Masters of Finance and Control Prof. Santosh Kumari AMITY UNIVERSITY [CORPORATE TAX PLANNING] =Corporate tax planning module seeks to enabling the students to make use of legitimate tax shelters, deductions, exceptions, rebates and allowances; with the ultimate aim of minimizing the corporate tax liability. PREFACE This =Corporate tax planning module seeks to enabling the students to make use of legitimate tax shelters, deductions, exceptions, rebates and allowances; with the ultimate aim of minimizing the corporate tax liability. To give an overview of wealth tax provisions pertaining to companies (from a users perspective).To create an awareness of VAT and how the scheme is going to have an impact on the existing sales tax system The book is designed for use in graduate & post graduate courses for self study for students and for the faculty as well. An attempt has been made to relate theory to practice to make it understandable easily for students. Each chapter is having various illustrations relating to each topic covered and followed by numerous questions and multiple choice questions also, which are designed to reinforce concepts & procedure presented in the body of chapter. I wish to express my sincere thanks to many of the authors who have received due acknowledgements, without whom, this module would not have been completed. I have taken every possible effort to remove the errors either of principle or of printing. Even then, if the reader comes across any error, he/she is requested to point out the same to me. I hope that many students will find this module interesting & helpful. Further suggestion for the improvement of the module is solicited. Santosh Kumari CORPORATE TAX PLANNING Course Objective: At the end of this course, the students should be able to demonstrate an understanding of the tax provisions enabling them to make use of legitimate tax shelters, deductions, exceptions, rebates and allowances; with the ultimate aim of minimizing the corporate tax liability. To give an overview of wealth tax provisions pertaining to companies (from a users perspective). To create an awareness of VAT and how the scheme is going to have an impact on the existing sales tax system Course Contents: Module I: Basic Concepts Introduction to Income Tax Act, 1961, Residential Status, Exempted Incomes of Companies. An overview of various provisions of Business & profession & Capital gains applicable to companies Module II: Assessment of Companies Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of companies, Concept of avoidance of double taxation. Module III: Wealth Tax An overview of wealth tax provisions to the extent applicable to companies Module IV: Indirect Taxation An overview of Sales Tax, (VAT) Text & References: Text: . Corporate Tax Planning & Business Tax Procedure,Dr. Vinod K. Singhania & Monica Singhania, Taxmman Publication, New Delhi. . Direct taxes law & practices, Singhania V.K. & Singhania Kapil, Taxmann Publication, New Delhi. References: . Corporate Tax Planning, Lakhotia, R.N. & Lakhotia, Vision books . Students guide to Income Tax, Singhania, V.K., Taxmann . International dictionary of taxation by Indian Tax Institute, 1st Edition. Sl.No. Topics Page No. 1. 2. 3. 4. 5. 6. 7. 8. Syllabus Module I : Basic Concepts Module ll : Assessment of Companies Module lll : Wealth Tax Module IV : Indirect Taxation Case Studies ITR-7 for Companies References : Books & Videos 3 5 49 248 316 Module I : Basic Concepts BASIC CONCEPTS ASSESSMENT YEAR "Assessment year" means the period starting from April 1 and ending on March 31 of the next year. Income of previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act. PREVIOUS YEAR Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year. Previous year is the financial year immediately preceding the assessment year. All assessees are required to follow financial year (ie, April 1 to March 31) as the previous year. This uniform previous year has to be followed for all sources of income. PREVIOUS YEAR IN THE CASE OF NEWLY SET-UP BUSINESS/PROFESSION In the case of a newly set-up business/profession or in the case of a new source of income, the previous year is determined as follows . The first previous year commences on the date of setting up of the business/profession (or, as the case may be, the date on which the source of income newly comes into existence) and ends on the immediately following March 31. Thus, in the case of a newly set-up business/profession or new source of income, the first previous year is a period of 12 months or less than 12 months. It can never exceed 12 months. . The second and subsequent previous years are always financial years. The second and subsequent previous years are always of 12 months each (ie, April to March). CONNECTION BETWEEN PREVIOUS YEAR AND ASSESSMENT YEAR Rule - Income of a previous year is taxable in the immediately following assessment year. Exception - In the following cases income of previous year is taxable in the previous year itself a. income of non-resident from shipping; b. income of persons leaving India either permanently or for a long period of time; c. income of bodies formed for short duration; d. income of a person trying to alienate his assets with a view to avoiding payment of tax; and e. income of a discontinued business. In these cases, income of a previous year may be taxed as the income of the assessment year immediately preceding the normal assessment year. PERSON The term .person. includes: a. an individual b. a Hindu undivided family; c. a company; d. a firm; e. an association of persons or a body of individuals, whether incorporated or not. f. a local authority; and g. every artificial juridical person not falling within any of the preceding categories. These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive. ASSESSEE "Assessee" means a person by whom income-tax or any other sum of money is payable Under the Act. It includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss or the amount of refund due to him. It also includes a person who is assessable in respect of income or loss of another person or who is deemed to be an assessee, or an assessee in default under any provision of the Act. INCOME As generally understood- Income is a periodical monetary return with some sort of regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth, which comes to a person during a fixed period of time. Extended meaning given under section 2(24) - Under section 2(24), the term "income" specifically includes the following: 1. Profits and gains 2. Dividend 3. Voluntary contributions received by a trust 4. Perquisites in the hands of employee 5. Any special allowance or benefit 6. City compensatory allowance/dearness allowance 7. Any benefit or perquisite to a director 8. Any benefit or perquisite to a representative assessee 9. Any sum chargeable under sections 28, 41 and 59 10. Capital gains 11. Insurance profit 12. Banking income of a co-operative society 13. Winnings from lottery 14. Employees' contribution towards provident fund 15. Amount received under keyman insurance policy 16. Amount exceeding Rs. 50,000 by way of gift received by an individual or a Hindu undivided family. GROSS TOTAL INCOME (GTI) As per section 14, income of a person is computed under the following five heads: 1. Salaries 2. Income from house property. 3. Profits and gains of business or profession. 4. Capital gains. 5. Income from other sources. The aggregate income under these heads is termed as "gross total income". RESIDENTIAL STATUS ROUNDING OFF The taxable income and tax liability shall be rounded-off to the nearest multiple of ten rupees. EXEMPETION VS.DEDUCTION If an income is exempt from tax, it is not included in the computation of income. Exemption can never exceed the amount of income. Deduction is generally given from income chargeable to tax .Deduction can be less than or equal to or more than amount of income. If amount deductible is more than the amount of income, the resulting amount will be taken as loss. CAPITAL RECEIPTS VS. REVENUE RECIEPTS Receipts are of two types - Capital receipts and revenue receipts. Capital receipts are exempt from tax unless they are expressly taxable. For instance, capital gains are taxable under section 45 even if they are capital receipts. On the other hand, revenue receipts are taxable, unless they are expressly exempt from tax. For instance, income exempt under section 10. METHOD OF ACCOUNTING Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" is to be computed in accordance with the method of accounting regularly employed by the assessee. In other cases, method of maintaining books of account is irrelevant. TYPES OF ACCOUNTING METHODS Mainly there are two types of accounting methods - Mercantile system and cash system. Mercantile system- Under mercantile system, income and expenditure are recorded at the time occurrence during the previous year. Cash system - Under cash system of accounting, revenue and expenses are recorded only when received or paid. TAX RATES Tax rates (including surcharge, education cess and secondary and higher education cess) are given in Appendix 1. RESIDENTIAL STATUS TYPES For different tax payers residential status is as follows- Individuals/Hindu undivided family- o Resident in India Ordinarily resident Not-ordinarily resident o Non-resident in India Others o Resident in India o Non- resident in India SIGNIFICANCE OF RESIDENTIAL STATUS In the case of non resident, Indian income is taxable but foreign is not chargeable to tax.In the case of resident but not ordinarily resident, Indian income is taxable but foreign income is taxable only in 2 cases. In the case of resident (or resident and ordinarily resident) Indian income as well as foreign income is chargeable to tax. RESIDENTIAL STATUS OF AN INDIVIUAL The tables given below summarize the rule of residence for the assessment year 2009-10 : Resident and ordinarily Resident (1) Resident but not ordinarily Resident (2) Non- resident (3) Must satisfy at least one of the basic conditions and both of the additional conditions Must satisfy at least one of the basic conditions and one or none of the additional conditions Must satisfy none of the basic conditions BASIC CONDITIONS AT A GLANCE In the case of an Indian citizen who leaves India during the previous year for the purpose of employment (or as a member of the crew of an Indian ship ) (1) In the case of an Indian citizen or a person of Indian origin ( who is abroad ) who comes on a visit to India during the previous year (2) In the case of an individual [ other than that mentioned in columns (1) and (2)] (3) a. Presence of at least 182 days in India during the a. Presence of at least 182 days in India during the a. Presence of at least 182 days in India during the previous year 2008-09 previous year 2008-09 previous year 2008-09 b. Non- functional b. Non - functional b. Presence of at least 60 days in India during the previous year 2008-09 and 365 days during 4 years immediately preceding the relevant previous year (i.e., during April 1,2004 and March 31,2008). ADDITIONAL CONDITIONS AT AGLANCE Taxpayers other than an individual Control and management of the affairs of the taxpayers are Wholly in Wholly outside Partly in India and India India partly outside India Hindu undivided family Resident Non-resident Resident Firm Resident Non-resident Resident Association of persons Resident Non-resident Resident Indian company Resident Resident Resident Non-Indian company Resident Non-resident Non-resident Any other person except an individual Resident Non-resident Resident i. