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M.COM.SEMESTERIII
DIRECTTAXES
UNITI:DEFINITIONS
Section2(7):ASSESSEEAssessee means a person by whom any tax or any other sum of money is payable under this act.ThetermAssesseeincludes:
(a) Every person in respect of whom any proceeding under this act has been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable,
or
of
the
loss
sustained
by
him
or
by
such
person,
or
of
the
amount
of
refund
due
to
himorsuchotherperson;
(b) Everypersonwhoisdeemedtobeanassesseeunderanyprovisionsofthisact;
(c) Everypersonwhoisdeemedtobeanassesseeindefaultunderanyprovisionsofthisact.
ThetermAssesseeincludesthefollowingpersons:
1. A person by whom any amount by way of tax, interest or penalty is payable under this Act.
WhethertheproceedingsunderthisActhasbeentakenornotwillbeimmaterial.
2. A person against whom the proceedings under this Act has been taken. In this case, it will be
immaterialwhethersuchapersonisliableornottopayanyamountbywayoftaxthereon.
3. Apersonwhoisrequiredtofilehisreturnoflossandwhoisnotrequiredtopayanytaxthereon.
4. Apersonwho isnot liabletopaytaxonhisnettaxable income,butsincethetax isdeductedatsource,heisentitledtoclaimforrefund.
5. Apersonwho isdeemedtobeanassesseeandwho isassessable inrespectof incomeor lossof
anothere.g.therepresentativeofnonresident,thetrusteesincaseoftrust.
6. Apersonwhoisdeemedtobeanassesseeindefault.Forinstance,anemployerwhoisrequiredto
deduct tax from salaries paid by him to his employees and fails to deduct such tax or after
deductingtaxdoesnotpayittotheGovernment.
Section 2 (24) : INCOMEIncome includes: -(a) ProfitsandGains,(b) Dividend,
(c) Voluntarycontributionsreceivedby:
1.Acharitableorreligioustrust,or,
2.Anyinstitutionestablishedwhollyorpartlyforcharitableorreligiouspurpose,or
3.Anapprovedscientificresearchassociation,or
4.Anyothernotifiedfundorinstitutionestablishedforcharitablepurposes,
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5.Any notified trust or institution wholly for public religious purposes or wholly for public
religious&charitablepurposes.
(d) Thevalueofanyperquisiteorprofitinlieuofsalarytaxableunderclauses(2)&(3)ofSection17.
(e) Anyspecialallowanceorbenefit,otherthanperquisite includedundersubclause(d)specifically
grantedtotheassesseetomeetexpenseswholly,necessaryandexclusivelyfortheperformance
ofthedutiesofanofficeoremploymentofprofit.
(f) Anyallowancegrantedtotheassesseeeithertomeethispersonalexpensesattheplacewherethe duties of his office or employment of profit are ordinarily performed by him or at a place
whereheordinarilyresidesortocompensatehimfortheincreasedcostofliving.
(g) The value of any benefit or perquisite whether convertible into money or not obtained from a
companyeitherbyadirectororpersonwhohassubstantialinterestinthecompanyorrelativeof
the director or of such person. It also includes any sum which is paid by the company which
otherwisewouldhavebeenpayablebythedirectororsuchotherperson.
(h) The value of any benefit or perquisite whether convertible into money or not obtained by any
representative assessee and any sum paid by the representative assessee in respect of any
obligationofanybeneficiarywhichotherwisewouldhavebeenpayablebysuchbeneficiary.
(i) Anysumchargeabletoincometaxasprofitsandgainsofbusinessorprofessionu/s28(ii)and(iii)
orSection
41
or
Section
59.
(j) AnyprofitsonsaleofalicensegrantedundertheImports(Control)Order,1955,madeunderthe
ImportsandExports(Control)Act,taxableu/s28(iiia).
(k) Any cash assistance (by whatever name called) received or receivable by any person against
exportsunderanyschemeoftheGovernmentofIndia,taxableu/s28(iiib).
(l) Any duty of Customs or excise repaid or repayable as drawback to any person against exports
undertheCustomsandCentralExciseDutiesDrawbackRules,1971,taxableu/s28(iiic).
(m) Thevalueofanybenefitorperquisitetaxableunderclause(iv)ofSection28.
(n) Anysumchargeabletoincometaxunderclause(v)ofsection28,suchasinterest,salary,bonus,
commissionorremunerationreceivedbyapartnerofthepartnershipfirmfromsuchfirm.
(o) Anycapitalgainschargeableu/s45.
(p) Profit
or
gains
of
business
of
insurance
carried
on
by
Mutual
Insurance
Company
or
by
a
co
operativesocietycomputedinaccordancewiththeprovisionsofthisActu/s44.
(q) Theprofits&gainsofanybusinessofbanking(includingprovidingcreditfacilities)carriedbyaco
operativesocietywithitsmembers.
(r) Anywinningfromlottery,crosswordpuzzles,horseraces,cardgamesandothergamesofanysort
orgamblingorbettingofanyformornaturewhatsoever.
(s) Anysumreceivedbytheassessee fromhisemployeesascontributiontoanyprovident fundor
superannuationfundoranyfundsetundertheprovisionsofEmployeesStateInsuranceAct1948
oranyotherfundforthewelfareofsuchemployees.
(t) AnysumreceivedundertheKeymanInsurancePolicy,meansaLifeInsurancePolicytakenbya
persononthelifeofanotherpersonwhoisorwastheemployeeofthefirstmentionedpersonor
isconnectedinanymannerwhatsoeverwiththebusinessofthefirstmentionedperson.
(u) Anysum
received
or
receivable
in
cash
or
in
kind
under
Non
compete
agreements
or
exclusive
rightsagreements.
(v) Amount exceeding ` 50,000 received without consideration from nonrelated person of the
assessee.
