Business Taxation Made Ezy By CA.Chandrashekhar Shetty.S.

B.com,PGDM,PGDCA, PGDFM, DIM,DISA, LL.B., ACWA, ACS, FCA

Email-id: shettysir@yahoo.com Tel. No. : 9845336700

INCOME TAX

INTRODUCTION

Tax means an amount paid by a person to Goverrnment (Central, State or local authority) for availing various benefits provided by such Governments. The benefits may be direct or indirect say infrastructure, health, education etc. One of the major sources of revenue to the govt. is taxes.

There are 2 types of taxes.a) Direct tax : It is a tax wherein incidence & impact of tax is on the same person

Ex: Income tax, wealth tax,b) Indirect tax : It is a tax wherein incidence & impact of tax is on the two different persons.

Ex: Sales tax/VAT, Excise duty, Customs, Octroi, Entry tax etc.Incidence means liability to pay tax to the govt.Impact means ultimate burden of paying such taxes

Tax [Sec. 2(43)]

Before AY 1965-66 w.e.f. AY 65-66 w.e.f. AY 06-07Income Tax & Super Tax Income Tax & FBT also

Total Income [Sec 2(45)] – It means total of income referred to in Sec 5.

Assessee [Sec. 2(7)] - Assessee means a person who is liable to pay tax or any other sum under this Act, and includes ; A person in respect of whom proceedings

have been initiated, either for his own income or for income of others, or for fringe benefits and includes representative assesses.

Deemed Assesses – Agent of a non-resident. Assessee in default – Default in TDS.

Sec.3 Previous Year: It means the financial year immediately preceding the assessment year.Proviso to Sec.3 – Exceptions to the rule that P.Y is a period of 12 months.

(a) When a new business or profession is started in the middle of the year, then the P.Y. shall be from the date of commencement of business till immediately succeeding 31st March.

(b) When a new source of income arises in the middle if the year, then the P.Y. shall be from the date of commencement of business till immediately succeeding 31st March.

Ex: 1. Mr. X, has taken a building on rent @ Rs. 10,000 p.m. from 1-4-08. He started pan beeda business on 1-12-08 to 31-3-09 and hence, rent to be claimed as expenditure is Rs. 40,000.Ex: 2. Mr. X, owns a House Property since 1975. He purchased another House Property on 24-2-2009. Both the houses were self occupied. If second house is considered as DLOP, then Annual value should be computed from 24-2-09 to 31-3-09.

2

Sec. 2(9): Assessment Year: It means the period of 12 months commencing from 1st April every year. P.Y. is the year in which the assessee earns the income where as A.Y. is the year in which assessee is expected to compute the income & tax, pay the tax and file Income Tax Return.

Exceptions to the rule that income of previous year is charged to tax in assessment year: In the following cases income of previous year is charged to tax in the assessment year itself

(a) Sec. 172 – Income from shipping business of a non-resident(b) Sec. 174 – Income of person leaving India(c) Sec. 174A – Income of an AOP/BOI, formed for a particular event or purpose(d) Sec. 175 – Income of persons likely to transfer property to avoid tax(e) Sec. 176 – Income of a discontinued business

Section 4 : Charge of Income

Capital receipts V/s Revenue receiptsCapital receipts are normally not taxable, unless specifically included.Revenue receipts are normally taxable, unless specifically exempted.

Ex:1) a) Loan received from a Private Ltd. company, by a shareholder having 12% stake is treated as deemed dividend u/s 2(22)(e), even though it is a capital receipt. Where as loan taken from a friend is not included anywhere in the Act, and hence it is not taxable.1) b) Compensation received for termination of employment is covered u/s 17(3) r/w 17(1) and 15, and hence taxable subject to 10(10B), even though it is a capital receipt.2) a) Agricultural income from growing and selling paddy is a revenue receipt. However, Indian agricultural income is exempt u/s 10(1) whereas other agricultural income is taxable in India.2) b) Dividend from a domestic co. as well as from a foreign company is a revenue receipt. Sec. 10(34) exempts the former, whereas the latter is taxable.

Special Income means the income for which, the tax rates are prescribed in the Act itself. Ex: 111A income, 112 income, lottery incomeNormal Income means income other than special income. For normal income, tax rates are prescribed by the Finance Act every year.TAX RATES FOR AY 2009-10Tax rates for individuals / HUF / AOP / BOI / Artificial juridical persons referred to in Sec 2(31)(vii)Total Income Tax rateUpto Rs.1,50,000 NilRs.1,50,001 to Rs.3,00,000 10%Rs.3,00,001 to Rs.5,00,000 20%Rs.5,00,000 and above 30%In case of resident women assessees basic exemption limit is Rs.1,80,000/- and in case of resident senior citizens basic exemption limit is Rs.2,25,000.Surcharge of 10% on tax payable shall be levied if the total income exceeds Rs.10,00,000. However in case of artifical juridical person referred to in Sec 2(31)(vii) surcharge of 10% shall be levied irrespective of total income.

3

Tax rates for firms / domestic companies / local authorities – 30%Surcharge of 10% on tax payable shall be levied if the total income of a firm / domestic company exceeds Rs.1,00,00,000/- (No surcharge on income of local authority)

Tax rate for co-operative societyTotal Income Tax RateUpto Rs.10,000 10%Rs.10,001 to Rs.20,000 20%Rs.20,001 and above 30%No surcharge on income of co-operative society.Marginal ReliefMarginal relief would be provided to ensure that the additional income-tax payable, including surcharge, on the excess of income over Rs.10,00,000 is limited to the amount by which income is more than Rs.10,00,000.Concept of MutualityIt means the Contributories and the beneficiaries of an activity are same. In other words, no one can make profit by selling to oneself. Normally, income from mutuality shall not be taxed.CIT v/s Bankipur Club Ltd.(1997) 226 ITR 97 (SC).Ex: Apartment owners association – the members of the association contributed Rs.10,000 p.a. and such amount collected is spent for benefits of the members only. A the end of the financial year Rs.1,20,000 surplus was remaining in the association. Such surplus can not be taxed since it is an income from mutuality.

Tax Planning vs. Tax Avoidance vs. Tax EvasionTax Planning – It means reducing the tax burden by availing various benefits given in the law. It is with the true script and moral of the law. Ex: Sec.80C. It is perfectly valid.

Tax Avoidance – It means reducing the tax burden by taking benefits of loopholes in the law. It is bending the law without breaking it. It may be legal but not ethical. (Refer case laws below)

Tax Evasion – It means reducing the tax burden through unfair means.Ex: Omitting sales bills, or excess providing for expenses etc. It is illegal as well as immoral.

There are 2 views on tax avoidance.a) IRC v/s Duke of Westminister (1936)- Since it is well within the script of the law, it should be

allowed.b) McDowell and Company ltd. V/s CTO (SC) (1985) 154 ITR 148.

Tax avoidance cannot be considered as tax planning. In other words, it is held that “Colourable devices cannot be considered as tax planning”

SCOPE OF TOTAL INCOME (Sec 5)Particulars R& OR in

IndiaR but NOR NR

1 Income received in India or deemed to be received in India (Sec.7), irrespective Taxable Taxable Taxable

4

of where it is earned2 Income earned in India or deemed to

accrue or arise in India (Sec.9), irrespective of where it is received.

Taxable Taxable Taxable

3 Income of a business controlled from India or Profession set up in India(Such business or profession referred is outside India and the income is earned/ received in India.

Taxable Taxable Not - Taxable

4 Any income earned / received outside India

Taxable Taxable Not - Taxable

General Notes1) Receipt here means first receipt and not the subsequent receipt / remittance.

Ex: Mr. X earns rs. 12L salary in UK.Case 1: Such salary is credited to Vijaya Bank in Chickpet. It is the income received in India.Case 2: Received in HSBC A/c in UK and latter on transferred to Vijaya Bank in Chickpet. It is the not received in India.

2) Past untaxed profits brought into India shall not be taxable. Since Income tax taxes the income earned during the P.Y.

3) In case of R&OR/R in India, global income is taxable in India.4) Non-resident ends up paying tax on income earned in India or received in India.5) From the view of taxation plan in such manner that assessee becomes non-resident especially for

frequently traveling persons residing outside India.

Note 1- An individual is said to be a resident ifa) resides in India for a period of 182 days or more in the immediately preceding PY

ORb) 60 days or more in P.Y. AND 365 days or more in 4 years immediately preceding the P.Y.

Exception to 60 days conditionIn the following 2 cases, 60 days shall be substituted by 180 days.

1. An Indian citizen leaves India, for the purpose of employment abroad, or as a crew member of Indian ship.

2. An Indian citizen or a person of Indian origin comes to India on a visit.

Person of Indian origin means either the assessee, or his parents or his grand parents have born in undivided India.

5

Section 6 – Residential Status

(1) Individual(Refer note 1)

(2)HUF,

Firm/AOP

(3)Company

(4)Any other

person

(5)One residential status

for all sources of income in an A.Y.

(6)Addnl

conditions (Refer note 2)

Note: 2 Resident but NOR conditions for Individuals & HUF only [Sec. 6(6)].

Any one of 6(1)

BUT AND

Note 1: Sec. 6(6) - Conditionsa) Non-resident for 9 out of 10 years.ANDb) Non-resident for 729 days or less out of 7 P.Y.s

BUT AND

6

Individual

Resident Non-Resident [None of Sec. 6(6)]

Any one of 6(6)Refer Note 1

OR

None of Sec. 6(6)

HUF

Resident

At least a part of its management is in India

Non-resident

Whole of its management & control is outside India

NOR OR

Karta satisfies 6(6) Karta satisfies none of 6(6)

NOR

Ex: HUF, 5 male members, 3 female members, 1 male with 3% management power and all females were in India. During PY 07-08, karta was in India for 30 days and during earlier 7 years, he was in India for 720 days. Comment.Ans: Part of the management & control is in India, and hence resident as per Sec. 6(2). Karta satisfied one of the conditions of 6(6) and hence HUF is Resident but NOR.The residential status of karta, is irrelevant, while deciding the residential status of HUF. In other words, in the given case, karta is non-resident as per 6(1). However, application of 6(1) is not required for determining residential status of HUF. Instead merely apply Sec. 6(2) and 6(6) independently.

Ex : 5 partners; 2 working(working partners outside India) Firm is non-resident.

Management and control means, defacto control, i.e. the actual control.

Sec. 2(24) - Income: It is defined to include the following:i. Profits and Gainsii.Dividendsiii.Capital Gains u/s 45iv.Perquisites and Profits in lieu of Salaryv. Income u/s 56(2)(vi)vi.Income u/s 28(va)vii.Income u/s 56(2)(v) viii Incomes from lotteries, horse race , card games or games of any sort. viii. Income from keyman insurance policy

7

Sec. 6(2) Firm/AOP

Resident NR

Part of its management & control is in India

100% of management & control is outside India

Sec. 6(3) - Company

Indian Company Other Companies

Always resident in India

Resident- If whole of its management & control is in India.

Non-resident – at least part is not in India.

ix. Employees contribution received by the employer towards any PF, ESI or any other employee welfare Fundx. Voluntary contribution received by a trust or institution or fund / university / educational institutionsNote 1: Dividend from Domestic company is exempt u/s 10(34)

Note 2:

Gifts received in kind does not attract this section.

From all persons in a P.Y.

Ex: X gave Rs. 30,000 & Y gave Rs. 30,000 – then,entire Rs. 60,000 is taxable.

Plan: Defer Y to next year or take 20,000 only. &defer 10,000 to next year or take 10,000 in kind.

Received by anybody other than Individual/HUF is not taxable.

Consideration can be Re.1/-; It does not say adequateconsideration.(Eveninadequate consideration is sufficient.

Proviso to Section 56(2)(vi)The above clause is not applicable in following cases:

1. Received from a relative.2. Received on the occasion of marriage of individual.3. Received by way of contemplation of death of the payer- As per the Indian Succession Act,

1925, it means amount received from a person who is suffering from serious disease & illness

8

Section 56(2)(vi)

Any sum of money

Aggregate of which per annum

Exceeds 50,000

Received by an individual or HUF

Without any consideration

On or after 1/4/06

From any person/s

Aggregate of whole of such sum is income

& expecting to die shortly. Such a will takes place effect, if and only if he dies because of illness referred.

4. Received from a local authority referred to in Explanation to Sec. 10(20).5. Received from a Fund / Institution / Educational Institution / Medical Institution trust referred

in Sec. 10(23C).6. Received from a trust registered u/s 12AA.

Relative for the purpose of Sec. 56(2)(vi) means:

(g) Spouses of persons referred to in (b to f) above.

HEADS OF INCOME

As per Sec 14 the incomes earned by an assessee are broadly classified under the following heads:

a) Income from Salaries (Sec 15 – 17)b) Income from House Property (Sec 22 – 27)c) Profits and Gains of Business or Profession (Sec 28 – 44DB)d) Capital Gains (Sec 45 – 55A)e) Income from Other Sources (Sec 56 – 59)

It is the duty of the assessee to classify incomes under the respective head to ensure benefits, deductions prescribed in that head are availed / enjoyed by such assessee. If the assessee mis-classifies the income it is the duty of the assessing officer to classify it under the correct head and grant the deductions and benefits accordingly.

9

(a) Spouse of the individual

(b) Brothers/ sisters of the individual

(c) Brothers/ sisters of the spouse of individual

(d) Brothers/ sisters of parents of the individual

(e) Any lineal ascendant / descendent of individual

(f) Any lineal ascendant / descendent of spouse of individual

INCOME FROM SALARIES (CHAPTER IV-A – Sec 15 to Sec 17)

Any income by the employee from the employer is taxable as income from salaries.

Conditions for taxing an income under the head salary1) Employer – Employee Relationship or Master Servant Relationship:The relationship between payer and payee should be that of employer and employee orMaster and Servant.Eg: salary received by a lecturer of a college is taxed as a salary income whereas valuationfees received by lecturer of a college from the university is income from other sources.Similarly, salary received by a partner is not salary income for the following reasons:(i) There is no employer – employee relation(ii)Salary paid to a partner is appropriation of business profits.

2) Advance Salary v/s Advance against SalaryAdvance salary is taxable in the year of receipt whereas advance against salary is a loan orcapital receipt. Hence, it is not taxable.

3) Arrears of Salary – It means the additional salary received in a financial year towardsservice rendered in the past.Ex: Increase in salary with retrospective effect.It is taxable in the year of receipt unless taxed earlier on due basis.The assessee can claim relief under Sec 89 against advance salary and arrears of salary.

4) Surrender of salary v/s Foregoing salary:If an employee surrenders salary to Government u/s 2 of “Voluntary Surrender of Salary”(exemption from taxation) Act, 1961, then, such salary is exempted from tax.Ex: Salary per month = Rs.10,000Salary surrendered = 2 monthsTaxable salary = 10,000 x 10 months = Rs.1,00,000.Salary forgone to employer is not exempt from tax .In the above example if the salary forgone was for 2 months then:Taxable salary = 10,000 x 12 months = Rs.1,20,000.

5) Salary of directors: Unless given otherwisea) Managing Director’s salary is taxable as income from salaries.b) Other directors salaries are taxed as Income from business or profession or Income from other

sources

6) Salary paid tax-free: Any tax borne by the employer on behalf of the employee shall beadded to salary income of employee, subject to Sec 10(10CC)As per Sec 10(10CC) any tax borne by the employer relating to non-monetary perquisites provided to employees is exempt in the hands of the employee. Therefore tax amount paid by the employer to be added to the employee’s salary is only to the extent of:

10

a) Cash salary say Basic Pay, Dearness Allowanceb) Monetary perquisites say Re-imbursement of medical perquisites.

Explanation 1 to Sec 15 – Advance salary taxed on receipt basis in a financial year shall not be taxed again in subsequent financial years on due basis.Explanation 2 to Sec 15 – Salary earned by a partner from a partnership firm shall not be taken as income from salary. It will be taxed as income from business or profession [Sec 28(v)]

Sec 16: Deductions under the head SalariesThe following are the deductions under the head salaries (i.e. deductions are exhaustive in nature)

Sec 16(i) - Omitted

Sec 16 (ii): Deduction for entertainment allowanceEntertainment allowance is given to government employees to meet various expenses incidental to entertaining customers.Ex: Entertainment allowance given to sales representativesEntertainment allowance received is first included in the gross salary of government as well as non government employees. The deduction is given as under only for government employees:Deduction is as follows:a) 1/5th of basic pay OR XXXb) Actual EA received OR XXXc) Statutory limit 5000

The above deduction is given irrespective of amount spent by government employee towards entertainment.

Eg: Basic pay – Rs.60,000

Income from Salaries

Sec 16 Deductions

Sec 15Charging Section Sec 17

Definitions

(a) Due Basis

(b) Receipt Basis

(c) Arrears(3) Profits in lieu of salary

(1) Salary(ii) Entertainment

Allowance

(2) Perquisites(iii) Professional Tax

11

EA received – Rs.10,000

What will be taxable salary if assessee is:a) Non – Government empolyeeb) Government employee

a) In the case of a Non – Government employeeGross salary = (60,000 + 10,000) = 70,000Taxable salary = 70,000

b) In the case of a Government EmployeeBasic Pay = 60,000EA =10,000Gross salary = 70,000Less: Deduction u/s 16(ii)a) 1/5th of basic pay = 12,000b) Actual EA received = 10,000c) Statutory limit = 5,000 5,000Taxable Salary = 65,000

Sec 16(iii): Deduction for Professional tax or tax on employmentProfessional tax (PT) actually paid by the employee shall be allowed as a deduction. If the employer pays the professional tax on behalf of the employee then, PT actually paid shall be first added to gross salary and then the deduction shall be given to the employee.Ex. Basic Pay – Rs.1,00,000/-, Professional Tax – Rs.2,000/-Case 1 – Professional Tax borne by employerBasic Pay - 1,00,000Professional Tax paid by the employer [Sec 17(2)(vi) - 2,000

1,02,000Less: Deduction u/s 16(iii) 2,000

1,00,000Case 2 – Professional Tax borne by employeeGross Salary - 1,00,000Less: Deduction u/s 16(iii) - 2,000

98,000Section 17 – DefinitionsAll the three definitions given in Sec 17 are inclusive definitions.Sec 17(1) – Salary“Salary includes:

(i) Wages(ii) Annuity(iii) Gratuity(iv) Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages(v) Advance of salary(vi) Encashment of earned leave(vii) Perquisites or profits in lieu of salary(viii) Annual accretion to RPF to the extent taxable

12

(ix) Transferred balance in RPF, to the extent taxable(x) Employers contribution to pension scheme u/s 80CCD”

Sec 17(3) – Profit in lieu of salary or Profits in addition to salaryThis section is an exception to the rule that capital receipts are normally not taxable. In other words, even though the following amounts are capital receipts, they are taxable as salary.

“Profit in lieu of salary includes:(i) Any compensation earned / received towards termination of employment or modification of

terms of employment(ii) Any amount received from key man insurance policy including bonus or amount received

from URPF to the extent of employer’s contribution and interest on such contribution(iii) Amount due or received from an employer:

a) Either before joining the employment with such employer ORb) After ceasing to be in employment with that employer”

From the above it is clear that the employer and employee relationship can be present, past or future.

