Rs. 70,000 was not paid even before filing the income tax return. Purchases of goods for which the payment is made by way of bearer cheques Rs. 1,20,000.

d.

e.

Unit 5

Profit and Gains from Business and Profession

f. g.

Expenses in connection with the increasing of the amount of authorised share capital-Rs. 18,000 Advertisement expenditure which included Rs. 1,80,000 for the advertisement in various media of advertising and Rs. 10,000 for the advertisement in the brochure issued by a political party.

h. Fine paid in lieu of confiscation of certain imported goods import of which is legally banned - Rs. 25,000. i. During the year, the company announced a scheme of voluntary retirement for the employees. Against this scheme, the company paid a total amount of Rs. 45 Lakhs which is entirely debited to Profit and Loss Account. Calculate the profits from business and profession for the AY 2007-2008, Solution Calculation of Profits from Business and Profession

Particulars Profit as per Profit and Loss Account Add: Inadmissible Expenses Provision for Gratuity - Section 40A(7) Excise Duty payable -Allowable on payment basis - Section 43B Purchase of goods with bearer Cheques - 20% Disallowed as per Rule 6DD Expenses in connection with increasing authorised Capital being capital expenditure Advertisement in brochure of a political party Fine for imported goods confiscated Payment for VRS allowed to be amortised over a Period of 5 years - Section 35DD Profits from Business and Profession

Rs.

Rs. 8, 40,000

29,000 70,000 24,000 18,000 10,000 25,000 36, 00,000 37, 76,000 46, 16,000

12 9

Taxation

Notes : a. b. Professional fees payable to the Chartered Accountant will be allowed as expenses. Expenditure incurred in connection with the issue of debentures is allowed as business expenditure.
"

c.

Compensation paid on VRS can be claimed as deduction during the next four years in equal installments. During the current year, only l/5th will be allowed as business expenditure.

7. Discuss the tax treatment of the following items which have been debited or credited while preparing the Profit and Loss Account of 'A Limited' for the year ending 31 st March 2007. a. An amount of Rs. 30,000 is debited to Profit and Loss Account towards the excise duty payable for the previous year ending on 31 st March 2005. The said amount is not paid till the date of filing the income tax return. An amount of Rs. 1,20,000 has been debited towards the travelling expenses of a Director who travelled abroad for the negotiations in respect of purchase of machinery. An amount of Rs. 5 Lakhs was paid as lump sum for the acquisition of technical know how. A technical consultant was paid the consultancy charges of Rs. 25,000 in cash and the deduction was claimed for the expenditure. Provision was made for gratuity as per actuarial valuation amounting to Rs. 1, 00,000. Stock in trade held by the assessee was destroyed by fire and the same was j debited to Profit and Loss Account. The cost of this stock was Rs. 25,OOQf while the selling price of the same was Rs. 30,000. An amount of Rs. 3 Lakhs was paid to the employee as bonus and the same \ was debited to Profit and Loss Account. Amount payable as per the provisic of Payment of Bonus Act, 1965 worked out to Rs. 2.5 Lakhs.

b.

c. d. e. f.

g.

h. An amount of Rs. 3 Lakhs has been debited to Profit and Loss Account being j the cost of one van which was purchased by the assessee for promoting family: welfare among the employees.

130

Unit 5

Profit and Gains from Business and Profession

5SS

i. A trust has been formed for the welfare of the employees working for the assessee. The assessee has paid an amount of Rs. 2 Lakhs as the initial contribution for the formation of the trust and debited the same to Staff Welfare Expenses Account. j. Advertisement Expenses debited to Profit and Loss Account totalling to Rs. 1, 80,000 include an amount of Rs. 20,000 being the advertisement in a brochure published by a political party. k. The assessee has taken an overdraft from the bank for the payment of income tax dues. Interest charged by the bank amounting to Rs. 24,000 has been debited to Interest Account.

ted

Solution me
Treatment of various items debited / credited to Profit and Loss Account a. As the amount of excise duty i s not paid even before the filing of return, it will be disallowed as per the provisions of Section 43B of the Income tax Act, 1961. The excise duty will be allowed as expenditure on payment basis. The travelling expenses of Rs. 1,20,000 will be disallowed as revenue expenditure as the same has been incurred in connection with purchase of machinery. It needs to be capitalised. The amount of Rs. 5 Lakhs paid as lump sum for the acquisition of technical know how is a capital expenditure and will be disallowed while calculating taxable income of the assessee. However, the assessee can claim the depreciation on the same. The amount of Rs. 25,000 paid to the consultant in cash will attract the provisions of Rule 6DD of the Act and as such 20% of the expenditure will be disallowed. The provision of Rs. 1,00,000 being the provision for the payment of gratuity will be disallowed as the same is not contributed to an approved gratuity fund. The fact that the provision has been made on the basis of actuarial valuation will not make the same as allowable expenditure. The loss due to the fire is business expenditure and as such will be allowed as expenditure while calculating the taxable income of the assessee. However, while calculating the loss, the cost of the stock will be considered and not the selling price.

b.

c.

d. e.

f.

131

Taxation

g. The amount of Rs. 3 Lakhs being the bonus paid to the employee will be considered as business expenditure. The amount of bonus payable as per the Payment of Bonus Act, 1965 will be immaterial. h. The van purchased by the assessee for the promotion of family welfare among the employees is a capital expenditure incurred. As such, as per the provisions of Section 36(I)(ix) of the Income Tax Act, 1961 only l/5th of Rs. 3 Lakhs will be allowed as business expenditure. Remaining 4/5th of the cost of the van can be claimed as expenditure during the next four assessment years. i. The trust formed for the welfare of the employees is not an approved trust. As such, as per the provisions of Section 40A(9), the initial an contribution paid for the formation of trust will be disallowed. j. Out of the total advertisement expenditure, the amount of Rs. 20,000 will be disallowed as business expenditure which represents the amount spent on advertisement in the brochure published by the political party. k. The amount of Rs. 24,000 will be disallowed as expenditure which represents the interest paid on the overdraft taken by the assessee for the payment of income tax. 8. Decide the taxability of the following amounts which have been debited or credited while preparing the Profit and Loss Account of A Limited for the year ending on 31 st March 2007.

Give reasons for your answer .

a. Compensation paid to a director on termination of his services amounting to Rs. 1, 30,000 debited to Profit and Loss Account. Interest for loan borrowed for investing in the shares of another company which has not yet declared any dividend. Amount debited to Profit and Loss Account Rs. 25,000. Issue expenses incurred by the company in connection with the issue of debentures debited to Profit and Loss Account amounting to Rs. 43,500. Professional Fees debited to Profit and Loss Account include an amount of Rs. 2,00,000 paid to a German Technician who had come to the company for repairs of a German machine. No tax has been deducted from this payment. Legal expenses incurred by the company for defending a case for the breach of contract amounting to Rs. 10,000 were debited to Profit and Loss

b.

c.

d.

132

e.

A cc ou nt . T he ca se w as de ci de d ag ai ns t th e co m pa ny .

UnitS

Profit and Gains from Business and Profession

f.

An amount being the premium paid on health insurance policy taken for the employees has been debited to Profit and Loss Account amounting to Rs. 75,000. Consultancy Charges debited to Profit and Loss Account include an amount of Rs. 40,000 for preparation of the project report in connection with a new project which is proposed to be executed at Pune.

g.

h. An amount of Rs. 20,000 debited to Profit and Loss Account indicates the loss incurred by the company due to embezzlement of cash by the cashier. i. An amount of Rs. 50,000 was paid to an old employee as compensation whose services were terminated as his continuance as an employee would have been detrimental to the interests of the business. j. The company took the Keyman insurance policy in the name of two of the directors of the company. An amount of Rs. 5,00,000 has been received by the company against the

p r o c e e d s o f t h e p o li c y a m o u n t i n c l u d i n g b o n u s . T h e c o m

pa ny ha s no t cr ed ite d th e sa m e k. to Pr of it an d L os s A cc ou nt on th e pr et ex t th at th e a m ou nt re ce iv ed

aga mpany. The company inst has treated the same as ins capital receipt and not ura credited the same to nce Profit and Loss poli Account. cy L An amount of Rs. 24,000 is being the amount of exe bad debt recovered was mp credited to Profit and t Loss Account. The fro said amount was m disallowed in the tax. earlier assessment The years. co Solution mp any Treatment of various items has debited / credited to Profit and rec Loss Account: eiv ed a. The amount of compensation an paid to the Director for am termination of his services oun will t of be considered to be business Rs. expenditure allowed for 3,0 deciding the taxable income. 0,0 00 b. Interest on loan borrowed as for investing in the shares of the another company will be dut allowed as business y expenditure. The fact that the dra company has not paid any wb dividend ack will not be material. for c. Issue expenses relating to the exp the issue of debentures will 13 orts be allowed as business 3 ma expenditure. de by the co

Taxation

d.

As per the provisions of Section 40(a) of the Income Tax Act, 1961, the professional fees paid to the German Technician will be disallowed as business expenditure. Legal expenses paid for defending the case for breach of contract will be allowed as business expenditure. The fact whether the case is decided in favour of the company or against the company is immaterial. The health insurance premium paid on the policy taken out for the employees will be allowed as business expenditure. Consultancy charges paid for the preparation of the project report will be considered to be capital expenditure and will be disallowed while calculating the taxable income.

e.

f.

g.

h. Loss incurred by the company for embezzlement of cash by the cashier will be allowed as business expenditure. i. The amount paid to the employee as compensation for termination of his services will be allowed as business expenditure. j. The amount received against the Keyman insurance policy taken out by the company will be treated as taxable income attracting tax liability. k. The amount received by the company as the duty drawback is taxable income in the hands of the company. 1. As the amount of bad debts recovered by the company amounting to Rs. 24,000 was disallowed in the earlier years, the same will not be considered to be the income in the current previous year when it is recovered by the company. 9. Discuss the tax treatment of the following items which have been debited or credited while preparing the Profit and Loss Account of ABC Limited for the year ending 31 st March 2007. a. During the year, the company declared VRS. 50 employees of the company opted for the same. The company debited the compensation amounting to Rs. 200 Lakhs to Profit and Loss Account claiming the same to be revenue expenditure.

134

b. T el ep h o ne ex pe ns es de bi te d to Pr of it an d L os s A cc o u nt in cl u de an a m o u nt of R s. 5 0, 0 0

0 for booking 10 telephone lines under "Own Your Telephone" scheme

Unit5

Profit and Gains from Business and Profession

c.

Travelling expenses debited to Profit and Loss Account include an amount of Rs. 1,20,000 for the foreign travel of the Managing Director of the company for his trip to USA for g. negotiating a foreign collaboration agreement. The discussions for foreign collaboration failed. The company has taken its office premises on lease. The company has debited stamp duty, registration charges etc. relating to the same amounting to Rs. 20,000 to Legal Expenses Account. The company has borrowed an overdraft from its bank for the purpose of paying the dividend to the shareholders. Interest on the same amounting to Rs. 3,50,000 has been debited to Interest Account. There has been delay in paying the sales tax amount to the respective authorities in time. The sales tax officer has charged an interest for the delayed payment amounting to Rs. 12,000 which has been debited to Profit and Loss

A c c o u n t.

d.

e.

f.

A n a m o u n t o f R s. 5 0 , 0 0 0 h a s b e e n c r e d it e d t o P r o

fit an d Lo ss A cc ou nt to w ar ds th e sal e of im po rt lic en se s. Th e co m pa ny cl ai m s th e sa m e to be ca pit al re ce ipt

Dur ing the Ass ess me nt Yea r 200 2- i. An amount of Rs. 20,000 being the amount 200 foregone by one of the 3, suppliers has been the credited by the company co to a special reserve. The mp said amount was charged any by the company to had Profit and Loss Account writ in the preceding year. ten *>off Solution an am Tax treatment of amounts debited oun / credited to Profit and Loss t Account: of Rs. 45, a. As per the provisions of 000 Section 35DD of the as Income Tax Act, the bad amount of compensation deb paid by the assessee will be ts considered as allowable bei expenditure in five ng assessment years in equal the installments. As such, during am the current previous year, an oun amount of Rs. 40 Lakhs will t be allowed as expenditure. 13 due 5 fro m one of the cust

omers. In that year, the amount was allowed as expenditure. During the current previous year, the company recovered the same from the customer but the said amount has not been credited to Profit and Loss Account treating the same to be capital receipt.

Taxation

b.

Amount paid for booking the telephone under "Own Your Telephone" scheme is allowed as business expenditure. Travelling expenditure incurred for negotiating the foreign collaboration agreement will be allowed as business expenditure. This will apply even if the negotiations regarding collaboration agreement failed. The stamp duty, registration charges etc. regarding the office premises taken on lease will be allowed as business expenditure. Interest paid on overdraft borrowed for the payment of dividend will be allowed as business expenditure. The interest charged for the delay in payment of sales tax dues to the respective authority will be allowed as business expenditure. The amount received by the assessee on the sale of import licenses is considered to be revenue income and is taxable in the hands of the company.

c.

d.

e.

c.

f.

g.

h. The amount of Rs. 45,000 recovered by the company will be taxable in the hands of the company. This is due to the fact that it was allowed as the expenditure in the year in which it was written off as bad debts. i. As per the provisions of Section 41 of the Income tax Act, 1961 any amount received against the remission of a trading liability will be taxable in the hands of the company. As such, the amount foregone by the supplier will be taxable in the hands of the company.

5.7 ANNEXURE Depreciation

As per the general understanding of the term 'Depreciation,' it indicates the reduction in the value of a Fixed Asset due to a. b. c. Time factor Use factor Both Time as well as Use factor

d.

Obsolescence factor

Unit 5

Profit and Gains from Business and Profession

The calculation of Depreciation under Income Tax Act, 1961 differs from the calculation of Depreciation for Financial Accounting purposes, particularly as per the provisions of Schedule XIV of the Companies Act, 1956. The differences are as indicated below : a. For the purpose of Schedule XIV of the Companies Act, 1956, the depreciation can be calculated as per Written Down Value Method (WDV) or as per Straight Line Method (SLM). Income Tax Act, 1961 recognizes only the WDV method. Schedule XIV of the Companies prescribes the rates for calculating the depreciation, both as per WDV as well as SLM. The rates prescribed by Income tax Act, 1961 are obviously under WDV method only and the rates prescribed by Income tax Act, 1961 are different from the rates prescribed under Schedule XIV of the Companies Act, 1956. For calculating the depreciation under Income tax Act, 1961, the concept of Block of Assets is prescribed which is discussed in detail in the following paragraphs. For the purpose of calculating the depreciation for the purpose of income tax Act, 1961, it is necessary that The assessee should be the owner of the fixed asset. The assessee must have put the fixed asset to use. The fixed asset must have been used by the assessee during the Previous year. If the fixed asset is put to use by the assessee for the purpose of business or profession for a period of more than 180 days during the Previous Year, he is entitled to the depreciation at the full rate. However, if the fixed asset is put to use by the assessee for the purpose of business or profession for a period of less than 180 days during the Previous Year, the amount of depreciation will be restricted to 50% of the normal depreciation.

Gene ral condi tions for Allo wabil ity of depre ciatio n
For gettin g the deduc tion for depre ciatio n, the assess ee shoul d satisf y the follo wing gener al condit ions a. D e p r e c i a ti o n is a ll

b.

c.

owable in respect of certain specified assets. The assets which are specified for the Allowability of depreciation are Buildings, Plant and Machinery and Furniture

137

Taxation

etc. b. c. d.

Intangible assets like patents, trademarks, copyrights, know how, licenses

The assessee claiming the depreciation should be the owner of the asset. The assessee claiming the depreciation should be the user of the asset. In case of any block of assets (the concept of block of assets is discussed in the following paragraphs), the depreciation is computed on the basis of written down value of the block of assets.

Block of Assets As per the provisions of Section 2( 11) of the Act, Block of Assets means a group of assets falling within a class of assets comprising of the tangible assets and intangible assets in respect of which same percentage of depreciation is prescribed. For the purpose of Block of Assets, following four Class of Assets have been prescribed a. b. c. d. Buildings Plant and Machinery Furniture Intangible Assets like patents, copyrights, trademarks, licenses etc.

Following Block of Assets can be formed on the basis of class of assets and the rate of depreciation: a) Buildings Rate of Depreciation Block 1 Buildings other than those covered under Block 3 and Block 4 stated below mainly used for residential purpose 5 % Block 2 Non-residential building like office, factory, godown other than covered under Block 3 10% Block 3 Buildings used as hotels and dwelling units with plinth area upto 80Sq. Meters 20% Block 4 New buildings with dwelling units each with plinth area of less than 80 Sq. Meters acquired after 1.4.1999 but before 1.4.2002 40% Block 5 Temporary Structures 100%

138

Unit 5

Profit and Gains from Business and Profession

b)

Plant and Machinery Rate of Depreciation Block 1 General Rate for Plant and Machinery, other than those machineries stated below 25% Block 2 Motor Cars other than those used in the business of running them acquired and put to use on or after 1.4.1990 20% Block 3 Motor buses, motor lorries and motor taxies used in a business of running them 40% Block 4 Containers made of glass or plastic used as refills 50% Block 5 Computers 60% Block 6 Pollution Control equipments, Energy saving devices 100% etc.

c)

Furniture Rate of Depreciation Block 1 Furniture used in hotels, restaurants, school, educational institutions, libraries, cinema houses etc. 15% Block 2 Other 10%

d)

Intangible Assets Rate of Depreciation Block 1 All intangible assets like Patents, Trade Marks, Copy Rights, Licenses etc. 25% Effectively, there are totally 14 Block of Assets prescribed under the Income tax Act, 1961. Calculation of Depreciation For the purpose of calculating the depreciation based upon the concept of Block of Assets, the WDV of the block of assets for the Previous year is taken as below: a. In case of the assets acquired before the Previous Year, the actual cost of 139 the

Taxation

b.

assets falling within the block of assets less the amount of depreciation actually allowed to the assessee. In case of the assets acquired during the Previous year, the actual cost of the assets to the assessee. Thus the depreciation is calculated as per the following steps a. b. Determine the WD V of the block of assets after considering the depreciation allowed till the immediately preceding Previous year. Add the actual cost of the assets acquired during the Previous Year according to the Block of Assets.

c.

Deduct the money payable in respect of the assets falling under the same Block of Assets in respect of the assets sold or discarded or destroyed during the Previous year.

140

Note: The money payable above will mean the price for which the asset is sold or in case of the assets destroyed or discarded, the insurance or salvage value of the assets.

d. T he ba la nc in g fi g ur e is th e W D V of

the Block of Assets on which the depreciation will be calculated for the current Previous year. Note: There may be a possibility that the sale consideration of the block of assets is more than the opening WDV of the block of assets and the actual cost of the assets acquired during the Previous year. In such cases, the excess of sale consideration over the WDV of the block of assets and cost of the assets acquired during the Previous year will be considered to be short-term capital gains. Similarly, there may be a possibility that all the assets in the block of assets is transferred during the Previous Year and the sale consideration of the block of assets are less than the opening WDV of the block of assets and the actual cost of the assets acquired during the Previous Year. In such cases, the WDV of such block of assets will be reduced to Nil and no depreciation will be allowed in such cases and the excess of WDV of the block of assets and cost of the assets acquired during the Previous Year over the sale consideration will be considered to be short-term capital loss. For the calculation of depreciation, the calculation of Actual Cost of the asset is most significant. Actual Cost means the actual cost of the asset to the assessee, reduced by that portion of the cost which is met directly or indirectly by any other person. Following propositions should be considered while calculating the actual cost:

Unit 5

Profit and Gains from Business and Profession

a.

Any amount of interest paid before the commencement of production, on the funds borrowed for the purchase of the fixed assets, forms the part of actual cost.

b. Any expenditure incurred including cost of materials on the test run of the machinery before the commencement of products is a part of actual cost. c. If the assessee has imported the asset on credit and due to the exchange rate variations, the liability of the assessee increases or decreases, the amount by which the liability so increases or decreases shall be added to or reduced from the actual cost of the asset.

Eg. On 10th January 2003, A to Z Ltd. imported a machine from USA for US$ 10,000 when the rate was Rs. 48 per US$. Accordingly, the fixed assets account has been debited by Rs. 4,80,000 and the depreciation has been claimed on Rs. 4,80,000 during the AY 2003- 2004. The machine was purchased on credit basis and the actual payment was made on 20th December 2003 when the rate was Rs. 50 per US$ . The difference of Rs. 20,000 will be assessed to the written down value of the block of assets during the AY 2004-2005. Illustration ABC Limited owns the following assets as on 1 st April 2005 . Asset Rate of Depreciation WDV as on 1 .4.2005 BuildingA10% Building B 10% Building C 05% Machinery X 25% MachineryY25% Computers 60% V ehicleP20% 40,000 2,40,000 50,000 5,20,000 "1,40,000 2,40,000 1,80,000

=ost rial aie

During the Assessment Year 2007-2008, following assets were acquiredBuilding D eligible for depreciation @5% was purchased on 15th February 2006 for Rs. 1,50,000,

14 1

Taxation

Computer eligible for 60% depreciation were purchased on 9th January 2006 for Rs. 80,000 and Vehicle eligible for 20% depreciation was purchased on 16th July 2005 for Rs. 2,50,000. Similarly, during the Assessment Year 2005-2006, Machinery Y was sold for Rs. 2, 00,000. Calculate the amount of depreciation for the AY 2007-2008. Solution Calculation of Depreciation Buildings - Block A (10% Depreciation) Depreciation Opening WDV for building A and B Less: Depreciation Closing WDV Buildings - Block B (5% Depreciation) Depreciation Opening WDV for building C Add: Acquired during the Previous year Less: Depreciation @5% on opening WDV and 2.5% on additions Closing WDV Machinery - Block A (25% Depreciation) Depreciation Opening WDV for machine X and Y Less: Sale consideration of Machine Less: Depreciation Closing WDV Computers (60% Depreciation) Depreciation Opening WDV Add: Acquired during the Previous year Less: Depreciation @60% on opening WDV and 30% On additions Closing WDV
142

2,80,000 28,000 2,52,000

50,000 1,50,000 6,250 1,93,750

6,60,000 2,00,000 1,15,000 3,45,000

2,40,000 80,000 1,68,000 1, 52,000

Unit 5

Profit and Gains from Business and Profession

Vehicles (20% Depreciation) Depreciation Opening WDV Add: Acquired during the Previous year Less: Depreciation @20% on opening WDV and on additions Closing WDV Hence, total depreciation Rs. 86,000 3, 44,000 4, 03,250 1,80,000 2,50,000

Thus, depreciation can be defined as wear and tear of the assets and calculated as per illustrations given above. 5.8 SUMMARY______________________________________________________ This unit clarifies that the term 'Business' in the Income Tax Act includes trade, commerce or manufacture. 'Profession' includes 'vacation' too. Certain expenses incurred in carrying out business are rents, repairs, maintenance, depreciation etc. and they are considered as deductions while calculating the profits from business and profession. Capital expenditure incurred is not allowed as deductible expenditure. This unit also shows, through numerous illustrations, how the calculation of profits from Business & Profession is done with the help of the Profit and Loss Account. 5.9 KEYWORDS_____________________________________________________ Definition Of Business And Profession: Section 2(13) defines the term "Business" to include trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Section 2(36) indicates that the word "Profession" will include vocation. Allowability of Certain Expenses: a. Following expenditures which were subject to certain restrictions earlier, are now allowed as expenditures without any limit: Entertainment Expenditure
143

Taxation

6.1 INTRODUCTION

Capital Gains are chargeable to Income Tax if there is any profit or gain arising from the transfer of a capital asset. As such, the income from Capital Gains arises if the following conditions are satisfied: a. b. There should be a Capital Asset The capital asset should be transferred during the previous year under consideration. When the consideration for such transfer is received by the transferor, is immaterial. In other words, even if the transfer consideration is not received during the year o! transfer, still the capital gains arising there from will be subjected to tax. c. There should a profit or gain earned by the transferor on such transfer of asset. e.

Charging section [Section 45] Any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head Capital Gain and shall be deemed to be the income of the previous year in which the transfer took place. If property transferred is noi a capital asset on the date of transfer, no capital gain will arise. However, it is immaterial whether the property is a capital asset or not on the date of acquisition. 6.2 CAPITALASSET Capital Asset includes property of any kind, whether fixed or circulating, movableot A immovable, tangible or intangible. However, the following assets are excluded from the * ambit of the term Capital Asset: a. b. Any stock in trade, consumable stores or raw material held for the purpose of busin Movable property held by the assessee for the personal use of himself or his depended family members. However, jewellery held by the assessee is not excluded for tl> purpose.
c.

Agricultural land situated in India provided it is not situated within the jurisdictiq municipality or a cantonment board having a population of more than 10,000 a to the latest preceding census before the first day of the previous year or t situated in the area beyond eight kilometers from the local limits of such mu or cantonment board.

160

Unit 6

Capital Gains

d. e. f.

6.5% Gold Bond, J 977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds, 1980 issued by Central Government. Special Bearer Bonds, 1991. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

Short term / Long term capital assets : Short term capital assets Short term capital assets means capital assets held by an assessee for not more than 36 months, immediately prior to its date of transfer. However, in the following cases an asset, held for not more than 12 months, is treated as short term capital asset-(l) Equity or preference shares in a company (whether shares are quoted or not) (2) securities (like debentures, Government securities) listed in a recognised stock exchange in India (3) Units of UTI (whether quoted or not) (4) Units of a mutual fund specified under section 10(23D) (whether quoted or not) [applicable from the assessment year 2006-2007] Long term capital asset An asset other than a short term capital asset is regarded as a long term capital asset. In other words, assets held by assessee for more than 36 months (or 12 months in a few cases, are termed as long term capital assets.

Period of Holding - The period of holding in respect of capital assets is determined as follows 1. All capital assets (except few cases mentioned below) 2. Shares held in a company in liquidation The period of holding will be considered from the date of acquisition of capital asset to the date on which such a capital asset is transferred by the assessee. In the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation should be excluded. In the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in section 49( 1) [i.e. when an asset is acquired by gift or will, etc.]

3. Where section 49(1) is applicable

16 1

Taxation

the period for which the share in the amalgamating company was held by the assessee should be included. 4. Amalgamation In the case of a share in an Indian company which becomes the property of the assessee in a scheme of amalgamation. The period for which the share in the amalgamating company was held by the assessee shoulc be included. In the case of a share in an Indian company, which becomes the property of the assessee in consideration of a demerger, the period of holding of shares in the demereged company shall be included in the total period of holding of shares in the resulting company by the assessee. The period of holding will be considered from the date of allotment of such financial assets.

5. Demerger

6. Bonus shares or Right to subscribe to shares or any other financial assets (here in after called as 'right entitlement') subscribed to by the assessee on the basis of such right.

7. Rights shares acquired by The period of holding will be considered from the date of the person in whose allotment of such financial assets. favour right entitlement has been renounced by the initial holder of such right entitlement. 8. Right entitlement The period of holding will be considered from the date of offer to subscribe to shares to the date when such right entitlement is renounced by the person.

162

9. Shares and securities

Unit 6

Capital Gains

Period of Holding in Case of Shares or Securities In the case of shares/sec urities it will be determine d as under Circular No. 704, dated April 28,1995 1. P u r c h a s e o f s h a r e s t h r o u g h p ri m ar y m ar k et .

Peri od of hol din o g f will a / be l s con l e side o c red t u fro m r m e i the n t dat t i e of e pur s cha b . se y by bro t ker h on e beh alf c of o inve m stor. p a 3. ) n Tr o y an f . sfe s a t e r gh (th st ro oc ug k h e sto x ck c e h x a c n h g a e n s g ) e o s h a r e s / s e c u r i t i e

f s h a r e s

2 . P u r c h a s e (t h r o u

s. Fo r co m pu tin g pe ri od of ho ldi ng 4. th e da te of br ok er' s no te wi ll be co ns id er ed as da te . $> f tra ns fer pr ov id ed su

ch tra ns act io ns are fol lo we d up

by deli very of shar es and the tran sfer dee ds. t i e s ( t r a n s a c t i o n t a k e n p l a c e d i r e

D at e o f p u r c h a s e / tr a n sf e r o f s h ar e s / s e c u ri

c t l y b e t w e e n p a r t i e s a n d n o t t h r o u g h s t o c k e x c h

a n g e s)

F o r c o m p u ti n g p e ri o d o f h o l d i n g t h e d at e o f c o n tr a ct o f s 5. D a t

ale as dec lar ed by par ties wil l be co nsi der ed, pro vid ed it is foll ow ed up by act ual del ive ry of sha res an d the tra nsf er de eds . e o f p

ur ch as e/ sa le of sh ar es / se cu rit ies pu rc ha se d in se ve ral lot s at dif fer en t po int s of ti m e bu t de liv er y ta ke n in

o The n first e -infirst l -out o (FI t FO) met a hod n shal d l be ado s pte u d to b rec s kon e the q peri u od e of n the t hol l din y g of the s sec o 6.l dS w ie na t p ae rq tu si . t y s h a r e s

urity in case s wher e the dates of purc hase and sale cann ot be corre lated throu gh speci fic num ber of the scrip s.

al lo tt ed by e m pl oy er.

ae se r ss ef m sr en o t bm ye y ar t 2 t h 0 he 0 e 8a 0 es 9) m p Transacti l ons not o regarded as y transfer: e r For the purpose t of section o 45, the following t transactio h ns are not e regarded as transfers. e m. D p i l s o tr y i e b e u ti ( o a n p o p f l a i s c s a e b t l

163

Taxation

2. Total or partial partition of HUF Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition [sec 47 (i) ] 3. Gift, will, etc. Any transfer of capital asset under a gift or a will or an irrevocable trust [sec.47 (iii) J [However, transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company, directly or indirectly, to its employees under the Employees' stock Option plan or scheme framed in accordance with guidelines issued by the central Government shall be deemed as transfer from the assessment year 2001-02 (a) any transfer of a capital asset by a company to its wholly owned Indian subsidiary company [sec 47 (iv)](b) any transfer of a capital asset by a wholly owned subsidiary company to its Indian holding company [sec 47 (v) ] (a) Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company, if the latter company is an Indian company [sec 47(vi) ](b)Any transfer of shares in Indian company held by a foreign company to another foreign company in pursuance of a scheme of amalgamation between the two foreign companies, if at least twenty-five per cent of the shareholders of the amalgamating.

4. Tranfer from a company to its 100% subsidiary or vice versa

5. Amalgamation

164

1. Circumstances when exemption can be withdrawn- Where at any time before the expiry of a period of eight years from the date of the transfer of capital assets referred to in clause (iv) or (v) of section 47,-(i) such capital assets are converted by the transferee company into, or is treated by it as, stock-in-trade of its business; or(ii)the parent company or its nominees or, as the case may be, the holding

compa whole of the share capital of the subsidiary company, the amount of profits or gains ny arising from the transfer of such capital assets not charged under section 45 by ceases virtue of the provisions contained in clause (iv) or (v) of section 47 shall be to hold deemed to be income chargeable under the head "Capital gains" of the previous year the in which such transfer took place. The

Unit 6

Capital Gains

cost of acquisition of such assets to the transferee company shall be the cost for which such asset was acquired by it. From the assessment year 2008-09 i. Any transfer in a business reorganisation of co-operative banks, of capital assets by the predecessor to the successor [sec.47 (vica)]; ii. Any transfer by a shareholder, in a business reorganisation of co-operative banks, of a capital asset being a share or shares held by him in predecessor if the transfer is made in consideration of the allotment to him of any share or shares in successor[sec.47(vicb); Foreign company continues to remain shareholders of the amalgamated foreign company and such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated[sec.47(via)](c) Any transfer in a scheme of amalgamation of a banking company with a banking institution [Section 47(viaa), applicable w.e.f. assessment year 2006-07](d) Any transfer by a shareholder, in a scheme of amalgamation, of share(s) held by him in amalgamating company, if the transfer is made in the consideration of the allotment to him of any share(s) in the amalgamated company and the amalgamated company is an Indian company [Sec.47(vii)] 6. Demerger (a) Any transfer in a Demerger of capital assets by the demerged company to resulting company, provided the resulting company is an Indian company[Sec.47(vib)](b) Any transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company if the following conditions are satisfied- (i) the shareholders holding not less than three-fourths in the value of shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; (ii) and such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated[sec.47(vic)(c) Any transfer or issue of shares by the resulting company, in a scheme of demerger

16 5

Taxation

to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking [Sec. 47(viia)J 7. ForeignCurrency convertible bonds or Global Depository Receipts The transfer of capital assets by a non-resident of such foreign currency convertible bonds or Global Depository Receipts as referred to in section 115AC(1) to another nonresident if the transfer is made outside India [sec.47(viia)J Any transfer of agriculture land infedia-effected before MarchXl, 1970[Sec. 47(viii)] Any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any other such public museum or institution as may be notified by the Central Government (i.e. Indira Gandhi National Centre of Art for the assessment years 1987-88 to 2004-05) [Sec.47(ix) Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form, of a company into shares or debentures of that company [Sec.47(x)] Any transfer with effect from the assessment year 1998-99 by a person other than company by way of exchange of a capital asset being membership of a recognised stock exchange is effected on or before December 31,1998 [Sec.47(xi)J Transfer of land with effect from the assessment year 1998-99 under a scheme prepared and sanction under section 18 OF THE Sick Industrial Companies (Special Provisions) Act, 1985 by a sick industrial company which is managed by its workers' co-operative if such transfer

8. Agricultural land

9. Work of art, book drawing, painting etc.

10. Conversion of debenture into shares of the company

11. Membership of a recognised stock exchange

12. Land transferred by sick industrial company

166

Unit 6

Capital Gains

is made during the period commencing from the previous year in which it has become a sick industrial company under section 17(1) of that Act and ending with the previous year during which the entire net worth (i.e., paid-up capital and free reserve) of such a company becomes equal to or exceeds the accumulated losses, "Free reserves" for this purpose means all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, Write back of depreciation provisions and amalgamation[sec. #Circumstances when exemption can be withdrawn: At any time, before the expiry of a period of 3 years from the date of the transfer of capital assets referred to in clause (xi) of section 47, any of the shares allotted to the transferor in exchange of membership in a recognised stock exchange are transferred, the amount of profits and gains not charged under section 45 by virtue of the provisions contained in clause (xi) of section 47 shall be deemed to be the income chargeable under the head "Capital gains" of the previous year in which such shares are transferred. *Circumstances when exemption can be withdrawn: Where any of the conditions laid down in the proviso to clause (xiii) or (xiv) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital assets or intangible assets not charged under section 45 by virtue of condition laid down in clause (xiii) or clause (xiv) of section 47, shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements of clause (xiii) or (xiv), as the case may be, are not complied with. (b) Transfer of a capital asset to the company (with effect from the assessment year 1999-2000) where a proprietary concern is succeeded by a company in the business carried on by it subject to following conditions-(i) all assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company; (ii)the shareholding of the sole proprietor in the company is not less than 50 per cent of the total voting power in the company and shareholding shall continue to so remain for a period of five years from the date of the 167 succession;

Taxation

(iii)the sole proprietor does not receive any consideration or benefit directly or indirectly, in any form or manner other than by way of allotment of shares in the company. [Sec.47(xiv)] 14. Membership right in a stock exchange Transfer of Membership right held by a member of recognised stock exchange in India for acquisition of shares and trading or clearing right acquired by such member in that recognised stock exchange in accordance with the scheme for demutualisation or corporatisation which is approved by SEBI[sec.47(xiiia) Any transfer involved in a scheme for lending of any securities under an agreement subject to the guidelines issued by the Securities and Exchange Board of India, or (with effect from assessment year 2003-04) the Reserve Bank of India in this regard, which the assessee has e n t e r e d i n t o w i t h t h e b o r r o w e r o f s u c h securities [sec.47(xv)J.