The aforesaid definition does not define the term income but merely describes various receipts as
income. It, therefore, follows that in addition to the aforesaid receipts, any other receipt is taxable
undertheActifitcomeswithinthegeneralandnaturalmeaningofthetermincome.
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EXPLANATION: -
Followingpointsshouldbenotedwhilestudyingthedefinitionofincome:
1. Personal gift is not considered as income, however, gift received for professional skill is to be
consideredasincome.
2. Income
may
be
received
in
cash
or
in
kind.
It
still
remains
income.
3. It is immaterial for income taxpurposewhether income isearned from lawfulmeansorunlawful
means.
4. Incomemaybecalculatedonreceiptoraccrualbasisdependinguponfacts&natureofincome.
5. Incomeincludeslossi.e.lossisconsideredasminusincome.
6. Pinmoneyreceivedbywifeforherpersonalexpensesisnottreatedasincome.
7. Incomeshouldbereal¬fictional.
8. Awardsreceivedbyaprofessionalsportsmanisanincome.
Section2 (31): PERSON
Thetermpersonincludesthefollowing:
i) Anindividual
ii) AHinduUndividedFamily(HUF)
iii) ACompany
iv) Afirm
v) Anassociationofpersons(AOP)orbodyofindividuals(BOI)whetherincorporatedor not.
vi) Alocalauthority.
vii) Everyartificialjuridicalpersonnotfallinginthecategoriesmentionedabove.
These are seven categories of persons chargeable to tax under the Act. The aforesaid
definition
is
inclusive
and
not
exhaustive.
Therefore,
any
person,
not
falling
in
the
above
mentioned
seven categories, may still fall in the four corners of the term person and accordingly may be
liabletotaxundersection4.
EXPLANATION:
1. Individual :Naturalhumanbeinge.g.Mr.X.
2. H.U.F. :ItisthefamilyarisingoutofHindulawconsistingofallmembers
lineally descended from a Hindu ancestor (children & grandchildren),and their
wives&unmarrieddaughters.E.g.Mr.A as Karta and B, C, D & E as family
members.
3. Company
:Under
section
2(17),
company
is
defined
as
a) anyIndiancompany;or
b) anybodycorporateincorporatedunderthelawsofaforeigncountry;or
c) any institution or association or a body which is assessed or was
assessable/assessedasacompanyforanyassessmentyear
commencingonorbeforeApril1,1970;or
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d) any institution, association or a body, whether incorporated or not &
whether IndianornonIndian,which isdeclaredbyspecialorderofthe
CentralBoardofDirectTaxestobeacompany.
Eg.WiproLtd.;RelianceIndiaLtd.
4. Firm : Apartnershipfirme.g.AregisteredpartnershipfirmwithX,Y,Z partners.
5. AOP/BOI
:
It
is
an
Association
of
Persons
for
a
common
cause,
e.g.
XYZ
HousingSociety.
6. LocalAuthority:Itmeansamunicipality,districtboard,grampanchayatorany
bodyentrustedbythegovernmentthecontrolandmanagement
ofamunicipalorlocalfunde.g.ThaneMunicipalCorporation,
B.E.S.T.etc.
7. Artificial :Itincludesanidol,adeity,auniversity,BarCounciletc.e.g.Idolsof
JuridicalPerson Gods&Allah,Balaji,Mumbaiuniversityetc.
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UNIT2:BASISOFCHARGE
Section2 (9): ASSESSMENT YEAR
AssessmentYearmeansaperiodofTwelvemonthscommencingfrom1stDayofAprileveryyear.
EXPLANATION:
Assessmentyear20132014thusbeginson1stApril2013andendson31stMarch2014.Thisistheyearin
whichincomerelatingtoPreviousYear20122013isassessedtotax.
Section 2 (34),Read with Section3 : PREVIOUS YEAR
UnderSection2(34)PreviousYearmeansthePreviousYearasdefinedinSection3.
AsperSection3therewillbeonlyonepreviousyearforalltheassesseesendingon31stMarchforall
sourcesofincome.E.g.Incaseofnewlysetupbusinesspreviousyearwillbeginfromthedateofsetting
upofbusiness&willendwith31stMarchnext.Thus,ifanewbusinessiscommencedon18thDec.2012,
firstpreviousyearwillbefrom18thDec.2012to31stMarch2013andwillcoveraperiodoflessthan12
months.
ForIncomeTaxpurposestatusoftheassesseeisclassifiedas
1. LegalStatusWhichisdecidedonthebasisofdefinitionofperson.Eg.ForaJointStockCompany,
legalstatusiscompany.ForMr.Xlegalstatusisindividual.
LegalStatusofanassesseedecidestherateatwhichheisrequiredtopayincometax.
2. ResidentialStatusOnthebasisoftheseprovisionsresidentialstatusoftheassessee iseithera)
Residentorb)NonResident.
Residentialstatusdecidesincomeonwhichassesseeissupposedtopaytax.Incomeearnedby
assesseeiseitherIndianincomeor/andForeignincome.
Thus, legalstatusdecidesrateoftax,whereas,residentialstatusdecides incomeonwhichtax istobe
paid.
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RESIDENTIAL STATUS
EveryassesseeisEitherResidentorNonResident.
Basedon legalstatusoftheassesseetherearedifferentprovisions,whichdecidewhetheraparticular
assesseeisresidentornonresident.
IfanassesseebecomesResidentaspertheprovisionsoftheactthenitistobedecidedfurther,
whetherheis
1. ResidentandOrdinaryResident
OR
2. ResidentbutNotOrdinaryResident.
RESIDENTIAL STATUS OF AN INDIVIDUAL SEC. 6 (1)
ForanindividualtobecomeResidenthehastosatisfyanyoneofthefollowingtwoconditions:
1. Heshouldhavebeen inIndia intheyearforwhichResidentialStatus istobedecidedforaperiod
amountingto182daysormore.
