Indian Tax Managment

A PROJECT ON

THE STUDY OF:

INDIAN TAX MANAGEMENT

PREPARED BY:

GULAB KUMAR MISHRA

MASTER IN BUSINESS ADMINISTRATION (MBA)4th SEMESTER [FINANCE]

ROLL NO- 510924972

SIKKIM MANIPAL UNIVERSITY

STUDY CENTRE: KANKURGACHI (02737), KOLKATA.

Sikkim Manipal UniversityOf Health, Medical and Technological Sciences

P-178, CIT Road,Scheme VI, Kolkata-700006

Centre Code: 2737Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

http://www.smu-ksa.com/images/logo2.gif

THE STUDY OF:


By

GULAB KUMAR MISHRA

A project report submitted in partial fulfillment of the Requirements for

Master of Business AdministrationOf

Sikkim Manipal University, INDIA

Sikkim Manipal UniversityOf Health, Medical and Technological Sciences

Distance Education WingSyndicate HouseManipal-576104

Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

Annexure A

I HERBY DECLARE THAT THE PROJECT REPORT

ENTITLED

INDIAN TAX MANAGEMENTSUBMITTED IN PARTIAL FULFILLMENT OF THE

REQIREMENT FOR THE DEGREE OF

“MASTER OF BUSINESS ADMINISTRATION”

THIS IS MY ORIGINAL WORK NOT SUBMITTED FOR THE

AWARD OF ANY OTHER DEGREE, DIPLOMA, FELLOWSHIP

OR ANY OTHER SIMILAR TITLE OF PRIZE

Place: Kolkata Gulab Kumar Mishra

Date:


Annexure B

THIS IS TO CERTIFY THAT THE PROJECT REPORT ENTITLED


GULAB KUMAR MISHRA

ROLL NO: 510924972

Submitted in partial fulfillment of the requirements for the degree

of “Masters of Business Administration” UNDER “Sikkim-Manipal

University of Health, MEDICAL AND TECHNOLOGICAL

SCIENCES”. Gulab Kumar Mishra has work under my supervision

and guidance & that part of this report has been submitted for the

award of degree, diploma, fellowship or other similar titles or prizes

and the work has not been published in any journal or magazine.

Signature

ABHISEK JAIN CFA MS FINANCE

(Guide’s name)


Annexure C

The project report entitled


GULAB KUMAR MISHRA

ROLL NO:510924972

COURSE & SEM: MBA IV

Learning Center: 2737

IS APPROVED AND IS ACCEPTABLE IN QUALITY AND

FORM

EXTERNAL EXAMINER INTERNAL EXAMINER

NAME: NAME: ABHISEK JAIN


Acknowledgement

My project report on “INDIAN TAX MANAGEMENT

for the fulfillment of MBA course from SIKKIM MANIPAL UNIVERSITY has

been completed under the guidance of ABHISEK JAIN (CFA MS FINANCE).

I want to thank him for providing his precious time and to help me in completing

the project well in time. I sincerely pay my thanks to ABHISEK JAIN (CFA MS

FINANCE). for the endorsement, appraisal, encouragement and expert guidance

needed to complete this project. I acknowledge my deep sense of regards and

respect to our Director Sir and Director Madam for their help, coordination and

mental support. Moreover, I am also thankful to faculty members of my college,

my Guide ABHISEK JAIN, my friends, my sisters, my brother, and my parents

for their guidance and crucial suggestions at critical phases of the project work.

Therefore, I am greatly indebted to all of them for their valuable guidance and

constructive suggestions, perhaps, without which it would have not been possible

to complete this project at all.

GULAB KUMAR MISHRA



INDEXNumber

Of Chapters

Name of Chapters Page No.

1 Synopsis of Various Section of the Income Tax ACT,19612 The Basic Concepts 1- 7

3 Salaries 8 - 32

4 Income from House Property 33 - 41

5 Profits or Gains of Business or Profession 42 - 74

6 Capital Gains 73 - 93

7 Income from Other Sources 94 - 99

8 Clubbing 100 - 104

9 Set off and Carry Forward of Losses 105 - 110

10 Carry Forward in Special Cases 111 - 112

11 Deduction under Chapter VIA 113 - 128

12 Reliefs 129 - 130

13 General Exemptions 131- 133

14 Agricultural Income 132 - 134

15 Tax Liability of Individuals 135 - 136

16 Provisions Relating to Filing of Return 137 -143

17 Charitable Trusts 144 - 149

18 Exemption to Some Specific Assesses 150 - 153

19 Tax Holiday 154 - 163

20 Resident Status 164 - 174

21 Miscellaneous Topics 173 - 176

22 Tax Deduction at Sources 177 - 189

23 Advance Tax 190 - 191

24 Interest Payable by Assessee 192 - 193

25 Rates of Tax for A.Y. 2011-12 194 - 195

26 Deductions relevant for B.Com Examinations 196 - 197


27 Service Tax & Vat 198 - 225

SYNOPSIS OF VARIOUS SECTIONS OF THE INCOME TAX ACT, 1961

Sections Headings

4 Basic principles followed while charging income tax.

6(1) Residential status of an individual-The primary condition.

6(6) Residential status of an individual-The secondary condition.

10(1) Exemption of Agricultural income.

10 (10) Exemption of Gratuity

10 (13A) Exemption of House rent allowance.

10 (14) Exemption of Special allowances.

10 (15) Exemption of Interest on post saving bank.

10 (34) Exemption of Dividend from Indian Company.

10 (35) Exemption of Dividend and interest from approved Mutual Fund/UTI.

10 (38) Exemption on Long Term Capital Gains on equity shares/equity oriented fund subjected to STT.

15 The chargeability of income tax under the head "salaries"

16 (ii) Entertainment allowance

16 (iii) Professional tax

22 The Chargeability of income under the head House Property.


24(a) Standard Deduction Under H.P.

24(b) Interest on borrowed capital.

27 Deemed ownership

28 The chargeability of income under the head Profits or Gains of Business or Profession.

30 Deduction in respect of the rent, rates, taxes, repairs and insurance of building used for business purpose under Profits or Gains of Business or Profession.

31 Deduction in respect of expenses on current repairs & insurance of machinery, plant d furniture in computing the income from business or profession.

32 Depreciation

35 Expenditure on scientific research.

35D Amortisation of preliminary expenses.

35AC Expenditure on eligible projects or schemes

35CCA Deduction for expenditure by way of payment to institutions carrying rural development programme.

35DD Amortisation of expenditure in case of a amalgamation/demerger.

35DDA Amortisation of expenditure incurred under voluntary retirement scheme.

37(1) General deduction.

40(a) Amounts not deductible

41 Deemed profit.

43B Certain deduction to be allowed on payment basis only.

40A(2) Expenses disallowable if excess payment to relatives.

40A(3) Payments otherwise than by way of payment by account payee cheque / bank draft in excess of Rs. 20,000.


44AB Audit of accounts of certain person.

44AA Maintenance of accounts by certain persons.

44AD Special provision for computing profit and gains of business of civil construction.

44AE Special provision for computing profit and gains of business of plying,hiring or lease goods carriages.

44AF Special provision for computing profit and gains of business of retail traders.

45(1) The chargeability of income under capital gain

55A Reference to valuation officer.

50C Special Previous for full value of consideration in certain cases.

54 Provides exemption in respect of capital gains arising on transfer ofresidential house property whose income is chargeable under the headhouse property

54B Provide exemption in respect of capital gain arising on transfer of landused for agricultural purpose.

54D Provide exempt/on in respect of capital gain arising on compulsory acquisition of land and building forming part of industrial under taking.

54EC Long-term capital gain on transfer of any long-term capital asset

54F Provide exemption in respect of capital gains arising on transfer of along-term capital asset other than house property.

54G Provide exemption in respect of capital gain arising on transfer of assets in cases of shifting of industrial undertaking from urban area to any area other than urban area.

54GA Provide exemption in respect of capital gain arising on transfer of assetsin case of shifting of industrial undertaking from urban area to anyspecial economic zone

56 The chargeability of income under the head other sources.


56(2)(VI) Any sum of money received without consideration exceeding Rs. 50,000.

57 Deduction from income chargeable to tax under the head "Income from other sources"

58 Amounts not deductible under Other Sources

64(1)(1V) Remuneration of a spouse

64(1)(IV) Transfer of assets to spouse

64(1A) Income of minor child

64(2) Conversion of acquired property in to joint family property andsubsequent partition

70 Inter source adjustment

71 Inter Head adjustment

72A Accumulated business loss of an amalgamating company

80C Deduction in respect of LIP, contribution to PF etc.

80CCC Deduction in respect of contribution to certain pension funds.

80CCD Deduction in respect of contribution to pension

80D Deduction for medical insurance premium.

80DD Deduction in respect of maintenance including medical treatment of a dependent being a person with disability.

80DDB Deduction in respect of medical treatment of specified diseases

80E Deduction in respect of payment of interest on loan taken for pursuing higher education.

80 G Deduction in respect donations to certain funds, charitable institutions, etc.

80GG Deduction in respect of rent paid.


80GA Deduction in respect of certain donations for scientific research or rural development.

145 Method of accounting

2(22) Deemed dividend

8 Chargeability of Dividend income

14A Expenditure incurred in relation to exempt income not deductible.

139(1) Voluntary filing of return

139(3) Return of loss

139(4) Belated return

139(5) Revised return

192 TDS from salaries

193 TDS from interest on securities

194A TDS from interest other than interest on securities

194B TDS from winning from lotteries, crossword puzzle or card game

194BB TDS from winnings from horse race (including jackpot)

194C TDS from payment to contractor and sub-contractor

194D TDS from insurance commission

194E TDS from payment to nonresident sports men or sports association

194EE TDS from payments in respect of deposits under NSS covered U/S80CCA

194F TDS from on payment on account of repurchase of units of mutual fund or UTT

194G TDS from commission on sale of lottery tickets

194H TDS from commission or brokerage

1941 TDS from rent •"


194J TDS pn fees for 'professional or technical services.

194LA TDS from payment of compensation or acquisition of certain immovable property (including enhanced compensation)

208 Obligation to pay advance tax

234A Interest payable by the assessee for default in furnishing the return of income

234B Interest for nonpayment or short payment of advance tax

234C Interest payable for deferment of advance tax


1

THE BASIC CONCEPTS

PERSON

(Person means individual, HUF, Company,

Firm, AOP,BOI, Loca15l Authority,

artificial judicial person)

EARNS INCOME IN 2010-11

(2010-11 in which person earns income is called Previous Year)

DETERMINES INCOME AND PAYS TAX IN 2011-12

(2011-12 is called the Assessment year relevant to the previous year 2010-11 as the income

earned by the assessee in 2010-11 is assessed by the Income Tax Department in 2011-12)

FILES RETURN IN 2011-12

INCOME TAX OFFICER ASSESSE INCOME TO SEE IF

TAX HAS BEEN CORRECTLY PAID

SOME BASIC DEFINITIONS(a) Person \ Section 2(31)1 : Person includes

1. An individual,2. A Hindu Undivided Family,3. A Company,4. A Firm,5. An Association of Persons (AOP) or a Body of Individuals, whether incorporated or not.6. A local authority,


7. Every artificial juridical person not falling within any of the preceding sub clauses.

2

An AOP, BOI, artificial juridical person shall be deemed to be person whether such a person was formed, established or incorporated with the object of deriving of income, profits or gains or not.

Question: Determine the status of the following1. Delhi University2. X and Y are the legal heirs of Z. Z dies in 2010. X and Y continue his business without

entering into partnership.

3. Kolkata Municipal Corporation4. ABC Co-operative Society

Answer: 1. Artificial juridicial person2. Body of Individuals3. Local Authority4. Association of Persons

b) Assessee [Section 2(7)1: Assessee means a person by whom income tax or any other sum of money is payable under the Act. It includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss or the amount of refund due to him. It also includes a person who is assessable in respect of income or loss of another person or who is deemed to be an assessee, or an assessee in default under any provisions of the Act.

Question : A single letter of enquiry was issued by the Income Tax Department Mr. Shoumik of Pune. In the letter there was no specific mention of any provision of the Income Tax Act. Can Mr. Shoumik be treated as an assessee under the Income Tax Act?


Answer: If a single letter of enquiry issued by the department does not mention any specific provision of the Act, it does not constitute proceedings under the Act. Hence Mr. Shoumik cannot be treated as the assessee in the given case.

(c) Previous Year [Section 2(34) read with Section 31

Previous Year means the financial year immediately preceding the Assessment Year. All assesses are required to follow financial year (i.e. from 1st April to 31st March next) as previous

3year. In case of a newly set up business or profession or source of income newly coming into existence first previous year will be the period starting from the date of setting up business or profession etc. upto the following March. For instance, if a person starts new business on 3/3/2011, the first Previous Year will be from 3/3/2011 to 31/3/2011.

(d)Assessment Year [Section 2(9)1

Assessment Year means the period of 12 months commencing on the first day of April every year. It is, therefore the period from 1st April to 31st March. For example, the assessment year 2011-12 will commence from 1/4/2011 to 31/3/2012. The tax is levied, in each assessment year, with respect to or on the total income earned by the assessee in the previous year.

(e) Income: [Section 2(24)1U/s 2(24) income has been defined which is inclusive but not exhaustive. It states that income not only things as mentioned U/s 2(24) but also other things which the term signifies according to its general and natural meaning. Some of the items referred under the section are :

(1) Dividend (2) Any Capital Gains (3) Value of perquisites or Profits in lieu of salary taxable under clauses (2) and (3) of Section 17 (4) Profits and gains.

(f) Manufacture [Section 2(29BA)1The term "manufacture" with its grammatical variations, means a change in a non-living physical object or article or thing ,-

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

(b) bringing into existence of a new and distinct object or article or thing with a chemical composition or integral structure;

BASIC PRINCIPLES FOLLOWED WHILE CHARGING INCOME TAX [SECTION 4]1. Income tax is an annual tax on income


2 income o£ previous year is charged in the next following Assessment year at the tax rates applicable for the relevant Assessment year.3. Tax rates are fixed by Annual Finance Act.4. Tax is charged on every person as defined under IT Act.5. Tax is levied on Total Income of every assessee computed in accordance with the provisions of the Act.

6. Total Income is calculated in accordance with the provisions of the Act as they stand on the

4

1st day of April in any Assessment year.

FIVE HEADS OF INCOME

All income earned by the assessee are not chargeable to tax. There are certain incomes on which no tax is charged. These are known as Exemptions or Income Exempt from Tax. All income earned by the assessee and chargeable to tax is divided and classified into following five heads of Income:

1. SALARIES (Sections 15 to 17)2. INCOME FROM HOUSE PROPERTY (Sections 22 to 27)3. PROFITS AND GAINS OF BUSINESS OR PROFESSION ( Section 28 to 44D)4. CAPITAL GAINS (Section 45 to 55A)5. INCOME FROM OTHER SOURCES (Section 56 to 59)

The sum of these 5 heads of income is known as GROSS TOTAL INCOME. (Section 14). It is

to be noted that tax is charged on Total Income and not Gross Total Income. This Total Income

is arrived at by reducing from Gross Total Income Deduction allowable under Chapter VIA.

Section 2(45) defines total income as "TOTAL INCOME "means the total amount of income

referred to in section 5, computed in the manner laid down in this Act.

DIFFERENCES BETWEEN CERTAIN TERMS USED IN INCOME TAX

(a) Heads of Income Vs. Source of Income

For the purposes of assessment all income chargeable to income tax have been divided into five

categories viz. Income from Salary; Income from House Property; Profits and Gains from

Business or Profession; Capital Gains; Income from Other Sources. These five categories of


income are known as Heads of Income under the Income Tax Act, 1961.Under each head there

may be several sources of income. Sources of Income refer to the place of origination of a

particular income. Thus, an assessee may be carrying 3 businesses say, that of Chemical, Paper

and Tea. In that case these 3 businesses will constitute 3 sources of income all chargeable under

the head Profits and Gains from Business or Profession.

5(b) Exemptions Vs. DeductionsThose items of income which do not form part of total income known as Exemptions. Example: Agricultural Income is Exempted from Tax U/s 10(1).The provisions relating to Deductions are covered under Chapter VIA. Incomes from which deductions are allowed are first included in Gross Total Income and then the deductions are allowed to arrive at Total Income. Thus, if there is no Gross Total Income, no deductions will be permissible.

(c) Association of Persons Vs. Body of Individuals(i) An AOP may consist of non individuals but BOI has to consist only of individuals.

(ii) An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activities, whereas a BOI may or may not have such a common design or will.


6COMPUTATION OF TAX LIABILITY

Assessee: Mr. / Mrs. X Previous Year : 2010-11

Status: Resident, Individua Assessment Year: 2011-12

Computation of Tax payable

PARTICULARS AMOUNT AMOUNTSalariesIncome from House PropertyProfits and Gains of Business or ProfessionCapital GainsIncome from Other Sources

GROSS TOTAL INCOME

Less: Deduction under Chapter VIA Deduction U/s 80D/80G/etc.

TOTAL INCOME Or Rounded off to nearest multiples of 10Tax on Total Income

Add: Education Cess [including SHEC] @ 3%Total Tax Payable.Less: Relief U/s 89(1)

Less: Prepaid Tax


Advance Tax

Tax Deducted at Source

Payable / Refundable

7APPLICATION OF INCOME VS. DIVERSION OF INCOME

An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of the income. On the other hand, an obligation to apply income which has accrued or arisen or has been received amounts merely to the apportionment of the income and not to its diversion.Diversion of income is not regarded as income but when an assessee applies an income to discharge his obligation after the income reaches the hands of the assessee it would be an application of income and hence taxable.Example: Mr. A and Mr. B jointly write an article for its publication in a Magazine on the understanding that the remuneration is to be shared equally. On its publication, Mr. A receives the entire amount say Rs. 5,000. Mr. A pays Mr. B Rs. 2,500 as per the agreement. The amount so paid by Mr. A is a diversion of income. Since the sum paid to Mr. B never accrued to Mr. A as income, it will not regarded as his income and therefore not taxable. Out of Rs. 2,500, Mr. A pays Rs. 2,000 towards rent. This Rs. 2,000 is an application of income - as it is a discharge of obligation out of the income of the assessee.


8

SALARIES(Sections 15 to 17)

INTRODUCTIONThe Chargeability [Section 15]As per Section 15 the following income shall be chargeable to Income Tax under the head "Salaries":(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid in the previous year or not.(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;(c) any arrears of salary paid or allowed to him in the previous year if not charged to income-tax for any earlier previous year.

Key Concepts1. Basis of Accounting

Salary is chargeable to tax on due basis or receipt basis whichever is earlier.2. Employer - Employee RelationshipAn income can be taxed under the head salaries only if there exists a relationship between employer and employee between the payer and payee.For example a Member of Parliament is not a Government employee and therefore remuneration received by him is not a salary.Further it is to be remembered that any salary, bonus, commission or remuneration due to or received by an assessee from a firm in which he is a partner, shall not be taxed under the head 'Salaries' as there is no employer employee relationship. It will be taxed under the head Profits and Gains of Business or Profession.In this connection a distinction must be made between Contract for Service and Contract of Service. A


Contract for Service implies a contract whereby one part undertakes to render service e.g professional or technical service undertaken by a person in which he is not subjected to detailed direction and control, but exercises professional skill and uses his knowledge or skill. Thus Income from a Contract for Service is chargeable under the head Business or Profession. Contract of Service implies a relationship of master and servant and involves direction and control over the work. The income in a Contract of Service is chargeable under the head Salaries.

9

3. Place of AccrualThe golden rule is that salary will be deemed to accrue or arise at a place where services are rendered. If the services are rendered in India and salary on account of such services is received outside India, it will be treated as an income which is deemed to accrue or arise in India. Similarly, if a person, who after rendering service in India, retires and settles abroad, 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 service on account of which pension accrues, were rendered in India.

However, there is one exception to this rule that where an Indian citizen, being a Govt. Employee receives any salary for rendering services outside India, salary received by him is treated as income deemed to accrue or arise in India although the services are rendered outside India.

4. Foregoing Vs. Surrender Of SalarySection 15 taxes salary on due basis even if it is not received. If, therefore, an ernployee foregoes his salary, it does not mean that salary so foregone is not taxable. Once salary has accrued to an employee its subsequent waiver does not make it exempt from tax liability. Such voluntary waiver or foregoing by an employee of salary due to him is merely an application of income and is nonetheless chargeable to tax.

If an employee opts to surrender his salary to the Central Government under Section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be excluded while computing his taxable income. Benefit of tax exemption in respect of salary so surrendered is available to all employees whether they are employed in private sector or public sector.


5. Computation of salary in graded systemStudents may find salary structure given in the problem as 12000-500-17000-800-20200 from 1.4.2008. Such a salary structure implies that basic salary of the employee would start from 12000. Thereafter he will get an annual increment of Rs. 500 upto Rs. 17000. Then from 17000 his salary would increase at a rate of Rs. 800 p.a. upto Rs. 20200. Once the salary reaches Rs. 20200 he will not get any further increment till he is placed in other grade.

Definition of Salary Salary U/s 17(1) includes— (i) Wages;(ii) Any annuity or pension;

10(iii) Any gratuity;(IV) Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;(v) Any advance of salary;(vi) Leave Salary(vii) The annual accretion recognised provident fund of an employee to the extent chargeable to tax(Viii) The aggregate of all sums in the transferred balance of an employee in a recognized provident fund, tothe extent chargeable to tax.(ix) the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD; [This point be ignored now. It will be covered in a subsequent chapter]

RETIREMENT BENEFITSA. GRATUITY

Gratuity is a payment made by an employer to an employee in appreciation of the past services rendered by the employee. Gratuity can be either be received by the employee himself at the time of his retirement or the legal heir on the event of the death of the employee. Gratuity received by an employee on his retirement is taxable under the head Salary whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head Income from other sources. However, in both the cases gratuity is exempt upto a certain limit. For the purposes of exemption of gratuity under section 10(10), the employees are divided into three categories:

1. Govt. Employees and employees of local authority

2. Employees covered under the payment of Gratuity Act3. Other employees.


1. Government Employees:In the case of such employees entire amount of gratuity shall be exempt.

2. Employees covered under the payment of Gratuity Act 1972In such a case least of the following shall be exempt:

(i) The amount of gratuity actually received(ii) 15/26 x last drawn salary * No. of years of service of part thereof in excess of 6 months

11[However in the case of an employee who is employed in a seasonal establishment and is not so employed throughout the year, the exemption shall be for 7 days wages for each season.]

(iii) Rs. 10, 00,000 Gratuity received in excess of the minimum of the above amounts will be included in the salary.

Meaning of Salary for the purposes of Gratuity. For the purpose of calculation of Gratuity salary means salary last drawn in cash and includes deamess allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.

3. Other Employees - who are not covered under the payment of Gratuity ActIn such a case gratuity received by him shall be exempt to least of the following:

1. Actual amount of gratuity received

2. 1/2 x Average Salary of Last 10 months x Number of completed year of service.

3. Rs. 10,00,000

Meaning of Salary and Average Salary: For this purpose salary includes dearness allowance only if the term of employment so provides, but excludes all other allowances or perquisites. [Rule 2(h) of Part A of the Fourth Schedule of the Income Tax Act.] However Supreme Court has held in the case of GestetnerDuplicators Pvt. Ltd. that commission, if received as a fixed percentage of turnover achieved by the employee, would form part of the salary.Further average salary is to be calculated on the basis of the average of the salary for 10 months immediately preceding the month in which such event occurs. For example, if an employee


retires on 23.12.2010 then the aggregate salary for the period 1.2.2010 to 30.11.2010 would be taken and then divided by 10.

Example 1: Mr. X retired on 25.1.2011 after rendering a service of 25 years and 10 months. His last drawn salary was Rs. 10000 plus dearness allowance ofRs. 5000 plus bonus 20% plus Overtime allowance of 500 per hour of overtime. During last month he worked 5 hours overtime and accordingly earned 2500/-. Calculate the taxable amount of gratuity if he received Rs. 250000 as gratuity assuming that Mr. X is covered under the payment of Gratuity Act, 1972.

12Solution:

Previous Year : 2010-11

Assessment Year: 2011-12Computation of Taxable amount of Gratuity

(When covered under The Payment of Gratuity Act)

PARTICULARS AMOUNT AMOUNT

Gratuity Received Rs. 250000Less: Exempted U/s 10(10) - Least of the following

(i) Amount of Gratuity actually received(ii) 15 days salary for every completed year of serviceor part thereof in excess of 6 months (15000 X 15/26 X 26) Rs. 225000(iii) Maximum Exemption Limit Rs. 1000000 Rs. 225000

Taxable amount of Gratuity Rs. 25000

Example 2: Mr. X retired on 25.1.2011 after rendering a service of 25 years and 10 months. He earned a salary of Rs. 10000 from 1.1.2010 to 30.6.2010 and his salary was increased w.e.f. 1.7.2010 to Rs. 15000 p.m. He received a dearness allowance of Rs. 1000 p.m. But the terms of employment did not provide for inclusion of D.A. for the purposes of Gratuity. Calculate the taxable amount of gratuity if he received Rs. 275000 as gratuity assuming that Mr. X is not covered under the payment of Gratuity Act, 1972.


Assessee: Mr. X Status: Individual

Rs. 250000

13

Solution: Previous Year : 2010-11

Assessment Year: 2011-12

Computation of Taxable amount of Gratuity

(When covered under The Payment of Gratuity Act)


Gratuity Received Rs. 275000

Less: Exempted U/s 10(10) - Least of the following

(i) Amount of Gratuity actually received

(ii) 1/.2 months salary for every completed year of

Service (13000 X 1/2 X 25) Rs. 162500

(iii) Maximum Exemption Limit Rs. 1000000 Rs. 162500 Taxable amount of Gratuity Rs. 112500

Note l : Calculation of 10 months average salary: (10000 x 4 + 15000 x 6)/10 = (40000 + 90000)/10 = 13000


Assessee: Mr. X

Status: Individual

Rs. 275000

14

B. PENSIONPension is the payment made by the employer after the retirement/death of the employee as a reward for the past service. Pension is normally paid as a periodical payment on monthly basis. But sometimes pension is allowed to be commuted i.e. a lump sum amount is given as against monthly pension. Where the employee dies then his family members receive pension. This is known as Family pension and is taxable under the head Other Sources and not under Salary. The treatment of pension is different in both the situations:

Pension

Uncommuted (monthly) Commuted

Fully Taxable for

All employees

Government Employee Others

Fully Exempted

If received Gratuity If not received Gratuity


Commuted value of 1/3 Commuted value of 1/2 Of pension exempted of pension exempted

15

Leave Salary [Exemption u/s 10(10AA)

During Employment On Retirement

Fully taxable Govt. Employee Others

Fully exempted Least exempted (1) Amt. actually received.

(2) Last 10 months total salary From the date of retirement

(3) Leave salary entitlement on The basis of max.30days leave

For every completed year of service. (4) Rs. 3, 00,000

More than two employers: Where the cash equivalent of unutilized earned leave is received by an employee from two or more employers in the same year the maximum amount exempt from tax will not exceed the amount specified by the Govt. In cases, where an employee who has received any cash equivalent of unutilised earned leave in any earlier year from his former employer(s) received cash equivalent of unutilised earned leave from his present employer in a


later year the ceiling limit specified will be reduced by the cash equivalent of unutilised earned leave which has been exempted in any earlier year(s).

Voluntary Retirement Scheme [Section 10(10C) read with rule 2BA]

Exemption available to: Employee of a public sector company or State or Central Government, any other company, an authority or University established under a Central, State or Provincial Act; a local authority ; a co-operative society ; IIT or notified institute of management ; an institution having importance throughout India or in any State(s) as may be notified by the Central Government at the time of his voluntary retirement in accordance with any scheme(s) of voluntary retirement or in the case of a public sector company, a scheme of voluntary separation.

Exemption : Least of the following: Amount actually received 3 months salary for every completed year of service Salary at the time of retirement X No. of months service left for retirement Rs. 5, 00,000.

16Guidelines to be followed in order to claim exemptionThe voluntary retirement scheme must be framed in accordance with the guidelines stated in Rule 2BA. These guidelines are briefly stated below:1. The employee has completed 10 years of service or 40 years of age (this condition does not apply for public sector Company's voluntary separation scheme)

2. It applies to all employees, including workers and executives except, to directors of a company or co operative society.

3. The vacancy caused by VRS should not be filled up and VRS should cause an overall reduction in the existing strength of the employees.

4. The VRS compensation should not exceed - 3 months salary for every completed year of service orSalary at the time of retirement X No. of months service left for retirement

Note:The assessee shall have an option either to claim exemption under the above provions for VRS or to claim relief U/s 89 but not both

Meaning of Salary: For this purpose salary includes dearness allowance only if the term of employment so provides, but excludes all other allowances or perquisites. [Rule 2(h) of Part A of the Fourth Schedule of the Income Tax Act.] However Supreme Court has held in the case of Gestetner


Duplicators Pvt. Ltd. that commission, if received as a fixed percentage of turnover achieved by the employee, would form part of the salary.

I

Example 3: John is employed in a public sector company and is paid a sum of Rs. 6,00,000 on

Voluntary retirement from service. The normal age of retirement in the company is 60 and John,

who was 45 at the time of retirement, had completed 20 years of service. His monthly salary at

the time of retirement was as follows:

Basic Pay Rs. 10,000; DA (50 % includible for pension) Rs. 6,000 ; H.R.A. Rs. 3,000 ;

Conveyance Allowance Rs. 800; What is the amount of compensation taxable under the Act?

17

Solution :

Assessee: Mr. John Previous Year : 2010-11

Status: Individual Assessment Year: 2011-12

Computation of Taxable amount of VRS


VRS Received Rs. 6,00,000

Less: Exempted U/s 10(10C) - Least of the following

1. 3 months salary for every completed year of services

[13000 x3x20] Rs. 7, 80,000

2. Salary at the time of retirement x No of

Months services. Rs. 23,40,000

3. Maximum Exemption Limit Rs. 5,00,000 Rs. 5,00,000

Taxable VRS Rs.1, 00,000

E. Retrenchment Compensation [Exempt u/s 10(1 OB)]It is basically compensation received by a workman at the time of his retrenchment. The retrenchment compensation so received is exempted to the extent of least of the following:


Actual Amount received \ 15 days average pay for every completed year of service or part thereof in excess of 6

months. Rs. 500000

Meaning of Average Pay: Average pay means the average of the wages payable to a workman in the three complete calendar months (or 4 complete weeks or 12 working days in the case of weekly or daily paid workman). Wages includes all allowances, the value of rent free or concessional house accommodationor of supply of light, water, medical attendance or any other amenity or service and traveling concession but does not include bonus, P.F. contribution and gratuity.iHowever, where retrechment compensation is received by a workman under any scheme which the Central Government has approved in this behalf, the entire amount of compensation so received shall be exempt U/s 10(10B)

18Example 4 : Mr. X received retrenchment compensation of Rs.8, 00,000 after 29 years 10 months of service. At the time of retrenchment, he was was drawing basic salary Rs. 20,000 p.m.; dearness allowance Rs. 5,000p.m. Compute his taxable retenchment compensation.Solution:Retrenchment compensation received Rs.8,00,000Less: Exempt u/s 10(10B) [Note 1] Rs. 432,692

:. Taxable retrenchmant compensation Rs. 3,67,308 Note 1: Exemption is to the extent of least of the following:(i) Compensatation actually received = Rs. 8,00,000(ii) Statutory Limit = Rs. 5,00,000(iii) Amount calculated in accordance with provisions of the Industrial Disputes Act, 194715/26 x Avg salary of last 3 mths x Completed yrs of service and part thereof in excess of 6 mths 26i.e = 15/26 X 25,000 X30 years = Rs. 4, 32,692

ALLOWANCES

A. House Rent Allowance [Exemption u/s 10(13A) read with rule 2A]Sometimes employer provides to his employee an allowance to meet his house rent expenses. This house rent allowance is exempt U/s 10(13 A) to the extent of least of the following:1. Amount Actually Received


2. Rent paid - 10% of Salary3. 50% of the salary where the residential house is situated at Mumbai, Kolkata, Delhi, Chennai and 40% of the salary if the house is situated at any other place.However no exemption shall be available if the employee has not actually incurred expenditure on payment of rent or stays in his own accommodation.

Meaning of Salary: For this purpose salary includes dearness allowance only if the term of employment so provides, but excludes all other allowances or perquisites. [Rule 2(h) of Part A of the Fourth Schedule of the Income Tax Act.] However Supreme Court has held in the case of Gestetner Duplicators Pvt. Ltd. that commission, if received as a fixed percentage of turnover achieved by the employee, would form part of the salary.Further it must be borne in mind that Salary is to be taken on due basis in respect of the period during which is occupied by the employee in the previous year. The salary of any other period shall not be included even though it may be received and taxed during the previous year.

19

Example 5: Mr. X is employed with XYZ Ltd. on a basic salary of Rs. 5000 p.m. He is also entitled to a dearness allowance of 5% of basic salary. He is entitled to HRA of Rs. 3000 p.m. He takes an accommodation on rent in Kolkata and pays Rs. 2500 p.m. as rent for the accommodation. Compute his taxable HRA.Assessee: Mr. P.Y.: 2010-11Status: Individual A.Y.: 2011-12

Amount AmountHouse Rent Allowances Received 36,000Less: Exemption available U/s 10(13A) Least of the following :(i)Amount actually received 36,000(ii) Rent paid (-) 10% of salary (a) Rent paid 25x12 30,000 (b) 10% of salary (5000+250)x12 6300 23,700 (iii) 50% of salary i.e.1/2 x 6300 31,500 23,700TAXABLE HRA 12,300

B. Special Allowances [exempt U/s 10(14) read with Rule 2BB]

The following allowances are exempted at lower of amount received or the following limits:


I. ALLOWANCES EXEMPTED UPTO FIXED LIMITS, IRRESPECTIVE OF EXPENDITURE INCURRED1. Children Education Allowance : Upto Rs. 100 p.m. per child upto a maximum of 2 children2. Hostel Expenditure Allowance : Upto Rs. 300 p.m. per child upto a maximum of 2 children

3. Transport Allowance : Upto Rs. 800 p.m. for commuting between place of his residence and place of his duty. But in case of an employee who is bilnd or orthopaedically handicapped with disability of the lower extremities of the body, to meet his expenditure for commuting between his residence and place of duty -Rs. 1,600 per month.

4. Allowance to an employee of transport company for meeting expenditure during his duty of running of such transport (provided he is not in receipt of daily allowance): 70 % of the allowance or 6000 p.m. whichever is lower.

5. Tribal Area Allowance : Rs. 200 p.m.

20II. ALLOWANCES EXEMPTED UPTO EXPENDITURE INCURRED FOR OFFICE PURPOSEThe following allowances are exempted upto the amount spent for office purpose: (i) Travelling or Transfer Allowance ; (ii) Conveyance Allowance ;(iii) Daily Allowance;(iv) Helper Allowance;(v) Academic Allowance;(vi) Uniform AllowanceThus if an employee receives Rs. 1000 as travelling allowance and he incurs Rs. 800 to meet travelling expenditure during the course of employment then Rs. 200 (Rs. 1000 - Rs. 800) would be taxable.

III. ALLOWANCES WHICH ARE FULLY EXEMPTED FROM TAX1. Allowance granted to Government employees outside India [Section 10(7)]2. Sumptuary Allowance granted to High Court or Supreme Court Judges3. Allowances paid by United Nations.4. Compensatory Allowance received by a judge.

IV. ALLOWANCES WHICH ARE FULLY TAXABLE


Medical Allowances, Entertainment Allowances, Project Allowances and all other similar allowances not discussed above shall be fully taxable.

C. Leave Travel Concession [Section 10(5} read with Rule 2B]The exemption in respect of leave travel concession is available to Indian as well as foreign citizens. Section 10(5) provides that where the employee receives any amount as leave travel concession(a) from his employer in connection with his proceeding on leave to any place in India(b) from his employer or former employer in connection with his proceeding to any place in India after termination of his serviceBesides this, the following points must be borne in mind:1 . The exemption is only limited to the expenditure on rail/bus/air fare. Taxi charges, lodging/boarding expenses are not included i.e. taxable.2. Further the exemption is limited to the amount of expense that would have been incurred had the journey been performed through the lowest route.

213. The exemption is available in respect of two journeys performed in a block of 4 calendar years commencing from 2006-2009 and 2010-13. This means that the assessee shall be entitled to claim exemption on two occasions in every block of 4 years.4. Where an assessee has not availed any travel concession in any specified block of 4 years or availed only one leave travel concession, then he can carryover leave travel concession in respect of one journey in the first calendar year of the next block.

5. For this purpose family means: (a) the spouse and children of the individual and (b) the parents, brother and sisters of the individual who are wholly or mainly dependent on him.

6. Further, the exemption shall be available upto a maximum two children.

PERQUISITES [Section 17(2)]Perquisite includes

(i) the value of rent-free accommodation or accommodation at concessional

rent provided to the assessee by his employer;

(ii)the value of any benefit or amenity granted or provided free of cost or at concessional

rate in any of the following cases:—


(a) By a company to an employee who is a director thereof;

(b) By a company to an employee being a person who has a substantial interest in the company

i.e. if the employee holds equity shares carrying 20% voting power at any time during the

previous year.

(c) By any employer (including a company) to an employee to whom the provisions of {a) and

(b) do not apply and whose income under the head "Salaries" (whether due from, or paid or

allowed by, one or more employers), exclusive of non monetary benefits exceeds 50000.(Employees falling under category (a), (b) and (c) are referred to as Specified Employees)(iii) Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;

(iv)Any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund to effect an assurance on the life of the assessee or to effect a contract for an annuity; and(v) The value of any other fringe benefit or amenity as may be prescribed.

22(vi) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate of the assessee.(vii) The amount of any contribution to an approved superannuation fund by the employer in respect of assessee, to the extend it exceeds Rs. 1,00,000;(vii) - the value of any other fringe benefit or amenity as may be prescribed ;

PERQUSITES ALWAYS TAXABLE IN THE HANDS OF EMPLOYEES

Rent Free Accommodation/Accommodation at concessional rent [Rule 3(1)]

Rent free accommodation

Government Employee Others Hotel Accommodation

24% of salary or Hotel Charge whichever is lower


Accommodation owned by Employer if Accommodation taken o Rent

15% of salary Or

Rent paid by

Employer – Whichever is lower

If population less if population If population 10 Lacs 10-25 Lacs > 25 Lacs7.5% of salary 10% of salary 15% of salary

If the employer provides furniture also then the amount to be added shall be 10%o p.a. of the Cost of furniture of hire charges as the case may be.(1) In all the above cases the amount of perquisite shall be reduced by the amount of expenses reimbursed by the employee.

23(2) For this purpose Salary means : Basic Salary + D.A. forming part of retirement benefits taxable allowances + bonus + commission + any monetary payment (i.e. Bonus, Leave Salary and commission) paid by the employer but does not include employer's contribution to Provident Fund and value of any perquisites.(3)Salary is to be calculated on due basis and whether received from that employer or other employer.(4) Where on account of the transfer of an employee from one place to another, he is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one accommodation which has the lower value for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both the accommodations.(5) If a hotel accommodation is provided in a remote area to an employee working at a mining site or an on shore oil exploration site, or a project execution site or an accommodation provided in an offshore site of similar nature the perquisite value shall be NIL. Remote area means an area that is located at least 40 kms away from a town having a population not excedng 20,000 based on latest published all India census.(6) But hotel accommodation shall not be regarded as perquisite if the following two conditions are satisfied:(i) The hotel accommodation is provided for not more than 15 days and (ii) such accommodation is provided on an employee's transfer from one place to another.


(7) While calculating the value of perquisite any advance paid by the employer to the landlord shall not be taken into account nor can the same be considered as a loan to the employee.

Example 6 : Salary of an employee consists of (1) Basic Salary Rs. 1,00,000 per annum (2) Dearness Allowance Rs. 50,000 per annum (3) a rent free house is provided to employee. Computte Income from Salaries:

Solution: Computation of Income from Salaries

Basic Salary 1,00,000Dearness Allowance 50,000Perquisite Value of Accommodation 22,500(15%ofRs. 1,50,000)

SALARIES -- 1,72,500

2. Interest free Loan or loan at concessional rate of interest to employee(i) Interest shall be calculated at the rate charged by the State Bank of India p.a. as on the 1 st day of the previous year in respect of the loans advanced by it for the same purpose. This rate shall

24be applied to the maximum monthly balance outstanding. The maximum monthly balance outstanding means the amount outstanding on the last day of each month.Purpose________________________________A.Y. 2010-11 _________________________________Housing

Car

Two Wheeler Loan

Education

Personal

(ii) But perquisite shall not be taxable if(a) loan is taken for medical treatment of specified diseases (The exemption is not available

on so much of loan as has been reimbursed to the employee under medical insurance scheme) or

(b) if original loan does not exceed Rs. 20000.