15. Lending of securities

Previous year in which capital gains are chargeable to tax

Generally, capital gain is taxable in the year in which capital asset is transferred. Following rules are applicable in case of movable/immovable assets to ascertain when a capital asset is "transferred": 1. Immovable property when documents are registered Title to immovable assets will not pass till the conveyance deed is executed or registered-Alapati Venkataramiah v.CIT[1965] 57ITR 185 (SC). Even if the documents are not registered but the conditions of section 53A' of the Transfer of Property Act are satisfied, ownership in an immovable property is "Transferred".

2. Immovable property when documents are not registered

168

*However, in the following cases capital gain is taxable in the year other than the year of transfer of the asset: (i) conversion of capital asset into stock-in-trade (see Para 48.1); (ii) compulsory acquisition of an asset (see para 48.2); and (iii) damage of any capital asset by fire or other calamities (see para 48.8).

Unit 6

Capital Gains

1. When these conditions are satisfied, the transaction will constitute "transfer" for the purpose of capital gains- (a) there should be a contract in writing; (b) the transferee has paid consideration or is willing to perform his part of the contract; and (c) the transferee should have taken possession of the property. 3. Movable property Title to a movable property passes at the time when property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for determining date of transfer-Alapati Venkataramiah v. CIT (supra), lia bil ity wi ll be co m pu te d. Th e ca pit al ga ins lia bil ity wi ll be co m pu te d in th e pr ev io

6.2.1 Transfer of Capital Asset - Section 2(47) Transfer of a Capital Asset includes sale, exchange or relinquishment of the asset or the extinguishments of any rights therein or the compulsory acquisition thereof under any law. The following points should be remembered from a practical point of view: a. If the transfer is of immovable property and the documents relating to the property are registered, the title in the property will not be transferred unless the conveyance deed is executed or registered. If the transfer is of immovable property but the documents are not registered, title in the property will be assumed to be transferred if the following conditions are satisfied:

b.

There is a contract in writing The transferee has paid the consideration or is willing to pay the

consideration

c.

The transferee has taken the possession of the property

If the transfer is of movable property, title in the property is assumed to be transferred at the time when the property is delivered as per the contract to sell. If the capital gains arise on account of compulsory acquisition of the capital asset under any law and any compensation is paid for such acquisition, initial compensation shall be considered to be the sale consideration and accordingly the capital gains

d.

us year in which the compensation or the part thereof is first received. The previous year in which the capital asset is actually acquired and the property is transferred is immaterial. In some cases, the compensation received by the assessee may be challenged by him and the compensation may subsequently be enhanced by a court

169

Taxation

or a tribunal or any other authority. In such cases, the tax implications will be as below:

The enhanced compensation shall be taxable in the previous year in which it is received by the assessee. The cost of acquisition and the cost of improvement shall be taken as Nil. Litigation expenses incurred for getting the compensation enhanced are considered as expenditure incurred for transfer.

JS^ Activity A:
1. Define Capital asset. Write in brief the types of capital asset

2. What do you mean by transfer of capital asset?

t*fa?*'<

6.3 CALCULATION OF CAPITAL GAINS - SECTION 48 Capital Gains arise on account of excess of transfer consideration over the following amountsa. b. c. Cost of acquisition Cost of improvement Expenditure incurred wholly and exclusively in connection with the transfer

Note - While calculating the Long Term Capital Gains, in place of Cost of Acquisition, the Indexed Cost of Acquisition and in place of Cost of Improvement, Indexed Cost of

170

Unit 6

Capital Gains

Improvement will be considered. The concept of Indexed Cost of Acquisition or Indexed Cost of Improvement is discussed in the following paragraphs. 6.3.1 Cost of Acquisition Cost of acquisition of a Capital Asset is the value for which it was acquired by the assessee. Any capital expenditure incurred in connection with the acquisition of capital asset will be considered to be a part of cost of acquisition. However, if the property becomes the property of the assessee before 1 st April 1981, the Fair Market Value of the property of the capital asset on that date will be considered to be the cost of acquisition. If the assessee himself has acquired the capital asset before 1 st April 1981; the assessee can consider Fair Market Value as on IstApril 1981 or the actual cost of acquisition to be the cost of acquisition for the calculation of capital gains. Following propositions should be remembered: Interest paid on the loan for acquiring a capital asset will be considered to be a part of cost of acquisition. Cost of acquisition of any financial assets (shares or any other security) allotted to the assessee on or after 1st April 1981 without any payment and on the basis of holding any other financial asset shall be considered to be Nil. The simple implication of this provision in practical circumstances is that the cost of acquisition of bonus shares allotted to the assessee shall be taken as nil. However, if the bonus shares are acquired before 1 st April 1981, the cost of acquisition of the same will be the Fair Market Value of the same as on 1 st April 1981. Cost of acquisition in respect of rights shares is calculated in the following manner. Rights shares indicate the additional shares to which the assessee is entitled, by virtue of holding certain shares in a company. The rights shares offered to the existing shareholder can be purchased by him, himself or he can renounce the right in favour of somebody else against some consideration. Eg. Mr. Ashok is holding 1000 Equity Shares of ALtd. originally purchased by him at the face value of Rs. 10. He is

of fe re d th e ri g ht s to b u y ad di ti o na l 5 0 0 sh ar es of A Lt d. as ri g ht s sh ar es at th e pr ic e of R s. 1

00 per shares. Mr. Ashok buys 250 shares by paying Rs. 25,000 to the company and renounces right for the balance 250 shares in favour of Mr. X at the consideration of Rs. 40 per share. The cost of acquisition will be calculated as below: The cost of acquisition of the original shares will be Rs. 10,000 i.e. For 1,000 shares @Rs. 10 per share.

171

Taxation

The cost of acquisition for 250 rights shares purchased by him will be Rs. 25,000 i.e. for 250 shares @Rs. 100 per share. The cost of acquisition for 250 right shares for which the rights are renounced in favour of Mr. X will be Nil. In practical circumstances, many employers issue shares or debentures or warrants to the employees under the Employees Stock Option Plan. As per the proviso to Section 17(2)(iii) of the Act, the value of any such benefit provided by the employer to the employee shall not be treated as perquisite if such plan is in accordance with the guidelines issued by the Central Government in this regard.

When the employee sells the shares allotted to him under this scheme assuming that the shares are not listed on any recognised stock exchange, he will be liable to pay the tax under the head Income from Capital Gains. While calculating the tax, the cost of acquisition of these shares will be taken as Nil if these shares are allotted free of cost. If the employee has paid some price for these shares, the same will be allowed to be deducted as cost of acquisition. If the shares, debentures or warrants are issued under the ESOP which is not in accordance with the guidelines issued for this purpose, the fair market value of these assets as reduced by the amount paid by the employee will be taxed as perquisites. If these assets are sold or transferred subsequently, the amount considered while calculating the value of perquisites will be considered as cost of acquisition. If the debentures are converted into shares, it is not considered to be transfer of the capital asset. However, if these shares are sold subsequently, following pro visions will apply:

Cost of acquisition of debentures shall be considered to be the cost of acquisition of shares. For deciding whether the shares are long term capital asset or short-term capital asset, the period of holding shall be decided on the basis of date of allotment of the shares. The indexation will start from the date of conversion of debentures into the

172

shares.

Illustr ation Mr. Ashok purcha sed unliste d conver tible debent ures for Rs. 4,50,0 00 in the month of May 1995. The debent ures were convert ed in equity shares of the compa ny in the month

Unit 6

Capital Gains

of April 1999. Mr. Ashok sold the shares in the month of April 2006 for the consideration of Rs. 10,00,000. He also paid the brokerage of 2% on the sale consideration. Calculate the capital gains for the Assessment Year 2007-2008.

Solution
Calculation of Capital Gains for Mr. Ashok Particulars Sale Consideration Less: Brokerage on Transfer Indexed Cost of Acquisition Rs. 4, 50,000 x 519 / 389 Long Term Capital Gain Notional Cost of Acquisition - Section 49(1) If the Capital Asset becomes the property of the assessee in the manner specified below, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner has acquired the capital asset. Some of the major situations specified for this purpose are as below: When the property is acquired under gift or will When the property is acquired by succession or inheritance When the property is acquired by distribution of assets on the liquidation of a 6,00,385 06, 00,385 03, 79,615 Rs. Rs. 10, 00,000 00, 20,000

company When the property is transferred under a transfer to a revocable or irrevocable

trust If the capital asset becomes the property of the assessee in the modes stated above, the assessee has the option of considering the cost of acquisition to the previous owner or the Fair Market Value as on 1 st April 1981 to be the cost of acquisition for calculation of capital gains. Cost of Inflation Index or Indexed Cost of Acquisition The purpose of Cost of Inflation Index is to give the benefit of inflation existing 173 in the economy to the assessee while calculating the amount of capital gains.

Taxation

Cost of Inflation Index is the Index Number for which the base year is 1981 -82. This is the Index Number as notified by Central Government in the Official Gazette having regard to 75% of average rise in the Consumer Price Index for the urban nonmanual employees for the immediately preceding previous year in relation to such a previous year. Cost of Inflation Index (CII) notified by the Government for the various financial years is as below: Financial Year 1981-82 1984-85 1987-88 1990-91 1993-94 1996-97 1999-00 2002-03 2005-2006

cn
10 0 12 5 15 0 18 2 244 305 389 447 497

Financial Year 1982-83 1985-86 1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-2007

cn
10 9 13 3 16 1 19 9 259 331 406 463 519

Financial Year 1983-84 1986-87 1989-90 1992-93 1995-96 1998-99 2001-02 2004-05

11 6 14 0 17 2 22 3 28 1 35 1 42 6 48 0

c n

In the situations of Cost of Inflation Index, the cost of acquisition is calculated as below: CII for the year of transfer Cost of Acquisition X =CII for the year of acquisition If the asset is acquired prior to 1 st April 1981, the assessee may consider the Fair Market Value as on 1st April 1981 to be the cost of acquisition. Note: It should be remembered that the indexation of acquisition cost is not allowed in case of certain capital assets:

174

Debentures / B onds Shares or Debentures acquired by a non-resident in foreign currency in an Indian Company.

Unit 6

Capital Gains

Illustration On 15th June, 1991, Mr. Ashok bought 1000 Convertible debentures of ALtd. for Rs. 1,00,000, face value of the debentures being Rs. 100 per debenture. As per the terms of conversion, these debentures got converted into 1000 Equity Shares of Face Value of Rs. 10 per share with effect from 15th June 1995. On 11th December 2006, Mr. Ashok sold the shares for the consideration of Rs. 250 per share. Calculate the capital gains arising out of the transaction for the AY 2007-2008.You can assume that the shares are not listed on a recognised stock exchange. Solution Calculation of Capital Gains for Mr. Ashok Sale Consideration Less: Indexed Cost of Acquisition Rs. 1,00,000x519/281 Capital Gains Illustration Mr. X purchased a piece of land on 10th January, 1980 for Rs. 50,000. He sold the land on 25th July, 2006 for Rs. 7,00,000. Brokerage paid on the sale of land was 2% of the sale price. The Fair Market Value of the land on 1st April, 1981 was Rs. 1, 00,000. Calculate the capital gains for the AY 2007-08. Will the calculations be different if Mr. X acquired the land on 10th January 1987? Solution If the land is acquired on 10th January 1980 -Particulars Sale Consideration Less: Brokerage on Transfer Indexed Cost of Acquisition 1,00,000x519/100 Long Term Capital Gain Rs. 1, 84,697 Rs. 0, 65,303 Rs. 2, 50,000

Rs.

Rs.
7, 00,000 0, 14,000

5, 19,000

5, 19,000 1, 67,000

17 5

Taxation

If the land is acquired on 10th January, 1987 -

Particulars
Sale Consideration Less: Brokerage on Transfer Indexed Cost of Acquisition Rs. 1,00,000X519/140 Long Term Capital Gain Note:

Rs.

Rs . 7, 00,000 0, 14,000 3, 70,714 3, 15,286

3, 70,714

16 7

If be done with respect to the year in which cos the assessee first held the capital asset t of and not the previous owner. acq uis If the previous owner acquires the capital itio asset prior to 1 st April 1981, the assessee n is can consider the Fair Market Value as on co 1st April 1981 or the cost of acquisition nsi to the previous owner whichever is higher der as the cost of acquisition, but the indexation ed ill be done with respect to the year in to which the assessee first held the capital be asset and not the previous owner. the cos 6.3.2 Cost of Improvement or Indexed Cost of Improvement t to the Cost of Improvement includes any capital pre expenditure incurred in making any vio addition or alteration made to the capital us asset. However, cost of improvement does ow not include any expenditure which is ner deductible from any other head of income. as Similarly, while calculating the capital gains, per any expenditure incurred before 1 st April the 1981 either by the assessee or the previous pro owner will be ignored. vis ion If the cost of improvement is incurred after 1 s st April 1981, indexation will apply only to of the cost improvement incurred after 1 st Se April 1981. cti on Illustration 49( 1) Mr. X acquired a house on 10th of November 1975 for Rs. 1,00,000 and the paid Rs. 10,000 for registration. He spent Ac an amount of Rs. 50,000 onth10th March t, 1980 and Rs. 80,000 on 15 June 1998 the on improvement of the house. He sold ind the house on 28th October 2006 for Rs. ex 12, 00,000 and paid the brokerage ati charges amounting to 2% on the sale on price. Calculate the Capital gains for AY wil 2007-2008. Assume the Fair Market Value l of the house as on 1st April 1981 to be Rs. 2,00,000.

Unit 6

Capital Gains

Solution Particulars Sale Consideration Less: Brokerage on Transfer Indexed Cost of Acquisition Rs. 2,00,000X519/100 Indexed Cost of Improvement Rs. 80,000X519/351 Long Term Capital Gain Activity B ; 1. Mr. X acquir ed a house on 10th Nove mber 1981 for Rs. 2, 00,00 0. He spent an amou nt of Rs. 70,00 0 on 10th Marc h 1990 and Rs. 80,00 0 on 16th J u n e 1 9 9 9 o n i m p r o v e m e n t o f t .01, 18,290 00, 19, 710 10, 38,000
Rs.

Rs. 12,00,000 00, 24,000

he house. He sold the house on 10th October 2006 for Rs. 24, 00,000 and paid the brokerage charges amounting to 2% on the sale price. Calculate the Capital gains for AY 20072008.

2. Mr. X purchased a piece of land on 10th January, 1980 for Rs. 70,000. He sold the land on 25th July, 2006 for Rs. 10,00,000. Brokerage paid on the sale of land was 3% of the sale price. The Fair 1 Market Value of the 7 land on IstApril, 7 1981 wasRs. 2,00,000. Calculate the capital gains for the AY 2007-08. Will the calculations be different if Mr. X acquired the land on 1 Oth January 1991 ?

6.4 DEDUCTIONS FROM CAPITAL GAINS From the amount of capital gains calculated as per the provisions discussed above, certain deductions are possible. We will consider some of the important deductions. 6.4.1 Capital Gains from the transfer of residential house property - Section 54 This deduction is available if certain conditions are satisfied:

This deduction is available to an individual or a HUF This deduction applies to long-term capital gains arising from the transfer of a residential house property, income from which is taxable under the head "Income from House Property". The assessee must have purchased or constructed another residential property within the specified period. The term "specified period" means: If the new property is purchased, one year before or two years after the date on which transfer took place. If the new property is constructed, three years after the date on which ihe transfer took place.

The amount of capital gains which are exempt under this section is restricted to the cost of new house purchased or constructed. Capital Gains Account Scheme, 1988 In order to claim the deduction under this section, the assessee can purchase or construct the new property during a certain period after the transfer takes place. However, the return of income is required to be submitted within the specified time in the relevant Assessment Year in which the transfer took place and the tax is required to be paid during the same year. However, the decision to invest in the new property may not be taken by the assessee immediately. In order to overcome the problems in such situations, the assessee is given the alternative. The am.ount of capital gains not invested by the assessee for the purchase or construction of the new property can be deposited by the assessee under the Capital Gains Account Scheme, before the date of filing his return of income. The proof of such deposit can be attached with the return of income for the purpose of claiming the deduction under this

178

Unit 6

Capital Gains

section. For the purpose of making the investment in the new property, the amount lying to the credit of this account can be utilised. The following possible situations may arise in the above case: Illustration Mr. Ashok purchased a residential house in 1971 for an amount of Rs. 2,50,000. During 1979- 80, he spent an amount of Rs. 50,000 for improvement of the house. During 1994-95, he spent an additional amount of Rs. 75,000 for the improvement of the house. The said house was sold by him on 15th October, 2006 for the consideration of Rs. 26, 00,000. Expenses in connection with this transfer amounted to Rs. 50,000. On 1 Oth Jan, 2007, he deposited an amount of Rs. 3,00,000 in a deposit account under Capital Gains Account Scheme. Compute the taxable capital gains with respect to the various assessment years assuming that the fair market value of the house as on 1 st April, 1981 was Rs. 4, 00,000. Solution Calculation of Taxable Capital Gains Particulars Sale Consideration Less: Expenses on Transfer Indexed Cost of Acquisition Rs. 4,00,000 X 519 /100 Indexed Cost of Improvement Rs. 75,000X519 7259 Long Term Capital Gain Less: Deduction u/s 54 Taxable Long Term Capital Gains '" 01,55,079 03,18,921 03, 00, 000 00,18,921 20, 76,000 Rs. 26, 00,000 0,50,000

6.4.2 Capital Gains from the transfer of Agricultural Land - Section 54B This deduction is available if certain conditions are satisfied: This deduction is available to an individual only
179

Taxation

This deduction applies to both shori-lerm capital gains as well as long-term capital gains arising from the transfer of an agricultural land which must have been used by the individual or his parents for agricultural purposes during the two years immediately preceding the date of transfer. The assessee must have purchased another agricultural land (rural or urban) within the period of two years after the date of transfer of the original agricultural land.

The amount of capital gains which are exempt under this section is restricted to the cost of new agricultural land purchased. It should be noted that the provisions regarding the Capital Gain Account Scheme are applicable in this case also. If the amount deposited in CGAS is not utilised for the purchase of new agricultural land within the period of two years, the amount which is not utilised shall be taxed as the short term capital gains or long-term capital gains in the year in which the period of two years from the date of transfer of the original asset expires.
Illustration

Mr. Ashok was the owner of an agricultural land in Pune which was purchased by him 1982-83 for an amount of Rs. 3, 50,000. He sold the land on 13th July, 2004 for a consideration of Rs. 20,00,000. On 20th October, 2006, he bought an agricultural land in his village for an amount of Rs. 1,00,000. On 12th Jan, 2007, he deposited an amount of Rs. 2,00,000 in the deposit account under CGAS. Calculate the amount of capital gains liability for Mr. Ashok.
Solution Particulars

Rs.
20, 00,000

Sale Consideration Less: Indexed Cost of Acquisition Rs. 3, 50,000X519/109 Long Term Capital Gain Less: Deduction u/s 54 Cost of land purchased Amount deposited in CGAS Taxable Long Term Capital Gains 180

16,

66,513

03, 33,487 01,00,000 02, 00,000 00, 33,487

2,50, 000. He 6.4.3 Capital Gains if invested in certain bonds - Section 54EC sold Section 54EC has been inserted from Assessment Year 2001-2002. Features of the said the deduction under this section are as below: prope rty a. The section applies to the long-term capital gains earned by any assessee by on transferring 12th the long-term capital asset after 1st April 2000. Dece b. Within six months from the date of transfer of the long-term capital asset, the mber assessee 2006 should invest the whole or part of the capital gains in the specified assets. The for a specified consi assets for this purpose mean the bonds redeemable after 3 years issued by the derati following on of institutions: Rs. 13,00 National Bank for Agriculture and Rural Development (NAB ARD) ,000. InFeb National Highway Authorities of India 2007 he National Housing Bank invest ed Small Industries Development Bank of India Rs. Rural Electrification Corporation Limited 5,00, 000 c. The quantum of exemption will be the amount invested in the specified assets or in the the notifi amount of capital gains, whichever is less. ed bond d. If the specified asset is transferred within the period of 3 years from the s of date of NHB acquisition, the amount of capital gains not charged to the tax from the whic transfer of original asset will be taxed as the long-term capital gain in the year in which h are redee the mabl specified asset is transferred. e after e. The cost of specified asset which is considered for the exemption under 45 Section mont 54EC shall not be eligible for rebate under Section 88 of the Act. hs. Illustration Com pute Mr. Ashok provides the following details regarding the transactions for the sale of the his residential house property which was bought by him in September 1989 for Rs. amou

Unit 6

Capital Gains

nt of capital gains chargeable to tax.

181

Taxation

Solution Computation of Capital Gains chargeable lo lax Sale Consideration Less: Indexed Cost of Acquisition i.e. 2,50,000x5197 172 Long Term Capital Gains Less: Deduction u/s 54EC Taxable Capital Gains Rs. 07, 54,360 Rs. 05,45,640 Rs. 05, 00,000 Rs. 00,45,640 Rs. 13,00,000

1 6.4.4 8 Capital 2

Ga Section 54ED are as below: ins ari a. The section appl ies to the long-term sin capital gains earned by any assessee. g fro b. The long term capital should arise from the transfer of capital asset in the m following tra form: nsf er A security listed in any of recognised stock exchange in India. A cer security for this tai purpose means shares, n debentures, bonds or Government sec Securities. uri A unit of Unit Trust of India or any tie Mutual Fund (whether listed in a s/ recognised un stock exchange or not) its Se c. Within six months from the date of transfer of such capital asset, the cti assessee should on invest whole or part of the capital gains 54 in the equity shares of an eligible issue. E Equity D Shares of an eligible issue need to satisfy the following conditions: Fe atu The issue of equity shares is res made by a public limited company of exe The shares should be offered to mp the public for subscription tio n d. The quantum of exemption will be the ava amount invested in the specified assets ila or the ble amount of capital gains, whichever is as less. per the pro e. If the specified asset is transferred within a period of 1 year from the date of vis acquisition, ion the amount of capital gains not charged s to the tax from the transfer of original of asset

Unit 6

Capital Gains

will be taxed as the long-term capital gain in the year in which the specified asset is transferred. f. The cost of specified equity shares which is considered for the exemption under Section 54EC shall not be eligible for rebate under Section 88 of the Act.

It should be noted that from Assessment Year 2005-2006, the long term capital gains arising from the transfer of listed securities will be exempted from tax as per the provisions of Section 10(38) of the Act. 6.4.5 Capital Gains on the transfer of a long term capital asset other than a house property - Section 54F The following conditions need to be satisfied for claiming the exemption under Section 54F: a. b. The assessee is an individual or a HUF The long-term capital gains should arise on account of transfer of a capital asset other than a residential house property. The assessee should invest the net sale consideration by selling the long-term capital asset for buying a residential house property within one year before or two years after the transfer, or construct a residential house property within the period of three years. Such house property is hereinafter referred to as "new house". The assessee should not purchase any other residential house property (other than the "new house") within a period of two years from the date of transfer of the original asset or construct a new residential house property within the period of three years from the date of transfer of the original asset. If the assessee transfers the "new house" within a period of three years from the date of its purchase/construction, the following consequences will arise:

c.

d.

e.

Capital Gains arising from the transfer of the "new house" will be treated as short term capital gains.

O ri gi na lly ex e m pt ca pit al ga in s un de r Se cti on 54 F wi ll be tre at ed as lo ng ter m ca pit al ga in s in th e ye ar in

which the "new house" is transferred. f. If the assessee purchases any other property (other than the "new house") within a

183

Taxation

period of two years from the date of transfer of the original asset or constructs a new residential house property within the period of three years from the date of transfer of the original asset, originally exempt capital gains under Section 54F will be treated as long term capital gains in the year in which the "new house" is transferred. If the above conditions are satisfied, amount of deduction will be calculated as below: a. If the cost of house purchased or constructed is more than the net consideration of the capital asset transferred, the entire capital gain arising from the transfer of the capital asset is exempt from tax. If the cost of house purchased or constructed is less than the net consideration of the capital asset transferred, the exemption is calculated as below: Amount Invested Net Sale Consideration It should be noted that the provisions regarding the Capital Gain Account Scheme are applicable in this case also. If the amount deposited in CGAS is not utilised for the purchase or construction of new residential house within the stipulated period, the amount which is not utilised shall be taxed as the capital gains in the year in which the period of three years from the date of transfer of the original asset expires. 1. Activity C ; Vijay purchased a residential house in 1980 for an amount of Rs. 3,75,000. During 198 1- 82, he spent an amount of Rs. 60,000 for improvement of the house. During 1997-98, he spent an additional amount of Rs. 75,000 for the improvement of the house. The said house was sold by him on 15th October, 2006 for the consideration of Rs. 36, 00,000. Expenses in connection with this transfer amounted to Rs. 50,000. On 10th Jan, 2007, he deposited an amount of Rs. 3, 00,000 in a deposit account under Capital Gains Account Scheme. Compute the taxable capital gains with respect to the various assessment years assuming that the fair market value of the house as on 1st April, 1981 was Rs. 4, 00,000.

b.

Capital Gains X =

184

Unit 6

Capital Gains

2. Amar was the owner of an agricultural land in Pune which was purchased by him 1982-83 for an amount of Rs. 5, 50,000. He sold the land on 13th July, 2006 for a consideration of Rs. 30,00,000. On 20th October, 2006, he bought an agricultural land in his village for an amount of Rs. 6,00,000. On 12th Jan, 2007, he deposited an amount of Rs. 4,00,000 in the deposit account under CGAS. Calculate the amount of capital gains liability for Amar.

3. Ketan provides the following details regarding the transactions for the sale of his residential house property which was bought by him in September 1989 for Rs. 2, 50,000. He sold the said property on 12th March 2007 for a consideration of Rs. 13,00,000. In May 2007 he invested Rs. 4,00,000 in the notified bonds of NHB which are redeemable after 45 months. Compute the amount of capital gains chargeable to tax.

6.5 ILLUSTRATIONS 1. Mr. Apurchased a house property in 1977 for Rs. 2,00,000. He is selling the house during December 2005 for Rs. 30,00,000. The fair market value of the house property as on 1- 4-1981 is Rs. 5,00,000. Compute the indexed cost of acquisition for the assessment year 2006-07. Solution: Indexed cost of acquisition Cost of acquisition or fair market value As on 1.4.81 as the case may be. X Index factor for the year of transfer Index factor for the base year 1981- 82 or year of transfer for the first year in which the asset was held by the assessee, whichever is later Indexed cost of acquisition = 5,00,000/100 x 497= Rs. 24, 85,000
185

Taxation

2.

Mr. Aconverts the house properi) mio stock-in-trade during Feb 2002. He incurs Rs. 6, 00,000 towards development expenditure lor the property and sells the property in April 2005 for Rs. 40. ()().()()(). The lair market value during Feb 2002 was Rs. 30, 00,000. Compute eapital gains and business income taxable. Ans: a) Indexed cost of acquisition (5, 00,000 X 497/ 480) Rs. 5, 17,708

b) Indexed eost of acquisition (5. ()().()()() X 4637 100) Rs.23, 15,000 In this case even though the indexation is available to the assesses only up to year of transfer ( up to the year i n which compulsory acquisition has taken place), the capital gains is chargeable to tax only in the year in which the compensation is received. Capital gains: Sale consideration (FMV during Feb. 2002) Less: Indexed cost of acquisition (5,00,000X426/100) Long term capital gains Business Income: Sale consideration of stock-in-trade Less: i) Cost of stock ii) Development expenses Taxable Business Income 30,00,000 6,00,000 Rs. 30,00,000 21,30,000 8,70,000

40,00,000

3.

4,00,000 36,00,000 Dilip, an individual purchased unlisted share in Indian companies as investments on 10.05.2001 for Rs. 30 lacs. On June 1, 2004 he started a business as a dealer in shares and transferred 50% of such shareholding to the business. The fair market value of the entire share as on that date was Rs. 60 lacs. The shares held in business were sold by Dilip for Rs. 34 lacs on October 20,2005. Compute the taxable income of Dilip under the relevant heads of income indicating the relevant assessment year. Ans: Taxable income for the assessment year 2006-07.

186

Unit 6

Capital Gains

Capital gains: Sale consideration on the date of com crsiom 1 M V) Less: Indexed cost of acquisition ( 15.00.000 X 480/426) Long term capital gains Business Income: Sale consideration of stock-in-trade Less: Fair market value on the date of conversion (60L X 50%) Taxable Business Income

Rs.
30,00,000 16,90,141 13,09,859
4,00,000 330,00,000 4,00,000

4. Mr. X purchases convertible debentures for Rs. 4, 88,000 during May' 1998. The debentures were converted into shares in June 2002. These shares were sold for Rs. 10,00,000 in August' 2005. The brokerage expenses are Rs. 30,000. Compute the capital gain taxable for the assessment year 2006-07 in the case of Mr. X. Ans; Taxable income for the assessment year 2006-07. Capital gains: Sale consideration Less: Expenses on transfer-Brokerage paid Net consideration Less: Indexed cost of acquisition (4,88,000 X 497/447) Long term capital gains

Rs.
10,00,000 30,000 9,70,000 5,42,586 4,27,414

5. X purchased a house property on May 1,1976 for Rs. 20,000. He constructed the first floor in 1977-78 for Rs. 7,000. He gifts the property to his friend Y on January 2,1980. Y spends Rs. 50,000 on construction of second floor during 1984-85. Y entered into agreement to transfer the property to A for Rs. 10,00,000 On August 1, 2001. He took advance of Rs. 10,000 from A. A later on failed to honour the contract and, therefore, Y forfeited Rs. 10,000. Y ultimately sold the property to B on December 24, 2006 for Rs. 11, 00,000. The fair market value of property as on April 1, 1981 is Rs. 1,00,000. Compute capital gains chargeable to tax for the assessment year 2007-08. The period of holding property is from May 1,1976 to December 24, 2006. The

187

Taxation

(fail 6

04,25,300 Rs.

Rs

the hands of Y for the assess ment year 200708 as follo wsParti cular s Sales consi derati on Less: Index ed cost of acqui 04, 67,100 sition (i.e. 90,00 0X51 9100) Less: Index

ed cost of impro veme

06,74,700

nt (i.e. 50,00 0X51 9^12 5 02,07 ,600 Longterm capita l gain

6X . purc hase d a plot of land on May 15,1 982 for Rs. 80,0 00. X dies on Sept emb er

1rred 5to his , son 1Y. Y 9sold 8the 7plot to A aon nNov demb er 1, a2006 sfor Rs. p10,0 e0,00 r 0. Com hpute i capit sal gains w taxa i ble l or l the , asses smen tt hyear e2007 -08. p l The operio t d of holdi i ng of sprop erty t is rfrom aMay n15,1 s982 fto eNov

eerefo m re, a blongeterm r capit al 1asset , . The 2capit 0al 0gains 6is . com pute T d in hthe ehand s of pY for l the oasses t smen t i year s2007 , -08 is as t follo hws-

S L ( L ( L

R 1

7X . purc hase d a plot of land on Dece mber 1, 1979 for Rs. 1,00, 000. Fair mark et value of the plot as on April 1,19 81 is Rs. 2,00, 000. X starte d busin ess in prop erties on May 15, 1987 and treat ed

t arket hvalu ee of the pplot l on oMay t 15, 1987 ois f Rs. 10,0 l 0,00 a0. X nsold dthe plot aof sland on hJanu i ary s2,20 07 sfor t Rs. o19,0 c0,00 k0. - Com i pute ncapit - al t gains r charg aeable dto etax . for the Fasses asmen it r year 2007 m -08.

188

Unit 6

Capital Gains

Capital gains will be computed as follows for the assessment year 2007-08

Rs.
Sales consideration Less: Indexed cost of acquisition (i.e. 2,00,0001X1502^1003) Long-term capital gains 3,00,000 7,00,000 10,00,000

8. X sold a residential house property for Rs. 20,00,000 on January 15, 2007. He initially purchased this property for Rs. 2,50,000 on October 1,2000. In order to avail exemption under section 54, X has purchased a house property located at pune for Rs. 10,00,000 and has deposited Rs. 5,00,000 in Capital Gains Deposit Account before due date of furnishing his return of income on July 31,2007. Compute capital gains chargeable to tax in the hands of X for the assessment year 2007-08. Assessment year Sale consideration Less: Indexed cost of acquisition [Rs. 2,50,000X519-f406] Balance Less: Exemption under section [amount of investment in new residential property and amount deposited in deposit scheme, i.e. Rs. 15,00,000 or amount of capital gains, i.e. Rs. 16,80,419, whichever is lower] Long Term capital gains chargeable to tax 3,19,581 16,80,419 54 15,00,000 2007-08 Rs. 20,00,000

1,80,419

9. X sells a vacant plot located in Delhi for Rs. 20,00,000 on January 15,2007 (cost of acquisition on December 1,1990 for Rs. 2,50,000). On January 15,2007 he owns one residential house. In order to avail benefit of section 54F, X deposits Rs. 10,00,000 in Capital Gains Deposit Account Scheme. He purchases a residential house in Lucknow for Rs. 9,50,000 on December 15,2008. Ascertain the amount of capital

189

Taxation

gains chargeable to tax for the assessment year 2007-08 and tax treatment of the unutilised amount. Assessment year Sale consideration Less: Indexed cost of acquisition (Rs.2,50,OOOX519/182) Capital gains before any exemption Less: Exemption under section 54F [Rs. 10,00,000 (i.e. cost of new house or amount deposited in deposit scheme) X Rs. 12,87,088 (i.e. amount of capital gains)/ Rs. 20,00,000 (i.e. amount of net sale consideration)] Long term capital gains chargeable to tax for the assessment Year 2007-08 Amount deposited in the Deposit Scheme is not utilised fully. Unutilised amount of Rs. 50,000 will attract tax as follows for the assessment year 2010-11: Net sale consideration (a) Original capital gains (b) Unutilised amount (d) Notional long-term capital gains [i.e. (d) X (b)/(a)] 32,177 Rs. 20,00,000 12,87,088 50,000 2007-08 Rs. 20,00,000 7,12,912 12,87,088 12,87,088

6,43,544

190

Moreover, X can withdraw unutilised amount of Rs. 50,000 at any time after January 15, 2010. 10. Suppose in 50.6-Ex 1, X sells the new house in Lucknow for Rs. 15,00,000 on November

17, 201 0. E f

fective exemption under section 54F available in 50.6Exl is Rs. 6,11,367 [i.e., Rs 6,43,544-Rs. 32,177]. Consequently, there will be notional long-term capital gains in the assessment year 2011-12 of Rs. 6,43,544. Moreover, short-term capital gains on the transfer of new house at Lucknow shall be calculated as follows:

Unit 6

Capital Gains

Sale consideration Less: Cost of acquisition Short-term capital gains

Rs. 15,00,000 9,50,000 5,50,000

11. X, a resident individual sold listed shares of AB Ltd for Rs. 80,000 on May 15, 2006. Securities transaction tax is not applicable, as shares are transferred to a friend outside stock exchange. These shares were acquired on May 12,2004 for Rs. 10,000. His business income during the previous year 2006-07 is Rs. 52,000. Compute tax liability for the assessment year 2007 -08. Computation of income of X for the assessment year Business income Long term capital gains(see note 1) Total income Tax on Rs. 52,000 Tax on long term capital gains of Rs. 21,266 (Rs. 69,266-Rs.48000) @20% is Rs. 4,253 restricted to Rs. 2,200 [i.e., (Rs. 70,000*-Rs. 48000) 10%] Tax liability Add: Education cess Note 1 - Computation of long term capital gains: Sales consideration Less: Indexed cost of acquisition (Rs. 10000X519/497) Longterm capital gains 80,000 10,443 69,557 2,200 2,200 44 2,244 2007-08 52,000 69,266 1,21,270 Nil

1 9 1

Taxation

6.6 SUMMARY
Capital Gains are chargeable to Income Tax if there is any profit or gain arising from the transfer of a capital asset. As such, the income from Capital Gains arises if the following conditions are satisfied a. There should be a Capital Asset

b. The capital asset should be transferred during the previous year under consideration. The time when the consideration for such transfer is received by the transferor is not material, In other words, even if the transfer consideration is not received during the year of transfer, still the capital gains arising there from will be subjected to tax. c. There should a profit or gain earned by the transferor on such transfer of asset.

