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FINAL COURSE STUDY MATERIAL

PAPER 7

Direct Tax Laws

Assessment Year 2013-14

[Relevant for May 2013 and

November 2013 examinations]

Volume – I

for May 2013 and November 2013 examinations] Volume – I BOARD OF STUDIES THE INSTITUTE OF

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text book(s). In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein they may write to the Director of Studies.

All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees.

Permission of the Institute is essential for reproduction of any portion of this material.

© The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher.

Edition

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October, 2012

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bosnoida@icai.org

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Board of Studies

Committee

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Price

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Published by

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The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No.7100, Indraprastha Marg, New Delhi-110 002,India.

 

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A WORD ABOUT STUDY MATERIAL

Direct tax laws is one of the core competence areas of the Chartered Accountants. A thorough knowledge of direct tax laws is, therefore, necessary for the students of the CA Final course. In the Final course, “Direct Tax Laws” constitutes Paper–7. Students are expected to acquire advanced knowledge of the provisions of direct tax laws after undergoing this course and apply such knowledge to various situations in actual practice.

The first part of this study material deals with income-tax. There are 28 chapters under income-tax. The second part of this study material is on wealth-tax. There are 3 chapters under wealth-tax. The subject matter in this study material is based on the law as amended by the Finance Act, 2012 and applicable for A.Y. 2013-14. In this study material, efforts have been made to present the complex direct tax laws in a lucid manner. The latest amendments have been given in bold italics. Chapters are organised in a logical sequence to facilitate easy understanding. Further, the amendments made by the Finance Act, 2012 and incorporated in this study material have been tabulated chapter-wise with the corresponding section reference and given as “Significant Amendments Incorporated in this Edition”. The illustrations which have undergone changes due to these amendments as well as the new illustrations have been given in a shaded background.

The taxation laws in our country undergo many amendments. In order to help the students to update their knowledge relating to the statutory developments in the field of direct and indirect tax laws, the Board of Studies brings out, every year, a “Supplementary Study Paper” containing all the amendments in direct and indirect tax laws. This is an essential read for all our students.

A word of advice to the students – please make it a habit of referring to the Bare Acts as often as possible. This will not only facilitate the process of understanding the law and the sequence of sections in these Acts, but will also equip them with the professional expertise that is expected.

Study Material of Direct Tax Laws is made in three volumes for ease of handling by the

Volume – I contains Chapters 1 – 14 of Income-tax, and Volume – II contains

Chapters 15 – 28 of Income-tax and Chapters 1 – 3 of Wealth-tax. Volume – III is the

Practice Manual.

students.

Finally, we would welcome suggestions to make this study material more useful to the students. In case of any doubt, students are welcome to write to the Director of Studies, The Institute of Chartered Accountants of India, A-29, Sector - 62, Noida 201 301, India.

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

SYLLABUS

PAPER – 7 : DIRECT TAX LAWS

(One paper Three hours – 100 Marks)

Level of Knowledge: Advanced knowledge

Objectives:

(a)

To gain advanced knowledge of the provisions of direct tax laws,

(b)

To acquire the ability to apply the knowledge of the provisions of direct tax laws to various situations in actual practice.

Contents:

I. The Income-tax Act, 1961 and Rules thereunder (90 marks)

II. The Wealth-tax Act, 1957 and Rules thereunder (10 marks)

While covering the direct tax laws, students should familiarise themselves with considerations relevant to tax management. These may include tax considerations with regard to specific management decisions, foreign collaboration agreements, international taxation, amalgamations, tax incentives, personnel compensation plans, inter-relationship of taxation and accounting, with special reference to relevant accounting standards and other precautions to be observed to maximise tax relief. Further, they should have a basic understanding about the ethical considerations in tax management and compliance with taxation laws.

Note – If new legislations are enacted in place of the existing legislations relating to income tax and wealth tax, the syllabus will accordingly include such new legislations in the place of the existing legislations with effect from the date to be notified by the

Institute.