(iii) Further interest shall be calculated on the balance outstanding on the last day of each month(i) The amount of perquisite shall be reduced by the amount of expenses

reimbursed by the employee.(ii) The perquisite value shall be computed whether loan is given to

employee or member of household. For(iii) this purpose member of household includes:

(a) Spouse; (b) Children and their spouses ; (c) Parents ; (d) Servants and dependents

253 Use and Transfer of Moveable Assets to employee or member of household

Use Transfer

Computer Other Assets Computer Motor Car Other Assets NIL 10%p.a of the actual cost Actual cost less depreciation

Or on WDV @20% for every Hire Charges as the case completed year of services

Actual cost less deprecation Actual cost lessOn WDV @50% for every deprecation @10%Completed year of service For every completed year of service.


OTHER PERQUISITES

4. Rule 3 (3) : Value of Sweeper, gardener, watchman, personal attendant provided by employer:

Fully Taxable5. Rule 3(4) : Supply of Gas, electric energy or water: Fully Taxable6. Rule 3(5) : Education Facilities

If the employer provides education facility to employee's children and cost of education facility

in similar institution does not exceed Rs. 1,000 p.m. then nothing shall be taxable. If it exceeds

Rs. 1,000 p.m. then entire amount shall be taxable.

7. Shares allotted by Employer to employee under Employees Stock Option Plan shall be

taxable as under:No. of Shares allotted (FMV of shares on the date of exercising option - Allotment Price)

Fair Market Value shall be caculated as under:

a) For listed equities = average of opening and closing price of shares listed or stock exchange

on date of exercising of option less any amount recovered from the employee.b) For unlisted equities

Perk value of unlisted sweat equity shares and other security allotted or transferred free of cost

or at concessional rates shall be the fair market value as determined by the category -1 Merchant

Banker.

26

Example: The employer allots 1000 shares to employee to its employee at a concessional rate

of Rs. 40. Opening Market Value Rs. 70 and Closing Market Price is Rs. 70. Therefore, 1,000

shares x Rs.(60 -40) = 20 x 1,000 = Rs. 20,000 shall be regarded as the perquisite value of

shares allotted under ESOP and shall be taxable in the hands of the employee.

i)Travelling, touring,

accommodation and other

expenses paid/reimbursed/

borne by employer for

holiday of employee or

member of household

(i) If such facility is maintained by the employer -value at

which such facilities are provided by other agencies to the

public, (ii) Where employee is on official tour and expenses

are incurred for any member of household - amount of

expenditure incurred.(iii) Where any official tour is extended

as vacation - expenditure incurred during extended period,

(iv) In other Cases - amount of expenditure incurred by

employer.

(ii) Free meals The amount of expenditure incurred by the employer less

exemption Rs. 50/- per meal. Exemption of Rs. 50 per meal

only if it is provided at office premises/ office hours or

through non transferable paid vouchers. For tea and snacks -


NIL. For Remote area - NIL.

(iii) Gift or voucher or

token or any member

In case of gifts in kind perquisites upto Rs. 5000 in one year

shall be exempted. Gifts in cash shall be fully taxable.

(iv)Credit Card expenses of

employee or any member of

the household not being for

official use

The amount paid by the employer.

(v) Expenses at club not for

official purpose of the

employee or any member of

the household.

The amount paid by employer. But in case of corporate

membership the initial fees paid by the employer shall not be

included in perks.

9. Perquisite for valuation of motor Car [Rule 3(2)](a) Perquisites in case of use of motor car for exclusively business purpose : Nothing Taxable(b) Perquisites in case of use of motor car for exclusively personal purpose amount of expenditure incurred by the employer on maintenance and running of motor car + amount paid to

27driver (chauffeur) + 10% p.a. of actual cost of motor car.(c) Where the motor car is used partly for performance of duties and partly for private or personal purpose of his own or any member of his householdMotor Car Expenses by Value of PerquisiteOwned by Or taken on Cubic capacity of car Hire by Up 1.6 litres Exceeds 1.6 litresEmployer Employer 1800 p.m 2400 p.mEmployer Employee 600 p.m 900 p.mEmployee Employer Expenses – 1800 expenses – 2400 pm

Or actual amount of or actual expenses for For official use if official use if documents Documents are are maintained Maintained

(1) In the above cases all the amounts shall be increased by 900 p.m. for Chauffeur, if any.Owned by

Maintained by Used forTaxable value of perquisite Who is

chargeableEmployee

EmployerOffice

purpose Nil Not applicable


Personal purpose

Actual maintenance All emlpoyee

Actual expenditure incurred by the employer as reduced by Rs. 600 p.m. or as reduced by the higher sum if prescribed conditions are satisfied.

All employee

(2) Where one or more motor cars are owned or hired by the employer and the employee or any member of the household is allowed the use of such motor car, the value of perquisite shall be the amount calculated as if one car has been provided for partly official and partly personal use and all the other cars for personal use.

In this connection it is to be noted that while calculating perquisite value for motor car purposes only completed months shall be taken into account and a part of the month shall be left" out of consideration.Valuation of Perquisite in respect of Vehicle other than Motor Car

28The facility provided by the employer is taxable in the hands of employee on the following basis:

CATEGORY B PERQUSITES ALWAYS EXEMPTED IN THE HANDS OF EMPLOYEES(1) Following expenses incurred or paid by employer:(a) Telephone (including a mobile phone) expenses(b) Medical Insurance Premium of employee or family member(c) Accident Insurance Premium

(2) Training or refresher course for employees(3) Use of health club, sports and similar facilities provided uniformly to all employees by the employer.(4) Tax paid by employer on non-monetary perquisite is exempted from tax U/s 10(10CC).

PERQUISITES IN RESPECT OF MEDICAL TREATMENT


Own Hospital Govt. Hospital Specified Hospital Other cases

Fully Exempted Fully Exempted Fully Exempted Exempted up to Rs. 15,000 p.a

For this purpose family means: a. the spouse and children of the individual b. the parents, brothers and sisters of the individual who are wholly or mainly dependent on him.Medical Treatment in foreign country:

1. Medical treatment outside India stay abroad of employee or family member and one attendant is exempted to the extent permitted by the Reserve Bank of India.

2. Further the amount of traveli1qng expenses shall be exempt only if Gross Total Income of the employee as computed before including traveling expenditure, does not exceed 200000.

Example 7 : Mr. Healthy is working in Wealthy Ltd. at a Basic Salary ofRs. 1,00,000 p.a. . During the year he suffered from Bird flu and accordingly was taken to USA for medical treatment. The traveling expenses amounted to Rs. 75,000. The expenses in respect of treatment,

29stay expenses and cost of medical attendant amounted to Rs. 90,000 (amounted permitted by RBI Rs. 80, 000)Solution: Rs.Basic Salary 1, 00,000Perquisite Value of treatment (90, 000 – 80,000) 10,000

Perquisite value of travelling expenses – exemptedSince GTI Rs. 1, 10,000 ie. Does not exceed Rs. 2, 00,000Income from Salaries 1,10,000

PROVIDENT FUND

The Provident Fund scheme is a scheme to provide incentive to savings and for the welfare of

the employees. In this scheme, certain amount is deducted from the salary of the employees at


certain percentage and the same is deposited in the provident fund of the employees. Since the

amount is deducted from the employee’s salary there is no question of any tax on the amount so

deducted as it is already included in the salary? Again, the employer also contributes certain sum

to the provident fund.

The amount contributed by the employer constitutes the income of the assessee. Further the

employees are allowed certain interest on the balance in their Provident Fund Account, which

again constitutes the income of the employee. The total amount standing to the credit of the

employee is refunded to them at the time of their retirement or resignation. The different types

of provident fund and the treatment of different items is discussed herein below:

Nature Own Contribut

ion

Employer’s Contribution

Interest Amount received on Termination

Statutory Provident Fund [Govt, employees]

Not an

income [But

deduction U/s

80C1

Exempted Exempted Exempted

Recognised Provident Fund

Not an income [But deduction U/s 80CL

Exempted upto 12% of Salary

Exempted upto 9.5%

Exempted [Refer

Note 1)

Unrecognised Provident Fund

Not an income No deduction U/s 80C

Exempted Exempted Taxable as under:1. Employer's Contribution: Salaries2.Interest on Employer's contribution: Salaries3.Employees • Contribution:Not taxable4. Interest on Employees Contribution:


Other Sources

Note 1: In case of Recognised Provident Fund the amount received by the employees on

termination of services —Exempt from tax in the following situations: The employee has rendered continuous service with his employer for a period of 5 years

or more or

If the employee has not rendered continuous service of 5 years, the service has been

terminated (a) by reason of such employee's ill health or (b) contraction/discontinuance

of employer's business or (c) due to reasons beyond employees control or

If on cessation of his employment, the employee obtains employment with any other

employer, to the extent the accumulated balance due and becoming payable to him is

transferred to his individual account in any recognised fund maintained by such other

employer.

Note 2: Meaning of Salary: For this purpose salary includes dearness allowance only if the term

of employment so provide, but excludes all other allowances or perquisites. [Rule 2(h) of Part A

of the Fourth Schedule of the Income Tax Act.] However Supreme Court has held in the case of

Gestetner Duplicators Pvt. Ltd. that commission, if received as a fixed percentage of turnover

achieved by the employee, would form part of the salary.

31

Note 3: What happens when the balance in unrecognised provident fund is transferred to

recognised provident fund?

When URPF is converted into RPF it is assumed that URPF is RPF from the beginning and

accordingly the employer's contribution in excess of 12% and interest on PF in excess of 9.5%

from beginning upto the date of conversion shall be taxable in the year of conversion. That part

of the accumulated balance which is not transferred and which relates to employer's contribution

and interest thereon is taxable as profit in lieu of salary.

Example 8 : Mr. X retires from on December 1, 2010, after 15 years of service and received

from the Unrecognised Provident Fund Rs. 5,00,000. Out of the amount received from the

provident fund, the employers share was Rs. 1,70,000 and the interest thereon Rs. 50,000. The

employee's share was Rs. 2,20,000 and the interest thereon Rs. 60,000. What is the taxable

portion of the amount received from the unrecongnized provident fund in the hands of Mr. X for

the assessment year 2011-12?Solution:Computation of Taxable portion of the amount received from the URPF in the hands of A


Income from SalariesEmployer's share in the payment received from the Unrecognized Provident Fund Rs. 1,70,000Interest on the employer's share Rs. 50,000Total Rs. 2,20,000Income from Other Sources:Interest on the employee's share Rs. 60,000Total amount taxable from the amount received from the fund Rs. 2,80,000

Note: The employee's share received from the URPF is exempt from tax

TREATMENT OF SOME OTHER ITEMS

Profits in lieu of salary U/s 17(3) includes—(i) compensation due or received by an assessee from his employer or former employer in connection with the termination of his employment or the modification of the terms and conditions relating thereto;(ii)any payment due to or received by an assessee from an employer or a former employer or from a provident or other fund, (excluding employees own contribution and interest on his contribution)

32(iii) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.(iv)any amount due to or received, whether in lump sum or otherwise, by any assessee from any person whether before joining or after cessation of his employment with that person.Approved Superannuation Fund:Superannuation Fund is also a scheme for retirement benefits of the employees. It is usually established under trusts by an undertaking for the purpose of providing annuities etc. to the employees on their, retirement or on their being incapacitated prior to their retirement etc. The tax treatment of approved Superannuation Fund is discussed below:

Employee's Contribution - Deduction U/s 80C Employer's contribution - Taxable in excess of Rs. 1,00,000 p.a. per employee Interest - Exempt from tax Payment from the fund: Section 10(13) grants exemption in respect of payment from

the fund -a) to the legal heirs on the death of the beneficiaryb) to an employee in lieu of or in commutation of an annuity on his retirement at or

after the specified age or on his being incapacitated prior to such retirementName of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

c) by way of refund of contribution on the death of the beneficiaryThe treatment of unrecognised superannuation fund is same as that of Unrecognised Provident Fund.

DEDUCTIONS FROM SALARY (Section 16)From the Gross Salary arrived the following deductions are allowed to the assessee

1. Entertainment Allowance [Section 16(ii)l:

Deduction on account of entertainment allowance is allowed only to Govt, employees. The

deduction is allowed to the extent of the least of the following:

• Actual amount received

• 20% of Basic salary

• Us. 5000Example 10:

Case 1: X is a Got. Employee. He receives Entertainment Allowance of Rs. 400 p.m. His Basic1

Salary is Rs. 1,000 p.m. and D.A. is Rs. 500 p.m. Compute Deduction U/s 16(h)

Case 2 : X is working in ABC Pvt. Ltd. He receives Entertainment Allowance of Rs. 800 p.m.

His Basic Salary is Rs. 1,000 p.m. and D.A. is Rs. 500 p.m. He spent Rs. 200 p.m. during the

year for entertainment of the clients. Discuss the treatment of Entertainment Allowance.

33Solution:Case 1: Deduction U/s 16(ii) - least of the following:Entertainment Allowance received: Rs. 4,80020% of Basic Salary : Rs. 2,400Maximum Deduction Limit : Rs. 5,000

Deduction U/s 16 (ii) : Rs. 2,400

Case 2: No deduction shall be allowed U/s 16(ii) as Mr. X is not a Govt, employee.

2. Professional Tax [Section 16(iii)l

As per Section 16(iii), a deduction of any sum paid by the assessee, on account of a

tax paid on employment shall be allowed. This deduction is allowed on payment

basis


34INCOME FROM HOUSE PROPERTY

(Sections 22 to 27)

INTRODUCTIONThe Chargeability (Section 22)The following conditions must be satisfied in order to charge any income under the head Income from House Property :

1. The property must consist of buildings and lands appurtenant thereto;2. The assessee must be the owner of the property and3. The assessee must not use the property for the purpose of business carried on by him.

From above it is clear that the following income shall not be charged to Income from House Property :

1. Rental Income from any vacant land not consisting of any building2. Where the assessee sublets any property i.e. where assessee is not the owner of the

property but is himself a tenant and again lets out the property to another person and derives rental income.

3. Where the property is let out for the benefits of the business.


The term House Property does not mean that the property must be let out for residential puipose only. Commercial buildings, Office Buildings, warehouse are also covered therein. Property in foreign country is also taxed under the head Income from House Property.ComputationIncome from House Property is computed in the following manner:P A R T I C U L A R S AMOUNT

Gross Annual ValueLess : Municipal Tax PaidNet Annual Value Less: Deductions U/s 24

Standard Deduction u/s 24(a) (30% of Net Annual Value) Interest u/s 24(b)

INCOME FROM HOUSE PROPERTY

From the above mode of Computation it is clear that determination of Gross Annual Value is the most important element. For the purpose of determination of Gross Annual Value we classify house property into following categories :

1. Property let out throughout the year2. Partly let out partly vacant.3. Partly let out partly self occupied

354. Self occupied or non occupied due to employment

CALCULATION OF GROSS ANNUAL VALUEComputation of Gross Annual Value [Section 23 (1) ]

1. Where the property is let out for entire year, the Gross Annual Value is the higher of(a) Expected Rent or,(b) Actual Rent received or receivable

Expected Rent is the higher of Gross Municipal Value or Fair Rent, but will not exceed the Standard Rent [Shield Kaushish Vs. CIT 1981 131 ITR 435 (SC)] , if any. This means that expected rent will be at first taken at higher of Gross Municipal Value and Fair Rent. If the resultant figure exceeds the Standard Rent then Standard Rent shall be taken as the Expected Rent. But if the resultant figure is less than the Standard Rent then it can be taken as Expected Rent. Thus if:Municipal Value 50 60 70


Fair Rent 55 58 80

Standard Rent 54 75 50

Expected Rent 54 60 50

DEDUCTIONS IN COMPUTING INCOME FROM HOUSE PROPERTY

1. MUNICIPAL TAX PAID(a)From the Gross Annual Value arrived at first Municipal Tax paid is deducted to arrive at the Net Annual Value.

(b) Further, Municipal tax will be allowed as deduction only if the same is paid by the owner. No deduction will be allowed towards Municipal Tax if it is paid by tenant.

(c) It is to be noted only municipal tax which is actually paid is allowed as deduction irrespective of the year to which it relates. Municipal Tax which is outstanding is not allowed as deduction.

36(d)It is not only the Municipal Tax which is allowed as deduction. In fact, all taxes levied by local authority are allowed as deduction provided it is paid during the previous year. However taxes levied by State Government are not allowed as deduction. In order to identify whether the tax is levied by local authority or State Government it must be remembered that all taxes levied by State Government will have the words 'State' or 'Benefit'. Thus Water Benefit Tax is levied by State Government and therefore will not be allowed as deduction. But Water Tax is levied by local authority and will be allowed as deduction.

(e) Interest and penalty on Municipal Taxes are not deductible.2.STANDARD DEDUCTION [Section 24(a)](a)From the net annual value computed the assessee is entitled to a deduction of 30%of the net annual value.(b)Since Standard Deduction is being provided, no deduction shall be provided in respect of actual expenses towards repairs, insurance premium, depreciation and any other expense.

(c ) In case NAV is negative no standard deduction shall be allowed.


3. INTEREST ON BORROWED CAPITAL {Section 24(b)] (a) Deduction on accrual basis

1. Interest on Loan shall be allowed as deduction on accrual basis.2.Interest on Loan shall be allowed only if loan has been taken and utilized for purchase, construction, repairor renewal of the house.

(b) Interest relating to period prior to completion of construction of house:Where the assessee takes a loan for construction of house then he is allowed theinterest on loan taken from the date of loan taken to the date of previous year prior to the previous year in which house is constructed in 5 successive financial years starting from the financial year in which the house is constructed/acquired.(c) Deduction subject to deduction of tax at source in certain casesInterest on borrowed money payable outside India shall not be allowed as deduction if tax has not been deducted or paid and in respect of which there is no person who could be treated as agent of the recipient for this purpose. (Section 25)

Example 1: Mr. A is the owner of a House at Kolkata.1. The property was let out for Rs. 20,000 p.m. during the previous year

2010-11.2. Expected Rent of the house is Rs. 2,00,0003. Municipal Taxes paid during the year were Rs. 40,000.4. Interest on money borrowed for the construction of the property amounted to Rs. 20,000.

375. Repairs and insurance charges amounted to Rs. 18,000 and Rs. 27,000 respectively.

Compute income from house property for the assessment year 2011-12.

Solution: Computation of Income from House property Rs." Actual Rent 2,40,000

Expected Rent 2,00,000Gross Annual Value 2,40,000Less: Municipal taxes 40,000Net Annual value 2,00,000Less: Deduction u/s. 24Standard deduction u/s. 24(a) [30% on Rs. 2,00,000] 60,000

Interest on Loan u/s. 24(b) 20,000 80,000Income from house property 1,20,000

Note: No deduction shall be allowed for repairs and insurance premium.


UNREALISED RENT

Explanation to Section 23(1) states that the actual rent does not include the amount of rent

which the owner cannot realise. But the following conditions must be satisfied before the

assessee can claim any amount as unrealised rent (Rule 4 of the Income Tax Rules):

1. The tenancy is bonafide ;

2. the defaulting tenant has vacated, or steps have been taken to compel

him to vacate the property ;

3. the defaulting tenant is not in occupation of any other property of the

assessee;

4. The assessee has taken reasonable steps to institute legal proceedings for the recovery

of the unpaid rent or satisfies the A.O. that legal proceedings would be useless.

PARTLY LET OUT AND PARTLY VACANT

Section 23 states that for the purposes of section 22, the Gross annual value of any property shall

be deemed to be—

(a) Expected Rent, or

(b) where the property is let out and was vacant during the whole or any part of the previous

year and owing to such vacancy the actual rent is less than Expected Rent, then such

Actual Rent shall be the Gross Annual value.

38PARTLY LET OUT AND PARTLY SELF OCCUPIED

A House Property can be partly let out and partly vacant in two manners - area wise or period wise.1. When the owner of the house lets out the house for a part of the year and lives in the house for part of the year then the house is said to be Partly let out partly self occupied - period wise. In this case the period for self occupation is irrelevant. The expected rent shall be taken for full year and actual rent only for the period let out.2. On the other hand when the a part of the house is let out and part of the house is self occupied then the house is said to be Partly let out partly self occupied – area wise.In the case the Expected Rent is taken only for the let out portion.

DEEMED OWNERSHIP (SECTION 27)Section 27 enumerates certain cases where a person shall be deemed to be the owner of the House Property even though the owner is some other person. Accordingly the Income from House Property shall be chargeable to tax in the hands of the deemed owner.


1. Transfer of house property to spouse/ minor child without adequate consideration : Where an individual transfers otherwise than for adequate consideration any house property to his or her spouse or minor child than the transferor shall be regarded as the owner of the property. However this provision shall be applicable where the transfer is made in connection with an agreement to live apart or a married minor daughter. 2. The holder of an impartible estate shall be deemed to be individual owner of all the properties comprised in the estate.

3. A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof;

4. 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 53 A of the Transfer of Property Act, shall be deemed to be the owner of that building or part thereof;

5. If lease is for 12 years or more then the lessee shall be deemed to be the owner of the property.

39Recovery of Unrealized Rent

Where a deduction has been claimed and the same has been allowed to the assessee in respect of unrealized rent and the assessee realizes that amount subsequently then the amount so realized shall be chargeable to tax under the head Income from House Property whether the assessee is the owner of that property or not in the year of recovery.

Example: Compute the amount of unrealised rent taxable in each of the following cases:Case 1: X claimed a deduction in respect of unrealised rent Rs. 5,000 in the Asst. Year 1999-2000. The Assessing Officer however did not allow the deduction on the ground that conditions stated in Rule 4 is not satisfied. He receives the entire amount in the current year.

Case 2: X claimed a deduction in respect of unrealised rent Rs. 8,000 in A.Y. 2003-04. The entire amount was allowed as deduction in the Asst. proceedings. During the previous year 2010-11 X recovered Rs. 6,000 in respect of the unrealised rent.


Answer:Case 1: Since Deduction has not been allowed in earlier years the recovery amount is also not taxableCase 2: The entire amount recovered Rs. 6,000 is taxable under the head House Property.

Arrears of Rent Received (Section 25B)

Any amount received as arrears of rent from such property, not charged to income-tax for any previous year, the amount so received, after deducting 30% of such amount, shall be taxable under the head "Income from house property" in the year in which such rent is received, whether the assessee is the owner of that property in that year or not.

Example 3 : X let out a house w.e.f 1/4/2008 to Mr. Y at a monthly rent ofRs. 5,000 p.m. for a period of two years. While renewing the agreement on 1/4/2010 it was provided that Y shall pay at a revised rent of Rs. 8,000 p.m. with retrospective effect from 1/4/2008. The house was completely destroyed on 15/4/2010 by fire. X received the amount on 1/5/2010. Discuss the treatment of arrear rent so received.

Answer:Arrears of Rent Received from 1/4/2008 to 31/3/2010 72,000[8,000 - 5,000] x 12 months x 2 yearsLess: Standard Deduction U/s 25B @ 30% 21,600Taxable Amount 50,400

40COMPOSITE RENT

Where the owner of the building gets along with the rent hire charges for other assets such as furniture or services charges for certain services such as security, lift etc. the total amount so received is known as Composite Rent. The tax treatment of Composite rent is as follows : -(a) Where Composite rent consists of rent for building and hire for other assets and the two rents are inseparable then the entire income shall be chargeable as Business Income or Other Sources (Supreme Court in the case of Sultan Bros. (P) Ltd. V CIT 1964 51ITR 353.)(b) Where rent for building and rent for assets are separable then rent for building is charged to tax under House Property and rent for assets under Other Sources.

(c) When composite rent consists of rent for building and it includes service charges for some services then composite rent is split into rent and service charges and rent is assessed under House Property and Service charges under Business Income.{The Calcutta High Court case of Kanak Investments Pvt. Ltd.)


Example 4 : Mr. Bharat owns a commercial Complex at Kolkata. He is in the business of letting out premises on rent. The property has been let out an annual rent of Rs. 18,00,000. This rent is inclusive of Rs. 1,00,000 towards of lift maintenance; Rs. 50,000 towards car parking facility and Rs. 1,50,000 towards other services. The Annual Municipal Value of the property is Rs. 16,00,000 and Municipal taxes paid amounted to Rs. 2,00,000. Interest on Loan amounted to Rs. 1,00,000. The expenses incurred towards the service provided amounted to Rs. 80,000. Compute Gross Total Income of Mr. Bharat.

Assessee: Mr. / Bharat Previous Year : 2010-11

Status: , Individua Assessment Year: 2011-12

Particulars Note Amount (Rs.) Amount(Rs.)

A Income From House Property

Gross Annual Value 16,00,000

Less: Municipal Taxes paid 2,00,000

Ne Annual Value 14,00,000

Less:Deduction U/s

Standard Deduction U/s 24 (a)[@30%of NAV 4,20,000

Interest on Loan U/s 24(b) 1,00,000 5,20,000

Income From House Property 8,80,000

Other Sources /Business Income

Servicing Income 3,00,000

Less: Servicing Expenses 80,000

Business Income 2,20,000

Gross total Income 11,00,000

Note 1: Calculation of Gross Annual ValueComposite Rent Rs. 18,00,000

Less: Service Charges


(i) Lift Maintenance 1,00,000(ii) Car Parking Facility 50,000(iii) Other Service Charges 1,50,000 3,00,000

Actual Rent (A ) 15,00,000Municipal Value – Excepted Rent (B 16,00,000Gross Annual Value 16,00,000

(Higher of A or B)

Property owned by Co-owners (Section 26)Where a property is owned by co-owners and their share is definite then the co-owners shall not be assessed as AOP in respect of income from House property but the share of each person shall be included in his Total Income. Further, each person shall be entitled for separate limits of Rs. 30,000 /Rs. 1,50,000 in respect of deduction for interest, if the house is self occupiedCases where Property Income is exempt from Tax

Income from House Property is exempt from tax in the following cases:1. Income from Farm House [Section 10(1) read with Section 2(lA)(c)]2. Property Income of a local authority [Section 10(20)]3. Property income of an approved scientific research association [Section 10(21)]4. Property income of a trade Union [Section 10(24)]5. Property income of a Political party [Section 13 A]6. Property income of a hospital or other medical association [Section 10(23C)]

42Apart from the above, students have already studied that Annual Value of one self occupied Property is NIL.

ILLUSTRATION OF PROPERTY INCOME FROM OUTSIDE INDIA

Example 5: Rajesh, an Indian owns a house in London, which he has let out at pound sterling 10,000 p.m. The municipal taxes paid to the Municipal Corporation of London, is pound 8,000 during the P. Y.2010-11. The value of one pound sterling in Indian rupee to be taken at Rs.82.50. Compute Rajesh's taxable income for the A.Y.2011-12.[Nov. 2010 Question - Modified]

Solution

Computation of income from house property of Mr. Rajesh for A.Y.2011-12Particulars Rs.

Gross Annual Value ($10,000x12x82.50) 99,00,000

Less: Municipal taxes paid ($8,000x82.50) 6,60,000


Net Annual Value (NA V) 92,40,000

Less: deduction u/s 24(a) 30% of NA V =30% of Rs. 92,40,000

27,72,000

Income from house property 64,68,000

43

PROFITS OR GAINS OF BUSINESS OR PROFESSION(Sections 28 TO 44D)

THE CHARGEABILITYSection 28: Income Chargeable under the Head Business/Profession

The following incomes shall be chargeable to income tax under the head "Profits and gains of Business or Profession":(i) the profits and gains of any business or profession which has been carried on by the assessee at any time during the previous year;(ii) Any compensation or other payment due to or received in certain cases from Government. (iii) income derived by a trade, professional or similar association from specific services performed for its members. (This is an exception to the normal rule that surplus arising to mutual concerns cannot be regarded as income chargeable to tax — as a person cannot do business himself)(iv) export incentives which include:


(a) profit on sale of import licences granted on account of exports.(b) cash assistance, by whatever name called, received or receivable

(c) duty drawbacks of customs and central excise(d) Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the duty remission scheme, under the EXIM Policy formulated under Foreign Trade (Development & Regulation) Act, 1992(e) Any profit on the transfer of the Duty Replenishment Certificate, being the duty remission scheme, under the EXIM Policy formulated under Foreign Trade (Development & Regulation) Act, 1992(v) the value of any benefit or perquisite, whether convertible into money or not, arising during the course of carrying on of any business or profession.(vi) any interest, salary, bonus, commission or remuneration due to or received by

a partner of a firm from the firm in which he is a partner to the extent it is allowed as deduction

in computation of the income of the firm.

(vii) any sum received under a Keyman Insurance Policy including the sum allocated by way

of bonus on such policy(viii) Income from Speculative Business. [For Detailed discussion refer chapter on Set Off

And CarryForward of Loss](ix) any sum, whether received or receivable in cash or kind, under an agreement

for (a)not carrying out any activity in relation to any business; or

44 (b) not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature.The above provisions shall not apply in the following cases(i)any sum received on of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head "Capital gains";

(ii)any compensation received under United Nations Environment Programme for depletion of Ozone Layer in accordance with agreement with Government of India.

Example: Mr. X and Mr. Y, both are engaged in manufacturing Ice cream. Mr. Y approaches Mr, X with an offer that he will pay Mr. X Rs. 10,00,000 in consideration of Mr. X discontinuing his business and not competing with him for next 10 years. This is known as a non-compete fees.

(x) any sum, whether the received or receivable, in cash or kind on account of any capital assets (other than land or goodwill or financial instrument) being demolished destroyed ,discarded or Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

transferred , if the whole of the expenditure on such capital asset has been allowed as deduction u\s 3 5AD.

Deemed Profits [Section 41]Recovery against any deduction U/s 41(1)Where (i) an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee(ii) and subsequently during any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof,(iii) the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession(iv) and accordingly chargeable to income-tax as the income of that previous year,(v) whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.The above mles are applicable even if remission or cessation of any liability arises by a unilateral act of the assessee.Sale of Capital assets used for Scientific Research: [Section 41(3)1Where any capital asset, used for Scientific Research without having been used for any other purpose is sold, and the sale proceeds together with the deduction allowed exceeds the amount of Capital Expenditure, such surplus or deduction allowed, whichever is less shall be chargeable as

45Business Income of the Previous year in which sale took place. This rule applies even if the business is not in existence in the previous year. Recovery of Bad Debts allowed as a deduction: [Section 41(4)1 Refer notes separately covered in Bad debts.Recovery after discontinuance of the business or profession [Section 176(3A)1Where any business or profession is discontinued by reason of the retirement or death of the person carrying on such business or profession, any sum received after the discontinuance of the business or profession is deemed to be the income of the recipient and charged to tax in the year of receipt.

DEPRECIATIONSection 32 allows deduction in respect of depreciation allowance resulting from diminution or exhaustion in the value of certain assets. The allowance of depreciation which is regulated by Rule 5 of the Income Tax rules is subject to the following conditions:

1. Asset must be tangible asset being building, plant & Machinery and furniture and fixture or intangible asset being patent, copyright, trademark license, franchise or any other commercial right of similar nature.


Buildins. No depreciation is allowed to the cost of land as the building refers only to the superstructure but not the land on which the building is erected. The term building includes roads, bridges, culverts, tubewells and wells.

Plant includes "Ships, books, vehicles, surgical equipments and scientific apparatus." It also includes computers.

2. The assessee must be owner of the asset3. The asset must be used during the previous year.

Rates of Depreciation

First year acquisition Subsequent yeaR

Put to use less than Fully rate of depreciation180days 180 days

Fully rate of Half theDepreciation normal rate

46Concept Capule 1: Determine the rate of depreciation I each of the following cases: Assume depreciation rete = 15%

(a) Asset purchased on 01/07/2010 but put to use of 01/12/2010

(b) Asset purchased on 02/10/2010

(c) Asset purchased on 01/07/2010 but put to use on 01/12/2011 d) Asset purchased on 01/07/2010 but put to use on 01/12/2012Block Concept Under Income Tax Act depreciation is charged under block concept. Block Refers to group of similar assets having the same rate of depreciation. For instance, if there are 10 buildings with 6 buildings having a depreciation rate of 5% and 4 building having a rate of 10% then it shall be considered as two blocks. As such depreciation the block shall be charged in the following manner:6 Building 5%.4 Building 10%.


4 Furniture 10%.[For assets to be in the same block, rate of depreciation and nature has to be same]Depreciation is charged in the following manner:Opening WDVAdd: Additions during the year.Less: sale proceeds of assets sold sold, discarded, demolished or destroyed during the previous year together with the amount of scrap valueClosing WDVSituation when block ceases to existIn the following cases no depreciation shall be charged.(i) When sale proceed exceeds the sum of Opening WDV and Additions. The resulting figure is termed as short term capital gain.Suppose opening WDV is Rs. 1,00,000 additions during the year is Rs. 50,000 and 1 asset in the block costing Rs. 25,000 is sold for Rs. 1,75,000 then the block of asset will be shown in the following manner:

Opening WDV on 1/4/2010 Rs. 1,00,000Add: Additions during the year Rs. 50,000

1,50,000Less : Sale value of one asset Rs. 1,75,000 restricted to Rs. 1,50,000

NilBalance Rs. 25,000 is Short term Capital Gain

47(ii) When all the assets in the block are sold. Resulting figure is short term capital gain or short term capital loss.

Rate of depreciation Buildings (residential) 5%Buildings (office/factory) 10%Furniture & Fixtures 10%Plant and MachineryBlock 1 -.Plant & Machinery and Motor Car 15%Block 2: Ship and vessels 20%Block 3: Motor Buses etc. which are used in a businessof running them on hire 30%Block 4: Computers including Computer Software and books(other than annual publication 60%Block 5: Air/ water pollution control equipments, Books which


Are annual publications and Books for asssessee running lendingLibrary 100%Block 6: Energy saving devices 80%

Block 7: New commercial vehicle acquired on or after 1-1-2010And put to use before 1-10-2010 50%Specified Intangible assets 25%Example 1 Gopichand Industries furnishes you the following information01.04.2010 Rs.

Block 1: Furniture (consisting of 10furniture) 5, 00,000

Block 2: Building (consisting of 3 buildings) 12,50,000

Acquired on 5.7.10 – 5 Furniture for 4,00,000

Sold on 7.12.10 – 15 Furniture for 10, 00,000

Acquirred on 10.01.2011 -2 Furniture for 3,00,000

Computers depreciation clime for A.Y.2011-12

48Solution: Rs. Rs.Block 1 (Furniture 10%)Opening WDV on 1.04.10 5,00,000Add: Assets acquired during the year

1. 5 Furniture on 5.07.10 – used for more than 180 days 4,00,000

2. 2 Furniture on 10.01.11 –used froLess than 180days 3, 00,000 7, 00,000


12,00,000Less: sale realization 10,00,000 Balance 2,00,000Depreciation @ 5% (A) 10,000

Block 2: Building (10%]Opening WDV on 1.04.10 12,50,000Depreciation @ 10% ( B) 1,25.000Total depreciation (A+B) 1,35,000

Some Questions and Answers on Depreciation

1. Whether it is mandatory to claim depreciation ?1. Explanation to Section 32 states that the provisions relating to depreciation shall apply whether the assessee claims depreciation in computing the total income or not. This means that even if the assessee does not claim depreciation while computing the total income the provisions of Section 32 shall apply and next year he can claim depreciation only on the reduced amount of WDV.2. State the circumstances when no depreciation is allowed under the Income Tax Act.

3. No depreciation shall be allowed on any Machinery or Plant if actual cost thereof

is allowed as a deduction in one or more years under an agreement entered into by

Central Government.

SPECIAL DEDUCTIONS

Expenditure on eligible projects or schemes[Section 35AC]1. Section 35AC provides deduction to an assessee equal to the amount contributed to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any project or scheme for promoting the social and economic welfare of, or the uplift of, the public.

492.Where the National Committee withdraws the approval granted to the institution/association for eligible project on prescribed conditions being violated the amount paid earlier and allowed as deduction shall be deemed to be the income of such company or authority or association or institution. But the assessee shall not be denied deduction in such a case.

Expenditure by way of payment to institutions carrying rural development programme [Section 35CCA]


U/s 35CCA, any assessee who is carrying on a business or profession shall be allowed a deduction of the amount of the expenditure incurred by way of payment of any sum:(i) to an association or institution, which has as its object, the undertaking of any rural development programme approved by the prescribed authority(ii) to an association or institution engaged in training of persons for implementing rural development programme.(iii) to National Fund for Rural Development set up by Central Government(iv) to the National Urban Poverty Eradication Fund set up and notified by the Central Government.The assessee shall not be denied deduction even if, after giving donation, the approval granted to theassociations has been withdrawn.

Expenditure on Scientific Research[Section 35]

The term Scientific Research means any activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries. The provisions regarding deduction of Scientific Research are explained below:(I) Donation/ Contribution to outsidersAny amount contributed to :(1) National Laboratory ; Indian Institute of technology or Research association or university, collegeor other institution which has its object the underatking of scientific research programme - 175% ofthe amont paid

2) Approved Indian company the main object of which is scientific research and development of the mount contributed.125%(3) Research association, University or college or other institution which has its object the undertaking of research in social science or statistical research - 125% of the amount paid.

1 .However, with a view to avoid multiple claims for deduction, the Act has provided that a company approved under the provisions of section 35(l)(iia) will not be entitled to claim weighted deduction of 200% under section 35(2AB). However, deduction u/s 35(1 )

502 (i) will continue to be allowed.

3 The assessee shall not be denied deduction even if, after giving donation, the approval granted to the associations has been withdrawn.In House Reserch: Particulars Company Assessee + Any other case


biotechnology/Manufacturing goods other than 11th Schedule + Agreement for Co-operative and audit with prescribed authority

A) Revenue expenditure(i) Current year expenses (all items)(ii)Expenditure of last 3 years - Materials and Salary to Research personnel- Other items(B) Capital ExpenditureFor current year and also of last 3 years (approval notrequired) :LandBuildingPlant and Machinery and

Other assets

200% of expenditure incurred

100%, if approved by prescribed authority

Not deductible Not deductible100%200% for current year and 100%for last 3 years

100%o of expenditure incurred

100%o, if approved by prescribed authority

Not deductibleNot deductible100%100%

AMOR TISA TION OF EXPENSES

Amortization of Preliminary Expenses [Section 35D]

(a) It is allowed as deduction only to Indian company or non-corporate resident assessee.(b) It is allowed as deduction in respect of expenditure incurred either at the time of commencement of business or on extension of existing undertaking or setting up of new unit.(c) It is allowed as deduction as l/5th of the qualifying amount over 5 successive years starting from the year in which business has commenced or extension is completed.

51(d) Qualifying amount is determined as under:

For of the following (i) 5% of cost of project(ii) actual expenditure incurred


(b) For Indian CompanyLower of the following

(i) amount actually incurred(ii) 5% of cost project or 5% of capital employed - whichever is higher

Expenses Qualifying for Deduction(a) For any assessee: Expenditure incurred in connection with(i) the preparation of feasibility report (ii) the preparation of project report (ii) conducting market surveys (iii) legal charges for drafting agreement between assessee and any other person for setting up business and (iv) engineering services related to the assessee's business, provided that in all the cases the work is carried on by the assessee himself or by a concern which is for the time being approved by the Board.(b) For Company Assessee: The following shall also be allowable in addition to the above expenses:(i) expenditure by way of legal charges for drafting the Memorandum of Association and Articles ofAssociation of the company ;(ii) printing of the Memorandum and Articles of Association(iii) registration fees of the company(iv) expenses in connection with the issue for public subscription of shares in or debentures of the company being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.(c) such other items of expenditure as may be prescribed.Definitions:

(a) Cost of the project” means

the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences or } the last day of the previous year in which the extension of the undertaking is completed or the new unit commences production, as the case may be.(b)"capital employed in the business of the company" means—

The aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the ' previous year in which the business of the company commences or as on the last day of

52

the previous year in which the extension of the undertaking is completed, or, as the case may be, the new unit commences * production or operation.

(c)"long-term borrowings" means—


(a)any moneys borrowed by the company from the Government or the IFCI or ICICI or any other financial institution which is eligible for deduction under section 36(l)(vii) or any banking institution, or (ii)any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India " of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred provide for the repayment thereof during a period of not less than seven years.

Section 35DD: Amortization of expenditure on amalgamation/demergerWhere an Indian Company, incurs any expenditure for amalgamation or demerger, the assessee shall be allowed a deduction equal to the l/5th of such expenditure for 5 successive years beginning with the previous year in which the amalgamation or demerger takes place.Section 35DDA: Amortisation of expenditure incurred under Voluntary retirement schemeWhere an assessee makes payment of VRS to its employees one-fifth of the amount so paid shall be deducted in 5 equal instalments.In case of amalgamation or demerger or conversion of company into LLP, deduction is allowed to the amlagmated or resulting company or LLP.Amortisation of Telecom License Fees (Sec. 35ABB)Section 3 5ABB provides for amortisation of capital expenditure incurred and actually paid by an assessee ( for acquiring any right to operate telecommunication services over the period of licence. The amortisation will be allowable in the previous year in which the licence fee is actually paid and the subsequent Previous year(s) during which the licence is in force.