Even if both Short Term Capital Gains and Long Term Capital Gains are a part of Total Income, the tax treatment applicable to both of them is different. The short-term capital gains are added to the total income as one of the heads of income. If the short-term capital gains arise on account of transfer of any securities listed on any recognised stock exchange, the said amount is considered as a separate block of income and are taxable at a flat rate of 10% (with effect of Assessment Year 2005-2006). The long-term capital gains are considered to be a separate block of income and are taxed at a concessional rate of tax of 20%. If the long-term capital gains arise on account of transfer of any securities listed on any recognized stock exchange, they are exempt from tax (with effect of Assessment Year 2005-2006).

6.7 KEYWORDS___________________________________________________
Capital Asset: Capital Asset includes the property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Short Term and Long Term Capital Asset: Short Term Capital asset means a capital asset for not more than 36 months and an asset other than short term capital asset is regarded long term asset. In case of shares, the period of holding will be 12 months instead of 36 months

192

Taxation

7.1 INTRODUCTION As discussed earlier, the sum total of all the heads of income clubbed together gives the amount of Gross Total Income. While calculating the tax liability of an assessee, certain deductions are permissible as per the provisions of Chapter VI-A of the Act. These deductions are based upon the certain payments made by the assessee or certain investments made by the assessee. However, these deductions are not available from -

Income from Long Term Capital Gains Income from winning of lotteries, races etc.

Basic rules for claiming the deduction a. The amount of deductions under the provisions of Chapter VI-A cannot exceed the Gross Total Income. As the deduction is available from Gross Total Income, unless there is a Gross Total Income, the deductions cannot be claimed. The deductions under Chapter VI-A are allowed if the assessee claims the deductions and establishes the circumstances warranting the deductions.

b.

c.

Some of the major deductions as per the provisions of Chapter VI-A of the Act are discussed below: 7.2 DEDUCTIONS (GENERAL)______________________________________

Deduction in respect of Life Insurance Premium, Differed annuity etc. Section 80 C(w.e.f.A.Y.2006-07) A. Eligible Assessee: Individual or HUF Quantum of deduction: 100 % of qualifying investment*. Or Rs. 100,000 whichever is less. Qualifying Investment:
198

A) In case of Individuals i) Life Insurance premium * to effect or keep in force an Insurance Policy (Life

Policy

Unit 7

Deductions from Total Income

or endowment policy) on the life of the assessee or on the life of the spouse or any child of the assessee (not exceeding 20% of the capital sum assured) ii) Premium paid in respect of non - commutable deferred annuity on the life of assessee or of the life of the spouse or any child of the assessee. iii) Contribution to statutory and recognised provident fund. iv) Contribution towards 15 years Public Provident Fund in the name of the assessee or the spouse or any child of the assessee. v) Amount deducted on behalf of the Government from the salary of Government Employee for securing a deferred annuity or making provisions for his wife or children (not exceeding 200/o of the salary). vi) Assessee's own contribution to an approved superannuation fund. vii) Sum deposited in Post Office Savings Bank-10 years and 15 years Rules, in the account of the assessee or the spouse or any child of the assessee. vm) Contribution for participating in Unit Link Insurance Plan of UTI**, Plan of LIC mutual fund (Dhanraksha Plan of LIC mutual Fund), in the name of the assessee or the spouse or any child k) Purchase of National Savings Certificates VI, VII and VIII issue. (VI and VII issue new purchase is now not available) x) Contribution to effect or keep in force a contract for notified annuity plan of LIC (Jeevan Dhara / 'Jeevan Akshaya). xi) Subscription towards any notified Pension Fund set up by Mutual Fund or UTI 1. Equity linked savings scheme of a mutual fund or UTI. xii) Subscription to Home Loan accounts Scheme of the National Housing Bank or notified Pension Fund of the National Housing Bank. xiii) Payment made towards the cost of purchase / construction of residential property. xiv) Subscription towards Deposit Scheme of any Public Sector Companies or Housing Development Corporation of India engaged in providing long term finance for housing accommodation and eligible for deduction under Sec36(i) (viii). xv) Expenditure incurred on the education of children (for maximum two children) by payment of tuition fees (excluding donation or development fees) to any university, college, school or other educational institution in India for full 199 time education.

Taxation

xvi) Eligible shares or debentures forming part of eligible issue(**) of capital approved by the Board. xvii) Any subscription by an Individual or HUF to any units of any Mutual Fund referred to in section 10 (23D) and approved by the Board. B) In case of HUF i) Life Insurance premium * to effect or keep in force an Insurance Policy (Life Policy or Endowment Policy) on the life of any member of the family ii) Purchase of National Savings Certificates VI, VII and VIII issue iii) Contribution to Public Provident Fund in the name of any member iv) Payment made towards the cost of purchase / construction of house v) Sum deposited in 10 years or 15 years Post Office Savings Bank (Cumulative Time Deposit) Rules, in the account of any member vi) Equity linked savings scheme of a mutual fund or UTI vii) Subscription towards Home Loan account Scheme of National Housing Bank viii) Contribution for participating in Unit Link Insurance Plan of UTI**, Plan of LIC mutual fund (Dhanraksha Plan of LIC mutual Fund), ;n the name of any member ix) eligible shares or debentures forming part of eligible issue(**) of capital approved by the Board and

x) any su bs cri pti on by @ an In di 200

vidual or HUF to any units of any Mutual Fund refer to in section 10 (23D) and approved by the Board

(**) Means an issue made by a public company form and registered in India or Public Financial institution and the entire proceeds of the issue are utilized wholly and utilised for the purpose of any business refer to in section 801-A (4). Points to be noted
*In case of the taxpayer discontinues the policy of Life Insurance, before premiums have been paid for 2 years, no deduction will be allowed in respect of any premium paid on that policy in the year in which the policy is terminated. Further the amount of deductions

Unit 7

Deductions from Total Income

allowed in respect of premium paid in the preceding years will be deemed to be the income of the assessee of the year in which the policy is terminated. In case of single premium insurance policy, if such policy is surrendered within two years of the date of commencement of insurance, the amount of deduction allowed earlier shall be deemed to be the income in the year of surrender.

o f w h i c h , t h e

d e d u c t i o ** No deduction will n be allowed in respect of contribution made h in such year: Where a a member, s participating in Unit Linked Insurance b Plan terminates his e participation before e making the n contribution for a period of 5 years, and a the amount on which l tax deduction has l been allowed earlier o be deemed to be the w tax payable by e assessee of the d previous year in which he terminates i as participant in the s plan. t In case of the house r property in respect

ansfe rred by the taxpa yer at any time befor e the expir y of 5 years from the end of the finan cial, year in whic h posse ssion of such prope rty as obtai ned by him, no deduc tion in this provi sion shall be allow ed in respe ct of the

p any amount of the t r ,tax deduction e allowed in the r v earlier years for the i same shall be a o deemed to be the n u income of the s assessee of the s previous year in f y which such house is e e transferred. a r r Following payments made by an i Individual or HUF n for purchase or o construction of a f house w residential h property are eligible qualifying i for h c investment. h o 84, Any installment or part payment u t of the amount h s due under self e financing or e other t scheme of any r development p a authority. n r s 85, Any installment f or part payment o e of the amount p r due to any company or co- e i operative s society towards r cost of the t m 'house property a allotted to him. y d . e 86, Stamp duty, 87, R registration, fee and a e n other expenses for d p

a y m e n t

h a e t a e s s G e o s v

Hou sing Ban k

o f

s e e r e n

a m o u n t

f m r e o n mt : . i. T ii. Bank iii. the life Insurance Corporation

b o r r o w e d

h e C e n t r a l

iv. Public limited companies providing long term finance v. Company engaged in financing the construction National

b y

o r S

201

Taxation

vL The Assessee's employer, where such employer is a Public Company or a Public Sector Company or a University or a Loc-31 Authority or a Cooperative Society or a Board. Corporation or Body established or constituted under Central or State Act,

7.2.1 Contribution to Certain Pension Funds [Section 8OCCC) 88, Assessee: Only Individual (irrespective of his residential status and citizen ship) 89, Qualifying Sum for availing deduction:
A sum paid or deposited to effect or keep in force a contract for any annuity plan of LIC or any other insurer referred to Section 10 (23 AAB). C) Quantum of deduction: (i) Sum so paid or deposited;

or (ii) RslOOOO/- whichever is less D) Treatment of amount at the time of receipt (i) In case the assessee or his nominee surrenders his annuity before maturity date, the surrender value shall be taxable in the hands of the assessee or his nominee, as the case may be in the year of receipt. (ii) In case the amount is received by the assessee or his nominee as pension at the time of maturity, the same will be taxable in the hands of the assessee or the nominee, as the case may be, in the year of the receipt.

7.2.2 Contribution to certain pension scheme of central Government [Section 80CCD] 90, Assessee: Person entering the service of the Central Government on or after 1.01.2004 91, Quantum of Deduction:
A sum deposited by the assessee in the pension account (subject to a maximumn of 10% of his salary*) as per the scheme to be notified by the Government; and further the employer's contribution to such pension scheme shall also be eligible for deduction under this section to the extent of 10% of salary.

202

Unit 7

Deductions from Total Income

C) Taxability on receipt of such pension fund The amount standing to the credit of the assessee in the pension account for which a deduction has already been claimed by him and accretions to such account shall be taxed as income in the year in which such amounts are received by the assesses or his nominee on closure of the account or opting out of the said scheme or on receipt of pension from annuity plan. *Salary includes D. A. (if the terms of employment so provide) but excludes all other allowances and perquisites.

a n d i t s s u b s i d i a r i e s a n d o t h e r p r i v a t e s e c t o r i n s u

7.2.3 Payment of Medical Insurance Premium (Section SOD)

This deduction is available in respect of the amount of premium paid by the assessee for Mediclaim policy of General Insurance Corporation of India

rance comp anies appro ved by Insura nce Regul atory and Devel opme nt Autho rity (IDR A). This deduc tion is availa ble if the follo wing criteri a are satisfi ed:

e d i c l a i m

p o l t The premium i should be paid by c cheque. y The premium should be paid by c the assessee out of a his income n chargeable to tax. b e b o u g h t b y t h e

his/her own name or in the name of the spouse or in the name of dependent parents or in the name of dependent children.

R e s i d e n t

I n d i v i d u a l

T his dedu ction is availa ble to an indivi dual or a HUF.

The amount of deduction permissible is actual premium paid or Rs. 10,000 whichever is less. However, in case of the assessee who is a senior citizen, the maximum amount of Rs. 10,000 is increased to Rs. 15,000.

a s s e s s e T e h e i Mn

7.2.4 Maintenance including medical treatment of dependants (Section 80 DD] 92, Assessee:

o r

H U F

e of

disability =

(i.e. depen Rs.75,000 even dant HUF being shou a ld be perso resid n ent in with disab

India ility* ) =

93, Q Rs.50

uant ,000 um of
95,

In

dedu case ction of depen

9 4 ,

dant being a perso n with sever e

2 0 3

I n

c a s

Taxation

Dependant means: (i) In case of individual: spouse, children, parents, brothers, or sisters. In case of HUF: A member of HUF such person should be dependent wholly or mainly for support and maintenance and should not have claimed any deduction under Sec. 80U. *Disability means person with disability person suffering from not less than 40% of any disability as certified by medical authority: Blindness Low vision, Leprosy cured Hearing impairment Locomotive disability, Mental retardation Mental illness, Autism, Cerebral palsy, multiple disabilities. Person with severe disability - Person with 80% or more with one or more disabilities as specified above. C) Treatment of amount in case the dependant predeceases the individual or member of HUF: The amount equal to the amount paid or deposited shall be deem ed income of the previous year in which such amount is received by the assessee.

Qualifying sum
(a) Any expenditure incurred for medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability, (b) Paid or deposited any amount under a scheme framed by LIC or any other insurer or the Administrator or the specified company as approved by the Board (Scheme provides for payment of annuity or lump sum amount for the benefit of dependant, in the event of death of Life individual or member of HUF in whose name subscription to the scheme has t been made).

7.2.5 Medical Treatment etc. [Section 80 DDE] 96, Assessee: Resident Individual or HUF (Including non-resident) 97, Quantum of deduction:
(i) Amount actually paid; or (ii) Rs. 40000 (Rs.60000 in case of resident senior citizen whichever is less.
204

Unit?

Deductions from Total Income

C) Qualifying sum Expenditure actually incurred for the medical treatment of the following persons for specified diseases or ailment in case of98, Individual: himself or a dependant 99, HUF - For any member of HUF.

inc om e for clai mi ng ded uct ion un der this sec tio n. 7 . 2 . 6 R e p a y m e n t o f l

Dependant includes the spouse, children, parents, brothers or sisters of the individual or any of them. D) Conditions A certificate in the prescribed form from a neurologist, an oncologist, a urologist, a hematologist, an immunologist or such other specialist as may be prescribed, who is working in a Government Hospital should be attached along with the return of the

oan taken for highe r educa tion (Secti on 80E)

100,

Asses see: Only Indivi dual

101,

Quant um of deduc tion P a y m e n t d u ri

ng agement or postthe graduate course applied year in by sciences or pure way sciences including of pay mathematics and ment statistics. of C) Period of Inter Deduction: est there The deduction on; shall be allowed or for 8 assessment (ii) years beginning Rs. from the 40,0 previous year in 007 which assessee whic starts repaying heve the loan of r less interest thereon or until the loan **Hi together with gher interest is repaid educ in full, ation whichever is mea earlier(i.e. ns maximum 8 yrs full from repayment time of loan or studi interest). es for7.2.7 Donations any paid (Section 80G) grad uate This deduction is or available if the postfollowing conditions grad are satisfied uate cour 2 se in 0 engi 5 neeri ng, medi cine, man

Taxation

This deduction is available to all the assessees. Donation should have been paid in terms of money (not in kind) to an approved fund/ institution. The assessee should produce a proof of payment of such donation. The amount of deduction available depends upon the nature of donation. For this purpose, the donations may fall under the following categories a. b. c. d. Donations eligible for 100% deduction without any qualifying limit. Donations eligible for 50% deduction without any qualifying limit. Donations eligible for 100% deduction subject to qualifying limit. Donations eligible for 50% deduction subject to qualifying limit.

For calculating the qualifying limit, all the donations under category c and d above are clubbed together and the qualifying amount will be limited to 10% of the Adjusted Gross Total Income which means Gross Total Income duly reduced by:

Long Term Capital Gains All the deductions under Chapter VI-A except under Section 80G.

Gross Qualifying Sum: Aggregate of donations made to the following institutions or funds (a) No ceiling for deduction for A & B Category

Category A of Donation Quantum of Deduction: 100% of donation made to below: i) National Defence Fund ii) Prime Minister's National Relief Fund iii) Prime Minister's Armenia Earthquake Relief Fund iv) Africa (Public Contribution -India) Fund
206

Category B of Donation B] 50% of donation made to below: i) Jawaharlal Nehru Memorial ii) Prime Minister's Drought Relief Fund iii) National Children's Fund iv) Indira Gandhi Memorial Trust

Unit 7

Deductions from Total Income

v) Any trust, institution or fund for p r o v i d i n g r e li e f t o v i c ti m s o f e a rt h q u a k e i n G u j a r a t

( C o n t r i b u t i o n m a d e b e t w e e n 2 6 . 1 . 0 1 t o 3 0 . 0 9 . 0

1 l l ) o Gn vi) o e T v e e R c r e h n l n mi o e e l n f o t g F y vii) Au n n D d d e r . v a e viii) Nat l P ion o r al p a Fou m d nda e e tion n s for t h Co mm F C una u h l n i Har d e mo f ny s e ix) An M approved t i University or n Educational u i p Institution s of national t b eminence x) e y r Chief ' Minister's C s Earthquake e n Relief Fund C t xi) Zilla y r c Saksharta a

Samti Constit uted in any district . xii) Nation al Blood Transf usion Counc il and State C ou nc il fo r Bl oo d Tr an sf us io n fu nd se t up b y t h e

S t a t e G o v e r n m e n t . x i i i ) N a t i o n a l

s tate Govt. a for s medical s relie i f to the s poor xv) t Central a Welfare n Fund of c the e Army and F Air force u and the n Indian Naval d Benevolent fund xvii) x National i sports fund or v national ) cultural fund xviii) National F trust for u welfare of n person with d Autism, Cerebral s e t u palsy, Mental Retardati on and Multiple disabilitie s b p

v) Rajiv Gandhi Found ation

i l l n e s

(b) Ceiling for y deduction under C & D Category is applicable S Cat egor

teg ory D of i) Dona tion by comp any to Olym pic Asso ciatio n or other notifi ed associ ation

Don atio n i) Any approved institution or fund establi shed in India for Indian charita ble purpos e.

207

Taxation

ii) D o n a t i o n t o G o v e r n m e n t o r S t a t e G o v

e r n m e n t f o r p r o m o ti n g t h e i n t e r e s t o f

t h e m e m b e r s 'l o c a l a u t h o r i t y , i n s t i t u t i o n o r o f t h

e m i n o ri t y C o m m u n it y a s s o c i a ti o n t o b e u ti li s d f o r p r o m o

t ii) i n g p l a n n i n g .

A n y a u t h o ri t y s e t u p f o r d e a li n g w it h a n d s a ti s f y i n g t h e n

e e d f o r h o u s i n g a c c o m m o d a t i o n o r f o r t h e p iii) u r p o s e o

f p l a n n i n g d e v e l o p m e n t o f t o w n s, v il l a g e s e t c A n y C o r

p o r a t i o n e s t a b l i s h e d b y t h e C e n t r a l G o v e r n m e n t o r S t

a t e G o v e r n m e n t f o r p r o m o ti n g t h e i n t e r e st o f t h e m e m b e r

s o f t h e c o m p a n y . iv) G o v e r n m e n t o r L o c a l A u t h o r i t y o r

a n a p p r o v e d i n st it u ti o n o r a s s o c i a ti o n t o b e u ti li s d f o r t h e

p u r p o s e o t h e r t h a n o f p r

o m o ti n g F a m il y p l a n n i n g

2 0 8

v) Any notified temple, mosque, gurdwara, church or other place (for renovation or repairs)

Il l lI un sc to rm ae t io of n T M hr e.

oI fn c to hm ee

ff or lo lm o w S ia nl ga

G D re os sh sp a T n od te a

r ii ne cs o m e sR :s .

e 1 ,P r 2o 0p ,e 0r 0t 0y I nc oR m s e.

n. g 4 T 5 e, r0 m 0 0 C Bank aIntere psti Rs. t 8,000 aDurin g the l Asses sment Year 2007G 2008, ahe has paid i the nMedic laim spremi um by chequ e for himse lf amou R nting to Rs. s

f8 r0 o, m 0 0 H 0 o uL so

5Rs. , 25,00 00 to a 0charit 0able . trust, which H attract es the deduct pion of a50% i subjec dt to qualif t ying hlimit. eCalcul ate the ddeduct oion navaila able t under i sectio on 80G nfor the oAY f 20072008.

Unit 7

Deductions from Total Income

Solution
Calculation of Gross Total Income
Rs. Income from Salaries Income from House Property Bank Interest GTI (Except LTCG) Less: Deductions 80D Adjusted GTI Qualifying amount for Section 80G Deduction under Section 80G (Being 50% of Qualifying Amount) 1,20,000 0, 80,000 0, 08,000 2, 08,000 0, 05,000 2, 03,000 19,500 9,750

7.2.8 Rent Paid (Sectio n 80GG)

m u s t

h a This deducti v e on is availabl e if the p followin a g i criteria d are satisfied r : e Thi n s t deducti on is f availabl o e to an r individu al. h The i ass s ess ee r

esidential accommodation, whether furnished or unfurnished.

The assessee may be self employed or employed. However, if he is employed, he should not be entitled to house rent allowance or a rent-free accommodation. The individual or his/her spouse or minor child should not own any residential accommodation at the place of residence or at the place of work. The amount of deduction is

restricted to the minimum of the following amounts:

Excess of rent paid over 9 10% of Adjusted Total Income

20

25 % of the Adjusted Rs. 2,000 per month.

Total Income

Adjusted Total Income for this purpose means the Gross Total Income duly reduced by Long Term Capital Gains and the deductions as per the provisions of Chapter VI-A of the Act.

Taxation

Illustration Mr. Anil is working as an Accountant with A Ltd. He furnishes the following details for the AY 2007-2008.

Income from Salaries (Gross) - Rs. 1,20,000 Short term capital gains from the sale of jewellery - Rs. 25,000 Long term capital gains from the sale of land - Rs. 30,000 Interest on Government Securities (Gross) - Rs. 20,000 Repayment of the loan taken from the bank for pursuing higher studies - Rs. 25,000 Interest on the loan stated above - Rs. 20,000 Premium paid on Jeevan Suraksha policy of LIC - Rs. 10,000 Rent paid for a flat in Pune - Rs. 30,000. Neither he nor any of his family members own a house.

Calculate the deduction under Section 80GG for the AY 2007-2008.

Solution Calculation of deduction under Section 80GG Income from Salaries Short Term Capital Gains Interest on Government Securities GTI (Except LTCG) Less: Deductions 80CCC 80E (Principal + Interest) Adjusted GTI Excess of rent paid over 10% of 20,000
210

Rs. 1,20,000 25,000 20,000 .1,65,000 10,000 40,000 50,000 1,15,000

Unit?

Deductions from Total Income

Adjusted GTI 25% of Adjusted GTI 28,750 Rs. 2,000 per month 24,000 Least of the above amounts 20,000 Hence, deduction under Section 80GG will he Rs. 20,000. 7.2.9 Donations for Scientific Research or Rural Development (Section 80 GGA)
102, Assessee: Any (whose GTI does not include income chargeable under the head 'Profits and Gains of Business or Profession). (ii) 103, Quantum of deduction 100% of Qualifying Sum. Qualifying sums:

i m pl e m e nt in g pr o gr a m of ru ra l d e v el o p m e nt . Su m pai d to Nat ion al Ur ban Po ver ty Era dic ati

(i) Sum paid to an Approved Association, Institution, Public Sector Company which , has as its object the training of persons for

o n f u n d s e t u p a n d n o ti fi e d b y C e n tr a l G o v e r n m e n t. (iii) S u m p ai d t

roved University, or College or Other Institutions to be used for Scientific Research or Research in Social Science or Statistical Research. (iv) Sum paid to the National Fund for rural developmen t set up and notified by the Central Governme nt for the purpose of carrying out rural developme nt programmes . $ Activity A; 1. Mr. Ashok is working as an Accountant with ALtd. He furnishes the following details for the AY 20072008.

1,4 0,0 00

Sho rt ter m cap ital gai ns fro m the sale of jew elle ry Rs. 45, 000

Inte rest on Go ver nm

Income

from Salaries (Gross) - Rs.

e n t S e c u ri ti e s ( G r o s s ) R s . 3 0 , 0 0 0

igher studies Rs. 25,000

2 1 1

R e p

Interest on the loan staled above - Rs. 10.000

Rent paid for a flat in I'ime - Rs. 30.000. Neither he nor any of his family members own a house. Calculate the deduction under Section 80GG for the AY 2007-2008.

2. The Gross Total Income of Mr. Sunil consists of the following incomes -Income from Salaries - Rs. 2,20,000 Income from House Property - Rs. 1,20,000 Bank Interest - Rs. 8,000 During the Assessment Year 2007-2008, he has paid the Mediclaim premium by cheque for himself amounting to Rs. 6,000. He paid the donation of Rs. 25,000 toa charitable trust, which attracts the deduction of 50% subject to qualifying limit. Calculate the deduction available under section 80G for the AY 2007-2008.

7.3 PROFITS AND GAINS FROM BIO-DEGRADABLE WASTE SECTION-80 JJA) _______________________________________________________
A) Assessee: Assessee whose Gross total Income includes any profits and gains derived from the business of collecting, processing and treating bio degradable waste for the purpose of: 104, Generating power, bio-fertilisers, bio-pesticides or other biological agents; or 105, Producing bio - gas and making pellets, briquettes for fuel and organic manure

Unit 7

Deductions from Total Income

the ma nuf act uri 107, Duration of ng deduction: for or period of five pro consecutive du assessment years cti beginning on with the of assessment year arti relevant to the cle previous year in or which such thi business ng commences. an d 7.3.1 Deduction in the sa respect of me is Employment of not New Workmen for me [Section 80 JJAA] d by 108, Eligible spl itti Assessee: Indian ng up company or 109, Conditions: rec ons tru 110, Incom cti e of the on taxpayer of includes any an profits and exi gains derived sti from any ng industrial un undertaking der engaged in
106, 'Quantum of deduction 100% profits & gains from such business.

ntant, giving ta such ki particulars in ng the report as or may be a prescribed. m al ga C) Quantum of m deduction: at Deduction shall io be allowed of an n amount equal to wi 30% of the th additional wages* an paid to the new ot regular workmen he employed by the r Assessee in the in previous year. du st Period of ri deduction: al Deduction shall un be allowed for de three assessment rt years, including ak the assessment in year relevant to g. the previous year in which such 111,T employment is he provided. as se *additional ss wages meansee fu (i) In case of any rn industrial is undertaking: he wages paid s to the new al regular on workmen' in g excess of wi 100 th workmen th employed e

dur ing the pre vio us yea r. The add itio nal wa ges shal l be Nil if the incr eas e in the nu mb er of reg ular wor km en em plo yed duri ng the yea r is less tha n 10 % of exis

t industrial i undertaking: n wages paid g to the new n regular u workmen in m excess of b 100 e workmen r employed o during the f previous w year. o 7.3.2 Income of r offshore banking k m Units [Section 80 LA] e n A) Assessee: ' Scheduled bank (not e being a bank m incoiporated by or p under the laws of a l o y e d i n s u c h a (ii) In n u n d e r 2 t 1 a 3 k i n g

Taxation

ife?

country outside India) owning an offshore banking unit* in a special economic zone. B) Eligible Income: a. b. Income from an offshore banking unit in a special economic zone. Income from banking business with an undertaking located in special economic zone or any other undertaking which develops and operates and maintains a special economic zone. income received in foreign exchange under FEMA 1999.

c.

C) Deduction: 100% of income for 3 consecutive assessment years beginning from the assessment year relevant to the previous year in which the permission under Banking Regulation Act was obtained and thereafter 50% of such income for 2 consecutive assessment years. "Offshore Banking Unit" means branch of a bank in India located in special economic zone and has obtained permission u/s 23(1 )(a) of Banking Regulation Act, 1949. 7.3.3 Income of a Person with Disability (Section SOU)

112, Assessee: Resident Individual 113, Conditions:

i) ii) C) He is certified by the medical 'authority to be a person with disability* at any time during the previous year. He furnishes, a certificate issued by the medical authority in the prescribed form.

Quantum of deduction i) ii) In case of person with disability* - Rs.50,000 In case of person with severe disability** - Rs.75,000

* Person with disability: Person suffering from not less than 40% of any disability as certified by radical authority Blindness, Low vision, Leprosy cured, Hearing impairment, Locomotive disability Mental retardation, Mental illness, Autism, Multiple disability, Cerebral Palsy

214

Unit 7

Deductions from Total Income

** Person with severe disability-Person with 80% or more with one or more disabilities as specified above.

g$ Activity B :
1. What will be deduction available in respect of person with disability?

2. Short Note on offshore banking and its deduction under the Act.

3. State the quantum of deduction under section 80 JJA.

7.4 PROFITS FROM INFRASTRUCTURAL ACTIVITY (SECTION 801A)

The deduction is available under this section if the GTI of the assessee includes profits and gains derived from following types of undertaking: A. Industrial undertakings or enterprises engaged in providing infrastructural development B. Telecommunication services C. Industrial parks or special economic zones D. Power Generation and distribution undertakings

215

Taxation

A) Industrial under-takings or Enterprises engaged in Infrastructural Development (Sec. 80IA (4)):

Conditions

i. Operating and maintaining the infrastructure facility on or after April 1,1995. ii. The enterprise (and the same is owned by an Indian company or consortium of such companies) should carry on business of developing or maintaining and operating or developing, maintaining and operating any infrastructure facility*. iii. The undertaking has entered into an agreement with Central or state Government or local authority or any other statutory body for developing, maintaining or operating new infrastructure facility with the condition that transfer of such infrastructure facility shall be transferred to the Central Government, State Government, Local Authority or other specified authority within a period stipulated in agreement. Infrastructure facility means: i) Road including toll road, bridge, or rail systems

ii) Airport, port, inland waterways iii) Highway project, including housing or other activities being integral part iv) Water supply/ irrigation / sanitation sewerage system, or water treatment solid waste management system (B) Telecommunication Undertaking - Section 801A (4) (ii) Telecommunication undertaking engaged in basic or cellular, radio paging, domestic satellite service or network of trunking & Broad band network and internet services providing telecommunication services at any time on or after 1.4.1995 but on or before 31.3.2005. It will be allowed to all assessees. (C) Industrial parks - Section 8OIA (4) (iii) Industrial undertaking which- (a) develops or (b) develops and operates or (c) maintains and operates notified Industrial parks by Central Government at any time on or after 1.4.1997 but before 31.3.2006.
216

Unit?

Deductions from Total Income

I n c a s e a n s p e c i a l e c o n o m i c z o n e b e g i n s t o d e

velop or operate or maintain and operate at anytime on or after 1.4.2001 hut before 31.3.2006. (D) Power Undertakin gs Industrial undertaking engaged in 114, generation, 115, generation and distribution of power or, 116,

( s u b j e c t t o c e r t a i n e x c e p t i o n s ) o n o r a f t e r 1 . 4

S t

f cutive An undertal ing i A. Y. which undertakes F r -100% substantial Subseq renovation s and t modernisation of uent five existing transmission 5 lines consec or distribution utive in period of A. Y. 01/04/2004 c to 31 /03/ -30% 2006,meanso increase n out of in plant & machinery s by at least 50%of 15 the e years book value of asset as on 01/04/2004 restriction i *imposed The on transfer of old deduction plant & is not applicable in this available case. only for 10 (E) consecutiv Quantum of e deduction assessmen Sec 80IA t years, falling All industrial undertakings within a period of other than 100% of profits 15 & years. (*20 gains for 10 years consecutive for Industrial years of the undertakin business of gs or providing enterprises Telecommunicati engaged on A. Y. out of 15 in years* beginning providing with the Service. infrastruct ural facility 1 other than 0 port, 0 airport, % inland waterway o or inland f

p
217

Taxation

maintaining infrastructure facility. The deduction is available commencing from the initial assessment year as chosen h\ the assessee. Profits from housing or other activities not liable to tax but have to transferred to Special reserve account and same is utilised for Highway project other than housing or other activities before expiry of three years from amount transferred, if not utilised, the same is taxable in that previous year. Computation of Profits and gains for deduction for initial A. Y. or subsequent A. Y, computed as if such eligible business were the only source of income of the assessee during the previous year relevant to initial A.Y. Where any goods or services held for the purposes of the eligible business are transferred from or any other business of assessee, the consideration in either case if any for such transfers a recorded in the accounts of eligible business does not correspond to the market value of such services as on the date of goods or transfer, then for the purposes of the deduction under this section the profits & gains of such eligible business shall be computed as if the transfer, in either case had been made at market value of such goods or services as on that date.

7.4.1 Profits and Gains from Certain Industrial Undertakings other than Infrastructure (SECTION 80IB)
Development Undertaking - For the following industrial undertakings deduction is available: A. Business of industrial undertakings including cold storage and cold chain facility B. C.
218

Operation of Ship Scientific and Industrial research Developing and Building Housing Projects Multiplex Theatres

D. Production of Mineral oil and Refining of Mineral Oil E. F.

G. Convention Centers

H. Operat J. ing and Maint aining a Hospit al in a Rural Area I.. I nt e g ra te d H a n dl in g S to ra g e a n d T ra n s p o rt at io

n of Food grains or processii preservation and packing of fruit or vegetables Business of any Hotel

Unit7

Deductions from Total Income

A) Industrial Undertaking

cir cu ms 117, It is an tan Undertakin ces g which is spe mainly cifi engaged in ed the business un of der generation sec or tio distribution n of electricity 33 or other B. form of 118, It power or in em the construction plo ys of ships 10 or in the manufactur or mo e or re processing of goods or wo in provided rke rs it is not wh formed by splitting up en ma or the reconstructi nuf act on of ure business is already in car existence rie subject to exceptions d out , an but industrial undertakin wit h gs which aid is formed as a result of po of we reestablish r or ment in

e m pl o y s 2 0 o r m o re w o r k er s w h e n m a n u fa ct u re is c ar ri e d o ut w it h o ut ai d o

119,

e other than specified in Eleven Schedule except if it is located in industrially backward state specified in Eight schedule eligible for deduction.

120,Quantum of deduction and period of deduction

Type of Business

a) SSI Units engaged in production of any article 30% for companies b) Situated in backward state (including union territories ) (eight schedule) and engaged in production of any article or a cold storage plant. c) Situated in category 'A' backward district and producing any article including cold storage plant excluding articles 2 specified in 1 1th 1 schedule. 9

Taxation

d) Situated in category 'B' backward district and producing any article including cold storage plant but excluding specified in 1 1 th schedule. e) Cold chain facility for agricultural produce

1-4-1994 to 31-3-2004

100%

First 3 A. years.