Note: Death cum retirement gratuity, commuted pension and encashment of earned leave received by government employees at the time of retirement is fully exempt from tax.

RETIREMENT BENEFITS

GratuitySec 10(10)

Commuted PensionSec10(10A)

Earned LeaveSec 10(10AA)

Provident Fund 10(11) & 10(12)

Sec 10(11) / 10 (12)

Govt employees coveredCentral Govt.State GovtLocal Authority

Govt employees coveredCentral Govt.State GovtLocal AuthorityStatutory corporation

Govt employees coveredCentral Govt.State Govt

13

Note: When an employee receives gratuity from more than one employer:a) In the same financial year – Maximum exemption in that year should not exceed Rs.3,50,000/-b) Received from second employer subsequently – While computing the exemption for gratuity

received from second employerStatutory Limit = Rs.3,50,000 Less Actual Exemption Given Earlier

14

DEATH CUM RETIREMENT GRATUITY

Government Employees

(Central Govt., State Govt. and

Local Authorities)

Non-Government Employees

Employees Covered by Payment of Gratuity Act, 1972

Least of the following is exempt:a) 15 days salary (7days for seasonal

employment) for each year of completed service or part thereof in excess of 6months based on last salary drawn

b) Actual gratuity receivedc) Rs. 350,000

Employees not covered by Payment of Gratuity Act, 1972

Least of the following is exempt:a) Half month’s salary for each year of

completed service based on average salary drawn

b) Actual gratuity receivedc) Rs. 350,000

• 15 days salary = Last salary drawn x 15/26 • Salary = Basic Pay + All DA (Whether taken

for retirement benefit or not)• The service in excess of 6 months is

regarded as 1 one complete year.Eg: 30 yrs 9 months = 31 yrs 30 yrs 6 months = 30 yrs

• Salary = Basic pay + DA, if taken for retirement benefit + Commission based on fixed percentage of turnover.

• Average salary means average of salary of 10 months immediately preceding the month of retirement (i.e. month of retirement to be excluded.)

• 1/2 month’s salary = Average Salary x 1/2 Fraction of year is completely ignored.Eg: 30 years 11 months = 30 years

Problems on Gratuity:1. Mr. Sri Hari retired from service on 10th Jan 2008. the salary at the time of retirement is as

follows:Basic pay 6000 p.m., DA Rs. 4000 p.m of which 20% is not taken for retirement benefitsBonus 10000 p.a., commission 10% of sales achieved by him. Total sales made by him for the F.Y. ending 31st Dec 2007 is Rs. 600,000. He has rendered service for 29 years, 10 months and he received gratuity of Rs. 140,000. Compute taxable gratuity ifa) he is an employee of Indian Railway

b) he is covered under Payment of Gratuity Act, 1972c) he is not covered under Payment of Gratuity Act 1972His last increment in basic pay of Rs. 500 p.m. was w.e.f. 1st oct 2007

2. Mr. Prakash retired from services on 10th jan.2007, the salary at the time of retirement was asfollows.

Basic pay- Rs. 12,000 p.m, DA- 6,000 p.m., Commission 3,000 P.m., Special allowance 4,000 p.m. Increment in basic pay Rs. 1000 p.m was from 1st may 2006. He has rendered service for 28 years 6 months 27 days. From the previous employer he has received Rs. 50000 of which Rs. 10,000 was taxed. Gratuity received Rs. 4,20,000. Total sales made by the employee for the financial year ending 3st dec 2006 is Rs. 6,00,000. Compute taxable gratuity ifa) an employee of income tax Departmentb) covered by Payment of Gratuity Act, 1972c) not covered by Payment of Gratuity Act

Commutation of Pension [Sec 10(10A)]:

Pension is a periodic payment received by an employee after retirement. It is fully taxable as salary in the hands of employee. Family pension means pension earned / received by the members of the deceased. It is taxed as income from other sources.Commutation of pension means surrendering the right to receive a periodic pension against a lump sum consideration. Pension can be commuted wholly or partly. Commutation of pension is exempted u/s 10(10A).Pension is always taxable irrespective of whether the assessee is a government employee or anon-government employee or irrespective of whether it is received while in service or after service.Government here means Central Government, State Government, local authority and statutory corporation.(Pension is taxable under the head ‘salaries’ where as family pension is taxable under other sources)However, commutation of pension received at the time of retirement is exempt as per provisions of Sec 10(10A). Commutation means surrendering the right to receive periodic pension against a lump sum consideration.

Exemption is as under:

15

Government employees: fully exempt

Non-government employees

Full value of commuted pension means expressing the commuted value of pension in terms of 100%

Summary:

PROBLEM:Q. Mr. Vivek retired from service on 1st Jan 2008 . he is eligible for pension of 6000 p.m. he commuted 2/3rd of pension on 1st march 2008 and received 300,000. Compute taxable amount of pension ifa) he receives gratuityb) does not receive gratuity

2) In the above example if employee retired on 15 June, 2007 & was eligible for 9000 p.m.

Encashment of Earned Leave [Sec 10(10AA)]:

Earned leave means leave granted but not availed or taken by the employee. The employee can encash such leave not taken. This is called encashment of earned leave.Encashment of earned leave received while in service is fully taxable (both for government and for non-government). However encashment of earned leave received at the time of retirement is exempt as per the provisions of Sec 10(10A).

The exemption is as under:

Note:1) Salary = Basic Pay + Dearness Allowance (if taken for retirement benefit) + Commission basedon fixed percentage of turnover.2) Average salary means average of salary of 10 months immediately preceding the date of retirement (i.e. including month of retirement unlike in case of gratuity)

16

A. In receipt of gratuity:Exemption= 1/3 x full value of commuted pension

B. Does not receive gratuity:Exemption= 1/2 x full value of commuted pension

Pension fully taxable as salary

Family pension taxable as income from other sources

Commuted value of pension is exempted u/s 10(10A)

Government employees (CG & SG only) – Fully exempt

Non government employees:

Least of the following is exempt u/s 10(10AA)a) cash equivalent to leave at the credit of the

employee, based on average salary calculated at a rate not exceeding 30 days p.a.

b) actual earned leave receivedc) statutory limit of Rs. 300,000d) Average salary x 10

3) While computing 30 days p.a., only complete years have to be considered.4) If the employee receives encashment of earned leave from more than 1 employer then the above exemption shall be restricted to the limit prescribed above (i.e. in totality)

5) If an exemption has been claimed during earlier years towards encashment of earned leave then, statutory limit has to be reduced by such exemption.

[ For HRA u/s 10(13A), Gratuity not covered under PGA, 1972, Encashment of earned leave u/s10(10AA), Contribution to RPF, VRS computations:Salary = Basic Pay + Dearness Allowance, if taken for retirement benefit + commission based onFixed percentage of turnover.For Gratuity covered under PGA, 1972:Salary = Basic Pay + All kinds of Dearness allowance ]

Problems:Q. Mrs. Shanthi retires from service on 30th nov 2007 after rendering service for 28 years. She

received Rs. 75,000 as encashment of earned leave. Leave granted as per company policy 20 days. Earned leave was 12 months. Salary at the time of retirement was as under:Basic pay: 4000 p.m. , DA 1200 p.m., commission 5% on sales ( sales for the last 12 months effected by her is Rs. 900,000)Last increment in basic pay of Rs. 2000 p.m.was w.e.f. 10th oct 2006Compute taxable earned leave

Q. Mrs. Shruthi retired from service on 30th nov 2007 after rendering service for a period of 28 years in ABC Pvt. Ltd. She received Rs. 75,000 towards encashment of earned leave.Leave granted as per company policy was 45 days. Her earned leave is 12 months.Salary details are as follows:Basic pay Rs. 4000 p.m. , DA- 1200 P.m., commission 5% on sales ( sales for the last 12 months effected by her is 9,00,000) last increment in basic pay of Rs.2000 p.m. was w.e.f. 10th oct 2006 )Compute taxable earned leave

Q. In the above question if leave is taken by the employee is 12 months, then what is the answer?

Q. Mr.A retired from service on 28th feb 2008 after rendering service for a period of 30 years. He hasTaken a leave of 12 months during the tenure of his service. Salary at the time of retirement was: Basic pay-8000 p.m., DA- 60% of basic pay of which 60% is taken for retirement benefits, commission Rs. 2000 p.m.Amount received at the time of retirement :a) gratuity- Rs. 140,000b) earned leave salary- 312,000c) commuted pension- 180,000( 75% commuted)compute taxable gratuity, earned leave and commuted pension for A.Y. 2008-09 if:

• leave granted as per company policy-20days• leave granted as per company policy-40 days

17

Tax Treatment of Provident Fund (PF)

Particulars Statutory provident fund(SPF)

Recognised provident fund (RPF

Unrecognised provident fund (URPF)

Public provident fund(PPF)

1. Applicability It applies to entities for which provisions of Provident Fund ACT of 1925 applies

It is a provident fund either recognised by the Commissioner of Income Tax or an entity for which provisions of Employees Provident fund and Miscellaneous Provisions Act of 1952 applies

Neither SPF nor RPF

It is not a provident fund in the real sense. It is a fund wherein assessee contributes

2.Employee’s contribution

Included in salary and hence not separately taxed

Included I gross salary and hence not separately taxed

Included in gross salary and hence not separately taxed

It is not out of employment contract . it is applicable to any member of the general public. It is an investment and hence question of taxation does not arise

3.Employer’s contribution

Exempted Contribution in excess of 12% of salary is taxable.(salary = basic pay+ DA, if taken into retirement benefits+ commission as a fixed percentage of turnover)

Ignored for the time being(taxed at the time of refund)

No such contribution

4. Interest on PF balance

Exempted Interest in excess of 8.5% is taxable

Ignored for the time being

Exempted

5. Refund Exempted Exempted Taxable (refer note 1)

Exempted

6.Deduction towards assessee’s contribution u/s 80C( any amount of contribution subject to 80C limits)

Eligible Eligible Not eligible Eligible

18

REFUND

Allowances

House Rent Allowance [Sec 10(13A) r/w Rule 2A]:

House rent allowance (HRA) is a fixed sum of allowance given to an employee to meet rental expenses.Least of the following is exempt (for both government and non – government employees):a) Actual HRA receivedb) Rent paid less 10% of salaryc) 40% of salary [50% of the salary in case the accommodation (and not the place of employment) is in Bombay, Calcutta, Chennai and Delhi]e.g. Job in Mumbai, house in Pune – 40%

Note:1) Salary = Basic Pay + Dearness allowance, if taken for retirement benefit (or considered forretirement benefit or forms part of salary) + Commission based on fixed percentage

19

Contribution Interest

Employee’s contribution

Employer’s contribution

Employer’s contribution

Employee’s contribution

Not taxable ( refund of investment) Taxed as income

from salary

Taxed as income from other sources

Section 10(13A) r/w Rule 2A

House rent allowance

Section 10(14) r/w Rule 2BB

Special allowances

of turnover2) Conditions for claiming exemption u/s 10(13A)(i) Accommodation occupied by the assessee should not be owned by him.(ii) Assessee should have actually incurred rental expenditure on accommodation occupied byhim during the previous year.

3) If there is a change in component of HRA computation ( say rent paid is different during two partsor assessee works for two different employers during a year ) then HRA computations have to bedone separately.

4) Rule 2A r/w Sec 10(13A) states that HRA exemption should be given for the relevant period.Relevant period means the period during which accommodation is occupied by the assessee.

Special Allowances u/s 10(14) r/w Rule 2BB:

(i) Allowances given to meet official expensesTaxable Amount (or allowance) = Allowance received – Amount spent.Ex: Uniform Allowance received = Rs.5,000a) Amount spent = Rs.4,000Taxable amount = 5,000 – 4,000 = Rs.1,000.b) Amount spent = Rs.5,500Taxable amount = Nil

(ii) Allowances given to meet personal expenses.Taxable Amount = Amount Realised - Amount specified by law to be exempt.

Personal allowances specified by law to be exempt are:a) Transport Allowance (for commuting between place of residence and office) is exempt to theextent of Rs.800p.m.b) Transport allowance given to blind or orthopaedically handicapped allowance is exempt upto Rs.1,600p.m.c) Children Education Allowance is exempt upto Rs.100 p.m. per child for a maximum of two childrend) Children Hostel Allowance is exempt upto Rs.300 p.m.per child for a maximum of two children

20

Official allowance:It includes:

• Conveyance allowance• Travelling allowance• Helper allowance• Academic research allowance• Daily allowance• Uniform allowance

Personal allowance:Taxable allowance= amount received – amount prescribed by the law, irrespective of the amount spent

Problems on special allowamce:1. Mr. R received transport allowance of rs 1500 p.m.

Case:1- amount spent: NilTaxable amount:Transport allowance received 1500Less: amount prescribed by law 800Taxable amount 700

Case 2- Amount spent : Rs.1000Transport allowance received 1500Less: amount prescribed by law 800Taxable amount 700

2. Children education allowance :amount received : Rs.1000 p.m. per child for 3 childrenAmount received(1000x12x3) 36000Less: amount prescribed under law(100x12x2) 2400Taxable amount 33600

3. children hostel allowance: amount received Rs.1000 p.m. for 3 childrenamount received(1000x12) 12000less: amount prescribed under law(300x12x3) 7200amount taxable: 4800

4. children hostel allowance: amount received : Rs.600 p.m. for 3 childrenamount received(600x12) 7200less: amount exempted(200x12x2) 4800taxable amount 2400

PERQUISITES:u/s 17(2) r/w rule 3

Sec 17(2)(i) Sec 17(2)(ii) Sec 17(2)(iii) Sec 17(2)(iv) Sec 17(2)(v) Sec 17(2)(vi)Rent free accommodation(RFA)

Concessional Rent free accommodation

Amenity/benefit to a specified employeeRefer note: 1

Proviso:ESOP (refer note 2)

Explanation: use of company’s vehicle (refer note 3)

Employees obligation met by employerEx:Employees life insurance premium, income tax borne by employer. Also refer sec 10(10CC)

Employer contributing to a fund to effect assurance on the life of assessee or contract of annuity

Any other fringe benefits, (other than provided in chapter XII-H), as may be prescribed(refer note 4)

Proviso to sec 17(2): medical allowance (refer note 5)

21

NOTES:1) Specified employee means :

a) director employeeb) an employee having substantial interest in the company, i.e. holding 20% or more of the

votingpowerc) an employee whose monetary income under the head salary after deductions under section 16exceeds Rs. 50000 p.a.

EX: basic pay : 4000 p.m. , RFA valued at 160,000, DA-3000 p.a. deduction u/s 16(iii)-2000/-

Calculation of monetary salary:Basic pay ( 4000x12) 48000DA 300051000less: deduction u/s 16(iii) 2000monetary income 48000

as employee’s monetary income doesnot exceed 50,000, he is not a specified employee

Ex: basic pay 5000p.m., RFA 200,000.In this case the employee is a specified employee

The following three perquisites are taxable only in the hands of specified employees: facility of sweeper, watchman,gardener, etc. – Rule 3(3) facility of gas, electricity, or any other mode of power—Rule 3(4) education facility—Rule 3(5)

2) Use of company vehicle:When the employer provides transportation facility from house to office and back, through his own vehicle no perquisite arises in the hands of the employees (cab/bus facilities)

3) Fringe Benefit Tax:fringe benefits means the benefits which are incidentally arising out of employment contract. They are classified as under for the purpose of taxation

A) Taxable in the hands of employees - Sec 17(2)(vi)

Following are the only three fringe benefits covered under this category.a) Interest free or concessional loan to employeesb) Use of employer’s moveable assets by the employeesc) Transfer of assets by employer to employee either free of cost or at concessional rate

• FBT in the hands of employer – Chapter XII-H Ex: conveyance expenses, staff welfare, gifts to employees, hospitality, etc.

22

FBT= prescribed expense x prescribed percentage x 33.99%

Ex: conveyance expense debited to P/L A/c RS 10LFBT= 10L x 20% x 33.99% = 67980FBT not applicable for individuals, HUF and certain prescribed trusts

4) Medical Perquisites:Medical allowances are fully taxable. However medical perquisites are exempt as under:

I) Medical perquisites in India:a) Medical treatment in a government hospital or public recognized hospital is fully exemptb) Reimbursement of medical expenses in the government hospital or recognized public hospital is fully

exemptc) Medical expense premia/ group medical insurance premia borne by the employer- sec 36(1)(ib), is

fully exemptd) Medical treatment in any other hospital, say, private hospital is exempt upto Rs.15000 p.a.

Ex: medical treatment in Rama nursing Home:Amount spent Rs.16000. Taxable perq: Rs1000e) Medical treatment in own hospital, i.e., hospital owned and maintained by employer is fully exempt

II) Medical treatment outside India:The following three expenses are exempted

a. Medical expense to the extent permitted by RBIb. Stay expense of patient and one attendant to the extent permitted by RBIc. Traveling expenses exempted if and only if Gross Total Income before including such traveling

expenses does not exceed Rs. 2,00,000

Ex: Basic pay 140,000, DA -50,000, medical expenses-50,000 ( permitted by RBI Rs. 45000), traveling expenses Rs. 110,000, income from other sources –Rs. 20,000Soln:GTI (before including traveling expenses)Basic pay 140,000DA 50,000Medical expenses incurred 50,000Less: permitted by RBI 45,000 5,000

195,000income from other sources 20,000GTI 215,000Since GTI before including traveling expenses exceeds Rs. 200,000, entire traveling expenses is taxableStatement of total income:Basic pay 140,000DA 50,000Traveling expenses 110,000Taxable medical expenses 5,000Taxable salary income 305,000

23

Income from other sources 20,000GTI 325,000

Note:Medical perquisites can be availed by employee or any of his/her family members. Family for this purpose and sec 10(5) means:

Spouse of individual Any two children, parents, brothers, sisters Wholly or mainly dependant on the individual

Valuation of Perquisites - Rule 3

Rule 3 is applicable for any benefit derived by any employee or any member of his household by reason of such employment. In other words all these perquisites are taxable only in the hands of employees.

When a director, non-employee is provided with a RFA, Rule 3 is not applicable. Further such RFA may not be taxable in the hands of director, since there is no computation provision given in law. When computation fails, taxation also fails. – held in B.C. Srinivas Shetty Vs. CIT (SC)

Member of house hold include:a. Spouse(s)b. Parentsc. Children and their spousesd. Servants and dependants of the employee

Valuation of free or concessional educational facility- rule 3(5)Taxable perquisites = CTC – amount borne by the employee

Own source:Perq = Cost of such education in a similar institution in same or near by locality. If such cost does not exceed Rs.100 p.m. per child, then there will not be any perquisites. (no restriction on number of children for IT purpose)

24

Valuation Of RFA/ CRFA Sec 17(2) (i),(ii) read with rule 3(1)

NOTE 1:- Hotel accommodation may be for I or II. Further there is no Y here.

I. Governmentemployee Perq = X+Y-Z

II.Non- Government employee

A. Accommodation owned by the employer.Perq = X+Y-Z

License fees as determined by concerned Government Rules.