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [ or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., 1998-99 to 2007-08)]. ii. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e., during April 1, 2001 and March 31, 2008). Notes: 1. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident .A resident Hindu undivided family is ordinarily resident in India if karta or manager of the family (including successive kartas ) satisfies the following two conditions as laid down by section 6(6)(b) : (a) he has been resident in India in at least 2 out of 1 0 previous years immediately preceding the relevant previous year; and (b) he has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year. If karta or manager of resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India. 2. In order to determine the residential status of the aforesaid taxpayers, the residential status of the karta of the family (except as stated in 1 supra), partners of the firm, members of the association, directors of the company, etc., is not relevant. For instance, it is possible that partners of a firm are resident in India but the firm is controlled from a place outside India and, consequently, the firm is a non-resident in India. INDIAN INCOME AND FOREIGN INCOME-WHEN TAXABLE/NOT TAXABLE In order to understand the relation between residential status and tax liability, one must understand the meaning of "Indian income" and "foreign income". Indian income - Any of the following three is an Indian income 1. If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year. 2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year. 3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year. Foreign income - If the following two conditions are satisfied, then such income is "foreign income" 1. Income is not received (or not deemed to be received) in India; and 2. Income does not accrue or arise (or does not deemed to accrue or arise) in India. Indian income - Indian income is always taxable in India irrespective of the residential status of the taxpayer. Foreign income - Foreign income is taxable in the hands of resident (in case of a firm, an association of persons, a joint stock company and every other person) or resident and ordinarily resident (in case of an individual and a Hindu undivided family) in India. Foreign income is not taxable in the hands of non-resident in India. In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable only if it is (a) business income and business is controlled wholly or partly from India, or (b) professional come from a profession which is set up in India. In any other case, foreign income is not taxable the hands of resident but not ordinarily resident taxpayers. RECEIPT OF INCOME IN INDIA Income is received in India; it is always chargeable to tax. The "receipt" of income refers to the first occasion when the recipient gets the money under his control. Once an amount is received income, any remittance or transmission of the amount to another place does not result in .receipt" at the other place. INCOME DEEMED TO BE RECEIVED IN INDIA The Act enumerates the following as income deemed to be received in India: . Interest credited to recognized provident fund account of an employee in excess of 9.5 per cent. . Excess contribution of employer in the case of recognized provident fund (i.e., the amount contributed in excess of 12 per cent of salary). . Transfer balance. . Contribution by the Central Government or any other employer to the account of an employee under a notified pension scheme referred to in section 80CCD. . Tax deducted at source. . Deemed profit under section 41. ACCRUAL OF INCOME Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The words "accrue" and "arise" are used in contradistinction to the word "receive". Income is said to be received when it reaches the assessee when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue or arise outside India. The cases enumerated by section 9 are given below . Income from business connection in India. . Income from any property, asset or source of income in India . Capital gain on transfer of a capital asset situated in India. . Income from salary if service is rendered in India . Income from salary (not being perquisite/allowance) if service is rendered outside India (provided the employer is Government of India and the employee is a citizen of India) . Dividend paid by the Indian company (this point does not have much practical utility. Normally in the hands of the shareholders, dividend from an Indian company is exempt from tax, as an Indian company has to pay dividend tax). . Interest, royalty or technical fees received from the Government of India. . Interest, royalty or technical fees received from a resident (except when the payment pertains to business carried on by the payer outside India). RESIDENTIAL STATUS AND TAX INCIDENCE RESIDENTIAL STATUS OF A COMPANY [SEC.6 (3)] An Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated as non resident if during the previous year , control and management of its affairs is either wholly or partly situated out of India. The table given below highlights the same proposition- Place of control Resident or non-resident An Indian company A company other than an Indian company Control and management of the affairs of a company [for meaning see para 28.1] is- . Wholly in India . Wholly outside India . Partly in India or partly outside India Resident Resident Resident Resident Non-resident Non-resident Note- A Company can never be .ordinarily. or .not-ordinarily. resident in India. Control and management 28.1 In determining residential status of a company, the following broad propositions should be kept in view : . Meaning of .control and management. The term .control and management. refers to .head and brain. which directs affairs of policy, finance, disposal of profits and vital things concerning the management of a company. . The place of incorporation of the company may not be the place where control lies- Control is not necessarily situated in the country in which the company is registered. . A company may be resident in more than one country- Under the tax laws a company may have more than one residence. The mere fact that a company is also resident in a foreign country , would not necessarily displace its residence in India. . Central control and management lies where meetings of board of directors are held- Usually control and management of a companys affairs is situated at the place where meetings of board of directors are held. Moreover, control and management referred to in section 6 is central control and management and not the carrying on of day to day business of servants, employees or agents. . Place of doing business may be different from place of control of business- The whole of business may be done outside India and yet the control and management of that business may be wholly within India. In order to determine the residence of a company, the real test to be applied is, where does the controlling and directing power function, or where is its head and brain. . .Control. is different from share holding control- .Control. does not mean share holding control. In the case of a subsidiary company managed by its local board of directors, it is difficult to establish that control and management of its affairs vests at the place where the parent company resides. . A non-Indian companys de facto control must be in India for residential India-In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such companys de facto is in India. Although central management and control has sometimes been stated in the form .head, seat and directing power. the question depends on the facts of the management and not on the physical situation of the thing that is managed. A company is managed by the board of directors and if the meetings of the board of directors are held within India, it may be said that the control and management is situated here. . Partial control from outside India -=control and management does not mean carrying o a day to day business. Even a partial control outside India is sufficient to hold a foreign company as a non-resident. CASE STUDY XYZ ltd. is registered in Srilanka and is a subsidiary of an Indian company. The business of the company is stevedoring in Srilanka. The meetings of the board of directors and general meeting of share holders are held in Bombay. The affairs of the assessee-company are looked after by two mangers under two power of attorney which confer upon them the widest power and authority. The directors retain complete control over the matter delegated to the managers and from time to time give direction to the mangers as to how things should be done and managed. Discuss whether under these circumstances the control and management of XYZ ltd is situated wholly in India and the company is resident in India within the meaning of section 6. . A company registered outside India is treated as resident in India only if during the previous year. Control and management of its affairs is situated wholly in India. In construing the expression .control and management. it is necessary to bear in mind the distinction between doing business and control and management of business. Business and whole of it may be done outside India and yet the control and management of that business may be wholly situated within India. In the given problem the business of the assessee company is done in Srilanka. However, it is entirely irrelevant where the business is done and where the income has been earned. What is relevant and material is from which place has that business control and management? .Control and