Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
CHAPTER-1
BASIC CONCEPTS OF INCOME TAX
was credited.
2. Unexplained Investments (sec 69): Where in any previous
year the assessee has made any investments which are not
recorded in the books of account maintained by him and the
assessee has no satisfactory explanation about the source of
investment then such unexplained investment is treated as income
of the assessee of the previous year in which such investment was
made.
3. Unexplained Money (Sec 69A): Where in any previous year
the assessee is found to be the owner of any money, bullion,
Jewellery or other valuable article which is not recorded in the books
of account and the assessee has no satisfactory explanation about
the source of money etc. then such unexplained money etc. is
treated as income of the assessee of the previous year in which the
assessee was found to be the owner.
4. Investments not fully disclosed in the books of account
(sec 69B): Where in any previous year the assessee has made any
investments which are recorded in the books of account maintained
by him at an amount less than amount expended and the assessee
has no satisfactory explanation about the source of excess amount
expanded in investment then such excess amount is treated as
income of the assessee of the previous year in which such
investment was made.
5. Unexplained Expenditure (Sec 69 C): Where in any previous
year an assessee has incurred any expenditure and the assessee
has no satisfactory explanation about the source of expenditure or
part thereof then such unexplained explained expenditure or part
thereof is treated as income of the assessee of the previous year in
which such expenditure was incurred. Also such unexplained
expenditure can not be allowed as deduction under any head of
income.
6. 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 drawn on a bank, the amount so borrowed or repaid shall be
deemed to be the income of the borrower or repayer for the
previous year in which such amount was borrowed /repaid. If
amount borrowed has already been taxed then there will be no tax
levied at the time of repayment of such amount.
EXECPTIONS TO THE GENERAL RULE THAT
INCOME OF A PREVIOUS YEAR IS CHARGED TO
TAX IN THE RELEVANT ASSESSMENT YEAR:
1. Non resident shipping business (sec 172) – In case of a non-
Ward/Circle/Range :
Permanent Account Number :
PARTICULARS AMOUNT
TAX LIABILITY
* * *
CHAPTER-2
RESIDENTIAL STATUS
A person may earn/receive his income from a source or
at a place with in India or outside India. Such income is charged to a
person on the basis of Residential Status. Residential Status is
different from 'Nationality’ or ‘Domicile.’ Before starting the concept
of understanding different types of residential status it is necessary
to understand that:
1) Each and every person has a distinctive residential status for
every relevant previous year. It means that the person can be
either ' ORDINARILY RESIDENT' or 'NOT ORDINARILY RESIDENT’
or ‘NON RESIDENT’:
2) Every person has to consider his residential status in every
relevant previous year. It means that a person Resident in
A.Y.2009-10 may be non-resident in AY 2010-11 according to
the rules to be studied later on.
3) It is not necessary that a person, who is resident in India, can't
be Resident in any other country in the same previous year. It
simply means that a person can be Resident in more than one
country in the same previous year.
4) If a person is resident in a particular previous year for one
source of income then he is also resident for other sources of
income for that previous year. This means that a person
has same residential status for incomes of a particular
previous year.
The residential status is studied by dividing the persons
in following five categories:-
a) Individual b) H.U.F. c) Firm/AOP or BOI.
d) Company e) every other person.
can be:
i) Resident; ii) Resident but not ordinarily resident; or iii) Non-
resident.
RESIDENT & ORDINARILY RESIDENT [Sec 6(1), 6(6)(a)]: An
individual is resident in India in a previous year if he fulfills at
least one of the following two conditions:
a) He is in India for at least 182 days in the previous year; or
b) He is in India for at least 60* days in the previous year and at
least 365 days in four years preceding the relevant previous
year.
*This period of 60 days is to be replaced by 182 days if:
i) Individual is Indian Citizen or a person of Indian origin who
comes for a visit to India; or
ii) Individual is Indian Citizen who leaves India during the relevant
previous year for employment purpose outside India or as a
crew member of Indian Ship.
NOTE: AN INDIVIDUAL IS A PERSON OF INDIAN ORIGIN IF HE
OR EITHER OF HIS PARENTS OR ANY OF HIS GRAND PARENTS
(BOTH PATERNAL & MATERNAL) WAS BORN IN UNDIVIDED
INDIA.
An individual, who fulfills either of 'a' or 'b' or both
conditions given above, has to fulfill both of the conditions given
below to be ordinarily Resident:-
a) He is resident in India for at least 2 years out of 10 years
immediately preceding the relevant previous year; &
b) He is in India for at least 730 days in 7 years preceding the
relevant previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT [SEC6 (1), 6(6)
(a)]: An individual who fulfills at least one of the Basic
conditions of resident but does not fulfill both of the
conditions for ordinarily resident is RESIDENT BUT NOT
ORDINARILY RESIDENT.
NON RESIDENT:- An individual who does not fulfill any of the basic
condition of resident is called NON-RESIDENT.
received in India
(wherever accrued )
3 Income accrued in TAXABLE TAXABLE TAXABLE
India(wherever
received)
4 Income deemed to be TAXABLE TAXABLE TAXABLE
accrued in India
(wherever received)
5 Income accrued and TAXABLE TAXABLE NOT
received outside India, TAXABLE
from a business
controlled from India
or a profession set up
in India (wholly or
partly)
6 Income accrued and TAXABLE NOT NOT
received outside India, TAXABLE TAXABLE
from a business
controlled from
outside India or a
profession set up
outside India
7 Income accrued and NOT NOT NOT
received outside India TAXABLE TAXABLE TAXABLE.
during any preceding
previous year but
remitted to India
during the previous
year.
Chapter-3
INCOME UNDER HEAD "SALARIES"
The first head of Income is ‘Income from Salaries’. First of all let us
GROSS SALARY
Less: Deduction for Entertainment -
Allowance u/s 16 (ii)
Less: Deduction for Professional/ -
Employment tax u/s 16(iii)
INCOME UNDER HEAD SALARY
by the employee either in the same year or any other year while
he is in service OR he may get earned leave encashed on
retirement or resignation or his legal heirs may get this amount
after his death.
A) If leave Salary is encashed by the employee when he is in
service with the same employer then it is FULLY TAXABLE.
However relief u/s 89 can be claimed.
B) If Leave Salary is encashed by the employee at the
time of retirement or leaving the job then the exemption is as
follows:
i) Exemption for Central or State Government
Employees [SECTION 10(10AA)(i)]: Leave encashment at
the time of retirement/leaving the job is FULLY EXEMPT.
ii) Exemption for other employees [SECTION 10 (10AA)
(ii)]: Leave encashment at the time of retirement/ leaving the job is
exempt to the least of following:
(a) Leave Encashment actually received;
(b) 10 months X Average Salary;
(c) (Total leave entitlement by taking maximum 30 days for every
completed year of service - Months of leaves
availed/encashed) X Average Salary.
(d) Rs 3,00,000/- (Rupees Three Lac only).
NOTE:
Salary Means Basic Salary, Dearness Allowance (if the terms of
Employment so provide) and Commission based on fixed
percentage of turnover achieved by the employee.
1. Average Salary means “Salary of 10 months immediately
preceding retirement/leaving the job.
2. Leave salary paid to legal heirs of the deceased employee is
not taxable.
3. In case of other employees, maximum amount of leave salary
exempt from tax is Rs. 3,00,000. This is applicable if the
employee has more than one employer in his life.
retirement.