25% other than Next 5 A. Y. CO. 09 Ayears for co.op. 30% for society owned companies undertaking 100% for all 25% other than CO. 30% for companies. First 5 year. 12 years for co.op. society owned undertaking

1-4-1999 to 31-3-2004

(f) Any other undertaking not specified above and engaged in production of any article other than specified in 1 1th Schedule B) Operation of Ship

1-4-1991 to 31-3-1995

25% other than First 10 years

CO.

30% for companies

1 2 years for co.op. society owned undertaking

121, Ship must be owned by an Indian Company. 122, It should not have been owned and used in Indian territorial waters by person resident in India prior to its acquisition by an Indian Company. 123, Quantum of deduction: 30% for first 10 Assessment years from the year of commencement of business (same should commence between 1.04.1991 to 31.03.1995
C) Hotel Industry

124, The business of a hotel is not formed by splitting up or the reconstruction of business already in existence.
220

125, The business of the hotel is owned & carried on by an Indian Company having paid up capital not less than Rs. 5,00.000. 126, The hotel is approved by prescribed authority.

Unit?

Deductions from Total Income

d) Quantum of deduction: (i) In case of Hilly area rural area place of pilgri mage or other notifie d areas 50% (busine ss comme nced betwee n prescri bed period ) For first 10 A.Y. from the year of comm encem ent of busine ss. (ii) In case of other place: 30% for first 10 A.Y. from the year of

co m me nc em ent of bu sin ess . (b usi ne ss co m me nc ed bet we en pr es cri be d pe rio d)

D ) C o m p a n y e n g a g e d

in Indus trial and Scient ific Resea rch and Devel opme nt: 127, T h e C o m p a n y m us t b e In di a n a n d h a v e as it s m ai n o bj ec t

Scie ntifi c& Indu stria l rese arch deve lop men t.

128, It is for time bein g appr ove (ii) In d by pres case ofcrib ed approval on or auth ority after 1.04.1999 . but before first 129, Qua 10 A. Ys. E) ntu m Mineral of Oils 131, ded Underta and Refining ucti kin on: g of Mineral Oil eng (i) In 130, Dedu age d in ction is bus allowed to ines an s of industrial undertaking refi nin which g of begins commercial min eral production oils of mineral on

0 but before April 1, 2005 100% of profits from such busines s is deducti ble for 10 years beginni ng with initial A. Y.

oils in any part of Ind ia[( on or afte r 01. 04. 199 7(n o suc h limi t for unit in Nor ther n Eas tern regi on) ]

o r a ft e r 1 . 1 0 . 1 9 9 8 s h a ll a ls o b e e li g i b l e f o r d e d u c ti o n .
132, Quant u m

ess commences prior to 1.4.1997)

F) Developing arid building housing projects

133, Proje ct should be approved by local authority before 31.3.2007 134, The minimum plot area should be 1 acre and the maximum built up area of each residential should be 1500 Sq. Ft. (1000 Sq. Ft. for Delhi and Mumbai and within 25 Km of their local limits)

2 2 1

Taxation

c)

!n case the housing project has been approved by the local authority before 1.4.2004 it should complete on or before 31.3.2008. In a case where the housing project is approved by the local authority on< after 1.4.2004, it should complete within 4 years from the end of financial ye in which housing project is approved by the local authority. Housing project can have shops and other commercial establishment butt built up area of the shops and other commercial establishment included in t housing project shall not exceed 5% of the aggregate built up area of the housii project or 2000 sq.ft, whichever is less. Quantum of deduction: Deduction shall be allowed 100% of the profits fa such project.

d)

e)

f)

222

G) Multiplex Theatres*

135, The business of the multiplex theatre is not formed by the splitting up. or t

re co ns tr uc tio n, of a bu si ne ss alr H) ea dy in ex ist en ce or by th e tra ns

fer of any buildin or of any machinery or of plant previously used for any purpose, to new business,!

136, Such multiplex theatres are not located at a place within the municipal jurisdictionf of Kolkatta, Chennai, Delhi-or Mumbai. 137, Quantum of deductions: 50% of profit for the first 5 years.
^Multiplex Theatre is a building of a prescribed area comprising two or morel cinema theatres and commercial shops of such size and number and having suclf other facilities and amenities as may be prescribed. Convention Centre

138, It means a building of a prescribed area comprising of convention halls tot used for the purpose of holding conferences and seminars, being of such siz and number and having such facilities and amenities as may be prescribed. 139, The business of convention is not formed by splitting up or the reconstruction! a business already in existence or by transfer to a new business of any buildin or machinery or plant previously used for any purpose. 140, Quantum of deduction: 50% of profit for first 5 years

Unit 7

Deductions from Total Income

d) A convention centre constructed between 01.04.02 to 31.0.2005 is only eligible for deduction under this section. I) Integrated Handling, Storage and Transportation of Food grains or processing, preservation and packing of fruits or vegetables on or after 1.04.2001: (a) Condition: It must operate integrated business of handling storage and transportation of food grains.

(b) Deductions. In case of Period of Deduction (i) Company (ii) Other than Co. First 5 years Next 5 years First 5 years Next 5 years

Deduction 100% 30% 100% 25%

J) Operating and Maintaining a Hospital in a Rural Area:

141, The hospital has at least 100 beds for patients and the construction of the hospital is in accordance with the regulations of the local authority (and the construction of the same shall be completed between 1.10.2004 to 31.03.2008) 142,
Quantum of deduction: 100% for first 5 A.Ys.

7.5 ILLUSTRATION_____________________________________________________

Mr. Ashokhas given the following details of his income during the Assessment Year 20072008. a. Income from Salaries - Rs. 40,000 b. Long Term Capital Gains - Rs. 75,000 c. Short Term Capital Gains - Rs. 10,000 During the year, he has made the following payments a. He paid the premium on Jeevan Suraksha Policy of LIC amounting to Rs. 10,000
22 3

Taxation

b.

He has the premium on Mediclaim policies purchased from Oriental Insurance Company Limited as stated below -

c.

On his own health - Rs. 2,000 On the health of wife - Rs. 1,000 On the health of his son not dependent on him - Rs. 1,500 On the health of his father not dependent on him - Rs. 1,500 On the health of his mother dependent on him - Rs. 1,000

He has deposited an amount of Rs. 30,000 under a scheme of LIC for the medical treatment and rehabilitation of his brother who is dependent on him. Calculate the amount of deductions available to Mr. Ashok as per the provisions of Chapter VI-A of the Income Tax Act.

Solution Calculation of Taxable income of Mr. Ashok

Rs.
Income from Salaries Income from Long Term Capital Gains Income from Short Term Capital Gains Gross Total Income Less: Deductions under Chapter VI- A Section 80CCC for Jeevan Suraksha Section SOD for Mediclaim Section 80DD for Medical Expenses Total Deductions
224

Rs.
40,000 75,000 10,000 1, 25,000

10,000 5,000 30,000 45,000

Taxable Income

80,000 1

Unit 7

Deductions from ToUil

7.6 SUMMARY

As discussed earlier, the sum tolal of all the heads of income clubbed together gives the amount of Gross Total Income. While calculating the tax liability of an assessee, certain deductions are permissible as per the pro\ isions of Chapter VIA of the Act. These deductions are based upon certain payments made by the assessee or certain investments made by the assessee.
7.7 KEYWORDS

Deductions : While calculating net taxable income of a person, we need to deduct deductions under section 80 of Income Tax act Section 80C: This is the most important amendment after A.Y. 2006-2007 where assessee can take the benefit of investments to the extent of Rs. 1,00,000
7.8 SELF-ASSESSMENT QUESTIONS__________________________________

Ql. Ashok provides the following details of his income for the Assessment Year 2007-2008. a. b. c. d. Income from Salaries (Computed) - Rs. 60,000 Long Term Capital Gains-Rs. 50,000 Short Term Capital Gains - Rs. 15,000 Interest on Government Securities - Rs. 18,000

During the year, he makes the following payments a. Rs. 12,000 paid as premium on Jeevan Suraksha policy of LIC. b. Mediclaim premium on the policy in his own name - Rs. 5,000 c. Mediclaim premium on the policy in the name of his dependent brother Rs. 2,000 d. Rs. 30,000 paid as the donation to a charitable trust giving the benefit of Section 80G. 225

Taxation

8.1 INTRODUCTION The net tax payable by the assessee can be paid in the following forms a. b. c. Advance Tax Tax Deducted At Source Self Assessment Tax

c.

d. e. f.

230

8.2 TAX DEDUCTIONS AT SOURCE (TDS) In order to avoid the cases of tax evasion on the part of the assessees, the Act has provided for tax deduction at source. As such, the payer of the various types of payments is required to deduct the tax at source from the various payments made by him to the various payees and deposit the same to the

credit of te to the payee within the stipulated time. The payee, at the time of filing his income tax returns, can Central attach such Tax Deduction Certificates and get the credit for the same. The person responsible for Govern making such payments is required to file the Annual Returns of TDS in the prescribed form, and within ment prescribed time limits along with the TDS Challans and copies of the Tax Deduction Certificates. within If the assessee is a company, the annual returns are required to be filed in a computer readable the stipulate format. For other assessees, it is optional to file the returns either in the computer readable format or d time. regular paper. The computer readable medium return is to be prepared on the data structure provided by NSDL and the same is to be copied on a floppy. The floppy should carry a label, permanent Similarl account number, tax deduction account number, address of the person filing the return, period to y, the which the return pertains and the form number of the return viz. Form No. 24 or Form No. 26. If the payer is assessee fails to file the annual returns as specified above, he will be liable to pay the penalty of Rs. responsi 100 per day during which the default continues. ble to issue the We will discuss the provisions of TDS in relation to the following main types of incomes received by the payee. Tax Deducti a. Payment of Salaries on Certifica b. . Payment of Interest on Securities

Unit

Tax Deducted at Source, Interest, Rebates and Relief

c. d. e. f. g.

Payment of Interest other than Winnings from lotteries, Payment to the contractors Insurance Commission Payment of Profession al Fees

Securities crossword puzzles, card games etc.

8.2.1 Payment of Salary (Sec. 192) The provisions are as follows: Payer Recipient Payment covered by section 192 Time of tax deduction at source Maximum amount that can be paid without tax deduction taxpayer. Rate of tax deduction at source Salary payment without tax deduction or with lower tax deduction

r e n t a l l o w a n c e

u Employer p Employee t Taxable o salary of employee. For computation of salary for the purpose of tax deduction R time of payment. At the s If taxable salary does not exceed maximum . amount not chargeable to tax in case of the 3 , Normal 0 rates applicable to an individual 0 Recipient can apply in Form No. 13 to the 0 Assessing Officer to get a certificate authorising

the payer to deduct tax at lower rate or Nil rate, p be appropriate. as may e r Computation of salary for the m purpose of tax deduction - Please o refer to the unit "Salaries" for n computation of taxable salary. t Apart from computing taxable salary h for the purpose of tax deduction: 1. House rent allowance - While computing taxable house rent allowance though actual expenditure on payment of rent is considered for claiming deduction under section 10( 13 A), it has been decided as an administrative measure that salaried employees drawing house w i l l b e e x

emp ted fro m prod ucti on of rent rece ipt. It may , how ever , be note d that this con cess ion is only for the pur pos e of tax ded ucti on at sour ce, and, in the regu lar asse ssm ent of the

e m pl o y e e, th e A ss e ss in g O ff ic er

231

Taxation

232

will be free to Section (3) Rounding 192(2)offprovides The total for deduction salary should of tax be at rounded off to the nearest multiple of Rs, make source 10 by ignoring by an employer the fraction (as of less the than tax payer five rupees ma; and increasing the fraction of five rupees such choose) or more. from the aggregate salary of an employee* enquir who is, or has been, in receipt of salary from more cases - They are as follows: y as he Special than one employer in the same year, if the employe^ deems furnishes details to such employer in Fora| November 6, 2004. fit for No. 12B 1. If a person is employed by the more than one employer (2) Deductions - No deductions are to be made from purpos the salary income in respect of any donations for e of satisfyi charitable purposes. The tax relief admissible under section 80G in respect of such donations will have to be claimed by the employee at the time of finalisation of his ng himsel assessment. However, in cases where contributions are made to the Jawaharlal f that Nehru Memorial Fund, the Prime Minister's Drought Relief Fund, the National Children's Fund, the Indira Gandhi Memorial Trust or Rajiv Gandhi Foundation, the emplo fifty percent of such contributions may be deducted in computing the total income of the employee. Similarly, the donations to the National Defence Fund, the Prime yee Minister's National Relief Fund, the Prime Minister's Armenia Earthquake relief Fund, has incurr the Africa (Public Contributions -India) Fund, the National Foundation for Communal Harmony, the Chief Minister's Earthquake Relief Fund, Maharashtra, ed actual National Blood Transfusion Council, State Blood Transfusion Council, Army Central expen Welfare Fund, Indian Naval Benevolent Fund, Air Force Central Welfare Fund, diture Andhra Pradesh Chief Minister's Cyclone Relief Fund, 1996, National Illness Assistance Fund, the Chief Minister / Lieutenant Governor's Relief Fund, the notified on payme University or other educational institute of National eminence, National Sports Fund or nt of National Cultural Fund or Fund for Technology Development and Application rent - or National Trust Welfare of Person with Autism, Cerebral Palsy, Mental Circul Retardation and Multiple Disabilities, will be eligible for hundred per cent deduction. It i> to be noted that all eligible donations, without any limit, will be deductible under the ar No.6/2 provision of section 80G Besides, the person responsible for making payment should 004, also take into consideration amount deductible under sections 80C, 80CCC, dated 80CCD, SOD, 80DD, 80DDB, 80E, 80G and SOU - Circular No. 6/2004, dated December 6,2004.

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

2. Relief under section 89

If the employee furnishes information in Form No. 1OE to the employer, relief under section 89 should be given to the concerned employee while deducting tax at source under section 192. However, this facility is available only if the employer is Government or public sector undertaking or company, co-operative society, local authority, university, institutions or associations or body. The employee may or may not declare his other incomes to the employer on a plain paper with verification (see rule 26B). Such declaration may include details of his other incomes (including house property loss from self-occupied or let out property or properties but not any other loss) and tax deducted there on by others. In case employee does not submit such information, then employer cannot take into account such income (even though it is otherwise known to the employer). After receipt of such information, the person responsible for paying salary, shall deduct out of salary payment, the tax due on the total amount of tax deductible from salary only (except where house property loss has been taken into account).

3. Other incomes of employee (Sec. 1925(2B))

4. If employer chooses to pay tax on The person responsible for paying any income in the perquisites (Sec.192 (1A)) nature of a perquisite (not provided for by way of monetary payment) referred to in section 17(2), may pay, at his option, tax on the whole (or part) of such income without making any deductions from salary payable to employee. For this purpose, tax shall be determined at the average of income tax computed on the basis of the rates in force for the financial year, on the income chargeable under the head "Salaries". The tax so paid by the employer is not taxable in the hands of the employee as a "perquisite".

23 3

Taxation

5. Particulars of perquisite and profit in lieu of salary (Sec. 192(2Q)

The person responsible for paying salary shall furnish to the recipient a statement giving correct and complete particulars of perquisites or profits in lieu of salary in Form No. 16 (if taxable salary <Rs. 1,50,000) or Form No. 12BA () if taxable salaty>Rs. 1,50,000).

234

8 . 2 . 2

at source from interest on securities (Sec. 193) The provisions are as follows: Payer Recipient Payment covered by section 193 of tax deduction at source Time Payer of interest on securities A resident person (includes non-resident person too, up to May 3 1 , 2003) holding securities Interest on securities At the time of payment or at the time of accrual, whichever is earlier 10% in case of listed debentures and 20% in case of non-listed debentures, if recipient is resident non-company assessee, 20% if the recipient is a domestic company. See Note Below Recipient can apply in Form No. 1 3 to the Assessing Officer to get a certificate authorizing the payer to \ deduct tax at lower rate or Nil rate, as may be appropriate.

T a x Securities not subjected to tax deduction Payment without tax deduction or with lower tax deduction Rate of tax deduction at source

d e d u c t i o n

Securities not subject to tax deduction No tax deduction is made in case of the following payments:
143, 4.25 per cent National Defence Bonds, 1972, where the bonds are held by any resident individual 144, 4.25 per cent National Defence Loan, 1968 or 4.75 per cent National Defence Loan, 1972 held by an individual

UnitS

Tax Deducted at Source, Interest, Rebates and Relief

National Development Bonds Ins ur 146, 7-year National Savings an Certificates (IV Issue) ce Bu 147, Debentures issued by any cosin operative society (including a coess operative land mortgage (N bank or a co-operative land ati development bank) or any other on institution or authority ali (including a public sector sat company) notified by the Central ion Government ) Ac 148, 61/2 percent Gold Bonds, t, 1977 or 7 percent Gold Bonds, 19 1980, held by a resident 72 individual, provided he gives a declaration in writing before the or an person responsible for making payment that the total y oth nominal value of such bonds er (including bonds held on his behalf) does not exceed ins Rs 10,000 at any time during the ure r period to which (ap interest relates pli ca 149, Any security of the ble Central/State Governments fro (however, from June 1,2007 interest m exceeding Rs 10,000 on 8 percent Ju Savings (Taxable) Bonds, 2003 ne during the financial 1,2 year shall be subject to tax 00 deduction under section 193) 2)
145, 150, Securities beneficially owned (9) by the Life Insurance Corporation of India or the General Insurance Corporation of India or to any of the four companies formed by virtue of the schemes framed under section 16(1) of the General

A ny int er es t

pa t mpany in which public is ya p substantially interested. bl a e y Payment without tax deduction or up e with lower tax deduction to e an C The provisions are as follows: ag h 1. Form 13 The recipient can gr e make an application eg q in Form No. 13 to ate u the concerned am e Assessing Officer and ou o Obtain a certificate nt n authorising the payer no to deduct tax at t l lower rates or ex i deduct no tax, as ce s may be appropriate ed t in e \ 2. Form 15G If Form No. 15G is g d submitted to the Rs payer, then no tax 2, d shall be deducted at 50 e source. Form No. 0 b 15G can be in e submitted, if - (a) fin n recipient is a person an t I other than company or cia u firm, (b) the estimate total income of l r the recipient ye e of the financial year ar s is Nil :and (c) to i amount of interest a s on securities, res s dividends, interest id u other than interest on en e securities, payments t d in respect in di b vi y 23 5 du al t by h ac e co c un o

Taxation

of deposits under National Savings Scheme and income in respect of units credited or paid during the previous year does not exceed the maximum amount which is not chargeable to incometax (i.e. Rs 1,35,000 in case of a resident woman taxpayer, whose age is less than 65 years at any time during the previous year, Rs. 1,85,000 in case of a resident senior citizen whose age is 65 years or more at any time during the previous year and Rs 1,00,000 in case of any other individual and every HUF AOP/BOL). Exemption limit for the financial year 2007-2008 is as follows: Rs 1,45,000 in the case of resident woman (below 65 years) Rs 1,95,000 in the case of resident senior citizen (65 years or more) Rs 1,10,000 in the case of any other individual or every HUF/ AOP/ BOL Regimental Fund - Income of regimental fund or non-public fund established by Armed Forces is exempt under section 10(23 AA), therefore, no tax may be deducted at source under sections 193 and 194 -I from the income of such Fund circular No. 735 dan January 30,1996. 8.2.3 Tax deduction at source from interest other than interest on securities (Si 194A) The provisions are as follows; Payer Any person paying interest other than interest oil securities (not being an individual or HUF whos| books of account are not required to be audited under section 44 AB in the immediately preceding f i n a n c i a l y e a r ) < A resident person j At the time of payment or at the time of accrual, w h i c h e v e r i s e a r l i e r J I A n y p a y me n t u p t o R s 5 , 0 0 0 1

Recipient Time of tax deduction at source Maximum amount that can be paid without tax deduction Rate of tax deduction at source

Payment covered by section 1 94A Interest other than interest on securities

1 10% if the recipient is resident non-corporatj

assessee and 20%, if the recipient is resides! corporate assessee \

236

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

Interest not subject to tax deduction

No tax deduction is made in case of following payments : (1) Where the aggregate amount of interest credited or paid (or likely to be credited or paid) during the financial year does not exceed the limit given. (2) Where interest is credited or paid to any banking company, co-operative society engaged in banking business, public financial institutions, the Life Insurance Corporation, the Unit Trust of India A company or a co-operative society carrying on the business of insurance, or notified institutions.
151, Where interest is credited or paid by the firm to its partners. 152, Where interest is credited or paid by a co-operative society to its members or to any other cooperative society. 153, Where interest is credited or paid in respect of deposits under the schemes of Post Office (Time deposit), Post Office (Recurring Deposits), Post Office Monthly Income Account, Kisan Vikas Patra, National Savings Certificates VIII Issue, and Indira Vikas Patra. 154, Where interest is credited or paid in respect of deposits other than time deposit made on or after July 1, 1995 with a banking company or (interest to nonmembers on deposit) with a co-operative bank. 155, Where interest is credited or paid in respect of deposit (by non - members) with a primary agricultural credit society or co-operative land mortgage bank or cooperative land development bank. 156, Where interest is credited or paid by the'Central Government under different provisions of the direct taxes. 157, Where the interest is paid or credited on compensation awarded by the

M ot o r A c ci d e nt s C la i m s T ri b u n al if th e a m o u nt o f p a y m e nt o r th e a g g re g

ate amount of such payment does not exceed Rs 50,000 (applicable from June 1,2003).
158, Where income is payable in relation to zero coupon bonds (applicable from June 1, 2005).

(11) Interest by an offshore Banking Unit on deposits made after March 31, 2005 by RNOR.

237

Taxation

No tax deduction if interest does not exceed a specified amount. Tax under section 194 A is not deductible where the aggregate amount of interest credited or paid (or likely to be credited or paid during a financial year does not exceed the amount given below: From June 1, 2007 Rs Where the Payer is a banking company and interest is paid or payable on time deposit Where the payer is a co-operative society engaged in carrying on the banking business and interest is paid or payable on time deposit. Where the payer is post office and interest is paid or payable on notified deposit scheme with post office Where the payer is any other person 10,000 5,000 Up to Ma\ 31, 2007 Rs

10,000 10,000 5,000

5,000 5,001) 5,000

The aforesaid limits shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society, as the case may be. The interest on time deposits made with a primary agricultural credit society or a primary credii society or a co-operative land mortgage bank or a co-operative land development bank, will not be subject to the requirement of deduction of income -tax at source. The expression "time-deposit" has been defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed period. 8.2.4 Tax deduction at source from winnings from lotteries or crossword puzzle (Sec. 194B) The provisions are as follows: Payer Any person paying winnings from lotterie&L crossword puzzles / card games / other m games Any person : f l Winnings from lotteries / crossword puzzljB / card games 9 9 At the time of payment F

Recipient Payment covered by section 194B Time of tax deduction

238

Unit:

Tax Deducted at Source, Interest, Rebates and Relief

Maximum amount that can be paid without tax deduction Rate of tax deduction at source Payment without tax deduction or with lower tax deduction Prize money partly in cash and partly in kind

Any payment up to Rs.5000

30%
No such provision Tax is deductible from cash prize with reference to the aggregate amount of the cash prize and value of prize in kind

Tax deduction at source from winnings from horse races (Sec. 194BB)
The provisions are as follows: Payer Recipient Payment covered by section 194BB Time of tax deduction Maximum amount that can be paid without tax deduction Rate of tax deduction at source Payment without tax deduction or with lower tax deduction Any person paying winnings from horse races Any person Winnings from horse races At the time of payment Any payment up to Rs. 2500 30% No such provision

8.2.5 Tax deduction at source from payment to contractors or sub-contractors (Sec. 194C)
The provisions are as follows: P (1) A specified person in case of payment to contractor, and (2) A resident

c
239

Taxation

Recipient

(1) A resident person in case of payment to contractor; and (2) A resident contractor in case of payment to sub-contractor Consideration for any work contract or a contract for supply of labour for works contract At the time of payment or accrual, whichever is earlier Any payment up to Rs. 20,000 provided the aggregate payment / credit to the same party during the financial year does not exceed Rs. 50,000 (1) When payment is made to contractor 2% in case of payment for a contract other than advertising contract and 1 % in case of payment for advertising contract; and (2) When payment is made to sub contractor -1 % Recipient can apply in Form No. 13 to the Assessing Officer to get a certificate authorising the payer to deduct tax at lowerjf rate or Nil rate, as may be appropriate

Payment covered by section 194C

Time of tax deduction

Maximum amount that can be paid without tax deduction

Rate of tax deduction at source

Payment without tax deduction or with lower tax deduction

240

Specified persons - The following are "specified persons" for this purpose:

159, the Central Government or any State Government; or

160, an corporation established by or under a Central, State or Provincial Act; or

y local 162, any company; or authorit 163, any co-operative society; or y; or
a

(6) any authority constituted in India by or under any law, engaged either for the purpose 161, an of dealing with and satisfying the need for housing accommodation or for the puipo.se y of planning, development or improvement of cities, towns and villages, or both; or

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

164, any society registered under the Societies Registered Act, 1860 or under any law corresponding to that Act in force in any part of India; or 165, any trust; or
i*

166, any University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a-University under section 3 of the University Grants Commission Act, 195 6; or 167, anyfirm 168, (with effect from June 1, 2007) any individual / HUF whose books of account are required to be audited under section 44AB (a) / (b) during the immediately preceding financial year.
It may be noted that the list does not include an individual or a Hindu undivided family. Payment without tax deducted under section 194C - From October 1,2004, no tax deduction shall be made if the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor does not exceed Rs. 20,000. However, the person responsible for paying such sum is liable to deduct tax at source where the aggregate of amounts of such sums credited or paid or likely to be credited or paid, during the financial year exceed Rs. 50,000. In other words, no tax deduction is required if single payment does not exceed Rs. 20,000 or if aggregate of all payments made in the financial year does not exceed Rs. 50,000. Up to September 30,2004, no deduction of tax shall be made under section 194C where the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor, in pursuance of a contract whose consideration does not exceed Rs. 20,000. This provision will apply irrespective of the fact that an individual contract has been divided into two or more contracts to escape tax deduction.

8.2.6 Tax deduction at source from insurance commission (Sec. 194D)

The provisions are as follows:

urpose (urpose >th; or

1Payer Recipient Payment covered by section 194D Time of tax deduction

Any person paying insurance commission A resident commission Insurance commission At the time of payment or accrual, whichever is earlier
24 1

Taxation

Maximum, amount that can be paid without tax deduction Rate of tax deduction at source

Any payment up to Rs. 5000

10% if the recipient is resident non-corporate assessee and 20% if the recipient is resident corporate assessee

8.2.7 Tax deduction at source from payment to non-resident sportsmen or sports associations (Sec. 194E)
The provisions are as follows: Recipient can apply in Form No. 13 to the Assessing Officer to get a certificate authorising the payer to deduct tax at lower rate or Nil rate, as may be appropriate

Payment without tax deduction or with lower tax deduction

242

Payer

Any person making payment to non-resident foreign citizen sportsmen or non-resident sports associations or institution Non-resident foreign citizen sportsmen ornonJ resident sports association or institution 1 1 ( 1 ) Payment to neo-resident foreign citizen 1 sportsman - Payment of any income by way of 1 participation in India in any game (other than can game or gambling etc.) or advertising or \ contribution of articles relating to any game or J sports in India in newspapers, magazines or 1 journals. (2) Payment to non-resident sports J association or institution - Payment of any inconsl by way of any amount guaranteed to be paid or 1 payable in relation of any game (but other than cadi game, etc.) or sport played in At the time of payment or accrual, whicheveris J earlier IS 10% 1

Recipient Payment covered by section 194E

Time of tax deduction Rate of tax deduction at source

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

Payment without tax deduction or with lower tax deduction

Recipient can apply in Form No. 13 to the Assessing Officer to get a certificate authorising the payer to deduct tax at lower rate or Nil rate, as may be appropriate

8.2.8 Tax deduction at source from payment in respect of National Savings Scheme (Sec. 194EE)

The provisions are as follows: Payer Recipient Payment covered by section 194EE Maximum amount that can be paid without tax deduction Time of tax deduction Rate of tax deduction at source Payment not subjected to tax deduction Post office Any person Payment (principal plus interest) out of National Savings Scheme, 1987 Any payment up to Rs. 2500 At the time of payment 20% Any payment made to the legal heir of the deceased depositor

Payment without tax deduction or with lower tax deduction If Form No. 15G is submitted 8.2.9 Tax deduction at source from payment in respect of repurchase of units of Mutual Funds or UTI (Sec. 194F) The provisions are as follows: Payer Recipient Payment covered by section 194F Time of tax deduction Rate of tax deduction at source Mutual fund or UTI Unit holder under section 80CCB Payment on account of repurchase of units referred to in section 80CCB At the time of payment 20%
243

^y e

Taxation

8.2.10 Tax deduction at source from commission or brokerage (Sec. 194H) The provisions are as follows: Payer Any person paying commission or brokerage (not being an individual or HUF whose books of account are not required to be audited under section 44 AB in the immediately preceding financial year) Any resident person, in case commission is retained by agent Any payment up to Rs. 2500 At the time of payment of accrual, whichever is earlier 5% (with effect from June 1 , 2007, 10%) Recipient can apply in Form No. 1 3 to the Assessing Officer to get a certificate authorising the payer to deduct tax at lower rate or Nil rate, as may be appropriate

Recipient

Payment covered by section 1 94H Commission or brokerage Maximum amount that can be paid without tax deduction Time of tax deduction Rate of tax deduction at source Payment without tax deduction or with lower tax deduction

When commission is retained by agent - In case commission or brokerage is retained by the consignee / agent and not remitted to the consignor / principal while remitting the sale consideration, deduction of tax is required to be made from the amount of commission because the retention of commission by the consignee / agent amounts to constructive

payment of the same to him by the consignor / principal. - Circular No. 169, dated December 4, 1991. 8.2.11 Tax deduction at source from rent [Sec. 194-1] The provisions are as follows: P
244

UnitS

Tax Deducted at Source, Interest, Rebates and Relief

Any resident person. It also includes a nonresident person up to May 31, 2003 Rent

Payment covered by section 194-1 Maximum amount that can be paid without tax deduction Time of tax deducti on Rate of tax deduction at source

Payment made during the financial year aggregating up to Rs. 1,20,000

At the time of payment or accrual, whichever is earlier (1) If recipient is individual or HUF -15 % 169, If any other case - 20% 170, Reduced rate in the case of rent of plant and machinery with effect from June 2007 -10%

171, Payment without tax deduction or with lower tax deduction

Recipient can apply in Form No. 1.3 to the Assessing Officer to get a certificate authorising the payer to deduct tax at lower rate or Nil rate, as may be appropriate for the us e of

Rent - Explanation (i) to section 194-1 defines rent as follows - 'rent' means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement

(either separa tely or togeth er) any,172,

MEquipment; or a1 c7 h8 i,

s [ W h et h er or n ot a n y or al l of th e a b o v

Land; n F or 173, eu rr

Buildi y n ng (inclu ding ;i t ou

factor r r y 1e

buildi 7 ; ng); or 6 174, Land ,o Pr

appurt l enant a ( to a nh

buildi t ) ng (inclu ding ; F oi

e ar e o w n e

factor r t y 1t

buildi 7 i ng);or 7 n 175, ,g

d by the paye e;]

2 4 5

^AXti.
Taxation

Therefore, it is immaterial whether or not the person to whom the rent is paid owns the building. 8.2.12 Tax deduction at source from payment of fees for professional or technical services [Sec. 194J] The provisions are as follows:
ft-

Payer

Any person paying fees for professional or technical services or (with effect from July 1 3,2006), royalty (not being an individual or HUF whose books of account are not required to be audited under section 44 AB in the immediately preceding financial year or not being personal purposes) Any resident person Fees for professional or technical services

Recipient Payment covered by section 194J

246 Meaning of can professional /Payment technical services - the The expression "professional services"! has been defined to mean Maximum amount that be made during financial year aggregating

services rendered by a person course of carrying on le| medical, engineering or architectural profession or the paid without tax deduction up in tothe Rs. 20,000 profession of accountancy ort consultancy or interior decorative or advertising (i.e. model, artists, photographers, Time of taxprov deduction At the time of payment or accrual, whichever is services to an advertising agency) or such other profession as is notified by the Bo the purposes of section earlier 44AA (i.e., authorised representative, film artist or con secretary or information technology) or of this i Rate of taxsection. deduction at source 10 per cent (up to May 3 1 , 2007 : 5 per cent) Payment without tax deduction or with lower tax deduction 1 Recipient can apply in Form No. 13 to the Assessing Officer to get a certificate authorising j the payer to deduct tax at lower rate or Nil rate, 1 as may be appropriate 1

UnitS

Tax Deducted at Source, Interest, Rebates and Relief

Failure to deduct the tax at source - Section 201

If the person responsible for deducting the tax at source and pay the same to the credit of Central Government fails to do so, he shall be considered to be Assessee in Default. The person who does not deduct the tax source as required by the Act or after deducting fails to pay the tax as required by the Act, shall be liable to pay the simple interest @ 1 % per month on the amount of such tax from the date on which the tax was deductible till the date on which such tax is actually paid. Online Tax Accounting System Every person who is required to deduct the tax at source and pay the same to the Central Government, is required to submit the quarterly statement for the period ending on 30th June, 30th September, 31 st December and 31 st March and submit the same to the prescribed tax authorities in the specified format and within the specified time. These details are required to be submitted in addition to the annual returns to be filed in Form No. 24 or Form No. 26. Failure to file these statements will attract the penalty of Rs. 100 per day during which the default continues. Based upon these statements and the annual returns, the prescribed income tax authority shall deliver a statement to every taxpayer specifying the amount of tax paid by him or on his behalf and the individual taxpayer will be given the credit for the tax paid by him. The taxpayer is not required to attach

t h e p r o o f f o r t h e a m o u n t o f t a x d e d u c t e d a t s o u r c e w it h t

he retur n of inco me. The pers on resp onsi ble to dedu ct the tax and pay that the Cent ral Gov ern ment is not requ ired to issue tax dedu ction certi ficat e to the paye e. Thes e provi sions will appl y

w it h e ff e c t fr o m

f failure in respect of noncompliance with the TDS requirements are enumerated below:

Nature of default Penalty

271C: Failure to deduct the tax at source Sum equal to the amount of tax which he failed todeduct

276B: Failure to pay the tax deducted Punishable with rigorous 1 imprisonment at source from 3 st months to 7 years and a fine. A p 272A (2): Failure to file the return of ri TDS Rs. 100 per day during which l default continues subject to the 2 maximum of amount of tax 0 deductible. 0 5 . T h e p e n al p r o vi si o n s in re s p e ct o

24 7

Taxation

272A (2): Failure to issue TDS Certificates Rs. 100 per day during which default continues subject to the maximum of amount of tax deductible. 272BB : Failure to apply for TAN and failure Maximum penalty of Rs. 10,000 to quote the same in challans, certificates and returns. Tax-Deduction Account Number (TAN) - Section 203 A

If the person responsible for deducting the tax at source and paying the same to the ci of Central Government has not been allotted the Tax Deduction Account Number (I he shall within one month from the end of the month in which the tax was deducted, for the allotment of TAN Number by filing Form No. 49B. Such TAN is required ti quoted by him in all the challans, certificates and returns required to be prepared/fil per the provisions of the Act. 8.3 ADVANCE TAX The purpose of Advance Tax is to ensure the receipt of tax proceeds by the Government before the assessment year ends on 31 st March. Every assessee is liable to pay advance tax if his tax liability exceeds Rs. 5,000. All the heads of income attract the provisions relating to advance tax. When the Advance tax is payable The due date for the payment of advance tax is different for corporate assesses andnon corporate assesses. On or before 15th June of the previous year payable On or before 15th September of the previous year payable payable On or before 15th December of the previous year payable payable On or before 15th March of 100% of advance tax to 75% of advance tax Up to Up to 45% of advance tax Up Corporate Assessees Up to 15% of advance tax

248

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

On or before 15lh June of the previous year payable On or before 15th September On or before 15th December On or before 15th March

Non-Corporate Assessees Nil Up to 30% of advance tax Up to 60% of advance tax Up to 100% of advance tax

Note: Any advance tax paid before 31 st March is treated as advance tax paid during the previous year. Failure to pay the Advance Tax If the advance tax paid by the assessee is less than 90% of the assessed tax, the assessee is liable to pay the interest as per the provisions of Section 234B of the Act. Similarly, if advance tax is not paid according to the instalments prescribed, the assessee is liable to pay the interest as per the provisions of Section 234C of the Act. The discussions about the interest payable as per the provisions of Section 234B and 234C of the Act are done in the following paragraphs. 8.4 SELF-ASSESSMENT TAX If the amount of tax payable by the assessee is higher than the combined amount of tax deducted at source and advance tax, such tax along with the amount of interest payable should be paid by the assessee at the time of filing the return of income. Such tax is called as Self Assessment tax. 8.5 INTEREST ________________

8.5.1 Interest payable for default in furnishing return of income (Sec. 234A) Section 234A is applicable if the return of income is furnished after the due date or is not furnished. Interest is computed as follows. 1. Rate of Interest 2. Period for which interest is payable a. if the return is furnished after the due date 1 % per month (simple interest ) Commencing on the date immediately following due date of filing the return of income and ending on date of furnishing
249

Taxation

b. if no return is furnished

of return of income. Commencing on the date immediately following due date of filing the return of income and ending on date of completion of assessment under section 144 Tax on total income as declared in the return minus advance tax paid and tax deducted or collected at source Tax on total income as determined under section 143(1) or on assessment under section 143(3) or 147 or 153A minus (advance tax paid and tax deducted at source)

3. Amount on which interest is payable a. where interest is paid under section 140 A b. where interest is paid on the income determined under section 143(10 or assessed under section 143(3) or 144 or 147 or 153A

250

When interes t is paid on the incom e deter mined under Sectio n 143(3) or 144 and intere st for delaye d filling of return is alread y paid under

Section 140A Interest under section 234A is computed in such cases as follows:

179, (Tax on total income as determined under section 143 (1) or on assessment under} section 143(3) or 147 or 153A minus (advance tax paid and tax deducted or collected at source) * 1 % period for which interest under section 234A is payable. 180, (Tax on total income as declared in the return minus (advance tax paid and tax deducted or collected at source) 1 %#*period for which interest under section 234A is payable. 181, Compute (1) - (2). This is the amount of interest payable for delayed filing of return when income is determined under section 143(1) or assessed under section 143(3) or 144.

