introduction to direct taxes - bcasonline.org · introduction to direct taxes students orientation...
TRANSCRIPT
CNK & Associates LLP“Knowledge Based Solutions” with Personalized
Services
Introduction to Direct
TaxesStudents Orientation Course
Organised by Bombay Chartered
Accountants‟ Society
Friday, 24th April 2015
Saroj Maniar
Partner
1SAROJ MANIAR, CNK
Income Tax
Filing of
Income Tax
Return
Heads of
Income
Earning of
Income
Interpretation
of Statutes
Assessment of
Income
Computation
of Taxable
Income
Determination
of Residential
Status
Introduction to Income Tax – An Overview
Appeal to
Higher
Authority
2SAROJ MANIAR, CNK
Introduction to Income Tax
Income Tax is a payment made to the Government without quid
pro quo
Authority to Tax given by the Constitution of India
Present Law – Income Tax Act, 1961, Income Tax Rules, 1962
History of Income Tax Law in India
Objectives of Taxation
3SAROJ MANIAR, CNK
Definition of Income
Income is defined in Section 2(24)
It is inclusive in nature i.e. apart from items listed in the definition, any receipt which satisfies the basic condition of being income is also to be treated as income.
Income broadly includes income from business and profession, salary, allowances and perquisites, dividends, winnings from lotteries, crossword puzzles, race games, gambling or betting, capital gains, amounts received under Keyman Insurance Policy, gifts received etc
Gross total income, deductions & total income
Capital receipts exempt unless specifically included
4SAROJ MANIAR, CNK
Income (Cont’d)
Persons - Income can be earned by Individual, Hindu Undivided Family (HUF),
Company, Firm, Association of Persons, Body of Individuals, Local Authority or Artificial
Juridical Person
Heads of Income :
1. Income from Salary. (Section 15-17)
2. Income from House Property. (Section 22-27)
3. Profits and Gains from Business or Profession. (Section 28-44)
4. Capital Gains. (Section 45-55)
5. Income from Other Sources. (Section 56-59)
Taxable Income after deductions under chapter VIA of the Act
5SAROJ MANIAR, CNK
Residential Status
Types of Residential Status
Individual & Hindu
Undivided Family
Firm, Company, AOP/ BOI,
Local Authority, Other
Artificial Juridical Persons
Ordinary
Resident
Non- Ordinary
ResidentNon- Resident Resident Non- Resident
6SAROJ MANIAR, CNK
Residential Status (Cont’d)
Basic conditions to be satisfied for determination whether a person is a Resident of
India or a Non- Resident :
NO
YES
YES
*This condition is not applicable when an Indian Citizen leaves India
NO during the previous year for the purpose of employment outside India or
as a member of crew of an Indian Ship or when an Indian citizen or a
person of Indian origin who comes to India during the previous year on a
visit.
Stay in India for a period of
182 days or more in that
previous year
*Stay in India for a period of
60 days or more during that
previous year AND for a
period of 365 days or more
during the 4 years immediately
preceding the relevant previous
year
Non Resident
Resident
7SAROJ MANIAR, CNK
Residential Status (Cont’d)
Conditions to be satisfied for determination whether a person is an ordinarily resident
or a not ordinarily resident :
NO
YES
NO
YES
Resident in India for at least 2 out of 10 previous
years immediately preceding the relevant previous
year.
Stay in India for a period of 730 days or more
during 7 years immediately preceding the relevant
previous year.
Resident and
ordinarily resident
Resident but not
ordinarily resident
Resident
8SAROJ MANIAR, CNK
Taxability of Income
Income received /deemed to be received in India - always taxable in India
Income accruing/arising/deemed to accrue or arise in India - always taxable in India
Income accruing or arising outside India and received outside India - taxable as under
1. For Non-Resident : Not includable in total income.
2. For Ordinarily Resident : Included in total income.
3. For Not Ordinarily Resident : Included only if,
Derived from business controlled in India.
Derived from profession set up in India.
9SAROJ MANIAR, CNK
Computation of Taxable Income and Liability
Particulars Amt Amt
Income from House Property XX
Income from Salary XX
Profits and Gains from Business and Profession XX
Capital Gains XX
Income from Other Sources XX
Gross Total Income (GTI) XXX
Less: Deductions under Chapter VI-A (XX)
Taxable Income XXX
Tax Payable at Applicable Slab Rates XXX
Less: Tax Deducted at Source XX
Less: Advance Tax Paid XX (XX)
Net Tax Payable XXX
10SAROJ MANIAR, CNK
Income From Salary
Salary includes wages, any annuity or pension, gratuity, any fees, commissions,
perquisites or profits in lieu of or addition to any salary or wages, any advance of salary etc.