NOTE: Salary means Basic Salary, Dearness Allowance (if the terms
of employment so provide) and commission (based on fixed %ge of
turnover achieved by the employee) last drawn.
p. a.
NOTE:
1) Salary means Basic Salary, Dearness Allowance (if the terms of
employment so provide) and commission based on fixed percentage
turnover achieved by the employee.
2) The receipt of Lump sum amount on Retirement/ resignation on
shall be exempt if:
(a) The employee has completed continuous service
for 5 years or more; OR
(b) The employee has been terminated due to
employee’s ill health, closure of employer’s business or other
reason beyond control of the employee; OR.
(c) The employee continues with same Provident fund Account
with other employer.
(3) The receipt of Lump-sum amount on URPF balance shall be
treated on follows:-
(a) Employer’s Contribution (total) + Interest on employer’s
Contribution shall be fully taxable as Salary.
(b) Interest on Employee’s Contribution Shall be fully taxable as
‘Income from other Sources’;
(4) PPF: Annual contribution by individual/ HUF fully qualifies for
Deduction u/s 80C. The annual Interest on PPF is fully exempt.
The Lump sum amount received is also fully exempt.
exempt if-
(a) It is made on the death of a beneficiary; or
(b) It is made on retirement at or after specified age or employee
becoming incapacitated before such retirement; or.
(c) It is made as refund of contributions on the death of
beneficiary; or
(d) It is made as refund of contribution of employee leaving
service (other than due to (b)) to the extent of contributions
made before 1/4/1962.
ALLOWANCES
Allowance is fixed amount of money paid/payable by the
employer to the employee for meeting some expense-the expense
may be official or personal. All allowances are taxable UNLESS
OTHERWISE CLEARLY STATED TO BE EXEMPT. The taxable
allowances are taxed on due or receipt basis whichever is earlier.
The allowances can be studied under following heads –
(a) Fully exempted allowances.
(b) Allowances Exempted UPTO some Limit.
(c) Entertainment allowance.
(d) Fully Taxable Allowances.
Now we shall study them one by one.
FULLY EXEMPTED ALLOWANCES: These are:
(1) Allowances (all) to Indian National Government Employees
posted out side India.
(2) Allowances to High Court Judges under section 22A (2) of
the High court Judges (Conditions of service) Act, 1954.
(3) Sumptuary Allowance to High court and Supreme Court
Judges.
(4) Allowances to UNO employees.
ENTERTAINMENT ALLOWANCE
This allowance is given to entertain various persons while
PERQUISITES
Perquisites (or perks) are the benefits/ facilities in cash or
in kind provided by the employer to the employee either free of cost
or at concessional rate. The most important feature of perk is that
the employee must have a right to the same and it should not be
voluntary or contingent (i.e. may or may not be) payment.
the employee;
(g) The amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
(h) The value of any other benefit or amenity as may be
prescribed.
NOTE: The perquisites from (a), (b), (d), (e) and (h) are taxable in
the hands of all employees whether specified or non-specified. In
case of specified employees perquisites mentioned in (c) are also
taxable. Perquisites as per (f) and (g) are taxable only if conditions
mentioned therein are fulfilled.
TAXABILITY OF PERQUISITES
Perks are divided into three categories as follows-
1) Perks taxable in case of all the
employees.
2) Perks taxable in case of
specified employees only.
3) Perk of sweat equity shares or any specified security (like
Debentures or Warrants) allotted or transferred (directly or
indirectly) by the employer either free or at concessional rates to
the employee.
4) Perk of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000.
5) Tax-free or exempted perks.
structure.
- Hotel includes licensed accommodation in motel, service
apartment or guest house.
- Salary is to be computed an accrual basis.
- Salary from all employers (in case of two or more employers)
will be taken into consideration for the period during which the
accommodation is provided.
- If employee is provided accommodation is a remote area and
the employee is working at mining site or onshore oil
exploration site or project execution site or an offshore site of
similar nature then value of such accommodation in NIL.
- If an employee is transferred from one place to other and he is
provided accommodation at new place while he occupies the
old accommodation also then value of perk will be only for one
accommodation having lower value till first 90 days and
thereafter both the accommodations will be charged to tax.
of the employer.
VALUATION OF FRINGE BENEFITS:
The fringe benefits provided by the employer to the employees are
taxable in the hands of all employees. According to rule 3(7), the
following are prescribed benefits:-
i) Interest free or concessional loan
ii) Travelling, accommodation and any other expenses paid/
borne/ reimbursed by the employer for any holiday availed of
by the employee and/or any family member
iii) Free food and beverages
iv) Any gift voucher or token
v) Expenses on credit cards
vi) Club membership and expenses in club
vii) Use of any moveable Assets by the employee.
viii) Transfer of any moveable assets by the employer in favour of
the employee (directly or indirectly).
Lac
d)Personal 16.50%
Loan
e) ESOP Loan 14.50%
^ Up to Rs. 30 Lac
* Above Rs. 30 Lac
** Above Rs. 30 Lac but up to Rs. 75 Lac
*** Above Rs. 75 Lac
The interest shall be calculated on Maximum monthly balance
outstanding. If any interest is ACTUALLY PAID by the employee
(directly or indirectly) then. Value of benefit will be reduced by
such interest actually paid.
But In The Following Cases There Will Be No Perk:
- If the amount of loans do not exceed Rs. 20,000; OR
- If the loan is for medical treatment of specified diseases (as
per rule 3A). But if any amount is reimbursed by the Insurance
Company to the employee then benefit shall be taxable on
amount so reimbursed by Insurance Company from the month
of such reimbursement.
- Maximum monthly outstanding balance means outstanding
balance on last day of each month.
- The term directly means employee and ‘indirectly’ means
spouse, children and their spouses, parents, servants and
dependents.
purposes
2) In any other case Value equal to amount
paid/reimbursed by the
employer. Such perk is to be
reduced by amount recovered
from employee.
*The employer: a) has to maintain a complete detail of such
expenses; and b) has to give a certificate in this regard that
such expenses are incurred wholly and exclusively for official
purposes.
(if provided)
III If any other automotive
conveyance owned by
employee and running &
maintenance expenses are
met by employer
i) Used wholly for official Nil (Note -1)
purpose
ii) Used partly for official and Actual expenses incurred by
partly for private purpose employer less amount @ Rs.
900 p.m. or higher amount
for official purpose (as per
note-1)
Note :-
1. Car is used for official purpose wholly only if following conditions
are fulfilled:
a) Employer has maintained full detail of journey for official purpose;
&
b) Employer gives certificate in this regard.
2. Month means complete month as per English calendar and part of
the month is ignored.
3. If employee is allowed to use more than one car then perk of one
of the cars
will be as if car is used partly for official and partly for private
purpose and perk
of other cars will be as if these are used wholly for private purpose.
4. If employee pays some amount for the perk enjoyed then such
amount shall be
deducted from the value of perk. But in case of car used partly
for official &
partly for private purpose nothing will be deducted if car is
owned/leased by
the employer.
5. Use of car by employee from residence to office and back is not
chargeable to
tax.
6. Conveyance facility to High Court Judges and Supreme Court
Judges in not
taxable.
the employee (if any). This perk is taxable to all employees if such
workman is engaged by the employee (as it becomes obligation of
employee met by the employer). Otherwise it is taxable in case of
specified employees only. But the method of valuation of perk is
same in both situations.