management. referred to in section 6 is capital control and management. The control and the management contemplated by this section is not the carrying on of day-to-day business by servants, employs or agents. The real test to be applied is where is the controlling and directing power, or rather, where does the controlling and directing power function, or, to put in a different language there is always a seat of powers or the head and brain and what has got to be ascertained is: where is this seat of power or the head and brain? A business organization has got to work through servants and agents, but it is not the servants and agents that constitute the seat of power or the controlling and directing power. It is that authority to which the servant employs and agents are subject, it is that authority, which controls and manages them which is the central authority, and it is at the place where the central authority concerns, the control and management is situated. In the given problem, it is entirely unacceptable that the control and management is situated at Srilanka where its affairs are carried on and they are carried on by people living there appointed by the company with large power of management. To mangers under two powers of attorney look after all the affairs of the assessee- company in Srilanka. However, it is equally clear from the given facts that the central controls and management has been kept in Bombay and has been exercised by the directors in Bombay. Therefore control and management of the assessee company is situated wholly in India- Narottam and Pereira ltd v. CIT [1953] 23 ITR 454(bom.) INCIDENCE OF TAX [SEC.5] Pg.66-67 Indian income and foreign income 29. Under the act, incidence of tax on a tax pair depends on his residential status and also on the placed and time of accrual or receipt of income. 29.1 In order to understand the relationship between residential status and tax liability, one must understand the meaning of .Indian income. and .foreign income.. . .Indian income.- any of the following three is Indian income- 1. If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year. 2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year. 3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise in India during the previous year. . Foreign income- if the following two conditions are satisfied, then such income is .foreign income. a. Income is not received (or not deemed to be received) in India ; and b. Income does not accrue (or arise or does not deemed to accrue or arise) in India Incidence of tax 29.2 Tax incidence is as follows- Resident in India Non-resident in India Indian income Foreign income Taxable in India Taxable in India Taxable in India Not taxable in India CONCLUSIONS 29.3 The following broad conclusions can be drawn- 1. Indian Income- Indian income is always taxable in India irrespective of the residential status of the tax payer. 2. Foreign Income Foreign income is taxable in hands of resident in India. Foreign income is not taxable in hands of non-resident in India. RECEIPT OF INCOME 30. Income received in India is taxable in all cases irrespective of residential status of the assessee. The following points are worth mentioning in this respect: RECEIPT VS. REMITTANCE 30.1 the receipt of income refers to the first occasion when the receipt gets the money under his control .Once an amount is received as income , any remittance or transmission of the amount to another place does not result in .receipt. at other place-Keshav Mills Ltd. v.CIT[1953]23ITR 230(SC).for instance ,an assessee, after receiving an income outside India, cannot be said to have received the same again when he brings or remits the same to India. The position will remain the same if income is received outside India by an agent of the assessee (may be a bank or some other person) who later on remits the same to India. Income after the first receipt merely moves as a remittance of money. The same income cannot be received by the person twice, once outside India and once within India. ACCTUAL VS. DEEMED RECEIPT 30.2 It is not necessary that income should be actually received in India in order to attract tax liability. An income deemed to be received in India, in the previous year ,is also included in the taxable income of the assessee. The act enumerates that the following as income deemed to be received in India: . Annual accretion (i.e., interest in excess of 9.5 per cent )to the credit balance of an employee in the case of recognised provident fund. . Excess contribution of employer (i.e. in excess of 12 per cent) in the case of recognised provident fund. . Contribution made by the central government or any other employer in the previous year, to the account of an employee under a notified pension scheme referred to in section 80CCD. . Transfer balance. . Tax deducted at source. . Deemed profit under section 41. CASH V. KIND 30.3 It is not necessary that income should be received in cash. Income may be received in cash or in kind. For instance, value of a free residential house provided to an employee i taxable as salary in the hands of the employees though the income tax is not received in cash. RECEIPT V. ACCRUAL Pg.67-68 30.4 Receipt is not the sole test of chargeability to tax. If an income is not taxable on receipt basis it may be taxable on accrual basis. ACCRUAL OF INCOME 31. Income accruing in India is chargeable to tax in all cases irrespective of residential status of the assessee. The words .accrues. and arises are used in contradistinction to the word .receive.. Income is said to be received when it reaches the assessee : when the right to receive the income become vested in the assessee, it is said to accrue or arise. INCOME THAT IS EXEMPT FROM TAX In the following cases income is exempt from tax, as it does not form part of total income.The burden of proving that a particular item of income falls within this section is on the assessee. Agriculture income Payments received from family income by a member of a HUF Share of profit from a firm Interest received by a non-resident from prescribed securities Interest received by a person who is resident outside India on amounts credited in the "Non-resident (External) Account" " Leave travel concession provided by an employer to his Indian citizen employee. Remuneration received by foreign diplomats of all categories Salary received by a foreign citizen as an employee of a foreign enterprise provided his stay in India does not exceed 90 days Salary received by a non-resident foreign citizen as a member of ship's crew provided his does not total stay in India does not exceed 90 days. Remuneration received by an employee, being a foreign national, of a foreign Government deputed in India for training in a Government establishment or public sector undertaking. Tax paid on behalf of foreign companies Tax paid by Government or an Indian concern in the case of a non-resident/foreign company Income arising to notified foreign companies from services provided in or outside. India in project connected with the security of India. Foreign allowance granted by the Government of India to its employees posted abroad Remuneration received from a foreign Government by an individual who is in India in connection with any sponsored co-operative technical assistance programme Income of the family members of such employee Remuneration/fees received by non-resident consultants and their foreign 10(1) 10(2) 10(2A) 10(4) 10(4) 10(5) 10(6) 10(6)(vi) 10(6)(viii) 10(6)(xi) 10(6A) 10(6B) 10(6C) 10(6C) 10(7) 10(8) 10(9) employees Death-cum-retirement gratuity Commuted value of pension and any payment received by way of commutation of pension by an individual out of annuity plan of LIC or any other insurer from a fund set up by that corporation or insurer. Leave salary Retrenchment compensation Compensation received by victims of Bhopal gas leak disaster Compensation from the Central Government or a State Government or a local Authority received by an individual or is legal hire on account of any disaster. Compensation received from a public sector company at the time of voluntary retirement or separation Tax on perquisite paid by employer Any sum (including bonus) on life insurance policy (not being a Keyman insurance policy) Any amount from provident fund paid to retiring employee Amount from an approved superannuation fund to legal heirs of the employee House rent allowance subject to certain limits Special allowance granted to an employee Interest from certain exempted securities Payment made by an Indian company, engaged in the business of operation of an aircraft, to acquire an aircraft on lease from a foreign Government or foreign enterprise if a few condition are satisfied. Scholarship granted to meet the cost of education Daily allowance of a Member of Parliament or State Legislature (entire amount is exempt), and any other allowance subject to 10(8A)(8B)9 10(10) 10(10A) 10(10AA) 10(10B) 10(10BB) 10(10BC) 10(10C) 10(10CC) 10(D) 10(11) 10(13) 10(13A) 10(14) 10(15) 10(15A) 10(16) certain conditions. Rewards given by the Central or State Government for literary, scientific or artistic work or attainment or for service for alleviating the distress of the poor, the weak and the ailing, or for proficiency in sports and games or gallantry awards approved by the Government. Pension and family pension of gallantry award winners Family pension received by family members of armed forces Notional property income of any one palace occupied by a former ruler Income of local authorities Any income of housing boards constituted in India for planning, development or improvement of cities, towns or villages Any income of an approved scientific research association Income of specified non-agencies (Ie., PTI and UNI) for the assessment years 1994-95 to 2008-09 . Any income (other than interest on securities, income from property, income received for rendering any specific services and income by way of interest or dividends) of approved professional bodies. Any income received by any person on behalf of any Regimental Fund or non-public fund established by the armed forces of the Union for the welfare of the past and present members of such forces or their dependents. Income of funds established for the welfare of employees Any income of the pension fund set up by LIC or any other insurer approved by the Controller of Insurance or Insurance Regulatory and Development Authority. Any income (other than business income) of a trust or a society approved by Khadi and Village Industries Commission Income of an authority whether known as Khadi and Village Industries Board or by any other name for the development of Khadi and Village Industries. 