OR
2. Withinthe4yearsprecedingtotheyearforwhichresidentialstatusistobedecided,heshouldhave
beeninIndiaforaperiodamountingto365daysormoreandshouldhavebeeninIndiafor60days
ormoreintheyearforwhichResidentialStatusistobedecided.
Exceptiontocondition2:
An Indian Citizen or an Indian member of a crew of an Indian ship who leaves India in any
previousyear
for
employment
outside
OR
an
Indian
Citizen
or
aperson
of
Indian
origin
who
is
outside
IndiaandcomesonavisittoIndia,inthesecondpartoftheconditionno.2thewords60daysshouldbe
replacedby182days.Itisclearthatconditionno.2becomesnonfunctionalincaseofsuchassesses.
A person is deemed to be of Indian origin if he or either of his parents or any of his grand
parentswasborninundividedIndia.
If an individual becomes a Resident it is to be decided further which type of Resident he is.
TheseprovisionsarediscussedinSection6(6).
For an individual to become Resident and Ordinary Resident he has to satisfy both the
conditionsgivenbelow:
1. HeshouldhavebeenresidentinIndiaatleast2outof10previousyears,precedingtotheprevious
yearinwhichheisresident.
AND
2. HeshouldhavebeeninIndiaforaperiodamountingto730daysormorein7yearsprecedingtothe
previousyearinwhichheisresident.
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Ifassesseedoesnotsatisfyanyoneoftheabovementionedconditions(orboth)hisResidential
StatuswillbeResidentbutNotOrdinaryResident.
PROBLEMS
1. Mr.XleftIndiaon1stAug.2013.Hisstayduringpreceding4yearswasasfollows:
20112012 50
20102011 70
20092010 90
20082009 100
DeterminehisresidentialstatusfortheA.Y.201415.
2. Mr. Suresh Ahire, an Indian citizen left India for London on 1st August 2013 as he was appointed
managerin
U.K.
based
hotel.
Determine
his
Residential
Status
for
A.
Y.
201415.
3. Mr.Advani,anIndiancitizenwhoisworkingasanassistantinatouristcompanyinPakistancameto
Indiaonholidayon15thApril2013andleftforPakistanon30thJune2013.
DeterminehisResidentialStatusforA.Y.201415.
4. Mr.XleftIndiaon15thOct2013.HisstayinIndiaduringprecedingyearswasasfollows:
20122013 220
20112012 185
20102011 90
20092010 320
20082009 100
20072008 200
20062007 75
20052006 55
20042005 365
20032004 200
20022003 320
20012002 300
20002001 120
DeterminehisresidentialstatusfortheA.Y.201415.
5. Mr.Xwasaprivatedetective.Priorto1stDec,2011hehadneverbeenoutsideIndia. On1stDec.
2012heleftIndiaforSouthAfricaashewasaskedbytheGovernmentofIndiatofindcertaindetails
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regardingirregularitiesinIPLcricketmatchesandsubmitareport.HecamebacktoIndiaon1stJune
2013andwasagainaskedtoleaveforSouthAfricaon15thJune2013.Hewastocomebackon10th
Oct.2013,butunfortunatelymetwithanaccidentandwaskilled.
DeterminehisResidentialStatusforA.Y.20142015.
6. Mrs. X came on a visit to India on 10th April 2013 and left India on 1st Sep.2013. Her stay during
precedingyearswasasfollows:
20122013 100
20112012 100
20102011 100
20092010 100
Placesofbirth
Mr.X Bristol,U.K.
Mrs.X
Jamaica
FatherofMr.XDubai
MotherofMr.XHamilton
GrandmotherofMr.X London
GrandfatherofMr.X Nairobi
GrandmotherofMrs.X Karachi
GrandfatherofMrs.XPortofSpain
Mrs.Xcelebratedher70thbirthdayon15thAugust2013.
DetermineherresidentialstatusfortheA.Y.201415.
7. Mr.Tiwari left forSwitzerlandon15thMarch2011afterstaying in India forabout1year from1st
April2010. HecamebacktoIndiaon9thSept2013.
DeterminehisResidentialStatusforAssessmentYear201415.
8. Mr. Harry, an Indian Citizen was born in Germany. He came to India for the first time when he
was 10 and never went outside India till he was 25. He left for Germany again in May 2011 and
againcamebacktoIndiainMarch2014.
Determinehis
Residential
Status
for
A.Y.
201415.
RESIDENTIALSTATUSOFHUF,FIRMANDAOPORBOISEC.6 (2)
HUF, Firm or AOP is said to be Resident in India in any previous year if the control and
managementthereofissituatedeitherpartlyorwhollyinIndia.
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RESIDENTIALSTATUSOFCOMPANYSEC.6 (3)
AcompanyissaidtobeResidentinIndiainanypreviousyearif:
1) ItisanIndiancompanyor
2) DuringthepreviousyearcontrolandmanagementofitsaffairsissituatedwhollyinIndia.
RESIDENTIALSTATUSOFOTHERASSESSEESSec.6(4)
AnyotherassesseeissaidtobeResidentinIndiainanypreviousyearifthecontrol&managementofits
affairsiswhollyorpartlysituatedinIndia.
RESIDENTANDORDINARYRESIDENT:Sec.6(6)
1. H.U.F.: H.U.F.issaidtobeOrdinaryResidentinanypreviousyearifitsKartaisresidentand
OrdinaryResidentinthatpreviousyear.
2. Firm,AOP,
Company
and
All
Other
Assesses:
The
term
Ordinary
Resident
is
not
applicable
to
otherassesses.TheyareeitherResidentorNonResident.