Note: If gardener is provided to employee along with rent free or
concessional rent accommodation owned by the employer then
salary of gardener is not taxable as it is not a perk.
employee.
b) In any other case Amount incurred by the
employer less amount
recovered from the
employee.
Note:
1. Perk of Free education covered under point (b) is taxable in
case of all employees. Perk covered under point (a) is taxable
in case of is taxable in case of specified employees only.
2. Free education facility and training of employees in not
taxable.
3. Fixed education allowance in exempt up to Rs. 100 p.m. per
child (for maximum of two children) and Hostel allowance is
exempt up to Rs. 300 pm. per child (for maximum of two
children). Excess is taxable.
4. Scholarship to children of employee by the employer solely at
employer’s discretion is not a perquisite.
VALUATION OF PERK OF FREE/CONCESSIONAL JOURNEY IN
CASE EMPLOYEES OF A TRANSPORTER EMPLOYER [RULE
3(6)]:
The value of benefit is amount offered by such employer
to the public as reduced by amount recovered from the employee.
This perk is taxable only in case of specified employees.
NOTE: Privilege passes and tickets granted to Railway and Airline
Employees are Tax Free perks.
VALUATION OF SWEAT EQUITY SHARES [RULE 3(8)] &
SPECIFIED SECURITIES [RULE 3(9)]:
The value of such specified securities or sweat equity
shares shall be their fair market value on the date when the option
is exercised by the employee as reduced by the amount recovered
from him in respect of such security or shares.
Note: The fair market value is:
CASE 1: Equity Share is listed in only one recognised stock
exchange:
a) Average of opening price and closing price on the date when
option is exercised.
b) Closing price on the date closest to date of exercise of option
preceding such date of exercise if no trading has been done on date
of exercise.
CASE 2: Equity Share is listed in more than one recognised stock
exchange:
a) Average of opening price and closing price on the date when
option is exercised in that exchange where there is highest volume
FULLY EXEMPT.
17. Premium paid by employer on personal accident policy of
employee is FULLY EXEMPT.
18. Transfer (without consideration) of a movable asset (other
than computer,
electronic item and car) by the employer to the employee
after using it for
10 years or more is FULLY EXEMPT.
19. Tax paid by the employer on non-monetary perquisites of the
employee is FULLY EXEMPT.
20. Leave Travel Concession is exempt upto limits mentioned in
the rules of
valuation discussed later on.
*****
Chapter 4
INCOME FROM HOUSE PROPERTY
STEP IV: From the amount as per step 3 deduct Loss due to
vacancy. This is Gross annual value. i.e. GAV = Amount as per Step
III – (f).
NOTE: If the ownership of such house property is for a period less
than 12 months then values as per (a), (b), (c) and (d) shall be
calculated for period of ownership only.
DEDUCTION OF MUNICIPAL TAXES
The municipal taxes levied by the local authority on such
house property are deducted from gross annual value only if these
are borne and actually paid by the owner during the previous year.
The amount after deduction of municipal tax is called NET
ANNUAL VALUE or ANNUAL VALUE.
STANDARD DEDUCTION U/S 24(a): The standard deduction is
30% of Net Annual Value.
INTEREST ON BORROWED CAPITAL U/S 24(b): The interest on
capital borrowed (for purchase, construction, repair, renewal or re-
construction of the house) is deductible on accrual basis. Interest is
divided into two parts:
a) Interest on loan for pre – construction period: It is a
period starting from date of borrowal till 31st March immediately
preceding the date of completion of construction/date of purchase or
date of repayment of loan w.e. is earlier. This is deductible in FIVE
EQUAL ANNUAL INSTALMENTS STARTING FROM THE YEAR OF
COMPLETION OF CONSTRUCTION / YEAR OF PURCHASE.
b) Interest on post construction period: It is deductible in the
year to which it belongs on ACCRUAL BASIS.
Note :
1) Interest on unpaid interest is not deductible.
2) Interest on fresh loan taken to repay original housing loan is
deductible.
3) It is not necessary that such property must be given as
security for availing such loan.
4) If interest on such loan is payable out of India, it is available for
deduction only if TDS has been deducted on such interest.
* * *
CHAPTER - 5
INCOME UNDER HEAD “PROFITS AND GAINS OF BUSINESS OR
PROFESSION”
annual or not).
13. Intangible assets: Know how, Patents, 25%
Copyrights, Trade Marks, Licences, Franchises
and other rights acquired after 31.3.98
WRITTEN DOWN VALUE [SEC. 43 (b)] : The WDV for assessment
year 2010-11 is determined as follows :-
(a) Find out depreciated value of block of asset as on 1.04.2009.
(b) To this, add “Actual Cost” of assets falling in the same block
acquired during the previous year 2009-10.
(c) From the resultant figure deduct money received / receivable
(including scrap value) in respect of that asset falling in the same
block of assets which is sold, discarded, demolished or destroyed
during the previous year 2009-10. However the net figure can not be
negative.
This net figure is written down value of the block of assets on 31-03-
2010.
WRITTEN DOWN VALUE IN CASE OF SLUMP SALE: Slump sale
as per section 2 (42C) means the transfer of one or more
undertakings as a result of the sale for a lump-sum consideration
without values being assigned to individual assets and liabilities.
Here also first three steps are same as in the above said case. Step
(d) is added for calculation. a), b), and c) are same as in simple
cases of WDV. d) In case of slump sale, deduct actual cost of asset
falling within that block as reduced :
(i) By the amount of depreciation actually allowed to him in
respect of any previous year till 31.03.1987; and
(ii) By the amount of depreciation that would have been allowable
to the assessee from 1.04.-1987 onwards if the asset was only asset
in the relevant block of assets. However the net figure can’t be
negative. The resultant figure shall be WDV of the block of assets on
31-03-2010 after slump sale.
COMPUTATION OF NORMAL DEPRECIATION: The normal
depreciation is calculated by multiplying the WDV of block of asset
as on 31-03-10 with rate of depreciation. But this rule has following
exceptions:
1. If the WDV of the block of assets is reduced to zero (though the
block assets does not cease to exit on 31-03-2010) NO
DEPRECIATION is charged on such block.
2. If a block of assets ceases to exist (i.e. all the assets of the
block have been transferred and the block is empty on 31-03-
2010) NO DEPRECIATION is charged on such block.
3. IMPORTED CARS: a) If it is used for running it on hire for tourist
or for business or profession outside India then DEPRECIATION
IS ALLOWED AT USUAL RATE.
Profession’.
2. If Depreciation is not fully deductible under head ‘Profit &
gains of Business or Profession’ due to absence or inadequacy of
profits it is deductible from income chargeable under other heads of
Income (except Income under head Salaries) for same previous
year.
3. If Depreciation is still not deductible, it can be carried
forward to subsequent assessment year(s) for indefinite period, if
necessary.
4. In next year(s), unabsorbed depreciation can be set off
against any income from ‘Profits and Gains of Business Profession’
or under any other head (except Income under head Salaries). The
same business may or may not be continued. In next years,
following priority order should be maintained-
• Current year’s Depreciation.
• Brought forward Business Loss.
• Unabsorbed (Brought Forward) Depreciation.
• So, if in any subsequent year(s), there is no
brought forward business Loss, unabsorbed depreciation can be
added to current depreciation for claiming the deduction u/s 32.
(subject to limits laid down by fourth schedule and Rules 87 and 88)
[As per provisions under section 43 B if assessee follows accrual
basis].
after due date of filing the return i.e. 30 th September. However, the
audit report should be obtained on or before due date.