DEDUCTIBLE AND NOT DEDUCTIBLE EXPENSES

Rent, rates, taxes, repairs and insurance of building [ Section 30]Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of buildings used by the assessee for the purpose of his business or profession. Where the assessee has sublet a part of the premises the allowance under this section would be confined to the difference between the rent paid by the assessee and the rent recovered from the sub-tenant. No notional rent shall be allowed as deduction if the assessee is himself the owner of the Building.

53However, the amount paid on account of the cost of repairs and the amount paid on the cost of current repairs shall not include any expenditure in the nature of capital expenditure.Repairs & Insurance of Machinery, Plant & Furniture [Section 31]


Section 31 allows deduction in respect of the expenses on current repairs & insurance of machinery , plant and furniture in computing the income from business or profession . However, the amount paid on accountof the cost of repairs and the amount paid on the cost of current repairs shall not include any expenditure inthe nature of capital expenditure.1.Section 36(l)(i) provides deduction in respect of insurance premium against risk of damage or destruction of stocks or stores, used for the purposes of business or profession.2 Section 36(1 )(i) provides deduction in respect of insurance premium paid by a federal milk co-operative society on the lives of cattle, owned by the members of a primary milk co-operative society affiliated to it.3. Section 36(l)(ib) provides deduction for insurance premium paid other than cash on the health of the / employees in accordance with scheme framed by the General Insurance Corporation and approved by the Central Government.4. Section 36(l)(ii) provides deduction in respect of Bonus or Commission paid to the employees. The deduction is allowed only if Bonus or Commission is paid to the employees not as profits or dividend. Further Bonus or commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing income tax return U/s 139.5. Employer's contribution to Recognised Provident Fund or Approved Superannuation Fund Section 36(l)(iv) provides deduction in respect of Employer's contribution to Recognised Provident Fund or Approved Superannuation Fund. The deduction is, however, subject to the provisions of Section 43B.6. Contribution towards approved Gratuity Fund: [Section 36(1)(v)]Section 36(1) (v) provides deduction in respect of employer's contribution towards

an approved gratuity fund created by him exclusively for the benefit of his employees under an irrevocable trust.

Employees Contribution towards Staff Welfare Schemes [Section 36(l)(va)]Section 2(24)(x) provides that any sum received by any taxpayer from his employees as contribution to provident fund or any fund for the welfare of such employees will be included in the taxpayer's income.Section 36(l)(va) provides that sums received from employees as contribution towards provident fund or any welfare fund of such employees will be allowed as deduction only if such sum is credited to their accounts before due date as per the provisions of Law.

54Interest on Borrowed Capital [Section 36(1)(iii)]


Section 36(l)(iii) provides deduction in respect of interest paid or payable on capital borrowed for the purpose of business or profession. The deduction is however subject to the provisions of Section 43B discussed later.Explanation to Section 36(l)(iii) provides that any amount of interest paid, in respect of capital borrowed, for acquisition or extension of existing business or profession (whether capitalised in the books of account or not) for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction. It has to be capitalised.The term interest is defined U/s 2(28A) to mean interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit money of any credit facility which has not been utilised.

Bad Debts [Section 36(1)(vii)]

As per Section 36(1) (vii) any amount written off as bad debts as irrecoverable in the accounts of the assessee for the previous year shall be allowed as deduction if:(a) such debt or part thereof has been taken into account in computing the income of the assessee of the previous year or earlier previous year or(b) It represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.Example.(i) Bad Debt on account of sales shall be allowed as deduction, because sales has been taken into account while computing the income of the assessee(ii) Bad Debt of interest receivable shall be allowed as deduction, because interest has been taken into account while computing the income of the assessee(iii) Bad debt of a loan in case of an assessee carrying on the business of banking or money lending shall also be allowed as deduction as point (b) above(iv) Bad debt of an advance given for purchase of a capital asset shall not be allowed as deduction as none of the conditions stated in point (i) or (ii) above is satisfied.Bad Debt Recovery:Taxable amount of bad debt recovery = (Amount received - Amount disallowed earlier) . Suppose bad debt claimed as deduction Rs.75,000 but bad debt allowed Rs.30,000. In subsequent year Rs.55,000 has been recovered.Amount taxable =

55

Family Planning Expenditure [U/s 36(1 )(ix)]


Family planning expenditure for welfare of employees

Company Assessee Other Assessee

Revenue Capital Revenue CapitalExpenditure Expenditure Expenditure ExpenditureFully deductible 1/5th over 5 Successive Fully deductible Claim depreciation- U/s 36(1) (ix) year U/s 37(1) u/s 32

Provisions under IT Act1. Section 36(l)(ix) provides deduction for any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees. If such expenditure or any part thereof is of a capital nature, one-fifth of such expenditure shall be deducted for the previous year in which it was incurred; and the balance thereof shall be deducted in equal instalments for each of the four immediately succeeding previous years.2. Where any family expenditure which is not allowed as deduction due to inadequacy of profit, shall be set off and carry forward as if it is unabsorbed depreciation.3. In the following cases, the provisions of Section 35 and 41 regarding capital expenditure on scientific research shall be applied:(i) When an asset purchased for promotion of family planning amongst employees is sold without putting it to some other use(ii) When such asset is used for the business of the company after it ceases to be used for family planning purposes.4. If deduction is claimed under this section, no deduction is available under any other provisions of the Act.

General Deduction [Section 37(1)]Section 37(1) states that any expenditure not being in the nature of capital or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed as deduction in computing the income chargeable under the head "Profits and Gains of Business or Profession".In order to claim deduction U/s 37(1) the following conditions must be satisfied:1. The expenditure should not be of nature as described under Sections 30 to 36.2. It should not be in the nature of capital expenditure.

563. It should not be personal expenditure of the assessee.4. It should have been incurred in the Previous Year.5. It should be in respect of business carried on by the assessee.


6. It should have been expended wholly and exclusively for the purpose of such business.7. It should not have been incurred for any purpose which is an offence or is prohibited by any law.Expenses not Deductible U/s 37(1)1. Payment for offence under any lawExplanation to Section 37(1) states that expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and therefore shall not be allowed as deduction U/s 37.2.Payment for advertisement to political parties

According to Section 37(2B), no allwance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.Note: CBDT vide its Circular No. F No. 204/70/75-IT (A- II) dated 10/5/1976 has clarified that the amount paid for acquiring a telephone and the security deposit paid shall be allowed as business expenditure. When the amount is returned to the assessee, the refund shall be treated as income of that year.What happens when Building, Plant, Machinery or furniture are used partly for business and partly for other purposes ?[Section 381In such a case only part of the expenses shall be allowed according to the fair proportion for which these are used for the purposes for the business.

Amounts Not Deductible [Section 40(a)]Notwithstanding anything contained in Sections 30 to 38, no deductions shall be allowed in respect of the following in computing the total income:1. any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable,to a Non Resident on which tax has not been deducted or, after deduction,- has not been paid during theprevious year, or in the subsequent year before the expiry of the time prescribed.However, if paid in subsequent year, then it shall be allowed as deduction in such subsequent year.2 any interest, commission or brokerage, rent, royalty,fees for professional services or fees for technicalServices payable to a resident, or amounts payable to a resident contractor or sub-contractor, on which tax isdeductible at source and such tax has not been deducted or, after deduction, has not been paid on or before

57the return filing dateProvided that where in respect of any such sum, tax has been deducted in any subsequent year after the due date mentioned above then it shall be allowed as deduction in the year of payment.


3.(i) Income Tax (ii) Wealth Tax (iii) Fringe Benefit Tax paid by the asses It is to be noted that anysum paid outside India and eligible for relief of tax U/s 90/90A/91 is not allowable.4. "Salaries" paid outside India on which no tax has been deducted at source5. any payment to provident fund established for the benefit of the employees of the assessee, unless the assessee has made specific arrangements to ensure tax is deducted at source when payment is made to the employees from that fund.6.Income Tax actually paid by any employer on non monetary perquisites of employees

EXPENSES DISALLOWABLE U/S 40A 1. EXCESS PAYMENT TO RELATIVES [SECTION 40A(2)]

Section 40A(2) provides that where the assessee incurs any expenditure in respect of which a payment has been made or is to be made to a relative or to an associate concern so much of the expenditure as is considered to be excessive or unreasonable shall be disallowed by the Assessing Officer.(i) The word 'Relative' means for an individual spouse, any brother, sister, lineal ascendant or descendent of such individual;(ii) Where the assessee is a firm, H.U.F. or an AOP the relationship will have to be reckoned for the purpose, with reference to the partners of the firm and the members of the family or association(iii) Where the assessee is a company the relationship will have to be reckoned for the purpose, with reference to the directors or persons having substantial interest in the company.Meaning of Substantial InterestA person shall be deemed to have a substantial interest in a business or profession -In a case where the business or profession is carried on by the Company, such person is, at any time, during the previous year, the beneficial owner of equity shares carrying not less than 20% voting power.

- In any other case such person is, at any time, during the previous year, beneficially entitled to not less than 20% of profits.-

2. PAYMENTS EXCEEDING Rs. 20,000 BY CASH/BEARER CHEQUE ETC.

According to the provisions of Section 40A(3), where an assessee incurs an expenditure in respect of which payment is made in a sum exceeding Rs. 20,000 (Rs.35,000,in case of payment made for plying, hiring, or leasing goods carriage)otherwise than by an account payee cheque

58or an account payee bank draft on a single day the entire expenditure shall not be allowed as deduction. But rule 6DD permits payments in certain cases otherwise than by an account payee cheque or an account payee bank draft in a limit exceeding Rs. 20,000.


(a) Where the payment is made to—(i) the Reserve Bank of India or any banking company.(ii) the State Bank of India or any subsidiary bank.(iii)any co-operative bank or land mortgage bank;(iv)any primary agricultural credit society or any primary credit society.(v) the Life Insurance Corporation of India.(b) Payments to Central and State Governments which under the rules framed by the Govt, are to be made in legal tender(c) Where the payment is made by—(i) any letter of credit arrangements through a bank;

(ii) a mail or telegraphic transfer through a bank;(iii) a book adjustment from any account in a bank to any other account in that or any other bank;(iv) a bill of exchange made payable only to a bank;(v) the use of electronic clearing system through a bank account;(vi) a credit card;(vii) a debit card.(d) Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;(e) Where the payment is made for the purchase of—(i) agricultural or forest produce; or(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or(iii) fish or fish products; or(iv) the products of horticulture or apiculture,to the cultivator, grower or producer of such articles, produce or products.(f) Where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products.(g) Where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;

(h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50,000.

59(i) Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee—


(a) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and(b) does not maintain any account in any bank at such place or ship;

(j) Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.(k) Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.

(1) Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

PROVISION FOR GRATUITY [SECTION 40A(7)]

Section 40A(7) of the Income Tax Act, provides that no deduction would be allowable for provision for gratuity to his employees on termination of their employment. Following shall however be allowed as deduction:(i) Any provision made by the assessee for the purpose of payment of a sum by way of contribution towards an approved Gratuity Fund or(ii) the amount of gratuity that has become payable during the previous year to employees.

Certain Deductions to be allowed on payment basis only (Sec43B)The following deductions shall be allowed only if they are paid during the relevant previous year or before the due date of filing of return:1. Any sum payable by way of tax, duty, cess or fee, by whatever name called under any law for the time being in force2. Any sum payable as bonus or commission to employees for services rendered3. Any sum payable as interest on any loan or borrowing from a Public FinancialInstitution (i.e. ICICI, IFCI, IDBI, LIC and UTI) or a state financial corporation or a state industrial investment corporation4. Interest on loan or advance taken from a scheduled bank including a co-operative bank.5. Any sum payable by an employer in lieu of leave at the credit of his employee6. Any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.Note: If payment is not made within the relevant date stated above then no deduction shall be allowed in computing business income of that year. But the same shall be allowed as deduction in the year of payment

60It is to be noted that deduction in respect of interest to Scheduled Banks (including co-operative Banks) or Financial Institutions shall be allowed only if such interest has been


actually paid and any interest which has been converted into loan or advance shall not been deemed to have been actually paid.Method of AccountingSection 145 provides that income under the head "Profits and Gains of Business or Profession" or "Income from Other Sources" has to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.Method of Accounting in certain cases [Sec. 145A]Notwithstanding anything to the contrary contained in section 145,-(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the

income chargeable to income under the head "PGBP" shall be-(i) in accordance with the method of accounting regularly employed by the assessee ; and

(ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called ) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation to Section 145A provides that such levies should be included notwithstanding any right arising as a consequence to such payment. For instance, MOD VAT credit, if any, will not be deductible.

PRESUMPTIVE TAXATION SCHEME

Sectiion 44AD: Special provision for computing profit and gains of business on

presumptive basis

The salient features are as follows :-

1. The Scheme shall be applicable to individual, HUFs and partnership firm excluding

limited liability partnership firm. It shall also not applicable to an assessee who is

avilaing deduction under section 10A, 10AA,B,BA,or deduction under any provisions of

chapter VIA under the heading “C.- Deduction in respect of certain income” in the

relevant Assessment Year.

2. Section 44AD provide that an assessee engaged in any business (excluding a business

already coverd u/s 44AE may opt for the presumptive taxation schemed if his gross

Turnover/ Gross receipt do not exceed Rs. 60Lacs. Incase the gross turnover / receipt

excess Rs. 60 lacs than the assessee shall have to opt for the normal provisions.

3. The income from the above mentioned business will be estimated at 8 percent of the

gross receipt A taxpayer can voluntarily declare a higher income in his return,

61


4. All deduction under section 30 to 38 including depreciation shall be deemed to have

been already allowed and no further deduction will be allowed under this section.

5. However , in the case of firm, deduction in respect of salary and interest to Partner

under section 40(b) shall be given . depreciation in respect of the said assets for the said

business shall be deemed to have been allowed and WDV of the assets shall be computed

accordingly.6. An assessee opting for the above scheme shall be exempted from payment of advance tax

related t" %» such business under the current provisions of the Income tax Act.7. An assessee who files the return, estimating income at 8 percent of gross receipts, or a

higher income, is neither required to maintain books of account U/s 44AA, nor required to get his accounts audited U/s 44AB.

8. Where an assessee claims his income to be lower than the deemed profits and gains, then he must 0* maintain books of account and other documents under section 44AA and the assessee gets his accounts audited under section 44AB.

Business of plying, hiring or leasing goods carriages [Sec 44AE]The scheme is similar to that of Section 44AD. The scheme does not apply to assessees owning more than 10 goods carriages. The scheme is not applicable to the persons who do not own any truck but operate on trucks taken on hire.The income from each goods carriage being a heavy goods vehicle is estimated at Rs. 5000 for every month (or part of the month) during which the goods carriage is owned by the assessee. The income from each goods carriage, other than a heavy goods vehicle is estimated at Rs. 4,500 for every month (or part ofthe month) during which the goods carriage is owned by the assessee. The assessee can, however, declare higher income.OTHER BUSINESS SUBJECTED TO PRESUMPTIVE TAXATION SCHEME

SECTION NATURE OF BUSINESS PRESUMPTIVE BUSINESS INCOME44B Non Resident engaged in 7.5% of Turnover – Mondatory Shipping Business44BB Non Resident engaged in the 10% of Turnover Business exploration of Mineral oil44BBA Non Resident engaged in the business 5% Trunover - Mandatory Of Aircraft operation


62

BOOKS OF A CCOUNTS AND A UDITMaintenance of accounts by certain persons [Sec.44AA]For compulsory maintenance of books of accounts the tax payers may be grouped as under:A. If the assessee is engaged in specified profession and his gross receipts exceeds Rs. 1,50,000 in each ofthe preceding 3 immediately previous years then he shall maintain the books of accounts as prescribed under Rule 6F.In any other case, he shall maintain such books of account and other documents as may enable the Assessing Officer to compute their taxable income under the Income-tax Act.B. If the assessee is engaged in business or a non-specified profession and their income from such business / profession exceeds Rs. 1,20,000, or the total sales, turnover, or gross receipts thereof are in excess of Rs. 10,00,000 in any of the three years immediately preceding the previous year then he shall maintain such books of account and other documents as may enable the Assessing Officer to compute their taxable income.In any other case, they need not maintain any books of accounts.C. Books of Accounts shall also be required to be maintained if an assessee is covered under section 44AD and 44AE and it is claimed that the profits and gains from the business are lower than the presumptive income under these sections."Specified Profession" - For the purpose of section 44AA and rule 6F legal, medical, engineering, architectural, accountancy, technical consultancy, or interior decoration or any other notified professions [i.e., authorised representative, film artist, company secretary and information technology] are specified professions."Non-specified profession"- A non-specified profession is a profession other than a "specified profession".In case of newly set up businesses/profession the estimated Gross Receipts/Net Income shall be considered.Requirement of compulsory maintenance of books of accountPersons falling in Category A above are required to keep and maintain the books of accounts and other documents as under: a. cash booka. a journal, if the accounts are maintained according to the mercantile system of accounting ;b. a ledger;c. carbon copies of bills, serially numbered exceeding Rs.25,d. original bills wherever issued to the personApart from the aforesaid books of account and documents, a person carrying on medical profession is required to keep the following additional books/ documents a. a daily register in Form No. 3C and


63b. an inventory under broad heads, as on opening and closing days of the previous year, of the

stock ofdrugs, medicines , and other consumable accessories used for the purpose of his profession.

The following points also need consideration :

The aforesaid books of account and documents should be kept and maintained by the person at the place where he is carrying on the profession The aforesaid books of account and documents should be kept and maintained for a period of 6 years.

Audit of accounts of certain person [Sec.44AB]As per the provisions of Section 44AB, the following persons must get their accounts compulsorily audited by a chartered accountant by the specified date and also furnish the audit report in the prescribed form on or before the specified date:1. A person carrying on business; if the total sales, turnover or gross receipts in business

exceeds Rs.60 lakhs in any previous year.2. A person carrying on profession, if his gross receipts in profession exceed Rs.15 Lakhs in

any previous year.3. An assessee covered under 44AE/44AD who claims that the profits and gains from the

business are lower than the profits and gains computed in accordance with these sections.

PARTNERSHIP FIRM

Total Income of the partnership firm will be determined as a separate entity and it will be computed under various heads of Income. But while computing Business Income a deduction shall be allowed to the firm on account of interest or remuneration payable to partners. Section 40(b) deals with the amount which are not deductible in the hands of the firm. Therefore, deductions on account of interest and remuneration to partners can be claimed U/s 36 or 37 subject to the conditions laid in Section 40(b).

Interest to PartnersThe Act does not make any distinction between interest to partner on capital or loan. Further interest is allowable whether paid to working or non, working partners. Both are treated in the same manner. The conditions for allow ability of interest to partners are:(i) Interest must be authorized by the deed and (ii) Payment must pertain to the period after the deed.The amount of interest allowable shall be lower of(a) 12% p.a. simple interest(b) amount actually paid as per deed.NOTE: Interest on drawings from partners is treated as income of the firm irrespective of the rate of interest.


64Remuneration to Partners

(i) Payment of salary, bonus, commission or remuneration by whatever name called to a non-working partner shall not be allowed as deduction.(ii) Payment of remuneration to working partners and interest to any partner shall be allowed as deduction only when it is authorized under Partnership deed.

(iii) The amount of remuneration paid to all the partners in aggregate shall not exceed the

following amounts:

On the first Rs. 3,00,000 of the book profit Rs. 1,50,000 or 90% of book profit whichever Or in case of a loss is more. On balance @60%Book profit means profit as computed in accordance with the provisions but before remuneration paid to partners.Treatment in the hands of the Partner1. Share of Profit of the partner in the total income of the firm is exempted U/s 10(2A).2. Interest and remuneration to partner shall be taxable in the hands of the partner under the head Business/Profession only to the extent the firm gets deduction for the same

Interest to representative Partner When an individual is a partner in a firm on behalf of or for the benefit of any other person he is said to be a representative partner. Interest paid to such individual as partner in representative capacity and to the person so represented shall be governed by the provisions of Section 40(b). But interest paid to such individual in other capacity shall not be governed by Section 40(b).

Example: X is the Karta of X(HUF). On behalf of the HUF he is a partner in M/s XYZ.

Case 1 : X introduces Rs. 1,00,000 as capital and Rs. 40,000 as loan to firm - both carrying interest @ 15% -both on behalf of HUF.

Answer: In the above case only interest @ 12% shall be allowed.Case 2 : X introduces Rs. 2,00,000 as loan in his personal capacity @ 15%>.Answer: In the above case only interest @ 15% shall be allowed.

SPECIAL CASES OF DEPRECIA TION1. Computation of Depreciation in case of Amalgamation etc. - Depreciation on the basis of number of days of use.

Where in the previous year there takes place:(i) Succession of a partnership firm by a company as per Section 47(xiii) or of a proprietary concern by a


Company65

(ii) Succesion of private limited company or unlisted public company by LLP(iii) Succession of any business other than death as per Section 170or(iv) Amalgamation or demerger of Company, than

1. The depreciation shall be at first computed as if amalgamation, demerger, succession etc has not taken place.2. Such deduction shall be apportioned between the transferee and transferor Company in the ratio of the number of days for which the assets were used by them.2. Actual Cost in certain in cases

Actual Cost means actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. However in the following cases the actual cost for the purposes of Depreciation shall be a notional cost to the assesse

Expln. to S. 43(1)

Case Notional actual cost to the assessee.

1 Asset used in business after it ceases to be Used for scientific research

Actual Cost to the assessee as reduced by the amount of deduction

2 Asset acquired by way of gift or inheritance Actual Cost to the previous owner less the depreciation allowable on that asset had it been the only asset in the relevant block.

4A Sale and lease back transaction Actual cost of the asset in the hands of the lessor shall be the same as the W.D.V. of the said asset to the seller at the time of transfer thereof.

5 Buildings brought into use for business purpose subsequent to its acquisition

Actual cost of the asset less all depreciation that would have been allowable had the, building been used for business since its acquisition

In case of conversion of company into LLP referred to in 47(xiiib)

The actual cost of the block of assets for LLP shall be WDV of the block of the assets of the company on the date of conversion

9 Actual cost of an asset in which the assessee is entitled to MODVAT(CENVAT)

Actual Cost less duty of excise/customs for which credit of MODVAT has been taken.


10 Where actual cost of an asset acquired by the assessee has been met, directly or indirectly, by the Central Government or State Government or any Authority established under any law or by any other person in the form of subsidy or grant or reimbursement

(i)if the subsidy/grant/reimbursement is directly relatable to the asset, such subsidy shall not be included in the actual cost or (ii) if the subsidy/grant/reimbursement is not directly relatable to any particular asset, such subsidy shall be apportioned to that particular asset in the following manager cost of the particular assets x amount of subsidyTotal cost of asset in respect of which subsidy is recevid

Example 2: Mr. X purchased a house property on December 12, 2008 for Rs. 10, 00,000. Till May 1, 2010, the same was self occupied as a residence. On this date the said building was brought into use for the purpose of medical profession. What is the depreciation allowable for the A.Y. 2011-12 assuming he owns no other building?Solution: Purchase of House Property on December 12, 2008= 10,00,000Less: Depreciation @ 5% (since used for less than 180 days) 50,000WDV on 1/4/2009 9,50,000Less: Depreciation @ 10% 95,000WDV on 1/4/2010 8,55,000Less: Depreciation 85,500WDV on 1/4/2011 7,69,500Hence depreciation allowable = 85,500

3. Additional Depreciation in case of new plant and MachineriesSection 32 provides for an additional depreciation of 20% on the actual cost of new plant and machinery (other than ships and aircraft), which has been acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing. If however the asset is put to use for less than 180 days in the year of acquisition the rate of additional depreciation shall be 10%. Such further sum of additional depreciation shall be deductible from WDV of the asset.

67Plants on which additional depreciation shall not be allowed:

(i) Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or


(ii) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or(iii) any office appliances or road transport vehicles; or(iv) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year, (V) Ship or aircraft

4. Depreciation on Straight line basis in the case of Power UnitsAn assessee engaged in the generation of power or generation and distribution of power can claimdepreciation either on straight line basis or on the basis of Written down value. The option is to be exercised before the due date of the furnishing of return and option once exercised shall be final. It is to be noted that in case the assessee opts for straight line method then the depreciation shall be charged on individual assets and not block of assets.

Treatment when asset on which Straight line method of depreciation is followed is transferredWhen an asset of a power unit on which straight line method of depreciation has been claimed is sold, discarded, demolished or destroyed in the previous year then1. If the sale proceeds of the asset is less than the written down value the shortfall can be claimed by the assessee as Business Loss (Terminal Depreciation) provided: (i) the asset is used by the assessee for some time during the previous year in which the asset is sold, (ii) It is actually written off in the books of accounts.2. If the sale proceeds exceeds written down value of the asset the amount of excess shall be chargeable as Business Income ( Balancing Charge) subject to the original cost. The amount in excess of the original cost shall be chargeable as Capital Gains.

Example 3: M/s Power Failure Ltd. is engaged in the generation and distribution of power. It charges straight line depreciation on its plant. On 1/4/2010 the written down value of the plant is Rs. 872300 (The original cost of the plant is Rs. 10,00,000). Discuss the treatment in each of the following cases.(a)The company sells its plant on 10/4/2010 for Rs. 11,00,000(b) The company sells its plant for Rs. 5,72,300 on 10/4/2010 (i) without using it in 2010-11 and (ii) using it for 10 daysSolution(a)Rs. 1,27,700 [= Rs. 10,00,000 - Rs. 8,72,300] shall be treated as Business Income & Rs. 1,00,000 [Rs. 11,00,000 -10,00,000] shall be treated as Capital Gain

68(b) (i) Rs. 3,00,000 shall be treated as short term capital loss and (ii) Rs. 3,00,000 shall be as allowable as terminal depreciation.5. In case of partly agricultural and partly business Income


Explanation 7 to section 43(6) provides that where the income of the assessee is derived, in part from agricultural and in part from business chargeable under the head "PGBP", for computing the W.D.V. of the assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire income is derived from the business of the assessee under the head PGBP and the depreciation so computed shall be deemed to be the depreciation' actually allowed under this Act.Miscellaneous Provisions1. Tea Development Account, Coffee Development Account and Rubber

Development Account (Section 33AB)The provisions of this section are applicable to an assessee carrying on business of growing and manufacturing tea or coffee or Rubber in India and the assessee has, before the expiry of 6 months from the end of the previous year or before furnishing the return of income, whichever is earlier—

(a) Deposited any amount with National Bank for. Agricultural and Rural Development in an account (hereafter referred to as 'the special account) maintained by the assessee with that Bank in accordance with, and for the purposes specified in, a scheme approved in this behalf by the Tea Board or Coffee Board or Rubber Board

(b) deposited any amount in Deposit Account opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Tea Board or Coffee Board or Rubber Board with the previous approval of the Central Government.

On making the deposit within the stipulated time, the assessee will be entitled to a deduction (such deduction being allowed before set off of any unabsorbed losses of previous years) equal to the amount of deposit which will, however, be restricted to 40% of the profits of such business.

Example 4: R Ltd. is engaged in the business of growing and manufacturing tea in India. For the previous year ending on 31.3.2011 its composite business profits before allowing deduction u/s 33AB are Rs.60,00,000. On 1.9.2010. it deposited a sum of Rs. l 1,00,000 in the Tea Development A/c. During the previous year 2004-05, R Ltd. had incurred a business loss of Rs.14,00,000 which has been carried forward.

69Solution:

Computation of Total Income of R Ltd.Previous year 2010-11 (Assessment year 2011-12)

PARTICULARS AMT (Rs.)


Composite profits before allowing deduction u/s 33AB 60,00,000Less: Deduction u/s 33AB 40% of Rs.60,00,000 orRs. 11,00,000, whichever is less11,00,000 49,00,000Less: 60% of Rs.49,00,000 being agricultural income 29,40,000Non-agricultural business income taxable u/s 28 19,60,000Less: B/F Business Loss 14,00,000Taxable business income 5,60,000

Discount on Zero Coupon Bond [Section 36(l)(iiia)

Section 2(48) provides that a zero coupon bond must satisfy the following conditions:1.it is a bond issued by the infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank.

2. In respect of such bond, no payment or/benefit is received or receivable before maturity/redemption from infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank.3.Such bond is specified by the Central Government by notification in the official gazette.

Tax treatment in the hands of the company issuing such bondsDiscount shall be allowed as deduction on pro rata basis over the period of life Of the bond commencing from the date of issue of the bond and ending on the Date of redemption or maturity of such bond. Discount means the difference Between amount received and the amount payable on maturity by the issuing company.Example : X Ltd., an infrastructure Co. issued 10,000 ZCB @ 100 per bond. These bonds are issued on 1/8/2010 and shall be redeemed on 1/8/2013 @ Rs. 136 per bond.Solution : Total discount = 10,000 x Rs. (136 - 100)

- Rs. 3,60,000Discount p.m = 3,60,000/36 = Rs. 10,000Deduction2010-11 = 10,000 x 8 months = 80,0002011-12 = 10,000 x 12 months = 1,20,0002012-13 - 10,000 x 12 months = 1,20,0002013-14 = 10,000 x 4 months = 40,000

70SECTION 35AD: DEDUCTION IN RESPECT OF EXPENDITURE ON SPECIFIED BUSINESSSpecified Business


Deduction under section 3 5 AD is available only in the case of a "specified business" given belowSpecified business Who should own

the business

Approval (if

any)

Datecommencement

Setting up and operating a

cold

chain facility

Any person Not required On or after 1-4-2009

Settingupand operatinga

warehousing facilityfor

storage of agricultural

produce.

Any person

Not required On or after 1-4-2009

Laying and operating a

crosscountry natural gas or

crude or petroleum oil

pipeline network for

distribution, including

storage facilities being an

integral part of such

network.

An Indian

company or a

consortium of

Indian

companies or an

authority/Board/

corporation

established

under any

Central or State

Act

Should be

approved by

Petroleum and

Natural Gas

Regulatory

Board

andnotified by the Central Govt

•On or after 1-4-2007 in

the case of laying and

operating a crosscountry

natural gas pipeline

net-work

distribution or storage

•In other cases, on or

after 1-4-2009

Building and operating

anywhere in India a new

hotel of two star or above

category

Any person On or after 1.04.2010

Building and operating anywhere in the a new hospital with at least 100 beds for patital

Any person Onor after 1.04.2010

Developing and operating

a

Any person On or after 1.04.2010


housing project for slm

redevelopment

rehabilation in accordance

with scheme framed by

Government

"Cold chain facility" means a chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce.QUANTUM OF DEDUCTION- 100 per cent of capital expenditure incurred wholly and exclusively for the purpose of specified business carried on by an assessee is deductible in the previous year in which the expenditure is incurred. However, this is subject to the following two propositions -Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under section 35AD.

(ii) Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of any specified business, shall be allowed as deduction during the previous year in which the assessee commences the operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date of commencement of operation.Additional Deduction: If operation of the business of laying and operating a cross-country natural gas distribution network is commenced during 1-4-2007 and 31-3-2010, the capital expenditure (not being for acquiring land or goodwill or financial instrument) incurred before 1-4-2010 (to the extent not allowed as deduction under any section earlier) will be allowed as additional deduction under section 3 5AD for the assessment year 2011-12.

CONSEQUENCES OF CLAIMING DEDUCTION U/S. 35AD-The following consequences should be noted -

(a) Where in respect of the specified business the assessee has claimed deduction then no deduction shall be allowed in respect of such business under the provisions of Chapter VIA under the heading "C-Deduction in respect of some income" for the same or any other assessment year.

72(b) No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the assessee under any other provisions of the Income-tax Act.(c) Any sum received or receivable on account of any capital asset, in respect of which


deduction has been allowed u/s 3 5AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee and chargeable to income-tax under the head "Profits and gains of business or profession". [Insertion of clause (vii) to section 28](d) Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed; the same will be carried forward for set off against profits and gains from any specified business in the following assessment year and so on. [Insertion of Section 73A](e) Explanation 13 inserted to section 43: As per Explanation 13 the actual cost of any capital asset on which deduction has been allowed or is allowable to the assessee under section 35AD, shall be treated as 'nil',-

(a) in the case of such assessee; and(b) in any other case if the capital asset is acquired or received, -

by way of gift or will or an irrevocable trust; (ii) on any distribution on liquidation of the company; and (iii) by such mode of transfer as is referred to in clause (i), (iv), (v), (vi), (vib), (xiii) and (xiv) of section

SL

No.

Particulars Allow

ance

Remarks

1 Cost of shifting the Plant to

another place

No Capital Expenditure [Sitalpur Sugar

Works Vs.

2 Annual sum paid for use of goodwill Yes Revenue Expenditure [Devidas Vithldas & Company. Ltd. Vs. Commissioner of Income

Tax]

3 Payment of royalty correlated

with production

Yes Revenue Expenditure [Mewar Sugar

Mills Ltd.

Vs. Commissioner of Income Tax J

4 Advertisement expenditure by putting

a neon sign board

Yes Expenditure on Neon sign

board is Capital Expenditure

and hence not allowable.

5 Embezzlement of cash by an

employee Yes Revenue

Expenditure[Circular No.35D

of Board]

6 Loss caused by advance given

to supplier of a raw material

and which is subsequently

Yes Revenue Expenditure [Commissioner

of Income Tax VS Mysore Sugar

Company Ltd.]


forfeiteed

7 Amount spent for suit filed against a

person for infringing trademark.

Yes It is a well established principle that

any amount spent for protection of an

asset is a Revenue Expenditure. Such

an expenditure is for commercial

expediency and hence allowable.

8Sum paid for training of

Employees

Yes Revenue Expenditure [Motor Sales

vs. Commissioner of Income Tax ]

9 Travelling expenses of a Director paid

on a foreign tour for negotiation of

purchases of a machinery

Yes Revenue Expenditure. [ Bralco Metal

Industries Pvt. Ltd.]

10 Compensation paid to window and children of a deceased employee as per order of court

Yes

Revenue Expenditure

11 Stock lost-destroyed by fire Yes Revenue Expenditure[Commissioner

of Income Tax vs. K.T.M.S.

Mahmood]

12 Interest paid on money borrowed for

payment of dividend

Yes Commissioner of Income Tax Vs.

Changdeo Sugar Mills Ltd.

13 Consultancy fees paid for improvement

of quality

Yes

Commissioner of Income Tax Vs.

Praga Tools Ltd.

14 Replacement cost of petrol engine by

diesel engine

Yes Commissioner of Income Tax Vs.

Hindustan

Sanitary ware and Industries Limited.

74

CAPITAL GAINS


CHAPTER 1: INTRODUCTIONThe Chargeability TSec. 45(1)1Any profit or gain arising from the transfer of a capital asset is chargeable to tax under the head "Capital gains" in the previous year in which the transfer took place, if it is not eligible for exemption under sections 54 to 54GA.Meaning of capital asset [Section 2(14)1The expression capital asset means property of any kind held by an assesses, whether or not connected with his business or profession. However, the following assets are excluded from the definition of "capital asset":a. any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession ;b. personal movable effects. However, the following shall be regaded as capital Assets:(1) Jewellery; (2) archaelogical collections (3) drawings (4 ) paintings (5) sculptures (6) any work of art.c. agricultural land in India provided it is not situated -

(i) in any area within the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more(ii) in any areas specified by the Government i.e. any area within 8 kms of local limits of

Municipality or Cantonment Boardd. 6 1/2 percent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; e. Special Bearer Bonds, 1991 ; and f. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999Explanation to Section 2(14) states that "jewellery" includes—(a)ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;(b)precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn \nto any wearing apparel

ALL CAPITAL ASSETS EXCEPT

Stock in Trade Personal Movable Effect Agricultural land in Rural AreaExample:

751. Motor Car meant for personal use is not a capital asset as it is a moveable personal effect and consequently there will be no capital gain on sale/transfer of Motor Car.2. Mr. X sells his residential House. Since House is an immoveable property, it is a capital


asset, even though used for personal use.3. Mr. X sells his Agricultural Land in Sri Lanka. Since the land is situated outside India is a Capital Asset.4. If the agricultural Land is located in India but in an area within jurisdiction of municipality, say in Kolkata, then also it is a capital asset.5. Mr. X sells his Land in a Village. The land was let out to a person who used it for agricultural purpose. In the given case the land is an agricultural land and therefore is not a capital asset. What is to be seen is the purpose for which the land is used and not whether the owner uses it for agricultural purpose or not.Transfer fSection 2(47)] Transfer, in relation to capital asset, includes:(i) the sale, exchange or relinquishment of the asset; or(ii) the extinguishment of any rights therein; or(iii) the compulsory acquisition thereof under any law;(iv) Conversion of capital asset into Stock in trade.(v) Any transaction involving possession in part perfonnance of the contract of the Nature referred to in Transfer of Property Act; or(vi) Any transaction which has the effect of transferring, or enabling the enjoyment of any immoveable property.(vii) The maturity or redemption of a zero coupon bond

CHAPTER 2: EXEMPTIONS UNDER CAPITAL GAINS

Transactions which do not constitute transferFor the purpose of section 45, the following transactions are not regarded as transfer :a. distribution of assets in kind of a Company to its shareholders on its liquidation [sec 46(1)]

b. any distribution of capital assets in kind by a Hindu undivided family to its

members at the time of totalor partial partition [sec. 47(i)]

c. any transfer of a capital asset under a will or an irrevocable trust or a gift [sec.47 (iii). However, transferunder a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a C Company, to its employees under the ESOP shall be deemed as "transfer".

76


d. any transfer of a capital asset by a company to its wholly owned Subsidiary Company or vice versaprovided the transferee Company is Indian Company. [Section 47(iv)]. The exemption shall however be withdrawn if:

(i) Such capital asset is converted by the transferee company into stock in trade at any time before theexpiry of 8 years from the date of transfer of the capital asset(ii) the holding company ceases to hold the entire share capital of the subsidiary company for a period of 8 years from the date of transfer.

e. any transfer, in scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the latter company is an Indian company [Section 47(vi)]

f. Any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under Banking Regulation Act. [Section 47(viaa)]

g. 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 25 per cent of the shareholders of the amalgamating foreign company continue 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 [Section 47(via)]

h. any transfer in a demerger of a capital asset by the demerged company to resulting company provided that resulting company is an Indian company .[Section 47(vib)]

i. any transfer of shares held in an Indian Company by a demerged foreign company to the resulting foreign company if the following conditions are satisfiedi) the shareholders holding not less than three-fourths in value of shares of the demerged foreign company continue to remain shareholders of the resulting foreign company ;

ii) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated

77


j. any transfer or issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking [see 47(vii)]

k. 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)]

J. any transfer of a capital asset by a non-resident of foreign currency convertible bonds or shares referred to in section 115AC(1) held by him to another non-resident where the transfer is made outside India. [Sec.47(viia)]

m. 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

n. any transfer by way of conversion of bonds or debentures (or debenture stock or deposit certificates) of a company into shares or debentures of that company. [Sec 47(x)]

o. any transfer by way of conversion of foreign currency exchangeable bonds(FCEBs) into shares or debentures of any company. [Sec 47(xa)]

p. any transfer of land under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provision ) Act, 1985, by a sick industrial company which is managed by its workers' co-operative provided such transfer is made in the period of its sickness, [sec 47(xiii)].

q. any transfer of a capital asset to the company where a firm is succeeded by a company in the business carried on by it subject to following conditions -i. all the assets and liabilities of the firm relating to the business immediately before the succession shall become the assets and liabilities of the company ;ii. all the partners of the firm immediately before the succession become theshareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession ;

78


iii. the partners of the firm do 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 ; and

iv. the aggregate of the shareholding in the company of the partners of the firm is not less than 50 per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession [sec. 47(xiii)] ;

r. any transfer of a capital asset to the company 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 asset 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 succession 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)]

s. any transfer of a capital asset by a private limited company or unlisted public Company to a limited liability partnership or any transfer of shares held in the Company by a shareholder as a result of conversion of company into a LLP shall be exempted provided the following conditions are satisfied:

(i) All the assets and liabilities of the company relating to the business Immediately before the succession shall become the assets and liabilities of the LLP

(ii) All the shareholders of the company immediately before the conversion succession become the partners of the LLP and their capital contribution and Profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion;

(iii) the shareholders of the company do not receive any consideration or benefit directly or indirectly, in any form or manner other than by way of share in profit and capital contribution in LLP; and

(iv)the aggregate of the Profit sharing ratio of the shareholders of the company in LLP is not less than 50 per cent at any time for a period of five years from the date of the conversion ;

79


(v) the total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which conversion takes place does not exceed Rs.