Employer – employee relationship is a must.
Taxable on due or receipt basis whichever is earlier.
Computation of salary and payment of taxes thereon done by employer.
Salary to partner of a Firm or LLP is taxable as business income.
11SAROJ MANIAR, CNK
Income from Salary (Cont’d)
Perquisites
Casual emolument or benefit attached to an office or position in addition to salary or
wages. Perquisites need not only be in kind. It can be in cash as well.
Example: Car & Driver, Rent free accommodation.
Valuation Rules – Rule 3
Allowances
Part of Salary such as HRA, Medical, Conveyance, LTA
Exemptions – section 10
Deduction from salary
Profession Tax
12SAROJ MANIAR, CNK
Income from House Property
Important terms –
House Property
Owner
Annual Value
House Property includes both residential and commercial property. Includes land
appurtenant to the building but not only plot of land.
Owners normally refer to legal owners. Exceptions individuals gifting property to spouse or
minor child, member of co-operative society etc.
Annual Value – sum chargeable to tax being the higher of actual rent received/ receivable
and the annual letting value.
13SAROJ MANIAR, CNK
Income from House Property (Cont’d)
Deemed to be Let Out Property (DLOP) situation:
If the assessee owns more than one house property, any one house property is Self
Occupied Property (SOP) and the other property/ properties shall be Deemed to be Let Out
Properties (DLOP).
Gross annual value from SOP NIL, whereas the gross annual value of DLOP would be
annual rent that would be receivable had the property been let out.
Income from Sub letting ????
Income from rent of land ????
14SAROJ MANIAR, CNK
Income from House Property (Cont’d)
Deductions from Annual Value :
Municipal taxes – on actual payment basis
30% Standard Deduction of Annual Value less Municipal taxes
Interest on borrowed capital
15SAROJ MANIAR, CNK
Income from House Property (Cont’d)
Practical Case Study:
Mr. X owns 2 houses in Mumbai, both of which are occupied by him and his family.
House 1 was purchased for Rs 70 lakhs. Loan on the house is Rs 30 lakhs. Interest on the
loan is Rs 2,75,000.
House 2 was purchased for Rs 60 lakhs with a loan of Rs 40 lakhs. Interest on the loan is Rs
3,40,000.
If X lets out House 1, he will earn an annual rent of Rs 3,00,000. If he lets out House 2, he
will earn an annual rent of Rs 3,60,000.
Municipal Taxes paid by him for both the houses are the same of Rs 10,000 each.
16SAROJ MANIAR, CNK
Income from House Property (Cont’d)
OPTION 1 : Treat House 1 as SELF OCCUPIED and House 2 as LET OUT.
House 1
Gross Annual Value Nil
Less: Municipal Taxes Nil
Net Annual Value Nil
Less: Interest allowed (2,00,000)
Loss from House Property (A) (2,00,000)
House 2
Gross Annual Value 3,60,000
Less : Municipal Taxes (10,000)
Net Annual Value 3,50,000
Less: Standard Deduction @ 30% (1,05,000)
Less: Interest allowed (no limit) (3,40,000)
Loss from House Property (B) (1,00,000)
Total Loss from House Property (A) + (B) (3,00,000)
17SAROJ MANIAR, CNK
Income from House Property (Cont’d)
OPTION 2 : Treat House 2 as SELF OCCUPIED and House 1 as LET OUT.
House 2
Gross Annual Value Nil
Less: Municipal Taxes Nil
Net Annual Value Nil
Less: Interest allowed (2,00,000)
Loss from House Property (A) (2,00,000)
House 1
Gross Annual Value 3,00,000
Less : Municipal Taxes (10,000)
Net Annual Value 2,90,000
Less: Standard Deduction @ 30% (87,000)
Less: Interest allowed (no limit) (2,75,000)
Loss from House Property (B) (72,000)
Total Loss from House Property (A) + (B) (2,72,000)
Since loss
under option 1
is more, we
conclude that
considering
house 1 as SOP
would be
beneficial.