PROBLEMS
1. Duringthepreviousyear201314affairsofaHinduUndividedfamilyarepartlymanagedfromDelhi
andpartlyfromHongKong.Don,aKartaofH.U.F.,isresidentandordinaryresidentinIndiaandTan
whoalsomanagestheaffairsoffamilyisanonresidentinIndiafortheassessmentyear201415.
Determinetheresidentialstatusofthefamilyfortheassessmentyear201415.
2. Afirmhasfivepartnersallofwhomareresident in India.Thefirmownsateaestate inSriLanka,
which ismanagedbyanagentwhostays inSriLanka.Agent looksafterthedaytodayworkingof
the estate. He takes permission of the partners before taking any major decision. Determine the
residentialstatusofthefirm.
3. A company is registered in Dubai, having its head office there. However, the majority of the
directors and managers resided in India. Sales contracts and other important business functions
werecontrolledbydirectorsinIndia.Whatistheresidentialstatusofthecompany?
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SCOPEOFTOTALINCOME
OnwhatincomeanassesseewillpaytaxinIndiadependsuponhisresidentialstatus.Scopeoftotal
incomeisexplainedinthefollowingchart:
INCOME:
A.INDIANINCOME
1.ReceivedordeemedtobereceivedinIndia
2.Accruingorarisingordeemed toaccrueorariseinIndia.
B.FOREIGNINCOME
ACCRUINGORARISINGOUTSIDEINDIA&RECEIVEDOUTSIDEINDIA:
1.FromabusinessControlledfromIndiaorProfessionsetupinIndia.
2.FromabusinesscontrolledfromoutsideIndiaorprofessionsetupoutsideIndia.
Note : - Ifinrespectofanybusiness,operationsarenotcarriedoutinIndiaitwillbetreatedas
ForeignincomeevenifitiscontrolledfromIndia.However,ifsuchanincomeis
receivedinIndiaitwillbetreatedasIndianIncome.
TAXABILITYBASEDONRESIDENTIALSTATUS
1. Residentand
Ordinary
Resident
:Has
to
pay
Income
tax
in
India
on
total
income
earnedbyhim.i.e.IndianaswellasForeignIncome.
2. ResidentbutNotOrdinaryResident :HastopayIncometaxinIndiaontotalincomeearned
byhimexceptincomefrombusinesscontrolledfrom
outsideIndiaorprofessionsetupoutsideIndia.
3. NonResident :HastopayIncometaxinIndiaonlyonIndianincome.
SECTION 7 : INCOMEDEEMEDTOBERECEIVEDININDIA
Income deemed to be received in India in the previous year is also included in the taxable
income
of
the
assessee.
The
following
income
shall
be
deemed
to
be
received
in
India:
(a) Annualaccretiontothecreditbalanceofanemployee inthecaseofrecognisedprovidentfundto
theextentprovidedundertherules.
(b) Excesscontributionofemployerincaseofrecognisedprovidentfundtotheextentprovidedunder
therules.
(c) Transferbalanceinarecognisedprovidentfundtotheextentasprovidedundertherules.
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SECTION 8 : DIVIDENDINCOME
Anydividenddeclaredbyacompanyordistributedorpaidbyitshallbedeemedtobetheincomeof
thepreviousyearinwhichitissodeclared,distributedorpaid,asthecasemaybe;
Any interim dividendshallbedeemed tobe the incomeof thepreviousyear inwhich theamountof
suchdividendisunconditionallymadeavailabletothememberwhoisentitledtoit.
Thefollowingtableillustratesscopeoftotalincomeinrespectofvariousincome:
Particulars R&OR RbutnotOR NR
1) AnyincomereceivedinIndia
ForworkdoneinIndia
ForworkdoneoutsideIndia
2) AnyincomereceivedoutsideIndia
Forwork
done
in
India
ForworkdoneoutsideIndia
3) IncomeaccruedinIndia
ReceivedinIndia
ReceivedoutofIndia
4) IncomeaccruedoutofIndia
ReceivedinIndia
ReceivedoutofIndia
5) SalarypaidbyIndianGovernment
6) DividendorInterestpaidbyIndiancompany.
7) IncomefrompropertyinIndia
ReceivedinIndia
ReceivedoutofIndia
8) ProfitonsaleofassetsinIndia
Receivedin
India
ReceivedoutofIndia
9) IncomefrombusinessinIndiacontrolledfrom
India
10) IncomefrombusinessinIndiacontrolledfrom
Dubai.
11) IncomefrombusinessinDubaicontrolledfrom
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Nottaxable
Taxable
Taxable
Taxable
Not
taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Nottaxable
Taxable
Taxable
Taxable
Not
taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
Taxable
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SECTION 9: INCOMEDEEMEDTOACCRUEORARISEININDIA
1) Allincomeaccruingorarisingthroughorfrom:
a. AnybusinessconnectioninIndia.
b. AnypropertyinIndia.
c. AnyassetorsourceofincomeinIndia.
d. TransferofcapitalassetsituatedinIndia.
2) SalariespayableforservicesrenderedinIndiawillbecalledIndianincome.
3) Salary received by Indian National from the Government in respect of services rendered outside
Indiais
an
Indian
income.
4) AnydividendpaidbyanIndiancompanyisconsideredasanIndianincome.
PROBLEMS
1. From the following details of income of the assessee find out his gross total income for the A.Y.
201415ifheis:
a)R&OR b)Rbutnot OR c)NonResident
(1) Dividendfrom
Indian
companies
credited
to
bank
account
in
Iraq
` 12,000.
(2) IncomefrombusinessinSriLankacontrolledfromMumbai` 18,000.
(3) IncomeaccruedinAfghanistan&receivedinPakistan` 31,000.
(4) IncomefrompropertyinAustraliareceivedinBhutan` 12,000.
(5) InterestcreditedinBankaccountinSwitzerland` 50,000.