60 lakhs(vi) no amount is paid directly or indirectly to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.t. any transfer involved in a scheme for lending of any securities subject to the guidelines issued by the Securities and Exchange Board of India or Reserve Bank of India. [sec.47(xv)]u. any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government. [Sec. 47(xvi)]

Exemptions from Capital Gains tax under Section 101. Exemption on Capital Gain from Agricultural Land [Section 10(37)1Section 10(37) provides exemption (i) to an individual or a Hindu undivided family from Capital Gains arising from the transfer of agricultural land situated in urban area (ii) if such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his(iii) and the transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India.2. Exemption on Long Term Capital Gain on equity shares/equity oriented fund subjected toSecurities Transaction TaxSection 10(38) provides exemption from long-term capital gain arising on sale of an equity share in a company or a unit of an equity oriented fund on or after 1/10/2004 and such transaction is chargeable to securities transaction tax.For the purposes of this clause, "equity oriented fund" means a fund—(i)where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund; and(ii)which has been set up under a scheme of a Mutual Fund specified under clause (23D) :Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.3. Exemption on Capital Gain from Reverse mortgage Scheme FSection 10(43)1 With a view to providing certainty in the tax regime to the Senior citizen section 10 (43) provide exemption on any amount received by an individual as a loan either in lump sum or in installment in a transaction of reverse mortgage referrrd to in section 47(xvi). However, capital gains tax shall be liable in case of alienation of the mortg aged property by the mortgagee for the purpose of recovering the loan.

80


CHAPTER 3: TYPES OF CAPITAL ASSETS AND PERIOD OF HOLDINGCapital Assets

Short Term Long Term

(A) For:

(a) Shares

(b) Mutual Fund More than 12 Months

(c) UTI

(d) Zero Coupon Bond

(e) Other Listed Securities

Up to 12 Months

(B) Other Assets: More than 36 Months

Upto 36 Month Period of

Holding In determining the period for which any capital asset is held by the assessee:(i) in a case of a share held in a company in liquidation, there shall be an exclusion of the period subsequent to the date on which the company goes into liquidation(ii) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in Section 49(1), there shall be included the period for which the asset was held by the previous owner referred to in the said section(iii) in the case of shares in Indian Company allotted pursuant to amalgamation referred to in section 47(vii) or demerger, there shall be included the period for which the shares in the amalgamating company/demerged company were held by the assessee.(iv) In the following cases the period of holding shall be determined in the given manner:(1) In case of right shares the period shall be reckoned from the date of allotment of such financial asset.(2) In case of right entitlement, the period shall be reckoned from the date of offer of such right by the company or institution to the date of renouncement, which in normal circumstances will be short term.(3) In case of bonus shares the period will be reckoned from the date of allotment of such financial asset.

81Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

CHAPTER 4: MODE OF COMPUTATION [SECTION 48]Computation of Short term Capital GainFull Value of Consideration Less : (a) Expenditure incurred wholly and exclusively In connection with such a transfer (b) Cost of acquisition (defined Us/ss49,51 and 55) (c ) Cost of ImprovementGross Short term Capital GainsLess: Exemption U/s 54B/54D/54G/54GTaxable Short term Capital GainComputation of Long term Capital GainFull Value of Consideration Less: (a) Expenditure incurred wholly and exclusively In connection with such a transfer (b) Cost of acquisition (c ) Cost of ImprovementGross Long term Capital GainsLess: Exemption U/s 54/54B/54D/54EC/54F/54G/54GA.Taxable Long term Capital GainNote: (1) Securities Transaction Tax is however not deductible as expenses for transfer.

(2)Bonds and Debentures are not indexed except capital indexed bonds issued by the Government.

Indexed Cost of Acquisition =Cost of acquisition X CH of the year of transfer

CII for the first year in which the asset was held by the assessee or 1/4/1981 whichever is later

Cost of Improvement TSection 55(1)]1. Cost of Improvement refers to the capital expenditure incurred in making any any addition or alteration to the capital asset on or after 1/4/1981 by the assessee or the previous owner.

2. Any improvement before 1/4/1981 is ignored.

3. Cost of improvement in respect of the following assts is taken at Nil:

(i) goodwill of a business or(ii) a right to manufacture, produce or process any article or thing or

82


(iii) right to carry on any businessIndexed Cost of Improvement Indexed Cost of Improvement = Cost of improvement x CII of the year transfer

CII of the year of improvement

CHAPTER 5: COST OF ACQUISITION IN CERTAIN CASES

1. Cost of Acquisition when the asset is acquired before 1/4/1981 [Section 55(2)(b)](i) When an asset has been acquired by the (i) assessee or (ii) by the previous owner from whom the asset was acquired by the assessee U/s 49(1) before 1/4/1981 the assessee has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1/4/1981 to be the cost of acquisition for computation of capital gain.The option is however not available in respect of the following items:(a) goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stagecarriage permits or loom hours and(b) depreciable assets.Note: (1) The option of substitution of Cost of Acquisition is available in case of Bonus Shares. (2) Cost of Improvement before 1/4/1981 is ignored.2.Cost to the previous owner U/s 49:Where the capital asset became the property of the assessee in any of the manner mentioned below, the cost of acquisition of the asset shall be deemed to be cost for which the previous owner acquired it:(a) on the distribution of the assets on total/partial partition of Hindu Undivided Family;(b) under a gift or will(c) by succession, inheritance or devolution(d) under a transfer to a revocable or irrevocable trust(e) on any distribution of assets on the liquidation of the company(f) on a transfer by a wholly owned Indian subsidiary company to its holding company or vice versa;(g) on any transfer in a scheme of amalgomation of two Indian Companies subject to certain conditions U/s 47(vi)/(via)/(viaa)(h) on any transfer in a scheme of amalgamation of two foreign companies subject to certain conditions

83


(i) on conversion of self acquired property of a member of a Hindu Undivided Family to the joint familyproperty.In this connection the following points must be noted:1. Previous owner means the last previous owner of the capital asset, who acquired it through the mode of acquisition other than referred to in clauses (a) to (i) above. Simply put, previous owner means the previous owner who actually paid for the asset.2. Where the cost of the previous owner cannot be computed or ascertained, the fair market value of the asset on the date on which it became the property of the previous owner shall be the cost of acquisition..

3. Cost of Acquisition of Goodwill, trademark etc. [ Section 55(2)(a)] The Cost of Acquisition in relation to a capital asset, being (i) goodwill of a business or a (ii) trade mark or (iii) brand name associated with a business or (iv) a right to manufacture, produce or process any article or thing or (v) right to carry on any business, (vi) tenancy rights, (vii) stage carriage permits or (viii) loom hours,—(i)in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and(ii')in any other case not being a case falling under Section 49(1 )(i) to Section 49(1 )(iv) shall be taken to be nil(iii) in case it is acquired in any mode acquired u/s 49(1) (i) to 49(1 )(iv) - it shall be the cost to the previous owner.4.Cost of Acquisition in case consolidation etc. of share capitalIn the case of: (a) the consolidation and division/ the sub-division of any of the shares of all or any of the share capital of the company into shares of larger/smaller amount than its existing shares,(b)the conversion/re-conversion of any shares of the company into stock,(c) the conversion of one kind of shares of the company into another kind,the cost of acquisition of the asset shall be calculated with reference to the cost of acquisition of the sharesor stock from which such asset is derived.5.Cost of Acquisition when advance money received is forfeited [Section 51]Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.

84


COST OF ACQUISITION IN CERTAIN CASESSection Particulars Cost of

Acquisition

49(2) Shares of Amalgamated Company in

lieu of shares of

Amalgamating company

Cost of acquisition to the Shareholder shall

be the cost of acquisition in the

Amalgamating Company

49(2A) Shares/Debentures issued

on conversion of

debentures/debenture stock/deposit

certificate//i?rag« currency

exchangeable bonds

Cost of Acquisition shall be deemed to be

that part of the cost of debenture/debenture

Stock/deposit certificate/bond, in relation to

which such an asset is acquired by the

assessee.

49(2AA) Where the capital gain arises from

the transfer of specified security or

sweat equity shares referred to sec.

17(2)(vi)

Cost of acquisition of such security or

shares shall be the fair market value which

has been taken into account for the purposes

of the said sub clause.

49(2AAA) Rights of a partner inLLP in lieu of

shares in company

Cost of acquisitionin rights in firm shall be

cost of acquisition of shares in company

49(4) Where the capital gajn arises from

the transfer of a property, the value

of which has been subject to tax u/s.

56(2)(vii)

the cost of acquisition of such property shall

be deemed to be the value which has been

taken into account for the purposes of

computing taxable gift u/s. 56(2)(vii).

55(2) Right Shares The amount actually paid for acquiring the

right shares plus the amount paid to the

person renouncing the right, where the right

shares have been acquired from the original

shareholder

.

55(2) Right Entitlement NI


55(2) Bonus Shares NIL. Where, however, Bonus shares has

been allotted before 1/4/1981, the assessee

may opt for market value as on 1/4/1981 as

the cost of acquisition of such bonus shares.

FULL VALUE OF CONSIDERATION IN CERTAIN CASES

1- Computation of capital gain when insurance claim is received [Section45(1 A'/1

Section 45(1 A) states that notwithstanding anything contained in Section 45(1) where in any previous year any person has received any money or other assets under an insurance from an insurer on account of damage to or destruction of, any capital asset, as a result of-(i)flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or(ii)riot or civil disturbance; or(iii)accidental fire or explosion; or(iv)action by an enemy or action taken in combating an enemythen, any profits or gains arising from receipt of such money or other assets shall be chargeable under "Capital gains" in the previous year in which such money or other asset was received and the value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration.2.Capital Gain on conversion of Capital Asset into Stock in trade [Section

45(2)1(i) The profits or gains arising from conversion of a capital asset into stock-in-trade of a business carried on by him shall be chargeable to capital gains in which such stock-in-trade is sold or otherwise transferred by him.

(ii) In such a case, the fair market value of the asset on the date of such conversion shall be the full value of the consideration for transfer of the capital asset.

3.Capital Gain on transfer of a capital asset by a partner/member to afirm/AOP/BOl as capital contribution: [Section 45(3)]In the case of transfer of a capital asset by a person to a firm or AOP or BOI in which he is or becomes a partner or member, by way of capital contribution or otherwise, the amount recorded in the books of account of the firm, AOP or BOI as the value of the capital asset shall be deemed to be the full value of the consideration.

86


4.Capital Gain on transfer of a capital asset by a firm/AOP/BOl by way of on its dissolution to its partner/member: [Section 45(4)1In the case of distribution of capital assets on the dissolution of a firm or AOP or BOI or otherwise, the fair market value of the asset on the date of such transfer shall be the full value of the consideration.5.Capital Gain on compulsory acquisition of an asset: [Section 45(5)1(i) Where a capital asset has been compulsorily acquired under any law or the consideration for transfer of a capital asset is determined or approved by the Central Government or Reserve Bank of India it will be treated as a transfer of the previous year in which the asset is compulsorily acquired. However, capital gain will be taxable in the year in which the compensation or part thereof is first received.(ii) If the compensation is enhanced or further enhanced the additional compensation shall be taxable in the year in which it is received. The cost of acquisition for the enhanced compensation shall be taken at NIL.

(iii) Furthc;, where by reason of the death of transferor, or for any other reason, the enhanced compensation is received by any other person, then it shall be deemed to be capital gains of such, other person.6. Transfer of Securities by Depository [Section 45(2A)]1. In respect of dematerialsed shares capital gain shall be chargeable in the hands of beneficial owner.2. In respect of demat shares the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.7.Buy Back of Shares or other specified securities [Section46A]Section 46A states that buyback of shares (or other specified securities) shall be treated as capital gains in the hands of shareholder and the difference between the cost of acquisition and the value of consideration received shall be deemed to be the capital gains in the year of buyback.8. Special provision for full value of consideration in certain cases [Section50C]Section 50C provides that where the consideration on transfer of a capital asset, being land or building or both, is less than the value adopted Stamp Valuation Authority for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or or assessable shall, be deemed to be the full value of the consideration.However, where

(a) the assessee claims before any Assessing Officer that the value adopted or assessed by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer;(b) the value so adopted or assessed by the stamp valuation authority has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

87


the Assessing Officer may refer the valuation to a Valuation Officer U/s 55A. In such a case, fair market value determined by the Valuation Officer or the value adopted by stamp valuation authority - whichever is lower, shall be taken as the full value of the consideration.

Explanation 2—for the purpose of this section, the expression "assessable" means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of payment of stamp duty.9. Capital Gain on transfer of depreciable Assets [Section 50]Refer Notes on Profits or Gains of Business or Profession.10. Computation of Capital Gains in the case of Slump Sale [Sec 50B] :The provisions relating to computation of capital Gains in case of Slump Sale is discussed below:1. Any profit or gains arising from the slump sale effected in the previous year shall be chargeable as Long term capital Gains and shall be deemed to be the income of the previous year in which the transfer took place. Where, however, any capital asset being one or more undertakings owned and held by the assessee for not more than 36 months is transferred under the slump sale, then capital gains shall be deemed to be short term capital gain.2. In the case of slump sale of the capital asset being more than one undertaking, the net worth of the undertaking shall be taken as cost of acquisition and cost of improvement.3. For computing the net worth, the aggregate value of total assets shall be, (a) in the case of depreciable assets, the written down value of the block of assets determined as per section 43; and (b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction u/s. 3 SAD, NIL (c)in the case of other assets, the book value of such assets. Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth4. The benefit of indexation shall not be available.

11. Cost of acquisition in case of depreciable asset of Power Units [Section 50A]Refer Notes on Profits or Gains of Business or Profession. Reference to Valuation Officer [Section 55A]

With a view to ascertaining the fair market value of a capital asset, the Assessing Officer may refer the valuation of capital asset to a Valuation Officer—(a)in a case where the value of the asset is made by a registered valuer, if the Assessing Officer is of opinion that the value so claimed is less than its fair market value ;(b)in any other case, if the Assessing Officer is of opinion—(i)that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more15% of the value of the asset as so claimed or by more than Rs. 25,000; or

88


(ii)that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do,The jurisdiction of the Valuation Officer has been defined under Rule 3A of The Wealth Tax Rules. The valuation Officer exercises the same jurisdiction for Income Tax purposes also.

Reference to valuation officer

If valuation done by Registered Valuer If valuation ot done by Registered Valuer

Reference shall be made to FMV of the Asset as per Valuation Officer if FMV of the Asset Assessing Officer's opinion as per Assessing Officer's opinion exceeds exceeds value of Asset by 25,000 or value given by Registered valuer 15% as the case may be.

CHAPTER 7: EXEMPTION OF CAPITAL GAINS

Asset in respect of

which capital

Gain is exempted

Who

can

Clai

m

Exe

mp-

ion

Which asset should be acquired

Amount of exemption

When can the exemption

be withdrawn


Section 54Provides exemption in Respect of capital gains arising on transfer ofresidential HouseProperty whoseincome ismust be term

chargeable under

the Head House

Property. It is to be

noted that self

occupied property is

also chargeable

under HP. The asset

must be long term

Capital Assets

The exemption isavailable if the capitalgain is invested in thepurchase of anotherresidential HouseProperty, within oneyear before or twoyears after the date oftransfer,and/orcompletes construction of a residential house property, within three years after the date of such transfer.

The Cost of thenew house,subject to the amount of capital gains.

(i)The amount unutilized in Capital Gains deposit schemes shall be charged as capital gain on the expiry of 3 years from the date of the transfer of the original asset.(ii)Where the new house purchased and /or constructed is transferred within a period of three years of its purchase or construction then the cost of the acquisition of the new house shall be reduced by the amount of capital gain exempted earlier.

Section 54BTransfer of landUsed for agriculturalpurpose. Theagricultural Landmust be used bythe tax payer or hisparents, forforagriculturalpurposes for aperiod of two yeasimmediatelypreceding the dateof transfer.The asset may be

Indiv

idual

Only

The exemption to the

extent the capital

gain is invested in the

purchases of another

agriculture land

within two years after

the date of transfer

The Cost of

the new

assts, subject

to the

amount of

capital gains.

(i)The amount unutilized in Capital Gains deposit schemes shall be charged as capital gain on the expiry of 2 years from the date of the transfer of the original asset.

(ii)Where the new agricultural

Land purchased is transferred

within a period of three years

of its purchase then the cost

of new agricultural Land shall

be reduced by the amount of

capital gain exempted U/s 54

and such capital gain shall

always be short term.


termShort term orLong Capital asset

Section:54D provided exemption in respect of capital gains arising on compulsory acquisition of land and building forming part of individual undertaking . the assts may be short term or long term subject to condition sterted in the next columns.

Any

asses

see

The exemption is

available if the

assessee purchases or

constructs individual

land or building

within a period of

three years from the

date of receipt of

compensation

The cost of

the new assts

subject to the

amount of

capital gains.

Same as Section 54

Section54EC Long

term Capital gain

on transfer of any

long term capital

Assts

Any

Asse

ssee

The exemption is available if the assessee invests the capital gains within 6 months from the date of transfer in the long term specified asset Long term specified Asset means the bonds redeemable after 3 years issued by NHAI, Rural

Electrification

Corporation Ltd

The Cost of

the new

asset,

subject to

a maximum

of Rs. 50

lakhs. The

LTCA need

not be

notified by

Central

Government

Where the long term specified asset is transferred or converted within a period of three years of its purchase then the capital gains exempted U/s 54EC earlier, shall be deemed to be long term capital gain of the previous year, in which the long term, specified asset is transferred or converted into money

Section 54Fprovidesexemption in respect of capital gains arising on

Individual Or HUF

The assessee should purchase within one year before the date of transfer or 2 years

Exemption= (cost of the newhouse x capital

1. If the assessee transfers the newhouse within 3 years of itspurchase/construction, the capital gain which was


transfer of a long term capital asset other than House property. The assessee should not own on the date of transfer of original asset more than one residential other than the new house.

after the date of transfer or construct within 3 years after the date of transfer, a residential house

Gains) / netconsideration

exempt u/s 54Fshall be treated as long term capital gain of the year in which the new house is transferred.2.The amount unutilized in Capital Gains deposit schemes shall be charged as capital gain on the expiry of 3 years from thedate of the transfer of the original asset.3.If the assessee purchases within2 years or constructs within 3years House Property from thedate of transfer of the originalasset, a residential house otherthan the new house then theexemption so granted earlier shallbe revoked.

Section 54Gprovidesexemption in respect of capital gain arising on transfer of assets being plant, machinery, right in land or building in cases of shifting of i. justrial

undertaking from urban area to any area other than urban area. It may be short tenn capital asset or long term capital asset.

Any Assessee

in the said areaB. acquired orconstructed industrialbuilding or land in thesaid area.C. shifted the originalasset and transferredthe establishment ofsuch undertaking tosuch area andD. incurred expenses

The Cost of the new asset, subject to the amount of capital gains

If the new asset is transferred within a period of 3 years of purchase, constructed or acquired, the amount of exemption u/s 54G shall be reduced from the cost of acquisition of the new asset.


for specified purposes.

Section 54GAprovidesexemption in respect of capital gain arising on transfer of assets being plant, machinery, land or building or any right in land or building in cases of shifting of industrialundertaking from urban area to any special Economic Zone whether developed in any Urban area or any other area. It may be short term capital asset or long term capital asset

Any assessee

The assessee has .within a period of 1 year before or 3 years after the date on which the transfer took placea. purchased a new machinery or plant for industrial undertaking in the said areaB. acquired orconstructed industrialbuilding or land in thesaid area.C. shifted the originalasset and transferredthe establishment ofsuch undertaking tosuch area andD. incurred expensesfor specified purposes

The Cost of the new asset, subject to the amount of capital gains

If the new asset is transferred within a period of 3 years of purchase, constructed or acquired, the amount of exemption u/s 54GA shall be reduced from the cost of acquisition of the new asset.

i i


93SOLVED EXERCISESExample 1 : S an owner of 3 houses, sells a residential house property in Madras for Rs. 13,90,000 on May 23, 2010. This house was purchased by him on April, 1996 for Rs.2,90,000 . On May 30, 2010, he purchased a flat in Bombay for Rs.8,70,000 for the purpose of the residence of his son-in-law. On August 10, 2010, S sells the house in Bombay for Rs. 12,10,000. Compute the capital gains arising on the two transactions. Is S eligible for exemption under Sec.54 in respect of the second sale ?

Solution: Computation of Capital Gains for A.Y. 2011-12 Rs.Full Value of Consideration 13,90,000

Less: Indexed Cost of Acquisition [2,90,000 x 711/305] 6,76,033 Gross Long Term Capital Gain 7,13,967Less: Exemption U/s 54 7,13,967Long Term Capital Gain NILNote: To claim exemption U/s 54 the new house need not be used by the assessee. Computation of Capital Gains for A.Y. 2011-12

Full Value of Consideration 12,10,000Less: Cost of Acquisition [8,70,000- 7,13,967] 1,56,033 Short Term Capital Gain 10,53,967

Example2 : On 25/4/2010, Sri Anirudh sold an urban agricultural Land for Rs. 50,00,000 which had been using for agricultural purposes for several years. He acquired that land in 1979 for Rs. 2,50,000. The market value of such Land on 1/4/1981 was Rs.5,00,000. He purchased rural agricultural Land for Rs. 10,00,000 on 25/6/2010 which was sold for Rs. 12,50,000 on 18/1/2011. A sum of Rs. 12,50,000 was also invested by him in the purchase of residential property on 25/7/2010. He did not own any house property before this date. The new house property was sold on 28/3/2011 for Rs. 15,00,000. Solution :

Solution: (A) On Sale of Land

Full Value of Consideration 50,00,000Less: Indexed Cost of Acquisition [ 5,00,000 X 711/100] 35,55,000Gross Long term Capital Gain 14, 45,000Less: Exemption U/s 54B 10, 00,000 Taxable Long Term Capital Gain 4, 45,000


(B) On Sale of New House Property 94

Full Value of Consideration 15,00,000Less: Cost of acquisition 12,50,000

Short Term Capital Gain 2,50,000

Note: Since the assessee has sold the house in the same year he is not entitled to exemption

U/s 54F. Further since agricultural land in Rural area is not a capital Asset, therefore no

capital gains shall arise on its transfer.FY CII FY CII EX CII

1981-82 100 1991-92 199 2001-02 426

1982-83 109 1992-93 223 2002-03 447

1983-84 116 1993-94 244 2003-04 463

1984-85 125 1994-95 259 2004-05 480

1985-86 133 1995-96 281 2005-06 497

1986-87 140 1996-97 305 2006-07 519

1987-88 150 1997-98 331 2007-08 551

1988-89 161 1998-99 351 2008-09 582

1989-90 172 1999-00 389 2009-10 632

1990-91 182 2000-01 406 2010-11 711


95

INCOME FROM OTHER SOURCES(Section 56 to 59)

The Charqeabilitv TSection 56(1)1Section 56(1) states that Income of every kind, which is chargeable to Income Tax but not includible underCertain Incomes which are always chargeable under the head Other SourcesAlthough Section 56(1) clarifies that Other Sources is a residuary head of Income, Section 56(2) states certain income which shall always be chargeable to Other Sources, namely.(i')dividends ;(ii) Casual Income in the nature of winnings from lotteries, crossword puzzles, races including horse races, card games etc.(iii) Following sums if these are not chargeable under Business Income (and Salaries in case of Keyman Insurance Policy)(a) any sum received from employees as contribution to any provident fund or other welfare fund.(b)income by way of letting of owned machinery, plant or furniture, interest on securities,(c)any sum received under Keyman Insurance Policy(iv) income by way of interest received on compensation or on enhanced compensation referred to in section 145A(2). [Sec. 56(2)(viii)]Any Sum of money or any property received without consideration [Section 56(2)(vii):Where an individual or H.U.F. receives in any previous year from any person or persons on or after 1st day of October,2009;a) any sum of money without consideration, the aggregate value of which exceeds Rs. 50,000 the whole of the aggregate value of such sum shall be treated as income of the individual or HUF.b) any immovable property without consideration, the stamp duty value of which exceeds Rs. 50,000 , the stamp duty value of such property the shall be treated as income of the individual or HUF.c) any property other than immovable propertyi) without consideration, the aggregate fair market value of which exceeds Rs. 50,000 the whole of the aggregate fair market value of such property shall be treated as income of the individual or HUF.;ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000 the aggregate fair market value of such property as exceeds such consideration shall be treated as income of the individual or HUF. Provided that where the stamp duty value of immovable property as referred in sub clause (b) is disputed by the Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

96assessee on grounds mentioned in section 50C(2) the Assessing officer may refer the valuation of such property to a valuation officer, and the provision of section 50C and section 155(15) shall as far as may be, apply in relation to stamp duty value of such property for the purpose of sub clause (b) as they apply for valuation of capital assets under that section 50.Provided further that this clause shall not apply to any sum of money received or any property received—(a) from any relative; or(b)on the occasion of the marriage of the individual; or(c)under a will or by way of inheritance; or(d)in contemplation of death of the payer.(e) from a local authority(f) from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in Section 10 (23C)(g)from a charitable institute registered U/s 12AA.Explanation.—For the purposes of this clause,"relative" means—(i)spouse of the individual;(ii)brother or sister of the individual;(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;

(vi)any lineal ascendant or descendant of the spouse of the individual;

(vii)spouse of the persons referred to in clauses (ii) to (vi)."property" means - The following CAPITAL ASSETS of the assessee -i) immovable property being land or building or both; ii) shares and securities; iii) jewellery; iv) archaeological collections ; v) drawings; vi) paintings ; vii) sculptures; or viii) any work of art; or ix) BullionNote: By virtue of insertation of the word 'Capital Assets', if the above mentioned assets held as stock in trade then section 56(2)(vii) shall not be invoked.

RULE 11UA: DETERMINATION OF FAIR MARKET VALUE FOR THE PURPOSE OF SECTION 56(2)(vii)/(viia)The fair market value of a property, other than immovable property, shall be determined in the following manner -


97VALUATION OF JEWELLERY, BULLION/ ARCHEOLOGICAL COLLECTIONS, DRAWINGS, PAINTINGS, SCULPTURES OR ANY WORK OF ART (HERE IN REFER AS ARTISTIC WORK)

Received on valuation Date

Purchased from a registered dealer Any other mode

FMV = Invoice Value Value > Rs. 50,000 Value > Rs. 50,000

FMV= assessee may obtain the report FMV = Estimated to be the Of registered valuer in respect the price which would fetch Of the price it would fetch if sold if sold in the open market

In the open market on the valuation date.

On the valuation date. (B) VALUATION OF SHARES AND SECURITIES

Quoted Unquoted

Equity Shares Other than EquityShares

(A) VALUATION OF QUOTED SHARES AND SECURITIES.-

If the quoted shares and securities are received by way of transaction carried out.(i) through any recognized stock exchange the fair market value of such shares and securities

shall be the transaction value as recorded in such stock exchange;


(ii) other than through any recognized stock exchange

the fair market value of such shares and securities shall be, (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and(b) in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange;the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange

(ii) VALUATION OF UNQUOTED EQUITY SHARES:

The fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner namely;-The fair market value of unquoted equity shares = (A-L) x (PV)

(PE)

A = Book value of the assets in Balance Sheet

Less: Advance tax paid under the Income-tax Act

Less: Any amount shown in the balance sheet including the debit balance of the P&L A/c. or the P& L appropriation A/c. which does not represent the value of any asset.

L = Book value of liabilities shown in the Balance Sheet but not including the following amounts:-

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves, by whatever name called, other than those set apart towards depreciation;

(iv) credit balance of the profit and loss account;

(v) any amount representing provision for taxation, other than amount paid as advance tax under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;


99(vi) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

PE = Total amount of paid up equity share capital as shown in Balance Sheet.PV = The paid up value of such equity shares.

(iii) VALUATION OF UNQUOTED SHARES AND SECURITIES OTHER THAN EQUITY SHARES

The fair market value of shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.'.Note: "Valuation date" - means the date on which the respective property is received. /Rule l1U(j)]

Section 56(2)(viia): where a firm or a company not being a company in which the public are

substantially interested, receives, in any previous year, from any person or persons, on or after

the 1st day of June, 2010, any property, being shares of a company not being a company in

which the public are substantially interested,

(i) without consideration, the aggregate fair market value of which exceeds

fifty thousand rupees, thewhole of the aggregate fair market value of such

property shall be taxable;

(ii) for a consideration which is less than the aggregate fair market value of the

property by an amount exceeding fifty thousand rupees, the aggregate fair market

value of such property as exceeds such consideration shall be taxable:Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under -Section 47 (via)/ (vic)-i.e, Transfer of shares of an Indian Company in case of amalgamation between two

foreign company.Section 47 (vid)/ (vii)- Amalgamation/Demerger between two Indian Co.Section (vicb) - Business re-organization between two co-operative banks.

Explanation.—For the purposes of this clause, 'fair market value" of a property, being shares of a company K it being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);


100Deduction U/s 57The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :—

(i)in the case of dividends, or interest on securities, any commission or remuneration to a banker or any ther person for the purpose of realising such income ;

(ii)in the case of income in the nature of family pension, a standard deduction of l/3 rd of amount received or Rs. 15000, whichever is less.

(iii)any other expenditure (not being in the nature of capital expenditure) inurred for earning such income :

(iv) In the case of income by way of interest received on compensation or on enhanced compensation a deduction of 50% of such income and no deduction shall be allowed under any other clause of this section.

Family Pension

Family Pension received by widow or legal heirs of deceased employees is taxable under the head Other Sources. However, the assessee shall be entitled to standard deduction of l/3 ru of amount received or Rs. 15,000 whichever is less.

However, Family pension received by the widow or children or nominated heirs, of a member of the armed forces (including para-military forces) of the Union, where the death of such member has occurred in the course of operational duties shall be exempted U/s 10(19)

Amounts not deductible U/s 58(i) Personal expenses of the assessee(ii) interest and salaries paid outside India on which tax is not deducted at source.(iii) Income tax and wealth tax(iV) any expenditure or allowance in respect of winning from lotteries, crossword puzzles

(v) any expenditure referred to in Section 40A.


101

CLUBBINGTransfer of Income where there is no transfer of Assets (Section 60)

If any person transfers income without transferring the ownership of the asset such income is taxable in the hands of the transferor.

For example, Mr. V has transfered through a duly registered document the income arising from a godown, to his son, without transferring the godown. In this case According to section 60 where there is a transfer of an income by a person to another person, without the transfer of the asset from which the income arises, such income shall be included in the total income of the transferor. Hence, the rental income will be charged in the hands of Mr. V.

Revocable Transfer of Assets (Section 61)

All income arising to any person by virtue of transfer of assets is deemed to be the income of transferor and chargeable to tax in his hands if the transfer is revocable.

Section 62 states exception to the above rule that income arising from revocable transfer of Assets is taxable in the hands of the transferor:

1. transfer, if effected through the medium of trust, is not revocable within the lifetime of the beneficiary

2. in the case of any other transfer, the same is not revocable within the lifetime of transferee.

Remuneration of a spouse [Section 64(1 )(ii)]

(vi) l. An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has substantial interest.

2. However, remuneration, which is solely attributable to the application of technical or professionalknowledge and experience of the spouse, will not be clubbed.

3. What is substantial interest?An individual is deemed to have a substantial interest if he individually or along with his relatives beneficially holds equity shares carrying not less than 20% of the voting power in the case of a Company or is entitled to not less than 20 per cent of the profits, in the case of a


102concern, other than a Company, at any time during the previous year. For this purpose relative means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.4. Where both husband and wife have substantial interestWhere both husband & wife have a substantial interest in the concern and both are in a receipt of the remuneration from the concern, remuneration will be included in the total income of the husband or wife whose total income excluding such remuneration is greater. Where such income is once included in the income of the either spouse, any such income arising in the subsequent year cannot be included in the total income of the other spouse unless the A.O. is satisfied after giving an opportunity of being heard that it is necessary to do so.Transfer of Assets to spouse [Section 64(1 )(iv)]Where an asset (other than House Property) is transferred by an individual to his/her spouse , directly or indirectly, otherwise than for adequate consideration not in connection with an agreement to live apart, any income from such assets will be deemed to be the income of the transferor.

Transfer of Assets to certain persons for spouse's benefits [Section 64f l)(vii)] Where any individual transfer any assets to any person or AOP otherwise than for adequate consideration the income from such assets shall be included in the income of the transferor to the extent such transfer is for the immediate or deferred benefit of his or her spouse.Notes: l. Transfer may be direct or indirect.2. It is to be noted that what is clubbed is income from the asset and not income from income.3. In case the amount is invested in partnership firm then clubbing provisions shall apply as under:(i) Share of profit: Exempted. Therefore'the question of clubbing does not arise(ii) Remuneration from firm: It accmes on account of being working partner in the firm. Therefore, it cannot be clubbed.(iii) Interest from firm: Clubbing provisions applicable.4. Where the amount is invested in a proprietorship concern then the proportionate amount of profit is clubbed5. The relationship of husband and wife should subsist both at the time of transfer of asset and at the time when income is accrued [Philip Johan Plasket Thomas vs. CIT 1963 49 ITR 97 SC]6. If property is acquired out of pin money there would be no clubbing i.e. when wife saves money out of the allowance given to her for her dress and other usual household expenses and wife purchases an asset out of money saved from it then income arising therefrom would not be added in the hands of Husband - R.B.N.J. Naidu Vs. CIT 1956 29 ITR 194 Nag.7. Further no clubbing shall be done on account of Interest on Bonus Debentures.


Clubbing in the case of Cross Transfers

103

In the case of cross transfers also, the income from the assets transferred would be assessed in

the hands of the deemed transfror if the transfers are so intimately connected as to form part of a

single transaction, and each transfer constitutes consideration for the other by being mutual and

oteherwise.

For example : A making gift of Rs. 50,000 to the wife of his brother B for the purchase of a

house by her and a simultaneous gift by B to A's minor son of shares in a foreign company

worth Rs. 50,000 owned by him. Thus, in the instant case, the transfers have been made by A

and B to persons who are not their spouse or minor child so as to circumvent the provisions of

this section, showing that such transfers constituted consideration for each other.

The supreme court in case of CIT v. Keshavji Morarji (1967) 66 1TR 142, observed that if

two transactions are inter- connected and are parts of the same transaction in such a way that it

can be said that the method was adopted as a device to evade tax , the implication of clubbing

provisions would be attracted. Accordingly, the income arising to Mrs. B from the house

property should be included in the total income of B and the dividend from shares transferred to

A's minor son would be taxable in the hands of A . This is because A and B are the indirect

transferors to their minor child and spouse respectively, of the income yielding assets, so as to

reduce their burden of taxation.

Transfer of Assets to son's wife [Section 64(1 )(vi)]

Where an asset is transferred by an individual to his son's wife, directly or indirectly, otherwise

than for adequate consideration any income from such assets will be deemed to be the income of

the transferor.

Transfer of Assets to certain persons for benefits of son's wife [Section 64(l)fviii)] Where any

individual transfer any assets to any person or AOP otherwise than for adequate consideration

the income from such assets shall be included in the income of the transferor to the extent such

transfer is for the immediate or deferred benefit of his or her son's wife.

Income of minor child[ Section 64 (1 A)]


The income of the minor child will be included in the total income of that parent whose total

income, excluding income includible U/s 64(1 A), is greater and where the marriage of the

parents does not subsist, in the income of the parent who maintains the minor child in the

104

relevant previous year. Where any such income is included in the total income of either parent,

any such income arising in the succeeding year shall not be included in the total income of the

other person unless the A.O., after giving a reasonable opportunity of being heard, is satisfied

that it is necessary to do so.

Note: Income of married minor daughter shall also be clubbed.

When clubbing is not attractedIn the following cases clubbing provision of section 64(1 A) will not be attached.1. Income of a minor child suffering from any disability of the nature specified U/s 80U.2. Income of a minor child on account of manual work.3. Income of a minor child on account of any activity involving application of his skill, talent, or specialised knowledge & experience.Exemption U/s 10(32)In case the income of an individual includes the income of minor child then he shall be entitled to exemption of Rs. 1,500 or the income of the minor so included, whichever is less in respect of each minor child.Example: Mr . A has three minor children - two twin daughters and one son. Income of the two twin daughters is Rs. 2,000 p.a. each and that of the son is Rs. 1,200 p.a. compute the income, in respect of minor children, to be clubbed in the hands of Mr. A.Solution: _Taxable income, in respect of minor children, in the hands of Mr. A isTwo minor daughters [Rs. 2,000 x2] Rs.4,000Less: Exempted u/s 10(32) [Rs. 1,500 x 2] Rs.3,000 Rs. 1,000Minor son Rs. 1,200Less: Exempted u/s 10(32) Rs. 1,200 NIL Income to be clubbed in the hands of Mr. A Rs. 1,000Concept Capsule 8: Mr. X is the karta of a HUF, whose members derive income as given below:(i) Income from X's own business Rs. 50,000(ii) Mrs. X a dermatologist draws salary Rs. 80,000(iii) Minor Son A (earning interest on fixed depositsWith ABC Ltd.,, which were gifted to him by his grandfather) Rs. 15,000(iv) A got winnings from lottery Rs. 2,00,000v) Minor Daughter B gave a dance performance and received remuneration Explain how the above income will be taxed. Rs. 1,00,000


Section 64(2) : Conversion of self acquired property into joint family property andsubsequent partition

105Section 64 (2) states that where, an individual converts any self acquired property into property belonging to the family, directly or indirectly, otherwise than for adequate consideration then income derived therefrom shall be deemed to arise to the individual and not to the family.

Where the converted property has been the subject-matter of a partition amongst the members of the family, the income derived therefrom as is received by the spouse on partition shall be deemed to arise from assets transferred indirectly by the individual to the spouse and the provisions of Section 64(1) shall apply accordingly.


106

SET OFF AND CARRY FORWARD OF LOSSES

Discussion Point 1; Inter Source Adjustment

Loss from one source falling under a particular head can be set off and adjusted against income

from another source falling under the same head. (Section 70). This is known as inter-source

adjustment. This is subject to the following exceptions:

1. Loss in a speculation business can be set off only against the profit in a speculation business.

2. Long term capital Loss can be set off only against long-term capital gains. [Section 70(3)].

3. Loss incurred in the business of owning and maintaining race horses can be set off only

against income from business of owning and maintaining race horses.

4. Further, by virtue of section 58(4) a loss cannot be set off against winnings from lotteries ,

crossword puzzles, races including horse races, card games and other games of any sort or

from gambling or betting of any form or nature.

Discussion Point 2 : Inter head adjustment

Loss under any source falling under any head of income , other than "Capital gains", can be set

off against income from any other source under any other head of income in the same

assessment year [Section 71(1)].This is again subject to the following:

1.Losses under the Head Capital Gains cannot be set off against any other head.

2. Loss in a speculation business can be set off only against the profit in a speculation business.

3. Loss incurred in the business of owning and maintaining race horses can be set off only

against income business of owning and maintaining race horses.


107

4.Further, by virtue of section 58(4) a loss cannot be set off against winnings from lotteries ,

crossword puzzles, races including horse races, card games and other games of any sort orfrom

gambling or betting of any form or nature.

5. Business Loss cannot be set off against Salary Income

Discussion Point 3: Carry Forward of LossesNATURE OF LOSS NUMBER OF YEARS

OF C/F

WHETHER FILING OF

RETURN IN DUE DATE

NECESSARY TO C/F

THE LOSS

1. HOUSE PROPERTY 8 NO

2. SPECULATIVE BUSINESS 4 YES

3. NON SPECULATIVE BUSINESS 8 YES

4. CAPITAL LOSSES 8 YES

5. OWNING AND MAINTAINING

RACE HORSES

4 YES

6. OTHER SOURCES CANNOT BE C/F

N.A.

7. UNABSORBED

DEPRECIATION,

UNABSORBED SCIENTIFIC

. NO TIME LIMIT

NO

8. SPECIFIED BUSINESS u/s.

35AD

NO TIME LIMIT

YES

Note: A Brought forward loss can be set off against its own head only. However, unabsorbed

depreciation, unabsorbed scientific research, unabsorbed Family planning expenditure can be

set off against any head of income even in subsequent years.

Priorities for carry forward and set off of losses and allowances:

The following priorities in the cany forward and set off of losses and allowances will have to be

observed

(i) Business Expenses


(ii) Current depreciation/current scientific research/current family planning expenses

(iii) Brought forward business / profession losses [Section 72(1)]

108

(iv) Unabsorbed depreciation; unabsorbed scientific research and unabsorbed family planning.WHAT IS A SPECULATION BUSINESS ?

In view of section 43(5), "speculative transaction" means a transaction in which a contract for

the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately

settled, otherwise than by the actual delivery or transfer of the commodity or scrips.However the following shall not be regarded as speculative business:

(a)a contract in respect of raw materials or merchandise in the course of manufacturing or

merchanting business to guard against loss through future price fluctuations in respect of his

contracts for actual delivery of such goods; or

(b)a contract in respect of stocks and shares entered into by a dealer or investor therein to guard

against loss' in his holdings of stocks and shares through price fluctuations; or

(c)a contract entered into by a member of a forward market or a stock exchange in the course of

any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the

ordinary course of his business as such member;

(d) Derivative Transaction not to be treated as Speculative transaction if (i) The transaction is

carried out in a recognized stock exchange (ii) in a electronically on screen based system (iii)

through a stock broker /sub broker/other registered intermediary (iv) in accordance with the

provisions of the Securities Contracts (Regulation) Act, 1956/SEBI Act, 1992/Depositories Act,

1996 or by banks or mutual funds and (v) is supported by a time stamped contract note issued by

stock broker etc. to every client indicating Unique client identity number and Permanent Account

number under the Income Tax Act.G. Loss under the head "Capital gains":

I. Short Term Capital Loss can be set off against long - term capital Gains or short-term capital Gains. [Section 70(2)].