NOTE: - If the date is extended by the income tax department then
30th September shall replaced by such date.
time during the year. For this purpose, a goods carriage taken on
hire purchase or on installments shall be deemed to be owned by
the assessee.
4. The income of a heavy goods vehicle (the unladen weight of
which is more than 12000 kilogram) is estimated at Rs. 3500/- per
month (or part of month) during which the goods carriage in owned
by the assessee.
5. The income of a good carriage other than heavy goods vehicle is
estimated at Rs. 3150/- per month (or part of a month) during which
the goods carriage owned by the assessee.
6. The assessee can voluntarily declare higher income.
7. The income as above is after deduction of all expenses from
section 30 to 38 including depreciation. But in case of firm, salary
and interest on capital to partners under section 40(b) shall be
allowed from such income.
8. Such assessee is not required to keep any books of accounts. He
is also not required to get his accounts audited.
9. Such assessee is eligible for deductions under chapter VI A, if
conditions therein are fulfilled.
10. Such assessee can however claim his income to be lower but he
will have maintain the books of account as per section 44AA and get
his accounts audited under section 44AB.
***
Chapter-6
INCOME UNDER THE HEAD CAPITAL GAINS
BASIS OF CHARGE [SEC 45]: Any profits or gains arising from
transfer of capital asset effected in the previous year, shall be
chargeable to tax under the head ‘Capital Gains’ and shall be
deemed to be income of the previous year in which the
transfer took place unless such capital gain is exempt u/s
54,54B, 54D, 54EC, 54F, 54G or 54GA. Thus, the following are
essential conditions for taxing capital gains:
(a) There must be a capital Asset.
(b) The capital asset must have been ‘transferred’ by the
Assessee. (But in some cases capital gains arise even if there
is no transfer of Capital Asset).
Such transfer must have taken place during the previous year.
(But in some cases capital gain is taxable in a year other than
the year in which the capital asset is transferred).
(c)There must be profits or gains on such transfer, which is
called ‘Capital gains’.
(d) Such profit or gains should not be exempt u/s 54,54B,
54D, 54EC, 54F, 54G or 54GA.
NOTE: According to section 45 (1A), in case of profits or gains from
insurance claim due to damage or destruction of property by fire or
other calamities, there will be capital gain, although no asset is
transferred in such case.
NOTE: 1.To find out whether or not such shares/debentures are long
term or short term capital asset the period of holding shall be
determined from the date of allotment of such new
shares/debentures.
2. The benefit of Indexation will be available from the year which
such new shares were allotted. (The benefit of Indexation is
not available in case of Debentures).
____
SHORT TERM CAPITAL GAIN
***_
In situation two the net result may be short term capital Gain or loss.
It is also calculated as above.
***_
In situation two the net result may be short term capital Gain or loss.
It is also calculated as above.
money.
(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and
54H.
NOTE:
1) If such new residential house property is transferred with in 3
years from date of purchase or completion of construction or
the assessee purchases a new residential house with 2 years
from transfer of original asset or constructs a new residential
house with 3 years from transfer of original asset then long
TAX RATE ON LONG TERM CAPITAL GAIN [SEC 112]: The long
term capital gain is charged to tax @ 20%.
NOTE: Deductions under chapter VIA are not allowed from long
term capital gain. But rebate under section 88 E is allowed from
Long term capital gain.
*****
Chapter-7
INCOME FROM OTHER SOURCES
As per section 56(1), the following conditions must be
satisfied to tax any income under the head ‘Income from other
sources':-
1. There must be an income;
2. Such income is not exempt under the provisions of this Act;
3. Such income is not chargeable to tax under any first four heads of
income.
Thus this head ‘income form other sources’ is residuary head of
income.
e) Director’s fee;
f) Director’s commission for standing guarantor to bankers;
g) Director’s commission for underwriting shares of new
company;
h) Ground rent of the plot;
i) Agricultural income from a place out side India;
j) Examination fees received by a teacher from a person other
than employer;
k) Insurance commission received by agent;
l) Mining rent and royalties;
m) Casual income;
n) Annuity received as per will, contract or trust deed
(excluding annuity payable by employer which is charged to
tax under the head ‘Salaries’);
o) salary received by a member of parliament;
p) interest on securities issued by foreign government;
q) family pension received by family members of a deceased
employee;
r) interest on employee’s contribution to unrecognized
provident fund (at the time of retirement or leaving the job
etc.).
s) income from undisclosed sources;
t) gratuity paid to a director who is not employee of the
company;
u) income form racing establishment;
v) compensation received for use of a business asset;
w) annuity received by lender of trade mark;
x) income form granting grazing rights;
y) interest received on refund of income tax.
NOTE: - 1. The Supreme Court has held that interest received by
the assessee from bank on a fixed deposit is income in the hands of
the assessee and there could be no deduction there from unless
there is a law permitting such deduction. The interest on loan taken
by the assessee on the security of fixed deposits did not go to
reduce the income by way of interest on the Fixed Deposits as there
was no provision for deduction of such interest on loan.
2. The interest earned on short term investment of funds
borrowed for setting up of factory during construction of factory
before commencement of business has to be assessed as income
from other sources and it cannot be held to be non-taxable on the
ground that it would go to reduce interest liability on borrowed
amount which could be capitalised.
be of three types:-
a) Dividends declared by a domestic company;
b) Dividends or any other income distributed by unit trust of
India ;
c) Dividends declared by a foreign company.
Any amount declared distributed or paid by a domestic company by
way of dividends as per section 115 O (interim or final) on or after
01.04.2003 (whether out of current or accumulated profits) shall be
exempt in the hands of shareholders.
Similarly income received (other than Capital Gain on transfer of
such units) in respect of units from the Administrator of the specified
undertaking or the specified company or a Mutual Fund specified
under section 10(23D) shall be exempt.
Dividend from a Foreign Company or deemed dividend shall be
TAXABLE under the head ‘Income from other sources’.
NOTE: 1. The dividend from a Domestic Company which is exempt
under section 10(34) includes deemed dividend but shall not include
deemed dividend under section 2(22) (e), i.e. loan or advance given
by a closely held company to a specified shareholder or concern.
2. Since dividends from a domestic company is exempt, no
deduction of any expense shall be allowed for such dividends from
other taxable incomes under head ‘income from other sources.
3. The domestic company is liable to pay corporate dividend tax on
such dividend @ 12.5% plus surcharge @ 10% plus education cess
@ 2%.
company.
e) Interest received by non-resident Indian from notified bonds
purchased in foreign currency.
f) Interest on deposits made by a retired government or public
sector employee out of money due to him on retirement in
such scheme for a lock in period of three years.
g) Interest on securities held by the welfare commissioner,
Bhopal gas victim, Bhopal.
h) Interest a gold deposit bonds, 1999.
i) Interest on notified bonds issued by a local authority.
GROSSING UP OF INTEREST:- Gross interest on securities is
chargeable to tax. If net interest (after deducting T.D.S.) in given
then it has to be grossed up.
In case of government securities, no grossing up is required as
there is no T.D.S. however in case of following securities grossing up
is required :-
i) tax free non-government securities.
ii) less tax non-government securities.
100
Gross interest = Net interest X (100- rate of TDS)
The rates of T.D.S. are as under :-
a) In case of listed non-government securities – 10% plus
surcharge (if applicable) plus education cess @ 2%.
b) In case of unlisted Non-government securities -20% plus
surcharge. (if applicable) plus education cess @ 2%.