(6) RentfrompropertyinAustraliareceivedinNepal` 24,000.
(7) IncomefrombusinessinMumbaicontrolledfromDubai` 1,00,000.
(8) PastuntaxedprofitbroughttoIndia` 40,000.
2. Mr.Balvinder,anIndiancitizen,furnishesthefollowingparticularsofhisincomeearnedduringthe
previousyear
relevant
to
assessment
year,
2014
15.
(a) PensionfromanIndianemployerreceivedinSudan` 36,000.
(b) ProfitfrombusinessatPuneandmanagedfromBritain` 48,000.
(c) IncomeearnedfrombusinessinKuwaitwhichiscontrolledfromMumbai(` 30,000 receivedin
India)` 54,000.
(d) PastuntaxedprofitbroughttoIndia` 1,00,000.
(e) IncomefromagriculturallandinSriLanka` 10,000receivedinIndia.
U.S.A.
12) IncomefrombusinessinDubaicontrolledfrom
India.
13) Remittanceofpastuntaxedamounts.
Taxable
Taxable
Nottaxable
Nottaxable
Taxable
Nottaxable
Nottaxable
Nottaxable
Nottaxable
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(f) ProfitonsaleofplantatBhopal(1/2receivedinU.S.A.)` 38,000.
(g) DividendfromGermancompanyreceivedinIndia` 5,000.
(h) ProfitfrombusinessinRajasthancontrolledfromMaharashtra` 74,000.
(i) SalaryearnedandreceivedinSaudiArabia` 48,000.
(j) InterestonBhutanDevelopmentBonds(entireamountreceivedinSudan)` 40,000.
DeterminethegrosstotalincomeofMr.Balvinderfortheassessmentyear201415ifheis,(i)
ResidentandordinarilyResident(ii)ResidentbutnotordinarilyResident(iii)NonResident.
3. FollowingistheincomeofMr.Khanforthepreviousyearrelevanttoassessmentyear201415.
i) InterestfromIndiancompaniesreceivedinIraqandcreditedtobankaccountinIraq`12,000.
ii) IncomefrombusinessinSriLankacontrolledfromKerala` 18,000.
iii) IncomeaccruedinNepalandreceivedinPakistan `31,000.
iv) IncomefrompropertyinJapanreceivedinTibet`12,000.
v) InterestcreditedfromBankaccountinSwitzerland`50,000.
vi)
Rentfrom
property
in
Australia
received
in
France
`24,000.
vii)IncomeaccruedinSwitzerlandandnotreceivedinIndia` 10,000.
viii) IncomeearnedinU.S.A.inpastbutbroughtinIndiaduringtheyear` 20,000.
Findouthisgrosstotalincomeresident:
i) Residentandordinarilyresident;
ii) Residentbutnotordinarilyresident;
iii) NonResidentinIndia.
4. The following are the sources of income of Shri Manohar for the assessment year 20132014.Determinehistotaltaxableincomeassumingalternativelythatheis:
i) ResidentandOrdinarilyResident.
ii) NotOrdinarilyResident
iii) NonResident.
(a) Salaryfromacompany(Gross)`52,000.(EarnedinIndia)
(b) IncomefromprofessioncarriedinIndia`57,000.
(c) IncomeaccruedinU.K.andbroughtinIndia` 3,000.
(d) IncomefromabusinessinGermany` 81,000(ThebusinessiscontrolledfromIndia).
(e) ` 10,000receivedfromabankinFrance.Themoneywasdepositedinthebankaccountbyhis
brotherbeingtheinterestanddividendearnedbyMr.ManoharinAmerica.
(f) ` 20,000salaryearnedinIndiadepositedbyhisemployerdirectlyinthebankinSwitzerland.
(g) ` 2000ProfessionalfeesearnedandreceivedinNewYorkbutlaterremittedtoIndia.
(h) ` 10,000incomefrombusiness,whichiscarriedoninHongKongbutcontrolledfromNewYork.
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UNIT3:EXCLUSIONSFROMTOTALINCOME(SECTION10)
UnderSection10of IncomeTaxActof1961certain income isexempted fromtaxeither fullyor
partially.Inotherwordsitisalistoftaxfreeincomeinthehandsoftheassesseeandthoughitis
anincomeoftheyearassesseeisnotrequiredtopaytaxonit.
1. AgriculturalincomeSec.10(1): Foranincometobecalledanagriculturalincomeconditionstobe
satisfiedare
(a) Rentorrevenueshouldbederivedfromland.
(b) Landshouldbeusedforagriculturalpurpose.
(c) ThelandshouldbesituatedinIndia.
Examples:
1. Incomefromleaseofagriculturalland.
2. Incomefromlandusedforagriculturalpurposee.g.producegrownforconsumptionbyman
(grains, vegetables or fruits) or animals (grass or pastures); cash crops (cottonjute etc.),
luxuryitemssuchascoffee,tobacco;cropsgrownforselfconsumptionetc;
3. CompensationreceivedfromInsuranceCompanyfordamagetoteagarden.
4. Incomefromgrowingflowers.
5. Salaryorinterestoncapitalreceivedbyapartnerfromafirmengagedinagriculture(assalary
orinterestisonlyawayofdistributingprofits).
ExamplesofNonagriculturalincome:
1. Income not directly derived from land: Interest on arrears of rent; dairy farming, poultry
farming,
dividend
received
from
a
limited
company
having
only
agricultural
income;
salary
of
amanagerofanagriculturalestate,rentfor landusedforstoringcrops;manufactureofsalt
fromseawater.
2. Income without performing basic agricultural operations: Sale of plants which have grown
spontaneously (on their own without any sowing of seeds e.g. mushrooms); sale of trees
whichwerealreadystandingontheagriculturalestatewhenpurchased.