10(17) 10(17A) 10(18) 10(19) 10(19A) 10(20) 10(20A) 10(21) 10(22B) 10(23A) 10(23AA) 10(23AAA) 10(23AAB) 10(23B) 10(23BB) Income arising to any body or authority established, constituted or appointed under any enactment for the administration of public, religious or charitable trusts or endowments or societies for religious or charitable purposes. Income of the European Economic Community derived in India by way of interest, dividends or capital gains in certain cases under the European Community International Institutional Partners Scheme, 1993. Any income of SAARC Fund for Regional Projects Any income of Secretariat of Asian Organisation of Supreme Audit Institutions Income of Insurance Regulatory Authority Income of North Eastern Dev. Fin. Corp. to the extent of 60 per cent for assessment year 2007-08. Income of the Central Electricity Regulatory Commission (applicable from the assessment year 2008-09) Income received by any person on behalf of specified national funds, approved public charitable institutions, educational institute and hospital. Income of a Mutual Fund set up by a public sector bank or public financial institution. Income of investor protection fund Income of Credit Guarantee Funds Trust for Small Industries Income of Investor Protection Fund by way of contributions from commodity exchange and the members thereof (applicable from the assessment year 2008-09). Income by way of dividend or long-term capital gain of venture capital fund/undertaking. Income of venture capital fund/venture capital company Income by way of interest on securities, property income and income from other sources of a registered trade union or an association of registered trade unions 10(23BBA) 10(23BBB) 10(23BBC) 10(23BBD) 10(23BBE) 10(23BBF) 10(23BBG) 10(23C) 10(23D) 10(23EA) 10(23EB) 10(23EC) 10(23FA) 10(23FB) 10(24) Any income received by a person on behalf of statutory provident fund, recognised provident fund, approved superannuation fund, approved gratuity fund and approved coal-mines provident fund Income of Employees' State Insurance Fund Income of a member of a scheduled tribe, residing in Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram and Ladakh from any source arising by reason of his employment therein and income by way of dividend and interest on securities. Income of a Sikkimese individual which accrues or arise to him/her from any source in the State of Sikkim or income from dividend/interest on securities from anywhere in the world (exemption not available to a Sikkimese woman who, on or after April 1, 2008, marries a non-Sikkimese individual). Income of an agricultural produce market committee or board constituted for the purpose of regulating the marketing of agricultural produce (applicable from the assessment year 2009-10). Any income of a statutory corporation or of a body/institution, financed by the Government formed for promoting the interest of scheduled castes/tribes. Income of National Minorities Development and Finance Corporation Income of ex-serviceman corporations. Income of a co-operative society formed for promoting interest of members of scheduled castes/tribes. Income of certain Commodity Boards/Authorities Subsidy from the Tea Board for replanting or replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation of tea in India. Subsidy received by planters Income of a minor child up to Rs. 1,500 in respect of each minor child whose income is includible under section 64(1 A). Capital gains on transfer of US 64 Dividend on or after April 1, 2003 from domestic companies 10(25) 10(25A) 10(26) 10(26AAA) 10(26AAB) 10(26B) 10(26BB) 10(26BBB) 10(27) 10(29A) 10(30) 10(31) 10(32) 10(33) 10(34) Interest on units of a Mutual Fund on or after April 1, 2003 Capital gains on transfer of listed equity shares Capital gains on compensation received on compulsory acquisition of urban agricultural land Long-term capital gains on transfer of securities not chargeable to tax in cases covered by transaction tax Income of an international sporting event Grant received by subsidiary company from holding company Capital gain in the above case Income of notified non-profit body/authority Any amount received by an individual as a loan (either in lump sum or installment) in a transaction of reverse mortgage. Any income received by any person for, or on behalf of the New Pension System Trust Voluntary contribution received by an electoral trust if a few conditions are satisfied. 10(35) 10(36) 10(37) 10(38) 10(39) 10(40) 10(41) 10(42) 10(43) 10(44) 13B NEW UNDERTAKINGS IN SEZ (SECTION 10A) CONDITIONS It must begin manufacture or production in free trade zone or electronic hardware technology park or software technology park or a special economic zone within specified time. . The industrial undertaking should not have been formed by the splitting up or reconstruction of a business already in existence. . The industrial undertaking should not have been formed by the transfer of a new business of machinery or plant previously used for any purpose [there are two exceptions like 20 per cent old machinery and imported old machinery]. 10, 11 PROFITS AND GAINS OF BUSINESS AND PROFESSION Income from a business or profession is calculated on the basis of method of accounting regularly employed by the assessed. . If the assesses has adopted mercantile system of accounting, then income is calculated on accrual basis as well as admissible expenses are deducted on accrual basis. . If the assesses has adopted cash system of accounting income is calculated on receipt basis. Admissible expenses will be deducted only on payment basis. Section 30 to 37 covers expenses, which are expressly allowed as deduction while computing business income. Sections 40, 40A and 43B cover expenses which are not deductible. Deductions is allowed in respect of rent, rates, taxes, land revenue, repairs and insurance for premises used for the purpose of business or profession is deductible. Rent of building is not deductible is building is owned by the assesses. Capital expenditure on repair is not deductive. The expenditure incurred on current repairs (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction. 1. Asset must be owned by the assesses. 2. It must be used for the purpose of business or profession. 3. It should be used during the relevant previous year. 4. Depreciation is available on tangible as well a intangible assets. If the above conditions are satisfied, depreciation is available whether(or not) the assessee has claimed the deduction for depreciation in computing his total income. Written down value of the block of assets on the last day of the previous year X rate of depreciation. . Block of assets- A group of assets falling within a class of assets comprising a. Tangible assets, being buildings, machinery, plant of furniture; b. Intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed. . Written down value of the block of assets Written down value for the assessment year2009-10 will be determined as under: 1. Find out the depreciated value of the block April 1, 2008. 2. To this value add .actual cost. of the asset (falling in the block) acquired during the previous year 2008-09. 3. From the resultant figure, deduct money received/receivable(together with scrap value ) in respect of that asset(falling within the block of assets ) which is sold. Discarded, demolished or destroyed during previous year 2008-09. The resulting figure(if positive) is written down value of the block of assets on the March 31, 2009. . Rate of depreciation A taxpayer may have 13 different blocks of assets for the purpose of computing depreciation. Nature of asset Rate 1. Building- Residential buildings 2. Buildings Office, Factory, godowns of buildings which are not mainly used for residential purpose. 3. Buildings Buildings for installing machinery and plant forming part of water supply project or water treatment system; and temporary erections such as wooden structures. 4. Furniture Any furniture/fittings including electrical fittings 5. Plant and machinery Any plant or machinery [not covered by block 6,7,8,9,10,11 or 12 ]motor cars (other than those used in a business of running them on hire) 6. Plant and machinery Ocean-going ships, vessels ordinarily operating on inland waters including speed boats. 7. Plant and machinery Buses, lorries and taxies used in the business of running them on hire. 5% 10% 100% 10% 15% 20% 30% 8. Plant and machinery Aeroplanes, commercial vehical(certain specified) and life saving medical equipment 9. Plant and machinery containers made of glass or plastic used as refills new commercial vehicle (certain specified) 10. Plant and machinery computers including computer software and new commercial vehicle (certain specified) 11. Plant and machinery Energy saving devices; renewal energy devices; rollers in flour milk, sugar works and steel industry 12. Plant and machinery Air pollution control equipments; water pollution control equipments; solid waste control equipments, recycling and resource recovery systems; etc. 13. Intangible assets (acquired after March 31, 1998) Know-how, patents, copyrights, trade marks, licenses, franchises and any other business or commercial rights of similar nature. 40% 50% 60% 80% 100% 25% . Exception One No depreciation is admissible where written down value has been reduced to zero though the block of assets does not cease to exist on the last day of the previous year. . Exception two If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assts is empty on the last day of the previous year, no depreciation is admissible in such case. . Exception three If any asset falling within a block of assets is acquired by the assessee during the previous year and it is put to use for the purposes of business of profession for a period of less than 180 days in that previous year, the deduction in respect of such asset shall be restricted to 50 per cent of the amount calculated at the percentage prescribed in the case of block of asset comprising such asset. . Exception four In the case of transfer of depreciable assets because of succession, amalgamation business reorganization of demerger in the previous year, depreciation is first calculated as if there is no transfer of depreciable assets and the quantum of depreciation so calculated shall be apportioned between the predecessor and successor in the ratio of number of days for which the assets are used by them during the previous year. Additional : To claim additional depreciation the following conditions should be satisfied 1. The assessee must be engaged in manufacture/production of any article or thing. 