If population is exceeding 25 L as per 2001 census 15% of salary

If population is >10L but ≤25L 10% of salary

Here X means

If population is ≤10L 7.5% of salary

Hotel Accommodation(Government /Non -Government)

15% of salary ORActual rent W I L

On transfer

Upto 15 days in aggregateNIL

Other than transfer(Even for one day)

B. Accommodation rented or hired by employer Perq = X+Y-Z

More than 15 days

PerquisitesX-Y

Here X means 24% of salary ORActual hotel charges; W I L

25

NOTE 2:- Y means perquisites value of furnishing say furniture, air conditioner, TV, refrigerator etc, if any provided.

NOTE 3:- Z means Rent recoverable from or payable by the assessee towards RFA + Hire Charges payable for Furniture and Fixtures, if any.Note 4:- No RFA perquisites arises where accommodation is provided to an employee working at mining site or onshore oil exploration site or project execution site or a dam site or power generation site or an offshore site, when any one of the following two conditions are satisfied:

Note: 5. More than one accommodation given on transfer:-When an accommodation is given in the new place of posting, while retaining accommodation at old place of posting.

Note 6:-

If the above items are owned by employer10% of original cost

If hired, actual hire charges of the furnishes

Condition 1

Located in remote area atleast 40 KM away from a town having population not exceeding 20,000 based on latest published all India census.

Temporary construction

Is located not less than 8 KM away from the local limits of municipality or cantonment board.

AND AND

Plinth area not exceeding 800 Square feet

Condition 2

Upto1st 90 days

WEL Say P

RFA of House 1

RFA of House 2 R

ORRFA of House 1 Q

RFA of House 2 2

After 90 days

Taxable perquisites = P+Q+R

26

Accommodation includes a house, flat, farm house or part thereof or accommodation in a hotel or motel, service apartment, guest house, caravan, mobile home, or other floating structure. Hotel includes licensed accommodation in the nature of motel, service apartment or guest house.

Note 7:- Salary for the purpose of rule 3 means: Basic pay

DA taken for retirement benefit All kinds of commission Bonus, Fees, or any other monetary payment Allowance to the extend of taxable. Ex: Transport allowance 1000 per month .Taxable allowance 200 per

month.Salary does not include:

1. DA not taken for retirement benefit,

2. Allowance exempted

3. Employers contribution to PF

4. Any other non monetary perquisites referred in 17(2)

Note: 8:- Most of the sub rules under rule 3 taxes the perquisites based on the principle of CTC (Cost to the

Company) Ex: Employer appoints sweeper in the house of employee. Sweeper salary paid by employer Rs. 12000/-p.a. Perquisites in the hands of employee is Rs.12000,

Further if any amount is recovered from the employee, the taxable perquisites gets reduced by such amount. In the above case if employee recovers 3000 from the employee then taxable perquisites= 9000

Rule 3(7): Fringe benefits taxable in the hands of employeeTaxable in the hands of employees. As of now, following are the only three perquisites which are taxable in the hands of employeesI) Interest free or concessional loan:Perquisite = maximum outstanding monthly balance of loan x interest rate – ZNote: closing balance at the end of each month is the maximum outstanding monthly balance of loan

Interest rates shall be prescribed by SBI applicable as on 1st April of the relevant P.Y. The rates applicable for A.Y. 2009-10 are:

Particulars Interest rates p.a.1. Housing:

• Upto Rs. 20 Lakhs - Upto 5 years

- Above 5 yrs but upto 15 years - Above 15 yrs but upto 25 years• Above Rs. 20 Lakhs

- Upto 5 years - Above 5 yrs but upto 15 years

10.00%10.25%10.50%

10.25%10.50%

27

- Above 15 yrs but upto 25 years

10.75%

2. Car loan for new car• Upto 3 yrs (Rs.7.5 lakhs and above)• Upto 3 yrs (below Rs.7.5 lakhs)• Above 3 yrs and upto 5 yrs• Above 5 yrs but upto 7 yrs

11.50%11.75%11.75%12.00%

3. Two-wheeler loan 16.75%4. Education loan

• Upto 4L• Above 4L

12.25%13.25%

5. Personal loan 15.50%

No perquisites arise when the loan is availed:a) in respect of disease specified in Rule 3A ( any amount of loan)b) If loan (petty loan) aggregating upto Rs.20,000 p.a.

II) Use of moveable assets (other than computers and laptops) belonging to employer, by the employee:Perquisites = Y; i.e.,

a) when such asset is owned by the employer 10 of original cost; or

b) when the assets are taken on hire, such actual hire charges

Note: moveable item do not include vehicles

III)Transfer/ sale of any assets by the employer to employee

Perquisite is computed as under:

Original cost of asset XXXLess depreciation as per prescribed rates XXX(Refer note 1)Book value XXXLess: sale value (amount received from employee) XXXPerquisites XXXNote1:Depreciation rates for this purpose:

computers and electronic items:- 50% of WDV motor car:- 20% of WDV other assets :- 10% p.a. for every completed year of usage under SLMEg: Furn – 10L; used for 4 yrs 11 months; Depreciation = 4L

Note 2:Electronic items does not include TVs, Refrigerators, micro- owens, washing machines, AC, etc. electronics items include digital diaries, printers, etcGeneral note: when asset is more than 10 years old there won’t be any perquisite.

Sec 10(10B) : Exemption towards Retrenchment compensation

Least of the following is exempted u/s 10(10B)

28

1) Actual compensation received XXX

2) amount prescribed U/S 25(F) of Industrial Disputes Act, 1947 XXX

3) statutory limit 5,00,000

Retrenchment compensation means amount received by the employee at the time of premature termination (income as per Sec 17(3))

Section 10(10C): Exemption in respect of Voluntary Retirement Scheme compensation

Least of the following is exempted u/s 10(10C)

1) Actual receipt XXX2) Statutory limit 5,00,0003) Completed years of service x last drawn salary x 3 times: orbalance period of service in months x last drawn salary; whichever is higher XXX

Salary = Basic pay + DA( if taken for retirement benefits) + commission based on fixed % on turnover executed by employee

Section 10(5):- Leave Travel ConcessionThe exemption is towards expenditure on travel incurred twice in a block of four years. The block commenced w.e.f. Calendar year 1986(i.e. 1st Jan 1986)1st block: 1986 to 19892nd block- 1990 to 1993 and so onIf an employee has not availed any LTC in a block of 4 years, he shall be allowed to carry forward one LTC tobe claimed in the first year of the immediately succeeding blockExample: block 2006-09Case 1: No LTC in the above block is availed. Employee avails LTC in 2010-13Ans: It can be availed.

Case 2: In the above case, LTC is availed in 2011,2012,2013.Ans.: Exemption is only for two LTC

Sec 10(5) exemption is given for LTC of self and family.

Family as per sec 10(5)

29

• Spouse• Two surviving children of

the individual( if 2nd issue is a multiple birth, then all such children & first child

• Parents, sisters and brothers who are wholly and mainly dependent on the assessee

Problems

1. Mr. X, an employee of ABC Ltd furnishes the following information : a. Basic pay Rs.4,500 - 300 - 5,400 - 500 - 7,400 w.e.f. 1.6.2004. Salary falls due on the

last day of each month. b. DA - 60% of basic pay of which 75% enters into retirement benefit. c. HRA - Rs.4,000 p.m. d. CCA - Rs.300 p.m. e. Transport allowance - Rs.1,500 p.m. (20% unspent) f. Children education allowance - Rs.600 p.m. for 3 children g. Children hostel allowance - Rs.400 p.m. per child for 2 children

Leave travel concession - Rs.40,000 i. Free meal at the place of work - Rs.14,700 (i.e.70 per day for 210 days, amount is

directly paid to the canteen by the employer.) j. Interest free loan for purchasing home appliances (amount Rs.1,20,000, date of taking the

loan 1.3.2001. Amount outstanding between 1.4.2008 to 30.11.2008 - Rs.76,000 andafterwards Rs.50,000)He has been provided with a motor car of 1.8CC. Car is used for both purposes.

l. He has been provided with 2 watchmen (salary Rs.700 p.m. per person) m. Reimbursement of medical expenses Rs.31,200 (private hospital) n. PT of employee paid by employer - Rs.2,000

Employer contribution to RPF - 14% p. Interest credited to PF balance @ 11% - Rs.33,000. q. He contributed : (i) Towards RPF - 14% (ii) Unit linked insurance policy - Rs.12,000

(iii) NSC - Rs.3,000 (iv) National Highway Authority of India Bonds - Rs.20,000(v) PPF - Rs.25,000 (vi) LIP of friend - Rs.3,000 (vii) Repayment of housing loan takenfrom Vijaya bank (Principal) Rs.22,000.

r. TDS on salary - Rs.20,000 & advance tax Rs.5,000.Rent paid by employee 3000 p.m & FD interest 600000/-Compute taxable salary & tax payable.

2. Mr.Ullas joined a company on 1.6.2008 and was paid the following emoluments andallowed perquisites as under :Emoluments : Basic pay Rs.25,000 p.m; DA - Rs.10,000 p.m; Bonus Rs.50,000Perquisites : (i) Furnished accommodation owned by the employer and provided free ofcost; (ii) Value of furniture therein Rs.3,00,000; (iii) Motor car owned by the company (withengine c.c. less than 1.6ltrs) along with chauffeur for official & personal use; (iv) Sweepersalary paid by the company Rs.1,500 p.m. (v) Watchman salary paid by the company

30

Rs.1,500 p.m; (vi) Educational facility for 2 children provided free of cost. The school isowned and maintained by the company. (vii) Interest free loan of Rs.5,00,000 repayablewithin 7 years given on 1.10.2008 for purchase of a house. No repayment was madeduring the year. (viii) Interest free loan for purchase of computer Rs.50,000 given 1.1.2007.No repayment was made during the year. (ix) Corporate membership of a club. The initialfee of Rs.1,00,000 was paid by the company. Ullas paid the bills for his use of club facilities.You are required to compute the income of Ullas under Salaries in respect of AY 2009-10.Suitable assumptions may be made, wherever necessary.

31

INCOME FROM HOUSE PROPERTY[Sections 22 to 27]

The rental income of a house property is chargeable to tax under the ‘Income from House Property’. (Profit on sale of building is taxable under the head ‘Capital Gains’). House Property for this purpose means any building which has the characteristic features of a building. It includes residential building, commercial building, cinema theatres etc.

Income from house property is the only head of income which is taxed on notional basis i.e. taxed even there is no income.Ex: Mr.X owns three houses and uses all the three for self-occupation. In this case two house properties are deemed to be let out and hence taxed accordingly.

Conditions for taxing income under the head house property:1) There should be a building or a land appurtenant thereto i.e. attached to such buildingAND2) Assessee should be owner of such propertyAND3) Such building should not be used for own business or Profession

Sec 22 – Charging Section“The Annual Value of a building or land appurtenant thereto is chargeable to tax in the hands of the owner provided the same is not used for own business or profession”Ex. 1: Mr. X lets out a HP to Mr.Y, who intends to carry on pan beeda business – Income from House Property.Ex. 2: Mr. X uses his property to carry on Pan Beeda business – NO Income from House Property.

Exceptions to the rule that the rental income of the building is taxable under the headHouse Property:-

1. Income from sub letting – Income from Other Sources since assessee is not the owner.2. Composite Rent – When a building has been let out along with the furniture, then such letting out

is called composite letting.a) As per section 56(2) when the rent is inseparable then entire rent is taxable under other

sources.b) As per CIT vs Shambhu Investments Pvt. Ltd., (S.C.) (2003) such inseparable composite

rent is taxable under House Property.

At present Supreme Court decision has to be followed.

However, if the composite rent is separable then the rent relating to the building is taxed under House Property and rent relating to furniture is taxed under the head Business or Other Sources.Ex.1: Mr. A lets out building along with furniture for Rs. 12000 – for building Rs.10000, furniture Rs.2000. In this House Property income is Rs.10000 and Business / Other Sources income is Rs.2000.

32

Ex.2: In the above example if rent is inseparable Rs.12000 is taxable under House Property.

3. When a building has been let out to Employees/Directors – Income from Business.4. Building let out for Bank or Post Office, Courier Agency etc., wherein letting out is incidental and

subservient to the business – Income from Business.

Section 27 – OwnerIn the following cases even the persons other than registered owners shall be deemed to be the owners.1) Transfer of property without adequate consideration to spouse without having an agreement to live

apart or to a minor child not being a married daughter – Transferor shall be the deemed owner.2) Holder of an impartible estate shall be the deemed owner.3) Disputed Ownership – Assessing officer shall decide the ownership of the property depending upon

the facts and circumstances of the case. Ex: Mukesh and Anil disputing for a property. Assessing officer decides Mukesh the owner of the property.

Case 1: The Court decides Mukesh is the owner :- Assessment done hitherto shall be continued as it is.Case 2: The Court later decides Anil is the owner – Assessment done on Mukesh shall be reversed and fresh assessment shall be done in the name of Anil.

4) Allotment of houses of Company / AOP Co-operative society to its members under a house building scheme of such institution

5) The person in possession of the property shall be the deemed owner in case of part performance of a contract referred in Sec 53A of Transfer of Property Act, 1882.

6) In case of lease for a period not less than 12 months lessee shall be the deemed owner. However, it should be not be a month to month lease or lease period should not exceed one year.

Section 23 – Annual ValueSec 23(1) – (a) The annual value of a property is the rent at which the property is let out or reasonably expected to be let out (Fair Rental value).(b) If the property is let out and rent received or receivable is higher than (a) then suchrent received or receivable is the annual value.(c) If the property is let out and was vacant and rent received or receivable is lesserthan (a) due to such vacancy then such rent received or receivable shall be theannual value.Proviso to Sec 23(1) – Any municipal taxes actually paid by the owner (irrespective of the year for which it belongs to) in India or outside India is deducted from Gross Annual Value (Applicable for LOP / DLOP)Explanation to Sec 23(1) – While computing (b) and (c) above unrealised rent should be deducted from the rent receivable provided the conditions prescribed in Rule 4 are satisfied.For claiming unrealised rent deduction [explanation to Sec 23(1)] from rent receivable the following conditions prescribed in Rule 4 must be satisfied:

a) Tenancy must be bona fide.b) The tenant should have actually vacated the property or steps should have been taken to vacate the

property.c) Such tenant should not be in occupation of any other property belonging to the same ownerd) Legal proceedings should have been initiated against the tenant.

Sec 23 (2) – The annual value of one house or part of the house used for self occupation or which could not be occupied for the reasons of employment or business / profession elsewhere shall be nil.

33

Sec 23 (3) – Conditions for Sec 23(2) property – To claim annual value as nil the following two conditions should be satisfied:

a) Property is not actually let out during the year ANDb) No other benefit is derived from such property.

Sec 23(4) – Deemed Let Out Property (DLOP) – If the assessee own or has more than 23(2) properties then:

a) Annual value of one property at the option of the assessee shall be taken as nilb) Annual value of the other properties (i.e. DLOP) is computed as

per Sec 23(1)(a)

Points to be noted:1) If the property is deemed to be let out then Sec 23(1)(b) and Sec 23(1)(c) shall not arise. A property

shall be deemed to be let out if and only if it is actually not let out even for part of the year.2) Fair Rental Value (FRV) means rental value of a similar house in a similar locality or near by locality

OR municipal value, whichever is higher.3) FRV cannot exceed the standard rental value

Hence, the annual value of LOP / DLOP is computed as under:Municipal Value

Which ever is higher (a) Standard Rent (b)Fair Rental value

Whichever is less (c)

Actual Rent Received / Receivable(d) GAV (e) = (c) or (d) whichever is higher

Less: Unrealised Rent

Note:1) Only if (e) > (d) vacancy allowance has to be considered. (Otherwise it is ignored)2) Annual value of the property cannot exceed standard rent as per Rent Control Act. (Sheila Kaushish

vs. CIT). However, if actual rent received is the highest figure then the same should be taken as annual value.

Sec 24 – Deductions from Income under the head House Property

The following are the only two deductions under the head House Property (exhaustive deductions):

1) Sec 24(a) – Standard deduction @ 30% of NAV – Only for LOP and DLOP.2) Sec 24(b) – Interest on capital or loan borrowed for acquisition, construction, renewal, repairs and

reconstruction in respect ofa) LOP / DLOP – Any amount is allowedb) SOP – Deduction is as follows:

(i) Normal deduction upto Rs.30,000/-(ii) Special deduction upto Rs.1,50,000/- (Refer Note 1 below)

34

Explanation – Pre-Construction Period (Refer Note 2 below)

Note:1) Interest deduction upto Rs.1,50,000/-. It is available only for acquisition and construction. However,

the following conditions must be satisfied:a) The loan should have been taken on or after 01.04.1999 and construction should have been

completed within 3 years from the end of the financial year in which loan is borrowed.b) For claiming deduction the interest certificate giving details of interest amount, principal

outstanding etc. has to be attached along with return of income.2) Pre-Construction Period Interest – Pre-Construction Period interest is allowed in 5 equal annual

instalments commencing from the year of completion. PCP means the period commencing from date of the loan till the complete repayment of loan or immediately preceding March 31st of the year of completion, whichever is earlier.

3) Penal interest on interest is not allowed u/s 24.4) Loan can be taken from friends and relatives also5) Unpaid purchase price is considered as loan6) Interest is allowed on accrual basis and not on cash basis.

Sec 25 – Amounts not deductibleInterest paid outside India without TDS or without having an arrangement for TDS in India is disallowed.

Sec 25AA – Unrealised rent recoveredUnrealised rent recovered is taxed in the year of receipt irrespective of whether assessee is the owner or not of such property in the year of such receipt. No deduction is allowed against this income.

Sec 25B – Arrears of rent receivedIt is taxable in the year of receipt irrespective of whether assessee is the owner or not of such property in the year of such receipt. Deduction of 30% shall be given against this income.

Sec 26 – Property owner by Co-Ownersa) When the share of each co-owner is definite and ascertainable, then respective share is taxable in the

hands of each such co-owner.b) If the share of each co-owner is not definite and ascertainable, then entire income is taxed as income

of an AOP.

Points to be noted:1) Annual value of partly self-occupied and partly vacant property (one property)

35

Period Based (i.e. 9 months – SOP and 3

months vacant) – Annual Value is Nil.

Usage based (i.e. 75% used as SOP

and 25% is vacant) – Annual Value is

Nil

2) Annual value of partly self-occupied and partly let out (one property)

3) Selection of one 23(2) property out of several 23(2) propertiesa) A property having higher GAV should be taken as SOPb) A property having lesser interest (i.e. upto Rs.30,000 or Rs.1,50,000/- as the case may be) should

be taken as SOP.4) When a property is having highest interest & GAV and other properties having lowest GAV & lowest

interest it is advisable to compute the incomes under various alternatives and alternative giving least income or highest loss should be selected.