2. Long term capital Loss can be set off only against long-term capital gains in the same assessment year [Section 70(3)].

3. Capital loss which cannot be set off in the same assessment year can be carried forward for set off for 8 succeeding assessment years. Unabsorbed Short term capital loss can be carried

4. forward and set off against both long-term and short-term capital gains. [Section 74(1 )(a)].


5. Unabsorbed long-term capital loss can however be set off only against long-term capital gains. [Section 74(1 )(b)].

109

H. LOSSES BY SPECIFIED BUSINESS U/S 35AD fSECTION 73A1

1) any loss, computed in respect of the specified business referred to in section 35AD shall not be setoff except against profits and gains, if any, of any other specified business.

2) where for any assessment year any loss computed in respect of the specified business has not been wholly set off, so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business, shall, subject to other provisions of this chapter , be carried forward to the following assessment year, and

(i) it shall be set off against the profits and gains, if any, of any specified business carried on by him assessable for that assessment year; and

(ii) if the loss can not be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. [newly inserted by the Finance Act, 2009, w.e.f 1-4-2010]

H. Losses from races including horse races (Section 74A)The loss arising from owning and maintaining race horses will be allowed to be set off in the same year from the income arising out of owning and maintaining race horses only.

The losses incurred by the owners of race horses in the activity of owning and maintaining such horses which cannot be wholly set off in the same year in which the loss is incurred are allowed to be carriedforward under section 74A(3) and set off against income from the same source in subsequent years upto aperiod of 4 assessment years immediately following the assessment year for which the loss is first computed.

Solved Illustration


Example 1 : Mr. X submits the following particulars pertaining to A.Y.2011-12:Particulars RS;Income from salary 5,00, 000

110Loss from self-occupied property (-) 70,000Business loss (-) 1,00,000Bank interest received 90,000Compute the taxable income of Mr. X for the A.Y.2011-12.Solution:

Computation of taxable income of Mr. X for the A.Y. 2011-12Particulars Amount Amount (Rs) (Rs)Income from salary 5,00,000Income from house property (-)70,000 4,30,000Business income (-) 1,00,000Income from other sources (bank interest) 90,000Business loss to be carried forward (-) 10,000Gross total income [See Note below] 4, 30,000

Note: Business loss of Rs. 1,00,000 is set off against bank interest of Rs.90,000 and remaining business loss of Rs. 10,000 shall be carried forward as it cannot be set off against salary Income .Example 2: Mr.X X furnished the following particulars for the P.Y. 2010-11Particulars Rs.Income from salary (Net) 55,000Income from house property (34,000)Income from business – non – speculative (22,000)Income from speculative business (4,000)Short- term Capital gains (35,000)Long- term capital gains 29,000What is the total income chargeable to tax for the A.Y 2011-12?Solution: The total income chargeable to tax for the A.Y 2011-12is calculate as under:Particulars Amount Amount

(Rs.) (Rs.)Income from salaries 55,000 Income from house property (34,000) 21,000Profit and gains of business and professionBusiness loss to be carried forward [Note 1] (22,000)


Speculation capital loss to be carried forward [Note 2] ( 4,000)Capital GainsLong term capital gains 29,000Short term capital loss ( 35,000)

111Short term capital lossto be carried [Note 3] (6,000)Taxable income 21,000

Note 1: Business loss cannot be set-off against salary income. Therefore, loss of Rs.22,000 from the non-speculative shall be carried forward.

Note 2: Short term capital loss can be set off against both short term capital gain and long term capital gain. Therefore, short term capital loss of Rs. 35,000 can be set-off against long-term capital gains to the extent of Rs.29,000. The balance short term capital loss of Rs.6,000 cannot be set-off against any other income and has to be carried forward to the next year for set-off against capital gains, if any.


112

CARRY FORWARD IN SPECIAL CASES

Business Losses in case of Amalgamation [Section 72A]Where there has been an amalgamation of

(a) a company owning an industrial undertaking or(b) a ship or(c) a hotel with another company(d) or an amalgamation of a banking company referred to in section (c ) of the Banking

Regulation Act, 1949 with a specified bank,(e) amalgamation of Public Sector Companies engaged in business of operation of aircraft then, the Business loss and the unabsorbed depreciation of the amalgamating company shall be deemed to bethe loss or allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected.Conversion of Firms /Sole Proprietorship concerns to CompanyWhere there has been reorganisation of business, whereby, a firm/sole proprietary concern is succeeded by a company fulfilling the conditions laid down in section 47(xiii) / 47(xiv) , then, accumulated business loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern shall be deemed to be the loss of the successor company of the Previous Year in which reorganisation took place.Conversion of Private Limited company or unlisted public company into LLP

Where there has been reorganisation of business, whereby, a private limitedcompany or unlisted public company is succeeded by a LLP fulfilling the conditions laid down in section 47(xiiib), then,accumulated business loss and the unabsorbed depreciation of the private limited company or listed public company shall be deemed to be the loss of the LLP of the Previous Year in which reorganisation took place. Demerger of CompaniesIn the case of a demerger of companies, the accumulated business loss and allowance for unabsorbed depreciation of the demerged company shall be set off in the hands of resulting company in the following manner -


(a)where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, it will be to be carried forward and set off in the resulting company ;(b) where sueh loss or vinat-sorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, it will be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company.

113Losses of closely-held companies where change in shareholding has taken placeUnabsorbed loss of closely-held companies relating to earlier previous years will not be set off in a previous year where a change in shareholding has taken place unless in the said previous year, shares carrying at least '51% of voting power are beneficially held on the last day thereof by the persons who held shares to the similar extent in the previous year in which the unabsorbed loss was incurred. However, change in shareholding in a previous year consequent upto death of a shareholder or transfer of shares by way of gift made by a shareholder to his relative, will not be taken into account for this purpose

Carry forward in case of change in constitution of firm or on succession [Sec 78]

(1) Where a change has occurred in the constitution of a firm, then the firm shall not be entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.

(2)Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, then the successor shall not be entitled to carried forward the loss and set off against his income.


114

DEDUCTION UNDER CHAPTER VI A

From the Gross Total Income so arrived at certain deductions are allowed to the assessee. But

before we proceed to discuss these deductions the following points must be borne in mind:1) Deductions cannot exceed Gross Total Income [Section 80A(2)]

2) The deductions are not allowed from the following income:

a) Long term Capital Gains

b) Winnings of lotteries, races etc.

c) Short term Capital Gains on which tax @ 15% is chargeable

3) The deduction under this Chapter shall be allowed with reference to net income of the assessee.

4) Deductions are to be allowed if the assessee claims it and establishes circumstances

warranting such a deduction.

5) deduction in respect of profits and gains shall not be allowed under any provisions of section 10A/10AA/10B/10BA or under any other provisions of chapter VIA under the Heading "C- Deductions in respect of certain income" in any assessment year, if a deduction in respect of same amount under any of the aforesaid has been allowed in the same assessment year;

the aggregate of the deductions under the various provisions referred above shall not

exceed the profit and gains of the undertaking or unit or enterprise or eligible business as

the case may be; [ Section 80A(4) -w.r.e.f A.Y. 2003-04]

6) No deductions under the various provisions referred above shall be allowed if the

deduction has not been claimed in the return of income; [ Section 80A(5)]7) not withstanding anything to the contrary contained in 10A or 10AA or 10B or 10BA or in

any provisions of this chapter under the heading "C. - "deduction in respect of certain incomes", that the transfer price of goods and services between the undertaking or unit or enterprise or eligible business and any other undertaking or unit or enterprise or business of


the assessee shall be determined at the market value of such goods or services as on the date of transfer, if the recorded transfer price does not correspond to the market value of such goods or services. [ Section 80A(5) - w.r.e.f A.Y. 2003-04]

Explanation—for the purposes of this sub section, the expression "market value"—

(h) in relation to any goods or services sold or supplied, means the price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or

115(i) eligible business in the open market, subject to statutory or regulatory restrictions if, any'(ii) in relation to any goods or services acquired, means the price that such goods or services would cost if these were acquired by the undertakings -or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any.'

(7) Where a deduction under any of the provisions of the chapter under the heading "C. - "deduction in respect of certain incomes"is claimed and allowed in respect of profits of specified business referred to in Section 35AD then deduction U/s 35AD shall not be allowed in respect of such business U/s 35AD in respect of such assessment year or subsequent years.

SECTION 80C: INVESTMENT IN LIC,PPF ETC.

Section 80C provides deduction to an Individual or HUF in respect of following investments:(i) Life Insurance Premium on the life of self, spouse and children in case of individual and member of family in case of HUF subject to a maximum of 20% of the Capital sum assured.(ii) Contribution towards statutory provident fund, recognised Provident Fund, approved superannuation fund(iii) Contribution to Public provident fund in the name of self, spouse and children in case of individual and member of family in case of HUF(iv)Subscription to NSC and NSS 1992.(v) Contribution to Equity Linked Savings Scheme of a Mutual Fund notified U/s 10(23D) or UTI(vi)Repayment of Housing Loan (principal amount) and Stamp Duty for registration of House after the construction/Acquisition of the house is completed.(vii) Contribution to 10 or 15 year Post Office Savings Bank (CTD)(viii) Contribution to Unit Linked Insurance Premium(ix) Group Insurance Premium where the assessee is a Govt. Employee and Group Insurance Premium does not exceed 20% of Salary.(x) Any sum paid as tution fees (not being any payment towards development fee, donation or payment of similar nature) whether at the time of admission or otherwise to any university, College or educational institution in India for full time education subject to maximum of two children.


(xi)as subscription to any specified deposit scheme of, or as a contribution to any pension fund set up by, the National Housing Bank(xii) Subscription to specified infrastructure bonds or equity shares or debentures forming part eligible issue of capital of a public company or public financial institution approved by the Board for this purpose.(xiii) Subscription to any units of approved Mutual Fund

116(xiv) Term Deposit for a period of 5 years or more with a Scheduled Bank in accordance with specified scheme.(xv) Subscription to notified bonds of NABARD also eligible for deduction.(xvi) Amount deposited under Senoir Citizens Saving Scheme (applicable from AY-2009-10)

(xvii) Amount deposited in 5 year time deposit scheme in post office ( applicable from AY-2009-10). However if any amount is withdrawn from such account before the expiry of 5 years from the date of its deposit, then, the amount so withdrawn shall be taxable. But any amount received by the legal heir of the diseased assessee shall not be taxable.

The maximum deduction available U/s 80C shall be Rs. 1,00,000. It is to be noted that deduction U/s 80C shall be allowed irrespective of whether such investment is made out of income chargeable to tax.SECTION 80CCC: CONTRIBUTION TO PENSION FUNDS

Where an individual has in the previous year paid out of his income chargeable to tax towards annuity plan of LIC or any other insurer then he shall be entitled to a deduction of the amount so paid subject to a maximum of Rs. 1,00,000/-.If the assessee or his nominee receives any amount such amount shall be included in the total income of the assessee or his nominee in the year of receipt.SECTION 80CCD: CONTRIBUTION TO PENSION FUNDS OF EMPLOYEES(1) Section 80CCD provides deduction to employees or any other assessee, being an individual (self- employed) in respect of contribution made by such employee, Employer and individual to a notified pension scheme of the whole of the amount so paid or deposited or 10% of his salary whichever is less in each such case - for employer's as well as employee's contribution.

(2) If the assessee or his nominee receives any amount such amount shall be included in the total income of the assessee or his nominee in the year of receipt.Notes:

(1) For the purposes of this section, "salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.'

(2) No deduction shall be allowed u/s 80CCD in respect of amounts on which deduction


has been claimed u/s 80C.(3) For the purpose of the said section the assessee shall be deemed not to have received

any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.

117[It is to be noted that the tax benefit u/s. 80CCD was hereto available to "employees" only but now by virtue of amendment made by the Finance Act, 2010 the benefit has been extended also to "self-employed" These amendments will take effect retrospectively from 1-4-2009]Section 80CCE: Section 80CCE provides that deduction U/s 80C, 80CCC and 80CCD shall not exceed Rs. 1,00,000.

Example 1 : Mr. X furnishes you the following information to compute his total income, given that his Gross Total Income Rs. 5,60,000

Premium paid Rs. 20,000 on LIP ofRs. 1,00,000 on the life of the assessee. Premium paid Rs. 10,000 on a LIP of Rs. 1,50,000 on the life of his wife. Premium paid Rs. 5,000 on LIP ofRs. 50,000 on the life of the mother of the assessee. Contribution to Recognised Provident Fund Rs. 15,000 Contribution to ULIP Rs. 10,000 Repayment of housing loan taken from the State Bank of India Rs. 15,000 (Rs.9,000 as

the principal and Rs. 6,000 as interest). The loan was utilised by the assessee to purchase a flat for his own residential purpose in the year 1994.

Subscription to units of Mutual Fund notified u/s 10 (23D) Rs. 18,000 Contribution to 15 year Post office Savings Bank (Cumulative Time Deposits) Rs. 8,000. Tution fees of Children for three children Rs. 15,000 each Contribution to LIC Pension Fund Rs. 1,85,000Solution :Gross Total Income 5,60,000

Less: Deduction Under Chapter V1 A Deduction U/s 80C

Insurance Premium on his life 20,000Insurance Premium on the of his wife 10,000Insurance Premium on the life of his mother ---Contribution to recognized Provident fund 15,000Contribution to ULIP 10,000Repayment of housing loan to SBI- principal amount onl 9,000Contribution to Post office savings Bank – CTD 8,000Tution fees of maximum 2 children 30,000Mutual fund referred to u/s 10(23D) 18,000


1,20,000Restricted to 1,00,000Deduction U/s 80CCC for contribution to

118LIC Pension Fund – amount contributed or Rs. 1,00,000 as per whichever is lower 1,00,000

2,00,000Maximum Deduction U/s 80CCC and 80CRs. 1,00,000 as per Section 80CCE 1,00,000 1,00,000Total Income 4, 60,000SECTION 80CCF: DEDUCTION FOR SUBSCRIPTION TO LONG TERM

INFRASTRUCTURE BONDSAn individual or HUF shall be entitled to a deduction equal amount to amount invested in long term infrastructure bonds notified by Central Government or Rs. 20,000 whichever is less.SECTION 80D: HEALTH INSURANCE PREMIUM OTHER THAN CASH

Description Mediclaim Premium or contribution to Central Government Health Scheme paid in respect of Self, Spouse & Dependent Children

Mediclaim Premium paid in respect of Parents, whether dependent or not

Total deduction u/s. 80D

No one attained the age of 65 years,

Rs. 15,000 Rs. 15,000 Rs.30,000

Assessee is less than 65 years of age and parent is a senior citizen

Rs. 15,000 Rs. 20,000 Rs.35,000

Both individual and the parent Attained the age.of 65 years

Rs. 20,000 Rs. 20,000 Rs.40,000

Example 2 : X pays medical insurance premia during the previous year through any mode other than

cash as under:


(a) Rs. 12, 500 for his health and on the health of his wife and dependent children.(b)Rs. 17,500 for the health of his parents. Compute deduction to be allowable u/s HOD for the AY 2011-12.

119

Solution: Mr. X will be allowed a deduction of Rs. 27,500 (Rs. 12,500 + Rs. 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 30,000(Rs, 12,500+ Rs. 17,500). Note: For deciding deduction under this section it is immaterial whether the parents are dependent or not.

Example 3 : In Illustration 2 , if cost of insurance on the health of the parents is Rs. 30,500, out of which Rs. 17,500 is paid (by any non cash mode) by the son and Rs. 13,000 by the father (senior citizen). Compute amount of deduction avialble u/s HOD for the AY 2011-12.

Solution: (1) The son will get a deduction of Rs. 17,500.

(3) The father will get a deduction of Rs. 13,000.

SECTION 80DD: EXPENDITURE FOR DISABLED DEPENDENT

Where a resient individual or Resident Hindu Undivided Family incurs any expenditure for the medical treatment (including nursing), training and rehabilitation of a dependent, being person with disability or has paid any amount under a scheme of UTI, LIC, any other insurer for maintenance of disabled dependent then the assessee shall get a deduction of Rs. 50,000 irrespective of the amount of expenditure incurred by the assessee. A higher deduction of Rs. 1,00,000 shall be available if sueh a person is suffering with severe disability.The assessee, shall furnish a copy of the certificate issued by the medical authority along with the return of income U/s 139.

Consequences if dependent with disability predeceases the individual or the member of the HUF If the person with disability predeceases, the individual or the member of the HUF in who has deposited money, an amount equal to the amount paid or deposited under the scheme shall be deemed to be the income of the assessee of the previous year in which such amount is received by the assessee.

Definitions (a)" disability" shall include "autism", "cerebral palsy" and "multiple disability".


(b)person with severe disability" means—

120

(i)a person with 80% or more of one or more disabilities, as referred to in section 56(4) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995

(ii) a person with severe disability referred to in section 2(o) of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999

Example 4 : Mr. X is a resident individual. He deposits a sum of Rs.35,000 with Life Insurance Corporation every year for the maintenance of his handicapped grandmother who is wholly dependent upon him. Compute the amount of deduction available u/s 8ODD for the A. Y. 2011-12.

Solution: Since the amount deposited by Mr. X was for his grandmother, he will not be allowed any deduction u/s 80DD. The deduction is available if the individual assessee incurs any expense for a dependant disabled relative. Grandmother does not come within the definition of dependant relative.

Example 5 : What will be the deduction if Mr. X had made this deposit for his dependant father?

Solution : Since the expense was incurred for a dependant disabled relative, Mr. X will be entitled to claim a deduction of Rs.50,000 under section 80DD, irrespective of the amount deposited. In case his father has severe disability, the deduction would be Rs. 1,00,000.

SECTION 80U: DISABLED ASSESSEE

Section 80U provides deduction to an individual, being a resident, who, at any time during the previous year, is certified by the medical authority to be a person with disability

Quantum of DeductionThe quantum of deduction is Rs. 50,000. A higher deduction of Rs. 1,00,000 shall be available if such a person is suffering with severe disability.Every individual claiming a deduction under this section shall furnish a copy of the certificate issued by the medical authority along with the return of income under section 139.SECTION 80DDB: MEDICAL TREATMENT OF SPECIFIED DIESEASEWhere a resident individual or resident HUF incurs an expenditure for medical treatment of a specified disease of the assessee himself or dependent relative then he shall be entitled to a


deduction of Rs. 40,000 or the amount of expenditure incurred, whichever is lower. But the person for whom the amount is incurred is a senior citizen the deduction shall be Rs. 60,000 or the amount incurred whichever is lower. But if such a person receives any amount as insurance

121claim in respect of the expenditure incurred then the amount of deduction shall be reduced by the amount so received.For the purposes of Section 80DD and Section 80DDB relative means Spouse, children, Parents, Brother and sisters.SECTION 80E: INTEREST ON EDUCATION LOANSection 80E allows deduction to an individual for payment of interest on loan taken by him from Financial Institution, banks or notified Financial Institution (HDFC Ltd.) or approved charitable institution for pursuing Higher Education. The amount of deduction is restricted to a maximum of 8 consecutive years starting from the assessment year in which the first repayment is made. The deduction shall be available whether the loan is taken for higher education of individual himself or for the purpose of his spouse and children or the student for whom the individual is the legal guardian.Points to be noted:

"Higher Education" means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any School, Board or University recognized by the Central Govt, or State Govt, or Local Authority or by any other authority authorised by the Central Govt, or State Govt, or Local Authority to do

SECTION 80G: DONATION TO CERTAIN FUNDS/TRUST ETC.

This section provides for deduction for donations to certain funds or Charitable Institutions. For the sake of simplicity we divide deduction under this section into two parts: Deduction without ceiling limit and deduction subject to certain limit.

Deduction without ceiling limit: This is again divided into two parts: 100 % item and 50% item.

100% items without any limit: Donation to following are allowed without any ceiling limit i.e full amount is allowed:

National Defence Fund Central Army Welfare Fund

Prime Minister's National Relief Fund Chief Minister's Relief Fund


Prime Minister's Armenia Earthquake

Relief Fund

National sports Fund or National Cultural

Fund or Fund for Technology Development

Africa Fund National Trusts for welfare of persons with

Autism, Cerebral palsy, Mental

Retardation, Multiple Disabilities.

National Foundation for Communal Harmony

Zila Saksharta Samity Institute of National Eminence

B.50% items without any limit

In the following cases 50%o of the amount paid are allowed as deduction without any limit:

□ Jawaharlal Nehru Memorial Fund

□ Prime Minister's Drought Relief Fund

□ National Children's Fund ■

□ Indira Gandhi Memorial Trust

□ Rajiv Gandhi Foundation100% and 50% items with ceiling limitIn the following cases the aggregate of amount paid or 10% of the "Adjusted Gross Total Income"1 whichever is less shall be taken as the "Net Qualifying limit". Thereafter, 100% or 50% of the Net Qualifying limit shall be allowed as deduction as the case may be:C. 100% with ceiling limit

Govt./Approved local authority/Institution or association to be utilised for promoting family planning.

The Indian Olympic Association or notified/ approved institution for promoting sports and games in India (deduction is available only if donation is given by a company).

D.50%o with ceiling limit Any trust or institution which satisfies condition stated in Section 80G (5) Government or local authority for any charitable purpose other than for the purpose of

promoting family planning. Any authority referred to in Section 10(20A) - an authority for planning and developing

towns, villages, etc.Adjusted Gross Total Income means Gross Total Income as reduced by Long term Capital Gains; STCG subjected to STT and all deductions permissible u/ss 80C to 80U except Section 80G

Illustration 7: Compute Deduction u/s 80G from the folio wing:


Business Income 4,00,000

Short term Capital Gain 25,000

Long term Capital Gain 50,000

Income from other Sources 18,000

Other Deductions under Chapter VIA 5,000 8,000

Deduction under Section 80D Deduction under Section 80CCC

Donationsi. National Defence Fund ii. Central Army Welfare Fund Iii Jawaharlal Nehru Memorial Fund iv. iV Donation to Govt, of India for promoting Family planning v. Donation to an approved charitable

10,00015,000

8,000

12,000

5,000 40,000

trust- In Kind- In Cash

Solution:Calculation of Deduction u/s 80GCalculation of Adjusted Gross Total IncomeGross Total Income 4,93,000Less: Long term Capital Gain 50,000Less: Deduction under chapter VIA Section 80CCC 8,000jkgjjgjgjgj Section 81D 5,000 13,000

4, 30,00010% of adjusted Gross Total Income 43,000 Note: In the given problem deductions which are subject to ceiling limit are donation to Govt, of India for promoting family planning and to approved charitable trust in cash. The Net Qualifying


amount of these deductions shall be the aggregate of donation given or 10% of adjusted Gross Total Income whichever is less i.e. Rs. 52,000 or Rs. 43,000 whichever is less. Now, the individual net qualifying amount of each of these donations shall be as under:

Donation to Govt, of India for promoting family planning Rs.12, 000Donation to approved charitable trust (Rs. 43,000 - Rs. 12,000) Rs. 31,000C. Calculation of Deduction u/s 80G

Gross Net Rate of Amount

Qualifying Qualifying Deduction Of

PARTICULARS Amount Amount Deduction

National Defence Fund 10,000 10,000 100% 10,000

Central Army Welfare Fund 15,000 15,000 100% 15,000

Jawaharlal Nehru Memorial Fund 8,000 8,000 50% 4,000

Donation to Govt, of India for promoting

Family planning 12,000 12,000 100% 12,000

Donation to an approved charitable trust

- In Kind NIL NIL NIL NIL

- In Cash 40,000 31,000 50% 15,500

Total 85,000 76,000 56,500

SECTION 80GG: DEDUCTION FOR RENT PAID

The following conditions must be satisfied in order to claim deduction under this section1) This deduction is allowed only to an individual2) The individual pays rent for his accommodation3) The individual is either a self employed person or if he is an employee he is not entitled to any HRA4) The individual, his or her spouse or minor child or a HUF of which he/she is a

member does not own any residential accommodation at the place where he works or carries on his business or profession

Adjusted Gross Total Income means Gross Total Income as reduced by Long term Capital Gains STCG subjected to STT and all deductions permissible u/ss 80C to 80U except Section 80GG.Quantum of Deduction


Deduction shall be restricted to the least of the following : Rent less 10% of Adjusted Total Income 25% of adjusted Total Income Rs. 2,000 per months

125Example 8: Mr. A, a business man submits the following particulars for the previous year 2010-

11.a)Income from House property at Kolkata Rs. 30,000b) Business income Rs. 40,000c) Long term capital gains Rs. 30,000d) Deduction U/s 80C Rs. 12,000

He pays Rs. 2,000 p.m. as rent for his residential accommodation in Delhi. Neither, he nor his family owns any residential accommodation. Compute Total income for A.Y. 2011-12

Solution:Amount

a) Income from house property 30,000b) Business Income 40,000c) Long term capital gains 30,000

Gross Total Income 1,00,000Less: Deduction under chapter VI A

1) Deduction u/s 80C 12,000

2) u/s 80GG (Note 1) 14,500Total Income 73,500

Note 1: Deduction u/s 80GG shall be the minimum of the following thetee amounts –

a) Rent paid – 10% of adjusted Gross Total Income =24,000-5,800 18,200

b) 25% of adjusted Gross Total Income 14,500c) Rs. 2,000 p.m 24,000Adjustted Gross Total Income = Gti – LTCG – Deduction u/s .80C to 80UExcept u/s. 80GG = 1,00,000-30,000-12,000 = 58,000

SECTION 80GGA: DONATION TO SCIENTIFIC RESEARCH ASSOCIATIONSection 80GGA provides deduction in respect of payment to the following(a) approved research association or to a University, college or other institution to be used for scientific research :(b)approved research association, University, college or other institution to be used for research in social science or statistical research(c)association or institution, which has as its object the undertaking of any programme of rural development, or training of persons for implementing programmes of rural developmentName of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

(djpublic sector company or a local authority or to an association or institution approved by the National Committee, for carrying out any eligible project or scheme(e)any sum paid to a rural development fund(f)any sum paid to the National Urban Poverty Eradication Fund.

126No deduction under this section shall be allowed in the case of an assessee whose gross total income includes income which is chargeable under the head "Profits and gains of business or profession". The assessee shall not be denied deduction even if, after giving donation, the approval granted to the associations has been withdrawn.

SECTION 80GGB: DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN

BY COMPANIES TO POLITICAL PARTIESIn computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it, in the previous year to any political party or an electoral trust..SECTION 80GGC: DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVENBY ANY PERSON TO POLITICAL PARTIESIn computing the total income of an assessee, being any person, except local authority and every artificial juridical person wholly or partly funded by the Government, there shall be deducted any amount of contribution made by him, in the previous year, to a political party or an electoral.trust.

SECTION 80LA: INCOME OF OFF SHORE BANKING UNITSDeduction U/s 80LA is available if the following conditions are satisfied:1. The assessee is a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or is a unit of an International Financial Services Centre2. It has a branch in India located in a Special Economic Zone3. Deduction shall be allowed to the assessee in respect of the following incomes:Any income: {a) from an offshore banking unit in a special economic zone;(b)from the business, referred to in section 6(1) of the Banking Regulation Act, 1949, with an undertaking located in a special economic zone or any other undertaking which develops, develops and operates or operates and maintains a special economic zone;(c)from any unit of the International Financial Service Centre from its business for which it has been approved for setting up in such a centre in a Special Economic Zone.Amount of deductionIf the above enunciated conditions are satisfied then 100% of the aforesaid income is deductible for 5 first years and 50% for next 5 years."Offshore Banking Unit" means a branch of a bank in India located in the special economic zone and has obtained 'he permission under section 23(l)(a) of the Banking Regulation Act, 1949;SECTION 80P: INCOME OF CO-OPERATIVE SOCIETY


Where the assessee is a co-operative society and its gross total income includes the following income, a deduction shall be allowed in accordance with and subject to the provisions of this section:Where 100% deduction is allowed:

127In the case of the following co-operative societies, full deduction is allowable in respect of following incomes:

(a) Profits attributable to certain specified activities: 100% of the profits, included in Gross Total Income, attributable to any one or more of the following activities are deductible to a co-operative society engaged in -

(i) carrying on the business of banking or providing credit facilities to its members, or(ii)a cottage industry or

(iii')the marketing of agricultural produce grown by its members, or

(iv)the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

(v) the processing, without the aid of power, of the agricultural produce of its members, or

(vi) the collective disposal of the labour of its members, or

(vii')fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,

However, in the case of a co-operative society falling under sub-clause (vi), and (vii) above, the deduction is available subject to the condition that the rules and bye laws of the society restrict the voting rights to the following classes of its member, namely:-i)the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;(ii)the co-operative credit societies which provide financial assistance to the society;iii)the State Government;b) Profits of certain primary co-operative societies: 100% of the profits, included in the Gross total income are deductible in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to—(i)a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or(ii')the Government or a local authority; or


(iii)a Government company as defined in section 617 of the Companies Act, 1956, or a statutory corporation (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),(c) in respect of any income by way of interest or dividends derived by the co-operative society fromits investments with any other co-operative society, the whole of such income.

128(d) in respect of any income derived by the co-operative society from the letting of godowns or 9 warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income.Where deduction is allowed to a limited extent(a) in the case of a co-operative society engaged in activities other than those specified in (a) and (b) above either independently of, or in addition to, all or any of the activities so specified, the profits and gains attributable to such activities upto the maximum limits indicated below are deductible.

(i) where such co-operative society is a consumers' co-operative society Rs. 1,00,000

(ii) in any other case, Rs. 50,000Explanation—"consumers' co-operative society" means a society for the benefit of the consumers(b) 100% of the income from interest on securities or income from house property shall be allowed as deduction in case of a co-operative society other than housing society or an urban consumer's society or a society carrying on transport business or a society engaged in manufacturing operation with the aid of power provided Gross Total Income of such co-operative society does not exceed Rs. 20,000.

Explanation—"urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.

Note: However, the exemption shall not be available to any co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. But, deduction shall still be available to a co-operative society which is engaged in the business of providing credit facilities to its member.

Deduction u/s 80P in respect of business income of a co-operative shall be available with reference to income after claiming deduction u/s 801 and 80IA.


SECTION 80QQB: DEDUCTION FOR ROYALTY INCOMEThe following conditions should be satisfied -

1. The assessee is a resident individual and has derived royalty income from the book authored

by him which is in the nature of literary, artistic or scientific nature. Consideration includes

an advance payment on account of such royalties or copyright fees, which is not returnable.

129

2. However, the "book" shall not include brochures, commentaries, diaries, guides, journals,

magazines, newspapers, pamphlets, text books for schools.

3. Where the income by way of royalty or the copyright fee, is not a lump sum consideration

so much of the income as is in excess of 15% of the value of such books sold during the

previous year, shall be ignored.

4. The taxpayer shall have to furnish a certificate in the prescribed manner duly verified by the

person responsible for paying the income.

5. Where any income is earned from outside India it must be brought into India in convertible

foreign

exchange within a period of 6 months from the end of the previous year or within such

further period as the Reserve Bank of India may extend.Amount of deductionIf the aforesaid conditions are satisfied, then the amount of deduction shall be lower of the following -a. Rs.3,00,000 ; orb. Income stated inSECTION 80RRB: DEDUCTION FOR ROYALTY INCOMEThe following conditions should be satisfied in order to claim deduction under section 80RRB-

1. The assessee is a resident individual is in receipt of any income by way of royalty in

respect of patent. It includes advance royalty which is not returnable.

2. The Assessee shall have to furnish a certificate in the prescribed form from prescribed

authority along with the return of income.

3. Where any income is earned from outside India it must be brought into India in

convertible foreign

exchange within a period of 6 months from the end of the previous year or within such further

period as the Reserve Bank of India may extend.

Amount of deduction: - If the aforesaid conditions are satisfied, then the amount of deduction is

—

(a) Rs.3,00,000; or


(b) Income stated whichever is lower.

130RELIEF U/s 89(1)

Relief is provided in the following cases:

(i) in respect of salary received in advance or in arrears

(ii) in respect of gratuity

(iii) in respect of compensation or termination of employment.

(iv) in respect of commutation of employment

(v) in respect of other payments(vi) in case of family pension paid in arrears to family members of the deceased employee.

"Provided that no such relief shall be granted in respect of any amount received or receivable by an

assessee on his voluntary retirement or termination of his service, if an exemption in respect of

voluntary retirement has been claimed by the assessee u/s 10(10C) in respect of such, or any other,

assessment year";

Example: Mr. X, an employee of Z Ltd. gives you the following information for computation of Relief U/s 89(1):

Salary income after all deductions Rs. 9,52,000

During the year arrears of salary (not included above) Rs 15,000 was received relating to F.Y. 2002-03

Assessed Income of F.Y. 2002- 03 Rs. 66,000

Total Income

of

2011-12

on receipt

basis

Total Income

of2011-12

On accrual

basis

Total Income

Of 2003-04 on

accrual basis

Total Income of

2003-04 on

receipt basis

Salary Computed 9,52,000 9,52,000 66,000 66,000

Arrears of Salary 15,000 - 15,000 -

Total Income 9,67,000 9,52,000 81,000 66,000

Tax Payable 1,44,100 1,39,600 6,200 3,200


Add: Education Cess @ 3%

4,323 4,188

Tax Liabilities including Education cess

1,48,523 1,43,788 6,200 3,200

131

Solution.

Additional Tax required to pay in A.Y. 201 1-12 1,48,420 - 1,43,790 = 4 630Additional Tax that would have been paid if charged to tax in A.Y. 2003-04

= 6,200-3,200= 3,000Excess Tax Payable - Relief U/s 89(1) 1,630Tax Payable 1,48,420Less: Relief U/s 89(1) 1630 Tax Payable 1,46,790"


132

GENERAL EXEMPTIONS

Following income are exempted:1. Agricultural Income U/s 10(1)

-2. Any sum received by a member of HUF from income of the family is exempt U/s 10(2).3. Share of Profit of a partner of a Partnership firm assessed as such is exempt U/s 10(2 A)4. Interest on Non Resident (External) Account U/s 10(4)5. Interest on PPF U/s 10(11)6. Interest on Post Savings Bank U/s 10(15)7. scholarships granted to meet the cost of education U/s 10(16)

8. Daily Allowance and Constituency Allowance received by a Member of Parliament or a member of State Legislature or of any Committee thereof is exempted U/s 10(17).9. Interest on Deposit with Off Shore Banking Unit U/s 10(15)10. Dividend from Indian Company U/s 10(34) [other than dividend U/s 2(22)(e)]11. Dividend and interest from Approved Mutual Fund/UTI U/s 10(35)12. any income received by any person for, or on behalf of, the New Pension System Trust established on the 27th day of February , 2008 under the provision of the Indian Trust Act ,1882". [Section 10(44)]OTHER EXEMPTIONSSums received from life insurance policy [Section 1Q(10D)| . Section 10(10D) provides exemption in respect of any sum received under a life insurance policy,including the sum allocated by way of bonus on such policy. The exemption is not available in the following cases:(a)any sum received under section 80DD(3)(b)any sum received under a Keyman insurance policy; or(c)any sum received under an insurance policy issued in respect of which the premium payable for any ofthe years during the term of the policy exceeds 20% of the actual capital sum assured.The exemption shall, however, be available in case the amount is received on the death of any person


133AGRICULTURAL INCOME

Agricultural Income U/s 2(1 A) means(a)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 way of agricultural operations including the processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market or sale of such produce.(c)any income derived from any building , farmhouse or land utilised in connection with cultivation of agricultural produce.As per Explanation 3 to Section 2 (1A) income derived from saplings or seedlings grown in a nurseryshall be deemed to be agricultural income.Discussion Point : Which of the following are agricultural income?sNo.

Particulars Yes/No

Case law/ Reasons

1. Dividend from Company whose entire income is derived from agriculture

No Bacha F. Guzdar Vs. Commissioner of Income Tax

2. Interest on arrear of rent receivable in respect of agricultural land

No It is neither rent nor revenue from Land-CIT Vs. K.N.Singh

3. Income from lease of land for grazing of cattle required for agricultural purpose

Yes CIT Vs. R.B.Rai Shamsherjang Bahadur

4. Salary by an active partner from a firm whose entire income is derived from agricultural operations

Yes It a form of adjustment of firm's income. CIT Vs. Chidambaram

5. Interest on Capital by any partner whose entire income is derived from agricultural operations

Yes It a form of adjustment of firm's income. CIT Vs. M.L. Mahindra


6. Sale of trees replanted in forest and subsequent operations

Yes CIT Vs. Benoy Kumar Sahas Roy

7. Compensation received from insurance Company for damage of any agricultural crop

Yes CIT Vs. B.Gupta (tea) Ltd.

8. Natural growth of trees & Sale No Mustafa AH Khan Vs. CIT. There is no agricultural process involved.

9. Director's Remuneration from an agricultural Co. as fixed percentage of Net Profit

No Premier Construction Co. Ltd. Vs. CIT

10. Interest received by a money lender in the form of agricultural produce

No Same case as in point 11

11. Income from supply of water for irrigation purpose

No Sri Ranga Vilas Gunning & Oil Mills Vs. CIT

Income which is partially agricultural and partly from business

Nature of Income Business Income Agricultural Income

Growing and Manufacturing of Tea [Rule 8] 40% 60%

Growing and Selling of Rubber [Rule 7A] 35% 65%

Sale of Coffee grown and cured by the seller [Rule 25% 75%

7B(1)1

Sale of Coffee grown, cured, roasted and grounded 40% 60%

by the seller with or without mixing chicory [Rule

7B(2)1


For Other Composite Business [Rule 7] In computing Business Income

Market Value

the Market Value of the

Of agriculture Agriculturalagricultural produce is

to beProducts

deducted.

135RULES FOR COMPUTING AGRICULTURAL INCOMERule 1- Agricultural income of the nature referred in section 2(lA)(a) will be computed on the same basis as is adopted for the computation of income chargeable under the head "Income from other sources" under section 56 to 59.Rule 2- Agricultural income of the nature referred in section 2(lA)(b) will broadly be computed as if it were income chargeable to tax under the head "PGBP" and provision of section 30 to 32, 36, 37, 40, 40A [other than sub-section (3) and (4)], 41, 43, 43A, 43B and 43C will apply accordingly.Rule 3- Agricultural income of the nature referred in section 2(lA)(c) will be computed as if were income chargeable under the head "Income from house property" under section 23 to 27.Rule 4- Where an assessee derives income from sale of tea grown and manufactured by him in India, 60% of total income from such business, as computed in accordance with rule 8 of the income tax Rules, will be regarded as agricultural income.Rule 5- Where the assessee is a member of an association of person or a body individuals (other than a Hindu Undivided Family, a company or a firm) which, in the previous year, has either no income chargeable to tax or has non-agricultural income of not exceeding the maximum amount not chargeable to tax in the case of AOPs or BOIs, but has agricultural income, then the agricultural income or loss of the association or body is to be computed in accordance with these rules and the share of the assessee in the agricultural income or loss so computed will be regarded as agricultural income or loss of the assessee.Rule 6- Loss incurred in agriculture will be allowed to be set off against gains from agriculture. No set off will, however, be allowed in respect of an assessee's share in the agricultural loss of an AOPs or BOIs.Rule 7- Any tax levied by a State Government on agricultural income will be allowed as deduction.Rule 8- The unabsorbed loss from agricultural activities during the previous year relevant to the A.Y. 2002-03 to 2010-11 will be set off against the agricultural income of the assessment year 2011-12 in chronological order. Likewise, an absorbed loss from agriculture during the previous year relevant to the assessment year 2003-04 to 2011- 12 will be taken into account in determining the net agricultural income for the purpose of payment of advance tax during the financial year 2011-12. The set-off of loss will, in either case, be allowed only if such loss has


already been determined. Where a person is succeeded by another person (other than the person who was incurred the loss) cannot claim the set off as discussed above.Rule 9- Where the net result of computation of agricultural income from various sources is a loss, the loss will bedisregarded and the net agricultural income of the assessee shall be taken as NILRule 10- The net agricultural income of the assessee will be rounded off to the nearest multiple of Rs.10.

136

TAX LIABILITY OF INDIVIDUALS FOR A.Y. 2011-12Rates of Tax in force

TOTAL INCOME TAX

UptoRs. 1,60,000 NIL

Next Rs. 3,40,000 i.e. Rs. 1,60,001 to Rs. 5,00,000 @ 10%

Next Rs. 3,00,000 i.e. Rs. 5,00,001 to Rs.8,00,000 @ 20%

Above Rs. 8,00,000 @ 30%

Senior Citizen However for resident individual who is at least 65 years of age at any time during the Previous Yt Income shall be exempted upto Rs. 2,40,000. Thereafter the aforesaid slab is to applied.Resident Woman For resident woman, not being a senior citizen income upto Rs. 1,90,000 shall be exempt Thereafter the aforesaid slab is to applied.Surcharge: NIL

Education Cess: 3% on the amount of Income Tax and surcharge [Including 1% SHEC]

TAX RATES PARTICULARLY SPECIFIED ON CERTAIN INCOMESSection Income Income Tax Rate A.Y. 2011-12


111A Short Term Capital gains on sale of

Equity shares and units of Equity

oriented Fund on which STT has

been paid

15% subject to basic exemption limit for

resident assessee.