3. Income from produce sold byothers andnot by thecultivator: Sale of agricultural produce
receivedas interestonloan;receivedaspriceforwatersuppliedtoagricultural land;saleof
agriculturalproducebyabroker.
2. ReceiptfromH.U.F.Sec.10(2):AnyamountreceivedbymemberofH.U.F.outofthefamilyincome
isexempt
from
tax.
3. PartnersShareintheprofitsofthefirmSec.10(2A):Partnerofthefirmisnotrequiredtopaytaxin
individualcapacityonhisshareinprofitsofthefirm.
4. LeaveTravelConcessionSec.10(5): It istheamountgivenbytheemployertotheemployeefor
travelingwhileonleaveortosettleatanyplaceinIndiaafterretirement.
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Subject to certain restrictions this income is exempt from tax in respect of travel concession
receivedbyanassesseefromhisemployerorformeremployer:
(a) Forhimself&hisfamilyinconnectionwithhisproceedingtoanyplaceinIndia.
(b) For himself & his family in connection with his proceeding to any place in India after
retirementfromserviceorafterterminationofhisservice.
However,
exemption
under
this
section
is
restricted
to
amount
actually
spent
by
the
assessee.
ForthepurposeofthissectionFamilyinrelationtoanyindividualmeans:
i. Thespouseandchildrenoftheindividual.
ii. Theparents,brothers&sistersoftheindividualoranyofthemwhollyormainlydependent
ontheindividual.
Exemption under this section is available in respect of 2journeys performed in a block of 4 calendar
yearscommencingfrom1986.
Leavetravel
Actual
amount
spent Exemption
Taxable
amount
allowancesreceived byemployee
10,000 Nil 10,000
10,000 2,000 2,000 8,000
10,000 9,000 9,000 1,000
10,000 10,000 10,000 Nil
10,000 15,000 10,000 Nil
5. Foreignallowances&perquisitestoGovernmentemployeesoutsideIndiaSec.10(7).
6. Section 10 (10) Gratuity: Gratuity is the lump sum payment made by the employer, to the
employeeatthetimeofhisretirement,ortothefamilymembersofemployeeincaseofhisdeath.
Forincometaxpurpose,Gratuityisconsideredsalaryincome.However,entireamountreceivedas
gratuityisnottaxable.Amountthatisexemptfromtaxiscoveredbyfollowingprovisions:
(a) Gratuityreceivedbygovernmentemployees:Itisfullyexemptfromtax.
(b) IncaseofemployeescoveredbythePaymentofGratuityAct,1972: Anygratuity receivedby
anemployeecoveredbythepaymentofGratuityAct,1972isexemptfromtaxtotheextentof
leastofthefollowing:
i) 15 dayssalary (7 days in the case of employees of aseasonal establishment) based on
salary last drawn for every completed year of service or part thereof in excess of six
months;
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ii) `10,00,000w.e.ffrom24/05/2010
iii) Gratuityactuallyreceived
(c) For employees not covered by the Payment of Gratuity Act, 1972: For other employees,
Gratuityreceivedisexemptasperthefollowing:
i) Halfmonthssalaryforeachcompletedyearofservicecalculatedonthebasisofaverage
salarydrawnfor10monthsimmediatelyprecedingthemonthofretirementordeath,OR.
ii) Actualamountreceivedasgratuity,OR
iii) Amount fixed by the government from time to time which at present is increased to`
10,00,000w.e.ffrom24/05/2010whicheverisless.
Followingpointsshouldbenoted:
1. SalaryforthispurposemeansBasic+D.A.for(b)above&Basic+D.A.+Commissionatfixed
percentagefor
(c)
above.
2. 26days refertoworkingdayspermonth.This is important tocalculate15days (or7days)
salary.
PROBLEMS
1. Mr.X,nongovernmentemployeenotcoveredbyPaymentGratuityAct1972retiredfromservices
ofKedarAutomobileson31stAugust2013andreceived` 96,000asGratuityafteraserviceof40
yearsand
3months.
His
average
salary
during
last
10
months
immediately
preceding
his
retirement
was` 4,500permonth.Computehistaxablegratuityifany.
2. Mr.YwasanongovernmentemployeenotcoveredbyPaymentofGratuityAct.Heretiredon1st
May2013afteraserviceof35yearsand11months.Since1stJan.2013hewasdrawingamonthly
salary of` 5,500. Salary was due for increment on 1st Jan. every year @ 10%. On retirement he
received` 60,000asgratuity.ComputetaxableGratuityifany.
3. Mr. A, Income tax officer receives` 2,00,000as gratuity while he is still working. Is this gratuity
taxable?
4. Mr.A,Incometaxofficerreceivesgratuityof` 2,00,000atthetimeofretirement.Isthisgratuity
taxable?
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5. Mr. D who is working in Reliance Industries Ltd. received Gratuity worth ` 5,00,000 while in
service.Isthisgratuitytaxable?
6. Mr.FretiredfromXLtd.towhomgratuityactisnotapplicable.Receivedgratuityof` 6,00,000.
Hisservice
period
is
35
years
11
months
and
average
salary
is
` 10,000.
Is
this
gratuity
taxable?
7. Section10 (10A)CommutationofPension: Pension isa periodical payment made byemployer to
theemployeeafterretirement.Thissectionisalsoapplicableinrespectofanypaymentreceivedby
wayofcommutation of pension receivedby an individualout ofannuityplanof the L.I.C. froma
fundsetupbythecorporation.
Therearetwooptionsregardingthispayment:
(a) UncommutedPension:Itisthepensionthatistobereceivedperiodically.Itisfullytaxableassalary
income
in
case
of
all
the
employees.