18SAROJ MANIAR, CNK
Profits and Gains of Business and Profession
Net profit from business-
Business includes trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture
Example: manufacturers, retailers or commission agents
Net income from profession-
Profession involves application of intellectual skill and includes vocation -Example: Doctor, Lawyer, Management consultant
Speculation & non-speculation business
19SAROJ MANIAR, CNK
Profits and Gains of Business and Profession (Cont’d)
Method of Accounting
Business Income & Other Sources – option to assessee – cash or mercantile regularly employed
Can employ cash for one source of income and accrual for the other
Even under same head of income, for different sources of income, different methods of accounting can be employed subject of course to regularity/ consistency
20SAROJ MANIAR, CNK
Profits and Gains of Business and Profession (Cont’d)
Deductions & Allowances
Deductions allowable:
Specific u/s.29 to s.36
Residuary business exp u/s.37- exclusively for business, not capital and not personal
Expenses not allowable:
S.40, s.40A
Only on payment-s.43B
Depreciation:
Block concept
21SAROJ MANIAR, CNK
Profits and Gains from Business and Profession
(Cont’d)
Presumptive Income under section 44AD
Presumptive income considered @ 8% of total turnover if the turnover is less than Rs. 1
crore.
This section is applicable to all businesses except the business of plying, hiring or leasing
goods as these have already been covered under section 44AE.
As the section specifically mentions the word business, it cannot be applied in case of
professionals.
Incase an assessee is carrying more than one business, the total turnover of all the
businesses should be taken into account.
Not applicable to corporate assessees and LLPs.
If income is below 8%, the tax audit mandatory.
22SAROJ MANIAR, CNK
Capital Gains
Excess of sale proceeds received or receivable on transfer of a capital asset over its cost of acquisition.
Capital asset is property of every kind excluding stock-in-trade, personal belongings excluding jewellery or ornaments, urban agricultural land and cash.
Types
Short term – period of holding -shares <=12 months , other <=36 months
Shares/ Equity oriented mutual funds –STT paid @ 15%
Other slab rate
Long term - other than short term
Equity Share STT paid – exempt
Other flat rate of 20%
Indexation for cost of acquisition
23SAROJ MANIAR, CNK
Capital Gains Exempt from Tax
Points Section 54 Section 54B Section 54D Section 54EC Section 54F Section 54G Section 54GA
Who can
claim
exemption?
Individual/
HUF
Individual/
HUF
Any person Any person Individual/
HUF
Any person Any Person
Type of
capital asset
eligible?
Long-term Short-term/
Long-term
Short-term/
Long-term
Long-term Long-term Short-term/
Long-term
Short-term/
Long-term
Which
specific asset
is eligible?
Residential
House
Property
Agricultural
land
Land or
building
compulsorily
acquired by
the Govt.
Any long-term
asset
Any long-term
asset (other
than a
residential
house
property)
Land,
Building, Plant
and Machinery
(Shifting to
rural area.)
Land,
Building, Plant
and Machinery
(Shifting to
SEZ.)
Which
specific asset
to be
acquired?
Residential
House
Property
Agricultural
Land
Land or
Building for
industrial
purposes.
Bonds of REC/
NHAI.
Residential
House
Property.
Land,
Building, Plant
and Machinery
Land,
Building, Plant
and Machinery
Exemption Investment in
new asset or
capital gain,
lower of two.
Investment in
new asset or
capital gain,
lower of two.
Investment in
new asset or
capital gain,
lower of two.
Investment in
new asset or
capital gain,
lower of two.
(max Rs 50
lacs)
Capital gain x
(Investment in
new asset/ Net
consideration)
Investment in
new asset or
capital gain,
lower of two.
Investment in
new asset or
capital gain,
lower of two.
24SAROJ MANIAR, CNK
Income from Other Sources
Residuary Head
Foreign dividend income
Keyman insurance receipt by Legal heirs
Interest income
Family Pension – Standard deduction is available upto maximum Rs.15,000/-
[Sec.57 (iia)]
Letting out of Plant & Machinery (if not taxable as business income)
Gifts
Winnings from lotteries
Restrictive expense deduction [Sec 57 (iii)]
25SAROJ MANIAR, CNK
Slab Rates for A.Y. 2015-16
Particulars Individual, HUF,
AOP &BOI, Co-
op Society, Firm
(LLP Included)
Domestic
Company
Foreign
Company
Upto 1 Crore Rate of
Surcharge
NIL NIL NIL
Effective Tax
Rate
30.90% 30.90% 41.20%
Above 1 crore
and Upto 10
crore
Rate of
Surcharge
10% 5% 2%
Effective Tax
Rate
33.99% 32.445% 42.024%
Above 10 Crore Rate of
Surcharge
10% 10% 5%
Effective Tax
Rate
33.99% 33.99% 43.26%
26SAROJ MANIAR, CNK
Slab Rates for A.Y. 2016-17
Particulars Individual, HUF, AOP
&BOI, Co-op Society,
Firm (LLP Included)
Domestic
Company
Foreign Company
Upto 1 Crore Rate of
Surcharge
NIL NIL NIL
Effective Tax
Rate
30.90% 30.90% 41.20%
Above 1 crore
and Upto 10
crore
Rate of
Surcharge
12% 7% 2%
Effective Tax
Rate
34.608% 33.063% 42.024%
Above 10
Crore
Rate of
Surcharge
12% 12% 5%
Effective Tax
Rate
34.608% 34.608% 43.26%
27SAROJ MANIAR, CNK
Filing of Income Tax Return
Individual, HUF, AOP, BOI having gross total income exceeding threshold exemption
limit. (Taxable income may be less than threshold exemption).