112 Long Term Capital GainsGeneral Rate

- Long Term Capital Gain on

Listed shares or Mutual Funds or

UTI without indexation


resident assessee.


resident assessee.

115BB Winnings from lotteries, crossword

puzzles, or races including horse

races or card games and other

games of any sort or from

gambling or betting of any from or

nature whatsoever

30% without basic exemption limit

Partial Integration and Non Integration of Agricultural Income

Though there is no tax on Agricultural Income but if an assessee has non-agricultural

income as well as agricultural income such agricultural income is included in Total Income

for the purpose of computation of income tax on non -agricultural income. This is also

known as partial integration of agricultural income with non-agricultural income or indirect

way of taxing agricultural income. This is done only if the following two conditions are

satisfied:1. Non agricultural income exceeds the maximum tax exemption limit2. Agricultural income exceeds Rs. 5,000

Computation of tax where there is agricultural income1. Add agricultural income to the Non Agricultural income as if it is also part of total income2. Calculate the tax on total income

3. Then calculate the tax on (Agricultural Income Maximum Exemption limit) \ 4. Tax Liability before rebate -=Tax as computed in 2 less 3


138

PROVISIONS RELATING TO FILING OF RETURN

FILING OF RETURN AND PROCEDURE FOR FILING THEREOFSubmission of return of IncomeSection 139(1) provides that following persons shall voluntarily file their return of income for any previous year on or before the due date in the prescribed form and manner(a) a company or a firm shall compulsorily file its return of income(b) (i) individual; (ii) HUF; (iii) Association of Persxons (iv) Body of Individuals and (v) artificial juridical person shall file their return of income if their Gross Total Income or total income before giving exemption under section 10A or 10B or 10BA exceeded the maximum exemption limit for such previous year.(c ) any other person if their total income exceeded the maximum exemption limit for such previous year.Due Pates of Filing of ReturnsParticulars Due Date (of AY)1. Company 30 th September2. Other than a Company(i) Where the accounts of the assessee are required under thisAct or any other law to be audited or where the assessee is a workingPartner in a firm whose accounts are required to be audited under thisAct or under any other law for the time being in force 30th September

(iii) in case of any other assessee 31st July


As per circular (No. 639 dated 13/11/1992) issued by CBDT if the IT department is closed on the last day for filing of return due to holiday the assessee can furnish the return on the next day on which the department is opened.

Return of Loss: U/s 139(3)Section 139(3) requires the assessee to file a return of loss in the same manner as in the case of return of income within the time allowed U/s 139(1). The following losses cannot be carried forward if the return of loss is not submitted within time.a. business loss (Speculation or otherwise )b. capital lossesc. Loss from an activity of owning & maintaining race horses.Belated Return[Section 139(4)1

139Any person who has not furnished a return within the time allowed to him U/s 139(1) or within the time allowed under a notice issued U/s 142(1) may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant Assessment Year or before the completion of the Assessment whichever is earlier.Revised Return [Sec. 139(5)]If certain condition are satisfied a person may furnish a revised return of income U/s 139(5) :1. A return can be revised only if such a return is furnished U/s. 139(1) or in pursuance of a notice U/s 142(1). A return filed U/s 139(4) cannot be revised. (Vimal Chandra Vs. CIT ).

2.Revised return can be filed U/s 139(5) only if the assessee discovers any omission or wrong statement in return originally filed. While "omission" denotes an unintentional Act or neglect to perform what the law requires, wrong statement" should include within its scope, statement which is not false to the knowledge ofthe person making it.

3.Revised Return U/S 139(5) can be filed at any time before the expiry of one year from the end of the relevant Assessment Year or before the completion of the assessment, whichever is earlier. A revised return can also be revised again, subject to other conditions.

Return of Income of Charitable Trusts and lnstitutions[Sec. 139(4A)]

A Charitable Trust is required to file return of income if its total income before giving exemption under sections ll and 12 exceeds the maximum exemption limit shall furnish a return of such income of the previous year in the prescribed form and manner on or before due date prescribed U/s 139(1).


Filing of return of income of a political party

Section 139 (4B)states that the chief executive officer of every political party shall, if its total income before giving exemption U/s'13 A exceeds maximum exemption limit furnish a return of such income of the f previous year in the prescribed form and prescribed manner on or before due date. Return of Income of certain associations and institutions (Sec 139(4C)Section 139(4C) provides that every

140(a) research association referred to in section 10(21);(b) news agency referred to in section 10 (22B)|(c) association or institution referred to in section 10 (23A)(d) institution referred to in section 10(23B)(e) fund or institution or trust or institution or any university or other educational institution or any hospital or other medical institution clauses (iv),(v),(vi) and (via) of section 10(23C)(f) trade union referred to in section 10(24) shall, if the total income before giving exemption exceeds maximum exemption limit furnish a return of such income of the previous year in the prescribed form and prescribed manner.Return of Income of institution approved U/s 35(1) [Section 139(4P)]Every College, University or other institution referred to in Section 35(1) (ii)/(iii)which is not required to furnish return under any other provision shall furnish its return of income if its total income before giving exemption exceeds the maximum exemption limit in any previous year in the prescribed form and manner on or before due date prescribed U/s 139(1).Submission of returns through Tax Return Preparers [Sec. 139B]A new section 139B has been inserted with effect from June 1,2008. If provides as follows-1 for the purpose of enabling any specified class of persons to prepare and famish returns of income, the Board may frame a scheme providing that such persons may furnish their returns of income through a Tax Return Preparer authorized to act as such under the scheme.2. The Scheme framed under the above provisions shall specify the manner in which the Tax Return preparer shall assist the persons furnishing the return of income, and shall also affix his signature on such return.3. A Tax Return Preparer may be an individual who has been authorized to act as a Tax Return Preparer under the above scheme However the following cannot be TRP:


(i) a Chartered Accountant or (ii) an employee of the specified class or classes of persons, (iii) or an officer of a Scheduled bank with which the assessee maintains a current account or has other regular dealings (iv) or any legal practitioner entitled to practice in any civil court in India4.Any individual who holds a graduation degree from a recognized Indian University in the fields of Business Administration or Management or Commerce or Economics or Law or Mathematics or Statistics shall be eligible to act as Tax Return Preparer.5. Preparation of and furnishing the Return of Income by the Tax Return Preparer -(1) An eligible person may, at his option, furnish his return of income u/s. 139 of the Act for any assessment year after getting it prepared through a Tax Return Preparer.Provided that the return of income for an assessment year shall not be prepared and furnished through a Tax Return Preparer, if-

141(i) an eligible person is carrying out business or profession during the previous year relevant to such assessment year and accounts of the business or profession for that previous year are required to be audited u/s. 44AB of the Act or under any other law for the time being in force; or(ineligible person is not resident in India during the previous year relevant to such assessment year:Provided further that an eligible person shall not furnish a revised return of income u/s. 139(5) of the Act for any assessment year through a Tax Return Preparer unless he has furnished the original return of income for that assessment year through such or any other Tax Return Preparer:

DEFECTIVE RETURNSFor the purpose of Sec. 139(9) ar return of income is regarded as defective if any one or more of the following defects are there :1. The annexures, statements and column in the return of income are

not duly filled in.2. The return of income is not accompanied by one or more of the

following namely :a. a computation of tax payable on the basis of the return ;b. The audit report referred to in section 44AB ;c. The proof of advance tax and tax on self- assessment paid ;d. Where regular books of account are

maintained by the assessee :(i) copies of Mfg. A/c,

Trading A/c, P/LA/c(ii) In case of a proprietary business or profession, personal Accounts of

the proprietor; in case of a firm, AOP, BOI personal accounts of the partners or members thereof


e. Where the accounts of the assessee have been audited, copies of the audited P/L, B/S, copies of auditor's report.

f. Where an audit of cost accounts of the assessee, the auditor's reportg. Where regular books of account are not maintained by the assessee, a

statement indicating the amount of turnover, Gross Profit , Expenses , Net Profit as at the end of Previous Year inrelation to Business or Profession on which such amounts have been computed.

A defective return is also known as an incomplete return. If the AO considers the return as defective he may intimate the assessee to rectify it within 15 days or such further period as he may allow. If the defects are not rectified within the stipulated period of time the return shall be treated as invalid and it would be deemed as if the assessee had failed to furnish the return. If

142however the return is rectified after the expiry of the period but before the assessment is completed the AO may excuse the delay and treat the return as valid. A return which is not signed or verified is not a defective return but an invalid return and therefore, it is no return in the eyes of the law. A return is not regarded as defective if the tax deducted at source certificate or tax collected at source is not furnished alongwith the return and the same is furnished within 2 years from the end of relevant assessment year.Section 139C: Section 139C provides that the CBDT may make rules providing for a class or classes of persons who may not be required to required to furnish documents, statements, receipts, certificate, reports of audit or any other documents, which are otherwise required to be furnished along with the return under any other provisions of this Act. However, on demand the said documents, statements, receipts, certificate, reports of audit or any other documents have to be produced before the assessing officer.Section 139D: Section 139D empower the CBDT to make rules providing for—(a)The class or classes of persons who shall be required to furnish the return of income in electronic form;

(b)The form and the manner in which the return of income in electronic form may be furnished;(c )The documents, statements, receipts, certificates or audited reports which may not be furnished along with the return of income in electronic form but have to be produced before the Assessing Officer on demand;(d)The computer resource or the electronic record to which the return of income in electronic form may be transmitted.

PERMANENT ACCOUNT NUMBER [SECTION 139A]

Who must apply for PAN


Following persons must apply for PAN:

(i)if his total income exceeds maximum exemption limit.

(ii/)carrying on any business or profession whose total sales, turnover or gross receipts are or is likely to exceed Rs. 5,00,000 in any previous year; or

(iii)who is required to furnish a return of income under section 13 9(4A),(iv) being an employer required to furnish return of fringe benefit U/s 115 WD(v) Persons specified by the Government.It may be noted that A.O. may allot PAN suo-moto to any person.

Quoting of PANEvery person shall—(a)quote such number in all his returns to, or correspondence with, any income-tax authority;

143(b)quote such number in all challans for the payment of any sum due under this Act;

(c) the person deducting tax or collecting tax must also quote PAN of the deductee and of the collectee in all statements.

The Board has prescribed the following transactions in which quoting of PAN will be compulsory:

(a)sale or purchase of any immovable property valued at Rs. 5,00,000

(b)sale or purchase of a motor vehicle, (excluding two wheeled vehicles) which requires registration by a registering authority

(c)a time deposit, exceeding Rs. 50,000, with a banking company or opening any other account with Bank(d)a. deposit, exceeding Rs. 50,000, in any account with Post Office Savings Bank;(e)a contract of a value exceeding Rs. 1,00,000 for sale or purchase of securities(f) making an application for installation of a telephone connection(h)payment to hotels and restaurants against their bills for Rs. 25,000 or more at any one time ;(i)payment in cash for purchase of bank drafts for Rs. 50,000 or more during any one day;(j)deposit in cash aggregating Rs. 50,000 or more, with a banking company during any one day;(k) payment in cash in connection with travel to any foreign country exceeding Rs. 25,000 at any one time.

(1) making an application to any banking company or bank or to any other company or institution for issue of a credit card(m) Payment of an amount of Rs. 50,000 or more to a mutual fund for purchase of its units(n) Payment of an amount of Rs. 5.0,000 or more to a company for acquiring shares by it(o) Payment of an amount of Rs. 50,000 or more to a company or an institution for acquiring debentures or bonds issued by it.


SECTION 140: SIGNING OF RETURNS

ORGANISATIONSIGNING A UTHORITY

1. Individual (i)by the individual himself;'

- Where he is absent from India (ii) by the individual himself or

authorized person

-Where he is mentally incapacited (iii) Guardian or any other

competent person

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-Where due to other reason he cannot (iv) Any person duly authiorised by him or person sign the return holding valid power of attorney.2. HUF by the karta, and, where the karta is absent from India oris mentally incapacitated, by any other adult member of such family;3. Firm Managing Partner; but if he is not able to sign due to Unavoidable reason then any partner not being a minor.4. Limited liability Partnership Designated partner; but if he is not able to sign due to Unavoidable reason or where there is no designated Partner, by any partner thereof.5. Company (i) Managing Director; but if he is not able to sign due toNon Resident Company (ii) Person holding valid power of attorney Company in liquidation (iii) LiquidatorWhere mgt. has been taken over by Govt. (iv) Principal Officer

6.Local Authority Principal Officer7. Chief Executive Officer Chief Executive Officer8. Any Other Association Principal Officer or any member thereof 9. Any Other Person some person competent to act on his behalf


145

PUBLIC CHARITABLE TRUSTS AND RELIGIOUS TRUSTINTRODUCTION

A trust may be defined as an arrangement by which confidence is placed in another person and property is handed over to or vested in a person, to use and dispose it off for the benefit of another person. The various persons constituting a trust are discussed below:Author of Trust: The person who reposes the confidence is called the Author of the trust.

Trustee: The person who accepts the confidence is called the trusteeBeneficiary: The person for whose benefits the confidence is accepted is called the beneficiary.Sections 11, 12 and 13 provide exemption in respect of income of a charitable trusts. Section 2(15) defines Charitable trusts to include relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife ) and preservation of monuments or places or objects of I artistic or historic interes and the advancement of any other object of general public utility. However, 'the advancement of any other object of general public utility'shall not be a charitable purpose, if it involves the carrying on of-(a) any activity in the nature of trade, commerce or business, or *(b) any activity of rendering any service in relation to any trade, commerce or business,for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or retention of such income, by the concerned entity.Provided that this proviso shall not be applicable if the aggregate vale of receipts from the activities referred to therein does not exceed Rs. 10,00,000 in the previous year.

Exemption U/s 11


1. Section 11, provides exemption in respect of the Income derived from property held under a trust for charitable and religious purposes to the extent applied in India. Voluntary Contributions, not being contributions made with specific direction that they shall form part of the corpus of the trust, shall also be deemed to be income derived from property held er trust. The exemption is however subject to the % following conditions:

2. The exemption is available only if the trust applies 85%of its income for charitable or religious purposes in India or accumulates income.

3. Trust and institution can carry out business activities if the business activities are incidental to the attainment of its objective and separate books are maintained without losing complete exemption from income tax.4. Further, Income from voluntary contributions with specific direction that they shall form part of the corpus trust is not deemed to be income of the trust.

146APPLICATION AND ACCUMULATION OF INCOME

In order to claim exemption, a charitable trusts or institution is required to apply at least 85% of the income of the income to charitable or for religious purposes. For this purpose, income means real income which has been received by the assessee and as such, income for the above purpose has to be computed applying normal rules of Accountancy. Thus depreciation shall be deducted.

APPLICATION OF INCOMESection 11(1) states that the exemption shall be available to the extent the income is applied for charitable purposes. For this purpose, application includes:1. Donation given by trusts2. Utilisation of income for meeting expenses.3. Interest bearing loans , advanced by educational trusts can be considered as an application of income and when the loan is returned the same may be considered as income.4. Repayment of loans taken for fulfillment of the objectives of the trust is also treated as an application of income.

What happens if trust fails to apply 85% of income for Charitable purposes ?

Income not received Any other reason

The trust should make an application to the The trust should make an Assessing officer for applying such application to the assessing Income in the year in which it receives or officer before due date for applying Subsequent Years Such income in the next year.


ACCUMULATION OF INCOMEWhere 85% of the income is not applied to charitable or religious purposes in India during the previous year but is accumulated or set apart, such income so accumulated or set apart shall be exempted, provided the following conditions are complied with, namely:(a)such person specifies, by notice in writing given to the Assessing Officer, the purpose for which the income is being accumulated or set apart and the period of accumulation, which shall in no case exceed 5 years;(b)the money accumulated or set apart is invested or deposited in the modes specified in Section 11(5)Consequences of defaultSection 11(3) states that if in any year the income which is accumulated for specified purpose of the trust,

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1. is applied to purposes other than charitable or religious purposes or ceases to be accumulated or set apart for application to such purposes, it will become chargeable to tax as the income of

that year:

2. ceases to remain invested or deposited in any of the forms or modes specified in section 11(5) then also the income so accumulated shall be deemed to be income of that year

3.is not utilised for the purpose for which it is so accumulated or set apart during the period of accumulation or in the year immediately following the expiry thereof then it will become chargeable to tax as income of the previous year following the expiry of the aforesaid period4. is credited or paid to any trust registered under section 12AA or to any fund or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C) then it shall be treated as income of that year

MODES OF INVESTMENT U/S 11(5)

The forms and modes of investing or depositing the money 11(2) are as follows: namely:—

(i) Investment in Government savings certificates; units of the Unit Trust of India, Central

Government or a

State Government securities; immovable property.

(ii) deposit in any account with the Post Office Savings Bank; scheduled bank or a co-operative

Banks; IDBI or investment or deposit in any public sector company:


(iii) Investment in any bonds issued by a financial corporation providing long-term finance for

industrial development or construction or purchase of houses in India

(iv) Deposits with or investment in any bonds issued by a public company providing long-term

finance for urban infrastructure in India.

(v) Any other form or mode of investment or deposit as may be prescribed

The following investment in share is eligible

1. Share in a public sector company2. Share of NSDL and CDSl3. Units of Approved Mutual Fund

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PROCEDURE FOR REGISTRATION

A trust should apply for registration in prescribed form (No. 10A) with the Commissioner of

Income Tax. The exemption shall be applicable from the previous year in which the application

is made.Procedure: The Commissioner, on receipt of an application, shall within the expiry of six months from the end of the month in which the application was received for registration shall—(a)call for necessary documents or information from the trust or institution to satisfy himself about the genuineness of activities of the trust or institution and may also make necessary inquiries; and(b)after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he: (i)shall pass an order in writing registering the trust or institution;

ii)shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, after giving the applicant reasonable opportunity of being heard and a copy of such order shall be sent to the applicant:(3)If after granting registration subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with its objects he shall pass an order in writing canceling the registration of such trust or institution after giving such trust or institution a reasonable opportunity of being heard.

FORFEITURE OF EXEMPTION U/S 13

The following income of a trust do not qualify for exemption U/s 13


(a)any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public;(b) in the case of a charitable trust any income thereof if the trust is created or established for the benefit of any particular religious community or caste. However, a trust or institution created or established for the benefit of Scheduled Castes, backward classes, Scheduled Tribes or women and children shall not be deemed to be a trust or institution created or established for the benefit of a religious community or caste.(c) in the case of a charitable or religious trust, any part of income which enures for the benefit of persons stated in Section 13(3).(d) in the case of a charitable or religious trust the entire income thereof, if the funds are invested in any mode other than Section 11(5).(e) Further any anonymous donation referred to in Section 115BBC on which tax is payable shall not be exempted.Specified Persons U/s 13(3)(a)the author of the trust or the founder of the institution;

149(b)any person whose total contribution up to the end of the relevant previous year exceeds 50000©where such author, founder or person is a Hindu undivided family, a member of the family;(d)any trustee of the trust(e)any relative of any such author, founder, person, member, trustee or manager as aforesaid;(f)any concern in which any of the persons referred to above has a substantial interest."relative", in relation to an individual, means—

1. spouse of the individual; 2. brother or sister of the individual; 3. brother or sister of the spouse of the individual; 4. any lineal ascendant or descendant of the

individual; 5. any lineal ascendant or descendant of the spouse of

the individual;6. spouse of a person referred to in (ii) to (v)7. any lineal descendant of a brother or sister of either

the individual or of the spouse of the individual.ANONYMOUS DONATION [Sec. 115 BBC ]

The expression "anonymous donation" has been defined as follows-1. It a voluntary contribution referred to in section 2 (24) (iia) for which the person receiving suchcontribution does not maintain a record of -a. the identity indicating the name and address of the person making such contribution; andb. such other records as may be prescrided.2. Anonymous donation would be taxable at the rate of 30 % (+ SC + EC) to the extent such


donations exceed 5% of the total donations of such trust/ institution or a sum of Rs. 1,00,000, whichever is more.3. The above provisions are applicable in the case of following-(i). any trust of institution referred to in section 11;(ii) any university, educational institution, Hospitals, Medical Institution, funds referred to in section 10 (23C)4. The following anonymous donations shall not be covered by the new provisions of section 115BBC-(i) donations received by any trust of institution created or established wholly for religious purposes; and(ii) donations received by any trust of institution created or established for both religious as well as charitable purposes.

150Illustration : A wholly Charitable trust received total donations ofRs. 30,00,000 during the P. Y. 2010-11, out of which Rs.10,00,000 are anonymous donations. Compute tax payable on Anonymous Donation.

Solution: Amount (Rs.)Aggregate of anonymous donations 10,00,000Less: Higher of the following-5% of the total donations i.e., 5% of Rs.30,00,000 - Rs. 1,50,000(b) Rs. 1, 00,000 1,50,000 Taxable Anonymous Donations 8,50,000 Tax @ 30.9% of Rs.8,50,000 2,62,650


151EXEMPTIONS TO CERTAIN SPECIFIC ASSESSEES

1. Income of a local authority [Section 10 (20)]Following income of a local authority are exempted:(i) Income from house property, (ii) Capital gains (iii) Income from other sources(iv) Income from supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.For the purposes of this clause, the expression "local authority" means— (i) Panchayat (ii) Municipality (iii) Municipal Committee and District Board, (iv) Cantonment Board

. Income of trade union [Section 10(24)|

Following income of a Trade Union registered union under Trade Unions Act or an association of registered Unions shall be exempted:(i) Income from house property (ii) Income from other sources

Incomes of political parties [Section 13A] Following income of a political party are exempted(i) Income from house property, (ii) Capital gains (iii) Income from other sources

(iv) any income by way of voluntary contributions received by a political party from any person

Provided that –


(a) Such political party keep and maintains necessary book of account

(b) in respect of each such voluntary contribution in excess of Rs. 20,000, such political party keeps and maintains a recordof such contribution and the name and address of the person who has made such contribution; and

(c) the accounts of such political party are audited by a Chartered AccountantSpecial provisions relating to voluntary contributions received by electoral trust [Section 13B]Any voluntary contributions received by an electoral trust shall not be included in the total income of the previous year of such electoral trust, if-

(a) such electoral trust distributes to any political party, registered u/s 29A of the Representation of the People Act , 1951 during the said previous year, 95% of theaggregate donations received by it during the said previous year alongwith thesurplus, if any brought forward from any earlier previous year; and

(b) such electoral trust functions in accordance with the rules made by the Central. Govt.152

4. Income of certain National Funds, educational institution & hospital [S. 10(23C)1

A. Income of certain fundsAny income received by any person on behalf of the following funds is exempt from tax:(i)the Prime Minister's National Relief Fund; or(ii)the Prime Minister's Fund (Promotion of Folk Art); or(iii)the Prime Minister's Aid to Students Fund; or(iii)the National Foundation for Communal Harmony; or(iv)any other fund or institution established for charitable purposes which may be notified by the Central Government.

(v)any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be notified by the Central Government.B. Income of an Educational Institution and hospitalsIncome of any university or other educational institution existing solely for educational purposes and not for purposes of profit is exempt from tax u/s 10(23C)(i) if it is wholly or substantially financed by the Government; or (i) if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or(iii')if it is approved by the prescribed authority. Such educational institution is required to satisfy certain conditions.


C. Income of HospitalIncome of a hospital is exempted if the following conditions are satisfied:1. Income arises to the hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation,2. It exists solely for philanthropic purposes and not for purposes of profit, i3. It is: a. wholly or substantially financed by the Government; or *b. if the aggregate annual receipts of such hospital or institution do not exceed the amount Rs. 1 crore. Orc. which may be approved by the prescribed authority which is granted subject to certain conditions being satisfied.Points to be noted:1. It is to be noted that any anonymous donation referred to in Section 115BBC on which tax is payable in accordance with the provisions of the said section shall be included in the total income.

1532. Further, where the fund/Educational Instititution/Hospital makes an application for the purpose of grant of exemption or continuance thereof, such application shall be made on or before the 30th day of September of the relevant assessment year from which the exemption is sought.3. Where the taxable income of the Fund/Educational Institution/Hospital exceeds maximum exemption limit before giving exemption U/s 10(23C) then they must get their books of accounts audited.

A Charitable trust must also get its accounts audited if before giving exemption U/s 11 and U/s 12 its income exceeds maximum exemption limit.5. Income of Approved Mutual Funds are exempted U/s 10(23D):6. Income of Investor Protection Fund are exempted Section 10(23EA)

Venture capital funds and venture capital companies [Sec. 10(23FB)]-"Venture capital company must be granted a certificate of registration by the SEBI."Venture Capital Fund" must be operating under a trust deed registered Registration Act, 1908 and must be granted certificate of registration by SEBI.W.E.F. Asst Year 2010-11 the income of Venture Capital Fund and Venture Capital Companies shall be exempt only to the extent it is derived from investment in Venture Capital Undertaking whose shares are not listed on a recognized stock exchange in India and which is engaged in the following business:(i) Nanotechnology (ii) Information technology relating to hardware and software development (iii) Seed research and development (iv) Bio technology (v) Research and development of new


chemical entities in the pharmaceutical sector (vi) Production of bio fuels (vii) Building and operating composite hotel cume cinvention centers with seating capacity of more than 3,000 (viii) Developing, operating and/or maintaining any infrastructure facility and diary or poultry industry Exemption of compensation received on account of disasterAny amount received or receivable on account of disaster by an indivdual or his legal heir by way of compensation on account of disaster will be exempt from tax if such compensation is received from the Central Government, State Government or local authority. However this exemption will not be allowable to the extent of the amount of loss or damage allowed as deduction to the individual or his legal heir.

Income of 'Sikkimese' individual [10 (26AAA)]

The following income, which accrues or arises to a Sikkimese individual, shall be exempt from

income-tax

a) from any source in the state of Sikkim; orb) dividend or interest on securities from any place,

154

Expenditure incurred in relation to Exempted Income [S. 14A]For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Further where the Assessing Officer is not satisfied with the correctness of the claim of the assessee as to the expenditure incurred for earning such income, then the A.O. shall determine the quantum of such expenditure in accordance with the method prescribed by the CBDT.


155

TAX HOLIDAYA. EXEMPTIONS

Section 10AA: Special provisions in respect of newly established Units in SEZ

1. This Section provides for tax holiday to an entrepreneur in respect of income "derived by him from Units set up in Special Economic Zone for manufacture or production of any article or thing or providing service during the previous year.

2. Section 2(j) of The SEZ Act, 2006 defines entrepreneur as a person who has been granted a letter of approval by the Development Commissioner U/s 15(9).

3. The sale proceeds must be received on, or brought into India by the assessee in convertible foreign exchange.

4. Amount of Deduction : If the aforesaid conditions are satisfied the deduction shall be computed as follows:Profits of the business of the undertaking x Export Turnover of the undertaking Total Turnover of the undertaking


5. Period of deduction

If the undertaking begins to manufacture during previous year relevant to Assessment year 2007-08 in any special economic zone, deduction shall be 100% of profits from the export for first 5 years.

50% of such profits and gains for further 5 assessment years. For the next 5 years , a further deduction of 50% of the profit or amount transferred to

Special Economic Zone Re-investment Allowance Reserve Account whichever is lower.Special Provisions in respect of newly established 100% export oriented

undertaking fSection 1QB]

Section 10B has been inserted with a view to providing incentive (similar to tax holiday available u/s 10A) to 100%) export oriented units.

In this connection the following points must be noted:

156

1. It must be approved 100% export oriented undertaking: The expression "100%o export oriented undertaking" means an undertaking which has been approved as a 100%) export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951, and the rules made under that Act.

2. It must manufacture or produce any article or thing or computer software.Points 3 and 4 same as 10AA.5. Deduction shall be allowed for 10 consecutive years starting from the year in which the assessee commences production or manufacture of things or articles or computer software. But the deduction shall not be allowed beyond A. Y. 2011-2012.Special provisions in respect of export of certain articles or things [Section l0BA]This section applies to any undertaking which fulfils the following conditions, namely :—

(1) it manufactures or produces the hand-made articles or things, which are of artistic value and which requires the use of wood as the main raw material without the use of imported raw materials;

(2) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (3)90% or more of its sales are by way of exports of the eligible articles or things;


(4)it employs twenty or more workers during the previous year in the process of manufacture or production.(5) The sale proceeds must be received on, or brought into India by the assessee in convertible foreignexchange during previous year or within 6 months from the end of the relevant previous year.(6) The deduction shall be compute as follows:Profits of the business of the undertaking x Export Turnover/Total Turnover of the business(7)The deduction shall not be allowed beyond A.Y. 2011-2012

DEDUCTIONS

Section 80IA: Deductions for Industrial Undertakings or enterprises engaged in

infrastructure development

Eligibility: All AssesseesClassification of Industries Deduction of Profits

Derivedi) Any enterprise carrying on the business of developing or maintaining

and operating or developing, maintaining and operating any infrastructure

facility

100% for 10 consecutive assessment years

ii) Any undertaking providing telecommunication services whether basic

or cellular including radio paging, domestic satellite service network of

trunking, broadband network and internet services

100% for first 5 years and 30% for the next 5years

iii) An undertaking set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on 1-4-1993 and ending 31-03-2011. [Finance Act, 2010 extended the date from 31-3-2011 to 31-03-2011 w.r.e.f. 1-4-2010}


iv) An undertaking which starts transmission or distribution of power by laying a network of new transmission or distribution lines at any time during the period beginning on 1-4-1999 and ending 31-03-2011. [Finance Act, 2010 extended the date from 31-3-2011 to 31-03-2011 w.r.e.f 1-4-2010]

v) An undertaking which undertakes substantial renovation and

100% for 10 consecutive assessment

years100% for 10 consecutive


modernization of existing network of transmission or distribution lines at any time during the period beginning on 1-4-2004 and ending 31-03-2011. [Finance Act, 2010 extended the date from 31-3-2011 to 31-03-2011 w.r.e.f. 1-4-2010]"substantial renovation and modernisation" means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1/4/2004.

assessment years

vi) an undertaking owned by an Indian Company and setup for

reconstruction or revival of a power generating plant- if fulfills following

condition

a. such company is formed before 31.11.2005 with majority equity

participation by public

sector companies for enforcing the security interest of the lenders to the

company owning

the power generating plant;b. Such Indian Company is notified by the Central Govt, before 31.12.2005 andc. the undertaking begins to generate or transmit or distribute power before 31-3-2011.[Finance Act, 2010 extended the date from 31-3-2008 to 31-3-2011 w.r.e.f 1-4-2008]


vii) Undertaking which develops, operates or maintain an Industrial park or SEZ notified by Central Government on or after 1-4-1997 but up to 31-3-2011. [Finance Act, 2010 extended the date from 31-3-2006 to 31-3-2011 w.r.e.f 1-4-2008]


(A) Infrastructure FacilityInfrastructure Facility means -i) a road including toll road, a bridge or a rail systemii) a highway project including housing or other activities being an integral part of the highway project

iii) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management systemiv) a port, airport, inland waterway or inland port

(i)any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely :—


(a)it is owned by a company registered in India or by a consortium of such companies or a Board or a corporation or any other body established or constituted under any Central or State Act.(b)it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;Housing Projects forming integral part of highway projectWhere housing or other activities are an integral part of the highway project such profit shall not be liable to tax where the profit has been transferred to a special reserve account and the same is actually utilised for the Highway project excluding housing and other activities before the expiiy of three years following the year in which such amount was transferred to the reserve account. The amount remaining unutilised shall be chargeable to tax as income of the year in which such transfer to reserve account took place.For assessees engaged in providing telecommunication services and engaged in generation of power following conditions must be satisfied:

1. it is not formed by the splitting up, or the reconstruction, of a business already in existence.

2. It is not formed by the transfer to a new business of machinery or plant Previously used for any purpose

159Conditions applicable to all undertakings mentioned above:1.The deduction can be claimed by assessee for any 10 consecutive assessment years out of first 15 years.

2. If any goods held for the purpose of the eligible business is transferred to any other business or other assessee and consideration does not correspond to market value profits of the eligible business shall be recomputed by the A.O.

3. Where deduction under this section has been allowed deduction under other sections shall not be allowed.

4.The deduction shall not be admissible unless the accounts of the undertaking have been audited by a Chartered accountant, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form and manner.

Explanation: For the removal of doubts it is here by declared that nothing contained in this section shall apply in relation to a business which is in the nature of a work contract awarded by


any person (including Central Govt or State Govt.) and executed by the above undertaking or enterprise, [w.r.e.f1-4-2000]

SECTION 80IAB: Deduction in respect of profits or gains by an undertaking engaged in development of Special Economic Zone

1.The deduction is available to assesses engaged in the business of developing a Special Economic Zone, on or after 1-4-2006 under the Special Economic Zones Act, 2006.

2.The deduction shall be allowed of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years, out of 15 years beginning from the year in which a Special Economic Zone has been notified by the Central Govt.

160 Deduction U/s 80IB to certain undertakingsNATURE OF BUSINESS DEDUCTIO

NREMARKS


Undertaking Engaged in Developing and Building Housing Projects.

100% of Profits from the project

1. The deduction is allowed to all the Assessees on account of housing projects on the size of land of minimum area of 1 acre approved by local authority before 31/3/2008.2. The built up area of the residential unit should notexceed 1,000 sq ft for Delhi and Mumbai and 1,500 sqft for other cities.3. The project must be completed within 4 years from the end of financial year in which the housing project is approved or before 1/4/2008 whichever is later.4. not allowed to allot more than one residential unit in the housing project to the same person, not being an individual, and where the person is an individual, no other residential unit in such housing project is allotted to any of the following person-i. spouse or minor child of such individual; ii. the HUF in which such individual is the karta; Hi. any person representing such the spouse or minor children of suchindividual or HUF in which suchindividual is the karta. [w.e.f 1-4individual, the

Spouse or minor children of such individual or HUF in which such individual is the karta [w.e.f.1-4-2011]Explanation: For the removal of doubt it is


hereby declared that nothing contained in the this subsection shall apply to. any undertaking which executes the housing project as a works contract awarded by any person(including theCentral or State Govt.) fw .r.e.f. 1-4-2001 ]5. the built up area of the shops and commercial establishments included in the hosing project does not exceed 3% of the aggregate built up area of the house or 5000 sqft. whichever is higher.

Hospital Located in Certain Areas ( non metro)

100% of the profits or gains for first 5 consecutive years.

1. The hospital must be constructed at any time during the period beginning on 1 /4/2008 to 31 /3/2013.2. The hospital has at least 100 beds for patients3. The construction of the hospital is in accordance withthe regulations of the local authority.4. The assessee shall furnish along with return an audit report in prescribed form and manner. Excluded area- the urban agglomerations of Greater Mumbai, Delhi, Kolkata, Chennai, Hydrabad, Bangalore and Ahmedabad, the district of Faridabad, Gurgaon, Ghaziabad, Gatuam Budh Nagar and Gandhinagar and the city of Secunderabad

Undertaking Engaged in the Production and Refining of Mineral Oil

100% of the profits derived from such business for 7 consecutive years including the initial assessment year.

1) In case the undertaking is engaged in commercialproduction of mineral oil and is located in North-Eastern region or any part of India it should have beginthe operation on or after 1-4-1997.2) In case the undertaking is engaged in the business ofrefining of mineral oil the undertaking should havebegun its operations on or after 1-10-1998 but not latterthan 31-3-2012.3) In case the undertaking is engaged in commercial


production of natural gas from blocks which arelicensed under the VII Round of bidding for awardexploration contracts under the New ExplorationLicensing Policy (NELP) announced by the Govt, ofIndia on 10-02-1999 and begin commercial productionof natural gas on or after the 1-4-2010.4) In case the undertaking is engaged in commercialproduction of natural gas in blocks licensed under theIV Round of bidding for award of explorationcontracts for Coal Bed Methane blocks and beginscommercial production of natural gas on or after 1-4-2010. Explanation: For the purpose of claiming deduction all blocks licensed under a single contract which has been awarded under the NELP announced by the Govt, of India on 10-02-1999 or has been awarded in pursuance to any law for the time being in force or has been awarded by Central or State Govt, in any other manner, shall be treated as a single "undertaking", [w.r.e.f 1-4-2000]Note: The term "Undertaking" has not been defined and Therefore, in the context of mineral, the meaning of the term "has been the subject matter of considerable dispute. The taxpayers have been holding the view that every well in block licensed constitutes a single undertaking and accordingly tax holiday is available separately for each such well. However, this view is against the legislative intent. Accordingly the Finance Act, 2010 inserted the above explanation.

Undertaking engaged in processing, preservation or packaging of fruits and

100% for first 5

Begins to operate such business on or after 1-4-2001 but in case of meat and meat products or poultry or marine or dairy products, on or after 1-


vegetables or meat and meat products or poultry or marine or dairy products or business of handling, storage and transportation of food grains.

years and 25% (or 30% in case of company assessee) for next 5 years

4-2009.

SECTION 80ID: Hotel Industries

1. The deduction is available to assessees (a) engaged in the business of hotel of two, three or

four star category located in specified area, if such hotel is constructed and has started

functioning between 1/4/2007 to 31/7/2010 or (b) engaged in the business of building,

owning and operating a convention centre if it is constructed between 1/4/2007 to

31/7/2010 or (c) engaged in the business of hotel of two, three or four star category

located at a World heritage site, if such hotel is constructed and has started functioning

between 1/4/2008 to 31/3/2013

2. The deduction shall be available at 100% of the profits from such business for first 5 consecutive years.

Section 80IE: Industries in Sikkim and North Eastern Industries

Section 80IE provides tax benefit to certain undertakings located in North Eastern States

including Sikkim. It is provided that a 100% deduction will be made in respect of any profits and

gains derived by such undertakings for 10 consecutive assessment years. It applies to such

undertakings which have between 1/4/2007 to 1/4/2017, begun:

(i) to manufacture or produce any eligible article or thing

(ii) to undertake substantial expansion to manufacture or produce any eligible article or thing

(hi) to carry on any eligible business

164

Eligible business has been defined to include hotel (not below 2 star) adventure and leisure

sports, providing medical and health service (more than 25 beds), running an old age home,


operating vocational training institute for specified purposes, IT training purposes, IT Training

center, manufacturing of IT hardware and biotechnology.

Filing of Return within due date

Section 80AC provides that Deduction U/s 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE shall not be

available if the assessee does not file his return of income within the due date specified U/s

139(1).

165

RESIDENTIAL STATUS


We already know, tax is charged on Total Income. The computation of this total income further depends upon the residential status of an individual. The computation is different for different individuals depending upon his residential status. Before we study residential status it is important to note the following basic facts: 11. Residential Status is determined for each previous year separately because residential status may change from year to year.

2. A person may be resident of more than one country for any previous year. If Mr. X is resident of India for previous year 2011-12 it does not mean that he cannot be resident of Canada or any other country for that purpose.

3. Citizenship of a country and residential status are altogether different terminologies. A person maybe an Indian Citizen but may not be a resident in India. Similarly, a person may be a foreign citizenbut resident in India. As such, the residential status under the Income Tax Act, is determined only forthe purpose of calculating the tax liability of an Individual. An individual may be a resident withinthe meaning of Income Tax Act but may not be resident under some other Act such as FEMA.

Residential Status

Resident Non Resident

Ordinarily Resident Not Ordinarily Resident In the above chart we see that there are two primary classifications : Resident and Non Resident. Again,Resident is classified into : Ordinarily resident and not ordinarily resident. Therefore, let us first study whenan Individual is said to be resident and when non resident.

Residential status of an individual [Section 6(1)]

A. THE PRIMARY CONDITIONS fSection 6(1)1 166

An individual is said to be resident in India an any previous year if he satisfies at least one of the basic conditions :

1. He is in India for at least 182 days in the previous year


2. He is in India for at least 60 days in the previous year and for 365 days or more during 4 years immediately preceding the previous year.

The ExceptionsIn the following cases the condition no. 2 above becomes non operative ;1. When an Indian citizen leaves India during the previous year for employment outside India;

2. When an Indian citizen leaves India during the previous year as a member of crew of an Indian Ship.

3. When an Indian citizen or a person of Indian origin comes to visit India.Thus in the above three cases whether a person is a resident or not shall be determined only with reference to point 1 above.

Note: While calculating the number of days of stay in India both the day on which an individual left and the day on which he came to India is to be taken into account. (As per Advance Ruling P No. 7 of 1995: (1997) 223 ITR 462)Example 1: Mr. X is an Indian citizen, who receives an employment offer from a company in Nigeria leaves India for the first time on September 26, 2009 for joining his duties in Nigeria. During the previous year 2010-11 he comes to India for 176 days. Determine his residential status for Assessment Year 2010-11 and Assessment Year 2011-12.Solution:As per Section 6(1), an individual is said to be resident in India in any previous year if he satisfies at least one of the following basic conditions :1.He is in India for at least 182 days in the previous year2.He is in India for at least 60 days in the previous year and for 365 days or more during 4 yearsimmediately preceding the previous year.In the given problem we see that Mr. X is an Indian Citizen who is leaving India for employment outside India. Therefore the second condition given above in point no. 2 shall not be operative in the case of Mr. X.