36

Period Based (i.e. 9 months – SOP and 3

months LOP)

Usage based (i.e. 75% used as SOP and 25% is LOP)

Treated as DLOP for entire period Annual Value of

SOP is NilAnnual Value of

LOP to be taken at 25%

Chapter IV-D - Profits and Gains from Business or Profession

As per Sec 2(13) "Business includes trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture". Normally to constitute a business there should be a series of transactions. However, in certain cases even a single transaction can constitute a business. Ex: Joint venture for export. Further the motive of the enterprise is irrelevant i.e. whether profit motive or non - profit motive of the enterprise. It is still chargeable under Chapter IV D.As per Sec 2 (36) "Profession includes vocation". It means application of skill, KnowledgeEg: Medicine, Chartered Accountant, Lawyers, Actors etc.The provisions of this head of income are same for business as well as profession.

Sec 28 – Charging Section:The following incomes are chargeable under this head:1.Profit and gains of business or profession carried out at any time during theprevious year.2.Income received by any person (including managing agency) for managing theaffairs of business in India including any receipt on termination of such serviceof management.3.Any benefit / perquisite in cash / kind arising in the course of business orprofession.4.Any salary, interest, commission or fees by what ever name called received bya partner from a partnership firm (PFAS or PFAOP), to the extent allowed in thehands of partnership firm u/s 40(b)5.Any amount received by the employer from keyman insurance policy includingbonus.

Deduction under the head business income:

Specific Deduction (Sec 30 – 36)General Deduction [Sec 37(i)]

1. Specific DeductionSec 30 – Rent, rate, repairs, insurance of buildingRevenue expenditure on repair (current repair), rent, insurance etc.Sec 31 – Repairs and insurance of machinery, plant and furnitureRevenue expenditure on repair, insurance etc. on these assets are allowedas deduction.

Sec 32 – Depreciation

32(1)(i) SLM32(1)(ii) WDV32(1)(iia) Additional Depreciation32(1)(iii) Terminal Depreciation

37

32(2) Carry forward of unabsorbed loss / allowance – Depreciation allowance can be adjusted against any income in first year as well as subsequent years and can be carried forward for any number of years.

Methods of Depreciation:Straight Line MethodWritten Down Value Method

1. Straight Line MethodIt is the option given to power generating or power generating and distribution undertakings. Since it is an option given to these undertakings / entities, they can also opt for Written Down Value Method.However option once selected cannot be reversed.Depreciation under this method = Cost of asset x Depreciation ratesprescribed in appendix 1A of IT Rules, 1962.

In the year of sale of asset, covered under this type of depreciation, the tax treatment is as under (For profit / loss on sale)i) When Sale value is less than book value – Sec 32(1)(iii)Loss is treated as terminal depreciation if and only if written off in the books of Account. (Loss = Book value – Sale value)ii) When sale value is greater than book valueSale Value – Original cost = Short Term Capital Gain u/s 50A.(Sale Value or Original Cost, whichever is less) – Book Value;This is Balance in charge (business income) u/s 41(2).Ex: Original Cost of asset – Rs.10 lacs. Book Value – Rs.3 lacsThe asset is sold for:(i) Rs.2,00,000Soln: Rs.1,00,000 can be claimed as terminal depreciationunder Sec 32(1)(iii) provided same is written off in the books(ii) Rs.5,00,000 (Sale Value < Original Cost)Soln: Profit = Rs.5 Lac – Rs.3 Lac = Rs.2 Lac. This is consideredas balance – in – charge u/s 41(2) and taxed as business income(iii) Rs.12,00,000Soln: Profit = Rs.12 Lac – Rs.3 Lac = Rs.9 LacA. Rs.12 Lac – Rs.10 Lac = Rs.2 Lac. This is the Short TermCapital Gain u/s 50A.B. Rs.10 Lac or Rs.12 Lac WELi.e. Rs.10 Lac – Rs.3 Lac = Rs.7 Lac. This is the Balancein Charge (Recovery of depreciation).

Note: 1) SLM method of depreciation is not applicable for entities engaged in meredistribution of power (Eg: KPTCL).2) Sec 32(1)(i) and Sec 50A are applicable to tangible as well as intangible assets whereas Sec 32(1)(iii)

and Sec 41(2) are applicable only to tangible assets.

38

2. Written Down Value Methodi) Depreciation under this method is charged on basis of block of asset concept.ii) As per Sec 2(11) Block of assets means “tangible assets namely building, machinery, furniture and plant OR intangible assets AND having same rate of depreciation.”Intangible assets include know-how, patents, trademarks, copyright, license, franchise or any other asset of similar nature.Normally for all intangible assets only one block of asset (since the rate of depreciation is equal). However under each category of tangible assets there may be various blocks of assets.iii) Depreciation is calculated based on WDV as on 31st March of the previous year.iv) As per 43(6) WDV is computed as under:WDV as on 1st April of PY XXXAdd: Actual cost of additions during the year XXXLess: Sale value on sale/Insurance money receivedon destruction of asset XXX

WDV as on 31st March of PY before depreciation XXXLess: Depreciation u/s 32 XXXWDV to be carried forward to next year XXXNotes:

1. Actual cost as per Sec 43(1) means cost incurred by the assessee as reduced by any amount directly or indirectly met by any other person.

2. Depreciation = WDV as on that date x Prescribed % as per Appendix I3. Date of sale is absolutely irrelevant. However date of purchase is relevant for the purpose of Point

(v) below.v) When an asset is used for a period less than 180 days then the depreciation is restricted to half .vi) Normal rates of depreciation are:

a) Buildings – 10%b) Furniture and Fittings – 10%c) Machinery – 15%d) Intangible assets – 25%e) Computers – 60%f) Motor Car – 15%g) Professional books being annual subscription – 100%h) Books other than those mentioned above – 60%i) Other vehicle and other plants – 15%

Sec 32(1)(iia) – Additional Depreciation1. It is applicable for WDV method.2. It is an additional depreciation in the year of purchase / construction.3. It is applicable only for plant / machinery.4. No additional depreciation in the following cases – Ship, aircraft, road transport

vehicles, office appliances, machinery / plant installed in accommodation or guest house, machinery / plant which is used before installation outside or within India, machinery/plant whole of cost of which is allowed as deduction under any other provisions of business income.

5. Additional depreciation = 20% of the actual cost of asset.

39

6. Additional depreciation is applicable only for industrial undertaking engaged in manufacture or production of any article or thing.

7. The new asset should be acquired and installed after 31st March 2005.Note: Provision of less than 180 days is applicable even for additional depreciation.Depreciation is allowed in the year of installation & not purchase.Normally depreciation can be claimed in the year in which asset is ready to use.However as per the latest decision of Karnataka High Court – Yellamma Dasappa Hospital case it is held that assets should be actually put to use.

Sec 35 – Expenditure on scientific researchRevenue expenditure and capital expenditure except on land is fully allowed as deduction in the year of actual expenditure provided such research is related to business.

1. Revenue Expenditure (salary and material used for scientific research only) and capital expenditure (except on land) incurred 3 years immediately prior to the year of commencement shall be fully allowed as a deduction in the year of commencement of business.

2. Any contribution/donation to a university, approved scientific research association/institution is entitled for a deduction of 125% of contribution. Such institution need not carry research related to the business of the assessee.

3. Contribution to National Laboratory, IIT is also eligible for 125% of deduction [Sec 35(2AA)]

4. In case of companies engaged in the business of bio-technology or engaged in the business of manufacture or production of drugs, pharmaceuticals, computers, electronic equipments, tele- communication equipment etc or any other article notified by CBDT. If the assessee carries out in-house R & D 150% of such expenditure is allowed as deduction. [Sec 35(2AB)]. However, expenditure incurred on land or building shall not be allowed. [Building can be claimed under Sec 35(2) as a deduction.

Sec 35ABB – Expenditure on obtaining tele-communication license – It is allowed equally over license period commencing from the year of commencement of business.

Sec 35D – Preliminary expenses only for Indian Company or Non-corporate resident assessee. Deduction per year = 1/5th of preliminary expensesPreliminary expenses allowed is Actual amount OR 5% of cost of the project WEL.However in case of Indian Companies higher of Cost of the project and capital employed is considered for ascertaining the 5% criteria.

Notes:1. Preliminary expenses include expenditure on feasibility study, preparation of project

report, MOA, AOA, legal fees etc.2. Cost of the project includes cost of fixed assets as on last day of PY in which business

is commenced.3. Capital employed = Issued Share Capital + Debentures + Long Term Borrowing as on

last day of PY in which business is commenced.Long term borrowings also include creditors for Fixed Asset imported from abroad, wherein the credit period exceeding 7 years.

40

Sec 35 DD – Expenditure on amalgamation / de-merger – Deduction is 1/5th of such expenses (only for companies)

Sec 35DDA – Expenditure incurred on VRS compensation – Deduction is 1/5th of such expenditure. It is applicable only to Indian Companies and any person, not being a company, resident in India.

Sec 37(1) – General DeductionsAny expenditure incidental to the business shall be allowed as a deduction provided the following conditions are satisfied:

1. It should not have been specifically covered u/s 30-36.2. It should not be a personal expenditure.3. It should not be a capital expenditure.4. It should have been incurred during the PY.5. Such expenditure should have been incurred wholly and exclusively for the purpose of business.Explanation: Any fine or penalty paid towards any offence or an activity prohibited by law shall not be allowed as a deduction. However, compensatory penalties are allowed.

Sec 37(2B) – Any advertisement in a journal, pamphlet, tract, souvenir, belonging to a political party shall not be allowed.

Sec 36 – Specific Deductions36(1)(i) – Insurance premium paid on stock of goods

36(1)(ia) – Insurance premium on the cattle belonging to the members of federal milk co operative society paid by the society (Deduction to society)

36(1)(ib) – Health insurance premia paid by employer, by way of A/c Payee cheque, on health of employees.

36(1)(ii) – Bonus or commission payable to employees subject to Sec 43B.

36(1)(iii) – Interest on borrowed capital – It is allowed as a deduction. Any interest on capital borrowed till the date asset is put to use cannot be claimed as a deduction as that amount is capitalised. (only for extension of business)

36(1)(iiia) – Discount on zero coupon bonds which are primarily infrastructure bonds is allowed pro-rata over the life of the bond.

36(1)(iv) – Employer’s contribution to RPF and/or approved super annuation fund

36(1)(v) – Contribution (by employer) towards approved gratuity fund.36(1)(va) – Employees contribution to PF, ESI received by the employer is considered as an income within the meaning of Sec 2(24)(x). However the same is allowed as a deduction if it is paid within the due date under the relevant Act.

36(1)(vi) – Deduction towards Animals other than stock-in-trade – Deduction is allowed in the year of death of animals or in the year in which it becomes permanently useless.

41

Deduction = Cost of animals – Sale value of Carcasses.

36(1)(vii) – Bad debt is allowed as a deduction, provided conditions u/s 36(2) are satisfied. It does not include RBD.

36(1)(viia) – RBD provision in case of banking company / Public Financial Institutiona) Schedule or Non-Schedule Bank incorporated in India – 7.5% of GTI. An additional

deduction of upto 10% of average rural advances made by the branches shall be allowed.

b) Banks incorporated outside India and Public Financial Institution/SFC – 5% of GTI.Note: In case of schedule and Non-schedule bank incorporated in India the banks shall be given an additional deduction of upto 5% of the doubtful assets and loss assets at their option.

36(1)(viii) – Deduction is for a specified entity for eligible business computed under head Profits & Gains of Business or Profession.– Deduction = Special Reserve created or 20% of the profit of such business WEL.No deduction when the balance in such reserve exceeds twice paid up capital & General reserve.

36(1)(ix) – Deduction towards family planning expenditure incurred by a company.Revenue expenditure is fully allowed whereas capital expenditure is only to the extent of 1/5th.Note: In case of other assessee deduction can be claimed u/s 37(1)/32.

36(1)(x) – Omitted.

36(1)(xi) – Omitted.

36(1)(xii) – Any expenditure incurred by corporation or body corporate for meeting the objects of such entity.36(1)(xiii) – Banking Cash Transaction Tax is allowed.36(1)(xiv) – Contribution towards Exchange risk administration fund – Credit guarantee fund trust for small industry.36(1)(xv) – Securities Transaction Tax w.e.f. 1.4.08 (STT)36(1)(xvi) – Commodity Transaction Tax w.e.f. AY 2009-10 (CTT)

Sec 36(2) – Conditions for claiming bad debts as deduction1. Debt should have been offered as an income or such money should have been lent in the normal

course of business of money lending.2. It should have been written off in books.3. It should be irrecoverable

Treatment of bad debts recovered – Sec 41(4) – It should be treated as business income to the extent allowed earlier.Ex: Bad debts in the year 2002-03 – 10 Lacs. Allowed by ITO – Rs.7 lacs. Bad debts recovered – 5 lacsIncome u/s 41(4) is 5 lacs – 3 lacs (disallowed earlier) = 2 lacs.

42

Sec 40(a) – Amounts not deductibleThe following amount shall not be deducted while computing business income.

(i)Any interest, royalty, technical fees etc payable outside India or in India to a non-resident (Other than a Company or foreign company) on which no TDS is made or after deducting the TDS has not been remitted to the government.(ia) Any interest, rent, commission, brokerage, technical fees, professional fees, contract amount etc payable to a resident in India, for which no TDS is made or after deducting the TDS has not been remitted to the government.

Note: Salary paid to a resident in India even without TDS is allowed as deduction.(ib) Security transaction tax. (AY – 2009-10 allowed)(ic) FBT(ii) Any amount of income tax or any other sum charged under this Act..(iia) Wealth Tax(iii) Salary payable

Outside India (resident or non-resident) To a non-resident, without TDS (in India)

(iv) Any payment out of PF or any other employee welfare fund unless effective TDS arrangement has been made.

(v) Tax referred u/s 10(10CC) i.e. tax paid by employer on non-monetary perquisites.Note: In Point No. (1) and (2) above, the amount shall be allowed in the subsequent year if TDS condition is satisfied in subsequent years.

Sec 40A – Expenses disallowed in certain circumstancesSec 40A(2) – Payment to relatives – Unreasonable amount is disallowed.As per Sec 2(41) relative to an individual means ‘spouse, brother, sister, any lineal ascendant or descendant of that individualEx: Mr.X and Mr.Y are CAs having equal knowledge and experience working in Mrs.X’s firm. Salary paid to X – Rs.4 lacs and to Y – Rs.3 lacs. In such a case Rs.1 lac is disallowed.

Sec 40A(3) – Payment made in excess of Rs.20,000 otherwise than by account payee cheque or Demand Draft – 100% of such expenditure is disallowed.

Sec 40A(7) – Provision for gratuity is disallowed. However the following amounts shall be allowed:a) Gratuity actually paid during the year.b) Provision that has become payable during current financial year.

Sec 40A(9) – Employer’s contribution to URPF is disallowed.

Sec 43B – Expenses allowed only on payment basisNot withstanding anything contained in Sec 145, the following shall be allowed if and only if paid on or before due date u/s 139(1):

(i) Any tax, duty, cess, fees by whatever name called payable to Government / Government authorities. Ex: Sales tax, excise duty, entertainment tax, octroi, entry tax, service tax etc.

(ii) Employer’s contribution to PF, ESI, Super Annuation Fund, Gratuity Fund or any other employee welfare fund.

43

Note: Employer’s contribution should be paid before the due date u/s 139(1), if paid subsequently allowed in that year. Employees contribution should be paid within the due date under relevant Act. If it is paid after the due date, it is never allowed.

(iii) Bonus or commission as referred in Sec 36(1)(ii).(iv) Any interest on loan or borrowings from Public Financial Institution, SFC, State Industrial

Investment Corporation.(v) Any interest payable on loans/advances taken from a scheduled bank.(vi) Any amount payable by employer towards earned leave.

If any of the above mentioned items are paid after due date then the same shall be allowed in such year of payment.Eg: Bonus debited to P&L A/c of 07-08-10L(A Ltd)Bonus paid Rs 3L on 10.3.08, Rs 5L on 15.9.08, 2L on 14.2.2008;Rs 8L is allowed for FY 07-08 & Rs 2L for FY 08-09

Format of computation of business incomeNormally business people follow accrual method of accounting. Business income is computed as under:Net profit as per P & L A/c XXXAdd: Expenses disallowed but debited to P&L A/c XXXBusiness income not credited to P&L A/c XXX XXX Less: Expenses allowed but not debited to P&L A/c XXXNon – business income credited to P&L A/c XXX XXX Taxable business income XXX

Format of computation of professional incomeNormally professional people follow cash basis of accounting. From the given receipts & payments A/c the professional income can be computed as under:Professional receipt irrespective of the year for which it belongs to XXXLess: Professional expenses actually paid during the yearirrespective of the year for which it belongs to XXXDepreciation allowed u/s 32 XXX XXX Taxable professional income XXX

List of expenses disallowed while computing business income:1. Scientific research capital expenditure on land.2. In-house scientific research mentioned in 35(2AB) – L & B disallowed.3. Personal expenses4. Capital expenditure (subject to sec 32)5. Fines & penalties (compensatory penalties are allowed)6. Any payment to NR without TDS.7. Interest etc paid to resident without TDS (other than salary)8. Donations subject to Sec 35, 35(2AA), 35CCA, 35CCB (certain donation say donation to kargil

fund, PM’s national relief fund etc are disallowed while computing business income. However, deducted for GTI u/s 80G)

9. Unreasonable payment to relatives u/s 40A(2)10. Cash payment in excess of Rs.20,000 – 20% is disallowed (only for revenue expenditure). Cash

payment can be made for capital expenditure (any amount)11. Expenses disallowed if not paid within due date of 139(1)

44

12. All provisions & reserves except RBD in case of banking companies / PFI.13. Advertisement in political party journal.14. Taxes disallowed are income tax, wealth tax, FBT, tax referred in 10(10CC), STT. (allowed for

AY 09-10)Taxes allowed are excise duty, custom duty, entry tax, octroi, sales tax, service tax.

Deduction incase of partnership firm :Partnership firm can be assessed as (1) PFAS (Sec 184) (2) PFAOPPFAS – If the following conditions are satisfied then firm is assessed as PFAS

1. certified true copy of partnership deed has to be filed along with the first year of return of income or every subsequent year of changes in terms of deed.

2. deed should be in writing3. individual shares of partners are specified in deed

Deduction of interest, salary etc allowed u/s 40(b). Share of profit is exempt in the hands of partner u/s 10(2A)

PFAOP – If any of the condition prescribed in sec 184 are not satisfied.

Sec 40(ba) – no deduction is allowed towards interest, salary etc paid to partner of PFAOP. Further, share of profit received by a partner of PFAOP is not exempt u/s 10(2A).

Sec 40(b) – Deduction towards interest & salary to the partners of PFAS :Interest :

1. it should be mentioned in the deed2. interest allowed is interest as per deed or 12% p.a., WEL.3. this interest is applicable on any amount given by the partner (capital or loan).

Remuneration to partners1. It should be mentioned in the deed.2. It is allowed only to the working partners. Working partner means a partner who is actively

engaged in the affairs of the firm.3. Remuneration allowed is amount prescribed in deed or amount prescribed in Sec 40(b) whichever

is less.