2. New plant and machinery should be acquired and installed after March 31, 2005. 3. It Should be an eligible plant and machinery. Additional depreciation is not available in the case of ships, aircrafts, second hand assets, assets installed in office/residence / guest house, office appliances, road transport vehicles and those assets which are qualified by 100 percent deduction in the first year itself under any provision of the Act. Amount of additional deprecation allowance In case the above three conditions are satisfied, additional depreciation shall be available @ 20 percent of the actual cost of new plant and machinery. if, however the asset is put to use for less than 180 days in the year in which it is acquired, the rate of additional depreciations will be 10 percent. 1. Depreciation allowance of the previous year is first deductible from the income chargeable under the head .profit and gains of business or profession.. 2. If depreciation allowance is not fully deductible under the head .Profits and gains of business of profession. because of absence or inadequacy of profits, it is deductible from income chargeable under other heads of income[except income under the head .Salaries.] for the same assessment year(s) by the same assessee. No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation. 1. Revenue expenditure on scientific research is deductible in the year in which the expenditure is incurred, if such research relates to the business. Revenue expenses(other than expenditure on providing perquisites to employess) incurred before the commencement of business (But within three years immediately before commencement of business) on scientific research related to the business are deductible (to the extent approved by prescribed authority ) in the previous year in which the business is commenced. 2. Capital expenditure(not being cost of land) on scientific research related to the business of taxpayer is fully deductible in the year in which the expenditure is incurred. In such case, depreciation is not deductible. 3. Contribution to approved scientific research association, approved university/college/other institutions is deductible at the rate of 125 percent of actual contribution. 4. Contribution to an approved national lab, university, IIT specified person is deductible at the rate of 125 percent of the contribution if such contribution is given for an approved research programme. 5. Expenditure on approved in-house research and development facilities of a company is qualified for deduction at the rate of 150 percent of the expenditure, if a few conditions are satisfied. One of the conditions is that the company should be engaged in the manufacture or production of any article or thing except those specified in the Eleventh Schedule. Moreover, no deduction is available in the case of cost of land and building. cost of building can be claimed as deduction under point 2 given above. The following conditions should be satisfied 1. The expenditure is capital in nature. 2. It is incurred for acquiring any right to operate telecommunication services. 3. the expenditure is incurred either before the commencement of business or thereafter at any time during any previous year. 4. The payment for the above has been actually made to obtain licence. . Amount of deduction The payment will be allowed as deduction in equal installments over the period starting from the year in which such payment has been made and ending in the year in which the licence comes to an end. It may be noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the accounting regularly employed by the assessee.Where deduction is claimed and allowed under section 35ABB, no deduction will be available in respect of the same expenditure under section 32. The following conditions should be satisfied 1. The taxpayer should be in the business of setting up and operating a cold chain facility or setting up and operating a warehousing facility for storage of agricultural produce. Alternatively an Indian company should be engaged in the approved business of laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. 2. The aforesaid activities should commence on or after April 1, 2009. However, this date is April 1, 2007 in the case of lying and operating a cross- country natural gas pipeline network for distribution or storage. 3. The aforesaid business should be a new business (i.e., not set up by splitting up, o reconstruction of. of an existing business ). If the aforesaid, 100 percent of the capital expenditure is deductible in the year in which the expenditure is incurred. However, expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under section 35AD. Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the pupose of any specified business, shall be allowed as deduction during the previous year in which the assessee commences the operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date of commencement of operation. If operation of the business of laying and operating a cross-country natural gas distribution network is commenced during April 1, 2007 and March 31, 2009, the capital expenditure(not being for acquiring land or good will or financial instrument ) incurred before April 1, 2009 (to the extent not allowed as deduction under any section earlier) will be allowed as additional deduction under section 35AD for the assessment year 2010-11. Certain preliminary expenses are deductible under section 35D. Deduction under section 35D is available in case of an Indian company or a resident non- corporate assessee. One-fifth of the qualifying expenditure is allowable as deduction in each of the five successive years beginning with the year in which the business commences, or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation. The expenditure is allowed as deduction in five successive years in five equal installments. The first instalment is deductible in the previous year in which amalgamation or demerger takes place. No deduction shall be allowed in respect of the above expenditure under any other provision of the Act. One fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year. And the balance shall be deducted in equal instalment for each of the four immediately succeeding previous years. This rule is applicable even if the scheme of voluntary retirement has been framed in accordance with guidelines prescribed under section 10(10C). Premium paid in respect of insurance against risk of damage or destruction of stock or stores, used for the purposes of business or profession, is allowable as deduction. Premia paid by employer(by any mode other than case ) for insurance on the health of his emoployees in accordance with the scheme framed by the General Insurance Corporation and approved by the Central Government or any other insurer and approved by IRDA, is deductible. Allowable as deduction if not otherwise payable as profit or dividend. Deduction is available on payment basis. Where, however, payment is made after the end of the previous year but on or before the due date of furnishing return of income, deduction is available on accrual basis. Allowable as deduction subject to fulfillment of three conditions: 1. The assess must have borrowed money. 2. The money so borrowed must have been used for the purpose of business. 3. Interest is paid or payable on such borrowing. Discount is the difference between amount received and the amount payable on redemption/maturity by the issuing company. It is allowed as deduction on pro rata basis having regard to the period of life of such bond. .Period of life of the bond. means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond. Allowable as deduction subject to the limits laid down for the purpose of recognized provident fund (RPF) or approving superannuation fund. Employers contribution towards an approved gratuity fund created by him exclusively for the benefit of his employees under an irrevocable trust is allowable as deduction. Any sum received by the taxpayer as contribution from his employees towards provident fund or any welfare fund of such employees shall be allowed as deduction only if such sum in credited by the taxpayer to the employees account in the relevant fund on or before the due date. Bad debt written off in the books of account is deductible. However, the following conditions should be satisfied 1. Debt must be incidental to the business or profession of the assessee. 2. Debt must have been taken into account in computing assessable income. Adjustment at the time of recovery where debt ultimately recovered is less that the difference between the amount of debt and bad debt allowed as deduction, such deficiency will be deductible in the previous year in which the ultimate recovery is made provided such deficiencies is written off in the books of account. Conversely, where the debt ultimately recovered is more that the difference between the debt and the amount of bad deducted, such excess amount will be chargeable to tax in the year of recovery. Amount deductible in respect of provision for bad and doubtful debts In the case of a scheduled bank [other than a foreign bank]and a non-scheduled bank In case of public financial institution, state financial corporation, State industrial investment corporation In the case of a foreign bank . Total income (Computed before this deduction and amount deductible under sections 80C to 80U) 7.5 percent of such income 5 percent of such income 5 percent of such income . Aggregate average advances made by rural 10 percent of such advances ______ _______ Revenue expenditure is fully allowable as deduction. If, however, such expenditure is of capital nature, One-fifth of such expenditure is allowable as deduction for the previous year in which it was incurred and the balance is deductible in equal installments in the next four years. Non-corporate assessee cannot claim this deduction[deduction may be claimed by a non-corporate assess under section 32 and 37(1) if the relevant conditions are satisfied]. It is deductible Section 37(1) is a residuary section. To avail deduction, the following conditions should be satisfied 1. The expenditure should not be of the nature described under sections 30 to 36. 2. It should not be in the nature of capital expenditure of the assessee. 3. It should not be personal expenditure of the assessee. 4. It should have been incurred in the previous year. 5. It should be in respect of business carried on by the assessee. 6. It should have been expended wholly and exclusively for the purpose of such business. 