8.5.2 Interest for default in payment of advance tax (Sec. 234B)

Interest is payable under section 234B if advance tax is not paid or advance tax paid is less than 90% of the assessed tax. If no tax has been paid on or after April 1 of the assessment year under section 140Aoi otherwise -

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

Interest is computed as follows: 1. Rate of interest 2. Period for which interest is payable 1 %# per month (simple interest) Commencing from the April 1 of the assessment year and ending on the date of payment of self-assessment tax. Tax on total income as determined under section 143(1) or on assessment under section 143(3) or 147 or 153 A minus tax deducted or collected at source minus advance tax, if paid.

3. Amount on which interest is payable

If tax has been paid on or after April 1 of the assessment year under Section 140A or otherwise: Interest is computed as aggregate of the following: Interest is computed @ per month (simple interest) for the period commencing April 1 of the assessment year and ending on the date of payment of self -assessment tax under section 140A or otherwise on the basis of tax determined under section 143(1) or on assessment under section 143(3) or 147 or 153A minus tax deducted or collected at source minus advance tax. Thereafter, interest is computed @ 1% per month (simple interest) for the period commencing from the date of payment of self assessment tax and ending on date of determination of income under section 143(1) or on assessment under section 143(3) or 144 or 147 or 153A on the basis of tax determined under section 143(1) or on assessment under section 143(3) or 147 or 153A minus tax deducted or collected at source minus advance tax minus tax paid under section 140A or otherwise. It is to be noted that from the amount of interest as computed above, the amount paid slider section 140A or otherwise towards interest chargeable under section 234B shall be deducted. Computation of interest where interest is to be paid at the time of payment of tax under section140A Interest is computed @ 1 % per month (simple interest) for the period commencing April 1 of the assessment year and ending on the date of payment of self-assessment 251 tax under section 140A or otherwise on the basis of tax on returned income minus tax deducted or collected at source minus advance tax.

Taxation

X files his return of income on February 2,2008 for the assessment year 2007-08, showing! income of Rs 2, 80,000. He has paid Rs 3,000 as advance tax during 2006-07 and a tax! deduction of Rs 1,000 has been made. The due date of filling return of income in case of | X was October 31,2007 for the assessment year 2007-08. Assume that X pays all his tax j dues (i.e. 30,680) and interest under sections 234A, 234B and 234C at the time of payment] of self- assessment tax. Compute interest payable under section 234B. X shall compute interest under section 243B at the time of payment of self assessment tax j under section 140A as follows: 1. Rate of interest 2. Period for which interest is payable 3. Amount on which interest is payable 1 % per month April 1, 2007 to February 2, 2008 (i.e. 11 months) Rs 33,990 (tax on Rs 2, 80,000) -Rs 1,000 (TDS) - Rs 3,000 (advance tax) =Rs 29, 99" or rounded off to Rs 29,990 ft

Amount of interest, therefore, works out to be Rs 3,289. Example - 2 Continuing Example -1 above, assessment of X is completed under section 143(3) on May 10, 2008 on income of Rs 3, 00,000 Compute interest payable on assessment under section 143(3). Interest Payable on assessment of income under section 143(3) will be computed in two parts as follows:

Parti
1. Rate of interest 2. Period for which interest is payable 3. Amount on which interest is payable 1 % per month April 1, 2007 to February 2, 2008 ( i.e. 11 j months ) Rs 40,170 (tax on Rs 3,00,000) -Rs 1,000. (TDS) - Rs 3,000 ( advance tax) =Rs

Amount of interest, therefore, works out to be Rs 3,971.

252

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

Part 2

1. Rate of interest 2. Period for which interest is payable 3. Amount on which interest is payable

1% per month February 2,2008 to May 10,2008 (i.e. 3 months) Rs 40,170 (tax on Rs 3,00,000) -Rs 1,000 (TDS) - Rs 3,000 ( advance tax) -Rs29,990 (tax paid at the time of selfassessment)=Rs 6,180

Amount of interest, therefore, works out to be Rs 183. Total interest pay able under section 234B is Rs 4154 (i.e. Rs 3,971 + Rs. 183). However, interest already paid at the time of payment of self- assessment tax is Rs. 3289. Therefore, interest payable under section 234B at time of assessment of income under section 234B is Rs 865 (i.e. 4,154-Rs 3, 289). 8.5.3 Interest for deferment of advance tax (Sec. 234C) Interest is payable under section 234C if assessee has not paid advance tax or has underestimated the instalments of advance tax. It is computed as follows: In case of a non-company assessee - Interest is computed as follows Interest is payable if advance tax paid on or before
Rate of interest (simple interest) Period of interest
Amount on which interest is payable

September 15<30% (a-b) December 15 <60% (a-b)

March 15<100% (a-b) Notes :

1% per month 1% per month 1% per month

3 months 3 months 1 month

30% (a - b) - c 60% (a - b) - d 1000% (a - b) - e

Tax on the total income as declared in the returns filed by the assessee.

253

Taxation

182, Tax deducted or collected at source, double tax relief under sections 90, 90A ; and 91. 183, Amount of advance tax paid on or before September 15 of the financial year immediately preceding the relevant assessment year. 184, Amount of advance tax paid on or before December 15 of the financial yeai immediately preceding the relevant assessment year. 185, Amount of advance tax paid on or before March 15 of the financial year immediately preceding the relevant assessment year.
In case of company assessee - Interest is computed as follows : Interest is payable if advance tax paid on or before

Rate of interest (simple interest) 1 % per month 1% per month 1% per month 1% per month

Period of interest 3 months 3 months 3 months 1 month

Amount on which interest is payable 15%(a-b)-c 45% (a - b) - d 75% (a - b) - e i

Junel5<12%(a-b) September 15<36% (a-b) December 15<75% (a-b) March 15<12% (a - b)

Notes :

100%(a-b)f !

186, Tax on the total income as declared in the return filed by the assessee. 187, Tax deducted or collected at source (and, from the assessment year 2007-08, MAT credit / double taxation relief) 188, Amount of advance tax paid on or before June 15 of the financial year immediately preceding the relevant assessment year. 189, Amount of advance tax paid on or before September 15 of the of the financial year immediately preceding the relevant assessment year. 190, Amount of advance tax paid on or before December 15 of the of the financial year immediately preceding the relevant assessment year. 191, Amount of advance tax paid on or before March 15 of the of the financial year immediately preceding the relevant assessment year.
254

a.

Unit:

Tax Deducted at Source, Interest, Rebates and Relief

Short payment of advance tax in case of capital gains or casual income No interest will be levied in respect of any shortfall in the payment of advance tax due on the returned income ifa. The shortfall is on account of underestimation or failure to estimate the amount of capital gains (short-term or long-term) or income of the nature referred to in section 2(24)(ix) (i.e., lottery income, gambling income, etc.); and b. The assessee has paid the whole of the amount of tax payable in respect of such income, as part of remaining instalments of advance tax, which are due, or if no instalment is due, then such tax is paid before the end of the financial year. 8.5.4 Interest on excess refund (Sec. 234D, applicable from June 1,2003) Section 234D is applicable (i) if any refund is granted under section under section 143(1) but no refund is due on regular assessment, or (ii) if any refund is granted to the assessee under section 143( 1) and the refund so granted exceeds the amount refundable on regular assessment. For the aforesaid purpose, regular assessment means assessment under section 143(3) or 144. If an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment. Interest will be computed as follows:

5 % Period for which interest is payable

per month or part of month Commencing from the date of grant of refund under section 143(1) to date of regular assessment

Amount on which interest is payable

Whole of the amount a. If refund is refunded granted under section 143(1) but no The excess amount refund is due on refunded under regular section 143(1) over assessment the amount b, If any refund is refundable on regular granted to the assessment. assessee under section 143(1) and the refund so granted exceeds the amount refundable on regular assessment

255

Taxation

Adjustment under section 234D (2) - Where, as a result of an order under section 154 or 155 or 250 or 254 or 260 or 262 or 263 or 264 or an order of the Settlement CowmJssw, under section 245D (4) the amount of refund granted under section 143( 1) is held to| correctly allowed, either in whole or in part, as the case may be, then the interest charge under section 234D( 1), shall be reduced accordingly.

8.5.5 Interest for making late payment of income-tax (Sec.220)

If any assessee fails to pay any tax (other than advance tax) specified in a demand noti within 30 days of the service of notice of demand, he is liable to pay interest at the rate! 1 % for every month or part of month from expiry of time limit mentioned in noticedf demand for payment of income-tax commencing from the date of service of den notice and ending on the date on which the amount is paid. Reduction or waiver of interest by CCIT/CIT - CCIT/CIT may reduce or waive t amount of interest paid or payable by an assessee if he is satisfied that -() payment of s amount has caused or would cause genuine hardship to the assessee; (ii) default in t payment of the amount on which interest has been paid was payable was due | circumstances beyond the control of the assessee; and (iii) the assessee has co-open in any inquiry relating to the assessment or any proceeding for the recovery of any i due from him. Cancellation of assessment order - Where an assessment order is cancelled ui section 146 or cancelled/set aside by an appellate / revisional authority and the cancellai / setting aside becomes final (i.e., it is not varied as a result of further appeals / revisions] no interest under section 220(2) can be charged pursuant to the original demand noti The necessary corollary of this point will be that even when the assessment is refr; interest can be charged only after the expiry of 30 days from the date of service of dei notice pursuant to such fresh assessment order - Circular No.334, dated April 3,1982. j

Assessment originally made varied or set aside but restored on the further i - Where the assessment made originally by the Assessing Officer is either varied or set aside by one appellate authority but on further appeal, the original order of the I restored either in part or wholly, the interest payable under section 220(2) will be compute with reference to the tax finally determined. The fact that during an intervening period, there was no tax payable by the assessee under any operative order would make no * differences to this position - Circular No. 334, dated April 3,1982.

The observation given in Circular No.334 does not find support in the j pronouncement given by the Apex Court in Vikrant Tyres Ltd. v. First ITO (2001)]

256

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

Taxman 202. The Supreme Court has held that section cannot be invoked to revive a demand notice, which has already been fully satisfied. The landmark ruling of the Supreme Court is a clear pointer to taxpayers to pay tax demands in full (and not in part) as and when they arise to save the burden of interest in the ultimate.

8.5.6 Interest for failure to deduct and pay tax at source (Sec.201 (1A))
If the person responsible for deducting tax at source does not deduct tax at source, wholly or partly, under sections 192 to 196C or after deducting tax fails to pay the same as required by the Act, he is liable to pay interest at the rate of 12% (up to September 7, 2003,15%) per annum on the amount of such tax from the date on which such tax was deductible to the date on which the tax is actually paid.

8.6 REBATE IN RESPECT OF SECURITIES TRANSACTION TAX

(w.e.f.A.Y.2005-06) 192, Assessee: An assessee whose total income includes any income-chargeable under the head profits and gains of business or profession arising from taxable securities transactions 193, Quantum of Rebate: The assessee is entitled for rebate least of the below (i) Security transaction tax paid by the assessee; or (if) Average rate of tax x business income from such taxable securities transaction 16.1 Rebates to A Member Of An Association Of Persons (Section 86) 194, Assessee: In case of members of AOP in receipt of any income from AOP and same is included in hands of such a person. 195, Quantum of Rebate: Step 1: Compute tax on total income of member of AOP and ascertain percentage of tax on total income. Step 2: Apply the percentage on share of income from AOP included in total income and find out resultant amount. Step 3: The amount so arrived is rebate available under Section 86 and it is deductible from 86.
257

Taxation

8.6.2 Relief for Arrears of Salary [Section. 89(1)] m advancr and thereby the rate of tax applicable in his case becomes higher than the usual rate due tu the reason of such arrears of salary or advance salary for a period of more than 1 2 months salary being chargeable in one Assessment Year, or if he received profits in lieu of salan and thereby his rate of tax becomes higher than as usual, he may make an application for relief to the Assessing Officer. I] Relief for Arrears of Salary or in Advance salary (Rule 21 A (2)) 1 . Calculate the tax payable on the total income, including additional salary of tl relevant previous years in which it is received. 2. Calculate the tax payable on the total income, excluding the additional sa (i.e. advance salary or arrears of salary) of the relevant previous year(s), i which it is received. 3 . Find out difference between tax [3=1 -2] 4. Compute the tax on total income after including the additional salary in t previous year to which such salary relates. Compute the tax on the total income after excluding the additional salary in ti previous year to such salary relates.
196, Find out the difference between tax at (4) and (5) [6= 4-5] 197, Relief = Balance of step 3- Balance of step 6 [Relief = 3-6]

n] Computation of relief in respect of Gratuity [Rule 21 A (3)] For claiming relief, taxable gratuity must be for 5 or more years' service renden: A] In case gratuity payable is in respect of past service of 1 5 years or more, (i) Compute average rate of tax* on the total income including the gratuity i the year of receipt. (ii) Find out the tax on gratuity at average rate of computed at (i) above, (iii) Compute average rate of tax by adding 1/3 of gratuity to other income of-each of the preceding 3 years
258

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

(iv) Find out average of these average rates computed in the manner specified in (iii) above and compute the tax on gratuity at that rate. (v) The difference between the tax on gratuity computed at (ii) and (iv) will be relief available under-Section 89(1). Average rate of tax = Total Tax Total Income

X 100

B] In case gratuity payable is in respect of past service of 5 years or more but less than 15 years, the relief is computed on the same lines replacing in above case A Step3 duration for 2 years instead of 3 years and average is computed base on 2 years by adding one-half of the gratuity to the other income of each of the preceding two years.

Ill] Computation of relief in respect of compensation on termination of employment (Rule 21A (4))
Relief shall be available if following conditions are satisfied: a) Compensation is received after continuous service of not less than 3 years. The unexpired term of employment is also not less than 3 years. The relief is calculated in the same manner as if gratuity was paid to the employee in respect of service rendered for a period of 15 years or more. IV] Computation of relief in respect of payments in commutation of pension Rule 21A(S) A relief can be claimed in respect of payment in commutation of pension received in is computed in same manner as if gratuity was paid to the employee in respect of service rendered for period of 15 years or more (discussed in supra A). Vj Computation of relief in respect of other payments Rule 21A (6) In case of other payments, CBDT may, having regards to circumstance of each case, allow such relief as it deems fit.

259

Taxation

8.7 SUMMARY The net tax payable by the assessee can be paid in the following forms a. b. c. Advance Tax Tax Deducted At Source Self Assessment Tax

The payer of the various types of payments is required to deduct the tax at source from the various payments made by him to the various payees and deposit the same to the credit of Central Government within the stipulated time. Similarly, the payer is responsible to issue the Tax Deduction Certificate to the payee within the stipulated time. The payee, at the time of filing his income tax returns, can attach such Tax Deduction Certificates and get the credit for the same. The person responsible for making such payments is required to file the Annual Returns of TDS in the prescribed form and within prescribed time limits along with the TDS Challans and copies of the Tax Deduction Certificates. If the assessee is the company, the annual returns are required to be filed in the computer readable medium. For other assessee, it is optional to file the returns either in the computer readable medium or regular paper. The computer readable medium return is to be prepared on the data structure provided by NSDL and the same is to be copied on a floppy. The floppy should carry a label name, permanent account number, tax deduction account number, address of the person filing the return, period to which the return pertains and the form number of the return viz. Form No. 24 or Form No. 26. If the assessee fails to file the annual returns as specified above, he will be liable to pay the penalty of Rs. 100 per day during which the default continues. Steps to Determine Tax Liability :

198, Determine the taxable income and find out the tax payable as per the applicable rates for the relevant assessment year. 199, From the tax payable so determined, deduct the following tax rebates u/s 88,88B, 88C, 88D and 88E, 200, To the balance tax liability determined in step 2 above add surcharge at applicable rate

260

Unit 8

Tax Deducted at Source, Interest, Rebates and Relief

201,

To Tax Liability arrived as

st ep 4 de du ct th e fo ll o wi ng

per step 3 above add Education Cess @ 2% and

202,

From Tax calculated under

step 4 deduct the following reliefs a. Relief in respect of share of

profit from an AOP or BOI [Section 86] b. Relief in respect of Arrears

or Advance salary [Section 89(1)] c. Relief for doubly taxed

income [Section 91]

Determine the taxable income and re find out the tax payable as per the lie applicable rates for the relevant assessment year. fs 203, From the tax payable so a. determined, deduct the following tax rebates u/s 88,88B, R 88C, 88D and 88E el 204, The balance tax liability ie determined in step 2 above add f surcharge at applicable rate in 205, To Tax Liability arrived as re per step 3 above add Education Cess s @ 2% and p 206, From Tax calculated under

e OI

bly taxed income [Section 91 ]

ct [Sec 8.8 KEY WORDS______________________________________________________ o tion Tax Deduction at Source: In order to avoid the cases of tax evasion on f 86] the part of the assessees, the Act has s b. provided for the tax deduction at source. h Reli Advance Tax: The purpose of ar ef in Advance Tax is to ensure the receipt of tax proceeds by the Government e resp before the assessment year ends on 31 st March. o ect f of p r o fi Self Assessment tax : If the amount of tax payable by the assessee is higher than the combined amount Arre of tax deducted at source and arsadvance tax, such tax along with the amount of interest payable should or be paid by the assessee at the time of filing the return of income. Such tax is Adv called as Self Assessment tax.

t ance fr salar o y m [Sec a tion n 89 A (1)] O c. P Reli o ef r for B dou 26 1

9.1 INTRODUCTION

The responsibility of an assessee under the Act does not get end with the payment of tax. Even if the tax required to be paid under the Act is paid, the assessee is required to fiJe the Return of Income.

Tax Authorities - Sec. 116

There shall be the following classification of Income-Tax authorities, for implementation of J the Act. The Central Board of Direct Taxes Directors -General of Income-Tax or Chief Commissioners of Income Tax Directors of Income-Tax or Commissioners of Income-Tax or Commissioners, IncomeTax (Appeals) Additional Directors of Income-Tax or Additional Commissioners of Income or Additional Commissioners of Income-Tax (Appeals) Joint Directors of Income-Tax or joint Commissioners of Income-Tax Deputy Directors of Income-Tax or Deputy Commissioners of Income-Tax Assistant Directors of Income-Tax or Assistant Commissioners of Income-Tax Income-Tax Officers Tax Recovery Officers Inspectors of Income-Tax "Assessing Officer" means an Income-Tax Officer or Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director of Income-Tax or the Join! Commissioner or joint Directofof Income-Tax who is vested with the relevant jurisdiction and assessment function under the relevant pro visions of the Act, Sec.2(7A)

or

266

If an Assessing Officer is vested with jurisdiction over any area then he shall have jurisdiction within the limit of such area in the case of any person carrying on business or profession within that area or where the business/profession is carried on by any person in more places than one, if the principal place of business or profession is situated within that area or having place of residence within that area. Any dispute relating to jurisdiction of an Assessing Officer to assess any person shall be determined by the Director General or Chief Commissioner or Commissioner of Income-Tax.

Unit 9

Assessment and Procedures

If the question of jurisdiction is relating to areas within the jurisdiction of different Director Generals, Chief Commissioners or Commissioners of Income-Tax, then the concerned authorities can determine the issue. If they are not in agreement then it shall be decided by the Board or by the Director General of Income-Tax or Chief Commissioner of Income-Tax or Commissioner as the Board may by notification in the Official Gazette, authorise in this behalf. The assessee can object to the jurisdiction of Assessing Officer within the time limit specified below:

R e t u

rn of in co

o r e t u r n
Withi n one mont h from the date of notic e issue d u/s. 142(1 )/ 143(2 )

of in co m e fil ed
Within the time allowed u/s. 142(1) or u/s. 148 for filing the ROI

o
Befo re com pleti on of asses smen t, whic hever is earlie r Time allowe d to show cause as to why best judgme nt assess ment u/s. 144 should not be made, whiche ver is earlier

Wher e the assess ee calls on the Jurisd iction of the assess ing officer and the assess ing officer is not satisfie d with such claims, he shall refer the matter for determ ination to Direct or Gener al or chief comm ission er or comm ission er of Incom e-Tax before compl eting the assess

mTO 138___________________________________________________________ e n 9.2.1 Power of t Income - Tax . Authorities regarding discovery, 9 production of . evidence 2 etc. Sec. 131

P The Assessing OOfficer, Joint W Commissioner of E Income-Tax, R Commissioner S (Appeals), Commissioner of OIncome-Tax and F Chief Commissioner I shall have powers N vested in the court C under the Code of OCivil Procedure Mwhile trying a suit E in respect of the following, T matters viz., A X 207, Discovery and inspection O 208, Enforcing F the attendance F of any person I C including any E officer of R banking company and S examining such person on oath -

2 6 7

cj Compelling the S production of E books of account C and other

1 3 1

documents

Taxation

PS-

d) Issuing commissions [calling witnesses to appear, record statements, conduct enquiry, refer to Valuation Officer, etc. ] Director General or Director of Income-Tax or Joint Director or Deputy Director or any Authorised Officer for a specific purpose can exercise the above powers if he has reason to suspect that any income has been concealed or is likely to be concealed by any person even though no proceedings with respect to such person are pending before him or any other Income tax authority. 9.2.2 Search & Seizure - Sec.132 Circumstances under which Powers of search and seizure (u/s. 132) can be exercised in the following circumstances. The Income-Tax authority concerned must have reason to believe in consequence of information in his possession that: a) Any person to whom summons u/s.131(1) or a notice u/s. 142( 1) has been issued to produce or cause to be produced any books of account, or other documents, has omitted or failed to produce or cause to be produced, such books of account or other documents, Or 209, Any person to whom summons or notice as aforesaid has been or might be issued,, will not produce or cause to be produced any books of account or other document, which will be useful for or relevant to any proceedings under the Act, or 210, Any person is in possession of any money, bullion, jewellery or other valuable thing and such money, bullion, jewellery or other valuable things represent either wholly or, partly income or property which has not been or would not be disclosed for the j purposes of the Act.

211, Authorising officer

Authorising officer

1) Director General or Director or Chief Commissioner or Commissioner

Joint director or Joint Commissioner Assistant Director/ Deputy director or Assistant Commissioner / Deputy Commissioner or Income-Tax officer. Assistant Director / Deputy Director or Assistant Commissioner / Deputy Commissioner or Income Tax Officer.

2) Joint Director or joint commissioner empowered by the Board in this behalf.

268

Unit 9

Assessment and Procedures

9.2.3 Power to requisition books of account etc. Sec. 132 A

Where the Director General has reason to believe that the books of account have been issued or to be issued for any or documents of any person to whom summons have been issued or to be issued for any proceeding has been taken into custody by any Officer or authority under any law in force and where any assets representing undisclosed income have been taken into custody by any officer or authority under any law in force, then such authority may authorise any subordinate authority to make a requisition for delivery of such books of account, documents or assets.

d o c u m e n t s s e i z e d s h a l l n o t b e r e t a i n e d b y t h e

Provisions relating to retention of books etc, seized during the course of search

A u 1. The books and t

h or is e d O ff ic er fo r a p er io d e x c e e di n g 3 0 d a y s fr o m th e d at e of or d er of as se ss m e

n t m a d e

e approval of Chief Commissioner or Commissioner for such is obtained.

b o o k s o r d o c u m e n t s , t h e B o a r d , o n r e c e i p t o f a n a p p l

u Retention / s 212, The Chief . Commissioner 1 or 5 Commissioner 3 Shall not A authorise such retention u beyond n 30 days after l all the e proceedings s under the Act s in respect of r the relevant e years are a completed. s (Sec. 132(8)) o n s 213, If a person legally entitled a to the book of r account or e other document r seized during e the course of c search objects o for any reason r to the d approval e given by the d Chief Commissioner, a Commissioner, n Director d General or Director for t retention of h such

ic t at u io n n i fr t o y m th o e f p b er e s i o n n, g B o h ar e d, a m r a d y p [ as S s e a c n . a 1 p 3 pr 2 o ( pr 1 ia 0 te ) or ] d . er af 214, te The r gi p vi er n s g o th n e fr o o p m p w or h

ose custody any books of account or other documents are seized may make copies thereof, or take extracts there from -Sec. 132(9).

215, The Board, on receipt of application under section 132(10) may, after giving an opportunity to the assessee to be heard, pass such orders as deem fit. [Sec. 132 (12)]

9.2.4 Power to call for information Sec. 133

Information can be gathered from a person who is considered to be useful for or relevant to any inquiry or in connection with 2 6 any pending 9 proceeding. When the information is

Taxation

collected in respect of an inquiry, in a case where no proceeding is ending, such power shall not be exercised by any Income-Tax authority below the rank of Director or Commissioner without the prior approval of the Director or the Commissioner.

9.2.5 Survey -Sec 133A

1)

270

An Income -Tax authority having juri sdiction or assigned with jurisdiction (being a Director, Commissioner, joint Director, joint Commissioner, Assistant Director or Deputy Director or an Assessing Officer or a Tax Recovery Officer or for certain

li r authority) m may enter any place within the limits of the area assigned to him or any place ite occupied d by any person in respect of whom he exercises jurisdiction, at which a business pu otj rp profession is carried on. os On entering such a place he can require the following: es an I) To afford him necessary facility to inspect such books of account and docume In sp ii) To afford him necessary facility to check or verify cash, stock or other valu ec articles or things found. to r iii) To furnish such information as may be required. of Explanation : If the person carrying on business or profession states that any of In h books of account or other documents or assets relating to his business or co profes; is kept at some other place, then such other place shall also be m covered. eTa x 216, An Income - Tax authority can enter only during hours at which such place is ( for conduct of business or profession and in respect of any other place only < au sunrise and before sunset. th or 217, An Income - Tax authority may do the following during the course of survey: is ed i) Place marks of identification on the books and documents or take extracts e by copies therefrom. an ii) Make an inventory of any cash, stock or other valuable articles. y su Mi) Record the statement of any person ch ot 4) An Income - Tax authority cannot remove any assets during survey operation he however, an Income-Tax authority is empowered to impound and retain in his cus

Unit 9

Assessment and Procedures

any books of account or other document inspected by him. Such power can be exercised only after recording reasons. The books and documents so impounded can be retained beyond 10 working days only after obtaining the approval of the Chief Commissioner or Director General.
218, Where considering the nature and scale of expenses incurred by an assessee in connection with any function, ceremony or event, if the Income tax authority deems it necessary, he can record a statement after conclusion of such a function, ceremony or event from

t h e p e r s o n w h o i n c u r r e d s u c h e x p e n s e s o r a n y o t h e r p e r

so n w h o is li ke ly to p os se ss in fo r m at io n. It m ay be m en ti o ne d he re th at if th e pe rs o n w h o ha s

i n c u r r e d t h e

he source or if the explanation offered is not satisfied, then the amount of such expenditure shall be assessed as income in accordance with section 69 C.

C o m m i s s i o n e r. 9 . 2 . 6 P o w e r o f I n c o m e T a x a u t h o r i t

e x 219, If a person refuses or p evades to e provide facility n as required d under this i provision the t Income-Tax u authority shall r have all powers e u/s. 131 for enforcing i compliance s thereof. u 220, The survey n operations a cannot be b carried out by l an Assistant e Director or t o e x p l a i n t Deputy Director or Assessing Officer or Tax Recovery Officer or Inspector of Income-Tax unless they obtain approval of the Joint Director or Joint

y to colle ct certa in infor mati on (door to door surve y) Sec.l 33B

221, An I n c o m e T a x a ut h o ri ty m a y, f o r th e p u r p o

s purposes of the e Act, enter any o building or f place within c the limits of o the area ll assigned to e such authority c or any building ti or place n occupied by g any person a in respect of n whom he y exercises i jurisdiction, at n which a f business or o profession is r carried on and m require to a furnish such ti information as o may be n prescribed. u (Rule 112E s and Form e No.45D are f relevant). u l 222, An Income - Tax authority o can enter any r such place only r during the e hours at which l it e is open for the v conduct of a business or n profession. t f 3) An Income o Tax authority r cannot t remove any h books, e documents

a n d a s s e t s b y v i r t u e o f t h i s p r o v i s i o n . I n c o m e t a x a u

thor ity for this purp ose mea ns a joint com miss ione r, Assi stan t Dire ctor/ Dep uty Dire ctor or an asse ssin g offic er and incl udes an insp ecto r of inco me tax auth oris ed by the Asse ssing offic er.

2 7 1

Taxation

9.2.7 Power to make enquiry - Sec. 135 Director General or Director of Income-Tax, Chief Commissioner or Commissioner and Joint Commissioner shall be competent to make any enquiry under the Act and for this purpose shall have all the powers of an Assessing Officer. 9.2.8 Proceedings to be judicial proceedings - Sec. 136 The proceedings under the Income-Tax Act before an income- tax authority shall be deemed to be judicial proceedings within the meaning of the relevant provisions of the Indian Penal Code and every Income-Tax authority shall be deemed to be Civil Court for such purposes. 9.2.9 Power to disclose information regarding assessees - Sec. 138 The Board or any Income-Tax authority specified by the Board by general or special order furnish any information relating to an assessee to any other officer or authority under any law. Where a person makes an application to Chief Commissioner or Commissioner for any information relating to any assessee, such authority if it is satisfied about the need to furnish such information in the public interest may furnish the information. The decision of such authority in this regard shall be final and shall not be called in question in any conn of law. -^Activity A: 1. While entering in any premises, what procedure needs to be carried out by assessing officer?

9.3 FILING OF RETURNS OF INCOME - SEC.139 139(1) Due date for filing ROI 139(1 A) Filing of returns by employers 139( 1B) Electronic returns 139(4A) ROI by trusts 139(4B) ROI by political parties 139(4C) ROI by certain institutions
272

139(3) Loss returns 139(4) Belated returns 139(5) Revised returns 139(9) Defective returns

Unit 9

Assessment and Procedures

Due dates According to sec.139 (1) I) every person being a company or firm; or

1 In case of a person being i) Company; ) ii) a person whose accounts are required to be
audited under this Act or under any other Law; iii) working partner of a firm whose accounts are so required to be audited; and iv) a person who is required to furnish a return on the basis of l/6th economic criteria

3 1st October of relevant assessment Year.

ii) being a person 2) In the case of any other assessee other than a company or a firm, if his 9 total income , or the total 3 income of any . 1 other person F in respect of i which he is l assessable i under this Act n during the g previous year exceeded the o f maximum amount which b is not u chargeable to l income tax, k shall furnish a r return of e income within t the due dates u stipulated r hereunder: n

3 1 st July of relevant assessment year.

Assessee

o f i n c o m e

by sala ried em plo yees Sec. 139 (1 A) In cas e of sal arie d cla ss ass ess ees the ret urn of inc om e for any pre vio us yea r sha ll be fur nis hed to the em plo yer

co nc er ne d. Su ch e m pl oy er sh all fu rn is h all ret ur ns of in co m e re ce iv ed by hi m on or be fo re th e du e da te, in su

ch form and manner as notified by the CBDT for this purpose. Any employee who has filed a return of income to his employer shall be deemed to have filed a return of income in accordance with the law.

9.3.2 Filing of Returns in Electronic Form - Sec.139 (IB) ny person may at his option file returns in electronic form such as floppy diskette, magnetic cartridge tape, CD-ROM or any other computer readable media. Such return shall be furnished in accordance with the scheme specified in this behalf by the CBDT, returns filed in such 2 computer 7 readable form 3 shall be deemed to be a return filed S. 139.