Amount prescribed in Sec 40(b):

Non-Professional Firma) Book Profit upto 1st Rs.75,000 – Remuneration allowed is 90% of book profit or Rs.50,000

whichever is higher.b) On next Rs.75,000 – 60% of book profitc) On balance of book profit – 40% of book profit.

Professional FirmSubstitute Rs.1,00,000 in place of Rs.75,000 in the above format

45

Sec 44AB – Tax Audit:(a) Business – Turnover / Gross receipts in the current previous year exceed Rs.40 lacs(b) Profession – Gross receipts exceed Rs.10 lac in current previous year.(c) Presumptive Tax - 44AD, 44AE, 44AF, 44BB, 44BBB and claiming lower income than prescribed.

In all the 3 cases, assessees have to get their accounts audited by a CA and submit the report within the specified date i.e. 31st October of AY.If there is a default under this section the penalty is 0.5% of turnover or Rs.1lac which ever is less.Audit report has to submitted in Form No. 3CA or 3CB along with statement of particulars in Form No. 3CD.

Presumptive Taxation – Sec 44AD, Sec 44AE and Sec 44AF.In the above sections law presumes certain minimum incomes.Sec 44AD – Profits and gains from civil construction including works contract

1. Income = Turnover or Gross receipts x 8%2. 44AD is applicable if and only if turnover does not exceed Rs.40 lacs.

Sec 44AE – Profits and gains from goods carriage vehicles1. For heavy goods vehicle Rs.3,500 per month or part of the month

Other vehicles – Rs.3,150 per month or part of the month2. Assessee should not own more than 10 vehicles at any time during the previous year.3. Asset taken on hire purchase or installment are deemed to be owned.

Gross receipts may be over Rs.40 lakhsSec 44AF – Profits and gains of retail business

Minimum income = Turnover x 5%.Turnover should not exceed Rs.40 lacs.It should be pure retail business.

Problems: 1 P & L A/c of ABC & Co. for year ending 31.3.09 :

To general expenses 2,000,000 By gross profit 3,000,000

To depreciation 500,000 By dividend received 400,000

To donation 1,500,000 By Net loss 2,610,000

To interest to partners at 18% p.a.

A 180,000.00

B 90,000.00

C 240,000.00 510,000

To salary

A 200,000.00

B 1,000,000

C 300,000.00 1,500,000

46

6,010,000 6,010,000

Adjustments :i) Depreciation u/s 32 - 3,00,000B/f depreciation loss 1 L & Business loss-2L

ii) Commission received - 3,00,000 directly credited to partners capital.

Compute income of firm & partners & tax.

iii)FD Interest 3L

2 Mr.Gautham is a Chartered Accountant practising at Mangalore. The following is the

analysis of his Receipts and Payments Account for the year ending 31.03.2006:

Receipts Amount Payments Amount

To Balance b /d 9,500 By Salaries 64,000

To Professional Income 190,000 By Rent 12,000

To House Rent for 8 months 32,000 By Telephone Expenses 5,500

To Share of Income from HUF 6,250 By Professional Expenses 3,000

To share of profit from firm 11,000 By Motor Car Expenses 7,500

To LIC policy matured 77,750 By Misc. Office Expenses 1,500

with bonus By Purchase of Car 80,000

By Advance Income-tax 12,500

By Personal Expenses 42,400

By Entertainment Expenses 17,000

By House Property Expenses

- Municipal Taxes 6,000

- Repairs 2,500

- Insurance 2,000

- Collection Charges 600

By Balance c /d 70,000

326,500 326,500

Compute Mr.Gautham's Gross Total Income after taking into account, the following:

a) Value of benefits received from clients during the course of profession is Rs.5,000/-.

b) Allowable rate of depreciation on motor car is 15%.

c) Municipal value of house property is Rs.42,000. The house was self-occupied for

residence for 4 months during the year.d) Salary outstanding – 6000/-e) 40% of the car is used for personal expenses.

15 3. Receipts & Payments A/c of Dr.Sindhu was as follows: (Rs. in lakhs)

Receipts Amount Payments Amount

To Balance b/d 4 By Salaries 5

To Visiting Fees 12 By Printing & Stationery 2

To Consultancy Fess 4 By Medicine purchased 2

To Sale of Medicines & Drugs 5 By Advertisement 1

To Gifts from Patients 2 By Car Expenses 2

47

To Gift received from brother 4 By Surgical Equipment 5

To Gift received from Nephew 1 By General Expenses 2

To Sale of Shares 4 By Balance c/d 17

36 36

Adjustments

a) Closing Stock of medicines - 0.2 Lakh

b) Salary Outstanding - 0.2 Lakh

c) Rent Outstanding - 3 Lakh

d) Advertisement includes payment for bill Financial Year 2003-04 - Rs.20,000

e) Consultancy Fees outstanding - Rs.3 Lakh

f) Visiting Fees include 20% of Financial year 2004-05

g) Car used for personal purpose - 40%

h) Depreciation: Car - Rs.2 Lakh; Surgical Equipment - 15%

CAPITAL GAINSChapter IV – E (Sec 45 – Sec 55A)

Any profits or gains arising on transfer of a capital asset is chargeable to tax under the head Capital Gains, unless specifically exempt u/s 54 to 54H.Capital Gain = Transfer [Sec 2(47)] + Capital Asset [Sec 2(14)]

According to Sec 2(14) – Capital Asset means: -Property of any kind held by the assessee, whether used in business or profession or not, but does not include:

(i) Stock – in – trade, raw materials and consumables used in the business or profession.(ii) Personal effects i.e., movable property (including wearing apparel and furniture but excluding

Jewellery) held for the personal use of the assessee or dependent family members.(iii) Non – urban agricultural land. Urban agricultural land is one which is situated within

(a) Municipality limits or cantonment limits and having population not less than 10,000 as per latest census, OR

(b) 8 Kms of local limits from such cantonment / Municipality.(iv) 6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defence Gold Bonds 1980,

Special Bearer Bonds 1991 issued by Central Government(v) Gold deposit Bonds of 1999 issued by Central Government.

Note 1: Jewellery is always a capital asset, irrespective of its form.Note 2: Jewellery includes ornaments made of gold, silver, platinum or any other precious or semi – precious metals/stones and also includes stones or precious stones as such, whether set in any furniture or wearing apparel . Note 3: Silver utensils like plates, bowls, spoons etc used for personal use are not capital assets. However, gold, silver coins or bar used for pooja are capital assets.

48

TYPES OF CAPITAL ASSETS1) Short Term Capital Asset (STCA – Sec 2(42A))It means any capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer. (i.e. <= 36 months)However, in the following cases, 12 months is considered instead of 36 months

(i) Shares (listed or unlisted).(ii) Other listed securities.(iii) Units of UTI or Mutual fund as specified in 10(23D).(iv) Zero coupon bonds (w.e.f. AY 2006-07)

Short Term Capital Gain (STCG – Sec 2(42B))Capital Gain arising on the transfer of Short Term Capital Asset.

2) Long Term Capital Asset (LTCA – Sec 2(29A))Any capital asset other than Short Term Capital Asset is called Long Term Capital Asset.

Long Term Capital Gain (LTCG – Sec 2(29B))Capital Gain arising on the transfer of Long Term Capital Asset.

TRANSFER (Sec 2(47))Transfer in relation to capital asset include:

(i) Sale(ii) Exchange(iii) Extinguishments of rights (building destroyed by fire)(iv) Relinquishment of asset (Surrender of tenancy rights)(v) Compulsory acquisition of capital assets under any law.(vi) Conversion of capital asset into stock-in-trade.(vii) Transactions allowing possession of an immovable property as referred in Sec 53A of

Transfer of Property Act, 1882.(viii) Any transaction which has the effect of transferring or enabling enjoyment of an immovable

property incase of members or otherwise of Co-operative society, Company, AOP etc.(ix) Maturity or redemption of a Zero Coupon Bond (w.e.f. 06-07)

Sec 48: COMPUTAION OF CAPITAL GAINS (FORMAT):Full value of sale consideration XXX(Money and/or money’s worth)Less: Expenses incidental to transfer such asBrokerage, commission etc. XXXNet sale consideration XXXLess: Cost/Indexed cost of acquisition XXXXXXLess: Cost/Indexed cost of improvement XXXSTCG/LTCG XXX

Note 1: In the case of LTCA, cost of acquisition and improvement have to be indexed, i.e. to give the benefit of inflation and change in the time value of money.

49

Indexed cost = cost of acquisition/improvement X cost inflation index of year of transfer cost inflation index of year of acquisition/improvement

Note 2: In case of assets acquired before 1.4.1981, the assessee has the option to choose either the actual cost or fair value as on 1.4.1981 (whichever is higher).

All improvements before 1.4.1981 should be completely ignored (incurred by assessee or previous owner)

Note 3: Cost InflationIndex (CII) for various years are given below:

Previous Year CII Previous Year CII81.82 10082.83 109 94-95 25983.84 116 95-96 28184.85 125 96-97 30585.86 133 97-98 33186.87 140 98-99 35187.88 150 99-00 38988.89 161 00-01 40689.90 172 01-02 42690.91 182 02-03 44791.92 199 03-04 46392.93 223 04-05 480

05-06 497 07-08 55106-07 519 08-09 582

Sec 50B: CAPITAL GAIN IN CASE OF SLUMP SALE(a) Slump sale means sale of one or more undertakings owned and held by the assessee, wherein consideration shall be determined on lump sum basis and not by assigning values to individual assets/liabilities.(b) Capital Gain = sale value – net worth of undertaking.(c) Net worth = assets – outsiders’ liability (value as per books of a/c).Note 1: Any change in the value of assets on revaluation should be ignored.Note 2: Values of assets shall be computed as under:(i) Depreciable asset – WDV as per 43(6)(ii) Other assets – Value as per books(d) Capital Gain is normally considered as LTCG , however, if the undertaking was owned and held by the assessee for a period not exceeding 36 months then, CG is STCG.

50

(e) No indexation can be done for net worth.(f) The assessee has to furnish a report from C.A. in case of slump sale, indicating correct valuation of net worth.

Eg:Balance Sheet

Share capital 8L Land 10LP&L A/c 4L Building 8LCRR 1L Machinery 4LDebentures 6L Stock 3LCreditors 5L Debtors 1LO/S Expenses 3L Preliminary expenses 1L

27L 27L

Market value of land – 15L; Building – 7LWDV of building and machinery under IT are Rs.7L & Rs.3L respectively.Slump sale for consideration of 22L. Compute CG.

Net worth:Assets: Land 10L

Building 7LMachinery 3LStock 3LDebtors 1L

(a) 24LLess: LiabilitiesDebentures 6LCreditors 5LO/S Expenses 3L(b) 14LNet worth (a) – (b) 10LTherefore, LTCG = sale (22L) – Net worth (10L) = 12L

Sec 50C: COMPUTATION OF CAPITAL GAIN ON SALE LAND OR BUILDING OR BOTH AND IMPACT OF STAMP VALUATION

(a) Applicable only for sale of land or building or both.(b) Sale value shall be

(1) Actual sale value or stamp valuation, whichever is higher.(2) Whichever is higher in (1) or valuation as per valuation officer (if referred by assessee), whichever is less (but minimum is actual sale value).

Eg1: Cost of land – 10L; Actual sale value – 15L; Stamp valuation (a) 12L (b) 20L;FMV – Rs.17L.

Solution:(a) 15L or 12L, WEH = Rs.15LLess: cost Rs.10L

51

STCG Rs.5L

(b) 15L or 20L, WEH = Rs.20LLess: cost Rs.10LSTCG Rs.10L

Eg2: In the above Eg1, if reference is made to valuation officer, what is sale valueIf value is (a) 18L (b) 22L (c) 12L

(a) 15L or 20L, WEH = 20L20L or 18L, WEL = 18L=> Sale value = 18L(b) 15L or 20L, WEH = 20L20L or 22L, WEL = 20L=> Sale value = 20L(c) 15L or 20L, WEH = 20L20L or 12L, WEL = 12LSale value = 15L as it is the actual sale value.Sec 51: ADVANCE MONEY RECEIVED and FORFEITEDAdvance money received / forfeited shall be reduced from the cost of acquisition (and not from indexed cost of acquisition even if it is long term), if such advance is forfeited by the present assessee. Advance money forfeited by previous owner should not be reduced from cost of acquisition.

TAXATION OF CAPITAL GAINSSHORT-TERM (Normal)Sec 111-A: Note – 1Others – Normal income, taxed at normal rates. Eg: individuals at slab rates.

LONG-TERM (Special)Sec 112 – Listed equity shares/units of equity oriented funds subject to STT; Exempt u/s10(38).Others – Note – 2

Note – 1:STCG on sale of listed equity shares or units of an equity oriented fund. It is taxed at 10% subject to following conditions:

(a) Sale is on or after 1.10.2004(b) Such transaction is subject to STT.(c) If other income is below taxable limit (Rs.1,50,000) then the deficit shall be taken out of

such CG [Applicable only for resident individual or HUF](d) No deduction under Chapter VI-A (including Sec 80C) against this income or tax.

Note – 2:Other long-term Capital Gains are taxed at flat rate of 20%

(a) Resident individual/HUF can use LTCG for adjusting deficit arising on account of other bincome being below taxable (same as 111-A above)(b) Chapter VI-A deductions cannot be given.

52

(c) Incase of transfer of listed securities including equity shares [if not covered u/s 10(38)], thefollowing option is given:(i) Tax @ 20% after indexing the cost or(ii) Tax @ 10% without indexation.

Note: While computing GTI, the income to be taken is always after indexation. Only while computing tax, the above option should be exercised.Note: The relaxation, exemption etc are for shares, listed securities etc. If listed securities are sold without undergoing STT then exemption u/s10(38) is not available.

Eg1: BI – 30,000; Mr.X (Non-resident); LTCG – 90,000.Solution: Tax = 90,000 X 20% = 18,000(+) E.Cess @ 2% = 360

18,360[Deficit of Rs.20,000 cannot be adjusted since, non-resident]

EXEMPTIONS UNDER THE HEAD CAPITAL GAINS (Sec 54 to Sec 54H)

Sec 54: Exemption in respect of LTCG arising on transfer of residential house property and investment in residential house property.

(a) Applicable only for individuals or HUF.(b) Asset transferred should be LTCA, being residential house property.(c) The assessee should invest LTCG in a residential house property. There is no restriction on

number of house properties to be invested.(However law uses the word ‘a house property’)(d) Amount of exemption is LTCG or amount invested, whichever is less.(e) Period of investment:

Purchase: Within 1 year before or 2 years after the date of transfer.* Construction: Within 3 years from date of transfer.

* Date of sale: 1/1/08; time limit permitteda) For purchase 1.1.07 to 1.1.10b) For construction (completion of construction) : 1.1.08 to 1.1.11Construction can be by the assessee himself or by any third party i.e 3 yrs time limit is applicable even in the case of purchase agreement entered into with a building developer which is yet to be constructed.

Note: Commencement of construction is not relevant rather completion date is relevant.(f) Capital Gain Account Scheme (CGAS)

If the assessee invests the money as mentioned above on or before the due date u/s 139(1) then, CGAS in not applicable. Else, the assessee can claim exemption iff he deposits the CG in CGAS on or before due date u/s 139(1).

Sec 54B: Exemption in respect of capital gain on the transfer of urban agricultural land used for agriculture

(a) Applicable only for individuals.

53

(b)The asset transferred should be agricultural land (ST or LT)(c) Such agricultural land should have been used for agricultural purposes in the 2 years immediatelypreceding the date of transfer either by himself or by his parents.(d)Amount to be invested is CG.(e) Exemption = amount invested or CG, whichever is less.(f) Time limit for investment: The assessee should invest such capital gain within 2 yrs from the dateof transfer in another agricultural land, urban or rural.Note: Other provisions of CGAS / default provisions (Refer Sec 54).

Sec 54D: Exemption in respect of capital gain on compulsory acquisition of Land & Buildings forming part of industrial undertaking

(a) Applicable for all kinds of assessees.(b) The capital asset transferred may be LT or ST.(c) Capital asset acquired should be (i) Land (ii) Building (iii) Right in land or building.(d) Such capital asset should form part of an industrial undertaking belonging to assessee.(e) Such capital asset should have been used by assessee for the purpose of business of the

undertaking for 2 yrs immediately preceding the date of transfer.(f) The asset should have been acquired by way of compulsory acquisition under any law.(g) Amount to be invested is capital gain.(h) Investment should be in another land or building or any right in such land or building, forming

part of another industrial undertaking (building can either be purchased or constructed).(i) Time limit: Time limit for investments is within 3 yrs from the date of transfer.(j) Capital Gain = amount invested or CG, WEL.

Note: For CGAS and transfer of new asset within 3 yrs, refer Sec 54.

Sec 54F: Exemption in respect of LTCG on transfer of LTCA other than residential HP & invested in residential HP

(a) Applicable for individual and HUF.(b) Asset transferred should be a LTCA other than residential HP. Therefore, if a commercial HP is

transferred Sec 54F is applicable.(c) The investment should be made in residential HP.(d) The investment should be Net Sale Consideration (NSC).(e) Time limit for investment – same as Sec 54.(f) Capital Gain exempted is:

(i) If investment is greater than or equal to NSC, entire capital gain is exempt.(ii) If investment is less than NSC, then exemption is proportionate amount

i.e. Exemption = Total CG X InvestmentNSC

(g) The assessee should not own more than one house property other than one purchased for Sec 54F on the date of transfer. In other words, the maximum number of house properties that an assessee can own on date of transfer is 2. i.e. one house property (existing) + one purchased within 1 year before date of transfer as per provisions of Sec 54F.

Note: For CGAS and transfer of new asset within 3 yrs, refer Sec 54.

Sec 54G: Exemption in respect of capital gain on transfer of asset in the course of shifting of industrial undertaking from urban area

(a) Applicable for all assessees.

54

(b) Capital asset may be LT or ST.(c) Capital asset should be: (i) Machinery (ii) Plant (iii) Building (iv) Any right in building (v)

Land.It does not cover rights in P&M etc (only in building). It also does not cover furniture & fittings.

(d) Such capital asset should be used for purpose of industrial undertaking.(e) The capital gain arises on transfer of above said capital asset in the course of shifting an

industrial undertaking. Eg: land is sold since industrial undertaking is getting shifted from urban area.

(f) The industrial undertaking should be shifted from urban area to any area other than urban area. (It can be shifted to semi-urban area also).

(g) The assessee should invest CG.(h) The investment should be made in another machinery, plant, building (purchase/construction)

or land. Exemption shall also be given towards expenses incidental to shifting.(i) Time limit for investment: Within 1 year before date of transfer or within 3 yrs after date of

transfer.Note: For CGAS and transfer of new asset within 3 yrs, refer Sec 54.

Sec 54EC: Exemption in respect of LTCG on transfer of any asset & investment in certain bonds(a) The asset transferred should be LTCA (including residential HP, jewellery, and agricultural

land).(b) The investment to be made is CG.(c) Investment should be made in the long-term specified assets i.e. any bond redeemable after 3

years issued by: NHAI – National Highway Authority of India. RECL – Rural Electrification Corporation Ltd.