7. It should not have been incurred for any purpose, which is an offence or is prohibited by any law. If the following three conditions are satisfied, the assessee (i.e. the payer) is supposed to deduct tax at source (TDS) under section 195 1. The amount paid is interest, royalty, fees for technical services or other sum. 2. The aforesaid amount is chargeable to tax under the Act in the hands of the recipient. 3. The aforesaid amount is paid/payable (a)outside India to any person; or (b) in India to a non-resident. If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct tax at source and deposit the same with the Government within the time-limit specified by section 200(1) [generally this time-limit is seven days from the end of the month in which tax is deducted . In some cases, time limits is different]. If tax is deductible but it is not deducted, the expenditure is not allowable as deduction. If tax is deducted and it is deposited with the Government in the same financial year, this disallowance is not applicable. If tax is deducted but it is deposited in the next year after the due date under section 200(1), then it will be disallowed for the current year. The amount which is disallowed during the current year, will be payment of interest, commission/brokerage, rent, fees for technical/ professional services, royalty to a resident contractors/sub-contractors. If tax is deductible but not actually deducted, the payment will be disallowed. If tax is deductible (and it is so deducted) in the month of march but it is not deposited on or before the due date of submission of return of income, it will be disallowed. If tax is deductible (and it is so deducted) before March 1 of the financial year but it is not deposited on or before the end of the financial year, it will be disallowed. The amount which is disallowed during the current year, will be allowed as deduction in the year in which tax is deposited. These are not deductible. Any fine, interest, penalty, etc., in respect of these taxes are also not deductible. It is not deductible if tax is not deducted at source and it is not paid to the Government. The employer provides non-monetary perquisite to employees. Tax on non-monerary perquisites is paid by the employer. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10(10CC). while calculating income of the employer, the tax paid by the employer on non-monetary perquisites is not deductible. Salary and interest paid/payable by a firm to its partners are deductible only if conditions of sections 184 and 40(b)are satisfied. One of the conditions is that these payments should be permitted by the partnership deed. Rate of interest cannot be more than 12 percent (excess interest will be disallowed in the hands of firm). Salary and remuneration to partners cannot exceed a specified percentage of book profit if the aggregate payment exceeds Rs. 1,50,000(excess payment if any shall be disallowed). Maximum remuneration to partners which is deductible is as follows On the first Rs. 3 lakh of book profit (or in the case of loss): Rs. 1,50,000 or 90 percent of book profit whichever is more. On the balance of book profit: 60 percent of book profit. Not deductible. Any expenditure incurred by an assessee in respect of which payment has been made to specified persons(e.g., relatives, inter-connected concerns) is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services or facilities, etc. If the following conditions are satisfied, payment is not deductible 1. The assessee incurs any expenditure, which is otherwise deductible under the other provisions of the Act for computing business/profession income(e.g., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.). The amount of expenditure exceeds Rs. 20,000. 2. A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds Rs. 20,000. 3. The payment mentioned above is made otherwise than by an account payee cheque or an account payee demand draft (it is made in case or by a bearer cheque or by a crossed cheque or by a crossed demand draft). If all the above conditions are satisfied , 100 percent of such payment will be disallowed. However, the limit of Rs. 20,000 has been increased to Rs. 35,000 in the case of payment made for plying hiring or leasing goods carriages. Not deductible. Employers contribution towards non-statutory fund (like unrecognized provident fund) is not deductible. Disallowance under section 43B is applicable only if the taxpayer maintains boos of account on the basis of mercantile system of accounting. The provisions of section 43B are given below General rule certain expenses are deductible on payment basis the following expenses (which are otherwise deductible under the other provisions of the Income-tax Act) are deductible on payment basis a. Any sum payable by way of tax, duty, cess of fee (by whatever name called under any law for the time being in force); b. Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employees; c. Any sum payable as bonus or commission to employees for services rendered; d. Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any loan or borrowing from a public financial institution (i.e., ICICI, IFCI, IDBI,LIC and UTI) or a state financial corporation or a state industrial investment corporation; e. Interest on any loan or advance taken from a scheduled bank including a co-operative bank; and f. Any sum payable by an employer in lieu of leave at the credit of his employee. The above expenses are deductible in the year in which payments are deductible in accrual basis if the payment is actually made on or before the due date of submission of return of income. 1. In any of the earlier year a deduction was allowed to the respect of loss, expenditure(revenue or capital expenditure ) or trading liability incurred by the assessee. 2. During the current previous year, the taxpayer a. Has obtained a refund of such trading liability (it may be in case or any other manner); or b. Has obtained some benefit in respect of such trading liability by way of remission or cessation thereof(.remission or cessation. for this purpose includes unilateral act of the assessee by way of writing-off of such liability in his books of account ). If the above two conditions are satisfied, the amount obtained by such person (or the value of benefit accruing to the taxpayer) shall be deemed to be profits and gains of business or profession and accordingly, chargeable to tax as the income of that previous year. Different taxpayers When they are covered by the provisions of compulsory audit under section 44AB A person carrying on profession If the total sales, turnover or gross receipt in business for the previous year(s) relevant to the assessment year exceed or exceeds Rs. 40lakh. A person carrying on profession If his gross receipts in profession for the previous year(s) relevant to the assessment year exceeds Rs. 10 lakh. A person covered under section 44AD, 44AE, 44AF, 44BB or 44BBB If such person claims that the profits and gains from the business are lower than the profits and gains computed under these sections (irrespective of his turnover). Section 44AD is applicable if the taxpayer is in the business of civil construction or supply of abour for civil construction and the turnover does not exceed Rs.40 lakh. Income is computed an estimated basis at the rate of 8 percent of turnover. The rate of 8 percent is comprehensive [i.e., no further deduction is allowed under any other section except remuneration and interest on partners]. Section 44AE is applicable, if the taxpayer is engaged in the business of plying, hiring an dleasing goods carriages and he/it does not own more than 10 goods carriages at time during the previous year. In such a case, income would be calculated on estimated basis at the rate of Rs. 3,500 (for heavy goods vehicle)/ Rs. 3,150 (for light goods vehicle) for every month (or part of a month) during which the goods carriage is owned by the taxpayer. No further deduction is allowed under by other section except remuneration and interest to partners. The amount of Rs. 3,500 per month/Rs. 3,150 per month will be increased to Rs. 5,000 per month/ Rs. 4,500 per month with efect from the assessment year 2011-12. Scheme for computing profits and gains of retail traders provides for computing income on astimated basis @ 5 percent. Rate of 5 percent is comprehensive [i.e., no further deduction is flowed under any other section except remuneration and interest to partners]. However, from the assessment year 2011-12, this provision would be incorporated in section 44AD and it will be applicable in the case of any business carried on by incorporated in section 44AD and it will be applicable in the case of any business carries on by an individual, Hindu undivided family or a partnership firm (other than limited liability firm). The rate of estimated income will be 8 percent. CAPITAL GAINS Income under the head .Capital gains. is chargeable to tax if the following conditions are satisfied . There is a capital asset. . It is transferred during the previous year. . Capital gain is generated because of transfer. . Capital gain is not exempt from tax. The expression .capital asset. means property of any kind held by an assessee, whether or not connected with his business or profession. However, the following are not capital assets . Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession. . Personal effects. . Agricultural land in a rural area in India. . A few gold bonds and special bearer bonds (this point does not have any practical utility). . Gold Deposit Bonds issued under Gold Deposit Scheme, 1999. Any movable property (including wearing apparel and furniture) held for personal use of the owner or for the use of any member of his family dependent upon him, is not a .Capital asset. for the purpose of income under the head .Capital gains.. However, the following are not .Personal effects.(in other words, the following are .capital assets.) even if these are for personal use jewelry, archaeological collections, paintings, sculptures, or any work of art. They should not be situated in (i) any area within the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more; or (ii) in any areas specified by the Government outside the local limit of a municipality but within 8 kilometers. There are two types of capital assets-shot-term and long-term. A period of holding is more than 6 months, the capital asset is long-term, otherwise it is short-term. However, in the following cases, the capital asset held for more than 12 months is treated as long term capital assets-any share in any company, Government securities, listed debentures, unites of UTI/mutual fund are zero coupon bonds. Capital gains arises on transfer of a capital assets. If the asset transferred is not a capital asset, capital gains will arise. Transfer includes sale, exchange or relinquishment of the asset; or t extinguishment of any right therein; or the compulsory acquisition thereof under any la however, the following are not treated as .transfer.