DEDUCTIONS FOR EXPENSES FROM INTEREST ON
SECURITIES:-The deductions for interest on securities are same as
in case of dividend.
other sources’ if the same is not taxable under head ‘profits and
gains of business or profession’.
DEDUCTIONS ALLOWED FOR LETTING OF MACHINERY, PLANT
OR FURNITURE WITH/WITHOUT BUILDING [SEC. 57 (ii) and
(iii)]:- The following deductions are allowed:-
a) Current repairs to the premises owned [as per section 30 (a)
(ii)].
b) Insurance premium of the premises owned [as per sec. 30
(c)].
c) Repair and insurance of machinery, plant or furniture [as
per section 31].
d) Depreciation [as per section 32].
e) Any other revenue expenditure [as per section 37].
*****
CHAPTER 8
CLUBBING OF INCOME
Generally, an assessee is taxed in respect of his own
income. But there are cases where the assessee makes an attempt
to reduce his tax bill by transferring his asset to family member or
by arranging his sources of income in such a manner that tax
incidence falls on other but benefit of income is derived by him
directly or indirectly. So the provisions under section 60 to 64 are
provided to counteract these practices of tax avoidance which are
as following:
(a) Income of other persons included in an assessee's total Income
(Sec 60 to63); or
(b) Income of other persons included in the Individual’s Total Income
(Sec 64).
(A) INCOME OF OTHER PERSONS INCLUDED IN THE
ASSESSEE'S TOTAL INCOME
(1) Transfer of Income where there is no
transfer of Assets (Sec.60): Where there is
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.
(2) Revocable Transfer of Assets (Sec .61):
Where there is revocable transfer of assets by a
person to another person, any income
arisen/derived from such assets shall be
included in the total income of the transferor.
Revocable transfer of asset-Meaning (Sec. 63): A transfer of
it is necessary to do so.
--------------------------------------------------------------------------------
-
Total investment by the transferee as on first day of
previous year.
section 10(32).
(7) INCOME FROM SELF ACQUIRED PROPERTY CONVERTED
TO PROPERTY OF H.U.F. (SEC.64 (2)) : Where an individual
after 31.12.1969 (a) converts his separate property as property of H.
U. F; or
(b) throws the property into common stock o the family; or
(c) transfers his individual property to the family;
otherwise than for adequate consideration then the income from
such property shall continue to be included in the total income of
the individual.
If such property has been subject matter of partition either
(another partial or total) among the members of the family, the
income from such converted property as received by the spouse on
partition shall be deemed to arise to the transferor.
NOTE : 1. Income is to be clubbed as per above provision but
income on in come can not be clubbed in the hands of transferor.
2. Clubbing of Income means clubbing of loss also.
*****
CHAPTER 9
SET OFF OR CARRY FORWARD & SET OFF OF LOSSES
Income tax is charged on total Income of a person during the
previous year. Such person may have income under 'FIVE' different
heads of Income. He may have income from different sources but
under same head of Income. There may be cases where 'NET
INCOME' from a particular source or head of Income may be a Loss.
This loss may be set off against other sources or head as per
provisions given under section 70 to 80 of Income Act.
NOTE:
(1) Inter source adjustment can be made even in case of clubbing
of Income under section 64.
(2) If income from particular source is EXEMPT then loss
from such source cannot be set off against income chargeable
to tax.
NOTE: Such losses can be carried forward only if loss has been
determined by the Assessing officer from a return of loss submitted
by the Assessee on or before due date of filing the return under
section 139 (1). But Loss under head House property' and
Unabsorbed depreciation can be carried forward return even if
return of Loss is not submitted on or before due date.
only. Such loss can be carried forward for four Assessment years
(EIGHT Assessment years till previous year 2004-05) immediately
succeeding the assessment year in which the loss was first
computed. It is not necessary that same speculative business must
continue in the year of set off of loss. But filing of return on or before
due date is necessary for carry forward of such loss.
NOTE :
1. The loss from Illegal /Banned speculative business cannot be
carried forward to subsequent year.
2. In case of a company (other than investment company and a
company involved in Banking or granting loans / advances) the
business of purchase and sale of shares (with actual delivery or
not) shall be treated as speculative loss.
NOTE : From Assessment year 2003-04, long term capital loss can
be set off only from long term capital Gains. But short term capital
loss can be set off against short term as well as long term capital
Gains.
*****
CHAPTER 10
DEDUCTIONS TO BE MADE IN COMPUTING TOTAL
INCOME
The aggregate of income computed under each of five heads after
giving effect to provisions for clubbing of incomes and set off losses
is called ‘GROSS TOTAL INCOME. From G.T.I. certain deductions are
made under sections 80 C to 80U to find out ‘TOTAL INCOME’.
However these deductions are not allowed from following incomes
although these incomes are part of ‘gross total income’:-
a) Long term capital gain;
b) Short term capital gain on transfer of equity shares and
units of equity oriented fund on or after 01.10.2004 through a
recognised stock exchange under section 111 A;
c) Winning from lotteries, races etc.;
d) Income referred to in section 115A, 115AB, 115AC, 115ACA,
115AD, 115BBA and 115D.
These deductions are of two types:-
a) Deductions on certain payments and investments (from section
80C to 80GGC).
b) Deductions on certain incomes included in G.T.I. (from section 80-
IA to 80U).
housing or
for the purpose of planning development or improvement of
cities/villages
or both.
15. Any payment made towards cost of purchase/construction of a
new residential house property. This amount does not include
interest on loan or cost of addition / renovation/repair of
property. But this includes stamp duty and other expenses for
purchase of such property. The Loan must be taken from
Government, Bank, Co-op. Bank, LIC, National Housing Bank,
assessee’s employer being Public Company/ Public Sector
Company/ University/ Co-op. Society/ Authority or Board or
Corporation established/ considered under a Central or State
Act.
16. Any sum paid by an Individual as Tuition Fees (not being
development fees/ donation/ payment of similar nature) to any
university/ college/ educational institution in India for full time
education of his children for a maximum of two children.
17. Amount invested in shares / debentures of a public company
engaged in infrastructure (including power sector) or units of
mutual funds the proceeds of which are utilised for
development and maintenance of infrastructure.
18. Any sum deposited in a term deposit with a scheduled bank for
a period not less than 5 years in accordance with the scheme
framed and notified by the Central Government.
19. Subscription to notified bonds of NABARD.
20. Any sum deposited in an account under Senior Citizen Saving
Scheme.
21. Any sum deposited in 5 years term deposit account in Post
Office as per the Post Office Time Deposit Rules, 1981.
STEP 2. NET QUALIFYING AMOUNT
The aggregate of payments from (1) to (21) above is the Gross
Qualifying Amount. The Net Qualifying Amount is determined as
follows:
a) Gross Qualifying Amount; or
b) Rs. 1,00,000 whichever is less.
STEP:3 AMOUNT OF DEDUCTION
The net qualifying amount as calculated in step 2 is the amount of
deduction under section 80 C. The point to remembered is that the
aggregate of deductions under section 80 C, 80 CCC and 80 CCD
cannot exceed Rs. 1,00,000.
Deduction in respect of pension fund [sec. 80CCC]:-
Conditions to be fulfilled:-
i) The assessee is individual (may be resident or non-resident).
other provision of the Act for same or any other assessment year.
2. If approval granted to any of the above institution is withdrawn
even then the deduction for payment made earlier by the assessee
cannot be denied.
DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY
INDIAN COMPANIES TO POLITICAL PARTIES [SEC 80GGB]: Any
sum contributed by an Indian Company in the previous year to any
political party shall be allowed as deduction while computing its
total income.
fulfilled.)
4) It should not be formed by transfer of any plant or machinery
previously used for any purpose to it. However such old plant
or machinery can be used to the extent of 20% of total value of
plant and machinery of such new undertaking.
E) CONDITIONS FOR UNDERTAKING SET UP FOR
RECONSTRUCTION OR REVIVAL OF A POWER
GENERATING PLANT:
1) Such undertaking must be owned by an Indian Company.
2) Such Indian Co. is formed before 30.11.2005 with public sector
companies as majority of equity shareholders for the purpose
of enforcing the security interest of the lenders to the
company.
3) Such Indian Co. is notified before 31.12.2005 by the Central
Govt. for this purpose.
4) Such undertaking begins to generate or transmit or distribute
power before 31.3.2011.
AMOUNT OF DEDUCTION
a) FOR BUSINESS OF TELECOMMUNICATION SERVICES:
For first five successive years @ 100% of profits and for next
FIVE successive years @30% of the profits [out of 15 years
beginning with the year of starting provision of
telecommunication services].
b) FOR BUSINESS OTHER THAN (a) ABOVE:
100% of Profits of such business for 10 successive years (out of
15 years beginning with the year of start of such business).
* In case of infrastructure facilities other than PORT, AIRPORT,
INLAND WATERWAY OR INLAND PORT this period is 20 years .
NOTE:
1) For getting/claiming deduction under this section audit of
accounts and submission of a Report in Form 10CCB duly certified
by a chartered Accountant along with the return of income is
compulsory.
2) The Central Government may in official Gazette, notify that the
deduction under this section not to apply to any class of industrial
undertaking or enterprise with effect from any notified date.
3) Deduction is allowed if and if only if the return of income is
submitted on or before due date of filing the return u/s 139 (1).
DEDUCTION IN RESPECT OF PROFITS AND GAINS BY AN
UNDERTAKING OR ENTERPRISE ENGAGED IN DEVELOPMENT
OF SPECIAL ECONOMIC ZONE (SEC 80 IAB): If a Special
Economic Zone is notified on or after 1.4.2005 then it is not eligible
for deduction u/s 80 IA. These undertakings will be allowed
deduction under section 80 IAB.
AMOUNT OF DEDUCTION
i) in an industrially backward
state
ii) in districts of category A (BUT
NOT NORTH EASTERN REGION)
iii) operating a cold chain facility
a) Owned by a Company First 5 100%
years
Next 5 30%
years
b) Owned by a co-operative First 5 100%
Society years
Next 7 25%
years
c) Owned by any other assessee First 5 100%
years 25%
Next 5
years
B) Notified Industries in North First 10 100%
Eastern Region years
2 Industrial Undertaking in
. Industrially backward districts
of category 'B'
i) owned by a Company First 3 100%
years
Next 5 30%
years
ii) Owned by a Co-operative First 3 100%
Society years
Next 9 25%
yeas
iii) Owned by other assessee First 3 100%
years
Next 5 25%
years
3 Industrial undertaking other
. than those specified above
i) Owned by a Company First 10 30%
years
ii) Owned by a Co-operative First 12 25%
society years
iii) Owned by any other assessee First 10 25%
years
AMOUNT OF DEDUCTION
Assessee Period of %ge of profit
Deduction as deduction
*****
Chapter -11
AGRICULTURAL INCOME & ITS TAX TREATMENT
by inheritance.
b) Fees paid by tenants for renewal of leases (as well as
fees paid for recognizing the distribution of holding on a
partition) would not be income derived from land, since they
are payments made for administrative services rendered by
the landlord, just like registration fees.
c) Receipts from the supply of water (with water tank) in an
agricultural land.
(ii) Land should be situated in India: Land should be situated
anywhere in India, though, it may or may not be subject to
land revenue or any local rate. The land may be situated in an
urban area or in a rural area. If the land is located outside
India, any agricultural income derived from such land will not
be deemed to be agricultural income and the same will not
enjoy any exemption u/s 10(1). In the case of a person residing
in India, such income from agricultural land situated outside
India will be included in his total income and would be liable to
tax.
(iii) Land should be used for agricultural purpose: The Supreme
Court [in CIT v Raja Benoy Kumar Sahas Roy (1975)] has held
that the land is said to be used for agricultural purpose where
the following two types of operations are carried out on such
land:
(a) Basic Operations: These involve cultivation of the ground, in
the sense of tilling of the land, sowing of the seeds, planting
and similar operations on the land. Such basic operations
demand the expenditure of human labour and skill upon the
land itself and further they are directed to make the crop
sprout from the land.
(b) Subsequent Operations: After the crop sprouts from the land,
there are subsequent operations which have to be performed
the agriculturists for the efficient production of the crop such
as weeding, digging the soil around the growth, removal of
undesirable growths, prevention of the crop from insects and
pests and from damage by cattle and attention, pruning,
cutting, etc.
Both the basic and the subsequent operations together
form the integrated activity of the agriculturist. The
performance of the subsequent operation on the produce of
the land would not be enough to invest the subsequent
operations with agricultural character. They should be in
combination with, and in carry-over of, the basic operation
which is end result of an agricultural operation. In other words,
basic operations must be performed before any income is
with the land, except that it was carried out on the agricultural
land.
Computation of Net Agricultural Income
Although the agricultural income is exempt from income-tax, but it
is included in non-agricultural income of an individual or HUF etc. for
purpose of determining the Income-tax on non-agricultural income.
Hence, agricultural income will have to be computed. The
computation of net agricultural income is done as per Rules given in
Part IV of Schedule 1 of the relevant Finance Act. These have been
summarized as under:
(1) Rent or revenue derived from land is computed under the head
‘Income from Other Sources’ and the provisions of sections 57
to 59 of this Act, so far as may be, apply accordingly. Thus,
any expenditure (not being in the nature of capital expenditure
or personal expenses of the assessee) laid out or expended
wholly and exclusively for the purpose of earning rent or
revenue will be allowed as deduction is computing the rent or
revenue from agricultural land. However, the provisions of
section 40A (other than the provision of sections 40A (3) and
(4) relating to payment exceeding Rs. 20,000 in cash) which
are applicable for income from other sources also, shall be
applicable in this case. [Rule 1]
(2) Income by way of agriculture or processing of agricultural
produce, etc. as discussed already will be computed under the
head ‘profit and gains of business or profession’ and therefore,
all the provisions of sections 30,31,32,36,37,38, 40, 40A
[excluding 40A (3) and (4)], 41, 43, 43A, 43B, 43C of that
Chapter will be applicable. [Rule 2] It may be noted that
provisions of section 35 will not apply in the computation of
such income and hence no deduction shall be allowed in
respect of expenditures on scientific search in computing such
income. Depreciation will, however, be admissible in respect of
the assets used for purpose of earning such agricultural
income.