© The Institute of Chartered Accountants of India

Volume – 1

INCOME TAX

CONTENTS

CHAPTER 1 : BASIC CONCEPTS

1.1 Overview of Income-tax law in India

1.1

1.2 Charge of income-tax

1.2

1.3 Rates of tax

1.2

1.4 Concept of income

1.6

1.5 Total income and tax payable

1.7

1.6 Important definitions

1.11

1.7 Other basic concepts

1.25

CHAPTER 2 : RESIDENCE AND SCOPE OF TOTAL INCOME

2.1 Residential status

2.1

2.2 Scope of total income

2.5

2.3 Deemed receipt and accrual of income in India

2.7

2.4 Meaning of “Income received or deemed to be received”

2.7

2.5 Meaning of income “accruing” and “arising”

2.7

2.6 Income deemed to accrue or arise in India

2.8

CHAPTER 3 : INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

3.1 Introduction

3.1

3.2 Incomes not included in total income

3.1

3.3 Tax holiday for newly established units in SEZ

3.55

3.4 Charitable or religious trusts and institutions

3.59

CHAPTER 4 : INCOME FROM SALARIES

4.1

Salary

4.1

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4.2 Definition of salary

4.2

4.3 Basis of charge

4.3

4.4 Place of accrual of salary

4.3

4.5 Profits in lieu of salary

4.3

4.6 Advance salary

4.4

4.7 Loan or advance against salary

4.5

4.8 Salary arrears

4.5

4.9 Annuity

4.5

4.10 Gratuity

4.5

4.11 Pension

4.5

4.12 Leave salary

4.6

4.13 Retrenchment compensation

4.6

4.14 Compensation received on voluntary retirement

4.6

4.15 Provident fund

4.6

4.16 Approved superannuation fund

4.10

4.17 Salary from United Nations Organisation

4.11

4.18 Allowances

4.11

4.19 Perquisites

4.12

4.20 Valuation of perquisites

4.18

4.21 Deductions from salary

4.36

4.22 Deduction under section 80C

4.38

4.23 Relief under section 89………………………………………………………………….4.38

CHAPTER 5 : INCOME FROM HOUSE PROPERTY

5.1 Chargeability

5.1

5.2 Conditions for chargeability

5.1

5.3 Composite rent

5.2

5.4 Income from house property situated outside India

5.3

5.5 Determination of annual value

5.3

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5.6 Deductions from annual value

5.7

5.7 Computation of “Income from house property” for different categories of property

5.9

5.8 Inadmissible deductions

5.17

5.9 Taxability of recovery of unrealised rent & arrears of rent received

5.17

5.10 Treatment of income from co-owned property

5.18

5.11 Treatment of income from property owned by a partnership firm

5.18

5.12 Deemed ownership

5.18

5.13 Cases where income from house property is exempt from tax

5.19

CHAPTER 6 : PROFITS AND GAINS OF BUSINESS OR PROFESSION

6.1 Meaning of “Business”, “Profession” and “Profits”

6.1

6.2 Income chargeable under this head

6.2

6.3 Speculation business

6.4

6.4 Computation of income from business

6.6

6.5 Admissible deductions

6.7

6.6 Inadmissible deductions

6.67

6.7 Expenses or payments not deductible in certain circumstances

6.71

6.8 Profits chargeable to tax

6.78

6.9 Special provisions for deduction in case of business for prospecting etc. for mineral oil

6.79

6.10 Changes in rate of exchange of currency

6.80

6.11 Certain deductions to be allowable only on actual payment

6.81

6.12 Special provisions for computation of cost of acquisition of certain assets

6.84

6.13 Special provisions in case of income of Public Financial Institutions

6.84

6.14 Insurance business

6.85

6.15 Special provisions in the case of certain associations

6.85

6.16 Compulsory maintenance of accounts

6.85

6.17 Audit of accounts of certain persons carrying on business or profession

6.88

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6.18 Special provision for computing profits and gains of business on presumptive basis