(d) Time limit for investment: Within 6 months from the date of transfer.(e) Exemption = CG or Amount invested, WEL.(f) Withdrawal of exemption: If any time within 3 years from the date of acquisition of such

specified asset. The said asset is either transferred or converted into money in any other mode or any loan or advance is taken on the security of such specified asset then, CG exempted earlier shall be taxed as LTCG.

Note: Provisions of CGAS is not applicable for Sec 54EC & 54ED.Maximum investment is Rs 50 Lakhs w.e.f 1.4.07

Sec 54H: Extension of time limit for acquiring new asset or depositing or investing amount of capital gainsWhere transfer of a capital asset u/s 54, 54B, 54D, 54EC, 54F is by way of compulsory acquisition and the compensation is not received as on the date of transfer then, the time limit shall commence from the date of receipt of compensation and not from the date of transfer. (Also refer Sec 45(5)).

55

GIST OF EXEMPTIONS(a) 54B, 54D and 54G - Short term / Long term (Others Long term) (Bombay Delhi Goa)(b) 54, 54F - Individual / HUF54B - Only Individuals (Applicability)(c) Investment - Capital Gains in all except Net Sale Consideration in 54F(d) Exemption - Capital Gains or Investment w.e.t (except 54F where there isproportionate exemption)(e) Time Limit - (I) 54 / 54F - within 1 year before or within 2 years for purchase (construction – 3 years)(ii) 54B - 2 years(iii) 54D - within 3 years(iv) 54G/GA - within 1 year before or within 3 yrs after(v) 54EC - 6 months.(f) CGAS - all except 54EC(g) New asset not to transfer within 3 years in all(h) one to one correlation 54, 54B, 54D and 54G.

INCOME FROM OTHER SOURCES (Chapter IV – F)Sec 56 – Sec 59

Sec 56(1): General ChargingAny income, which is not chargeable to tax under any of the earlier 4 heads of income, is chargeable to tax under the head “Income From Other Sources”.Thus, conditions for taxing under this head:

(a) It should be income.(b) It should not be exempt.(c) It should not have been taxed in earlier four heads of income.

Sec 56(2): Specific ChargingThe following incomes are always taxed under this head:

(i) Dividend subject to exemption u/s 10(34).(ii) Casual income such as income from lotteries, races (including horse race). Card games or any

other sort of gambling or betting.(iii) Amount received from Keyman Insurance Policy if not taxed u/s 15 or 28.(iv) Profits and Gains from letting of machinery, plant, furniture etc. if not taxed u/s 28.(v) Income from interest on security if not taxed u/s 28.

56

(vi) Apart from the incomes given in Sec 56(2), the following incomes are always taxed under other sources.(a) Family pension(b) Salary of M.P.(c) Honorarium(d) Royalties(e) Copyrights, technical know-how etc if not taxed u/s 28.(f) Bank interest etc.

Sec 57: DeductionsThe following deductions are available under the head income from other sources:

(a) Collection charges of interest/dividend (unless exempted).(b) In respect of family pension, 1/3rd of such pension or Rs.15,000, whichever is less(c) The deductions prescribed u/s 30, 31 and 32 shall be applicable in respect of letting of machinery,

furniture etc.(d) Deduction similar to Sec 37(1)[Sec 57(iii)]

Sec 58: Expenses not deductibleThe following amounts shall not be deducted:

(a) Interest, salary payable outside without TDS.(b) Personal expenses of the assessee.(c) The provisions of sec 40A shall be applicable ‘Mutatis Mutandis’.(d) No expenditure shall be allowed in respect of casual income. If income is from owning and

maintaining racehorses, it is taxed either as Business Income or Other Sources and normal deductions are available against such income.

Note: Lottery, horserace incomes are taxed @ flat rate of 30% (Sec 115-BB).Sec 59: Deemed IncomeIt is equal to Sec 41(1).

CLUBBING OF INCOMESec 60 – Sec 64

It means including in one’s income, the income of other person. Basic intention of clubbing is to reduce tax evasions, except in special cases such as Sec 64(1A).

Sec 60: Transfer of income without transferring the assetsEg: Right to receive rent of machinery transferred without transferring machinery.

Sec 61: Revocable transfer of assetsTaxable in the hands of transferor.

Sec 62: Exceptions to Sec 61There wont be any clubbing in the following cases:

(i) Transfer is by way of a trust, which is not revocable during the lifetime of beneficiary.(ii) Transfer by other mode (other than through trust which is not revocable during the lifetime of

transferee).Transfer made before 1/4/61 which is not revocable for a period exceeding 6 yrs. All these exceptions shall apply if the transferor does not derive any income from such asset directly or indirectly.

57

Sec 63: Definition of transfer & revocable transferTransfer: It includes any settlement, trust, agreement or arrangement.Revocable Transfer: It means transfer which can be retransferred to the transferor or the transferor gets the right to reassume powers, directly or indirectly.

Sec 64: Income of spouse, minor child etc.(i) Spouse:

(a) Income of the spouse by way of salary, commission, fees etc from a concern where the assessee has a substantial interest. However, no clubbing if the remuneration etc is solely attributable to application of his/her technical or professional qualification.

(b) Transfer of asset to spouse otherwise than for adequate consideration or without having an agreement to live apart (subject to Sec 27).

(c) Indirect transfer: If an asset is transferred to the trust or association without adequate consideration and such trust is for the benefit or spouse.

(ii) Son’s wife (Daughter-in-Law):(a) Any transfer to son’s wife, directly or indirectly through trust or association without

adequate consideration is clubbed in the hands of transferor.

Sec 64(1A): Clubbing of income of minor childMinor’s income is clubbed in the hands of parent having highest total income in the 1st year of clubbing. In the subsequent yrs, it is clubbed with the same parent irrespective of total income of other parent. However, the assessing officer may shift the clubbing to other parent in the subsequent year, if there is a reason to do so only after giving opportunity of being heard.However, there won’t be clubbing of minor child’s income in the following cases:

(a) Child is suffering from disability as referred in Sec 80U.(b) Income relates to manual work done by him or income relates to application of skills or talent or

special knowledge or experience of such child.(c) Clubbing shall be made subject to additional provisions

(i) If the marriage of parent does not subsist, then clubbing shall be made in the hands of such parent who is maintaining child.

(ii) If the parents are not alive, clubbing is made in the hands of guardian. (not specifically provided in law)

In the case of (a), (b) and (c) above, minor child himself shall be the assessee and parent/guardian shall be deemed u/s 2(7).

DEEMED INCOMES

Sec 68 to 69DSec 68: Cash CreditIf any amount is found credited in the books of the assessee and no explanation is given by him about the same or explanation is unsatisfactory then, such amount shall be taxed as cash credit.

Sec 69: Unexplained InvestmentInvestments found with the assessee but not recorded in the books are deemed income.

58

Sec 69A: Unexplained money, jewellery, bullion etc.Same as Sec 69.

Sec 69B: Investments, jewellery, bullions etc. partly disclosed in the booksDeemed income – to the extent not disclosed in the books.

Sec 69C: Unexplained ExpenditureIf the assessee offers no explanation or unsatisfactory explanation about the expenditure incurred then, the same shall be deemed to be income. No deduction shall be allowed against such income under any head of income.

Sec 69D: Amount borrowed or repaid in HundiHundi means Bill of Exchange in vernacular language. It is taxable either at the time of borrower or at the time of repayment (including interest).

SET-OFF & CARRY FORWARD OF LOSSES(Sec 70 – Sec 80)

Sec 70: Inter source / Intra head adjustmentIt is possible in all cases except,

(a) LTCL can be adjusted only against LTCG. (It means STCL can be adjusted against ST or LT capital gain).

(b) Speculation losses cannot be adjusted against non-speculation income.(c) Loss from activity of owning and maintaining race horses.

Sec 71: Inter head adjustmentIt is possible in all cases, except,

(a) Capital losses cannot adjusted against other head of income.(b) Speculation losses cannot be adjusted against other heads of income including non-speculation

business income.(c) Loss from racehorse.(d) Business losses cannot be adjusted against Salary Income. (w.e.f. A.Y. 05-06) (However,

depreciation loss may be adjusted).Speculation loss/capital loss cannot be adjusted against any other head of income. Whereas, losses from any other head can be adjusted against speculative profit /capital gain.

CARRY FORWARD OF LOSSES (Sec 71B – Sec 80)Sec 71B: Unabsorbed HP lossCarry forward for 8 subsequent years. But, can be adjusted only against HP income in subsequent years.

Sec 72: Carry forward of Non-Speculation business losses8 subsequent years to be adjusted against business income only. (the same business need not be carried)It can be adjusted against speculative and non-speculative incomes.

Sec 72A: Carry forward of losses incase of amalgamation, demerger etc(a) The losses to be carried forward are:

(i) Unabsorbed depreciation allowance.

59

(ii) Unabsorbed business loss only.(b) The transferee company can carry forward the losses as under:

(i) In case of amalgamation: Amalgamated company can carry forward business losses for next 8 years irrespective of the number of years which transferor company avail the benefit of carry forward.

(ii) Demerger: The resulting company can carry forward and set-off such losses for balance period only.

Sec 73: Carry forward of speculative loss4 subsequent years and only against speculation income.

Sec 74: Carry forward of capital losses8 subsequent years. (a) STCL against ST or LT capital gain. (b) LTCL only against LTCG.

Sec 74A: Losses from the activity of owning and maintaining race horse.Only for 4 subsequent years and can be adjusted only against such income.

Sec 75: Carry forward of losses of firmIt can be carried forward only by firm and not by partners.

Sec 78: Change in constitution of firm & carry forward incase of succession(i) Change in constitution of the firm: The firm cannot carry forward loss relatable to share of

retired/deceased partner.(ii) Succession: If any person carrying business/profession has been succeeded in such capacity by

another person otherwise than by inheritance. No losses can be carried by the successor.

Sec 79: Carry forward or set-off of losses incase of company in which public are not substantially interestedCarry forward of losses unless shareholders holding atleast 51% of the voting power share continued to be shareholders even on the last day of the P.Y. in which carry forward or set-off is to be claimed. However, this is not applicable if change in shareholding takes place because of death of the shareholder or transfer of shares by way of gift to any relative.

Sec 80: Return of lossesFor claiming carry forward of losses, the return of losses has to be compulsorily filed within due date u/s 139(1), in the year of incurring such losses. However, this Sec is not applicable incase of carry forward of allowances under Sections 32(2), 35(4), 36(1)(ix) and 71B.

Chapter VI A Deductions

A. Deduction in respect of paymentsSection Nature of Payment Deduction

80C (1) Actual amount paid towards Life Insurance Upto Rs.1,00,000Policy Premium

60

(2) Contribution to Public Provident Fund(3) Investments in National Savings Certificates(4) Subscription to any approved units of mutual fundreferred to in Sec 10(23D)(5) Contribution by an employee to a recognisedprovident fund(6) Contribution by an employee to an superannuation fund(7) Contribution to Unit Linked Insurance Plan, 1971(8) Payment made as tuition fees to any university,college or school or other educational institutionsituated in India for the purpose of full timeeducation in respect of any two children of theassessee.(9) Repayment of loan taken from GovernmentApproved Institution or Specified Employer or anyBoard or a Corporation or any other bodyestablished under Central or State Act or anotified Institution, borrowed for the purpose ofpurchase or construction of residential house.Any expenditure incurred towards stamp duty,registration charges for purchase of the house isalso eligible.(10) Amount Contributed towards a contract fordeferred annuity.(11) Contribution to 10 / 15 year account under PostOffice Savings Bank (Cumulative TimeDeposit) Rules, 1959w.e.f AY 08-09 Bonds of NABARDSw.e.f AY 07-08 FD in a scheduled bank for a period of 5 years

80CCC Annuity or Pension Fund (LIC or other Insurer) Upto Rs.1,00,000

80CCD.Central Government Pension Scheme a) Employer's Contribution

10% of salary or actualamount paid by the employeeb) 10% of salary or actualamount contributed by

61

Central Government.[Salary = Basic Pay + DA (Iftaken for retirement benefit)

Note: According to Sec 80CCE, aggregate of deductions under Sec 80C, Sec 80CCC andSec 80CCD is limited to Rs.1,00,000

80D Medical Insurance Premium paid by cheque only Senior Citizen - Rs.20,000(w.e.f AY 08-09, paid by any mode of payment other than by cash)

Others - Rs.15,000

80DD Medical treatment and maintenance of dependant Normal Disability - Rs.50,000with disability Severe Disability - Rs.75,000

(Irrespective of amount spent)

80DDB Treatment of Specified disease or ailment Senior Citizen- Upto Rs.60,000Others - Upto Rs.40,000

80E Interest on loan for higher education (Interest only) No Limit

80G Eligible Donations I(A) + I(B) + II(A) + II(B)I. Without Limit Donations(A) Eligible for 100% deductiona) Contribution to National Relief Fundb) Contribution to Africa Fundc) Contribution to Prime Minister's National Relief Fund

d) Contribution to Gujrat Earthquake Relief Fund(B) Eligible for 50% deduction a) Contribution to Jawaharlal Nehru Memorial Fund

b) Contribution to Indira Gandhi Memorial Trustc) Contribution to Rajiv Gandhi Foundation(Contribution to Gandhi Family Funds)d) Contribution to National Relief Funde) Contribution to PM Drought Relief Fund

62

II. With Limit Donations(A) Eligible for 100% deductiona) Contribution to Indian Olympic Associationb) Contribution to Government or Local Authority for family planning.(B) Eligible for 50% deductiona) Contribution to Government or Local Authorityfor purpose other family planning.b) Contribution to religious and charitable trust

[With limit donation means that aggregate of donationsunder this category should not exceed 10% of AdjustedGross Total Income

Adjusted Gross Total Income = GTI - Exempted Income- Deductions under Chapter VIA excluding Deductionunder this section - LTCG - Special Income u/s 115A,115AB, 115AC, 115AD, 115BB and 115D

80GG Rent Paid Least of the following:a) Rent in excess of 10% ofTotal Incomeb) 25% of total incomec) Rs.2,000 p.m. ceilingTotal Income means Gross TotalIncome as reduced by deductionsunder Chapter VIAexcept u/s 80GG

80U Individual who suffers from disability Severe Disability - Rs.75,000(The first in which the assessee claims deduction, Normal Disability - Rs.50,000he should furnish a certificate from the Governmentdoctor)

Collection and Recovery of Taxes (Chapter XVII)

Tax Deducted at Source (TDS)

The various provisions relating to TDS are covered under Chapter XVII-B of Income Tax Act, 1961.TDS refers to tax deducted at source by the payer at the prescribed rate at the time of accrual or payment of certain incomes to the payee.The following are the objectives of TDS:

63

a) To collect income tax at the earliest opportunityb) To provide information about the tax – payer (i.e. the person from whom tax is deducted)

Rates of TDSDifferent rates of TDS are provided under respective sections for various payments made. Only in case of salary payment, the employer shall apply the income tax rates applicable for individual assessee. In addition to TDS rates, surcharge shall be applied as follows:

Status of the Payee

Rate of Surcharge

Individual, HUF, AOP, BOI where total amount paid or credited under relevant TDS provisions does not exceed Rs.10,00,000/-

Nil

Individual, HUF, AOP, BOI where total amount paid or credited under relevant TDS provisions exceeds Rs.10,00,000/-

10%

Firms and Domestic Companies where total amount paid or credited under relevant TDS provisions does not exceed Rs.1 crore

Nil

Firms and Domestic Companies where total amount paid or credited under relevant TDS provisions exceeds Rs.1 crore

10%

Foreign Companies 2.5%

Items covered under TDS provisions are exhaustive in nature and not indicative.

Gist of TDS Provisions (AY 2008-09)

Section Nature of Payment Rate of TDS Threshold limitWhen should tax be deducted?

192 Salaries Average Rate Rs.1,10,000/- At the time of

64

payment

193 Interest on securitiesCompany – 20%

Rs.2,500/-At the time of credit or payment whichever is earlierOthers – 10%

194 Dividend

Non-Company Assessesa) Resident – 20%b) Non-Resident – 30%

Rs.2,500/-At the time of paymentCompany

Assesseesa) Domestic – 20%

b) Foreign – 40%

194AInterest other than interest on securities Company – 20%

Non-Company – 10% Rs.5,000/-At the time of credit or payment whichever is earlier

194BWinnings from lottery or crossword puzzle

30% Rs.5,000/- At the time of payment

194BB Winnings from horse race 30% Rs.2,500/-At the time of payment

194CPayments to contractors / sub-contractors

Advertising Contract – 2%Non-Advertising Contract – 1%Sub-Contract – 1%

Single payment exceeding Rs.20,000/- or aggregate of payments exceeding Rs.50,000/- in a financial year

At the time of credit or payment whichever is earlier

194D Insurance CommissionResident other than company – 10%Domestic Company – 20%

Rs.5,000/- At the time of credit or payment whichever is earlier

194E Non-resident sportsman or sports association 10% Nil At the time of credit or

payment whichever is earlier

194EE Payment in respect of deposit under NSS 20% Rs.2,500/-

At the time of payment

194F

Payments on account of repurchase of units by Mutual Fund or Unit Trust of India

20% NilAt the time of payment

194GCommission on sale of lottery tickets

10% Rs.1,000/- At the time of credit or payment whichever is earlier

194H Commission or brokerage 10% Rs.2,500/-At the time of credit or payment whichever is earlier

194I Rent(As per table below)*

Rs.1,20,000 p.a At the time of credit or payment whichever is earlier

194JProfessional or technical services

10% Rs.20,000/- At the time of credit or payment whichever is earlier

194LACompensation on acquisition of certain immovable property

10% Rs.1,00,000/-At the time of payment

195 Payment to non-resident Rate as per Finance Act or Agreement u/s 90 or

Nil At the time of credit or payment whichever is earlier

65

Agreement u/s 90A

196BPayment to offshore fund income from mutual fund units

10% Nil At the time of credit or payment whichever is earlier

196CPayment of income on foreign currency bonds or shares of Indian Company

10% Nil At the time of credit or payment whichever is earlier

196D Payment of income to FIIS on securities 20% Nil At the time of credit or payment whichever is earlier

* Rate of TDSa) Upto 31.05.2007

15% plus applicable surcharge and cess if the payee is an individual or HUF and at the rate of 20% plus applicable surcharge and cess if the payee is any other person.

b) From 01.06.2007

Asset PayeeRate of TDS

(i) For use of any machinery or plant orEquipment

Any Payee 10%

(ii) For use of any land or building (includingfactory building), land appurtenant to abuilding (including factory) or furniture orfittings

Individual or HUF 15%

(iii) For use of any land or building (includingfactory building), land appurtenant to a building(including factory) or furniture or fittings

A person other than an individual or HUF

20%

INCOME TAX AUTHORITIES

Sec. 116

66

The following are the classes of income tax authorities:i) The Central Board of Direst Taxes

ii) Directors General of Income-tax or Chief Commissioners of Income – taxiii) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax(Appeals) iv) Additional Directors of Income-tax or Additional Commisioners of Income-tax or Additional

Commisioners of Income-tax (Appeals)v) Joint Directors or Joint Comissioners of Income-tax

vi) Deputy Directors of Income-tax or Deputy Commissioners of Income-taxvii) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax

viii) Income-tax officers ix) Tax Recovery Officersx) Inspectors of Income-tax

ASSESSMENT

Section 139: filing return of income:

1. Section 139(1): 1) Who should file ROI?

• Company/firm, or • Other persons whose total income exceeds basic exemption limit( total income = total income before deductions under sec 10A/10B/10BA or Chapter VIA)

2) Due date for filing ROI: a. In case of company or a person whose accounts to be audited or a working partner if his accounts to be audited: 31st Oct of AYb. Others: 31st July of AY

2. Section 139(1A): filing of bulk return of income by salaried employee to their employer:- such employer shall furnish return of income within due date

3. Section 139(1B): • Filing of returns in e-form is equivalent to return filed u/s 139(1)• E-form includes floppy, magnetic cartridge, CD-ROM

4. Section 139(3): loss return• To be furnished within 139(1)• Return of Income(ROI) so filed is equivalent to Return of Income filed u/s 139(1)• If not filed, then no carry forward of losses• However, such non-filing shall not affect carry forward of losses u/s 71B,32(2)

5. Section 139(4)- belated return• If ROI is not filed within 139(1) or within 142(1), assessee can file belated return• Time limit for such belated return is one year from the end of the relevant AY or before

assessment is complete; whichever is earlier.