Now let us calculate the no. of days Mr. X stays in India in the previous year 2009-10

Since Mr. X stays in India for less than 182 days he is a Non Resident in the Asst. Year 2010-11


Months No.of Days

April 2009 30

May 2009 31

June 2009 30July 2009 31August 2009 31September 2009 26Total 179

Assessment Year 2011-12Since Mr. X stays in India for 176 days that is less than 182 days he is a non resident for the Assessment Year 2011-12

B. THE SECONDARY CONDITIONS [Section 6(6)1 If after applying the basic conditions it is determined that the individual is non resident then nothing is to be done further. On the contrary if it is determined that the individual is resident then it remains further to be decided whether he is an 'ordinarily resident' or a 'not ordinarily resident.'

An individual is said to be not ordinarily resident if he satisfies any one of the following conditions:

1. He is a non resident in India in at least 9 years out of the previous 10 years preceding the relevant previous year.

2. He is in India for 729 days or less during 7 years immediately preceding the relevant previous year.

Example 2: Pollock, the SA cricketer comes to India for 102 days every year since last 10 years. Find out his residential status for the A.Y. 2011-12.

Solution: For the purpose of his residential status in India for A.Y.2011-12, the relevent previous year is 2010-11.

The total stay of Pollock in the last 4 years preceding the previous year is 408 days and his stay in the previous year is 102 days.Therefore, since he has satisfied the second condition in section 6(1),he is a resident.

168

Since his total in India in the last 7 years preceding the previous year is 714 days (i.e. 102 *7),he does not satisfy the minimum requirement of 730 days in 7 years .Any one of the conditions not being satisfied,the individual is resident but not ordinarily resident.

The residential status of Pollock for the assessment year 2011-12 is resident but not ordinarily resident.

Example 3: Mr. X, an Australian citizen, comes to India for the first time during the P.Y. 2004-05. During the financial years 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11 he was


in India for 55 days , 70 days , 80 days, 140 days and 68 days respectively. Determine his residencial status for the A. Y. 2011-12.

Solution: During the previous year 2010-11, Mr. X was in India for 68 days and during the 4 years preceding the previous year 2010-11, he was in India for 345 days (i.e. 55+70+80+140 days )

Thus, he does not satisfy section 6(1). Therefore, he is a non-resident for the previous year 2010-11.

Example 4: Mr. Z, a USA citizen left India after a stay of 10 years on 02.07.2008. During the financial year 2010-11 he comes to India for 1 year on 1.11.2010. Determine his residential status for the A.Y.2011-12.

Solution: During the previous year 2010-11, Mr Z. was in India for 151 days (i.e. 30+31+31 + 28+31 days). His stay in last 4 years is:2009 - 10 = 02008 - 09 = 932007 - 08 = 3652006 - 07 = 365

823Mr .Z. is a resident since his stay in the previous year 2010-11 is 151 days and in the last 4 years is morethan 365 days.For the purpose of being ordinarily resident, it is evident from the above calculations, that

(1) His stay in the 7 years is more than 730 days and

169

(2) Since he was in India for 10 years prior to 02.07.2008, he was a resident in a last 2 out of the last 10 years preceding the relevant previous year.Mr . Z is a resident and ordinarily resident for the A.Y. 2011-12.For the purpose of being ordinarily resident, it is evident from the above calculations, that

(1) His stay in the 7 years is more than 730 days and

(2) Since he was in India for 10 years prior to 02.07.2008, he was a resident in a last


2 out of the last 10 years preceding the relevant previous year.Mr . Z is a resident and ordinarily resident for the A.Y. 2011-12.

Example 5: Mr.F. an Indian citizen, leaves India on 24.09.2010 for the first time, to work as an officer of a company in Paris. Determine his residential status for the A.Y. 2011-12.

Solution: During the previous year 2010-11, Mr, F, an Indian citizen, was in India for 177 days (i.e.30+31+30+31+31+ 24 days ), He does not satisfy the minimum criteria of 182 days. Also,since he is an Indian citizen leaving India for the purpose of employment, the second condition u/s 6(1) is not applicable to him. Mr. F is non-resident for A.Y. 2011-12.

Example 6: Mr. Y after rendering services in India for 15 years left India to England for employment on June 1, 2008. He again came to India after taking an employment on 10th

January,2011. Find out his residential status for A.Y. 2011-12.

Solution : As per Section 6(1), an individual is said to be resident in India an any previous year if he satisfies at least one of the following basic conditions :

1. He is in India for at least 182 days in'the previous year2. He is in India for at least 60 days in the previous year and for 365 days or more during 4 years immediately preceding the previous year.

Previous Year No. of Days2010-11 January 2011 22 (31-9) February 2011 28March 2011 31TOTAL 81Stay in 4 year preceding the relevant previous year2006-07 - 365

1702007-08 - 3652008-09 - 62 (=30 + 31 +1)2009-10 - NILTOTAL 792

Since, Mr. Y stays in India in the relevant previous year for more than 60 days and in 4 years preceding the relevant previous year for more than 365 days he clearly satisfies the condition no. 2 and therefore is resident for the A.Y. 2011-12. Again, a resident may be an ordinarily


resident or a not ordinarily resident. A resident individual is said to be an ordinarily resident if he satisfies both the following conditions:

1. He is a resident in India in at least 2 years out of the previous 10 years preceding the relevantprevious year.

2. He is in India for at least 730 days during 7 years immediately preceding the relevant previous year.

Now let us proceed to calculate whether Mr. Y is a ordinarily resident or not ordinarily resident.Calculation for condition no. 1

Previous year Days Status

2000-01 365 Resident2001-02 365 Resident2002-03 365 Resident

2003-04 365 Resident2004-05 365 Resident2005-06 365 Resident2006-07 365 Resident

2007-08 365 Resident

2008-09 62 Non Resident

2009-10 NIL Non Resident

Thus Mr. Y satisfies both the conditions i.e. he is a resident in India in at least 2 years out of 10 years preceding the relevant previous year and he stays in India for more than 730 days during 7 years preceding the previous year 2010-11.Therefore, Mr. Y will be treated as resident and ordinarily resident for the A.Y. 2011-12.

Residential Status of HUF [Section 6(2)] Resident if control and management of its affairs wholly or partly situated in India Non Resident if control and management wholly outside India

171Resident HUF is Resident and Ordinarily resident if Karta or manager satisfy both following conditions:1. He is a resident in India in at least 2 years out of the previous 10 years preceding the relevant previous year.2. He is in India for at least 730 days during 7 years immediately preceding the relevant previous year.Example 7: The business of a HUF is transacted from USA and all the policy decisions are taken there. Mr.F,the karta of HUF, who was born in kolkata, visit India during the


P.Y.2010-11 after 15 years. He comes to India on 01.04.2010 and leaves for USA on 01.12.2010. Determine the residential status of Mr. F. and the HUF for A.Y.2011-12.Solution:(a)During the PY 2010-11 Mr. F has stayed in India for 245 days (i.e.30+31+30+31 + 31+30+31+30+1 days). There fore, he is resident.However, since he has come to India after 15 years, he cannot satisfy any of the conditions for being ordinarly resident.Therefore, the residential status of Mr. F for the P.Y. 2010-11 is resident but not ordinarily resident.(b)Since the control and management is also wholly outside India, the HUF is a non-resident for the P.Y.2010-11.

Residential Status of Firm/AOP [Section 6(2)] Resident if control and management of its affairs wholly or partly situated in India Non Resident if control and management wholly outside India

There is no concept of ordinarily or not ordinarily resident in the case of Firm and AOP.

Residential Status of Company [Section 6(3)]An Indian Company always resident in India.

A foreign company is Resident if control and management of its affairs wholly situated in India

Non Resident if control and management wholly or partly outside IndiaThere is no concept of ordinarily or not ordinarily resident in the case of Company.What is meant by control and management ?Control and management means de facto control and management and not merely the right to control and management. Control and management is usually situated in a place where the head, the seat and the directing power are situated. In case of a company Control and management is situated at the place where Board meetings are held.

Scope of Total IncomeUnder Section 5 of The Income Tax Act, incidence of tax on a tax payer depends on his residential status as well as the place of accrual or receipt of Income. The foregoing paragraphs discusses the scope of Total Income of different Individuals depending on his residential status:(1) Resident and ordinarily resident

172In the case of resident and ordinarily resident the following shall be chargeable to tax : (a) Income received or deemed to be received in India whether accrued in India or elsewhere. (b)Income which accrues or arises or is deemed to accrue or arise in India or outside India, whether received in India or elsewhere.

(2) Resident but not ordinarily residentIn the case of resident but not ordinarily resident the following shall be chargeable to tax :(a) Income received or deemed to be received in India and whether accrued in India or elsewhere.


(b )Income which accrues or arises or is deemed to accrue or arise in India, whether received in India or elsewhere.(c)Income which accrues or arises outside India and received outside India from a business controlled from India.(3) Non ResidentIn the case of non resident following shall be chargeable to tax:(a) Income received or deemed to be received in India whether earned in India or elsewhere.(b) Income which accrues or arises or is deemed to accrue or arise in India whether received in India or elsewhere.Summary: From the above discussions it is clear that in the case of ordinary resident the global income is taxed.For a non resident an income is taxable only if it is either earned in India or it is received in India. For a Resident but not ordinarily resident income earned or received in India and Income which accrues outside India from a business controlled from India.Question: Discuss the taxability of the following incomes in each of the following cases (1) Resident and Ordinarily resident (2) resident but not ordinarily resident (3) non resident1. Interest paid by an Indian Company but received outside Indi 1000002. Interest on Italian Bonds (1/4th received in India) 400003. Profits from a business in Kolkata and managed from outside India (40% of the profit is received outside India) 500004. Income from agriculture in Sri Lanka, received there but later on Rs. 50000 is remitted to india 3000005. Income earned from business in Nepal which is controlled From New Delhi(Rs. 75000 is received in India) 4000006. Income from property in Kenya received outside India [Rs. 10000 used in Brazilfor meeting the education expenses of X's daughter there and Rs. 40000 is later on remitted to India] 500007.Person from a former employer in india , received in Iran 2000008.Past untexed profit bought to india 20000

SI Particulars Ordinary Resident

Not ordinary Resident

Non resident

1 Interest paid by an Indian Company but received outside India


2 Interest on Italian Bonds (l/4 th received in India)

3 Profits from a business in Kolkata and managed from outside India

4 Income from agriculture in Sri Lanka, received there

5 Income earned from business in Nepal which is controlled from New Delhi

6 Income from property in Kenya received outside India

7 Pension from a former employer in India, received in Iran

8 Past untaxed profits brought to India

TOTAL

Income deemed to accrue or arise in India (Section 9)The following incomes shall be deemed to accrue or arise in India :—(i)Income accruing or arising, whether directly or indirectly, through or from any business connection in India.(ii) Income through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India.(iii')income chargeable under the head "Salaries" - refer notes on salary

174(iv)Dividend :a dividend paid by an Indian company outside India ;(v)Interest /Royalty/technical Services if it is payable by— (a)the Government; or


(b)any other person, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, or royalty is payable for right or technical services is payable for services used outside India.

"Explanation.—For the removal of doubts, it is hereby declared that for the purposes of thissection, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause(vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident,whetheror not,—(i) the non-resident has a residence or place of business or business connection in India; or(ii) the non-resident has rendered services in India.".Business ConnectionThe expression Business connection has not been defined under Income Tax Act but is used in Section 9(1) to deem income arising through Business connection to arise in India. A Business connection involves a relationship between a business carried by a non resident which yields profit or gains and an activity in India which contributes directly or indirectly in earning those profit or gains.Explanation 2 to Section 9 states that "Business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,—(a)has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or(b)has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or(c)habitually secures orders in India for the non-resident

175

MISCELLANEOUS TOPICSCompany in which public are substantially interested [Sec.2(18)1:


A Company is said to be a company in which public are substantially interested if:1. A company owned by Central or State Govt, or RBI or a Company in which not less that 40% of the shares are held by the Govt, or Reserve Bank of India or Corporation owned by that bank.

2. A Company which is registered U/s 25 of the Companies Act, 1956 (formed for promoting science, art, commerce, religion, Charity or other useful object)3. A Company having no Share Capital which is declared by the Board for the Specific Assessment Year(s) to be a Company in which public are substantially interested.4. A Company the equity shares of which on the last day of the relevant previous year is listed in a recognised Stock Exchange of India5. A Company which carries on, as its Principal business, the business of acceptance of deposits from its members & which is declared by the Central Govt. U/s 620A of the Company's Act to be Nidhi or Mutual Benefit Society.

6. A Company in which equity shares carrying not less than 50% of the voting power were were throughout the relevant Previous year held by one or more co-operative societies.Exceptions to the rule that income of Previous Year will be assessed in a subsequent Assessment Year:As per the provisions of Section 4, income of the Previous Year is assessed to tax in the immediately succeeding Assessment Year. However, the following provisions override Section 4 and the income is charged to tax in the same previous year in which it is earned:1. Shipping business of a non resident (Section 172) : Where a ship, belonging to or chartered by a non-resident carries passengers, goods, livestock or mail shipped at a port in India, it is not allowed to leave the port unless tax has been paid or satisfactory arrangements for payment of tax has been made.2. Persons leaving India (Section 174) : Where an individual is leaving India and he has no intention of returning to India, then the total income of the individual is chargeable to tax in that previous year.3. Assessment of AOP or BOI or artificial juridical person formed for a particular event or purpose (Section 174A): Where any association of persons or a body of individuals or an artificial juridical person, formed for a particular event or purpose is likely to be dissolved in the assessment year in which it was formed or established, then its total income shall be chargeable to tax in that assessment year. Transfer of property to avoid tax (Sec. 175): Where a person is likely to sell, transfer, charge, dispose of or otherwise part with any of his asset to escape the liability under this Act, the total income of the person from the date of expiry of previous year for the Assessment Year upto the date when the A.O. commences proceeding under this section is chargeable to tax.- Discontinued business (Sec. 176).Where any business or profession is discontinued in any Assessment Year then at the discretion of the Assessing Officer income for the period from the


expiry of the previous year for the A.Y. upto the date of discontinuance is chargeable to tax in that Assessment Year. Previous Year for undisclosed sources of incomeCash Credit: [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 is not satisfactory, the sum so credited may be charged to income - tax as the income of the assessee of that previous year in which it is found to be credited.Unexplained investments [Sec.69] : Where in the financial year the assessee has made investments which are not recorded in the books of account and the assessee offers no explanation about the nature and source thereof the value of the investments may be deemed to be the income of the Assessee for such financial year.Unexplained money, etc[Sec. 69A] : Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or valuable article and the same is not recorded in the books of account, and the assessee offers no explanation the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.Amount of investments etc. not fully disclosed in the books of account [Sec. 69B]:Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article and the Assessing Officer finds that the amount expended on making such investments or in acquiring such article exceeds the amount recorded in the books of accounts and the assessee offers no explanation about the nature and source thereof the excess amount may be deemed to be the income of the assessee for such financial year.Unexplained expenditure, etc. [Sec.69Cl: Where in any financial year, an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure the amount covered by such expenditure may be deemed to be the income of the assessee for such financial year and shall also not be allowed as deduction.Amount borrowed or repaid on hundi[Sec 69D]: Where any amount is borrowed on a hundi from , or any amount due thereon is repaid to, any person otherwise than through an account payee cheque, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid. If any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again assessed in respect of such amount on repayment of such

177amount. Moreover, for the purpose of this section, the amount repaid includes the amount of interest paid on the amount borrowed.

177 Deemed Dividend

\ Deemed Dividend U/s 2(22) includes—


(a)any distribution by a company of accumulated profits, whether capitalised or not, if such distribution k entails the release to its shareholders of assets of the company ;any distribution to its shareholders by a company of debentures or deposit certificates and ar distribution of bonus shares to its preference shareholders , to the extent to which the company posses accumulated profits, whether capitalised or not; (c)any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not.(d)any distribution to its shareholders by a company on the reduction of its capital, to the extent of accumulated profits whether capitalised or not.(e)any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan(i) to a shareholder, being a person who is the beneficial owner of shares having voting rights holding at least 10% of the voting power, or(ii)to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or(iii) any payment by any such company on behalf, or for the individual benefit, of any such shareholder,to the extent to which the company in either case possesses accumulated profits ;However the following shall not be treated as dividends(i)any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business of money lending(ii)any dividend paid by a company which is set off against any sum previously paid by it and treated as a dividend U/s 2(22)(e), to the extent of set off;(iii) buy back of shares U/s 77A of the Companies Act; or(iv)any distribution of shares in a demerger by the resulting company to the shareholders of the demerged company.Dividend income [Section 8]The method of accounting employed by the assessee does not affect the basis of charge of dividend fixed by section 8.(a)any dividend declared by a company or distributed or paid by it section 2(22) shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be ;(b)any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

178TAX DEDUCTION AT SOURCE


Section Nature of Payment

Monetary Limit Rate of Tax Note

192 Salaries The tax is to be deducted on the basis of estimated income of the employee and is to be made on the basis of average of income tax computed on the basis of rate in force and is deducted monthly on average basis.

(i) Tax is to be deducted at the time of payment(ii) Where employee is working under two employees simultaneously or has changed employment then he may furnish to the employer of his choice or subsequent employer the details of his salary from other employers for the purpose of TDS.(iii) An employee at his option furnish to the employer the details of other income and the employer shall consider such income for tax deduction at source. However Losses from House property can only be considered and not other losses

193 Interest on Securities

Rs.2,500 p.a. 10% No tax is to be deducted if interest on securities is payable on account of the following:(i) Any such debenture, issued by an institution or authority, or any public sector company, or any co-operative society (including Co-operative Land Mortgage Bank or Co-operative Land Development Bank) as


the Central Government may notify.(ii) Any interest payable on any security of the Central Government or State Government.(III) Any interest payable to—(a) Life Insurance Corporation of India; (b) General Insurance Corporation of India or any of four companies formed under it; (c)Any other insurer, in respect of any securities owned by them, or in which they have full beneficial interest.(iv) Securities of Central or State Government.(v) Interest payable to a resident on any securities issued by a company where such security is in dematerialized form and is listed • on a recognised stock exchange in India .Tax is deductible on 8% Savings (Taxable) Bonds, 2003 if interest exceeds Rs.10,000 p.a.

194A Interest other than Interest onSecurities

If the payer is a banking company including co operative banks or in case of deposit under post office

10% Tax need not be deducted in the following cases:(a)Interest paid or credited byfirm to its partners(b)Interest paid to Bankingcompanies, UTI, notified


Rs. 10,000 p.a. (The ceiling limit applies with respect to each branch of bank) In any other case:Rs.5000 p.a.

institution etc.(c)Interest other than on termdeposits paid by Bankingcompanies, co-operative society(d) For interest on compensationawarded by Motor AccidentsClaims Tribunal tax need not be deducted upto Rs. 50,000.

194B Winning From Lotteries , crossword puzzle or card game or game of any sort

10,000[W.E.F 1/7/2010

30% (i) Tax is deducted at the time of payment(ii) Where winnings are wholly or partly in kind and the amount in cash is not sufficient to meet the liability of deduction of tax then the person responsible for paying shall before releasing the winnings shall ensure that tax has been paid in respect of such winnings

194BB Winnings from Horse Race (including Jackpot

5000 [W.E.F 1/7/2010]

30%

194C Payment to Contractor and Sub Contractor

Either Rs. 30,000 in a single contract or Rs. 75,000 p.a.

wherepayment for a contract( including sub-contract) are to(i)indiuidualsHUF@1%(ii)

Tax is deducted on Works contract. For this purpose Works contract includes(a) Advertising(b) broadcasting and telecasting including production of programs (c) carriage of goods and


In case ofany otherentity @ 2%

passengers other than by railways (d) catering(e)manufacturingor supplying productaccording to the requirement or specification of a customer by using material purchased from such customer, but does not include if material purchased from a person other than such customer.(ii) For the work mentioned in point (e) above, tax deduction shall be made -on the invoice value (excluding the value of material) if such value is separately mentioned in the invoice otherwise on the gross invoice value.(iii) Where any sum referred to insub-section (1) is credited to any account, whether called"Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.(iv) The TDS provision


shall not be applicable(a) if the recipient is a transport operator (person in the business of plying, hiring or leasing of goods carriages)(b) where the operator furnishes his PAN to the deductor. The deductor is required to intimate these PAN details to the IT Dept. in prescribed Format.(v) The contract for putting up hoardings is in the nature of advertising and therefore 194C is applicable. Section 194C would also be on routine, normal maintenance contracts and e;ectric works which includes supply of spares.

194D Insurance Commission

Rs. 20,000 p.a.

10%

194E Payment toNonResident sportsman, who is notan Indian citizen or a non resident sports association or institution

Any Amount 10% Tax is to be deducted on income arising to non residents ports person from(i) participation in any game or sport in India (ii) advertisement(iii) contribution of article to Newspaper, magazines or journal

194G Commission on sale of lottery tickets

Rs. 1,000 p.a. 10%


194H Commission or Brokerage

Rs. 5,000 p.a. 10% Commission or brokerage includes any payment received or receivable, by a person acting on behalf of another person for services rendered, or for any services in the course of buying or selling of goods, assets, valuable article or thing other than securities. However, no deduction shall be made on brokerage payable by BSNL to their public call offices or Turnover commission payable by RBI.

194I Rent 180000 p.a. TDS rate for rent on plant, machinery and equipment @ 2% for rent on land and building furniture and fixture @ 10% for all person

1.Rent means any payment by whatever name called, under any lease,sub lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fitting plant &machinery and the land appurtenant thereto, whether or not such building is owned by the place.2.as per CBDT circular where there are various co- owners then separately apply to each co- owner.3. Rent includes any non- refundable deposit.


4. as per CBDT circular no Tax shall be deducted at source on Service Tax on rent.

194J Rs. 30,000 p.a.Professional or technical Services or royalty or Non Compete Fees

10%(separate limits for each professional and technical services)

professions and does not apply to teaching, sculpture, painting etc.(ii) Technical Services include Managerial Services, Technical Services, Consultancy Services, etc. It shall not include and income chargeable under the Head Salaries or consideration for construction or assembly or mining or like project.

194LA Payment ofCompensationor acquisitionof certainimmovableproperty(includingenhancedcompensation

Rs. 1,00,000 p.a. 10% No tax shall be deducted on agricultural Land

195 All sums payable to Non resident (other than Salaries)

Any Amount Ratesprescribed by the relevant Annual Finance Act

No tax is to be deducted on Dividend which is exempted U/s 10(34)

185Note: Surcharge and Education cess will not be added to TDS except in following two cases-


i) under section 192, EC and SHEC will be added to rate of TDS.

ii) If the recipient is a foreign company and the payment subject to TDS exceeds Rs. 1 Crore, surcharge @ 2.5% will be applicable.

Requirement to furnish PAN

(1) Notwithstanding anything contained in any of the provisions of this Act, any person whose receipts are subject to deduction of tax at source i.e., the deductee, shall mandatorily furnish his PAN to the deductor falling which the deductor shall deduct tax at source at the higher of the following rates—

(i) at the rate specified in relevant provision of this Act; or (ii) at the rates or rates in force, or (iii) at the rate of 20%.

(2) TDS at the above mentioned rate will also apply in case where the tax payer files a declaration u/s 197A(Le., inform 15G or 15H) but does not provide his PAN.

(3) No certificate u/s. 197 shall be granted unless the application contains the "PAN" of the applicant

(4) The deductee shall furnish his PAN to the deductor and both shall indicate the same in all the correspondence, bills, vouchers, and other documents which are sent to each other .

(5) Where the PAN. provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the eductee has not furnish his PAN to the deductor and the provision subsection (1) shall apply accordingly.

Who is liable to deduct tax at source?Section Nature of Payment Person responsible for deduction of tax192 Salaries The Employer himself194BB The Employer himself The bookmaker or the person to whom the licence

has been granted by the government for horse racing etc. making such payment

194C Payment to Contractor and Sub Contractor

(i) Government (ii) Local Authority (iii) any corporation established under a Central, State or Provincial Act (iv) Company (v) any Society registered under Societies Registration Act (vi) any


trust (viii) any university (ix) any firm or (x) Any individual or HUF or A OP or BOI, whether incorporated or not f other than person u/s 194C(1)] who is liable to get the accounts audited U/s 44AB in the immediately preceding year will have to deduct tax at source, (xi) any Govt, of a foreign State or a foreign enterprise or any association or body established outside India.

194B194D 194E,194G;

194LA

l)Winning From Lotteries , crosswordpuzzle or card game(2)Insurance Commission; (3)Paymentto Non Resident sportsman;(4)Commission on Sale of lotterytickets;(5)Payment of Compensation oracquisition of certain immovableproperty

Any person responsible for making such payment

194A194H 1941 194 J

Interest other than Interest on SecuritiesCommission or BrokerageRentFees for Professional or technicalServices

Any person responsible for paying interest on securities, other then individual and HUF. However Any individual or HUF who is liable to get the acr^u^' audited U/s 44AB in the immediately preceding year will have to deduct tax at source. In case of individual there shall be no obligation to deduct tax at source where payments are exclusively for personal purposes.

When to deduct tax at Source?1. For Sections 192, 194B, 194BB,194LA - tax is to be deducted at the time of payment.

1872. For Section 193, 194A,194C,194D,194E,194G,194H,194I,194J,195: At the time of credit or payment whichever is earilerDue Date for depositing tax at source to the credit of Central Government(1) In case of any payment other than Salaries; 194B, 194BB, 194LA

(a) Where tax is deducted by or on behalf of Government - on the same day


(b) Where tax is deducted by any other person : (i) In case the tax is deducted on the credit entry on last day of the financial year then it must be paid within 2 months from the end of the financial year (ii) In any other case within 1 week from the end of the month in which tax is deducted at source.

(2) In case of payment of Salaries; 194B, 194BB, 194LA(a) Where tax is deducted by or on behalf of Government - on the same day

(b) Where tax is deducted by any other person : Within 1 week from the end of the month in which income tax is deducted.

No Deduction of tax on Payment to certain persons(l)No deduction of tax shall be made by any person from any sums payable to -(a)the government, or(b)the Reserve bank of India, or(c)a corporation estabilised under a central act, which is exempt from income-tax or(d) a Mutual fund specified under Section 10(23D).(e) New Pension Trust systemCertificate for deduction of tax at a lower rate [Section 1971(1) This section applies where, in the case of any income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or payments, as the case may be at the rates in forces as per the provisions of sections 192, 193,194A, 194C, 194D, 194G, 194H, 194-1, 194J, 194LA and 195.(2) In such cases, the assesses can make an application to the Assessing Officer for deduction of tax at a lower rate or for non-deduction of tax.(3) If the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at lower rates or no deduction of income-tax, as the case may be, he may give to the assessee such certificate, as may be appropriate.(4) W7here the Assessing Officer issues such a certificate, then the person responsible for paying the income shall deduct income-tax at such lower rates specified in the certificate or deduct no tax, as the case may be, until such certificate is cancelled by the Assessing Officer.No deduction in certain cases [Section 197A1(1) No deduction of tax shall be made under sections 193 or 194A, where a person, who is not a company or a firm, furnishes to the person responsible for paying such income a declaration in writing in the prescribed form to the effect that the tax on his estimated total income will be nil.(2) The provisions of this section will, however, not apply where the aggregate of above sums exceeds the maximum exemption limit.

188(3) For a senior citizen, who is of the age or 65 years or more at any time during the previous year, no deduction of tax shall be made under section 193 or section 194 or section 194A, if they furnish a declaration in writing to the payer, of any amount or income mentioned in the above sections.


(4 No deduction of tax shall be made by an Offshore Banking Unit from the interest paid on deposit or borrowing made by a non-resident/not-ordinarily resident.Tax deducted is income received {Section 198] All sums deducted in accordance with the foregoing provisions shall, for the purpose of computing the income of an assessee, be deemed to be income received.Credit for tax deducted at source [Section 199](1) Any deduction of tax and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made.(2) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary.Duty of person deducting tax [Section 2001(1) The persons responsible for deducting the tax at source should deposit the sum so deducted to the credit of the Central Governement within the prescribed time.(2) Further, an employer paying tax on non-monetary perquisites provided to employees in accordance with section 192 (1A), should deposit within the prescribed time, the tax to the credit of the Central Govrenment or as the Board directs.3) These persons are responsible for preparing such statements for such period as may be prescribed.Processing of statements of tax deducted at SourcefSection 200A1

1) The following adjustment can be made during the computerized processing of statements of tax deducted at source -i) any arithmetical error in the statement; or ii) an incorrect claim, apparent from any information in the statement.2) After making adjustments, tax and interest would be calculated and sum payable by the deductor or refund due to the deductor will be determined.3) An intimation will sent to the deductor informing him of his tax liability or granting him the refund due within 1 year from the end of the financial year in which the statement is field.4) The processing of these statements can be done in Centralized processing centre.Explanation: For this purpose "an incorrect claim apparent from any information in the statement"shall mean a claim, on the basis of an entry, in the statement -i) of an item, which is inconsistent with another entry of the same or some other item in such statementii) in respect of rate of TDS , where such rate is not in accordance with the provisions of this Act.

189

Consequences of failure to deduct or pay


FAILURE INTEREST PENALTY

For Failure to deduct tax at source

U/s 201 interest is

chargeable @ 1% p.m. or

part of the month from the

date on which tax was

deductible to the date

of on which tax is

deducted and @1.5%

p.m. or part of the

month from the date on

which it is deducted till

the date of payment

U/s 221 a maximum penalty of 100% of the

amount of TDS may be levied

Default in filing of returns

Nil U/s 272A(2) 100 per day during which the

default continues but not exceeding the

amount of TDS

1. No order shall be made u/s. 200(1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax of a person resident in India at any time after the expiry of-

(i) In case statement is filed by the deductor u/s. 200 - 2 years from the end of the financial year in which the statement is filled.

(ii) In any other case: 4 years from the end of the financial year in which payment is made or credit is given.However, order pertaining to the financial year 2007-08 or earlier years can be passed at any time up to 31- 3-2011.

190Certain period to be excluded : In computing the period of limitation for above purposes, certain period prescribed under Explanation 1 to section 153 shall be excluded.Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

Common number for TDS and TCS [Section 203A]

Person responsible for deducting tax or collecting tax source apply to the Assessing Officer for the allotment of a "tax-deduction and collection-account number". Such number is required to be quoted in Challans for payments, TDS certificates, statements prepared U/s 200 and other prescribed documents.

191

ADVANCE TAX

1. Liability for payment of advance tax


Under section 208, obligation to pay advance tax arises in every case where the advance tax payable is Rs. 10,000 or more.2. Computation of advance tax

(1) An assessee has to estimate his current income and pay advance tax thereon. He need not submit any estimate or statement of income to the Assessing Officer, except where he has been served with notice by the Assessing Officer.(2) The Assessing Officer, if he is of the opinion that assessee is liable to pay advance tax, can serve an order under section 210(3) requiring the assessee to pay advance tax.(3) The above order can be served by the Assessing Officer at any time during the financial year but not later than the last date of February.(4) If the assessee feels that his own estimate of advance tax payable would be less than the one sent by the Assessing Officer, he can file estimate of his current income and advance tax payable thereon.(5) In all cases, the tax calculated shall be reduced by the amount of tax deductible at source.3. Installments of advance tax and due dates

Due date of installment Amount Payable

On or before the 15th June of p.y Not less than 15% of advance tax liability.

On or before the 15th September of p.y Not less than 45% of advance tax liability, as reduced by the amount, if any, paid in the earlier installment.

On or before the 15th December of p.y Not less than 75% of advance tax liability, as reduced by the amount, if any, paid in the earlier installment or installment.

On or before the 15th March of p.y The whole amount of advance tax liability as reduced by the amount or amounts, if any, paid in the earlier installment or installments.


B. FOR ASSESSEES - OTHER THAN COMPANIES

193


Due date of installment Amount payable

On or before the 15th September of p.y Not less than 30% of advance tax liability

On or before the 15th December of p.y Not less than 60% of advance tax liability, as reduced by the amounts, if any, paid in the earlier installment or installments.

On or before the 15l1 March of p.y The whole amount of such advance tax as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

INTEREST PAYABLE BY ASSESSEEInterest Payable by the Assessee for default in furnishing the return of income [Section 234A1

1. Where an assessee fails to furnish return of income or fails to furnish it within the due date U/s 139(1) then interest U/s 234A is chargeable.

2. The interest is chargeable on the amount of tax determined under summary assessment or regular assessment as reduced by the amount of advance tax and tax deducted at source.

3. Interest is charged @ 1% p.m. or part of the month from the day immediately following the due date of return till the date of furnishing return or till the date of completion of assessment U/s 143(3).Interest for non-payment or short-payment of advance tax (section 234B)1. Interest under section 234B is attracted for non-payment of advance tax or payment of advance tax of an amount less than 90% of assessed tax.2. The interest liability would be 1% per month or part of the month from 1st April of Assesstment year till thedate of payment of tax or till the date of assessment whichever is earlier.3.Such interest is calculated on the amount of difference between the assessed tax and the advance tax paid.4.Assessed tax is the tax calculated on total income less tax deducted at source.Interest payable for deferment of advance tax (Section 234C)1.Interest under section 234C is attracted for deferment of advance tax beyond the due dates.2.The interest liability would be 1% per month , for a period of 3 months, for every deferment.3.However, for last installment of 15th March, the interest liability under this section would be l%for one month.4.The interest is to be calculated on the difference between the amount arrived at by applying the specified percentage of tax on returned income and the actual amount paid by the due date.5. In case of company assessee no interest shall be charged U/s 234C for the first 2 instalments if the company pays advance tax @ 12% and @ 36% of the Advance tax payable for the year.Advance tax in case of capital gains/casual income (proviso to sec 234C).Advance tax is payable by an assessee on his/its total income, which includes capital gains and casual income like income from lotteries, crossword puzzies etc.2.Since it is not possible for the assessee to estimate his capital gains, income from lotteries, etc.it has been provided that if any such income arises after the due date for any installment, then, the entire amount of tax payable (after considering tax deducted at source) on such capital gains or casual income should be paid in the remaining installments of advance tax which are due.3.Where no such installment is due, the entire tax should be paid by 31st March of the relevant financial year.4.No interest liability would arise if the entire tax is so paid.


http://etc.it/

194

RATES OF TAX FOR A.Y. 2011-12TOTAL INCOME TAX

UptoRs. 1,60,000 Nil

Next Rs.3,40,000 i.e. Rs. 1,60,001 to Rs. 5,00,000 @ 10%

NextRs. 3,00,000 i.e. Rs. 5,00,001 to Rs. 8,00,000 @ 20%

Above Rs. 8,00,000 @ 30%

Senior Citizen: However for resident individual who is at least 65 years of age at any time during the Previous Year Income shall be exempted upto Rs. 2,40,000. Thereafter the aforesaid slab is to applied.

Resident Woman: For resident woman, not being a senior citizen income upto Rs. 1, 90,000 shall be exempted. Thereafter the aforesaid slab is to applied.

Surcharge: NIL

Education Cess: 3% on Total Tax plus surcharge. OTHER THAN INDIVIDUALSASSESSEE RATE OF TAX SURCHARGE EDUCA

TIONCESS

PARTNERSHIP FIRM

30% ON WHOLE OF TOTAL INCOME

NIL 3%

LOCAL AUTHORITY 30% ON WHOLE OF TOTAL INCOME

NIL 3%

CO-OPERATIVE SOCIETY

Upto Rs. 10,000 @ 10% 10,001 to 20,000 @20% If exceeds Rs. 20,000 @30%

NIL 3%


DOMESTIC COM

30% ON WHOLE OF TOTAL INCOME

10% if Total Income exceeds Rs. 1 crore

3%

FOREIGN COMPANY

50% ON SPECIFIED ROYALTIES AND TECHNICAL SERVICES AND 40% ON THE BALANCE

2.5% if Total Income exceeds Rs. 1 crore.

3%

HUF, AOP, BOI, ARTIFICIAL JURIDICAL PERSON

Upto Rs. 160000: NIL 160001 to 300000 @ 10% 300001 to 500000 @ 20% Above 500000 @ 30%

NIL 3%

Section 288A: Total Income shall be rounded off to nearest multiply of Rs. 10Section 288B: Tax Liability shall be rounded off to nearest multiples of Rs. 10

196

DISCUSSIONS RELEVANT FOR B.COM EXAMINATIONS


Following are some important discussions relevant only for students appearing in B.Com examination. These discussions are not relevant for Professional courses.

INCOME FROM HOUSE PROPERTY

Concept of Gross Municipal Value and Net Municipal Value

In cities of Kolkata, Mumbai, Delhi and Chennai Municipal Taxes are not charged on Gross Municipal Value but on Net Municipal Value. Net Municipal Value = 90% of Gross Municipal Value. As such, GMV is relevant for Expected Rent and NMV is relevant for Municipal Tax calculation.

Consider that property is located in Kolkata. Gross Municipal Value = Rs. 1,00,000; Fair Rent Rs. 80,000 and Actual Rent Rs. 1,50,000; Municipal Taxes @ 40%. The solution would be as under:

Gross Municipal Value = 1,00,000

Fair Rent 80,000

Expected Rent 1,00,000

Actual Rent 1,50,000

Gross Annual Value = 1,50,000

Less: Municipal Tax

[40% of Net Municipal Value]

[NMV = 90% of GMV = 90,000]

i.e. 40% of Rs. 90,000 36,000

Net Annual Value 1,14,000

Less: Standard DeductionU/s 24(a)

30%ofNAV 34,200

INCOME FROM HOUSE PROPERTY 79,800

197Most commonly asked question: Which treatment to be followed for vacancy ?


The treatment discussed in class. The same treatment is also stated in the Study material issued by The Institute of Chartered Accountants of India for PCC [Page 4.50 and Page 4.51]. The same treatment is also stated in Bare Act.

Student; But in some books it is stated that CBDT circular 14/2001 states that vacancy can be deducted from Expected Rent also?Reply: Circular 14/2001 issued by CBDT does not state so. It just states the reverse thing. Circular 14/2001 states that expected rent should be taken as Gross Annual Value in case Actual Rent is less than expected rent but not due to vacancy. The contents of circular 14/2001 is reproduced below [quoted in page 88-89 of Income Tax Reports Volume 252 - If required, students may take a copy of the said circular in our class]"In case the actual rent received and receivable during the year is less than the ALV, but not because of vacancy, it is the ALV which shall be taken to be the annual value." [ALV is the other term for Expected Rent.]

Conversion of URPF Into RPFQuestion: Mr. P.K. Basu is employed in a company on 1/6/2007 in a pay scale of Rs. 5,000- 200 - 7,000 - 300 -10,000. He and his employer both contributed 15% of basic pay into an unrecognised provident Fund. On 1/2/2010, the Commissioner of Income Tax recognised the provident fund of this company. On that date his P.F. account was credited by an interest amounting to Rs. 3,354 on the balance of the P.F, Explain the treatment of the above situation.Solution:1.Calculation of Salary Salary from 1.06.2007 to 31.05.2008 = 5000 X 12 = Rs. 60,000Salary from 1.06.2008 to 31.05.2009 = 5,200 X 12 = Rs. 62.400Salary from 1.06.2009 to 31.01.2010 = 5,400 X 8 = Rs.43,200Total Salary Rs.1,65,6002. Employer's Contribution to P.F.Employer's contribution to Recognosed P.F. shall be taxable in excess of 12% of Salary i.e. @ 3% of Salary = 3% of Rs. 1,65,600 = Rs. 4,9683. Interest on Recognised Provident FundTotal Contribution to Provident Fund by both employer and employee = 1,65,600 x 15% x 2 = Rs. 49,680

Total Interest accrued = 3,354Therefore, the rate of interest = (3,354/49,680) x 100 = 6.75%Since the rate of interest is less than 9.5%, the entire amount shall be exempted.

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SERVICE TAXThe Charqeability [Section 66]There shall be levied service tax at the rate of 10% +(EC + SHEC) of the value of taxable services provided or to be provided to any person referred in Section 65 (105) and collected in such manner as may be prescribed .Points to be noted1. Although, service tax is attracted on service provided or to be provided but the tax has to be paid only on the receipt of the consideration. In case, some amount has been realized in advance, tax has to be paid in advance. This is because the charge of Service Tax is not only on service provided but also on service to be provided2. The current rate of service tax is 10% of the value of service plus education cess @ 2% of the tax and SHEC @J% of the tax. Hence, the effective rate of service tax is 10.3% of the value of taxable service.3. Finance Act, 2006 has inserted an explanation below section 65, which provides that 'taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration. However, in case of Resident Welfare Association providing services to their members where monthly subscription does not exceed Rs. 3,000 shall be exempted.4. The power to levy service tax is derived by the Parliament from Entry 92C (to be made effective from notified date) of the Union List of the VII Schedule to the Constitution of India. At present, the Parliament's authority to levy service tax is derived from Entry 97 of the Union List. Section 64 to 96 of Finance Act, 1994 provides the legal basis for levy and collection of service tax.