(in other words, in the following cases, the is no capital gain )- 1. Distribution of assets in kind by a company to its share holders on its liquidation. 2. Any distribution of capital assets in kind by a Hindu undivided family to its members at the tin of total or partial partition. 3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception gift of ESC shares is chargeable to tax). 4. Transfer of capital asset between holding company and its 100 per cent subsidiary compare if the transferee-company. 5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-company is an Indian company. 6. Transfer of shares in amalgamating company/demerger company in lieu of allotment shares in amalgamated company/resulting company in the above case. 7. Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution. 8. Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation /demerger of the two foreign companies, if a few conditions a satisfied. 9. The transfer of a capital asset by a non- resident of foreign currency convertible bonds or Globe Depository Receipts to another non-resident if the transfer is made outside India and if a f conditions are satisfied. 10. Transfer of any work of art, archaeological, scientific or art collection, book, manuscripts, drawing, painting, photograph or print to the government or a university or the Nation Museum, National Art Gallery, National Archives or any other notified public Museum institution. 11. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form, of a company into shares or debentures of that company. 12. Land transferred by a sick industrial company, if a few conditions are satisfied. 13. Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in company if a few conditions are satisfied. 14. Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfying. 15. Any transfer of capital asset in a reverse mortgage. COMPUTATION OF CAPITAL GAINS Short term capital gains - It arises on transfer of short-term capital asset and it is calculated as follows Full value of consideration minus cost of acquisition minus cost of improvement minus expenditure pertaining to transfer incurred by the transferor. Long term capital gains - It arises on transfer of long-term capital asset it is calculated as follows Full value of consideration minus indexed cost of acquisition minus indexed cost of improvement minus expenditure pertaining to transfer incurred by the transferor. . However, in the following cases the benefit of indexation is not available ever if the capital as is long-term capital asset 1. Bonds or debentures, but other than capital indexed bonds issued by the government 2. Depreciable Assets. 3. Slump Sale. 4. Units/GDR/securities given in sections 115AB, 115AC, 115ACA and 115AD. 5. Shares and debentures in Indian acquired by a non-resident in foreign currency, if a few conditions are satisfied. It does not include any expenditure on improvement incurred before April 1, 1981. Cost of Improvement How to convert cost of acquisition into indexed cost of acquisition Cost of acquisition x Cost inflation index (CII) of the year in which the capital asset is transferred CII of the year in which the asset was first held by the assessee. Cost inflation index for different previous years 1981-82 100 1988-89 161 1995-96 281 2002-03 447 1982-83 109 1989-90 172 1996-97 305 2003-04 463 1983-84 116 1990-91 182 1997-98 331 2004-05 480 1984-85 125 1991-92 199 1998-99 351 2005-06 497 1985-86 133 1992-93 223 1999-00 389 2006-07 519 1986-87 140 1993-94 244 2000-01 406 2007-08 551 1987-88 150 1994-95 259 2001-02 426 2008-09 582 2009-10 632 Indexed cost of Improvement Cost of improvement x Cost inflation index (CII) of the year in which the capital asset is transferred CII of the year in which improvement took place. In the following cases capital gain is exempt under section 10 - 1.Transfer of units of US64. 2.Compulsory acquisition of urban agricultural land in India owned by an individual or HUF, if land was used for agricultural purposes by the owner (for any of his parents) during 2 years immediately prior to acquisition. 3.Long-term capital gains on transfer of shares/units, if securities transaction tax is applicable. Special mode of computation When cost of asset to the previous owner is taken into consideration. When an assessee acquired capital asset by any mode given in section 49, then at the time of its transfer, cost of acquisition to the previous owner is taken as cost of acquisition. . Acquisition mode given under section 49- In the following cases, cost of acquisition of asset to previous owner is considered 1. Acquisition of a property by a member at the time of partition of Hindu Undivided Family. 2. Acquisition of a property by gift/will or by succession inheritance, etc. 3. Acquiring a capital asset by a holding company from its 100 per cent subsidiary company or vice versa, if the transferee-company is an Indian company. 4. Acquisition of a property in a scheme of amalgamation, if the transferee-company is an Indian company. . Special points The following are special points 1.The benefit of indexation is available from the year in which the current owner first acquired property. 2.To determine whether the asset is short-term or long-term, the period of holding by the previous owner is also considered. If the Capital Asset was acquired by the assessee (or by the previous owner in the cases given above) before April 1, 1981, the fair market value of the capital asset on April 1, 1981 can taken (at the option of the assessee) as cost of acquisition. . Special points- the following are special points 1. This rule is optional. The assessee may or may not adopt the fair market value on April 1, 1981 as cost of acquisition. 2. The option is not available in the case of transfer of following capital assets depreciable assets, goodwill of a business, trade-mark/brand name associated with a business, right to manufacture/produce an article, right to carry on business, route permits and loom hours. If a depreciable assets is transferred , capital gain (loss) shall be calculated only in two case a. When the written down value of the block of assets on the last day of the previous year becomes zero. b. When the block of assets becomes empty on the last day of the previous year. Only in these two cases, capital gain (loss) arises on the transfer of a depreciable asset. Cost of acquisition in such case will be the depreciated value of the block of assets on the first day of the previous year plus actual cost of assets (falling in the same block of assets) acquired at any time during the previous year . Other points capital gain or loss, which arises on transfer of depreciable assets, is always taken as short-term capital gain or loss. At the time of negotiating transfer of a capital asset, the transferor has forfeited any advance money. It is forfeited because the purchaser could not pay the balance consideration within the stipulated period (or it may be forfeited because of any other non-performance). The advance money so forfeited is deductible from cost of acquisition for calculating capital gain when the asset is ultimately transferred. Fair Market Value on April 1,1981 If capital is converted into stock-in-trade during a previous year relevant to the assessment year 1985-86(or any subsequent year), the following special rules are applicable 1. It will be assumed that capital asset is transferred in the year in which conversion taken place. 2. Fair market value of the asset on the date of conversion will be taken as full value of consideration. 3. However, capital gain will not be taxable in the year of conversion. It will be taxable in the year in which stock-in-trade is transferred. Transfer of capital Assets to a firm by way of capital contribution by a partner- It is treated as transfer. The amount recorded in the books of account is taken as full value of consideration. Distribution of a capital assets by a firm to partners at the time of dissolution- It is treated as transfer. Capital gain is taxable in the hands of the firm. Fair market value of the asset on the date of distribution is taken as full value of consideration. Compulsory acquisition of a Capital asset- Initial compensation taken as full value of consideration. Capital gains is chargeable to tax in the year in which thie indial compensation is first received. Indexation benefit is however, available up to the year in which the asset is compulsorily acquired. . When additional compensation is received If a court/Tribunal/authority enhances compensation it will be taxable in the year in which enhanced compendation or additional compensation is received. For this purpose cost of acquisition and cost of improvement are taken as nil However, litigation expenses or incidental expenditure for obtaining additional compensation is deductible. Capital gain on transfer of shares/debentures in the hands of non-residents-If a non-resident acquires shares in, or debentures of an, an Indian Compnay by utilizing foreign currency, the gain will be calculated in the same foreign currency, which was initially utilized in acquiring shares/debentures. After calculating capital gain in foreign currency, it will be converted into Indian Currency. This rule is not optional, it is compulsory. The benefit of indexation is not available. In the case of transfer of self-generated goodwill of a business right to manufacture/produce an article/thing or right to carry on business the cost of acquisition and cost of improvement are taken as nil. In the case of transfer of self-generated assets being tenancy right route permit, loom hours, trade name or brand name, cost of acquisition is taken as nil. In these cases the option of adopting fair market value on April 1, 1981 is not available. On transfer of any other self-generated asset, capital gain is always zero. If capital asset being goodwill of a business, right to manufacture/produce an article/ thing or right to carry on business, is purchased, then at the time of its transfer, cost of improvement is taken as nil. If bonus shares were allotted before April 1, 1981 cost of acquisition is the fair market value on April 1,1981. If bonus shares are allotted after April 1, 1981, cost of acquisition