6.89

6.19 Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages

6.90

6.20 Special provision for computing Profits and gains of shipping business of non-residents

6.91

6.21 Provisions for computation of taxable income from activities connected with exploration of mineral oil

6.91

6.22 Special provision for computing profits and gains from business of operation of aircraft by non-residents

6.92

6.23 Profits and gains of foreign companies engaged in the business of civil construction etc. in certain turnkey power projects

6.93

6.24 Special provisions for computing income by way of royalties etc. in case of non-residents

6.94

6.25 Method of computing deduction in the case of business reorganisation of co-operative banks

6.94

6.26 Computation of business income in cases where income is partly agricultural and partly business in nature

6.98

CHAPTER 7 : CAPITAL GAINS

7.1 Introduction

7.1

7.2 Capital asset

7.1

7.3 Short-term and long-term capital assets

7.3

7.4 Transfer: what it means

7.5

7.5 Scope and year of chargeability

7.5

7.6 Capital gains on distribution of assets by companies in liquidation

7.9

7.7 Capital gains on buyback, etc. of shares

7.10

7.8 Transactions not regarded as transfer

7.10

7.9 Important definitions

7.15

7.10 Withdrawal of exemption in certain cases

7.17

7.11 Mode of computation of capital gains

7.17

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7.12 Ascertainment of cost in specified circumstances

7.19

7.13 Cost of improvement

7.25

7.14 Cost of acquisition

7.27

7.15 Computation of capital gains in case of depreciable asset

7.33

7.16 Capital gains in respect of slump sales

7.34

7.17 Special provision for full value of consideration in certain cases

7.35

7.18 Fair Market Value of the capital asset on the date of transfer to be

taken as sale consideration in cases where the consideration is not

determinable

7.35

7.19 Advance money received

7.36

7.20 Exemptions of capital gains

7.38

7.21 Reference to valuation officer

7.49

7.22 Short term capital gains tax in respect of equity shares/units of an equity oriented fund

7.50

7.23 Tax on long-term capital gains

7.50

7.24 Exemption of long term capital gains on sale of equity shares/units of an equity oriented fund

7.51

CHAPTER 8 : INCOME FROM OTHER SOURCES

8.1 Introduction

8.1

8.2 Incomes chargeable under this head

8.1

8.3 Bond washing transactions and dividend stripping

8.10

8.4 Applicable rate of tax in respect of casual income

8.11

8.5 Deductions allowable

8.11

8.6 Deductions not allowable

8.12

8.7 Deemed income chargeable to tax

8.13

8.8 Method of accounting

8.13

CHAPTER 9 : INCOME OF OTHER PERSONS INCOME

9.1 Clubbing of income - An introduction

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INCLUDED IN ASSESSEE’S TOTAL

9.1

9.2 Transfer of income without transfer of the asset

9.1

9.3 Income arising from revocable transfer of assets

9.1

9.4 Exceptions where clubbing provisions are not attracted even in case of revocable transfer

9.2

9.5 Clubbing of income arising to spouse

9.2

9.6 Transfer of assets for the benefit of the spouse

9.5

9.7 Income arising to son’s wife from the assets transferred without adequate consideration by the father-in-law or mother-in-law

9.5

9.8 Transfer of assets for the benefit of son’s wife

9.5

9.9 Clubbing of minor’s income

9.6

9.10 Cross transfers

9.7

9.11 Conversion of self-acquired property into the property of a HUF

9.7

9.12 Income includes loss

9.7

9.13 Distinction between section 61 and section 64

9.8

9.14 Liability of person in respect of income included in the income of another person

9.8

CHAPTER 10 :SET-OFF AND CARRY FORWARD OF LOSSES

10.1 Aggregation of income

10.1

10.2 Concept of set off and carry forward of losses

10.1

10.3 Inter source adjustment

10.1

10.4 Inter head adjustment

10.2

10.5 Set-off and carry forward of loss from house property

10.3

10.6 Carry forward and set-off of business losses

10.4

10.7 Carry forward and set-off of accumulated business losses and unabsorbed depreciation allowance in certain cases of amalgamation/demerger,

10.5

10.8 Set-off of losses of a banking company against the profits of a banking institution under a scheme of amalgamation

10.8

10.9 Provisions relating to carry forward and set-off of accumulated losses and unabsorbed depreciation in business reorganisation of co-operative banks