(b) Commuted Pension: It is amount received in lump sum in lieu of periodical pension. Regarding
commutation,optionsavailableare: a)Commutationoffullpension,wherenoperiodicalpayment
will be made, entire pension will be paid in lump sum. b) Part of the pension can be commuted
whereinrespectofuncommutedpensionperiodicalpaymentwillbemade.
TAXABILITY OF COMMUTED PENSION1. Any payment on commutation of pension received by all Central and State Government
Employeesisfullyexemptfromtax.
2. Incaseofotheremployeestaxabilitydependsonwhetheremployeereceivedgratuityalsoon
retirement.
Exemptionis
restricted
to
the
following:
1. Incasewhereemployeereceivedanygratuity,commutedvalueof1/3rdpensionisexempt.
2. Incasewhereemployeedidnotreceivegratuity(i.e.hereceivedonlypension)commuted value
ofhalfofpensionisexempt.
Anypaymentreceivedbywayofcommutationofpensionfromafundunderclauses23AAB(i.e.
fund set up by LIC of India viz Jeevan Suraksha) under pension scheme approved by controller of
Insuranceisfullyexemptfromtax.
NewPensionSchemeforCentralGovt.Employees
New pension scheme is applicable to new entrants to Government service. As per the scheme it is
mandatoryforpersonsenteringtheserviceoftheCentralGovernmentonorafterJanuary1,2004,to
contribute10percentofsalaryeverymonthtowardstheirpensionaccount.Amatchingcontributionis
requiredtobemadebytheGovernmenttothesaidaccount.
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Thetaxtreatmentunderthenewschemeisasfollows
1. Contribution by the Central Government to the pension scheme is first included under the head
Salariesinhandsoftheemployee.
2. Suchcontribution isdeductible(totheextentof10percentofthesalaryoftheemployee)under
section80CCD.
3. Employeescontribution
to
the
pension
scheme
(to
the
extent
of
10
per
cent
of
the
salary
of
the
employee)isalsodeductibleundersection80CCD.
4. Whenpension isreceivedoutoftheaforesaidamount, itwillbechargeabletotax inthehandsof
therecipient.
5. Theaggregateamountofdeductionundersections80C,80CCC&80CCDcannotexceed`1,00,000.
6. Salaryforthepurposeofpoints2and3(supra)includesbasicsalaryanddearnessallowances(if
thetermsofemploymentsoprovide)butexcludesallotherallowancesandperquisites.
7. Nodeductionwillbeallowedundersection80Cinrespectofamountsonwhichdeductionhasbeen
claimedundersection80CCD.
PROBLEMS
1. Mr. A retired from the department of Sales Tax on 1st April 2013. He was entitled to Monthly
pension`3000 & received gratuity worth ` 2,00,000. On 1st Oct 2013 he commuted 50% of the
pensionfor`2,00,000.Findouthistaxablepensionforpreviousyear201314.
2. Mr.D retired from the department of Central Exciseon 1stDec.2013.Monthlypension` 10,000
30%ofthepensionhecommutedfor` 4,00,000.Healsoreceivedgratuityof`5,00,000.
Findout
his
taxable
pension,
if
any.
3.Mr.AretiredfromGaneshLtd.on1stApril2013.Monthlypension` 6,000.70%ofthepensionhe
commutedfor` 4,20,000on1stOct.2013.Hehasreceivedgratuityalso.Findouttaxablepension
4. Mr.XretiredfromParagLtd.on1stMay2013.Hedidnotreceivegratuity.MonthlyPension` 6,000.
On1stSep.30%ofthepensionwascommutedfor` 3,00,000.
Findout
taxable
pension.
5. Mr.AretiredfromKBCLtd.on1stJan.2014.Hewasentitledtoamonthlypensionof`6,000butgot
80%pensioncommutedfor` 2,10,000.Hewasalsoentitledtoreceivegratuityasperthetermsof
hisemployment.FindouttaxablepensionforA.Y.201415.
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6 Mr.AretiredfromChiragLtd.on1stApril2013.Serviceperiod40years,6months.Averagesalaryat
thetimeofretirement` 10,000.p.m.Gratuityreceived` 3,00,000.Pensionpermonth` 7,500.On
1st April 2013 he commuted 50% of the pension for ` 3,00,000. Find out his taxable pension &
gratuityforthepreviousyear201314.HeisnotcoveredbyGratuityAct.
8 Leave SalarySection10 (10AA): Leave salary is taxable under the head Income from Salary.
However,incertaincasesLeaveSalaryisexemptfromincometax.Detailsofthisexemptionare
givenbelow:
a. Leave Salary received by an employee of Central or State Government at the time of
retirementistotallyexemptfromtax.
b. For other employees, if leave salary is received at the time of retirement, least of the
followingisexempt:
1. Periodofearnedleave(inmonths)tothecreditofemployeeatthetimeofleavingthejobbut
notexceeding30dayspereachcompletedyearofserviceAveragemonthlysalary
2. Leave salary for the period 10 months based on average salary drawn in last 10 months
precedingtothedateofretirementor
3. AmountasspecifiedbyCentralGovernmentfromtimetotimewhichatpresentis` 3,00,000.
4. Actualamountreceivedasleaveencashment.
SalaryforthispurposeisBasic+DA+Commissionatfixedpercentage.
Notifiedlimitof `3,00,000appliestoallsuchamountreceivedfromoneormoreemployers/current
orearlieryears.Therefore,forsubsequentclaimsamountexemptedearlierwillbedeductedfrom
thelimit.
9
RetrenchmentCompensationSection10(10B):Retrenchmentcompensationreceivedbyaworker
underIndustrialDisputesActof1947oranyotheractisexemptonthefollowingbasis:
a. AmountascalculatedaccordingtotheprovisionsoftheActor
b. Amountasspecified(notlessthan50,000)bytheCentralGovernment.Foraworkerretrenched
after31.12.1996amountspecifiedis` 5,00,000or
c. Amountreceived.Whicheverisless.