67

6. Sec 139(4A) – Return by trust• If income exceeds Rs.1,00,000 , then audit is attracted u/s 11- due date is October 31st of

relevant AY.• If no audit is attracted, due date is July 31st of relevant AY.

Note: Return of Income to be filed if total income exceeds basic exemption limit.

7. Sec 139(4B) – Return by Political Parties• Return of income to be filed if total income exceeds basic exemption limit• Under Sec 13A audit of accounts is compulsory. Thus due date is October31st of relevant

AY.

8. Sec 139(4C) – Return by certain Institutions• Following institutions shall file return of income if total income before exemption u/s 10

exceeds basic exemption limit:o Sec 10(21)o Sec 10(22B)o Sec 10(23A)o Sec 10(23B)o Sec 10(23C)(iiiad),(iiiae), (iv),(v),(vi), (via)o Sec 10(24)

• The following institutions need not file return of income:o Sec 10(23C)(i), (ii),(iii), (iiia), (iiib),(iiic)

9. Sec 139(4D) – University/College/Institution approved for Scientific Research- return to be filed within due date give u/s 139(1).

10. Sec 139(5) – Revised Return • Any person who has filed return of income u/s 139(1) or 142(1) can file a revised return if

he discovers any error or omission • Time limit for revised return is the time limit given u/s 139(4)• If belated return is filed, then there is no benefit under this section.

11. Sec 139(9) – Defective Return• Circumstances when a return can be treated as defective by AO:

o Annexures/ Statements/Columns in return of income are not duly filled.

o Return of income is not accompanied by : Statement showing computation of tax Proof of TDS , Advance tax paid (such proof can be submitted within 2

years from the end of relevant AY) Tax audit report u/s 44AB

o Where regular books are maintained and P&L a/c and Balance sheet / personal account are not furnished.

68

o Audit report (if audited) is not filed o Where regular books of account are not maintained and a statement of available

particulars is not furnished• AO may intimate defect and the assessee should rectify the defect within 15 days.

12. Sec 139A: Permanent account Number- rule 114• Submitted in Form No. 49A• Following persons should apply for PAN

o Person assessable to tax- on or before 31st May of AYo Persons carrying on business or profession whose turnover is 500,000 or more in a

previous year- Apply before the end of PYo Persons required to file return of income u/s 139(4A)- apply before the end of PYo Persons registered under CST Act/ GST Act or export assessee of appropriate state

13. Sec 139B: Tax Return Preparer(TRP)• This section enables CBDT to frame a scheme by which specified class of persons may file

their return of income through a TRP• TRP shall assist the specified class of persons in preparing their return of income and affix

his signature on such return of income• Specified class of person shall mean any person other than

o A company , oro A person whose accounts to be audited u/s 44AB or under any law and is required

to file return of income • TRP can be any individual, other than

o Any officer of the scheduled bank with which the assessee maintains a current account or has other regular dealings

o Legal practitioner entitled to practice in any civil code of Indiao A Chartered accountanto An employee of specified class of persons

• Scheme notified under this section may provide for o Manner in which and the period for which the TRPs shall be authorizedo Educational and other qualifications to be possessed and training and other

conditions required to be fulfilled by TRPo Code of conduct by TRPo Duties and obligations of TRPo Circumstances under which the authorization given to a TRP may be withdrawno Any other relevant matter as may be prescribed by the scheme

14. Sec 140 - Return by whom to be signedSl No Person Signatory 1 • Individual

• When he is absent from India/ Himself Guardian/agent

69

mentally retarded or any other reason

2 • HUF Karta When he is absent, any other adult member of the family

3 • Company• Where MD is unable to sign or no MD• When company is non-resident in India• When company is in liquidation• When company’s management is taken over by the government

MD Any other director

Person having power of attorney Liquidator Principal officer

4 • Partnership firm Managing partner or any other major partner

5 • political party chief executive officer6 • association of persons any member or principal

officer7 • local authority principal officer8 • any other person person who is competent

to sign

15. Section 140A: self assessment tax• on the basis of return to be filed u/s 139 or in response to sec 142(1), assessee is required

to compute tax after considering the followingo Tax paid under the provisions of the Acto TDS and TCSo Relief from double taxation o Maximum alternate tax

• Also he should compute interest payable u/s 234A for delay in filing return of income and u/s 234B for default in payment of advance tax

• Amount paid by him is first adjusted towards interest payable and then for tax payable amount

• Failure to pay tax in full or in part—then assessee becomes assessee in defaultAssessment means verifying the correctness of total income shown in the return &accordingly determining the tax payable/refundable & issue notice/intimation accordingly.

16. section 142: inquiry before assessment• 142(1): AO may serve a notice on any person who has filed return of income or where ha has

not filed within due date requiring the following:o notice requiring the person to furnish return of incomeo notice requiring production of accounts and documents( not exceeding 3 years accounts

prior to PY)o notice requiring to furnish information about assets and liabilities and any other matter

70

Types of assessment :1. Self assessment 140A2. Scrutiny assessment 1433. Best Judgement 1444. Re-assessment 147 & 148

• Enquiry- sec 142(2)AO can make enquiry to collect full income information of any person

• Special audit- sec 142(2A)o AO can direct assessee to get accounts audited and furnish the audit reporto Prior approval of CCIT to be obtainedo Audit to be done by a CA nominated by CCIT/CITo Audit to be done even if accounts are audited alreadyo Expenses of audit is determined by CCIT and is paid by assessee

17. Section 143: assessmentAccording to this section, intimation is required to be sent only in a case where there is demand payable by the assessee or where refund is due to the assessee. In all other cases, acknowledgement issued at the time of filing of return of income shall be deemed to be the intimation.

71

SERVICE TAX

Taxes are mainly of two types:a) Direct Taxb) Indirect Tax.

Indirect tax is a tax wherein the incidence and impact of tax is on two different persons.The main contributories to indirect tax revenue are sales tax / VAT, service tax, central excise duty, luxury tax etc.

Sales Tax is in existence for collection of taxes on sale of goods for several decades, but the government’s eye was also on services being rendered as service sector’s contribution to India’s GDP was substantial. To tax these services, a committee was formed which was headed by Dr. Raja J Chelliah. Based on the committee’s recommendations, service tax was introduced through the Finance Act 1994 (There is no separate Act for service tax unlike other taxation laws like income tax, wealth tax etc.)

Nature of Service TaxService Tax is a tax on services. This is not a tax on profession, trade, calling or employment but is in respect of services rendered. If there is no service, there is no tax. Generally speaking service means, some intangible activity being rendered which can be only felt. As per dictionary terms ‘Service’ means a useful result or product of labour, which is not a tangible commodity.

Finance Act 1994The statutory provisions relating to service tax were first promulgated through Chapter V of the Finance Act, 1994.

SOURCES OF SERVICE TAX LAW

72

EXTENT OF SERVICE TAX [SECTION 64]

The Act applies to whole of India except the state of Jammu & Kashmir. The levy applies to taxable services provided or to be provided.If the service is provided in Jammu & Kashmir Service Tax is not applicable.If the service is provided from Jammu & Kashmir to any other part of India, the service will be liable to Service Tax.Hence, for the applicability of Service Tax, location of service provided is relevant.Levy of Service Tax extends to services rendered in designated areas in the continental shelf and exclusive economic zone. The Exclusive Economic Zone extends upto 200 nautical miles inside the sea from base line.Service provided within the territorial waters will be liable to Service Tax, as levy of Service Tax extends to whole of India except Jammu & Kashmir and India includes territorial waters. Indian territorial waters extends upto 12 nautical miles from the Indian land mass.

CHARGE OF SERVICE TAX [SECTION 66]

The rate of service tax prescribed by section 66 is 12% + Cess on service tax is 3% w.e.f. 11.05.2007. i.e 2% Education Cess and 1% Secondary Higher Education Cess. Section 65(105) provides that taxable service shall not only include service provided but also the “service to be provided”. Thus,

a) The charge is on the services provided or to be providedb) The services provided or to be provided must be the one which is covered in Sec 65(105)

Three Important Section of Finance Act, 1994

Sec 65(105) – It gives a list of services covered under service tax net. If a service doesn’t feature here then it cannot be taxed, meaning the list is exhaustive in nature

Sec 66 – Charging Section

Sec 67 - Value of taxable service

73

FinanceActs

Rules

Notifications

Circulars or Office letters (Instructions)

OrdersTrade Notices

c) The rate of tax is 12%d) The measure of tax is on “Value of Taxable Services” provided which is defined in section 67.

GENERAL EXEMPTIONS FROM SERVICE TAX FOR ALL SERVICESSection 93 of the finance act, 1994 empowers the central government to exempt taxable services either generally or subject to the specified conditions from levy of whole of the service tax or any part thereof.

The exemptions are:

(a) Exemption to all services provided to United Nations or International Organisation –Notification No. 16/2002 ST, dated 02.08.02

(b) Exemption to services provided to a developer or units of special economic zone -Notification No. 17/2002 ST, dated 21.11.02The recipient of the service should be SEZ. Since Service Tax being an indirect tax, the burden is on the customer & SEZ being favoured by all, it is exempted.Taxable services provided to a developer of special economic zone or a unit (including a unit under construction) of special economic zone by any service provider, for consumption of the services within such special economic zone, are exempt from the whole of service tax leviable therein under section 66 of the act. However, such an exemption is subject to the following conditions, namely:

The developer has been approved by the Board of Approvals to develop, operate and maintain the special economic zone;

The unit of special economic zone has been approved by the Development Commissioner or Board of Approvals, as the case may be, to establish the unit in the special economic zone

The developer or unit of special economic zone shall maintain proper account of receipt and utilization of the said taxable services.

Value of taxable services

Free services – meaning no quid pro quid

No service Tax

Where the consideration is not ascertainable

67(1)(iii) comes into effect & accordingly it shall be valued by applying Service Tax (Determination of value) Rules, 2006

74

(c) Exemption to goods and materials sold by service provider to recipient of service– Notification No. 12/2003 ST, dated 20.06.03

W.e.f 1.07.03 so much of the value of all the taxable services, as is equal to the value of goods and materials sold by the service provider to the recipient of service has been exempt from the service tax leviable thereon subject to the condition that there is documentary proof specifically indicating the value of the said goods and materials.

However, the said exemption shall apply only in such cases where: No credit of duty paid on such goods and materials sold has been taken under the provisions of the CENVAT Credit Rules, 2004 or Where such credit has been taken by the service provider on such goods and materials, such service provider has paid the amount equal to such credit availed before the sale of such goods and materials.

(d) Exemption for small service providers – Notification No. 6/2005 ST dated 01.03.05:Service tax is fully exempt in respect of the taxable services of aggregate value not exceedingRs.4,00,000 (Rs.8,00,000 from FY 2007-08 & Rs.10,00,000 from FY 2008-09) in any financial year.

NOTE:a) The service provided above should be taxable service.b) Consideration includes any amount that is payable for the taxable service provided.c) The gross amount charged for the taxable service shall include any amount received towardsthe taxable service before, during or after the provisions of such service.

Valuation of taxable services (Sec 67)

Consideration wholly in money

Consideration partly in terms of money

Consideration inclusive of ST

payable

Value of such service will be

such money charged

Value shall be such amount in money, with the addition of ST

charged, is equivalent to the

consideration

Value shall be such amount as, with the addition of ST payable, is equal to the gross amount charged.

Consideration not ascertainable

Value shall be determined in the prescribed

manner

75

d) Money includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include that is held for its numismatic value.e) Gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit noted and book adjustment.

Note: Subject to the provisions mentioned above, the value of taxable services shall be determined in such manner as may be prescribed.

Eg: FY 2008-09 Amount Billed – 9,00,000Amount Received - 7,00,000Eligible for Small Service Providers (SSP) exemption & no tax.

- FY 2009-10 Billed amount – 9,90,000Amount Received – 7,00,000It is eligible for SSP exemption but taxation is on amount received i.e. 1,00,000 is taxable

- FY 2010-11o Amount billed – 10,00,000o Amount received – 7,00,000

No SSP eligibility since billed amount exceeded 10,00,000. However, there is no tax since he has eligibility in preceding year & amount received in CY is less than 10,00,000

- FY 2011-12o Billed amount – 12,00,000o Amount received – 4,00,000

Service Tax on entire 4,00,000 i.e from 1,00,000

FY Amount Billed Amount Received Service tax2008-09 11,00,000 10,50,000 50,000 x 12.36% = 61182009-10 9,00,000 4,00,000 4,00,000x 12.36% =49440

1,00,000

Option1 :Send separately a debit note of Rs 1,00,000

ST = 1,00,000 x 12.36%= 12360/-

Option 2:1,00,000 is presumed to be cum-tax (inclusive).

ST = 1,00,000 x 12.36 112.36

= 11000

76

2010-11 7,00,000 9,00,000 NilBuildingV Used for self occupationIVIII

Let out to employees for residence

III

Let out for business

Service Tax is applicable for I & II i.e building used by occupier for commercial purpose.

PERSONS REQUIRED TO GET REGISTERED UNDER SERVICE TAX:

PERSONS LIABLE TO PAY SERVICE TAX

Below persons are required to register under service tax

Service Provider

Specified Persons [Rule 2(1)(d)]

Persons notified by the Central Government

Input Service Provider

Aggregate value of taxable services exceed 7 Lakhs (9Lakhs for FY:08-09)

Persons liable to pay service tax

Service providerSpecified persons as per rule

2(1)(d) of service tax rules

77

Taxable services and the specified person / class of person who are liable to pay service tax thereon as per Rule 2(1)(d) of Service Tax Rules, 1994 are:

a) In relation to general insurance business, the person liable to pay service tax is the insurer or re-insurer, as the case may be, providing such service.

b) In relation to insurance auxiliary service provided by an insurance agent, the perso liable to pay ST is the person carrying on general insurance business or the life insurance business as the case may be, in India.

c) In relation to taxable service provided or to be provided by any person from a country other than India and received by any person in India, the person liable to pay ST is the recipient of such service.

d) In relation to taxable service provided by a goods transport agency, where the consignor or consignee of goods is:

Any factory registered under or governed by Factories Act, 1948; Any company formed or registered under Companies Act, 1956; Any corporation established by or under any law;

Any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India;

Any co-operative society established by or under any law; Any dealer of excisable goods, whois registered under the central excise act, 1944 or the

rules made thereunder; or Any body corporate established, or a partnership fir registered, by or under any law,the person liable for paying ST is any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage i.e. recipient of services.

e) In relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor or an agent, as the case be, the person liable for paying ST is mutual fund or asset management company, as the case may be, receiving such service.

f) In relation to sponsorship service provided to body corporate or firm, the person liable to pay ST is the body corporate or firm, as the case may be, who receives such sponsors service.

PAYMENT OF SERVICE TAX ONLY ON RECEIPT OF VALUE OF TAXABLE SERVICES

The service provider charges service tax in his bill raised on his client as and when the service is provided. However, the service tax is payable to the government only when the value of taxable services is ‘received’.Thus, if a chartered accountant raises a bill for outstanding services say, on 15th December, 2007 for Rs.1,12,360/- (including service tax of Rs.12,360/-) and the client pays his bill only in February 2008, the liability to pay service tax to the government would arise only in February 2008. This alleviates the major grievance of the service providers who otherwise would be required to pay service tax on amounts not received or not likely to be received.

SERVICE TAX NOT PAYABLE ON FREE SERVICES:

Section 67(1) (iii) and Service Tax (Determination of value) Rules, 2006 (as inserted w.e.f. 19.04.2006) make provisions for valuation even when consideration is not ascertainable.However, these provisions apply only when there is consideration.

78

If there is no consideration i.e. in case of free service, section 67 and Service Tax (Determination of Value) Rules, 2006 cannot apply. Therefore, service tax is not applicable in such cases.

SERVICE TAX LIABLE TO BE PAID EVEN IF NOT COLLECTED FROMTHE CLIENT : Section 68 casts the liability to pay service tax upon the service provider or upon the person liable to pay service tax as per rule 2(1) (d). This liability is not contingent upon the service provider realizing or charging the service tax at the prevailing rate. The statutory liability does not get extinguished if the service provider fails to realize or charge the service tax fro the service receiver.

SERVICE TAX PAYABLE ON ADVANCE RECEIVED

POINTS TO BE REMEMBERED WHILE PAYING SERVICE TAXThe following points to should be noted while paying Service Tax:

a) ST is to be paid on the value of taxable services which is charged by an asseessee. Any income tax deducted at source is included in the charged amount. Therefore, ST is to be paid on the amount of Income Tax deducted at source also.

b) Where the amount of ST is paid in cash, the date of payment is the date on which cash is tendered to the designated bank.

Payment of ST into non-designated bank does not amount to payment of STc) In case the amount of ST is paid by cheque, the date of presentation of cheque to the bank

designated by Central Board of Excise & Customs shall be considered as the date of payment, subject to realization of cheque.

d) Payment should be rounded off in multiple of rupees.

ADJUSTMENT OF SERVICE TAX PAIDAn asseessee may adjust excess payment of ST against his liability of ST for subsequent periods.Where an asseessee has deposited ST in respect of taxable service which is not provided by him either wholly/partially for any reason, he may adjust the excess ST so paid by him (calculated on a pro rata basis) against his ST liability for the subsequent period.However, for carrying out such adjustment, asseessee must have refunded the value of taxable service and the ST thereon to the person from whom it was received.

Service tax is payable as soon as any advance is received as:

Taxable services includes “services to

be provided”

Payments received before, during or after the provision of taxable service, form part of the gross

amount charged for the taxable services.