10.9

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10.10 Losses in speculation business

10.10

10.11 Carry forward and set-off of losses by specified business

10.11

10.12 Losses under the head ‘capital gains’

10.12

10.13 Losses from the activity of owning and maintaining race horses

10.12

10.14 Carry forward and set off of losses in case of change in constitution of firm or succession

10.14

10.15 Carry forward and set-off of losses in case of closely held companies

10.14

10.16 Order of set-off of losses

10.14

CHAPTER 11 : DEDUCTIONS FROM GROSS TOTAL INCOME

11.1 General Provisions

11.1

11.2 Deductions in respect of payments

11.3

11.3 Deductions in respect of incomes

11.27

11.4 Other deductions

11.59

CHAPTER 12 : INTER-RELATIONSHIP BETWEEN ACCOUNTING AND TAXATION

12.1 Recognition of accounting principles by judicial forums while settling tax disputes

12.1

12.2 Accounting Standards and Income-tax law - Convergence and divergence

12.3

12.3 Treatment of income-tax expense under Accounting Standards

12.8

12.4 Relevance of method of accounting under the Income-tax Act, 1961

12.15

12.5 Valuation of inventory [Section 145A vs. AS-2]

12.19

12.6 Requirement of compulsory maintenance of prescribed books of account under the Income-tax law

12.21

12.7 Relevance of profit and loss account prepared in accordance with the provisions of part II of Schedule VI to the Companies Act, 1956 for computing book profit for levy of MAT

12.23

12.8 Conclusion

12.24

CHAPTER 13 : ASSESSMENT OF VARIOUS ENTITIES

13.1 Assessment of Companies

13.1

13.2 Assessment of Other Entities

13.39

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13.3

Liability in Special Cases

13.71

CHAPTER 14 : TAX PLANNING AND ETHICS IN TAXATION

14.1 Basic concepts

14.1

14.2 Tax planning considerations in respect of salary income

14.22

14.3 Tax planning considerations in relation to business

14.25

14.4 Ethics in Taxation

14.46

CHAPTERS 15 – 28 of Income Tax and CHAPTERS 1 – 3 of Wealth Tax are available in Volume – 2.

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DIRECT TAX LAWS

SIGNIFICANT ADDITIONS IN THE EDITION

Chapter

Particulars

Section

No.

 

Income-tax

1.

Basic Concepts

Rates of tax

Unexplained share capital, share premium etc. credited in the books of account of a closely held company to be treated as income of such company

68

Unexplained money, investments etc. to attract maximum marginal rate of tax @30%

115BBE

2.

Residence and scope of total income

Gains from offshore transactions to be taxed if underlying assets are located in India

9(1)(i), 2(14), 2(47) & 195(1)

Consideration for use or right to use of computer software is royalty

9(1)(vi)

3.

Incomes which do not form part of total income

Exemption of income of Prasar Bharati (Broadcasting Corporation of India)

10(23BBH)

Removal of sectoral restrictions on VCUs 10(23FB)

Exemption in respect of income received by certain foreign companies in India in Indian currency from sale of crude oil to any person in India

10(48)

Exemption to be denied to a charitable trust having its main object as “advancement of any other object of general public utility” if its trading receipts exceed the specified threshold irrespective of withdrawal of approval or cancellation of registration or rescindment of notification

10(23C) & 13

6.

Profits and gains of business or profession

Benefit of additional depreciation@20% extended to new plant and machinery acquired and installed in power sector undertakings

Extension of sunset clause for claiming weighted 35(2AB)

32(1)(iia)

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deduction@200% of expenditure on in-house scientific research and development incurred by a company

Expansion of scope of “specified business” for provision of “investment-linked tax deduction”

35AD

Weighted “investment-linked” tax deduction for certain specified businesses

35AD(1A)

Owner of a hotel eligible for “investment-linked” tax deduction even if he transfers the operation of the hotel to another person

35AD(6A)

Weighted deduction in respect of expenditure incurred on notified agricultural extension project

35CCC

Weighted deduction in respect of expenditure incurred by companies on notified skill development project

35CCD

Increase in threshold limits of total sales/ turnover/ gross receipts for applicability of tax audit

44AB & 44AD

Presumptive

taxation

provisions

not

to

apply

to

44AD(6)

profession,

brokerage

or

commission

income

and

 

agency business

7.