Taxation

274

9.3.3 ) Loss retur nSee. 139(3

Any person who sustain ed loss

in any so filed shall be treated as a return filed u/s. 139 (1) and all the provisions of previo the Act shall accordingly apply. Students may also refer to Sec. 80 which us states that unless loss return is filed in accordance with the due date stipulated year u/s. 139(3) and loss is determined in pursuance of that return, the loss cannot and be carried forward. claims The abovementioned stipulation does not cover unabsorbed depreciation that such carried forward u/s.32 (2) and loss under the head "Income from house property" U/s.7 IB. These two provisions are not specified even under loss should section 80. be carrie 9.3.4 Belated return - Sec. 139(4) d Any person who has not furnished a return within the time allowed U/s. 139( 1) forwa or within the time allowed by the notice issued u/s. 142 (1) can file a belated rd return for any previous year at any time before one year from the end of the under relevant assessment year or before assessment is completed, whichever is sec.72 earlier. ,73,74 and 9.3.5 Returns by Trusts - Sec. 139(4A) 74A of the Every person in receipt of income derived from property held under trust or Act other legai obligation wholly or partly for charitable or religious purposes or income shall by way of voluntun contributions shall furnish a return of the total income if it furnis exceeds the maximum ami > which is not chargeable to tax before giving effect h a to the provisions of Sec. 11 and 12. i return of loss In the case of a trust whose income does not exceed Rs. 50,000 audit within requirement d> not arise and therefore, return will have to be filed on or before 31 st July. Even in i business is carried on, then the due date the time applicable will be 31 st July. If the income exn. Rs.50,000/- or if business allowe turnover exceeds Rs. 40,00,000/- and thereby audit requi arises, then the d u/s. due date shall be 31 st October of the relevant assessment year. 139( 1 ) in 9.3.6 Returns by political parties - Sec. 139(4B) the The Chief Executive Officer of every political party shall furnish a return of prescri incomei respect of which the political party is assessable if it exceeds the maximum bed amount eacliil not chargeable to tax before giving effect to the provisions of Sec. form. 13 A. In order to a' exemption u/s. 13 A, the accounts of a political party must be Any audited. Therefore, the date for filing the return of income is 31 st October of return the assessment year.

in) iv) v)

h)

Unit 9

Assessment and Procedures

9.3.7 Returns by certain associations / institutions - Sec. 139(4C)

1 0 ( 2 3 C The following ) entities shall furnish ( their return of i income if the total v income, before giving effect to the ) exemption u/s. 10, / ( exceeds the basic v exemption limit: ) i) Scientific / ( Research v Association i ) covered under / ( section 10(21); v ii) News agency i a covered under ) section 10(22B); ; i) Association or a n Institution referred d to in 10(23A) / (23B); iv) Fund or Institution, University or other educational institution or hospital or other medical institution referred to under section v )

T r a d e

r 3 u n i o n uR ne dv o r ei r s s e a s s o c i a t i o n ed c t r i e ot nu r 1n 0 ( 21 43 c o v e ) 9 . ( 95 . ) e. d8

A n y p e r s o n w h o h a s f u r n i s h e d a r e t u r n u / s . 1 3 9 (

1) or in pursu ance of a notic e issue d Ws. 142( 1) can file a revis ed retur n if the asses see disco vers any omiss ion or any wron g state ment in the return filed earlie r. Such revise d return can be furnis hed at any

t elevant assessment i year or before m completion of e assessment b whichever is e earlier. The f effective return for o the purposes of r assessment is the e return ultimately t filed by the h assessee. A revised e return replaces the e original return. x Therefore, if the p assessee discovers i any omission or r wrong statement y in such a revised return he is entitled o to furnish a second f revised return. )) o a) Where belated n return is filed e u/s. 139 (4), y assessees e cannot file a a revised return r u/ s. 139 (5). f The r provisions of o sec. 139 (5) m provide that a revised return t can be filed h only where a e return has e been n furnished u/s. d 139 (1) or in response to a o notice issued f u/s.142 (1) t Kumarjagadis h h Chandra e Sinha Vs. r

C I T 2 2 0 1 ' R 6 7 ( S C ) . A s s e s s e e fi l e s a l o s s r e t u r n u

/ s . 1 3 9

an d cl ai m s en ( ha 3 nc ) ed . a Lm a ou t nt e of r lo i ss. t A r cc e or v di i ng s to e se s cti t on h 13 e 9( 3), r on e ce t a u ret r ur nn is u fil / ed s , . all 1 th 3e 9 pr ov ( isi 5 on ) s

of the IncomeTax Act shall apply as if such return has been filed u/ s.l39(l). Consequently, the filing of revised loss return is valid and section 80 does not come in the way of disallowing the carry forward of such increased amount of loss - CIT Vs. Periar District Co-operative Milk Producers Union Ltd. 266ITR 705 (Mad.).

2 7 5

9.3.9 Defective return - Sec. 139(9)

Circumstances when a return can be treated as defective: A return of income can be regarded as defective by the Assessing Officer under the following circumstances.

223, Annexure, statements and columns in the return of income has not been duly
filled;

224, Return of income has not been accompanied by i) Statement showing computation of tax on returned income

ii) Proof of tax claimed to have been deducted at source (TDS) before the first; day of 01.04.05 iii) advance tax paid and self-assessment tax paid. However, the return of income shall not be regarded as defective if a certificate for TDS was not received by the person furnishing the return of income and such certificate is produced within a period of 2 years from the end of the assessment year in which recovered by the TDS is assessable. Once the certificate is so furnished, the Assessing Officer shall amend the intimation or deemed intimation or the order of assessment for the relevant assessment year by virtue of sec.155 (14) to grant the credit for the TDS. iv) Tax Audit report u/s. 44 AB or copy of such report together with proof of furnishing the report on earlier date.

225, Where regular books of account are maintained, the copies of Manufacturing account or Trading account or Profit and Loss account or Income and Expenditure account or any other similar account and Balance Sheet has not been furnished. Similarly, where, no copies of personal account of the proprietor, partner or member of AOP/ BOI has been filed; 226, If accounts are audited and copies of audited statement.of accounts and auditor j report have not been filed (including cost audit report, if any);
r

276

227, Where regular books are not maintained, a statement indicating the amount of turnover i or gross receipts, gross profit, expenses and net profit and the basis thereof together I with the amount of total sundry debtors, sundry creditors, stock in trade and r^ balance at the end of the previous year have not been filed.

Unit 9

Assessment and Procedures

No person who has already been allotted a permanent .account number under the new series shall apply, obtain or possess another permanent account number. Therefore, an assessee cannot hold two permanent account numbers. Persons who have agricultural income and who are not in receipt of any other income chargeable to Income-Tax are not required to apply for PAN, provided that a declaration in Form No. 61 is filed by such persons. Section 139A(1 A) provides that the Central Government may notify any class or classes of persons including importers and exporters and such persons shall apply to the Assessing Officer for the allotment of Permanent Account Number within such time as mentioned in that notification.

9.3.10 Return by whom to be signed - See. 140

Assessee

Signatory

1. Individual Himself When absent from India; mentally His guardian or any other person competent to incapacitated; for any other reason he is act on his behalf duly authorised by him. not able to sign Karta 2. H.U.F. Any other adult member of the family Where Karta is absent from India or is mentally incapacitated Managing Director Any 3 Company Where M.D. is unable to sign or where there is no M.D. When company is not resident in India When the company is in liquidation When the company's management is taken over by the Government. other director; any person who holds a valid Power of Attorney from the company The liquidator The Principal Officer Managing partner or any other partner not being a minor Principal Officer Chief executive officer

228, 229, 230,

Partnership firm Local Authority Political party

27 7

Taxation

231, Association of Person 232,

Any other person

Any member or Principal Officer Thatperson or some other person who is competent to sign.

Activity B :
1. What are the due dates for filing income tax returns?

2. Define belated returns.

9.4 ENQUIRY BEFORE ASSESSMENT - SEC. 142______________________

Notice
i) If the assessee has not filed a return within the time allowed u/s. 139(1), then the notice can require him to furnish the return of income.

ii) The notice can require the production of accounts and documents. iii) The notice can require furnishing of information on such points or such matters including the furnishing of the list of assets and liabilities as the Assessing Officer may require. But, prior approval of Joint Commissioner is necessary before requiring the assessee to , furnish the details of all assets and liabilities not included in the accounts. The Assessing Officer shall not require the production of accounts relating to a period more than 3 ye* prior to the previous year [Sec.142(1)]. I

278

Unit 9

Assessment and Procedures

Enquiry
The Assessing Officer may make such inquiry as he considers necessary for the purpose of obtaining full information about the income or loss of any person [Sec. 142(2)] Special Audit 1) The Assessing Officer at any stage of the proceedings may, have regard to the nature and complexities of the accounts of the assessee and the interest of the revenue direct the assessee to get the accounts audited and furnish the audit report. Such a direction can be issued only with the prior approval of the Chief Commissioner or Commissioner and the audit shall be done by a Chartered

A c c o u n t a n t n o m i n a t e d b y t h e C h i e f C o m m i s s i o n e r

o r C o m m is si o n er . [ S e c. 1 4 2 ( 2 A )] 1) T h e a u d it c a n b e r e q u ir e d t o b e

d o n e e v e n

i f t h e a c c o u n t s a r e a l r e Opportunity a d The assessee shall given an y be opportunity of a being heard in of u respect d materials gathered i on inquiry and t proposed to be in the e used assessment. [Sec. d . 142 (3)] T h e a u d i Estimation by Valuation Officer in certain cases Sec 142A

t report shall be furnished within a period specified by the Assessing Officer which can be extended up to 180 days from the date of receipt of direction by the assessee on an application made by him. The expenses for the audit shall be determined by the Chief Commissioner or Commissioner and shall be paid by the assessee.

For the purposes

o f m a k i n g a n a s s e s s m e n t o r r e a s s e s s m e n t, w h e r e a n e s ti m a t

e valu e of any inve stm ent refe rred to in Sec. 69 or Sec. 69B or the valu e of any bulli on, jew eller y or othe r valu able arti cle refe rred to in Sec. 69A or Sec. 69B is req uire d to be mad e, the

as se ss in g of fi ce r m ay re q ui re th e va lu ati o n of fi ce r to m ak e an es ti m at e of su ch va lu e an d re p or t

the same to him. The valuation officer to whom such reference is made shall have all the powers that he has u/s.38A of the Wealth-tax Act, 1957. On receipt of the report from the valuation officer, the assessing officer may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment.

9.4.1 Assessment Sec. 143

According to Sec. 143, intimation is required to be sent only in a case where there is

2 7 9

Taxation

demand payable by the assessee or where refund is due to the assessee. In all other cases, acknowledgement issued on filing of the return of income shall be deemed to be intimation.

9.4.2 Best Judgment Assessment -Sec. 144

The provisions of Sec. 144 are mandatory in nature, even if there is one of the 4 defa mentioned below on the part of the assessee the officer is bound to make assessment t the best of his judgement. The default committed by the assessee should be indicated i| the record. Opportunity given to the assessee must be real and effective. The proper an valid service of notice should be proved by the department. The Assessing Officer after taking into account all relevant material which he has gathers^j is empowered to make the assessment of the total income or loss to the best of his judg and determine the sum payable by the assessee on the basis of such assessment under ti following circumstances: Failure on the part of assessee 1. Failure to make the return or belated return or revised return 2 . Failure to comply with all the terms of a notice issued requiring the assessee to: a) file a return or produce accounts etc . or furnish information called for b) get the accounts audited and furnish the audit report c) ensure his attendance or produce evidence supporting the return filed 142(1) 142(2A) 143(2)
JM

Relevant section 139(1), (4) &(5)

Opportunity < to be heard To be given

Neednotbegivea j i I To be given To be given I

Protective Assessment is made to ensure that when the issue is finally settled, the c of such income should not get time barred. When the issue is finally settled in i otherwise, only one assessment will stand and the other will be cancelled ace requires to be mentioned that the Income-Tax Department cannot recover the t both the assessees in respect of the same income. Similarly, Protective Assessment! be the basis for levy of penalty.
280

Unit 9

Assessment and Procedures

9.4.3 Income Escaping Assessment

Sec. 147
1) Assessment 2) Reassessment 3) Recomputation

Sec. 148 Notice to be Issued

Sec. 149 Time limit for Issue of notice

Sec. 151 Sanction required For issuing notice

Assessment, reassessment and recomputation - Sec. 147 Basis

If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year he may assess or reassess such income or recompute the loss or depreciation allowance or any other allowance for that assessment year. Scope Once the assessment has been re-opened, any other income which has escaped assessment and which comes to the knowledge of the Assessing Officer subsequently in the course of the proceeding u/s. 147 can also be included in the assessment.
Circumstances when income can he said to escape assessment

Explanation 2: In the following cases, it shall be deemed that income chargeable to tax has escaped assessment:
233, Where no return of income has been furnished by an assessee although his income is above the non-taxable limit. 234, Where a return of income has been furnished but no assessment has been made and the assessee is found to have understated his income or claimed excessive loss, deduction etc., in the return. 235, Where an assessment has been made but: 236, 237, 238,

Income chargeable to tax has been under assessed; or Such income has been assessed at too low a rate; or Excessive relief was given in respect of such income; or

281

Taxation

d)

Excessive loss/depreciation allowance or any other allowance under this Act has been computed.

282

It may be noted that a proceeding u/s. 147 cannot be treated as a revision or review proceeding. The objective of this section is only to increase revenue collection. Therefore, the tax liability of an assessee cannot be reduced further in respect of a proceeding u/ s. 147. This view was upheld by the Supreme Court in Sun Engineering Works Pvt. Ltd. (1992) 198ITR297.

9.4.4 Issue of notice where income has escaped assessment - Sec.148

1.

The Ass essi ng Offi cer shal l, bef ore mak ing an asse ssm ent, reas sess men t or reco mpu tatio n u/s. 147,

serve on the assessee a notice u/s. 148 requiring him to file a return of his income or of any other person in respect of which he is assessable.

239, Before issuing any such notice, the Assessing Officer shall record his reasons for doing so. 240, The return of income is required to be furnished within the time prescribed in & notice by the Assessing Officer. Time limit for completion of Assessments and Reassessments - Sec. 153

153(1)
153(2) 153(2A)

Passing assessment order u/s. 143 or 144 Making assessment reassessment etc. u/s. 147 Making assessment in pursuance of order u/s.250, 254, 263 or 264 setting aside or cancelling assessment

Within 2 years from end of assessment year in which income was first assessable ,
Jl

Within 1 year from end of financial yeanB which notice u/s. 148 is served Within 1 year from end of a financial yeaf which order u/s.250 / 254 is received by] Commissioner or order u/s.263, 264 isifl passed by the Commi ssioner. V

9.4.5 Assessment of income of any other person - Sec.l53C

Where the assessing officer is satisfied that any money, bullion, jewellery or other v article or thing or books of account or documents seized or requisitioned belongs ti other person other than a person in whose case search was made u/s. 132 orrequi^j was made uls. 132A, then the seized or requisitioned records and assets shall be ft over to the assessing officer having jurisdiction over such other person. Thereafter,!

Unit 9

Assessment and Procedures

assessing officer shall proceed to issue notice to such other person and assess or reassess his income in accordance with the provisions of Sec. 153A for a period of six years proceeding to the previous year in which search or requisition took place. Other points

241 242 243, No r et u r n o f i n c o m e h a s b e e n f u r n is h e d b y s u c h o t h e r p e rs

o urn n of a inc n om de n has o be n en o fur tinis c he ed u by /ssuc .h 1 oth 4 er 2 per ( so 1n ) but h no a not s ice b u/s e. e 14 n 3( is2) s ha us e be d en t ser o ve hd i an m d , li o mi r tati on 244, of A ser r vin eg t the

notice u/s. 143(2) has expire d, or

245, A ssessm ent, if any, has been made. The assess ment for the six years period and the year of search shall be compl eted with in a period of 2 years from the end of the financi al year in which last of the authori sation execut

e d o r w it h i n o n e y e a r fr o m t h e e n d o f t h e fi n a n c i a l y e a r i n w h

i ov assessi c er ng h to officer t the s. h 246, e 9.5 APPEALS TO b HIGH COURT o Sec. 260A o k After the Tribunal s decides the appeal, o an appeal shall be f filed in the High a Court against the c order of the c Appellant Tribunal o if the High Court u is satisfied that the 2 n case involves a 8 3 t substantial question o of law. The time r prescribed for filing d such an appeal is o within 120 days c from the date of u receipt of order. An mappeal can be filed e by the Chief n Commissioner or tsCommissioner or o an assessee r aggrieved by the a Appellate Tribunal's s Order. s e Where the High t Court is satisfied s that a substantial a question of law is r involved, the High e Court shall h formulate that a question. The n High Court shall d decide the e question of law so d

Taxation

formulated and deliver such judgement containing the grounds on which such decision is founded. The High Court may award such cost as it deems fit. The High Court may determine any issue which has not been determined by the Appellate Tribunal or any issue which has been wrongly determined by the Appellate Tribunal. The appeal filing fee will be in accordance with the relevant court rules applicable and the provisions of the Code of Civil procedure shall apply to all the appeals covered by Sec.260A.

9.5.1 Revision by the Commissioner of Income-Tax - Sec.263 & 264

Revision of orders Prejudicial to the Interest of Revenue - Sec.263 i) The Commissioner may call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of revenue, pass such order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. Such order can be passed only after giving the assessee an opportunity of being ; heard. For this purpose the Commissioner may make or cause to be made such J enquiry as he deems necessary. ii) "Record" shall include all records relating to any proceeding available at the timei; examination of the file by the Commissioner of Income-Tax. iii) Where any order passed by the Assessing Officer had been the subject matter of appeal, the powers of the Commissioner shall extend to such matters as had nor. 'been considered and decided in such appeal. iv) No order shall be made after the expiry of 2 years from the end of the financial year in which the order sought to be revised was passed. In computing the period of two years limit the time taken in giving an opportunity to the assessee to be reheard u/ s. 129 and any period during which revision proceeding is stayed by Court, shall k excluded. v) An order in revision may be passed at any time in the case of an order which lias < been passed in consequence of, or to give effect to, any finding or direction contained > in an order of the Appellate Tribunal, the High Court or the Supreme Court. '

284

Unit 9

Assessment and Procedures

9.5.2 Revision of other orders Sec. 264

t h e

i) In the case of a any order s other than an s order referred e to in Sec. 263 s passed by a s subordinate e authority, the e Commissioner . may, either on his own motion iii) or on an T application by h the assessee for e revision, call for the record of C any proceedings o under the m Income-Tax m Act in which i any such order s has been s passed and i may pass such o order thereon n as he deems fit. e r ii) An order prejudicial to s the interests of h the assessee a cannot be l passed under l this provision. n However, o Commissioner t declining to , interfere will o not amount to n passing of an order h prejudicial to i

s o w n m ot io \ n re vi se a n y or d er if th e or d er h as b ee n m a d e m or e th a n o n e y ea r pr e vi

o u s l y . A p pl ic at /) io n fo r re vi si o n b y th e as se ss e e m u st b e m a d e w it hi n o n e y

ear from the date on which the order was communicated to him or the date on which he otherwise came to know of it, whichever is earlier. On every application by an assessee for revision, an order shall be passed within one year from the end of the i) financial year in which such application is made by the assessee for revision. In computing this time limit, the time lost u/s. 129 or due to stay order by Court shall be excluded. Besides, there is no time limit for the Commissioner to pass an order of vision in consequence of or to give effect to any finding or direction contained in an order of the Appellate Tribunal, the High Court or

t h e S u p r e m e C o u r t . C o m m i s s i o n e r h a s t h e p o w e r t o

c q n d o n e t h e d e l a y i f h e i s s a t i s f i e d t h a t t h e a s s e s s

e e w as pr e v e nt e d b y s uf fi ci e nt c a u se fr o m m a ki n g th e a p pl ic at io n w it hi n th e

specified time. If the order is an appealable order, then the application can be made only if the appeal is not filed or where the time limit for filing the appeal has not lapsed, only if the right of appeal is waived. ) Every application for revision should be accompanied by a fee of Rs. 500.

.6 SUMMARY__________________________________________________
iider Income Tax Act, Assessment and proceedings are necessary to be carried out by ery assessee at the end of financial year. Returns need to be filed by person as per 2 prescribed 8 guidelines 5 mentioned under Act.

Taxation

10.1 INTRODUCTION As we know, a partnership firm is an agreement among not more than 20 persons. As per the Act, a partnership firm is considered to be a separate taxable entity provided that the following conditions are satisfied:
a. Partnership should be evidenced by a partnership deed.

b. The individual shares of the partners should be clearly specified in the partnership deed. c. d. A certified copy of the partnership deed should be attached to the return of income pertaining to the year in which the partnership firm was formed. If there is any change in the constitution of the partnership firm or there is any change in the profit sharing ratio, a copy of the revised partnership deed should be attached to the return of income of the previous year in which such change took place.

Rate of tax in the case of a firm- Sec. 167A

In the case of a firm, which is assessable as a firm, tax shall be charged on its total income at the rate as specified in the finance Act of the relevant year. The finance Act has specified ; 30 % as the tax rate for the firms. Surcharge at 10% plus education cess @ 2% is also leviable However, long term capital gains will be chargeable to tax under section 112 at the rate of 20% plus surcharge and education cess.

10.2 ASSESSMENT AS A FIRM-SEC. 184

A firm shall be assessed as a firm, only when the following conditions are satisfied:

The partnership is evidenced by an instrument

in writing;

The shares of each partner are specified in such

instrument;

A Copy of the partnership instrument as certified by all the partners is enclosed wilt a return of income in respect of the first assessment year for which the status of' is claimed; Where once the firm is assessed as firm by complying with the above mi conditions it shall continue to be assessed as a firm for subsequent

a s s e s s m e n t s o l o n g a

s there is no change in the constitution of the firms or in the profits ratio.

a)

Unit 10

Taxation of Partnership Firms

Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year so that it can be assessed as a firm. The firm does not commit any default as mentioned in sec. 144, resulting in framing of best judgement assessment by the Assessing Officer.

Assessment when Sec. 184 is not complied with - Sec. 185

Where a firm does not comply with any of the provisions of sec 184 for any assessment year, the firm shall be continued to be assessed as a firm for that assessment year. In such cases, no deduction shall be allowed in respect of payment of any interest, salary, bonus, commission or remuneration to partners. The amount of interest or salary etc. so disallowed in the hands of the firm shall not be chargeable to tax in the case of respective partners.

10.3 CHANGE IN CONSTITUTION - SEC. 187___________________________

Where at the time of making an assessment u/s. 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the lime of making the assessment. (i.e, single assessment shall be made.) For the purpose of assessment of a firm "Change" in constitution of firm would mean the following: If one or more partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change, continue as partner(s) after the change ;or All the partners continue with a change in their respective shares or in the shares of some of them.

10.4 SUCCESSION OF FIRMS - SEC. 188

Where a firm carrying on a business or profession is succeeded by another firm and the case is not covered by sec. 187 (i.e. not a change in constitution) then separate assessment shall be made in the following manner: a) The predecessor firm shall be liable to be assessed in respect of income of previous year in which the succession took place up to the date of succession. The successor
29 1

firm shall be liable to tax in respect of the income that previous year derived after the date of succession. b) Liability of successor firm is the same as stipulated in sec. 170. 10.5 JOINT AND SEVERAL LIABILITIES OF FIRMS - SEC 188A Where any tax, penalty or any other sum payable by a firm for any assessment year is due, then every person who was the partner of the firm during the relevant previous year and the legal representative of any such person who is deceased shall be jointly and severally liable in respect of the firm. Note: The liability of the legal representative of a deceased partner cannot exceed the value of estate inherited by him from such deceased partner- sec 159(6). 10.6 DISSOLUTION OF FIRMS - SEC. 189__________________________ 247,Where a firm is dissolved or the business or profession in discontinued, for the purpose of any proceeding pending under the Income-tax Act, the firm shall be deemed to be in existence and the proceeding shall be continued accordingly. 248,For the purpose of initiating any proceeding against such firm, the firm shall be deemed to be in existence. 249,In respect of any tax, interest, penalty or any other sum payable by the firm, all persons who were partners, together with the legal heirs of any deceased partners, during the previous year when dissolution or the discontinuance took place, shall be jointly and severally liable to pay any such amount. 250,In the course of any proceeding, if the Assessing Officer or the Commissioner (Appeals) is satisfied that the firm was guilty of any of the acts attracting levy of penalty, he may impose or direct the imposition of a penalty according to the relevant provisions of law. ^ Activity A; What do you mean by Partnership Firm?

292

Unit 10

Taxation of Partnership Firms

c. O n th e ba la nc e a m o u nt of b o o k pr of it, at th e ra te of 4 0 % .

Computation of tax liability of Partnership Firm As in case of any other assessees, Gross Total Income of the Partnership Firm consists of Income from House Property, Income from Capital Gains, Income from Business or Profession and Income from Other Sources. From the Gross Total Income, adjustments are required to be made for brought forward losses and deductions under Chapter VI-A of the Act, wherever applicable. Resulting amount is the Total Income on which the firm is taxed at a flat rate of 30%. The tax amount will be increased by the surcharge @ 10% and 2% as Education Cess. While calculating the "Income from Business or Profession" of the firm, the firm is allowed to debit following amounts to the Profit and Loss Account:

The firm can pay interest on capital to the partners on the amount of capital introduced by them in the firm provided that the rate of interest does not exceed 12 per cent per annum. The firm can pay such interest to all the partners, whether working or nonworking. The firm can remunerate the partners in the form of salary, bonus, commission etc. provided that the partners are working partners. The maximum amount of remuneration which can be paid by the firm to all the working partners taken together is specified in the Act. Section 44 A of the Act provides that the maximum amount of remuneration , which the firm can pay to the working partners is decided on the basis of its "book profit" which means the profit as per the Profit and Loss Account after calculating the interest of capital as stated above and after making the adjustments as per the Act regarding expenses and incomes. After deciding the amount of book profit, the remuneration is decided as below -If the firm is carrying on a profession: a. On the first Rs. 1,00,000 of the book profit or in case of a loss, Rs. 50,000 or 90% of the book profit whichever is more. On the next Rs. 1,00,000 of the book profit, at the rate of 60%.

b.

293

Taxation

In case of any other firm a. On the first Rs. 75,000 of the book profit or in case of a loss, Rs. 50,000 or 90% of the book profit whichever is more.
1.

b. c.

On the next Rs. 75,000 of the book profit, at the rate of 60%. On the balance amount of book profit, at the rate of 40%.

After charging the amount of interest on capital and remuneration as stated above, the firm is required to pay the tax at the flat rate of 30%. The balance remaining which indicates the profit after tax is transferred to the capital accounts of the partners as "share of profit", but this share of profitisnot taxable in the hands of the individual partners.

Notes

a.

The term working partner is not defined in the Act. Who is to be considered as the working partner is the matter of interpretation. In simple words, a partner will be considered to be a working partner if he is holding requisite experience or qualifications or knowledge about the business of the firm and if he is engaged in the following types of activities in connection with the firm:

framing of business policies regarding the firm business decision making regarding the firm attending the general administration of the firm attending routine jobs regarding the activities of the firm

It should be noted that full time attendance to carry out any or all of the above activities is not required. b. The interest on capital and remuneration paid by the firm to the partners will be considered to be expenditure for the firm but it will be taxable in the hands of individual partners.

Losses incurred by the firm

There are no specific provisions in the Act regarding the losses incurred by the firms. As such, the same provisions that apply to other assessees equally apply to partnership firn
294

Unit 10

Taxation of Partnership Firms

Losses incurred by the firm are allowed to be carried forward to the next assessment years. The detailed discussions on this topic are made in the chapter on "Set Off and Carry Forward of Losses". 10.7 ILLUSTRATIONS_______________________________________________ 1. The profit and Loss Account of M/s XYZ & Co., a partnership firm of Chartered Accountants for the year ended on 31 st March 2007 is as below Expenses Depreciation Interest on Capital Remuneration to Partners Profit for the year 1, 20,000 1, 39,000 80,000 25,000 36,000 Professional Fees 4,00,000

Total
a. b. c.

4,00,000 {Total

4,00,000

Additional information Expenses include an amount of Rs. 15,000 being the expenses of personal in nature. Depreciation as per the Act amounts to Rs. 21,000 Interest on capital is paid @ 18 per cent per annum.

Calculate the amount of remuneration payable to the working partners.

Solution
Profit as per Profit and Loss Account Add - Personal Expenses Depreciation Disallowable Interest on Capital Remuneration to partners Less - Depreciation as per Income tax 15,000 25,000 12,000 1, 20,000 1, 91,000 0,21,000 29 5 Rs. Rs. 1, 39,000

Taxation

Book Profit

1, 70,000 Rs. 90,000 Rs. 42,000 Rs. 1,32,000

Remuneration to the partners

First Rs. 1,00,000 of book profits Balance @ 60% Total Remuneration

2. The profit and Loss Account of M/s XYZ & Co., a partnership firm engaged in the trading activity for the year ended on 31 st March 2007 is as below Cost of goods sold Other Expenses Depreciation Interest on Capital Remuneration to Partners Total 5, 78,000 1, 21,000 0, 28,000 0, 47,000 2,20,000 9,94,000 Total 9,94,000 Sales Loss for the year 7, 86,000 2, 08,000

Additional information
a. b. c. Expenses include an amount of Rs. 12,800 being the expenses of personal in nature. Depreciation as per the Act amounts to Rs. 19,800 Interest on capital not deductible as per the Act Rs. 2,300

Calculate the amount of remuneration payable to the working partners.

Solution
Profit as per Profit & Loss Account Add: Personal Expenses Depreciation Disallowable Interest on Capital Remuneration to partners Less: Depreciation as per Income tax

Rs.

Rs. (-)2,08,000

12,800 28,000 2,300 2,20,000 2,63,100: 0,19,8001

296

Unit 10

Taxation of Partnership Firms

Book Profit Remuneration to the partners Book Profit Less: Remuneration Loss Rs. Rs. 35,300 50,000

0, 35,300

Rs. 14,700

Loss of Rs. J 4,700 will be allowed to be carried forward. 3. Amal, Bimal and Kamal are the partners in a firm sharing profits and losses equally. For the Assessment year 2007-2008, following particulars are available a. b. Loss as per Profit and Loss Account (after debiting partners' remuneration and interest on capital) Rs. 2,50,000 Remuneration to partners Amal Rs. 90,000 Bimal Rs. 60,000 Kamal Rs. 30,000 c. Interest on Capital Capital on 1.4.2006 Interest Amal Rs. 1,00,000 Rs. 20,000 Bimal Rs. 1,00,000 Rs. 20,000 Kamal Rs. 1,00,000 Rs. 20,000 You are required to work out the income of the firm and of its partners for the Assessment Year 2007-2008 assuming that the partners have no other income. Solution Calculation of taxable income of the firm Profit as per Profit & Loss Account 0)2,50,000

29 7

Taxation

AddDisallowable Interest on Capital Remuneration to partners Book Profit 24,000

1,80,000

(-) 46,000

2,04,00 0

29 As book profit is a negative 8 amount, the maximum

remuneration which can be paid to the partners will be restricted to Rs. 50,000 and the same will be shared among the par in the ratio in which the remuneration is paid to them i.e. 9:6:3. The total loss oft partnership firm amounting to Rs. 96,000 will be allowed to be carried forward to the r year. Taxable income of the individual partners will be as below Amal

c o u l d r e c o v e r a n a m o u n t o f R S . 6 L a k h s f r o m t

Rs.
Salary Interest on Capital 25,000 20,000 45,000 4. Vijay agency, a partnership firm constituted by three partners with equal shares was dissolved on 01.04.2003 after a search. The liability to tax finally decided against the firm outstanding to be paid was Rs. 15 Lakhs. Out of three partners, one was declared insolvent on 18.03.2005 by the Court. The Assessing Officer for recovering the demand attached the bank accounts of other two partners and

he ac co unt of on e su ch. Pa rtn er. Yo u are as ke d by the pa rtn ers of dis sol ve d fir m; Ab out the Lia bilit y of eac h of the m to pay outs tan din

g o dem at and. ta c h t h e b a n k a c c o u n t o f p a rt n e rs a g ai n st d e m a n d o f d is s o l

ve d fir m is jus tifi ed ? Ans Se

ction 188 A of the Income tax Act, 1961 clearly states that the liability of the partners of the firm is joint and several. Hence partners are collectively as wll as individually liable for the income tax arrears of the firm. Since one of the partners

Unit 10

Taxation of Partnership Firms

became insolvent, remaining two partners are jointly and severally liable for the income tax liability of RS 15 lacs. According to Sec 189(3) every person who was a partner of the firm at the time of dissolution along with the legal heir of the deceased partner shall be jointly and severally liable for the amount of tax payable by such firm. For the purpose of continuing any pending proceeding or initiating any proceeding, sec 189 deems a dissolved firm to be in existence. Therefore, the action of the assessing officer in attaching the bank account of partners against demand of dissolved firm is valid. 10.8 SUMMARY A partnership firm is an agreement among not more than 20 persons. As per the Act, partnership firm is considered to be a separate taxable entity provided that following conditions are satisfieda. Partnership should be evidenced by a partnership deed. b. The individual shares of the partners should be clearly specified in the partnership deed. c. A certified copy of the partnership deed should be attached to the return of income pertaining to the year in which the partnership firm was formed. d. If there is any change in the constitution of the partnership firm or there is any change in the profit sharing ratio, a copy of the revised partnership deed should be attached to the return of income of the previous year in which such change took place. Rate of tax in the case of a firm- Sec.l67A In the case of a firm, which is assessable as a firm, tax shall be charged on its total income at the rate as specified in the finance Act of the relevant year. The finance Act has specified 30 % as the tax rate for the firms. Surcharge at 10% plus education cess @ 2% is also leviable However, long term capital gains will be chargeable to tax under section 112 at the rate of 20% plus surcharge and education cess. 299

Types of companies
The various types of companies to be identified and recognised for tax provisions can be brought out by the following chart before the relevant definitions are studied: Sec.2[ 17] Company

Sec.2 [22A] Domestic Company (includes Indian companies u/s.2 [26] & foreign companies which fulfill prescribed requirements as per Sec. 194 read with Rule 27) Sec.2 (18) company in which public are substantially interested (known as widely held companies)

Sec.2 (23A) Foreign Company

Other companies (commonly known as closely held companies)

306

Sec 2(17) "Company" means 251, Any Indian company; or 252, Body corporate incorporated outside India under the laws of foreign country; or 253, Any institution, association or a body which is assessed or was assessable/assessed as a company for any assessment year commencing on or before April 1,1970; or 254, Any institution, association or body whether incorporated or not and whether Indian | or non-Indian which is declared by special order of the Central Board of

Di rc ci

f Taxes to be a company. t

Unit \ \

g) It i s Sec 2(18) Company in which the public are substantially interested a c A company is regarded as company in which the public are substantially interested ifo m 255, It is owned by the government or the Reserve Bank or in which not less than p 40% a shares are held singly or taken together by the government or the Reserve Bank n or a y, corporation owned by the Reserve Bank; or w h 256, It is a company registered u/s. 25 of the Companies Act, 1956, i.e. e companies r incorporated for promotion of commerce, art, science, religion, charity, and ei prohibiting n the payment of any dividends to its members; or e 257, It is a company having no share capital and it is declared by the CBDT q to be a u company in which the public are substantially interested; or it y 258, It is a company which carries on, as its principal business, the business of s acceptance h of deposits from its members and which is declared by the Central a Government u/ r S.620A of the Companies Act to be a Nidhi or Mutual Benefit Society; or e s 259, It is a company which is not a private company and its equity shares are, as c on the a last day of the previous year, listed in a recognized stock exchange in India; or rr y 260, It is a company which is not a private company and its shares carrying not i less than n 50% of the voting power (40% in the case of Indian companies whose g business n consists mainly in the construction of ships or in the manufacture or processing o of t goods or in mining or in the generation or distribution of electricity or any other le form s of power) have been allotted unconditionally to, or acquired unconditionally by, s and t were throughout the relevant previous year beneficially held byh a i) The government; or n ii) A statutory corporation; or 5 0 iii) A company in which the public are substantially interested or any wholly % owned subsidiary of such a company.
Taxation of Companies

of the voting power have been unconditionally allotted to or acquired by and were throughout the relevant previous year beneficially held by, one or more co-operative societies.