(3) Income derived from any building which is used as a dwelling
house by the receiver of the rent or revenue or cultivator or
receiver of rent in kind would be computed as if it was income
from House Property and the provisions of sections 23 to 27 of
the Act shall, so far as may be, apply accordingly. [Rule 3] On
the other hand, agricultural house property which is used as
store house or other out building will be treated in the same
manner as house property used for the purpose of business.
business
(A) Income from growing and manufacturing of any product
other than tea, rubber and coffee [Rule 7]: An assessee
may have composite business income which is partially
agricultural and partially non-agricultural, for example, where
XYZ Ltd. grows potatoes and further process its produce to sell
them as wafers. In this case the company has composite income
i.e. from agriculture and from business. The composite income
has to be disintegrated and for computing business income the
market value of any agricultural produce raised by the assessee
or received by him as rent in kind and utilized as raw material in
his business is deducted. No further deduction is permissible in
respect of any expenditure incurred by the assessee as a
cultivator or receiver of rent in kind. For computing agricultural
income the market value of agricultural produce will be total
agricultural receipt on account of potatoes. From such
agricultural receipts, expenses such as cultivation expenses etc.
incurred in connection with such receipt will be deducted and
balance will be agricultural income, which will be exempt.
For example, in the above case, if the market value of the
potatoes grown by the company, which have been used for the
purpose of making its own wafers, is Rs. 5 lakhs and the cost of
cultivation of such potatoes is Rs. 4 lakhs. From the business income
of wafers Rs. 5 lakhs i. e. the market value, shall be deducted and
no other expense shall be allowed for such potatoes. On the other
hand, the agricultural income shall be Rs. 1 lakh (5 lakhs-4 lakhs).
This agricultural income of Rs. 1 lakh shall be exempt.
(B) Income from growing and manufacturing of rubber (Rule
7A):
(1) Income derived from the sale of centrifuged latex or cenex or
latex based crepes (such as pale latex crepe) or brown crepes (such
as estate brown crepe, re-milled crepe, smoked blanket crepe or flat
bark crepe) or technically specified block rubbers manufactured or
processed from field latex or coagulum obtained from rubber plants
grown by the seller in India shall be computed as if it were income
derived from business, and 35% of such income shall be deemed to
be income liable to tax.
(2) In computing such income, an allowance shall be made in
respect of the cost of planting rubber plants in replacement of plants
that have died or become permanently useless in an area already
planted, if such area has not previously been abandoned, and for
the purpose of determining such cost, no deduction shall be made in
respect of the amount of any subsidy which, under the provisions of
section 10(31), is not includible in the total income.
******
Chapter-12
ASSESSMENT OF COMPANIES
(2)]
Step 1: The net profit as shown in the profit and loss account
(prepared as per Part II and III of Schedule VI) for the relevant
previous year, shall be increased by the following, if debited to the
Profit and Loss Account:
(a) the amount of income-tax paid or payable, and the
provision therefore; or
(b) the amounts carried to any reserves by whatever name
called (other than a reserve specified under section 33AC,
inserted as per the Finance Act, 2002, w.e.f. assessment
year 2003-04); or
(c) the amount or amounts set aside to provisions made for
meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary
companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any
income to which section 10, 10A, 10B, 11 or 12 applies (i.e.
incomes which are exempt from tax).
W.e.f. assessment year 2005-06 expenses of
infrastructure capital fund or company referred to in
section 10(23G) shall not be added back.
Step 2: The profit as per the Profit and Loss Account shall be
reduced by the following:
(i) the amount withdrawn from any reserves or provisions, if
any, such amount is credited to the profit and loss account.
A clarificatory amendment has been made by the Finance
Act, 2002 w.r.e.f assessment year 2001-2002 to section 115JB
to provide that the amount withdrawn from the reserve or
provision, created not out of profits before 1-4-1997, if credited
to the profit and loss Account shall not be deducted while
computing book profit. In other words, the amount withdrawn
from any reserve, credited before 1-4-1997, shall not be
reduced from the net profit unless the same was debited to the
profit and loss account at the time when such reserve was
created. Similarly, the amount withdrawn from the reserve
created on or after 1-4-1997 and credited to the profit and loss
account shall not be deducted while computing book profit
unless the book profit in the year of creation of such reserve
was increased by such reserve at that time.
Example: R Ltd. transferred a sum of Rs. 40 lakhs to Reserve
for bad and doubtful debt account in the financial year 2001-
2002. It withdrew a sum of Rs. 15 lakhs out of the reserve
during the financial year 2004-2005 by debiting the reserve
account and crediting the profit and loss account of that year.
In this case, Rs. 40 lakhs must have been added back to net
profit for computing the book profits of financial year ending
31-3-2002. Hence, Rs. 15 lakhs credited back to profit and loss
account of year ended 31-3-2005 shall be reduced to calculate
the book profits of that year.
(ii) the amount of income to which any of the provision section
10, 10A, 10B, 11 or 12 applies (i.e. incomes which are exempt
from tax), if any such amount is credited to the profit and loss
account; or
W.e.f. assessment year 2005-06 exempted income of
infrastructure capital fund or company referred to in
section 10 (23G) shall not be deducted.
(iii) the amount of loss brought forward or unabsorbed
depreciation, whichever is less as per books of account. The
loss shall, however, not include depreciation. Further the
provision of this clause shall not apply if the amount of brought
forward loss or unabsorbed depreciation is Nil; or
(iv) the amount of profits of sick industrial company for the
assessment year commencing from the assessment year
relevant to the previous year in which the said company has
become a sick Industrial company under sub-section (1) of
section 17 of Sick Industrial.Companies (Special Provisions)
Act, 1985 and ending with the assessment year during which
the entire net worth of such company becomes equal to or
exceeds the accumulated losses.
(v) the amount of profits eligible for deduction under section
80HHC (for direct exporter and /or supporting manufacturer),
subject to the conditions specified in that section;
(vi) the amount of profits eligible for deduction under section
80HHE (for direct exporter and /or supporting manufacturer),
subject to the conditions specified in that section;,
(vii) the amount of profits eligible for deduction under section
80HHF, subject to the conditions specified in that section;
The amount computed after increasing or decreasing the above in
Step 1 and
Step2, respectively, is known as Book-profit.
How much brought forward loss/unabsorbed depreciation
are deductible from book profits: As per clause (iii) above, the
amount of loss brought forward of unabsorbed depreciation as per
books of account whichever is less is to be deducted from the book
profits. It has been however clarified that loss however shall not
include depreciation In this case brought forward loss and
unabsorbed depreciation as per income-tax shall have no relevance.
*****
Chapter-13
BUSINESS REORGANISATION
*****
Chapter-14
any one.
Tax avoidance
Tax avoidance is minimizing the incidence of tax by
adjusting the affairs in such a manner that although it is within the
four corners of the taxation laws but the advantage is taken by
finding out loopholes in the laws. The shortest definition of tax
avoidance is that it is the art of dodging tax without breaking the
law.
In the case of tax avoidance, the tax payer apparently
circumvents the law, without giving rise to a criminal offence, by the
use of a scheme, arrangement or device, often of a complex nature
but where the main purpose is to defer, reduce or completely avoid
the tax payable under the law.
In the words of Justice O. Chinnappa Reddy of Supreme
Court in McDowell & Co. Ltd. v CTO (1985) 154 ITR 148 (SC) at p.
160 the evil consequences of tax avoidance are manifold and may
be summarized as under:
(a) Substantial loss of much needed public revenue, particularly in
a welfare State like ours.
(b) Serious disturbance caused to the economy of the country by
piling up of mountains of black money directly causing inflation
(c) Large hidden loss to the community by some of the best brains
in the country being involved in the perpetual war waged
between tax avoider and his expert team of advisers, lawyers and
accountants on one side, and the Tax Officer and his perhaps not
so skillful advisers on the other side.