10.CompensationonretirementofanemployeeofapublicsectorcompanySection10(10C):
Paymentreceivedbyanemployeeof:
1. AnauthorityestablishedunderCentral/State/ProvincialAct.
2. Localauthority.
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3. University(underUGCAct)
4. IIT.
5. AnyStateorCentralGovernment
6. PublicSectorCompany
7. AnyotherCompany
8.
Cooperative
society
9. AnyInstitutespecifiedbytheGovernmentforthispurpose.
10. AnyinstituteofmanagementastheCentralGovernmentmaynotify.
UndervoluntaryretirementorterminationofserviceschemeapprovedbytheGovernmentamount
isexemptfromincometaxupto` 5,00,000.
11
Taxonperquisitespaidbyemployer.Section10(10CC)
12
AmountreceivedunderaLifeInsurancePolicySection10(10D):Policyamountaswellasbonusis
fully
exempt
from
tax
except
amount
received
under
Keyman
Insurance
Policy
and
under
section
80DDor80DDA(3)andanysumreceivedunderpolicy issuedonorafter1.4.2003wherepremium
payableinanyyearexceeds20%ofsumassured.Howeverinsuchcasessumreceivedondeathofa
personshallcontinuetobeexempt.
13
PaymentfromProvidentFundSection10(11).FordetailsreferchapterSalary.
14
AccumulatedbalancefromarecognisedProvidentFundSec.10(12).
15 PaymentfromanapprovedSuperAnnuationFundSection10(13).
16 HouseRentAllowance(Section10(13A)andrule2A):
Theleastofthefollowingisexemptfromtax:
(a) Anamountequalto50percentofsalary,whereresidentialhouseissituatedatMumbai,Kolkata,
DelhiorChennaiandanamountequalto40percentofsalarywhereresidentialhouseissituated
atanyotherplace;OR
(b) House rent allowance received by the employee in respect of the period during which rental
accommodationisoccupiedbytheemployeeduringthepreviousyear;OR
(c) Theexcessofrentpaidover10percentofsalary.Salaryfortheaforesaidpurposesmeansbasic
salary
and
includes
dearness
allowance
if
terms
of
employment
so
provide.
It
also
includes
commission based on a fixed percentage of turnover achieved by an employee as per terms of
contractofemployment,butexcludesallotherallowancesandperquisites.
17
SpecialAllowanceforexpensesSection10(14):
Anyspecialallowancegrantedbyemployertoemployeetomeettheexpensesshallbeexemptfrom
tax to the extent spent by an employee on expenses or to the extent specified in the Act. e.g.
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EducationAllowanceisexempt@` 100permonthperchildUpto2children,TransportAllowance
isexemptupto` 800permonth.ChildrenshostelAllowance@` 300Permonthupto2children.
18 CertainincomebywayofinterestSection10(15):
e.g. a) InterestonP.P.F.
b) InterestonPostOfficeSavingsAccount.
c) InterestonNotifiedGovernmentSecurities&Debentures.
d) InterestonTaxfreeRBIbondsetc.
19
ScholarshipsgrantedtomeetthecostofeducationSection10(16).
20
AllowancereceivedbythemembersofparliamentorstatelegislatureSection10(17).
a) Dailyallowancefullyexempt.
b) Allowancereceivedundermembersofparliament(constituencyallowance)Rulesof1986fully
exempt.
c) Anyconstituencyallowanceisfullyexempt.
21 Section10(17A)Awards:
Awardsreceived(incashorkind)areexemptinrespectofAwardinstitutedinthepublic interest
byCentralorStateGovernmentoranybodyapprovedbytheGovernment.
22
Section10(18):Anyincomebywayof
a.
Pension
received
by
an
individual
who
has
been
in
the
service
of
the
Central
or
StateGovernmentandhasbeenawardedParamVirChakraorMahaVirChakraorVirChakra
orsuchothergallantryawardastheCentralGovernmentmay,bynotification intheOfficial
Gazette,specifyinthisbehalf;
b. Familypensionreceivedbyanymemberofthefamilyofanindividualreferredtoin
subclause(i)
23
Incomeofamemberofascheduledtriberesiding inareaspecified in theconstitutionor inthe
statesofNagaland,Manipur&Tripura&intheUnionTerritoriesofArunachalPradesh&Mizoram
orareascoveredbyNotificationissuedbyGovernorofAssam.Section10(26).
24 Income of resident of Ladakh District. Section 10(26A). This exemption is available subject to
certainrestrictions.
25 ClubbedincomeofaminorchildSection10(32): Incaseincomeofaminorchildisclubbedwith
that of the parent under section 64(1A) such income is exempt from tax up to maximum of `
1,500inrespectofeachminorchild.
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26 Section10(33):AnyincomearisingfromtransferofunitsoftheUS64wheretransfertakesplace
onorafter1.4.2002.
27 Section10(34):DividendAnyincomebywayofdividendreferredtoinsection115O.
28 Section10(35):AnyincomeinrespectofMutualFundspecifiedunderclause23D.
29 Section10(36):Any income from transfer of long termcapital asset being eligibleequity shares
purchasedonorafter1.3.2003butbefore1.3.2004.
30
Section10(37):Capitalgainoncompulsoryacquisitionofurbanagriculturallandif compensationis
receivedafter31.3.2004& landwasusedbytheassessee(oranyofhisparents)foragricultural
purposeduring2yearsimmediatelyprecedingtotransfer.
31
Section10(38): Long Term Capital Gain on transfer of equity shares/units covered by Securities
TransactionTax(STT).
32
Section10(39): Income arising from international sporting event held in India where in two or
morecountriesareparticipating.
33
Section10(44):AnyincomereceivedbyanypersonfororonbehalfoftheNewPension
SystemTrust.
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