Any firm or company.
Assessee incurring Loss under the head “Income from House Property or Business
Profession, Capital Gains or Other Sources” in order to carry forward the losses in the
next assessment years.
Resident Indian having any foreign asset/financial interest in any organization based out
of India.
28SAROJ MANIAR, CNK
Income Tax Return Utilities (A.Y. 2015-16)
The Income Tax Department provides assessee with income tax return (ITR) utilities on
www.incometaxindiaefiling.gov.in which is it‟s official website. Details about ITR utilities
are as follows:
ITR Description
ITR 1 (Sahaj) For Individuals having income from Salary and Interest.
ITR 2 For Individuals and HUF‟s not having Income from Business and Profession.
ITR 3 For Individuals/ HUF‟s being partners in firms and not carrying out business or
profession under any proprietorship.
ITR 4 For Individuals & HUF‟s having income from a proprietory business or
profession.
ITR 4S (Sugam) For Individuals/ HUF having income under presumptive business.
ITR 5 For firms, AOP‟s, BOI‟s and LLP.
ITR 6 For Companies other than companies claiming exemption under section 11.
ITR 7 For persons including companies required to furnish return under section 139(4A),
139(4B), 139(4C) or 139(4D).
29SAROJ MANIAR, CNK
Consequences of Non Filing of Return
1. Consequences for not filing within due date under section 139(1):
Interest under section 234A will be charged at 1% per month or part thereof on tax
payable on self assessment.
The benefit of carry forward of losses is lost.
The right to revise return under section 139(5) is lost.
2. Consequences when return is not filed:
Where the assessee is required to file return of income under section 139(1) or proviso to
section 139(1) and the same is not filed before the end of relevant assessment year, he is
liable to pay a penalty of Rs. 5000/- under section 271F.
Best Judgment Assessment can be made under section 144.
Prosecution under section 276CC can be attracted which includes fine as well as
imprisonment.
30SAROJ MANIAR, CNK
Assessment Procedures under Income Tax Act, 1961
Section 2(8)- “assessment’ includes reassessment.
Assessment
Self Assessment
Summary Assessment
Scrutiny Assessment
Best Judgment
Assessment
Protective Assessment
31SAROJ MANIAR, CNK
Inquiry before Assessment- Section 142
For the purpose of making assessment, the Assessing Officer can:
Serve a notice under section 142(1)(i) for furnishing the return of income.
Serve a notice under section 142(1)(ii) to produce such documents or accounts as the
assessing officer may require.
Serve a notice under section 142(1)(iii) to call for information he may require including
statement of assets and liabilities.
32SAROJ MANIAR, CNK
Summary Assessment- Section 143(1)
Where the return is made under section 139(1) or in response to notice under section 142(1),
The Total Income shall be adjusted for any arithmetical error or an apparently incorrect
claim.
Tax and interest will be computed after adjusting TDS/ TCS, advance tax, relief under
section 90/ 91 etc.
Intimation shall be sent within 1 year from the end of the financial year in which the
return is made.
Practical Questions:
1. Whether the „intimation‟ issued under section 143(1) is an order?
2. Can a return be revised after processing under section 143(1)?
33SAROJ MANIAR, CNK
Service of Notice- Section 143(2)
Assessing Officer may serve a notice for scrutiny assessment if:
The assessee has filed a return of income under section 139 or in response to a notice
issued under section 142(1).
He considers it necessary to do so, in order to ensure that the assessee has not under-
stated the income, or computed excessive loss, or underpaid tax in any manner.
Notice has to be served before the expiry of 6 months from the end of the financial year
in which the return is furnished.
Notice must be served and mere issue is not sufficient.
34SAROJ MANIAR, CNK
Notice u/s. 142(1) vs. Notice u/s. 143(2)
142(1) 143(2)
Assessment not possible. Assessment only if the notice is served.