(d) Sense of injustice and inequality which tax avoidance arouses
in the breasts of those who are unwilling or unable to profit by
it.
(e) Ethics (or lack of it) of transferring the burden of tax liability to
the shoulders of the guideless, good citizens from those of artful
dodgers.
As to the ethics of taxation, the learned judge observed:
We now live in a welfare State whose financial needs, if backed by
the law, have to be respected and met. We must recognize that
there is behind taxation laws as much moral sanction as behind any
other welfare legislation and it is pretence to say that avoidance of
taxation is not unethical and that it stands on no less moral plane
than honest payment of taxation.
Tax planning
Tax planning is the arrangement of financial activities in
such a way that maximum tax benefits are enjoyed by making use
of all beneficial provisions in the tax laws. It entitles the assessee to
avail certain exemptions, deductions, rebates and relief's, so as to
minimize his tax liability. This is permitted and not frowned upon.
Tax planning is permissible even after McDowell's case. There might
be a difference of opinion in various quarters in respect of tax
avoidance, as these days Judges have started thinking in the
interest of the State with a firm determination to leave the age-old
accepted thinking of 1936 and to look into future. But tax planning is
still not touched by these judgments and in the words of Ranganath
Mishra, J. of Supreme Court in McDowell's case itself, it is
permissible provided it is within the frame work of law. He observes:
Tax planning may be legitimate provided it is within the
framework of law. Colourable devices cannot be part of tax planning
and it is wrong to encourage or entertain the belief that it is
honorable to avoid the payment of tax by resorting to dubious
methods. It is the obligation of every citizen to pay taxes honestly
without resorting to subterfuges.
Distinction between tax planning, tax avoidance and tax
evasion:Tax planning, tax avoidance and tax evasion are three
different approaches to the same objective viz., to reduce tax
liability. However, they have different characteristics. Tax planning
is perfectly legal as the object of tax reduction is achieved by
making use of the beneficial provisions in the tax laws. On the other
hand, tax avoidance is also legal though technically satisfying the
requirements of law. Tax evasion is a method of evading tax liability
by dishonest means like suppression, conscious violation of rules,
inflation of expenses, etc.
Tax planning imply compliance with the taxing provisions
in such a manner that full advantage is taken of all exemptions,
deductions, concessions, rebates and relief's permissible under the
Act so that the incidence of tax is the least. Tax planning, therefore
cannot be equated to tax evasion or tax avoidance. Tax planning
may be regarded as a method of intelligent application of expert
knowledge of planning corporate affairs with a view to securing
consciously provided tax benefits on the basis of the national
priorities in keeping with the interest of the State and the public.
The cases covered under "Tax avoidance' are those
where the tax payer has apparently circumvented the law, without
giving rise to a critical offence by the use of a scheme arrangement
or device often of a complex nature whose sole purpose is to defer
reduce or completely avoid the tax payable under the law. In other
words tax avoidance is a method of reducing incidence of tax by
taking advantage of certain loopholes in tax laws.
Tax evasion is a dubious way of attempting to solve tax
problems by suppression of income, conscious violation of rules
inflation of expenses, etc. Tax evasion, therefore, cannot be
looked into. [Assam Bengal Cement Co. Ltd.v CIT (1955) 27 ITR 37
(SC)].
Areas of tax planning
Tax planning may be effective in every area of business
management. Some of the important areas where planning may be
attempted are:
(i) Location of business.
(ii) Nature and size of business.
(iii) Form of business organization and the pattern of its ownership.
(iv) Specific management decisions like make or buy, own or lease,
capital structure, renew or replace, etc.
(v) Employees remuneration.
(vi) Mergers/Amalgamation of companies.
(vii) Double Taxation Relief.
(viii) Non-residents.
(ix) Advance Ruling.
Location of Business
Tax planning is relevant from location point of view.
There are certain locations which are given special tax treatment.
Some of these are as under:-
1. Full exemption under section 10B for ten years in the case of a
newly established 100% export oriented industrial undertaking
in free trade zones, etc.
2. Full exemption under section 10A for ten years in the case of a
newly established industrial undertaking in free trade zones,
etc.
3. Full exemption under section 10BA for 10 years in the respect
of profits from the export of eligible article or things.
4. Deduction under section 80-IB in the case of newly set up
industrial undertaking in an industrially backward State or district.
5. Deduction under section 80-IC in case of newly set up
industrial undertaking or substantial expansion of an existing
undertaking in certain special category States.
Nature of business
Tax planning is also relevant while deciding upon the nature of
business. There are certain businesses which are granted special tax
treatment. Some of them are as follows:
1. Newly established industrial undertaking in free trade zones,
etc.[Section 10A].
2. Newly established hundred per cent export-oriented
undertakings [Section 10B].
3. Tea Development Account, coffee Development Account and
Rubber Development Account [Section 33AB].
4. Site restoration fund [Section 33ABA].
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Chapter-15
Double Taxation Relief
country.
In addition the Central Government may enter into an
agreement to provide:
(i) for exchange of information for the prevention of evasion or
avoidance of income-tax chargeable under this Act or under
the corresponding law in force in that country, or investigation
of cases of such evasion or avoidance, or
(ii) for recovery of income-tax under this Act and under the
corresponding law in force in that country
In the above cases, the Central Government may, by notification in
the Official Gazette, make such provisions as may be necessary for
implementing the agreement.
Provisions of income-tax laws are subject to provision of DTAA: The
liability to tax arising under provisions of sections 4 and 5 of Income
–tax Act are subject to provisions of Double Taxation Avoidance
Agreements between India and foreign country. Thus Treaty
provisions shall prevail over income-tax provisions. [CIT v P.V.A.L.
KULANDAGAN Chettiar (2004) 137 Taxman 460]
But, situations could arise where due to subsequent
amendments, the statute law is more beneficial than the provision in
the treaty. Since the tax treaties are intended to grant tax relief and
not to put residents of a contracting country at a disadvantage, vis-
à-vis other taxpayers, sub-section (2) was inserted by the Finance
(No.2) Act, 1991 with retrospective effect from Ist April, 1972, to
clarify that any beneficial provision in the law will not be denied to a
resident of a contracting country merely because the corresponding
provision in the tax treaty is less beneficial.
Effect of double taxation avoidance agreement: If an
agreement is entered into under this section, the effect of the same
shall be as under:
If all the above conditions are satisfied, such person shall be entitled
to deduction from the Indian income-tax payable by him of a sum
calculated on such doubly taxed income-
(a) at the average Indian rate of tax or the average rate of tax of
the said country, whichever is the lower, or
(b) at the Indian rate of tax if both the rates are equal.
Average rate of tax means the tax payable o total income, after
deduction of any relief due under the provisions of this Act but
before deduction of any relief due under this Chapter, divided by the
total income.
Steps for calculating relief under this section
Step 1 Calculate tax on total income inclusive of the foreign
income on which relief is available. Claim any relief
allowable under the provision of this Act including
rebates available under section 88E but before relief due
under sections 90 and 91.
Step II Calculate average rate of tax by dividing the tax
computed under step 1 with the total income
(inclusive of such foreign income).
Step III Calculate average rate of tax of the foreign country by
dividing income-tax actually paid in the said country after
deduction of all relief due but before deduction of any
relief due in the said country in respect of double
taxation by the whole amount of the income as assessed
in the said country.
Step IV Claim the relief from the tax payable in India at the rate
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