VALUATION OF TAXABLE SERVICES

Section 67 contains comprehensive provisions for valuation of services for the purpose of levy of service tax.Accordingly, where service tax is chargeable on any taxable service with reference to its value, then, such value shall be computed as follows

Case- Value shall be -

(a) Where the provision of service is for a consideration in money

The gross amount charged by the service provider 1 for such service provided or to be provided by him


(b) Where the provision of service is for a consideration not wholly or partly consisting of money

Non monetary consideration should be converted to equivalent monetary value.

(c) Where the provision of service is for a consideration which is not ascertainable

The amount as may be determined in the manner prescribed by Service Tax (Determination of Value); Rules, 2006.

Where the gross amount charged is inclusive of service tax : Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be calculated as follows -Value of taxable service Gross amount charged (inclusive of service tax) x 100 (100 + Rate of service tax) i.e. 110.3Scope of gross amount charged : The gross amount charged for the taxable service shall include any| amount received towards the taxable service before, during or after provision of such service.

Explanations -

(a) 'Consideration' includes any amount payable for taxable services provided or to be provided;

(b) 'Money' includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value;

(c) 'Gross amount charged' includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment.

Valuation Rules : For the purposes of this section, the value shall be computed in accordance with the Service Tax (Determination of Value) Rules, 2006.

Service Tax (Determination of Value) Rules, 2006The provisions of the Service Tax (Determination of Value) Rules, 2006 are as follows -(1) Determination of Value when consideration is wholly or partly not in money

[Rule 31: Where the consideration received is not wholly or partly consisting of money, the


200vahre shall be determined by theservice provider in the following manner:-

(a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;(b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case, be less than the cost of provisionof such taxable service.(2) Rejection of Value [ Rule 4} : The Central Excise Officer has the power to satisfy himself as to the accuracy of any information furniture or document presented for valuation.Where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance with the provisions of the Act or the rules, he shall issue a notice to such service provider to show cause why the value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in the notice.After providing a reasonable opportunity of being heard, the Central Excise Officer shall determine the value of such taxable service in accordance with the provisions of the Act and these rules.(3) Inclusion in or exclusion from value of certain expenditure or costs [Rule 51 : Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for charging service tax on that service.Expenditure or costs incurred as 'pure agent' to be excluded: The expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, -(a) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;(b) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;(c) the recipient of service is liable to make payment to the third party;(d) the recipient of service authorises the service provider to make payment on his behalf;(e) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;(f) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;(g) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and


201(h) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.Pure agent: "Pure agent" means a person who -(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;(c) does not use such goods or services so procured; and(d) receives only the actual amount incurred to procure such goods or services.

Value to include all components even if separately shown : The value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual cpmponents of the total consideration is indicated separately in invoice.RULE 6: CASES IN WHICH THE COMMISSION, COSTS, ETC., WILL BE INCLUDED OR EXCLUDEDThis rule specifies certain items, which will be included in the value of the taxable services and which will not be included in the value of taxable services.Inclusions : Subject to the provisions of the section 67, the value of the taxable services shall include,-

(a) the commission or brokerage charged by a broker on the sale or purchase of securities including commission or brokerage paid by the stock-broker to any sub-broker;

(b) the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;

(c) the amount of premium charged by the insurer from the policy holder;(d) the commission received by the air travel agent from the airline;(e) the commission, fee or any other sum received by an actuary, or intermediary or insurance

intermediary or insurance agent from the insurer;(f) the reimbursement received by the authorized service station, from manufacturer for

carrying of any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;

(g) the commission or any amount received by a rail travel agent from the railways or the customer;(h) the remuneration or commission, by whatever name called, paid to such agent by the client

engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; and


202(i) the commission, fee or any other sum, by whatever name called, paid to such agent by the

insurer appointing such agent in relation to such insurance auxiliary services provided by an insurance agent.

Exclusions: Subject to the provisions relating to inclusions listed above, the value of any taxable service, as the case may be, does not include -

(a) initial deposit made by the subscriber at the time of application of the telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;

(a) the airfare collected by air travel agent in respect of service provided by him;(b) the rail fare collected by rail travel agent in respect of service provided by him; and

(d)interest on loans.(e) the taxes levied by any Government on any passenger traveling by air, if shown separately on the ticket,or the invoice for such ticket, issued to the passenger, [w.e.f 27-2-20101(4) Valuation in case of service taxable under section 66A: The value of taxable service received under the provisions of section 66A, shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.However, where a taxable service is only partly performed in India, then, the value of taxable service shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.Question: State on what amount is service tax chargeable in thefollowing cases:1. An Auditor raises the following bill -Audit fees Rs. 30,000Traveling expenses reimbursement Rs. 10,000

Rs. 40,0002. An Air Travel Agent raises the following bill -Commission Rs. 500Air- ticket reimbursement Rs. 10,000

Rs. 10,5003. A Real Estate Agent raises the following bill -Brokerage Rs. 5,000Advertisement Rs. 1,000

Rs. 6,0004. A Custom House Agent/ Cable Operator raises the following bill -Service Charges Rs. 20,000Custom Duty/ Entertainment Tax Rs. 5,000

Rs. 25,000


203

5.A rent a – Cab operator raises the following bill – Hire Charges Rs. 5,000 Driver’s Exp. Rs. 200

Rs. 1,32,000

6.A Manpower Agent raises the following bill – Labour Charges Rs. 1,20,000 Service Charges Rs. 12,000

Rs. 1,32,000

7. In Eg. 2 Airfare incurred is Rs. 10,000 but the agent charges Rs. 10,100 for Airfare + Rs. 500 for Commission.I. Will the payment to a hotelier of Rs. 10,000 on behalf of an architect/auditor by a service receiver ie included in the value of the services? X visits a beauty parlor and the total amount billed is Rs. 1,500 inclusive of Rs. 500 for materials old and Rs.200 for materials consumed.3 EXEMPTIONS UNDER SERVICE TAX

Small Service ProvidersWhen aggregate value of taxable services rendered by a service provider from"one or more premises, does not exceed Rs. 10 lakhs in the preceding financial year then the service provider shall be considered as small service provider in the current financial year and shall claim exemption for value of taxable services of Rs. 10,00,000."Aggregate value not exceeding Rs. 10 lakh" means the total of first consecutive payments received during a financial year towards the gross amount charged "by the service provider towards taxable services till the aggregate amount of such payments is equal to Rs.. 10 lakh but does not include payments received towards such gross amount which are wholly exempt from service tax under any other notification.This exemption shall not apply to -(a) Taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or(b) Such value of taxable services in respect of which person liable to pay service tax is specified under section 68(2) (i.e. person liable to pay service tax is the person other than the service provider).


204During the period of exemption the Small Service Provider shall not be eligible to claim CENVAT credit. Once the exemption has been already availed and the Service Provider starts paying service tax and he can again claim CENVAT credit Alternatively, the Small Service Provider may opt not to claim SSP exemption i.e.pay service tax and claim CENVAT credit alsoNotes:(1) "Brand name" or : Trade name "means a brand name or a trade name , whether registered or not, that is to say, a name or a mark ,such as symbol, monogram, logo, lavel, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person,(2) In the first year of business or in a year in which the service has been made taxable, the basi< exemption of 10 lakhs will be available in the first year upto Rs.10 lakhs , as the case may be.Spaces for class Notes:

2.Exemption of taxable service of production of goods on behalf of client i.e. Job work production

The Central Government has exempted the taxable service of production or processing of goods for, or on behalf of the clientHowever, the said exemption shall apply only in case where such goods are produced or processed using raw materials or semi-finished goods supplied by the client and goods so produced are returned back to the said client for use in or in relation to manufacture of any other goods falling under the first Schedule to the Central Excise Tariff Act, 1985 on which appropriate duty of excise is payable.i) The expression "production or processing of goods" means working upon raw materials or semifinished goods so as to complete part or whole of production or processing, subject to the condition that such production does not amount to "manufacture" within the meaning of clause (f) or section 2 of the Central Excise act, 1944: (ii) "Appropriate duty of excise " shall not include 'Nil' rate of duty or duty of excise wholly exempt.3. Export of ServicesRule 4 of the Export of services Rules specifies that any taxable service can be exported without thepayment of service tax. Rule 5 also enables the Central Government to grant rebate of input taxes paid forthe provision of services which are ultimately exported4. Services provided to the United Nations or International organizationsThe Government has exempted all the taxable services specified in section 65 provided by any person to the United Nation or an international organization from the whole of the service tax. For the purposes of the notification an international organization means an international


205organization declared by the Central Government in pursuance of section 3 of the United Nations (Privileges & Immunities) Act, 19475. Service provided to diplomatic missions for their official useAll taxable services provided to foreign diplomatic missions or consular posts in India for their official use are exempted. The exemption would be available on the taxable services provided to such foreign diplomatic mission or consular post in India for its official use, which is issued with an entitlement certificate (with or without any conditions) on the principle of reciprocity, by the protocol division of the Ministry of External affairs (MEA).6. Service provided to diplomatic missions for their personal useAll taxable services provided to diplomatic mission agents or career consular officers posted in a foreign diplomatic or consular posts in India for their personal use are exempted.The exemption would be available on the taxable services provided to such diplomatic agent or career consular officer working in a foreign diplomatic mission or consular post in India for his personal use or for the use of their family members, who is issued with an entitlement certificate (with or without any conditions) on the principle of reciprocity, by the protocol division of the Ministry of External Affairs (MEA).Such agent or officer should also hold a photo-identification -card bearing a unique serial number, issued by the protocol Division of MEA or the protocol department of the state concerned.7. Exemption for services provided to units in SEZAll taxable services, which are provided in relation to the authorized operations in a Special EconomicZone, and received by a developer or units of a Special Economic Zone, whether or not the said taxableservices are provided inside the Special Economic Zone, is exempt.The said Notification classified the service provided in relation to the authorized operations in a SEZ in thefollowing two categories:(1) Services consumed wholly within the SEZ ; (2) Services consumed partially or wholly outside SEZExemption for Category 1 : Services consumed wholly within the SEZTaxable services falling under this category is exempted.Conditions

a) The developer or units of SEZ shall get the list of specified services as are required in relation to the authorized operations in the Special Economic Zone, approved from the Approval Committee (hereinafter referred to as the specified services).

b) The developer or units of SEZ claiming the exemption actually uses the specified services in relation to the authorized operations in the Special Economic Zone.

c) The developer or units of a SEZ shall maintain proper account of receipt and utilisation


206d) of the taxable services for which exemption is claimed.

Exemption for category 2:Services consumed partially or wholly outside the SEZTaxable services falling under this category is exempted by way of refund i.e., the firstly it is required to bepaid and then refund is required to be claimed.Conditions

a) The developer or units of SEZ shall get the list of specified services as are required in relation to the authorized operations in the Special Economic Zone, approved from the Approval Committee (hereinafter referred to as the specified services).

b) The developer or units of SEZ claiming the exemption actually uses the specified services in relation to the authorized operations in the Special Economic Zone.

c) The developer or units of SEZ claiming the exemption, by way of refund, has actually paid the service tax on the specified services.

d) No CENVAT credit of service tax paid on the specified services used in relation to the authorized operations in the SEZ has been taken under the CENVAT Credit Rule, 2004.

e) Exemption or refund of service tax paid on the specified services used in relation to the authorized operation in the SEZ shall not be claimed except under this notification.

f) The developer or unit of a SEZ shall maintain proper account of receipt and utilisation of the taxable services for which exemption is claimed.

In nutshellThe exemption claimed by the developer or units of SEZ shall be provided by way of refund of service tax paid on the specified services used in the relation to the authorized operations in the SEZ except for services consumed wholly within the Special Economic Zone. Putting it differently

Service Method of Exemption

Specified services used in relation to the authorized operations in the SEZ i.e., services may be consumed partially or wholly outside SEZ

Exemption by way of refund i.e. first it is required to be paid and then refund shall be claimed

Services consumed wholly within the Special Economic Zone

Exemption i.e. not required to pay

8. Exemption for the value of goods and material sold

207


Notification No, 12 of 2003 issued on 20-06-2003 provides for an exemption for the value of goods and materials sold by the service provider to the recipient of service provided that there is documentary proof specifically indicating the value of the said goods and materials.However, the said exemption shall apply only in such cases where -

(a) no CENVAT credit of duty paid on such goods and materials sold, has been taken, or(b) where such credit has been taken by the service provider on such goods and materials,

such service provider has paid the amount equal to such credit availed before the sale of such goods and materials.

9. Services provided in Jammu and Kashmir are exempted:10. Exemptions to incubators and incubates: Taxable services provided by incubators are exempt from service tax. Further, incubatees or entrepreneurs who work with the incubator to develop their ideas into commercially viable venture are entitled to service tax exemption for a period of 3 years from the date of signing of the agreement with the incubators

11. Exemption to digital cinema service provider : Services provided by digital cinema service provider to producer/distributor in relation to delivery of content of cinema in digital form after electronic encryption are exempt from service tax.12. Exemption for Sovereign Functions : Activities assigned to and performed by the sovereign/public authorities under the provisions of any law are statutory duties, The fee or amount collected as per the provisions of the relevant statute for performing such functions is in the nature of a compulsory levy and are deposited into the Government account. Such activities are purely in public interest and are undertaken as mandatory and statutory functions. These are not to be treated as services provided for a consideration. Therefore, such activities assigned to and performed by a sovereign/public authority under the provisions of any law, do not constitute taxable services. Any amount/fee collected in such cases are not to be treated as consideration for the purpose of levy of service tax.However, if a sovereign/public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within scope of a taxable service as defined.13. Exemption to RBI : Taxable services provided or to be provided to any person, by Reserve Bank of India, is exempt from the whole of service tax. Similarly taxable services provided or to be provided to any person to RBI is exempt from service tax only if the person liable to pay service in respect of that service is RBI. Also, the service imported by RBI are exempt.14. Transmission of electricity has been exempted from Service Tax.REGISTRATIONRegistration [Section 69 and rule 41

208


Every person liable for paying the service tax is required to make an application to the concerned superintendent of Central Excise in form ST-1 for registration with in such time as may be prescribed. Further the central government may, by notification in the Official Gazette , specify such other person or class of persons, who shall make an application for registration with in such time and in such manner and in such form as may be prescribed.

Time limit for registrationThe application in form. No. ST-1 has to be made within time prescribed as under:

Situation Time limit for Registration

When service tax is imposed on a new service, in case of service providers already engaged in providing that service

Within 30 days from the date of levy of service tax

In case a service provider commences the business of providing the service which is already made taxable

Within 30 days from the date of commencement of business

It is important to note that the time limit of 30 days for registration as provided under rule4(l) is fromthe date of commencement of business and not from the date on which the liability to pay service taxarises . However, according to section 69 , only persons liable to pay service tax are required to makeapplication for registration.Registration of specialised category of persons The following persons shall also make an application (in Form ST-1) for service tax registration -(a) An input service distributor; and(b) Any provider of taxable service whose aggregate value of taxable service in a financial year exceeds Rs.9 lakh.Time: Such application shall be made within 30 days of the commencement of business, or of exceeding the aggregate value of taxable service of Rs. 9 lakh, as the case may be.Question: Discuss whether the following persons are liable apply for registration under the service tax law and if yes, by which date-fa) A provider of taxable service, whose aggregate value of service is Rs. 8,80,000 up to 31-03-

2010b) A provider of taxable service, whose aggregate value of service is Rs. 9,01,000 on 1-01-

2010c) A provider of taxable service, who has provided services as follows:

Aggregate value of services upto 31-05-2008(i.e. before the service become taxable) Rs. 7,00,000. Aggregate value of services form 1-06-2008 to 31-03-2010 Rs. 8,95,000;

d) An input service distributor who starts his business w.e.f 05-06-2008;209


(e) A provider of taxable service, who starts its business w.e.f. 11-08-2008 and whose aggregate value of taxable services as on 10-10-2008 becomes Rs.9,02,000;

Answer:(a)No registraction is required

(b) 31-01-2010(c) No registration is required(d) 05-07-2008(e) 09-11-2008Centralized registration [Rule 4(2)1Where a person, liable for paying service tax on a taxable service,--(i) provides such service from more than one premises or office: or(ii) receives such service in more than one premises or offices: or(iii) is having more than one premises or offices, which are engaged in relation to such service in any othermanner, making such person liable for paying service tax.

ANDHas centralized billing system or centralized accounting system in respect of such service, and such centralized billing or centralized accounting systems is done, are located in one or more premises,He may, at his option, register such premises or offices from where centralized billing or centralized accounting systems are located.The registration under above sub-rule (2) shall be granted by the Commissioner of Central Excise in whose jurisdiction the premises or offices, from where centralized billing or accounting is done, are located.Separate Registration of Multiple place of business in the absence of centralized billing or centralized accounting system [Rule 4(3 A)]Where an assessee is providing a taxable service from more than one premises or offices, and does not have any centralized billing systems of centralized accounting systems, as the case may be , he shall make separate applications for registration in respect of each of such premises or offices to the jurisdictional superintendent of Central excise.Single application for registration even it more than one service is provided [Rule 4(4)1If the same assessee provides more than one category of taxable services, he need not apply for separate registration for each taxable service. Single application mentioning therein all the taxable services provided shall be sufficient. In case the assessee is alread\ registered for one service but subsequently becomes liable for another category of service, then he has to get his certificate endorsed for the other category of service.It should be noted that even though the registration is common across different service categories, the tax liability has to be discharged separately for each of the taxable service in separate GAR-7 Challans mentioning the accounting code relevant for the pertinent taxable

210


service. However, a single return in form ST-3 indicating the details separately for such taxable service will suffice.It should also be noted that the registration numbers for each service category would be different though the service tax code (PAN based) would be common. Also, the classification of services would be very important in this situation.Documents to be attachedAn application for registration has to be accompanied along with the following documents: 1. Application in form ST-1 in triplicate duly signed.2. Attached copy of the PAN card.3. Proof of address of the premises which is required to be registered.4. Copy of the Document governing the constitution of the organization (partnership deed in

case of partnership firm), Memorandum of Association in case of a company , Trust deed in case of a trusts or association)5. Authority Letter in favour of the person who is to collect the registration certificate on the letter head of the organization applying for registration.6. Power of Attorney in case the documents are signed by an authorized representative.Issue of registration Certificate

The Superintendent of Central Excise is required to verify the application of registration and issue a certificate in form ST-2 within 7 days of the receipt of application. If the registration certificate is not granted within the said period , the registration applied for shall be deemed to have been granted.New PAN Based service Tax CodeThe department has decided to introduce Service tax code based on PAN Accordingly , it is compulsory, it is compulsory for all concerns registered under the Service tax Rules to obtain PAN whether or not they pay income tax . The service tax Code is a 15 digits alphanumeric code. First 10 digits will be 10 character PAN issued by income tax authorities. Next two characters will be 'ST', Last three will be numeric code -001, 002, 003 etc. the concern person should apply in prescribed from.Changes in Registration CertificateIf there is any change in name or place of the applicant, the registration certificate should be sent for necessary amendment within 30 days from the change .it is now provided that a certified copy of the registration certification can be filed. Moreover, if the change in the place also results in a change in the jurisdiction, an additional request for the transfer of records should also be made.It has been clarified that in case of change in the case of change in the place of business, looking at the scheme of premise -specific registration and the provisions of rule 4(1), an application should be made within a period of 30 days.If the business is transferred to another person, fresh certificate of registration is necessary vide rule4 (6). If the assessee ceases to carry on the activity for which he is registered, he should surrender the registration certificate immediately.


211Similarly, in case there is a change in constitution of a partnership firm, the name should be intimated through a letter to the superintendent of central excise. This stand has also been supported by the Delhi Commissioner.Cancellation of registration [Rule 4(8)](1) If the assessee ceases to carry on the activity for which he is registered, he should surrender the registration certificate to the Superintendent of Central Excise.(2) On receipt of application with certificate, the Superintendent of Central Excise shall ensure that the assessee has paid all dues to the Central Government under the provision of the Act and then he will cancel the registration(3) It is to be note that the cancellation of registration may be done when the assessee applies for cancellation on his own or surrenders his certificate and not in other cases.

PAYMENT OF SERVICE TAX Person liable to pay service tax

Every person liable to pay service is required to pay the service tax as per the provisions of rule 6 of the service tax Rules, 1994, Unincorporated associations or body of persons providing taxable services to its members for cash, deferred payment or any other valuable consideration are also liable to pay service tax.

When recipients of Services are liable to pay Service Tax1. In relation to insurance auxiliary service by an insurance agent, the insurance company shall be liable to pay the service tax.2. In relation to any taxable service provided by a non-resident not having any office in India , the person receiving the taxable service in India shall be liable to pay the service tax.3. In relation to any taxable service provided by a goods transport agency where either the consignor or the consignee is a specified entity, the person paying the freight either himself or through his agent shall be liable to pay the service tax.4. In relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor or an agent, the mutual fund or asset management company receiving such service shall be liable to pay the service tax.5.In relation to sponsorship services, the person sponsoring the event if he is located in India.

Discounts & Short payments

In case where there has been a short recovery, it would be necessary for the assessee to revise the bill or to endorse the reduction on the original bill. In case an assessee does not do so , his liability to pay service tax shall be on the amount billed by him to the client for the services rendered.


212Excess Collection

As per section 73 A , every person, who is liable to pay service tax has collected any amount in excess of the service tax assessed or determined and paid on any taxable service in any manner as representing service tax, must pay the amount so collected immediately to the credit of the Central Government. This provision ensures that the service provider does not collect excess amount from the recipient of the service in the name of service tax.Further, where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person should also immediately pay the amount so collected to the credit of the central Government

Due Dates for the payments [Rule 6(1)

There have been frequent changes in the due dates for payment of service tax. The current law pertaining to due dates for depositing the service tax are summarized in the table given below:Category of assessee Periodicity of

paymentPeriod Due Date

Individuals, proprietary firms or partnership firms

Quarterly April to June, July to September, October to December

5th (6th if paid electronically through internet banking ) of the month immediately following the said quarter

January to March 31st March

Others Monthly All months except March

5th (6th if paid electronically through internet banking ) of the month immediately following the calendar month

. March 3 Ist March


Note:

2131. It is to be noted that as per CBEC clarification, where the tax is paid electronically, the same should be paid by 8 p.m on the due date. If the same is paid later than 8 p.m on the due date, it shall be deemed to have been paid on the next date.

2. Where the transaction of taxable service is with any associate enterprise, any payment received towards the value of the taxable service, in such case shall include any amount credited or debited to any account, whether called 'Suspense Account' or by any other name , in the books of the account of a person liable to pay service tax.

How to make the payment [Rule 6(2)]Under rule 6(2), the assessee is required to deposit the service tax with the bank designated by the Central board of Excise & Customs for this

purpose. The payment has to be deposited through challan GAR-7However, in case the assessee has paid service tax of Rs. 10,00,000 or more in the preceeding financial year including utilization of CENVAT credit service tax shall have to be paid electronically through internet banking.It is to be noted that the interest for delayed payment of service tax has also to be paid along with the service tax amount, however, the accounting codes for interest and penalties are different from those for the service tax amounts.

Payment in Cheque - Date of Tender [Rule 6(2A)]

In case of payment by cheque , rule6 (2 A) provides that the date of payment is the date on which the cheque is tendered to the designated bank, provided the cheque is not dishonored in the course of clearing.

Rounding off of tax

The provisions of section 37D of the Central Excise Act, 1944 provide for the rounding off of the payment of duty. The said provisions have been made applicable to the service tax law also. Therefore the payment of service tax should be rounded off in multiple of rupees. Where such amount includes fifty paise or more, it should be increased one rupee and if it is less than fifty paise, it should be ignored.

Option to pay service tax in advance and adjust the same against future service


tax liability Rule 6 (1 A)

214

Every person liable to pay service tax, may, on his own option, pay an amount as service tax in advance and adjust the amount so paid against the service tax which he is liable to pay for the subsequent period. However, the assessee shall,

(a) intimate the details of the amount of service tax paid in advance, to the jurisdictional Superintendent of Central Excise within 15 days from the date of such payment; and

(b) indicate the details of the advance payment made, and its adjustment, if any in the subsequent return to be filled U/s 70 of the Act.

Adjustment of Excess service Tax paid [Rule 6(3)1

Where an assessee has paid to the credit of Central Government any amount in excess of the amount required to be paid towards service tax liability for a month/quarter, the assessee may adjust such excess amount paid by him against his service tax liability for the succeeding month/quarter, subject to the following conditions -

(a) excess amount paid is on account of reasons not involving interpretation of law, taxability, classification, valuation or applicability of any exemption notification,

(b) excess amount paid by an assessee having Centralized Registration, on account of delayed receipt of details of payments towards taxable services may be adjusted without monetary limit,

(c) in cases other than specified in (b) above, the excess amount paid may be adjusted with a monetary limit of Rs. 1 lakh (amended w.e.f. 1-3-2008) for a relevant month/quarter,

(d) the details and reasons for such adjustment shall be intimated to jurisdictional Superintendent of Central Excise within a period of 15 days from the date such adjustment.

In case where an assessee has opted for centralized registration and has paid any service tax amount in excess of the liability for a period due to non receipt of details of receipts from other premises or offices, the assessee may adjust such excess amount against his service tax liability for the subsequent periodWhere the excess payment is due to any other reason, the assessee has to apply for a refund section 1 IB of the Central Excise Act if the assessment is pending, If the assessment is completed, the assessee should apply for rectification under section 74 of the Finance Act, 1944.

Self Assessment


Section 70 provides that every person liable to pay the service tax shall himself assess the tax due on the services provided by him and shall furnish to the Superintendent of Central Excise, a return in such form and in such manner and as such frequency as may be prescribed. It is the

215duty of the assessee to make self-assessment of tax due in respect of services provided by him in a particular period and pay the tax on the basis of self-assessment.

Provisional assessmentRule 6(4) provides that where an assessee is unable to correctly estimate the actual amounts of service tax payable for any month or quarter, the assessee may make a request in writing to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise, as the case may be, to make a provisional assessment of tax on the basis of the amount deposited.

The Assistant Commissioner or Deputy Commissioner as the case may be, may, on receipt of such request, order provisional assessment of tax. Accordingly, the provisions of Central Excise Rules, 2002 relating to provisional assessment shall apply except the provisions relating to execution of bond.

Rule 6(5) provides that after such request is made, the assessee shall submit a memorandum, in Form -3A; giving details of difference between the provisional amount of service tax deposited and the actual amount of service tax payable for each month along with the half-yearly return in Form - 3.

Where the assessee submit a memorandum, in Form-3A, the AC /DC of Central Excise, as the case may be shall complete the assessment, wherever he deems it necessary and proper in the circumstances of the case.

Section 72: Best judgment assessmentIf any person, liable to pay service tax,

(a) fails to furnish the return under section 70;

(b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules made thereunder,

the Central Excise Officer, may require the person to produce such accounts, documents or other evidence as he may deem necessary and after taking into account all the relevant material which is available or which he has gathered, shall by an order in writing, after giving the person an opportunity of being heard, make the assessment of the value of taxable service to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment.


216Interest on delay in payment of service tax [Section 75] : In case of delay in payment of service tax, interest shall be charged @ 13% p.a. after the expiry

of the due date till the date of payment of tax.

Special rates of Service Tax/Composition Scheme

(1) Option to air Travel Agent - 0.6% of domestic fare & 1.2% of international fare [Rule (6(7) of Service tax rules,1994] : The person liable for paying the service tax in relation to the services provided by an air travel agent, shall have the option, to pay an amount calculated -

• @ 0.6% of the basic fare in the case of domestic bookings, and• @ 1.2% of the basic fare in the case of international bookings,

"Basic fare" means that part of the air fare on which commission is normally paid to the air travel agent by the airline.

(2) Life insurance business - 1 % of gross amount of premium [Rule 6(7A)of Service Tax Rules, 1994]: an insurer carrying on life insurance business shall have the option to pay an amount calculated @1 % of the gross amount of premium charged by such insurer towards the discharge of his service tax liability instead of paying service tax @10.3% on risk premium.

However, such option shall not be available in case where -

• The entire amount paid by policy holder is only towards risk cover in life insurance ;

• The part of the premium payable towards risk cover in life insurance is shown separately in any of the documents issued by the insurer to the policy holder.

(3) Money- changing services provided by a foreign exchange broker - 0.25 % of gross amount of currency [Rule 6(7B)of service tax rule, 1994] : The person liable to pay service tax in relation to purchase or sale of foreign currency, shall have the option to pay an amount calculated @0.25%of the gross amountof currency exchanged towards discharge of his service tax liability instead of paying service tax @ 10.3% on commission element.However, such option shall not be available in cases where consideration for the service provided or to be provided is shown separately in the invoice, bill or challan issued by the service provider.


217OTHER PROCEDURES UNDER

SERVICETAXProcedure for Issue of bill/invoice/ challan [Rule 4A & 4B]

(1) Every person providing taxable service shall issue an invoice/bill/challan signed by such person or a person authorized by him in respect of such taxable service provided or to be provided.

(2) Time limit for issue of invoice/bill/challan: The invoice/bill/challan shall be issued not later than 14 days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier.

Where any payment towards the value of taxable service is not received and such taxable service is provided continuously for successive periods of time and the value of the such taxable service is determined or payable periodically, then, an invoice/bill/challan shall be issued by a pe -son providing such taxable service, not later than 14 days from the last day of the said period.

(3) Contents: Such invoice/bill/challan shall be serially numbered and shall contain the following -(a) The name, address and the registration number of such person;(b) The name and address of the person receiving taxable service;(c) Description, classification and value of taxable service provided or to be provided; and(d) The service tax payable thereon.

(4) Issue of consignment note by goods transport agency: Any goods transport agency providing taxable service shall issue a consignment note to the recipient of service. However, where any taxable service is wholly exempted, the goods transport agency shall not be required to issue the consignment note.

(5) Invoice in case of input service distributor: A input service distributor distributing the credit of taxable services shall issue a invoice/bill/challan in respect of credit distributed by it.

Maintenance of records [Rule 5]

The records (including computerised data) shall be acceptable. Every assessee shall furnish to the Superintendent of Central Excise at the time of filing of return for the first time or 31-3-2008, whichever is later, a list in duplicate, of-


218(1) all records prepared or maintained by the assessee for accounting of transactions in regard to, -

(a) providing of any service, whether taxable or exempted;(b) receipt or procurement of input services and payment for such input services;(a) receipt, purchase, and manufacture, storage, sale,

or delivery, as the case may be, in regard of inputs and capital goods;

(d) other activities, such as manufacture and sale of goods, if any.

(2) All other financial records maintained by him in the normal course of business.

All such records shall be preserved at least for a period of 5 years immediately after the financial year to which such records pertain.

Power of authorised officer to have access to registered premises for scrutiny, etc.[Rule 5A]

An officer authorised by Commissioner in this behalf shall have access to any registered premises for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

Records may be demanded for scrutiny: For the purposes of the scrutiny, such authorised officer, or, the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, may demand -

(a) the records listed in Rule 5 ;(b) trial balance or its equivalent; and(c) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961.

Assessee to furnish requisite records within, 15 days: On such demand, every assessee shall make available all the requisite records to such officer or the audit party within a reasonable time not exceeding 15 working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party.

Note: "registered premises" includes all premises or offices from where an assessee is providing taxable services.


219Filing of returns of Service Tax

Periodicity of Filing Returns [Section 70 and rate rule 71Every person liable to pay service tax shall himself assess the tax due on the services provided by him and furnish a return in From ST-3 (in triplicate) on a half yearly basis. 'Half year' means 1st April to 30 September and 1st October to 31st March of financial year.

Revision of return [Rule 7C1: An assessee may submit a revised return, in Form ST-3, in triplicate, to correct a mistake or omission, within 90 days (amended w.e.f. 1-3-2008) from date of submission of original return.

Fees for delayed furnishing of returns [Rule 7C1: Where the return in prescribed form is furnished after the due date for its submission, the person liable to furnish such return shall pay to the credit of the Central Government a fees for such delayed submission, computed as follows

Period of delay in furnishing return Fees to be paid

15 days from the due date Rs. 500

Beyond 15 days but up to 30 days from the due date

Rs. 1,000

Beyond 30 days from the due date Rs. 1, 000 +Rs. 100 for every day from the 31st day till the date of furnishing of return; subject to a maximum of Rs. 2,000

Proceedings to be deemed to be concluded if fees paid as above: Where the assessee has paid the amount as given above for delayed submission of return, the proceedings in respect of such delayed submission of return will be deemed to be concluded.

Reduction/Waiver of fees if service tax is Nil: Where the gross amount of service tax payable is nil, the Central Excise officer may, on being satisfied that there is sufficient reason for not filing the return, reduce or waive the penalty.

Due dates of filing of returns


tn

The return has to be submitted by the 25in of the month following the particular half-year. Even a NIL return to be filed if the assessee has not rendered any taxable service during particulars half year. In case the due date of deposit of tax or filing of return happens to be a

220public holiday, the service tax can be paid or the return can be filed on the next working day immediately following the holiday.

Contents of the service tax returnThe return should include inter alia, month wise details for each of the taxable service rendered by the assessee -

Value of taxable service charged/billed; Value of services which are exempted - with reference to the notification; Value of services which are exported; Abatement Claimed - with reference to the notification; Value of taxable service realized for services already rendered; Value of taxable service realized for services yet to be rendered; Amount of service tax payable/paid; Amount of education cess payable/paid; Details of CENVAT Credit

The new format of "the return is much more comprehensive and provides for the details of gross billing, exemptions, abatements, references to notifications & realizations. It also includes the details of service tax, education cess, CENVAT Credit, interest and the like.

Enclosures to the Return

The following documents should be enclosed with the return:

• Copies of GAR-7 challans for the enclosed with the return:• Memorandum in Form ST-3A in case of a provisional assessment*• List of accounts maintained in relation to service tax by the assessee should be attached

with the first return.

• Documentary Proof for adjustment of excess service tax paid in terms rule 6(3).

• Worksheet of calculation of interest in case of delayed payment of service tax.

E-Filing of ReturnsThe Central Board of Excise & Customs has introduced a scheme of e-filing of service tax returns. The broad scheme is as under:

1. Assessee should have the 15 digits STP Code (based on PAN) to avail the facility of e-filing


of returns.

2212. The assessee should indicate his 15-digit code in the challans used by him for the period for which the returns are being filed. (An assessee who has not done this may also opt for e-filing, but he will have to submit copies of Challans, evidencing payment of service tax to the concerned excise formations after indicating his 15-digit STP code on each challan).

3. The assessee should file an application to the concerned excise officer at least one month in advance before the due date of filing of the return, in Annexure-I. User 'id' and 'password' for the assessee will be communicated to him within ten days after filing the application along with the necessary technical guidance.

4. After receipt of the said details the individual service provider can download form for entering details of ST-3 returns and GAR-7 challans from the central server using internet and enter the necessary details for the concerned return period.

5. The computer generates a key number which will depend on the STP code, date of filing, value of services declared and tax paid and generates an acknowledgement giving these as declared by the assesses are not found the assessee will be contacted.

6. The computer will verify the fact of payment from data obtained from Focal Point Bank. Where details as declared by the assesses are not found the assessee will be contacted.

7. Where the assessee has paid service tax of Rs. 10,00,000 or more in the preceding financial year including utilization of CENVAT credit then the assessee mst file retrn electronically.

Multiple Services RenderedIn case the assessee renders multiple categories of taxable services, he can file a single return for all the categories of taxable services. However, complete information should be presented in the return month-wise and category wise. Also, the payment of service tax has to be made in separate or in one challan with separate codes mentioned clearly thereon.

Section 71: Scheme for submission of returns through Service Tax preparers

The Board is empowered to frame a scheme providing that specified class of person may furnish their service tax returns through an authorised Service Tax Return Preparer. Such scheme may


provide for various provisions applicable to the Service Tax Return Preparer (including educational qualification, duties, etc.)

222"Service Tax Return Preparer" means any individual, who has been authorised to act as a Service Tax Return Preparer under aforesaid Scheme.

A Service Tax Return Preparer shall assist the specified person or class of person to prepare and furnish the return in such manner as may be specified in the Scheme framed under this section.

CLASSIFICATION OF SERVIESSection 64A(1) provide that where a taxable servive is prime facie classifiable under two or more categories Service, than classification ssall be done as follows-

(a) Specific description to be preferred over a general description

(b) Classification should be as per essential character in case of composite services.(c) When a service cannot be classified in the manner specified in clause (a) or clause (b),

then it shaft be classified under the category, which occurs first in clause (105) of section 65.

EXPORT OF SERVICESThe Export of services Rule, 2005 makes an attempt to define the “export of service rule classifies the taxable servicea as category ‘A’ and ‘C’. the meaning of categories ‘A’, ‘B’ and “C’ is as follows :- (A) Immovable property situated abroad(B) Service performed (wholly or partly) outside India.C) When services is provided in relation to business or commerce, export means- provision of such services to a ^ recipient located outside India.

(ii) When service is provided other wise, export means - provision of such services to a recipient located outside India at the time of provision of such services.Rule 4 of the Export of services Rules specifies that any taxable service can be exported without the payment of service tax. Rule 5 also enables the Central Government to grant rebate of input taxes paid for the provision of services which are ultimately exported. It is to be noted that the Central Government has granted the rebate by way of notification in the official Gazette and the procedure for claim of such rebates has also been specified. The rebate is available only if the amount of rebate is Rs. 500 or more.

CENVAT Credit is still available for "exported services"Name of the student: Gulab Kumar MishraRoll No. : 510924972 SIKKIM MANIPAL UNIVERSITY (Kankurgachi – LC- 02737)

IMPORT OF SERVICESCharge of service tax on service received from outside India [Sec. 66A1

223(1) Where any service specified in section 65(105) is provided or to be provided by a person who has:

(i) established a business or has a fixed establishment from which service is provided or has been provided in a

country outside India, or (ii) his permanent address or usual place of residence is in a country other than India

And Such service is received by a person (i.e. recipient) who has his place of business, fixed establishment, permanent address or usual place of residence in India.It will be treated as if recipient himself has provided the services in India and it will be chargeable to tax in his hands instead of the service provider.

(2) However, if the recipient of the service is an individual, such service shall not be taxable unless it has been received by him in any business or commerce,

(3) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishment shall be treated as separate persons for the purposes of the section.(4) Where the provider of service has his business establishment both in that country and else where, then, the country, where the establishment directly concerned with the provision of service is located, shall be considered.

Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 have been framed to govern the provisions of this section. This provides as under-Rule 3: It classify all taxable services in four categories, namely (i) Services in relation to immovable property (ii) Services to be performed in India and (iii) Services received by recipient located in India (iv) Services which will never be treated as 'import of service'.Note: The classification is same as per export of Service Rules,Rule 4: The recipient of service shall make an application for registration in accordance with the provisions of section 69 and rules framed thereunder.Rule 5: The service taxable under this section shall not be treated as 'output service' for the purpose of availing credit of excise duty/service tax paid on any input/input service.


224MISCELLANEOUS

penal provisions under service tax law are

The penal provisions under the service tax law are as under :-

Sec. Reasons of penalty Quantum of penalty76 Failure to pay service tax (a) Rs. 200 per day of failure, or (b) 2% p.m.

of service tax, whichever is higher, starting with the first day after due date till the date of actual payment of outstanding amount of service tax, subject to maximum of tax not paid.

77 (1) Failure to take registration as per provisions of section 69 or rules made under this Chapter

Penalty which may extend to - (a) Rs. 200 for every day during which such failure continues starting with the first day after the due date, till the date of actual compliance, or, (b) Rs. 5000, whichever is higher

(2) Failure to keep, maintain or retain books of account and other documents as required by this law

Penalty which may extend to Rs. 5000.

(3) Failure to -(i) furnish information called by an officer in accordance with the provisions of this Chapter or rules made thereunder; or(ii) produce documents called for by a Central Excise Officer in accordance with the provisions of this Chapter or rules made thereunder; or (iii) appear before the Central Excise Officer, when issued with a summon for appearance to give evidence or to produce a document in an inquiry.

Penalty which may extend to -(a) Rs. 200 per day during which such failurecontinues starting with the first day after the duedate, till the date of actual compliance, or(b) Rs. 5000,whichever is higher.


(4) Failure to pay tax electronically through internet banking, though required to pay tax electronically


(5) Issuing invoice in accordance with the provisions of the Act or rules made thereunder, with incorrect or incomplete details or failure to account for an invoice in his books of account


(6) Contravention of any of the provisions of this Chapter or any rules made thereunder for which no penalty is separately provided


78 Suppressing value of taxable Service 100%, Subject to maximum of 200% of service tax sought to be evaded by suppressing taxable service.

The end