Capital Gains

Modification in the conditions to be satisfied in case of amalgamation and demerger for not being regarded as transfer

47(vii) & 2(19AA)

Cost of acquisition of the capital asset transferred by a sole proprietorship or firm to a company on succession, to be taken as cost to the previous owner i.e. the predecessor proprietor or firm, where such succession is not regarded as transfer under section 47

49

Fair market value of the capital asset on the date of transfer to be taken as sale consideration, in cases where the consideration is not determinable

50D

Extension of capital gain exemption under section 54B to a Hindu Undivided Family

54B

Exemption of long-term capital gains on transfer of residential property if the sale consideration is used for subscription in equity of a new start-up manufacturing SME company to be used for purchase of new plant and machinery

54GB

Assessing Officer enabled to make a reference to the 55A

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Valuation Officer in case the assessee has taken the fair market value as the cost of acquisition of the asset in accordance with the estimate made by the Registered Valuer

Non-residents and foreign companies to be subject to tax at a concessional rate of 10% (without indexation benefit or currency fluctuation) on long-term capital gains arising from transfer of unlisted securities

112

8.

Income from other sources

Any sum of money or property received by a HUF without consideration or for inadequate consideration from its members exempt from tax

56(2)(vii)

Consideration received in excess of FMV of shares issued by a closely held company to be treated as income of such company, where shares are issued at a premium

56(2)(viib)

11.

Deductions from Gross Total Income

Life insurance premium up to 10% of minimum capital

80C & 10(10D)

sum assured to qualify for deduction under section 80C, in respect of insurance policies issued on or after

1.4.2012

One time deduction for investment by a resident individual in listed equity shares as per notified scheme

80CCG

Eligible age for senior citizen reduced from 65 years to 60 years for availing increased deduction

80D & 80DDB

Deduction for expenditure on preventive health check- up

80D

No deduction in respect of cash donation exceeding of ` 10,000

80G & 80GGA

Extension of sunset clause for tax holiday for power- sector undertakings

80-IA(4)(iv)

Deduction in respect of interest on deposits in savings accounts

80TTA

13.

Assessment of various entities

Income received or receivable by a non-resident entertainer, from performance in India included within the scope of Section 115BBA and rate of tax thereunder increased from 10% to 20%

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115BBA & 194E

Dividends received by Indian companies from specified foreign companies to be entitled to concessional rate of tax for one more year

115BBD

Net profit as per profit and loss account prepared in accordance with the respective Act governing insurance companies, banking companies, electricity companies etc. to form the basis for computation of book profit for levy of MAT in case of such companies

115JB

Amount standing in the revaluation reserve relating to a retired or disposed asset, to be subject to minimum alternate tax, if the same is not credited to profit and loss account

Explanation 1 to section 115JB

Levy of Alternate Minimum Tax (AMT) extended to all persons claiming profit-linked deductions, other than companies [New Chapter XII-BA]

115JC to 115JF

Tax credit for AMT

115JD, 140A, 234A, 234B &

 

234C

Conversion of an Indian branch of foreign company into an Indian subsidiary company [New Chapter XII-BB]

115JG

Removal

of

cascading

effect

of DDT in multi-tier

115-O

corporate structure

 

Taxability of income of VCCs/VCFs in the hands of the investor on accrual basis

115U

Increase in presumptive rate of daily tonnage income 115VG

Note: In the above table the amendments/additions have been indicated against the chapters where they have been primarily dealt with at length. Some of the amendments may have also been referred to or discussed in other related chapters. In addition, the illustrations in each chapter have been modified to give effect to the amendments by the Finance Act, 2012. New illustrations have also been added to explain the application of some of the amendments.

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