is taken as zero. Amount realized by an existing shareholder by selling rights entitlement (i.e.,right to acquire additional shares in the company at a pre-determined price) is taxable in the year of transfer of the right entitlement. Cost of acquisition of right entitlement is always taken as zero and the capital gain is deemed as short-term capital gain. Conversion is not taken as transfer. Cost of acquisition of debentures/bonds will become cost of acquisition of shares. TO find out whether shares are short-term or long-term capital asset, the period of holding shall be counted from the date of allotment of share. The benefit of indexation is available from the date of allotment of shares. The cost of acquisition and period of holding any security in demat form shall be determined on the basis of first-in-first-out (FIFO) method. See para 216. See para 198. See para 206. It is taxable on the year in which compensation is received. The amount of compensation will be taken as full value of consideration. However this rule is applicable only when insurance compensation is received because of damage to or destruction of an y capital asset because of- a. Flood typhoon, hurricane, cyclone, earthquake or other convulsion of nature: b. Riot or civil disturbance; c. Accidental fire explosion; d. Action by an enemy or action taken in combating an enwmy. If insurance compensation is received in respect of a capital asset because of any other reason, it is not chargeable to tax. If sweat equity shares are allotted during 1999-2000 or on after April 1, 2009, cost of acquisition Is fair market value on the date of exercise of option. If shares are allotted during April 1, 2007 and march 31, 2009 the fair market value on the date of vesting of option will be cost of acquisition. If shares are allotted before April 1, 2007(Not being during 1999-2000), cost of acquisition will be the amount actually by the employee. See para222. If the sale consideration is less than the value adopted (or assessable) by stamp duty authority for the purpose of collecting stamp duty, stamp duty value shall be taken as full value of consideration. The transeferor before the stamp duty authorities can challenge stamp duty valuation alternatively it can be challenged before the Assessing officer. Aggregate amount of exemption cannot exceed the quantum of capital gain Who can claim exemption An individual or a Hindu undivided family Which specific asset is eligible for exemption A residential house property (lon-term) Which asset the taxpayer should acquire to get the benefit of exemption Residential house property. What is time limit for acquiring the new asset Purchase: 1 year backward or 2 years forward construction: 3 years forward How much is exempt Investment in the new asset or capital gain whichever is lower. The new asset should not be transferred within 3 years from the date of acquisition of the new asset. Who can claim exemption Individual. Which specific asset is eligible for exemption Agricultural land if it was used by the individual or his parents for agricultural purpose during at least 2 years immediately prior to transfer. Which asset the taxpayer should acquire to get the benefit of exemption Agricultural land (may be in rural area or urban area). What is time limit for acquiring the new asset 2 year forward. How much is exempt Investment in the new asset or Capital gain, whichever is lower. The new asset should not be transferred within 3 years from the date of acquisition of the new asset. Who can claim exemption Any Taxpayer. Which specific asset is eligible for exemption Land o building forming part of an industrial undertaking which is compulsorily acquired by the government and which is used during 2 years for industrial purposes prior to its acquisition. Which asset the taxpayer should acquire to get the benefit of exemption Land or building for industrial purposes. What is time limit for acquiring the new asset 3 years forward How much is exempt Investment in the new asset or Capital gain, whichever is lower. The new asset should not be transferred within 3 years from the date of acquisition of the new asset. Who can claim exemption Any taxpayer Which specific asset is eligible for exemption Any long-term capital asset transferred after march 31,2000. Which asset the taxpayer should acquire to get the benefit of exemption Bonds of National Highways Authority of India or Rural Electrification corporation. Maximum investment in one financial year is Rs. 50 lakh. What is time limit for acquiring the new asset 6 months forward. How much is exempt Investment in the new asset or Capital gain, whichever is lower. The new asset should not be transferred within 3 years. Moreover, the new asset should not be converted into money or any loan or advance should not be taken on the security of the new asset within 3 years from the date of acquisition of the new asset. Who can claim exemption An individual or a HUF. Which specific asset is eligible for exemption Any long term capital asset (other than a residential house property ) provided on the date of transfer the taxpayer does not own more than own residential house property (except the new house property given below) Which asset the taxpayer should acquire to get the benefit of exemption A residential house property What is time limit for acquiring the new asset Purchase:1 years back ward or 2 year forward construction 3 years forward How much is exempt Who can claim exemption Any taxpayer . Which specific asset is eligible for exemption Land, building, plant or machinery in order to shift an industrial undertaking from urban area to rural area. Which asset the taxpayer should acquire to get the benefit of exemption Land, building, plant or machinery in order to shift undertaking to rural area. What is time limit for acquiring the new asset 1 year backward or 3 years forward How much is exempt Investment in the new asset or capital gain whichever is lower. The new asset should not be transferred within 3 years from the date of its acquisition. Who can claim exemption Any taxpayer Which specific asset is eligible for exemption Land, building, plant or machinery in order to shift an industrial undertaking from urban area to special economic zone. Which asset the taxpayer should acquire to get the benefit of exemption Land, building, plant or machinery in order to shift undertaking to any special economic zone. What is time limit for acquiring the new asset 1 year backward or 3 years forward How much is exempt Investment in the new asset or capital gain whichever is lower. The new asset should not be transferred within 3 years from the date of its acquisition. Long term capital gains are taxable under section 112 at the rate of 20 percent. The following points should be noted 1. No deduction is available from long-term capital gains under section 80C to 80U. 2. The benefit of exemption limit is available only in the case of a resident individual or a resident Hindu undivided family. 3. In the case of listed security, any unit of UTI/ mutual fund or zero coupon bonds, if indexation benefit is not taken, capital gains will be taxable at the option of the taxpayer at the rate of 10 percent. Securities Transaction tax is applicable it is taxable at the rate of 15 percent under section 111A. deduction is available from such short-term capital gains under sections 80C to 80U. The benefit of exemption limit is available only in the case of a resident individual or a residential Hindu undivided family. Other short term capital gains Taxable just like revenue Income. MULTIPLE CHOICE QUESTIONS Q1. The following are Indian companies a. an institution declared by the board to be a company under section 2(17); b. a company established under an act by parliament; c. Both of the above; d. None of the above Q2.an Indian company can never be a non domestic company a. True b. False Q3. A company registered in the UK and makes arrangement for payment of dividend in India is not a domestic company a. True b false Q4.a private limited company can never be a company in which the public are substantially interested a. True b. false Q5. An ltd company is a private limited industrial company in which 40% shares are held by LIC of India. The company is actually controlled by X and his family members who hold 60% shares. A ltd is not a company in which the public are substantially interested A. true B. false Q.6. An Indian company is said to be resident in India if- a. Control and management of the affairs of accompany is situated wholly in India; b. Control and management of the affairs of a company is situated outside India; c. Control and management of the affairs of a company is situated partly in India and partly in India; d. All of the above. Q7. X ltd., a foreign company manages its affairs partly from India and partly outside India. X ltd. is said to be- a. Resident in India; b. Non-resident in India; c. Resident and ordinarily resident; d. Resident but not ordinarily resident. Q8. In the case of an Indian company, the following incomes are chargeable to tax- a. Income earned outside India and received outside India; b. Income earned in India and received in India; c. Income earned in India but received outside India; d. Income outside India and received in India; e. All of the above. Q9. A Ltd. is a foreign company. It is wholly controlled from UK. It generates income in the UK. However income is deposited by it in the London branch of State Bank of India. Out of which generally 40 per cent is remitted to India. Out of which, generally 40 per cent is remitted to India for the purpose of meeting out operating expenses of its branch situated in Bangalore. Income of A Ltd. deposited in the London branch of state State Bank of India and later on remitted to India is chargeable to tax in India- a. True: b. false MODULE II : ASSESSMENT OF COMPANIES SET OFF AND CARRY FORWARD OF LOSSES A loss can be set off within the same head of income in the financial year subject to the following exceptions 1. Speculative business losses can be set off only against speculative business income. 2. Any loss, computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business. 3. Long-term capital loss can be set off only against long-term capital gains. 4. Long from the activity of owing and maintaining race horses can be set off only against any other income from the activity of owning and maintaining race horses. 5. A loss cannot be set off against winnings from lotteries, betting gambling etc. Loss under one head of income can be set off against income under any other head of income in the S