307

Taxation

Sec. 2(22A) "Domestic Company" means

i) an Indian company or

ii) any other company which, in respect of its income liable to tax under the Act, has made the following prescribed arrangements for the declaration and payment of dividends within India in accordance with Sec. 194 read with Rule 27 of the Rules:

261, The share register of the company for all shareholders should be regularly maintained at its principal place of business in India, in respect of any assessment year, from 1 st April of the relevant assessment year. 262, The general meeting for passing of accounts of the relevant previous year and for declaring dividends in respect thereof should be held only at a place within India. 263, The dividends declared, if any, should be payable only within India to all shareholders.
Students may note that an Indian company is always a domestic company and the above mentioned conditions are relevant only for other than Indian Companies. Sec. 2(23A)' 'Foreign Company'' means - a company which is not a domestic compam Sec. 2(26) "Indian Company" means- a company formed and registered under the Companies Act, 1956. Besides, it includes the following:

264, A company formed and registered under any law relating to companies formerly in force in any part of India; 265, A corporation established by or under a Central, State or Provincial Act; 266, Any institution, association or body which is declared by the Board to be a compair under section 2( 17) 267, A company formed and registered under any law in force in the State of Jammu ant1 Kashmir;

308

268, A co m pa n y fo r m ed an d re gi st er ed u n de r an y la w fo r th e ti m e be in g in fo rc e in th e U ni o n te rri

tories of Dadra and Nagar Haveli, Daman and Diu, Pondicherry and Stale ofGoa.

the court does In the aforesaid cases, a company, corporation, institution, association or, body will not be treated as an Indian company only if its registered or principal office is in India. modi fy 11.2 CONCEPT OF AMALGAMATION_________________________________ the date \ccording to section 2( IB), Amalgamation in relation to companies, speci fied means:-i) The merger of one or more companies with another in the sche company or ) The merger of two or more companies to form a new me, company. amal gama ; he company or companies which so merge are known as 'amalgamating company' tion or takes effect ompanies and the company with which the merger takes place or the new on company the which is formed as a result of the merger is known as the 'amalgamated company'. date Any of such merger will be treated as amalgamation only if the following occur by virtue of transf the er i speci amalgama fied tion: in the sche ri ) All the assets of the amalgamating company or companies should become the me. property of the amalgamated company. The b) All the liabilities of the amalgamating company or companies should become inco me the liabilities of the amalgamated company. of the Shareholders holding not less than 75 % in value of the shares in the amal amalgamating company or companies should become shareholders of the gama amalgamated company. ting comp |The understanding of the term "amalgamation" is significant since certain concessions any are Dvided in case of amalgamation under some of the provisions of the Income-tax from Act. [For instance, section 47 provides that if capital assets are transferred in a such scheme of date amalgamation to an Indian Company, it is not regarded as transfer for capital gains of purposes. trans Similarly, the loss of amalgamating company shall be allowed to be set off and fer carried shall forward by the amalgamated company by virtue of sec. 72 A. be asses In a scheme of amalgamation, the effective date is the date of transfer specified in sed the scheme and not the date of High Court's order approving the scheme. So long as

Taxation of Companies

as the income of the amalgamated company and shall be ssessed accordingly Marshall Sons and Co. (India) Ltd. vs. ITO (1996) 223ITR 809

309

Taxation

11.3 CONCEPT OF DEMERGER

2( 19AA) "demerger" in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company in such a manner thati) All the property of the undertaki ng, bei ng transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; ii) All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of demerger; iii) The property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of accounl immediately before the demerger; iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, Otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; vi) The transfer of the undertaking is on a going concern basis; vii) The demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. For the purpose of this definition, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not ; include individual assets or liabilities or a combination of these not constituting a business activity. For determining the value of property which is the subject matter of demerger, any change in the value of an asset, on account of revaluation, shall be ignored.

11)
iii)

310

Unit 11

Taxation of Companies

Splitting up or the reconstruction of any authority or a body constituted or established under any Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies shall be deemed to be the demerger if such split up or reconstruction fulfills the conditions as may be notified by the Central Government. 2(19AAA) "demerged company". means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company. 2(41 A) "resulting company" means one or more companies to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger. Where there is demerger as defined u/s. 2( 19 A A) of the Act, the implications are as under: i) There will be no capital gains tax liability in respect of transfer of capital assets by the demerged company to the resulting Indian company by virtue of Sec.47 (vib). ii) Shareholders of the demerged company are not chargeable to capital gains tax with reference to shares transferred/issued-Sec.47 (vid). iii) No tax liability will arise by deeming any portion distributed to the shareholders of the demerged company as "deemed dividend"-Sec.2(22)(v) iv) The demerged company shall be entitled to claim depreciation after demerger in respect of the value arrived at by reducing the written down value of the block of assets prior to demerger by the written down value of assets transferred pursuant to demerger Explanation 2A to Sec. 43(6). v) In the case of resulting company, depreciation shall be allowed in respect of assets transferred from the demerged company pursuant to demerger on the written down value of the transferred assets of the demerged company immediately before the demerger Explanation 2B to Sec.43(6). vi) Expenses incurred for demerger shall be allowed over a period of five years in equal installments- sec.35DD. vii) The cost of acquisition of the shares in the resulting company for the shareholder 311 shall be determined as follows:

Taxation

Net book value of the assets transferred Net worth of the demerged co. immediately before the demerger

Cost of acquisition of shares held by the assessee in the demerged co

The value so arrived at shall be reduced from the cost of acquisition of the original shares held by the shareholders in the demerged company and balance shall be the cost of acquisition of the shares held in the demerged company. For this purpose, "net worth" means the aggregate of the paid up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger-Sec.49 (2C) and Sec.49 (2D). viii) Deductions under sections 35ABB, 35D and 35E available to the demerged company can be availed by the resulting company in the same manner as the demerged company would have availed had the demerger not taken place. Same is the position with respect to deduction under sec.80-IA and 80-IB. ix) The resulting company will enjoy the benefit of carry forward of losses and unabsorbed depreciation of the demerged company as attributable to the demerged undertaking. Of course, the carry forward benefit of loss can be enjoyed only for the unexpired remaining number of years out of the total period of eight assessment years and unabsorbed depreciation can be carried forward for indefinite period.-Sec.72A(4).

Losses in case of closely held company - Sec. 79

In the case of a company in which public are not substantially interested, the unabsorbed business loss relating to any assessment year can be carried forward and set off against the income in a subsequent assessment year only if the following requirement is fulfilled:On the last day of the previous year in which the loss is sought to be set off, the shares ol the company carrying not less than 51 % of voting power are beneficially held by the persons who beneficially held the shares of the company carrying not less than 51 % of the voting power on the last day of the previous year in which the loss was incurred.

Exceptions
The above restriction does not apply to a case if the change in the said voting power takes places due to the following reasons: i) Death of the shareholder ii) Gift by a shareholder to his relative

312

Unit

Taxation of Companies

This restriction placed u/s.79 shall not apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company. However, 51 % of the shareholders of the amalgamating or demerged foreign company should continue to be the shareholders of the amalgamated or the resulting foreign company. The provisions of Sec. 79 are applicable only in the case of carry forward of fosses. As carry forward of unabsorbed depreciation is covered by sec. 32(2), its carry forward and set off is not affected by Sec. 79.

1 . D e f i n e D o m e s t i c C o m p a n y .

2 . D e f i n e F o r e i g

$ Activity A:

n In % of book Comp t profit any. h exceeds tax e on total c income, the a book profit s shall be e deemed to o be the total f income 11.4 a and the tax TAX c payable on ATI o such total ON m income OF p shall be CO a 7.5% MPA n thereof. NIE y Surcharge S , at 10% shall be 11.4. It h added to 1 such Spec a amount. ial s b Education prov cess @ 2% ision e e shall be for added on pay n the men p r aggregate t of of Income tax o v tax and by surcharge. cert i ain d 270, For the com e purpose of pani d computatio t es n of book (Min h profit u/s. imu a 115 JB, t m every Alter w company h nate assessee e Tax) shall r - Sec. prepare its e 115J profit and 7 B loss . account for 269, 5

t h e r e l e v a n t p r e v i o u s y e a r i n a c c o r d a n c e

313

Taxation

with the provision of Parts II and III of schedule VI of the Companies Act 1956. While preparing the annual accounts including profit and loss account, the accounting policies, the accounting standards, the method and rates of depreciation shall be the same as have been adopted for preparing such accounts including profit and loss laid before the Annual General Meeting u/s 210 of the Companies Act. This requirement applies even if the company adopts a financial year which is different from the previous year under the Income tax Act. The book profit shall be computed by making the following adjustments contemplated u/s 115JB to the net profit shown in the profit and loss account shall be increased by -

271, the amount of Income-tax paid or payable, and the provision therefore or 272, the amounts carried to any reserves by whatever name called (other than reserves for shipping business as specified under section 33AC) or 273, the amount or amounts set aside to provisions made for meeting liabilities other than ascertain liabilities or 274, the amount by way of provision for losses of subsidiary companies or 275, the amount or amounts of dividends paid or proposed or 276, the amount or amounts of expenditure relatable to any income to which Sec 10 other than the provisions contained in sec 10(23G) thereof 10A. 1 OB. Sec 11 or 12 apply.
The above adjustments are called for only if any of the amounts referred to above are debited to the profit and loss account. Further, the following shall be reduced from the net profit as per the profit and loss account. i) the amount withdrawn from any reserve or provision if any such amount is credited to the profit and loss account or ii) the amount of income to which Sec 10 other than the provisions contained in sec 10(23G) thereof 10A, 10B, sec 11 or 12 apply, if any such amount is credited to the profit and loss account, or
314

iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account (for this purpose the loss shall not include depreciation) or

Unit 11

Taxation of Companies

iv) the amount of profits eligible for deduction u/s 80HHC; v) the amount of prof its eligible for deduction u/s 80HHE; vi) the amount of profits eligible for deduction u/s 80HHF; vii) the amount of profits of sick industrial company for the years commencing from the year in which the said company has become a sick industrial company under the relevant Act and ending with the year in which the entire net worth of such a company becomes equal to or exceeds the accumulated losses.
277, The determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent years under sections 32(2) or 72 or 73 or 74 or 74A shall not be affected by the application of section 115JB(1) 278, All other provisions of the Income-tax Act, except to the extent otherwise provided in this section, shall apply to every company mentioned in this section.

Note: In computation of the book profit, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account is allowable as deduction. For this purpose, business loss shall not include depreciation loss. It is clarified that if either the loss brought forward or unabsorbed depreciation is NIL then nothing shall be allowed as deduction.
11.4.2 Applicability of Sec 115 JB to Foreign companies
Under the Companies Act, every company has to maintain its books of account relating to the Indian business in the manner required u/s 209 of the companies Act and u/s 594 of the same statute, every foreign company has to file its global accounts. In the case of Foreign company, the income derived from the Indian business is chargeable to tax and therefore, the company has to furnish a balance sheet and profit and loss account in respect of its Indian Business. In order to comply with this, the company has to calculate its Indian profits of the Indian business of the Foreign company for the purpose of section 115 JB. ihe Authority for Advance Rulings in P. NO. 14 of 1997 234ITR 335, has held that the provision of sec 115 J A (now substituted by sec 115 JB) are applicable to Foreign companies in the case of a foreign company incorporated in Netherlands having permanent establishment in India. Under Article 7 of the Double Tax Avoidance Agreement, the foreign company is liable to be taxed only on the income attributable to

its perm anent establ ishme nt in India. The comp any has to furnis h a balan ce sheet and profit and loss accou nt in respe ct of its India n profit s separ ately and there canno t be any speci al diffic ulty in findin g out the

315

Taxation

book profit of the Indian business of the foreign company for the purpose of minimum alternate tax. In the case of a foreign company engaged in exploration of oil and gas fields, deduction of expenditure u/s 42 is allowable only when business income is computed under chapter IVD of the Income-tax Act and not for computation of book profit u/s 115JB. The provision of sec. 115JB apply to a foreign company and the provision of sec 42 cannot override sec. 115JB - Niko Resources Ltd vs CCIT (Authority of Advance Ruling) (1998) 234 ITR 828.

11.4.3 Credit for tax paid under MAT - Sec 115JAA

Where any amount of tax is paid u/s 115 JB in excess of the payable under the normal j provisions, such excess shall be treated as credit available to the assessee company. The j amount of such credit shall be carried forward to the subsequent years and set off against j the excess of tax payable under the normal provisions over the tax payable under sec ,* 115JB. It can be so carried forward and set off within a period of 5 years immediately J succeeding the assessment year in which the tax credit is determined. If in the subsequent | 5 years, the company continues to pay minimum alternate tax and the credit is not set off, I it shall lapse.

Examples M/s Koti & Lalith Ltd. furnishes the following information for the year ending 31.03.2006. | It seeks your advice for MAT credit u/s. 115JAA Tax computed u/s 115JB for the A.Y. 2006-07 Tax computed under normal provisions for the A. Y. 2006-07 Tax computed under normal provisions for the A.Y. 2006-07 Tax computed under normal provisions for the A. Y. 2007-08 Ans: -5,00,000 -3,00,000 -3,00,000 -4,00,000

316

Comput forward u/s 115 JAA for the A.Y. 2006-07 ation of Tax computed u/s. 115JB credit to be Tax computed under normal provisions MAT credit to be carried forward u/s 115JAA 5,00,000 3,00,000 2,00,000 5,00,000

carried Total Tax payable for the A.Y. 2006-07

Unit 11

Taxation of Companies

Computation of credit to be carried forward u/s 115 JAA for the A.Y. 2007-08

3,00,000 Tax computed u/s. 115JB 4,00,000 Tax computed under normal provisions

Higher of the above shall be tax payable u/s. 115JB 4,00,000 4,00,000 Less: Set off of credit u/s. 115JAA

3,00,000 1,00,000 2,00,000

Tax on total income under normal provisions Less: Tax computed u/s 115JB Difference Tax credit available u/s. 115AA 1,00,000 Restricted to Balance tax 3,00,000 payable after MAT credit Note: Bal MAT credit of Rs. 1,00,000 is eligible for carry forward upto A.Y. 2011 -12. Report of a Chartered Accountant u/s 115JB Every company to which the provisions of sec. 115JB are applicable shall furnish a report in Form 29B from a chartered accountant certified that the book profit has been computed in accordance with the provisions of sec 115JB. Levy of interest u/s 234B and 234C with reference to tax on book profit Though companies finalise the statement of accounts in with Schedule VI after the closure of the accounting year, it cannot be regarded that it would be an impossible exercise for a company maintaining its accounts on mercantile basis to estimate the profits during current year itself and pay advance tax on the estimated current profits. Therefore, interest u/ S.234B is leviable though 115JB is attracted. However a contrary view is opined by the KarnatakaHigh Court in the case of Quality Biscuits Vs. 01(1999), 243ITR 519 (KAR). Since companies finalise the statement of accounts in accordance with Schedule VI after the closure of the accounting year, it is not possible to determine book profit and pay advance tax. Therefore, advance tax provisions are not applicable to book profit tax. Amount of loss and depreciation to be carried forward

It is possibl e in a case

that the assessee avails set off of brought forward loss and unabsorbed depreciation as per normal provision, on account of which the taxable income is substantially reduced or made nil. Consequently, the assessee may end up paying tax on book profit u/ s 115JB. Issue arises about the eligibility of the assessee to carry forward such loss or
31 7

Taxation

depreciation and set off in the years in which it had paid book profit tax. If such benefit is allowed, in the subsequent years the assessee will get benefit of set off of the same loss or depreciation. Even where the book profit tax is imposed, the amount of business loss and unabsorbed depreciation at the beginning of the year should be adjusted and set off as permissible under the normal provisions and only the balance amount of unabsorbed loss and depreciation can be carried forward to the next year. Assessee cannot contend carry forward of entire amount on the ground that tax has been imposed on book profit. For instance, if the brought forward loss is Rs. 50 lakhs: unabsorbed depreciation is Rs. 30 lakhs and income computed under the normal provisions is Rs. 60 lakhs; then after set off u/s. 72 and u/s 32(2), total income assessable shall be nil and assessee would be eligible to carry forward unabsorbed depreciation of Rs 20 lakhs. If the book profit is computed at Rs 20 lakhs and the company is made to pay tax thereon at 7.5% with surcharge and education cess, it would not alter the amount of carry forward loss/depreciation. Capital gains part of book profit While calculating the total income under the Income-tax Act, the assessee is required to take into account income by way of capital gains u/s 45 of the Income-tax Act. In the circumstances, while computing the book profit under the Companies Act, the assessee has to include capital gains for computing the book profit u/s 115JB. Even under clause 3(xii) (b) of Part II of Schedule VI to the Companies Act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gains should be included for the purposes of computing book profit -CIT vs. Veekaylal Investment Co. P. Ltd (2001) 249ITR 59? (Bom). 11.5 ILLUSTRATION Following particulars have been provided in respect of A Limited for the year ending i 31st March 2007. Particulars

Operating Profit Less: Transfer to Reserves

Rs.
25

(Rs. in Lakhs] Rs.

318

Unit II

Taxation of Companies

Proposed Dividend

15 040

Net Profit 080 While calculating the above profit, following amounts have been debited to Profit and Loss Account: Depreciation on SLM basis - Rs. 30 Lakhs Provision for taxation - Rs. 40 Lakhs

Following further information is provided:

Depreciation on WDV basis as per Income Tax calculations - Rs. 120 Lakhs As per the income tax records, brought forward business loss - Rs. 30 Lakhs

Determine the applicability of Section 115JB to the company and also calculate the tax liability for the AY 2007-2008. Solution Calculation of Tax Liability for A Limited for AY 2007-2008 Calculation of Book Profits

Particulars
Profit as per Profit and Loss Account Add: Transfer to Reserves Proposed Dividend Provision for Taxation 25 40 15 Rs.

(Rs. in Lakhs) Rs. 80

Less: Brought Forward Losses

80 160
30 030

31 9

Taxation

Book Profit as per Section 115JB Tax payable as per the provisions of Section 115JB-@7.5 % of Rs. 210 Lakhs Rs. Add - Surcharge Rs. Total Tax Liability Rs. Calculation of Taxable Income Particulars Profit as per Profit and Loss Account Add: Transfer to Reserves Proposed Dividend Provision for Taxation Depreciation as per SLM 25 15 40 30 9,75,000 0,24,375 9,99,375

130

(Rs.inLakhsJj

Rs.

Rs.1

110 190

Less: Brought Forward Losses Depreciation as per WDV Taxable Income Tax payable under normal calculations @35%onRs.25Lakhs Add - Surcharge Total Tax Liability

30 135
165

25
Rs. 8,75,000 Rs. 21,875 Rs. 8,96,875

320

As the total tax liability works out to be higher as per the provisions of Section 115 tax payable will be Rs. 9,99,375 In either of the cases, the tax payable shall be increased by the education cess @ 2fj

12.1 INTRODUCTION
There may be a situation where an assessee has different sources of income under one head of income and the result of one source is a loss. Similarly, there may be a possibility that the assessee has different heads of income and the result of one head of income is a loss. The question arises as to whether the assessee gets the benefit of these losses or not The answer to this question is in the positive. The losses incurred can be set off to reduce the Gross Total Income. Similarly, there may be a possibility that the Gross Total Income under different heads of income is negative. The question arises as to whether the assessee gets the benefit of these losses in the subsequent Assessment years or not. The answer to this question is again in the positive. The losses incurred in the current Assessment Year can be carried forward to the subsequent Assessment Years and can be adjusted against the income earned in the subsequent Assessment Years.

12.2 SET -OFF OF LOSSES Inter source adjustment - Sec. 70

Where the net result of computation for any assessment year in respect of any source of income falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. However, the following are the exceptions to the above rule: i) Loss from speculative business

ii) Loss from the activity of owning and maintaining race horses iii) Long term capital loss

Inter head adjustment - Sec.71

Where the net result of the computation under any head of income in respect of any assessment year is a loss, the assessee shall be entitled to have such amount of loss set off against his income assessable for that assessment year under any other head of income. This rule of inter head adjustment is subject to the following exceptions:

279, 280, 281,

326

Loss from speculative business Loss from the activity of owning and maintaining race horses -Loss under capital gains

Unit 12

Set off and Carry Forward of Lossess

d) Loss under Profits & Gains of Business or Profession against salary income Students may note that loss under the head "Profits and Gains of Business or Profession" cannot be set off against salary income. However, Set off of business loss against any other head of income is allowed. According to the Sec. 58(4), any loss or unabsorbed depreciation allowance cannot be set off against any income in the form of winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting.

Section Type of Loss

71B 72 72A(1) Loss from house property Business loss unabsorbed. Unabsorbed depreciation ofAmalgamation Co. Demerged company Firm or proprietary concern succeeded by a company Banking company Demerged company

Number of years
8 years 8 years Indefinite period

To be set-off against
Income from house property. Income from business or profession. Any income of the amalgamated co. Any income of the resulting company Any income of successor company

Indefinite period Indefinite period

72A(4) 72A(6)

Indefinite period

72AA 72A(4)

72A(6)

Firm or proprietary concern succeeded by a company

Any income of Banking Unexpired period out of institution the total permissible period Income from business or of 8 years profession of the resulting 8 years from the expiry of company. the year of conversion of Income from business or the firm or proprietary profession of the successor concern into a company company [set off in the year of succession and c/f for 8 years]

32 7

\3rat \1

Set off and Carry foiwavd <tf Possess

12.3 DEEMED INCOME 12.3.1 Cash credits - Sec. 68

Where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof, or, the explanation offered is not satisfactory, the sum so credited may be charged as income of the assessee for that previous year. For the purpose of avoiding the applicability of sec. 68, the burden is on the assessee to prove that:

282, The identify of the creditors is established; 283, The capacity of the creditor is beyond doubt; and 284, The transaction is genuine.
An assessing officer cannot impose penalty u/s. 27 ID for violation of sec. 269SS in respect of credits treated as income u/s.68. If the credits are genuine, sec.68 does not apply and if they have been borrowed to the tune of Rs.20,000/- or more from a person in cash then sec. 217D can be invoked. To sum up, sec.68 and sec. 269SS are mutually exclusive. 12.3.2 Unexplained investment - Sec.69 Where in the financial year relevant to an assessment year, the assessee has made investments which are not recorded in the books of account, if any, maintained by him and the assessee offers no explanation or unsatisfactory explanation, the value of the investment may be deemed to be the income of the assessee for such a financial year. 12.3.3 Unexplained money, jewellery etc. - Sec. 69A Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles which are not recorded in the books of account, if any, maintained by the assessee and the assessee offers no explanation or unsatisfactory explanation, the money and value of assets so found may be deemed to be the income of the assessee for such a financial year. 12.3.4 Unexplained expenditure - Sec, 69C Where in any financial year the assessee has incurred any expenditure and offers no explanation about the source of such expenditure, or the explanation 329 offered is not

Taxation

satisfactory, then the expenditure to the extent it is not satisfactorily explained may be deemed to be the income of the assessee for such a financial year. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.

12.3.5 Investment not fully disclosed - Sec. 69B

Where in any financial year, the assessee has made investment or is found to be the owner of any bullion, jewellery or other valuable article and the assessing officer finds that the amount expended for making such investments exceeds the amount recorded in the books and the assessee offers no explanation or unsatisfactory explanation, the excess amount may be deemed to be the income of the assessee for such a financial year.

12.3.6 Any amount borrowed/repaid on hundi - Sec. 69D

Where any amount is borrowed on hundi from any person or any amount thereon is repaid to such person otherwise than by an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing/repaying the amount for the previous year in which it is borrowed or repaid. 1) Once an amount is deemed as income at the time of borrowal, it cannot be deemed as income at the time of repayment. Amount repaid shall include the amount of interest paid on amount borrowed.

2)

JS$ Activity B ; 1. Define Cash credits - Sec. 68.

Define Unexplained investments - Sec.69.

330

Unit 12

Set off and Carey Forward of Lossess

Illustration Mr. Ashok provides the following particulars about his income for the Assessment Year 2007-2008. Particulars a. b. Income from Salary Income from House Property House I House II House III (Self occupied) c. Profits and gains from business and profession Manufacturing business Trading business Business A (Speculative) Business B (Speculative) d. e. Long Term Capital Gains from the transfer of house Short Term Capital Loss from the transfer of shares Income from Other Sources Winning from lotteries Income from card games Interest Calculate the Gross Total Income of Mr. Ashok for the AY 2007-2008. Solution Calculation of Gross Total Income for Mr. Ashok for AY 2007-2008 Particulars Rs. Rs. n Income from Salaries
;

Rs. 1,00,000 24,000 (-) 14,000 (-) 60,000 68,000 (-) 28,000 (-) 60,000 25,000 90,000 (-) 48,000 29,000 (-) 20,000 18,000

1,00,000

Income from House Property

331

Taxation

(-) 60,000 25,000 f. 90,000 (-) 48,000 29,000 18,000 1,59,000

bs ufrom scard i game ns eRs. s20,00 s0 Set - off and

3 3 Note 2

R Carry sForw . ard of Losse 3s 285 5 12.4 , CAR RY 0FOR WAR 0D OF LOS 0 SES % If the losses canno t be L set off ounder the ssame heads

Followi ng losses will be carried forward to the AY 20082009 % Loss from speculat ive

of income f due to noni availabili nty of c sufficient oincome m in the e same year, osuch r losses can be ucarried nover to dthe next e Assessm r ent Year. Accordin dg to the i provision fs of f Income e Tax Act, r 1961, e followin ng losses t can be carried hforward e to the a next dAssessm s ent Years o

Unit 12

Set off and Cany Forward of Lossess

Loss under the head "Income from House Properties" As per the provisions of Section 71B of the Act, loss under the head of Income from House Properties can be carried forward and set off in the subsequent Assessment Years against the Income from House Properties subject to the limit of 8 Assessment years. Loss from Speculation Business As per the provisions of Section 73 of the Act, the loss from Speculative Business can be carried forward and set off in the subsequent Assessment years against the Speculative Profits subject to the time limit of 8 Assessment yeai s Loss from Non-speculative Business Loss from Non-speculative Business may arise on account of the following reasons -a Unabsorbed Depreciation b. Unabsorbed Business Loss Unabsorbed depreciation can be carried forward to the subsequent Assessment Years without any time limits. In the subsequent Assessment Years, the unabsorbed depreciation can be set off against any head of income, not necessarily against Profits from B usiness and Profession. dnabsorbed business loss can earned forward and sel off in the subsequent Assessment Years against the any business profits, whether speculative or non-speculative, subject to the time limit of 8 Assessment years.

t.

12.5 ILLUSTRATIONS Rs. Rs. 40,00 45,000 0 80,00 75,000

0 10,00 90,000 0 Following particulars are available in respect of M/s Ashok Industries Limited
Particulars Profits (before depreciation) Depreciation for current year Income from Other Sources Calculate the taxable income for the assessee for the AY 2006-2007 and 2007-2008.
33 3

AY 2006-2007

AY 2007-2008

Taxation

Solution Calculation of Taxable Income Assessment Year 2006-2007

Rs. Rs
.

Particulars Income from Business and Profession

40,000 Profit before Depreciation 80,000 Less: Depreciation (-) Hence, Profit from Business and Profession 40,000 Income from Other Sources 10,000 Hence, Taxable Income The business loss of Rs. 30,000 can be carried forward to the AY Rs 2007-2008. Assessment Year 2007-2008

Rs.
.

Particulars Income from Business and Profession Profit before Depreciation

45,00 Less: Depreciation (including unabsorbed Depreciation for AY 2003-2004) 0 Hence, Profit from Business and Profession Income from Other Sources 1,05,000 Hence, Taxable Income Loss under the head Income from Capital Gains

334

As per the provisions of Section 74 of the Act, loss under the head Income from Capital Gains, to the extent it is short term capital loss can be carried forward and set off in the subsequent Assessment Years against the short term capital gains or long term capital gains subject to the limit of 8 Assessment years. Loss under the head Income from Capital

Gains, it is long term capital loss can be carried forward and set off in the , to the subsequent Assessment Years against the long term capital gains subject to extent the limit of 8 Assessment years.

Unit 12

Set off and Carry Forward of Lossess

Loss from the activity of owning and maintaining the race horses
As per the provisions of Section 74A of the Act, loss from the activity of owning and maintaining the race horses can be carried forward and set off in the subsequent Assessment Years against the income under the same head subject to the limit of 4 Assessment years. 2. Following particulars are available in respect of Ashok for the Assessment Year 2007-2008.

Particulars
a. b. c. d. e. Profit from trading business Interest on capital from a partnership firm Long term capital gains on account of sale of Jewellery Profit from speculation business Bank Interest

Rs.
25,000 28,000 45,000 10,000 12,000

Following losses have been brought forward from the preceding year a. b. c. d. e. Unabsorbed business loss (Non-speculative business) Unabsorbed depreciation Unabsorbed business loss (Speculation business) Short term capital loss Long term capital loss Rs. 15,000 Rs. 8,000 Rs. 12,000 Rs. 30,000 Rs. 35,000

Calculate the taxable income of Ashok for the Assessment Year 2007-2008.

Solution
Calculation of taxable income of Ashok

Particulars
Profits from Business & Profession Profit from trading business Interest on Capital Sub Total

Rs.

Rs.
25,000 28,000 53,000

33 5

jaxation

i^ess. Unabsorbed loss I Jnabsorbed Depreciation Profit from business & profession Profits from Speculation Business Profits Less: Unabsorbed loss Profits from Speculation Business Capital Gains I .or, ~ term capital gains - tied forward loss
,, "di V l , U t l >

15,000 8,000
30,000

10,000 10,000 Nil 45,000 45,000 Nil 12,000

hicoune from Other Sources ..-rest ,/i ue trom Other Sources ,.* Total Income 42,0110

336

i K units will be allowed to be carried forward K oil is from speculation business - Rs. 2,000 b. 289 12,6 .SUMMARY 'f Capita] Loss-Rs. 35,000 c i oft and Carry Forward of Losses

The provisions regarding set off and carry forward of loses are contained in Sections 70 to 80 of the Income Tax Act, 1961. The provisions regarding set off and carry forward of losses can be considered under the following heads: a b. c. Inter-Source Adjustments - Section 70 Inter-Head Adjustments - Section 71 Carry Forward of losses

Taxation

13.1 INTRODUCTION
Section 44AB of the Act provides that every person carrying on business and having sales; turnover or gross receipts exceeding Rs. 40 Lakhs in any previous year has to get his accounts audited by a Chartered Accountant before the specified date and furnish by that. date, the report in the prescribed form, duly signed by the Chartered Accountant. In case j of the person carrying on the profession, the provisions of this section apply if the gross receipts in the profession exceed Rs..10 Lakhs. Following points should be noted in this connection -

The specified date indicated above is 31 st October of the Assessment Year. The assessee is not only required to get the accounts audited by a Chartered Accountant before the specified date, but is also required to furnish the report of such audit before the specified date, whether the return of income is filed or not. If the person (say a company) is required to get his accounts audited under any other law (say Companies Act, 1956), it shall be considered to be a sufficient compliance with the provisions of this section if report of audit as required under such other lav is furnished before the specified date along with a further report in the prescribe; form under this section. The tax audit report specified above is found mainly in three forms in practical circumstances : a. Form No. 3CA - This is the form of Audit Report applicable to a person \ carries on business and profession and whose accounts are required to be aud by or under any other law. Form No. 3CB - This is the form of Audit Report which applies to a pen who carries on business or profession but not being a person referred to in 1 above. Form No. 3CD - This form of Audit Report contains the particulars in resp of a person carrying on business which are required to be given under { 44 AB of the Act.

b.

c.
344

The specimen of the above three forms is given in the Annexure at the end of this unit. If any person fails to get the accounts audited by a Chartered Accountant under section and fails to submit the copy of such report, he may be liable to pay the pei

equal to 0.5% of the sales, turnove r or gross receipts as the case may be or Rs. 1,00,00 fff whiche ver is less.

Unit 13

Tax Audit

13.2 FORM3CD
As stated above, Form No. 3CD of the Tax Audit Report is the form in which the auditor is required to give his comments on various aspects. The various clauses of Form No. 3CD are discussed in detail in the following paragraphs. General Information - Clause No. 1 To Clause No. 8 Clause No. 1 to Clause No. 8 of the Form No. 3CD contains the general information about the assessees such as -

Name of the Assessee Address Permanent Account

Number t Status Previous Year Ending Assessment Year If the assessee is a firm or association of persons, details of partners/members and their profit sharing ratios and if there is a change in the constitution or profit sharing ratios, details thereof. Nature of business or profession and if there is a change in the nature of business or profession, details thereof.

Maintenance Of Accounts - Section 44AA - Clause No. 9 Section 44AA of the Act requires that every person carrying on the specified profession is compulsorily required to maintain specified books of accounts and documents to enable the Assessing Officer to compute the total income of the assessee. Specified professions for this section contain the following professions: Law
345

t Medicine

Engineering Architecture

Taxation

Accountancy Technical Consultancy Interior Decoration Film Making Company Secretaryship Information Technology
J

The books of account to be maintained under this sectiorf include -

A Cash Book A Journal if the accounts are maintained on accrual basis ",'i.. A Ledger
i;

Copies of machine numbered or serially numbered bills and receipts of over Rs. 25 wherever such bills and receipts are issued. Original bills in respect of expenditure incurred by the person and where such bills are not available and the expenditure does not exceed Rs. 50, payment vouchers prepared and signed by the person.