Books of accounts can be called for 3 years. No such provisions. Assessing Officer can
invoke section 131 and call for earlier
records.
Notice can be issued even if the return of
income is not filed.
Notice can be issued only if the return is
filed.
Non compliance is an offence liable for
prosecution.
Non compliance is not an offence.
35SAROJ MANIAR, CNK
Best Judgment Assessment- Section 144
Best judgment assessment can be made if any person:
Fails to file return of income under section 139(1) and has not made a belated return
under section 139(4) or revised return under section 139(5) or
Fails to comply with all the terms of notice under section 142 or fails to comply with the
directions for special audit under section 142(2A).
Having made a return, fails to comply with all the terms of notice under section 143(2).
36SAROJ MANIAR, CNK
Rejection of Books- Section 145(3)
Assessing Officer can reject the books of accounts if not satisfied with the correctness/
completeness of accounts or
Where the method of accounting under section 145(1) is not followed or
Where the accounting standards prescribed under section 145(2) have not been followed.
37SAROJ MANIAR, CNK
Notice of Demand- Section 156
When any tax, interest, penalty, fine or any other sum is payable in consequence of any
order passed under this Act, the Assessing Officer shall serve upon the assessee a notice
of demand in the prescribed form specifying the sum so payable.
Provided that where any sum is determined to be payable by the assessee under section
143(1), the intimation shall be deemed to be a notice of demand for the purposes of this
section.
38SAROJ MANIAR, CNK
Income Tax Proceedings
Income tax officer (ITO)
Commissionerof Income Tax(CIT)
Income Tax Appellate Tribunal (ITAT)
State High Court (HC)
Supreme Court of India (SC)
39SAROJ MANIAR, CNK
Income Computation and Disclosure Standards (ICDS)
CBDT vide its Notification No: 32/2015 dated 31-03-2015 notified 10 Income
Computation and Disclosure Standards(ICDS) which is to be followed by all assesses at
the time of computation of income chargeable to income tax under the head “Profit and
gains of business or profession” or “ Income from other sources”.
The effective dates of such ICDS are 01st April, 2015 and shall accordingly apply to the
Assessment Year 2016-17 and subsequent assessment years.
Section-145 (2) of Income tax Act,1961 empowers Central Government(CG) to issue
Accounting Standards for computation of Income.
ICDS NO NAMEEquivalent New IND
AS NoEquivalent AS No
I Accounting Policies 1 & 8 1
II Valuation of Inventories 2 2
III Construction Contract 11 7
IV Revenue Recognition 18 9
V Tangible Fixed Asset 16 10
VI Effects of changes in foreign exchange rates 21 11
VII Government Grants 20 12
VIII Securities 32 30
IX Borrowing Costs 23 16
X provisions, contingent liabilities and contingent assets 37 29
40SAROJ MANIAR, CNK
Key Features of ICDS
Effective Date of ICDS is 01st April, 2015 i.e. FY:2015-16 & AY: 2016-17.
ICDS applicable to all Assesses i.e. Corporate & Non Corporate Assesses.
No Net Worth or Turnover Criteria Prescribed for applicability.
Entity need not to maintain Books of accounts for ICDS. ICDS is only for computation
of income under the head “Profit and gains of business or profession” or “Income
from other sources”.
ICDS is meant for normal computation of income not for Minimum Alternate Tax(MAT)
Calculation.
In the case of conflict between the provisions of the Income‐tax Act, 1961 and Income
Computation and Disclosure Standard, the provisions of the Act shall prevail to that
extent.
The ICDS in general do not have prudence as a fundamental assumption, and
accordingly in several situations this would result in earlier recognition of income or
gains or later recognition of expenses as compared to that under the accounting
standards; this would potentially have a direct impact on the timing of tax related cash
outflows.
41CNK
Principles of Interpretation of the Statute
The object of all constructing or interpretation is to ascertain the intention of the law-
makers and to make it effective.
The true function of the court is to interpret the law and not to make it.
If two interpretations to a statute are possible, then the interpretation that upholds the
constitutionality or advances the object of the enactment should be favoured.
In order to interpret a statute in case of ambiguity, a contextual meaning must be
provided.
Additionally, all the limbs of a section must be read harmoniously.
If a case appears to be governed by more than one provision, then it is clearly the right of
the assessee to claim that he should be assessed under that one which leaves him with a
lighter burden.
„Casus Omissus‟ means a matter not provided by the court cannot be supplied by the
Court.
An amendment may be made by the legislature not only to change the law but also to
clarify the position.
2014 © CNK India. CNK & Associates LLP. All rights reserved.
THANK YOU