It is further provided that the above requirement shall not apply if the total gross receipts in the profession do not exceed Rs. 1,50,000 in any one of the 3 years immediately preceding the previous year, or in case of a newly set up profession, if the total gross receipts in the profession for that year are not likely to exceed Rs. 1,50,000. If the person carries on the profession not specified above or carries on the business, the requirements in respect of compulsory maintenance of books of accounts apply if the total income from such business or profession exceeds Rs. 1,20,000 or his total sales or gross receipts from such business or profession exceed Rs. 10,00,000 in any of the 3 years immediately preceding the previous years and in case of newly set up business or profession, if the total income from such business or profession is likely to exceed Rs. 1,20,000 or his total sales or gross receipts from such business or profession it likely to exceed Rs. 10,00,000.

346

Unit 13

Tax Audit

i.

13.3 PRESUMPTIVE PROFITS - CLAUSE NO. 10

Under certain sections of the Act, the profits and gains from certain specific businesses are calculated on presumptive basis. More frequently found businesses under this category are as below: Section 44AD - Busing of Civil Construction Section 44AE - Business of plying, hiring or leasing goods carriages Section 44AF-Retail Business Let us discuss the provisions of these sections in more details. 13.3.1 Section 44AD - Business of Civil Construction a. The provisions of this section apply to an assessee engaged in the business of civil construction or supply of labour for civil construction. The provisions of this section apply where Gross Receipts from such business (excluding cost of material supplied by the client) does not exceed Rs. 40 Lakhs. The profit from such business chargeable to tax shall be deemed to be 8% of Gross Receipts paid or payable to the assessee in the previous year on account of such business. From the profits calculated above, no deduction shall be made for any expenditure except interest and/or remuneration payable to the partners as per the provisions of Section 40(b) of the Act. The written down value of the assets shall be deemed to have been calculated as if the assessee had claimed and had been allowed the deduction in respect of depreciation. The provisions of Section 44AA of the Act regarding the compulsory maintenance of books<9$iaccounts do not apply in this case.
v

'""

b.

c.

d.

e.

f.

If th e a ss e ss e e fe el s th at th e p r o fi ts e ar n e d fr o m th e b u si n e ss ar e le ss th a n 8 % o

f the Gross Receipts, he may choose not to opt for this scheme. However, in that case, he will be required to maintain the books of accounts and get the accounts audited by a Chartered Accountant and furnish the report of such audit as required under Section 44ABoftheAct.

347

Taxation

13.3.2 Section 44AE - Business of plying, hiring or leasing goods carriages

a. The provisions of this section apply to an assessee who owns not more than 10 goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leasing of such goods carriages. The profit from each goods carriage owned by the assessee shall deemed to be

b. -

For Heavy Goods Vehicles - Rs. 3,500 for every month or a part of the month during which the goods carriage is owned by the assessee during the previous year. For goods carriages other than Heavy Vehicles - Rs. 3,150 for every month or a part of the month during which the goods carriage is owned by the assessee during the previous year.

c.

From the profits calculated above, no deduction shall be made for any expenditure except interest and/or remuneration payable to the partners as per the provisions of Section 40(b) of the Act. The written down value of the assets shall be deemed to have been calculated as if the assessee had claimed and had been allowed the deduction in respect of depreciation. The provisions of Section 44 AA of the Act regarding the compulsory maintenance of books of accounts do not apply in this case. If the assessee feels that the profits earned from the business are less than as stated above, he may choose not to opt for this scheme. However, in that case, he will be required to maintain the books of accounts and get the accounts audited by a Chartered Accountant and furnish the report of such audit as required under Section 44AB

d.

e.

f.

348

of th e A b. ct.

ail trade in any goods or merchandise. The provisions of this section apply where total turnover of such retail trade business does not exceed Rs. 40 Lakhs.

13.3.3 Sectio n 44AF Retail Busin ess

a. T he pr ov isi on s of thi s se cti on ap pl y to an as se ss ee en ga ge d in th e ret

Unit 13

Tax Audit

c.

The profit from such business chargeable to tax shall be deemed to be 5% of the total turnover in the previous year on account of such business. From the profits calculated above, no deduction shall be made for any expenditure except interest and/or remuneration payable to the partners as per the provisions of Section 40(b) of the Act. The written dowa value of the assets shall be deemed to have been calculated as if the assessee tuppclaimed and had been allowed the deduction in respect of depreciation.

d.

e.

1. The provisions of Section 44 AA of the Act regarding the compulsory maintenance of books of accounts do not apply in this case. g. If the assessee feels that the profits earned from the business are less than 5 % of the total turnover, he may choose not to opt for this scheme. However, in that case, he will be required to maintain the books of account and get the accounts audited by a Chartered Accountant and furnish the report of such audit as required under Section 44AB of the Act.

13.4 METHOD OF ACCOUNTING - SECTION 145 - CLAUSE NO. 11

Section 145 of the Act provides that in respect of Income from Business and Profession and Income from Other Source, the assessee may follow either Cash System of Accounting or Accrual System of Accounting. In case of cash system of accounting, the receipts and payments will be accounted for as and when received or paid. In case of accrual system of accounting, the income and expenditure will be accounted for on accrual basis. The date of receipt of income or payment of expenses is not material in case of accrual system of accounting. In respect of method of accounting, choice is given to the assessee to select between cash system or accrual system, provided that he follows the system of accounting regularly. The section further provides that the Central Government may notify the various accounting standards which need to be complied with by various types of assessees in respect of various types of incomes. The auditor is required to comment upon whether the assessee is complying with the above requirements and whether there is any change in the method of 349 accounting employed by the assessee from the one employed by him in the immediately preceding previous year and if the answer to the same is in the affirmative, the effect of such change on the Profit and Loss Account is required to be specified.

Taxation

Valuation Of Closing Stock - Section 145 A - Clause No. 12 Section 145 A of the Act provides that the amount of tax, cess or fee (Eg. Excise Duty, Customs Duty, Sales Tax etc.) actually paid or incurred by the assessee to bring the goods to the place of its location and condition on the date of valuation of the inventory should be included in the value of the stock in the purchase and sale of the goods and inventory for the purpose of calculating the income chargeable under the head "Profits from Busines and Profession". Amounts Not Credited To Profit And Loss Account - Clause No. 13 Clause No. 13 of the Tax Audit Report requires the auditor to specify the amounts whid should have been credited to Profit and Loss Account but have not been credited. Th amounts which are specified under this clause are as below a. The items which fall within the scope of Section 28 of the Act - Section 28 of the At refers to the following main items of profits which will be chargeable to tax undo Profits from Business and Profession.

Profits of any business carried on by the assessee during the previous year. Export incentives received by the assessee which in turn include -

Profits on sale of import licenses Cash assistance received or receivable Duty drawbacks of customs and central excise duties

Any interest, salary, bonus or commission received by the partner of a partne firm Any amount received under a Keyman Insurance policy including the amount^ bonus thereon Income earned from speculative business

transactions Depreciation - Clause No. 14 Clause No. 14 of the Tax Audit Report requires the auditors to disclose various fa about the depreciation from the angle of Income Tax Act, 1961. We have discussed t same in details in the chapter on Profits from Business and Profession.

350

Unit 13

Tax Audit

J* Activity A: 1. Explain Tax Audit in brief.

2. What do you mean by presumptive taxation scheme?

13.5 AMOUNTS ADMISSIBLE UNDER VARIOUS SECTIONS CLAUSE NO. 15 Clause No. 15 requires the Tax Auditor to give the information about amounts admissible as deductions under various Sections of the Act. The various sections which are specified in this clause are discussed below 13.5.1 Section 33AB - Tea or Coffee or Rubber Development Account Section 33 AB of the Act applies to an assessee carrying on the business of growing and manufacturing tea or coffee or rubber in India. The deduction under this section is allowed if the assessee has, before the expiry of six months from the end of the previous year or before the due date for filing the return of income, whichever is earlier a. deposited with the National Bank for Agriculture and Rural Development (NABARD) any amount in an account maintained by the assessee with that Bank according to a scheme approved by the Tea Board or Coffee Board or Rubber Board b. deposited any amount in an account opened by the assessee according to a scheme framed by the Tea Board or Coffee Board or Rubber Board with the prior approval of Central Government. The amount standing to the credit of the above deposit accounts may be withdrawn

only for the purp oses laid down in the sche me. If the amou nt relea sed by NAB ARD or Tea

351

Taxation

Board or Coffee Board or Rubber Board in a year is not utilised in the same previous year 1 for the purpose for which it is released, the said amount will be considered to be the taxable profits in that year. The amount of deduction is a. a sum equal to the aggregate of the amounts so deposited or

b. a sum equal to 40% of the Profits from Business and Profession of the assess whichever is less. 13.5.2 Section 33ABA Section 3 3 ABA of the Act applies to an assessee carrying on the business of prospecting for, or extraction, or production of petroleum or natural gas or both in India. The deduction under this section is allowed if the assessee has before the end of the previous year a. deposited with State Bank of India any amount or amounts in an account maintained with that bank for the purpose of a specified scheme (Site Restoration Fund Scheme, 1999) approved by the Central Government deposited any amount in an account (Site Restoration Account) opened in accordance with the scheme framed by Ministry of Petroleum and Natural Gas.

b.

Any amount standing to the credit of such deposit account or the Site Restoration Account may be withdrawn for the purpose specified in the respective scheme. If the amount released by SBI or the amount withdrawn from site restoration account is not utilised in the same previous year for the specified purpose, the same will be treated as the taxable profits in the said year. The amount of deduction available is a. b. a sum equal to the amount or amounts so deposited or a sum equal to 20% of the profits of such business which are taxable under the head "Profits from Business and Profession" whichever is less.

It is further provided that any amount credited by way of interest on these accounts shall be deemed to be a deposit.
352

Unit 13

Tax Audit

13.5.3 Section 35
Section 35 of the Act applies to the expenditure incurred by the assessee on scientific research where scientific research means any activities for the extension of knowledge in the field of natural or applied sciences including agriculture, animal husbandry and fisheries. This deduction is available in respect of a. Any revenue expenditure incurred by the assessee for carrying out scientific research provided that such research is related to his business. If salary has been given to an employee engaged in the scientific research or any materiaf nas 6een used in the scientific research, such salary or cost of material paid or incurred within three years immediately preceding the commencement of business is deemed to have been paid or incurred in the previous year in which the business has commenced. Any capital expenditure incurred by the assessee himself for carrying out the scientific research provided that such research is related to his business. Such capital expenditure might have been incurred by the assessee for the plant and machinery, building etc. However, the deduction is not available in respect of land purchased. If the capital expenditure has been incurred by the assessee before the commencement of business, such expenditure incurred within three years immediately preceding the commencement of business is deemed to have been paid or incurred in the previous year in which the business has commenced. c. If the assessee is a company and is engaged in the business of biotechnology or in the business of manufacture or production of any drugs, Pharmaceuticals, electronic equipments, computer, telecommunication equipments, chemicals or any other notified product, a weighted deduction of 150% is allowed in respect of expenditure on inhouse research and development expenditure. However, this deduction will not be applicable in respect of land purchased. Similarly, this deduction will be

b.

av ail abl e in res pe ct of ex pe ndi tur e inc urr ed till 31 st M arc h 20 07. d. If th e as se ss ee do es no t ca rr y ou t th e sci en tif

ic research himself but makes the contribution to an approved scientific research association of a university/college/ institution/national laboratory, a weighted deduction 125% is allowed in respect of such contributions made, even if the research is not related to the business of the assessee.

353

Taxation

13.5.4 Section 35AC Section 35AC of the Act applies to any sum paid by the assessee to a public sector company or a local authority or an association or institution approved by National Committee for Promotion of Social and Economic Welfare, for carrying out any project or scheme for promoting the social and economic welfare of or the uplift of the public. 13.5.5 Section 35CCA Section 35CCA of the Act applies to any expenditure incurred by the assessee by way of payment of any sum to a. any association or institution to'be used for carrying out any programme of rural development. an association or institution which has the objective of training the persons for implementation of a rural development programme. the National Fund for rural development set up by the Central Government. the National Urban Poverty Eradication Fund set up by the Central

b.

c. d.

Government. 13.5.6 Section 35D Section 35D applies to the preliminary expenses incurred by a company which in turn may consist of a. Expenditure in connection with the preparation of
354

feasibility report project report conducting market survey or any other survey engineering services relating to the business

b.

Legal charges for drafting the agreement between the assessee and any otherperson for the purpose of setting up or conduct of the business. Charges in connection with drafting and printing of Memorandum of Association and

c.

A rti cl es of A ss oc iat io n.

d. Fees for register ing the compa ny as per the provisi ons of Compa nies Act, 1956.

Unit 13

Tax Audit

e. Expenses in connection with the public issue of shares or debentures like underwriting commission, brokerage and charges for drafting, typing, printing and advertising of prospectus. The aggregate amount of all the expenditures under the above heads cannot exceed 5% of the Cost of Project. However, for an Indian Company the aggregate of all the expenditures can be 5% of the Cost of Project or 5% of Capital Employed, whichever is higher. Section 35D of the Act provides that the preliminary expenses can be amortised and written off to profit and loss account over a period of 5 years commencing from the year of commencement of business. 13.5.7 Section 35E Section 35E of the Act applies to all the resident assessees engaged in the business of prospecting for or extraction or production of certain specified minerals. The deduction is available in respect any expenditure incurred by the assessee during the year of commercial operations and four immediately preceding years, wholly and exclusively on any operations relating to prospecting for any minerals or on the development of a mine or other natural deposit of any such mineral. Such expenditure is allowed to be amortised over a period of 10 years commencing from the year in which the commercial operations start. /gf Activity A; 1. How much deduction is allowed under section 35 of the Act?

2. Discuss deduction under section 35D of the Act.

355

T a

13.6
a. b. c. d. e. f. g. h. L

\JrvU 13

"Tax. A.vuiit.

5ns

a. b.

the amount of gratuity has actually become payable to the employees during the previous year. the provision has been made for the payment of a sum by way of contribution to an approved gratuity fund. Other than these two situations, any provision made for the payment of gratuity is not allowed as deduction.

13.7 PAYMENT MADE TO SPECIFIED PERSONS - CLAUSE NO. 18 Disallowability of the payments made to the persons specified in Section 40A (2)(b) of the Act has been discussed in details in the unit on Profits from Business and Profession. 13.8 DEEMED PROFITS - CLAUSE NO. 19_________ .

While discussing Clause No. 15, provisions have already been discussed about the deemed profits under the following sections Section 33AB Section 33 ABA Section 33AC

13.9 PROFITS CHARGEABLE TO TAX UNDER SECTION 41 - CLAUSE NO. 20_________________________________________________________ Section 41 of the Act deals with the deemed profits chargeable to tax which are not credited to Profit and Loss Account. In practical circumstances, following main types of income may fall under this category a. If any deduction has been allowed in the assessment of any earlier year in respect of any loss or expenditure or trading liability incurred by the assessee and subsequently, during the previous year, the assessee obtains, whether in cash or otherwise Any amount in respect of such loss or expenditure Some benefit in respect of the trading liability by way of remission thereof. The amount received by the assessee or the value of benefit received by the assessee shall be deemed to the profit of that previous year.

357

Taxation

3 13.10 5 DED 8 UCT

ION ON ACT

U 1 of A the L Tax Audit B Repor A t S Irefers Sto the details ( of Svariou E s C paym T ents Iwhich O are N allow ed as 4 3deduc tion B only - if they are C L actual A ly U paid Sfor. E Howe ver, if N the O . assess 2ee 1follo ) ws merca C ntile l syste am of uaccou snting, ethe said N paym oents . can be claim 2ed on

"of the dsame uis emade "on or before bthe adue sdate i of sfurnis hing athe s'retur n of w incom ee. The l vario l us , paym ents pwhich r are oreferr ved to i the dsaid esectio dn are as t below h: a t a. t h e p a y m e n t A n y s u m p a y a b

l e b y t h e a s s e s s e e b y w a y o f t a x , d u t y , c e s s o r

f e e b y w h a t e v e r n a m e it m a y b e c a ll e d . I n p r a c ti c a l s it u a ti o n

s , t h e s e a m o u n t s i n c l u d e t h e t a x e s l i k e s a l e s t

a x , e x c i s e d u t y , c u s t o m s d u t y , p r o f e s s i o n a l t a x e t c . I t

m a y h a p p e n i n p r a c t i c a l s i t u a t i o n s t h a t s o m e o f

t h e s e p a y m e n t s d o n 't a f f e c t t h e p r o f it a b il it y o f t h e a s s e s

s e e . E g . I n d i r e c t t a x e s l i k e s a l e s t a x , e x c i s e

d u t y e t c . S t i l l t h e y a r e a d d e d b a c k a s d i s a l l o w a b l e e x p e

n d i t ub. r e a s p e r t h e p r o v i s i o n s o f t h e s a i d s e c t i

o n .

s e e t o w a r d s a n y p r o v i d e n t f u n d o r S u p e r a n n u a t i o

A n y E m p l o y e r' s C o n t r i b u t i o n p a y a b l e b y t h e a s s e s

n f u n d o r g r a t u i t y f u n d o r a n y o t h e r f u n d f o r t h e w e l f a r e o

f t h e e m p l o y e e s .

. A n y s u m p a y a b l e b y t h e e m p l o

y e r t o t h e e m p l o y e e a s b o n u s o r c o m m i s s i o n f o r s e r v i c e s r

e n d e r e d , w h e r e s u c h s u m w o u l d n o t h a v e b e e n p a y

a b l e t o h i m a s p r o f it s o r d i v i d e n d i f i t h a d n o t b e e n p a i d a

s b o n u s o r c o m m i s s i o n .

. A n y s u m p a y a b l e b y t h e

a s s e s s e e a s i n t e r e s t o n a n y l o a n o r b o r r o w i n g m a d e b y h i m

f r o m a n y p u b l i c f i n a n c i a l i n s t i t u t i o n o r s t a t e e. f

i n a n c i a l c o r p o r a ti o n a s p e r t h e t e r m s o n t h e a g r e e m e n t.

A n y s u m p a y a b l e b y t h e a s s e s s e e a s i n t e r e s t o n

a n y l o a n o r a d v a n c e s b o r r o w e d b y h i m f r o m a n y s c h e d u l e

d b a n k a s p e r t h e t e r m s o f t h e a g r e e m e n t . f. A n y s u m p a y a b l e b y t h e e m p l o y e r i n r e s p e c t o f a n y l e a v e s t a

n d i n g t o t h e c r e d i t o f t h e e It m pgoes l with oout ysayi eng ethat if ( any i of the . abo e ve . amo unts i are n not allo s wed i as

m p l e w o r d s , L e a v e E n c a s h m e n t ) .

ds eyear ds but uare cpaid t duri i ng othe ncurr ent i prev nious year, athey nwill ybe allo owed f as ded t ucti hon eduri ng pthe r curr eent vprev i ious oyear u.

Unit 13

Tax Audit

from:

a. 13.11 DETAILS OF ANY LOANS OR DEPOSITS BORROWED OR Gover REPAIDnment SECTION 269SS / 269T - CLAUSE NO. 24 ____________________________________________________________ Section 269SS Section 269SS of the Act provides that no person should accept any loan or deposit from any other person otherwise than by account payee cheque or account payee draft if the amount of such loan or deposit together with the loan or deposit already accepted from such person exceeds Rs. 20,000. The section further provides that the said provisions will not apply to the loan or deposits accepted by -

Government B anking Company (including the co-operative bank) and post office savings

bank

Government company Any other notified institution

The above clause requires the auditor to give the details of such loans or deposits accepted. Section 269T of the Act provides that no branch of a banking company or a cooperative bank and no company or co-operative society and no firm or any other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit if a. the amount of loan or deposit together with the interest payable thereon.

b. the aggregate of the loans or deposits made by such person either in his own name or jointly with other person on the date of such repayment, together with the interest payable thereon exceeds Rs. 20,000. It is provided if the repayment is made by a branch of a banking company or a cooperative bank; such repayment can also be made by crediting the amount to the savings or current account of the person with such branch to whom the loan or deposit has to be repaid. Section 269T does not apply to the repayment of any loan or deposit taken or accepted

359

b.
:

any banking company or co-operative bank any corporation established by the Central or State Act any Government Company
M

c. | d. H

The above clause requires the auditor to give the details of such loans or deposits repaid. 13.12 BROUGHT FORWARD LOSSES OR DEPRECIATION CLAUSE NO. 25 _______________________________________________________ Provisions regarding set off and carry forward of losses and depreciation have been discussed in details in the previous unit. The auditor is supposed to state the year wise details regarding the brought forward losses and depreciation. 13.13 DEDUCTIONS UNDER CHAPTER VI-A - CLAUSE NO. 26_________ These deductions have been discussed in details in an earlier unit. 13.14 TAX DEDUCTED AT SOURCE - CLAUSE NO. 27_________________ Provisions regarding Tax Deducted at Source have been discussed in detail earlier. The auditor is required to comment as to whether the assessee has deducted the tax at source and paid the same to the credit of Central Government. If not, the auditor is required to give the details of the same. 13.15 QUANTITATIVE DETAILS - CLAUSE NO. 28 Clause No. 28 contains the reporting of quantitative details in respect of trading activity and manufacturing activity. The format of reporting reproduced in the Annexure is self-explanatory. 360 13.16 COST AUDIT REPORT - CLAUSE NO. 30_______________________ Section 209 of the Companies Act, 1956 requires that the companies engaged in production, mining, manufacturing or mining activities should maintain proper books of account showing the particulars relating to the utilisation of material or labour or other items of cost as may be prescribed. Section 233 B of the Companies Act, 1956 also provides that the Central

Unit 13

Tax Audit

Government may direct that an audit of cost accounts of the company should be conducted. Such audit is required to be carried out by a cost accountant. If sufficient number of cost accountants are not available; such audit can be carried out by a chartered accountant also. Such auditor is required to be appointed by the Board of Directors of the company with the previous approval of the Central Government. Clause No. 30 of the Tax Audit Report requires that if the Cost Audit of the company is carried out, the report of such cost audit should be enclosed to the Tax Audit Report. 13.17 ACCOUNTING RATIOS - CLAUSE NO. 32 ___________________________ In the Tax Audit Report, the auditor is required to give the calculations of the following ratios particularly a. b. c. d. Gross Profit/Turnover Net Profit/Turnover Stock In Trade/Turnover Material Consumed/Finished Goods Produced

13.18 SUMMARY Section 44 AB of the Act provides that every person carrying on business and having sales turnover or gross receipts exceeding Rs. 40 Lakhs in any previous year has to get his accounts audited by a Chartered Accountant before the specified date and furnish by that date, the report in the prescribed form, duly signed by the Chartered Accountant. In case of the person carrying on the profession, the provisions of this section apply if the gross receipts in the profession exceed Rs. 10 Lakhs. Following points should be noted in this connection -

The specified date indicated above is 31 st October of the Assessment Year. The assessee is not only required to get the accounts audited by a Chartered Accountant before the specified date, but is also required to furnish the report of such audit before the specified date, whether the return of income is filed or not.

361

If the person (says a company) is required to get his accounts audited under any other law (say Companies Act, 1956), it shall be considered to be a sufficient compliance with the provisions of this section if report of audit as required under such other law is furnished before the specified date along with a further report in the prescribed form under this section. The tax audit report specified above is found mainly in three forms in practical circumstances a. Form No. 3CA - This is the form of Audit Report applicable to a person who carries on business and profession and whose accounts are required to be audited by or under any other law. Form No. 3CB - This is the form of Audit Report which applies to a person who carries on business or profession but not being a person referred to in "a" above. Form No. 3CD - This form of Audit Report contains the particulars in respect of a person carrying on business which are required to be given under Section 44 AB of the Act.

b.

c.

The specimen of the above three forms is given in the Annexure at the end of this unit. If any person fails to get the accounts audited by a Chartered Accountant under this section and fails to submit the copy of such report, he may be liable to pay the penalty equal to 0.5% of the sales, turnover or gross receipts as the case may be or Rs. 1, 00,000 whichever is less.

13.19 KEY WORDS Form 3 CD: As stated above, Form No. 3CD of the Tax Audit Report is the form in which the auditor is required to give his comments on various aspects. Accounting Policies: Section 145 of the Act provides that in respect of Income from Business and Profession and Income from Other Source, the assessee may follow either Cash System of Accounting or Accrual System of Accounting.

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13.20 SELF-ASSESSMENT QUESTIONS Q1. With respect to the provisions applicable to the Tax Audit Report, state the provisions of the Income Tax Act, 1061 relating to a. b. c. d. e. f. g. h. i Maintenance of Books of Account Tax payable on the basis of presumptive profits Payments allowed as expenditure on payment basis Deemed Profits Particulars of loan/deposits borrowed or repaid exceeding Rs. 20,000 Payments made to persons as per Section 40A (2)(b) Deemed profits not credited to Profit and Loss Account Preliminary Expenses Expenditure on scientific research

Q2. Which methods are to be followed as per section 145 of Income Tax Act? Q3. Discuss in brief amounts not credited to profit and loss account. Q4. Discuss deduction under Section 33AB of Act. Q5. Discuss deduction under Section 33 ABA of Act. 13.21 ANNEXURE__________________ TAX AUDIT REPORT FormNo.3CA \udit Report under Section 44AB of the Income tax Act, 1961 in a case where the accounts of the business or profession of a person have been audited under any other law Ve report that the statutory audit of M/s issessee) of_________________________
___________________

(Name of the .(Address of the Assessee) (Permanent

36 3

Account number

_) was conducted by us in pursuance of the provisions of Companies Act, 1956 and we annex hereto a copy of our audit report dated XXX along with a copy each of The audited Profit and Loss Account for the year ended on 31 st March XXX The audited Balance Sheet as on 31 st March XXX Documents declared by the said Act to be part of or annexed to the Profit and Loss Account and Balance Sheet. The statement of particulars required to be furnished under Section 44AB is annexed herewith in Form No. 3CD. In our opinion and to the best of our information and according to explanations given to us, the particulars given in the said Form No. 3CD are true.

a. b. c. d. e.

ForXYZ&Co., Chartered Accountants, ABC Partner

Form No. 3CB Audit Report under Section 44AB of the Income tax Act, 1961 in case of a person carrying on business
1. We have examined the Balance Sheet as at 31 st March XXX and the Profit & Loss Account for the year ended on that date of_________________ (Name of the assessee) (Permanent Account Number XXX). We certify that the Balance Sheet and Profit & Loss Account are in agreement with

2.

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Tax Audit

isions of (X along

5.

In our opinion and to the best of our information and according to the explanations given to us, the said accounts give a true and fair view a. b. In the case of the Balance Sheet, of the state of affairs of the above named assessee's affairs as at 31 st March XXX and In the case of Profit and Loss Account, of the Profit/Loss of the above named assessee for the accounting year ending on 31 st March XXX.

and Loss 6. 5 annexed 5 given

The statement of particulars required to be furnished under Section 44AB is annexed herewith in Form No. 3CD. In our opinion and to the best of our information and according to the explanations given to us, the particulars given in the said Form No. 3CD are true and correct.

FoiXYZ&Co., Chartered Accountants, ABC Partner Form No. 3CD [See Rule 6 G (2)] PARTA 285, Name of the Assessee Address Permanent Account Number Status Previous Year Ended on 290, Assessment Year 286, 287, 288, 289, PARTS 7. a. If Firm or Association of Persons, indicate names of partners /members and their profit sharing ratios.

a person

fit & Loss me of the ment with rest of our je so far as

b. If there is any change in the partners / members or their profit sharing ratios, particulars of such a change. 365

Taxation

8.

a.

Nature of business or profession.

b. If there is any change in the nature of business or profession, the particulars of such a change. 9. of a. Whether books of accounts are prescribed under section 44AA. If yes, list books so prescribed. b. Books of accounts maintained. (In case books of account are maintained in a computer system, mention the books of account generated by such computer system.) List of books of accounts examined.

c.

291, Whether the Profit and Loss Account includes any profit and gains assessable on presumptive basis. If yes, indicate the amount and the relevant section (44AD, 44AE, 44AF, 44B, 44BB, 44BBB or any other relevant section.) 292, a. Method of accounting employed in the previous year.
b. Whether there has been any change in the method of accounting employed visvis the method of accounting employed in the immediately preceding previous year. If answer to (b) above is in the affirmative, give details of such change and the effect thereof on the profit or loss. Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under Section 145 and the effect thereof on profit or loss.

c.

d.

12. a. Method of valuation of closing stock employed in the previous year.

366

b.

Details of deviation, if any, from the method prescribed under Section 145A and the effect thereof on the profit or loss.

13. Amounts not credited to the Profit and Loss Account being -

a. Th e ite m s fal lin g wi thi n th e sc op e of Se cti on 28 . b. Pe rfo rm a cr ed its , dr a w ba ck s, ref un ds of du ty of cu

stoms or excise or refunds of sales tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned.

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Tax Audit

c . Escalation claims accepted during the previous year. d. Any other item of income. e . Capital receipt, if any. 1 4 . Particulars of Depreciation allowable as per the Income Tax Act, 1 96 1 in respect of each asset or block of assets as the case may be in the following form a. b. c. d. Description of asset /block of assets. Rate of depreciation. Actual cost or written down value as the case may be. Additions / deductions during the year with dates. In the case of additions, date put to use including adjustments on account of : Modified Value Added Tax credit claimed and allowed under the Central Excise Rules, 1944 in respect of assets acquired on or after 1st march 1994. Change in the rate of exchange of currency and Subsidy or grant or reimbursement by whatever name called

e. f.

Depreciation allowable Written down value at the end of the year.

15. Amount admissible under Section 33AB, 33ABA, 33AC, 35 ABB, 35AC, 35CCA, 35CCB, 35D, 35E : a. b. Debited to the Profit and Loss Account (showing the amount debited and deduction allowable under each section separately) Not debited to the Profit and Loss Account

i 6. a. Any sum paid to the employees as bonus or commission for services rendered, where such sum was otherwise payable to him as profit or dividend [Section b . Any sum received from employees towards contribution to any provident fund or Superannuation fund or any other fund mentioned in Section 2(24)(x) and due date for payment and the actual date of payment to the concerned authorities under Section 36(l)(va).
.367

Taxation

17. Amounts debited to the Profit and Loss Account being a. b. c. Expenditure of capital nature Expenditure of personal nature Expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party Expenditure incurred at clubs e. the time being in force ii. Any other penalty or fine i As entrance fees and subscriptions As cost for club services and facilities used Expenditure by way of penalty or fine for the violation of any law for

d.

iii. Expenditure incurred for any purpose which is an offence or which is prohibited by law f. g. Amounts inadmissible under Section 40(a) Interest, salary, bonus, commission or remuneration inadmissible under Section 40(b) / 40(ba) and computation thereof. Amount inadmissible under Section 40A(3) read with Rule 6DD and computation thereof. Provision for payment of gratuity not allowable under Section 40A(7). Any sum paid by the assessee as an employer not allowable under Section 40A(9)

h. L j.

k. Particulars of any liability of a contingent nature 293, Particulars of payments made to persons specified under Section 40A(2)(b) 294, Amounts deemed to be profits and gains under Section 33AB or 33ABAor33AC
368

295, Any amount of profit chargeable to tax under Section 41 and computation thereof

296, 1. In respect of any sum referre d to in clause (a), (b), (c), (d) or (e) of Section 43 B, th e lia bil ity fo r w hi ch :

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Tax Audit

a.

pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous years and was: paid during the previous year. not paid during the previous year.

b.

was incurred in the previous year and was paid on or before the due date for furnishing the return of

income. not paid on or before the aforesaid date.

2. In respect of any sum referred to in clause (b) of Section 43B the liability for which a. pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year b. Nature of liability Due date of payment under second provision to Section 43B Actual date of payment If paid otherwise than in cash, whether the sum has been realized within fifteen days of the aforesaid due date

was incurred in the previous year Nature of liability Due date of payment under second provision to Section 43B Actual date of payment If paid otherwise than in cash, whether the sum has been realised within fifteen days of the aforesaid due date

* State whether sales tax, customs duty, excise duty or any other indirect 369 tax, levy, cess, import etc. is passed through the Profit and Loss Account.

Taxation

22. a. Amount of Modified Value Added Tax credits availed of or utilised during the previous year and its treatment in the Profit and Loss Account and treatment of outstanding Modified Value Added Tax credits in the accounts. b. Particulars of income or expenditure of prior period credited or debited to the Profit and Loss Account. 297, Details of amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed), repaid otherwise than through the an account payee cheque (Section 69D) 298, a. Particulars of each loan or deposit in an amount exceeding the limit specified in Section 269SS taken or accepted during the previous year Name, address and permanent account number (if available with the assessee) of the lender or depositor Amount of loan or deposit taken or accepted Whether the loan or deposit was squared at any time during the previous year Maximum amount outstanding in the account at any time during the previous year Whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft (These particulars need not be given in the case of a Government company, a Banking company or a corporation established by Central, State or Provincial Act) b. Particulars of each repayment of loan or deposit in an amount exceeding the limit Specified in Section 269T made during the previous year
370

Name, address and permanent account number (if available with the assessee) of the payee Amount of the repayment

M ax im u m a m ou nt ou tst an di ng in th e ac co un t at an y ti m e du rin g th e pr ev io us ye ar

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Tax Audit

Whether the repayment was made otherwise than by an account payee cheque or an account payee bank drafts 25. Details of brought forward loss or depreciation allowance in the following manner, to the extent available: Serial No. Assessment Year Nature of loss / allowance (in rupees) Amount as returned (in rupees) Amount as assessed (give reference to relevant

order) . Remarks

26. Section-wise details of deductions, if any, admissible under Chapter VI-A. 27. a. Whether the assessee has deducted tax at source and paid the

amount so deducted to the credit of the Central Government in accordance with the provisions of Chapter XVII-B. b. If the answer to (a) above is in negative, then give the following details Serial No Particulars of head under which tax is deducted at source Amount of tax deducted at source (in rupees) Due date for remittance to Government Details of payment date (amount in rupees) Remarks
371

' 8. a. In the case of a trading concern, give quantitative details of principal items of goods traded: Opening Stock

Taxation

Purchases during the previous year Sales during the previous year Closing Stock Shortages / Excess, if any

b. In the case of a manufacturing concern, give quantitative details of principal items of raw materials, finished products and by-products. A. Raw Materials

B.

Opening Stock Purchases during the previous year Consumption during the previous year Sales during the previous year Closing Stock * Yield of finished products * Percentage of Yield * Shortages / Excess, if any

Finished Products / By-Products

Opening Stock Purchases during the previous year Quantity manufactured during the previous year Sales during the previous year Closing Stock Shortages / Excess, if any

* Information may be given to the extent available. 29. In the case of a domestic company, details of tax on distributed profits under Section 115-O in the following form
372

Total amount of distributed profits

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Tax Audit

Total tax paid thereon Date of payment with amounts

299,Whether any Cost Audit was carried out. If yes, enclose a copy of the report of such audit. [See Section 139(9)] 300,Whether any audit was conducted under the Central Excise Act, 1944. If yes, enclose a copy of the report of such audit. 3 2. Accounting ratios with the calculations as follows: Gross Profit / Turnover Net Profit/Turnover Stock in Trade/Turnover Material Consumed / Finished Goods produced

373