79

In such cases of adjustment, the asseessee is required to file details in respect of such suo motu adjustments done by him at the time of filing ST returns. The return form ST-3 also provides for enclosure for documentary evidence for adjustment of such excess ST paid.It is to be noted that adjustment of excess payment of ST is not allowed per se, say due to clerical mistake etc. in such cases, the asseessee has to claim the refund of excess tax paid.MANNER OF PAYMENT OF SERVICE TAXService tax has to be paid to the credit of the Central Government in Form GAR-7 challan (yellow colour) in the specified branches of the designated bank. The list of such Banks and Branches is available in every Commissionerate of Central Excise. Different heads of accounts have been specified for different taxable service by the Government under which payment has to be made.While making the payment of service tax to the credit of Central Government, head of accountshould be correctly and properly indicated under major and minor heads and sub-heads to avoidmisclassification. In the challan, account head of education cess should be shown separately.A multiple service provider (a service provider rendering more than one taxable service) can usesingle GAR-7 challan for payment of service tax on different services.

INTEREST ON DELAYED PAYMENT OF SERVICE TAXIf the assessee fails to deposit the tax within the stipulated time, he shall be liable to pay simple interest at the rate of 13% per annum. There is no provision to waive this interest on delayed payment of service tax. For computing the period of delay in payment, the month is counted from the next day of the month on which the payment of service tax was due.

EXCESS COLLECTION [SECTION 73A]Every person who has collected an amount in excess of the service tax assessed or determined under the service tax law, is required to deposit such amount to the credit of Central Government.

INTEREST ON AMOUNT COLLECTED IN EXCESS: [SECTION 73B]

Where an amount is collected in excess of the service tax assessed or determined, the person who liable to pay such amount shall, in addition to the amount, be liable to pay interest. Interest shall also be payable by a person who has collected any amount, which is not required to be collected as service tax.The interest shall be payable at the rate of 13% per annum from the first day of the month succeeding the month in which the amount should have been paid till the date of payment of such amount.

DUE DATE FOR PAYMENT OF SEVRICE TAX [RULE 6(1)]

By an individual or a proprietary firm or a partnership firm

Quarterly oncePayable by the 5th of the month immediately following the said quarter

In other cases (company and HUF)Monthly oncePayable by the 5th of the month immediately following the said calendar month

DUE DATE FOR FILING OF SERVICE TAX RETURNS:

The service tax return, in form ST-3 should be filed on half yearly basis by the 25 th of the month following the particular half year. The due dates on this basis are tabulated as under:

80

HALF YEAR DUE DATE1st April to 30th September 25th October1st October to 30th March 25th April

When the due date falls on public holiday: Incase the due date of the filing of return i.e., either 25th

October or 25th April falls on public holiday, the assessee can file the return on the immediately succeeding working day.

DOCUMENTS TO BE SUBMITTED ALONG WITH RETURN:

Along with ST-3 return following documents should be attached:(i) Copies of GAR-7 challan which indicate the payment of service tax for the months/quarterscovered in the half year return(ii) A memorandum in Form ST-3A giving full details of difference between the amount ofprovisional amount of tax deposited and the actual amount payable for each month. FormST-3A is to be attached only when the assessee opts for provisional payment of service tax.

REVISED RETURN [RULE 7B OF SERVICE TAX RULES]:W.e.f 1/3/07, A return can be revised within 60 days from the date of filing original return

NIL RETURN:Even if no service has been provided during a half year and no service tax is payable; the assessee has to file a nil return within the prescribed time limit.

LATE RETURN [70(1)]:Unlike Income Tax, Service Tax Law does not contain any provision for filing a late return. If the return is not filed within the prescribed time, a penalty is leviable.

E-FILINGE-filing is a facility for the electronic filing of service tax returns by the assessee from his office,residence or any other place of choice, through the Internet, by using a computer. The assesseecan go to the e-filing site ‘Home Page’ by typing the address http://servicetaxefiling.nic.in in theaddress bar of the browser.E-filing of returns is an assessee facilitation measure of the department in continuation of itsmodernization and simplification program. It is an alternative to the manual filing of returns. This facility is available to all service providers.

ADMINISTRATION OF SERVICE TAX

MINISTRY OF FINANCE (1)

DEPARTMENT OF REVENUE (2)

81DIRECTOR GENERAL OF SERVICE TAX (CO-ORDINATOR BETWEEN 3 & 5)

CENTRAL BOARD OF EXCISE AND CUSTOMS (CBEC) (3)

CENTRAL EXCISE ZONES HEADED BY CHIEF COMMISSIONERS (4)

CENTRAL EXCISE COMMISSIONERATES HEADED BY COMMISSIONERS (5)

Functions of Director General (Service Tax)a) To ensure that proper establishment and infrastructure has been created under different Central

Excise Commissionerates to monitor the collection and assessment of service taxb) To study the staff requirement at field level for proper and effective implementation of service taxc) To study as to how the service tax is being implemented in the filed to suggest measures as may be

necessary to increase revenue collection or to streamline proceduresd) To undertake study of law and procedures in relation to service tax with a view to simplify the

service tax collection and assessment and make suggestions thereone) To form a data base regarding the collection of service tax from the date of its inception in 1994

and to monitor the revenue collection from service tax.

PRACTICING CHARTERED ACCOUNTANT’S SERVICESEffective Date: 16th Oct 1998.

Definition:“Practicing Chartered Accountant” means a person who is member of the Institute of Chartered Accountants of India and is holding a certificate of practice granted under the provisions of the Chartered Accountants Act, 1949 and includes any concern engaged in rendering services in the field of chartered accountancy.Scope of taxable services shall include any service provided or to be provided to a client by a practicing chartered accountant in his professional capacity, in any manner.

GENERAL INSURANC SERVICS

Effective Date: 01.07.1984Definitions:`‘General insurance business’ has the meaning assigned to it in clause (g) of Section 3 of the General Insurance Business (Nationalization) Act, 1972.‘General Insurance business’ means fire, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them but does not include capital redemption business and annuity certain business [Sec 3(g) of General Insurance Business (Nationalisation) Act, 1972]

‘Policy holder’ includes a person to whom the whole of interest of policy holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in the policy is defeasible or is for the time being subject to any condition [Sec 2(2) of the Insurance Act, 1938].

‘Insurer’ means any person carrying on the general insurance business and includes re-insurer.

82

Scope: The service shall include any service provided to a policyholder or any person, by an insurer, including re-insurer carrying on general insurance business in relation to general business.Service tax is payable only on the total amount of the premium charged by the insurer carrying on general insurance business.W.e.f. 11.07.2003 the taxable service provided by the insurer, carrying on general insurance business, to a policyholder in relation to General insurance business provided under the Universal Health Insurance Scheme is exempt from the service tax leviable thereon.

CONVETION SERVICES

Effective Date: 16th July, 2001.Definition:‘Convention’ means a formal meeting or assembly which is not open to the general public, and does not include a meeting or assembly the principle purpose of which is to provide any type of amusement, entertainment or recreation.

Scope: The service shall include any service provided or to be provided to a client, by any person in relation to holding of any convention in any manner.

Points to be noted:a) Stage shows, music concerts, sports events are not considered as convention since these events

provide some type of amusement, entertainment or recreationb) Hotels and event management companies holding seminars are liable for service tax in respect of

the charges levied towards holding of such seminars. Service can be providing rooms / halls for the convention or providing other facilities such as video conferencing, OHPs, speakers, microphones etc. apart from providing space for holding a convention.

c) Services provided by mandap keeper may appear similar to convention services but there is a subtle distinction between the type of events (official, social or business in case of mandap keeper as opposed to a formal meeting in case of convention service).However, a mandap keeper already paying service tax is not liable to pay service tax again under the category of convention services and vice-versa.

d) In case of service provider providing catering service along with convention services and catering charges are included in the gross amount of the bill, an abatement of 40% is allowed on the gross amount charged in the bill.However, abatement will not be available in the following cases:

(i) The cenvat credit of duty paid on inputs or capital goods or the cenvat credit of service tax on input services, used for providing such taxable service, has been taken under Cenvat Credit Rules, 2004.

(ii) The service provider has availed the benefit under the Notification No.12 / 2003 ST, dated 20.06.2003.

Here ‘catering service’ means a supply of substantial and satisfying meal.

RENT-A-CAB SCHEME OPERATOR’S SERVICES

Effective date: 16th July, 1997Definitions

83

‘Rent-a-cab scheme operator’ means any person engaged in the business of renting of cabs‘Cab’ means a motor cab or maxi cab.[Maxi cab and motor cab have the same meanings as defined in the Motor Vehicles Act, 1988.

Scope:The service shall include any service provided or to be provided to any person, by a rent-a-cab operator in relation to renting of a cab.

Note: In case of rent-a-cab operator abatement of 60 % is allowed on the gross amount charged in the bill. Abatement is not available in the following cases:

a) The credit of duty paid on inputs or capital goods has not been availedb) Exemption has not been availed for the cost of material used in providing services.

RENTING OF IMMOVABLE PROPERTY SERVICE

Effective date: 01.06.2007Definition‘Renting of immovable property’ includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include:

(a) renting of immovable property by a religious body or to a religious body(b) renting of immovable property to an educational body, imparting skill or knowledge or lessons on

any subject to or field, other than a commercial training or coaching centre.

‘Immovable property’ means building and its parts, the land incidental to the use of such building, the common or shared areas and facilities. In the case of a building located in a complex or industrial estate, it also includes common areas and facilities relating thereto, within such complex or estate. It excludes:

a) Vacant land solely used for agriculture, aqualculture, farming, forestry, animal husbandry, mining purposes, education, sports, circus, entertainment and parking purposes.

b) Building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents and camping facilities.

Scope: The taxable service shall include service provide or to be provided to any person, by any other person in relation to renting of immovable property for use in the course or furtherance business or commerce.

SERVICE INVOLED IN EXECUTION OF WORKS CONTRACTEffective date: 01.06.2007

‘Works contract’ means a contract wherein:(i) Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of

goods(ii) Such contract is for the purpose of carrying out:

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain lying or other installations for transport of fluids, heating, ventilation or air-c, onditioning including related pipe work, duct work and sheet metal work, thermal

84

insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of new building or a civil structure or part thereof, or of a pipeline or conduit, primarily for the purpose of commerce or industry; or

(c) construction of a new residential complex or part thereof; or(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar

services, in relation to (b) or (c); or(e) turnkey projects including engineering, procurement and construction or commissioning

(EPC) projectsScope: The taxable service shall include service provided or to be provided to any person, by any other person in relation to the execution of a works contract excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Note: There is a composition scheme for the service providers involved in the execution of works contract. The scheme gives an option to the assessee to pay 2% of the total value of the works contract as service tax. Assessees opting for the composition scheme would not be entitled to avail cenvat credit of capital gods, input and input services required for use in the works contract. The assesses who do not opt for this scheme would pay service tax on the taxable value of the works contract which is relatable to the services provided in the execution of a works contract. Such value would be determined on actual basis based on the records maintained by the assessee.

SPECIAL PROVISIONS FOR PAYMENT OF SERVICE TAX IN CASE OF AIR TRAVEL AGENTThe person liable for paying service tax in relation to the services provided by an air travel agent has an option to pay an amount calculated at the rate of:

a) 0.6% of the basic fare in the case of domestic bookingsb) 1.2% of basic fare in the case of international bookings

of passage for travel by air, during the calendar month or quarter, as the case may be, towards the discharge of his service tax liability instead of service tax @ 12%.The option once exercised applies uniformly in respect of all bookings of passage for travel by air made by him and cannot be changes during a financial year under any circumstancesThe expression ‘basic fare’ means that part of the air fare on which commission is normally paid to air travel agent by the airline

SPECIAL PROVISIONS FOR PAYMENT OF SERVICE TAX IN CASE OF LIFE INSURER CARRYING ON LIFE INSURANE BUSINESSAn insurer carrying on life insurance business who is liable for paying service tax has the option to pay an amount calculated @ 1% of the gross amount of premium charged by him towards the discharge of his service tax liability instead of paying service tax @ 12%.Such an option is not available when:

a) the entire premium paid by the policy holder is only towards risk cover in life insurance; orb) the part of the premium payable towards risk cover in life insurance is shown separately in any of the

documents issued by the insurer to the policy holder.

Problems1) Ajay Ltd. has agreed to render services to Mr. Guru. The following are the chronological events:Contract for services entered into on 31.8.2006Advance received in September, 2006 towards all services 60,000Total value of services, billed in February, 2007 2,10,000

85

Above includes non-taxable services of 70,000Balance amount is received in March, 2007When does the liability to pay service tax arise and for what amount? Contract contains cleardetails of services; consideration and service tax are charged separately, as mutually agreedupon.

Soln:The liability to pay service tax arises at the time of receipt of advance in September, 2006 andat the time of receipt of balance consideration in March 2007. Service tax is payable as soonas any advance is received as the taxable service includes “service to be provided” andpayments received, before during or after the provision of taxable services form part of thegross amount charged for the taxable services. Further, the liability to pay service tax arisesonly upon the receipt of the value of taxable services and not when the bill is raised.

Advance portionAdvance received towards all services in September, 2006 = 60,000Amount billed for taxable services = 2,10,000 – 70,000 = 1,40,000Advance received towards taxable services = 60,000 x (1,40,000/ 2,10,000) = 40,000Service tax @ 12% (since, service tax is charged separately) = 40,000 x 12% = 4,800Education Cess @ 2% = 96Total service tax liability = 4,896In this case, the due date for payment of service tax will be 5th October, 2006.

Balance portion.Balance amount received in March 2007 = 2,10,000 – Rs.60,000 = 1,50,000Amount received towards taxable services = 1,50,000 x (1,40,000/2,10,000) = 1,00,000Service tax @ 12% = 1,00,000 x 12% = 12,000Education Cess @ 2% = 240Total service tax liability = 12,240In this case, the due date for payment of service tax will be 31st March, 2007.

2) MN Ltd. has entered into a contract with OP Ltd. on 31.05.2006 for rendering services. The contract contains clear details of services. Consideration and service tax are charged separately. The following information is also available:(i) Advance received in June 2006 from OP Ltd. towards all services Rs.1,20,000(ii) Total value of services billed to OP Ltd. in August 2006 Rs.4,20,000(iii) Non-taxable services billed to OP Ltd.(included in (ii) above) Rs.1,40,000Balance consideration for services is received in December 2006.(i) How many times does the liability to pay service tax arise in such a case and when?(ii) What is the service tax liability in each case?(ii) What are the due dates for payment of service tax in each case?

Soln:

(i)The liability to pay service tax arises twice in such a case. The liability to pay service tax arises first when the advance is received as:(i) the taxable service includes ‘service to be provided’ and(ii) payments received, before during or after the provision of taxable services form part of the gross .

86

The liability to pay service tax arises again when the balance consideration is received. It may be noted that the liability to pay service tax arises only upon the receipt of the value of taxable services and not when the bill is raised.

(ii) Contract contains clear break up of taxable and other services. So advance received should also be bifurcated.(a) Advance portion Rs.Advance received in June 2006 = 1,20,000Amount billed for taxable services = 4,20,000 – 1,40,000 = 2,80,000Advance received towards taxable services = 1,20,000 x (2,80,000/4,20,000) = 80,000Service tax @ 12% (since service tax is charged separately) = 80,000 x 12% = 9,600Education cess @ 2% = 9,600 x 2% = 192Total service tax liability 9792

(b) Balance portionBalance consideration has been received in December 2006 Rs.Balance amount received in December 2006 = 4,20,000 – Rs.1,20,000 = 3,00,000Amount received towards taxable services = 3,00,000 x (2,80,000/4,20,000) = 2,00,000Service tax @ 12% = 2,00,000 x 12% = 24,000Education cess @ 2% = 24,000 x 2% = 480Total service tax liability = 24,480

(iii) In case of a company, service tax for a calendar month is payable by the 5th of the month immediately following the said calendar month. Therefore, the due date for payment of service tax in respect of receipt of advance is 05.07.2006. The due date for payment of service tax in respect of receipt of balance consideration is 05.01.2007.

3) PQ Ltd. gives the following particulars relating to the services provided to various clients by themfor the half-year ended on 30.09.07:(i) Total bills raised for Rs. 9,50,000 out of which bill for Rs. 50,000 was raised on an approved

International Organisation and payments of bills for Rs. 1,50,000 were not received till 30.09.07.(ii) Amount of Rs. 70,000 was received as an advance from MNO Ltd. on 25.09.07 to whom the

services were to be provided in October’07.You are required to work out the:(a) taxable value of services(b) amount of service tax payable

Soln:Computation of taxable value of services provided by the PQ Ltd. for the half year ending on 30.09.2007:Total bills raised 9,50,000Less: Bill raised on an approved International organisation (note 1) 50,000Less: Bills for which payment has not been realized (note 2) 1,50,000 2,00,000

7,50,000Add: Advance received for the services to be provided in October ’07 (note 3) 70,000Taxable value of services 8,20,000

Computation of service tax payableTaxable value of services 8,20,000Service tax @ 12% 98,400Add: Education cess @ 2% 1,968Add: Secondary and Higher Education cess @ 1% 984Total Service tax payable 1,01,352

87

Notes:1. Services provided to approved International Organisation are exempt from the service tax vide Notification No.

16/2002 ST dated 02.08.2002.2. Service tax is payable only on the value of taxable services received [Rule 6(1) of Service Tax Rules, 1994].3. Service tax is payable on advance received for taxable services (Section 67 of the Finance Act, 1994).

VAT (VALUE ADDED TAX)

The Value Added Tax (VAT) is a multistage tax levied as a proportion of value added(i.e. sales-purchases) which is equivalent to wages plus interest, other costs and profits.

In other words the various taxes paid on inputs purchased will be allowed as a credit.As VAT is less distortive and more revenue-productive, it has been spreading all over the world.

Tariff contains four rates only viz., 0, 1, 4 & 12.5%

ILLUSTRATION ON HOW VAT OPERATES:A is a trader selling raw materials to the manufacturer of finished products. He imports hisstock-in-trade as well as purchases the same in the local markets. If the rate of VAT is assumed to be 12.5% ad valorem, he will pay VAT as under:

VAT

Multi-point Tax on

Value addition

Collected at different stages of sales

Provision for set-off for tax at the previous

stage

88

(i) A’s cost of imported materials (from other states) 10,000(A will deposit rs.1250 duty on the above. Since, this is not a state VAT 1,250it will form a cost of input)

(ii) A’s cost of local materials 20,000(VAT charged by local suppliers Rs.2500. since the credit of this wouldbe available it will not be included in cost of input)(iii) Other expenditure (such as storage, transport, interest etc.) incurredand profit earned by A 8,750

(iv) Sale price of goods 40,000

(v) VAT on the above @ 12.5% (Approx) 5,000

(vi) Invoice value charged by A to the Manufacturer, B

I. A’s liability for VAT

Tax on the sales price 5,000Less: Set-off VAT paid on purchasesOn imported goods --On local goods 2,500 2,500Net Tax Payable 2,500

In the above illustration it is assumed that set off of VAT paid on imported goods from outside countries or other states is not allowed.

VARIANTS OF VAT:VAT has three variants, viz.,

Gross product variant

Income variant Consumption variant

Allows deductions for taxes on all

purchases of raw materials &

components, but no deduction is allowed for taxes on capital

inputs.

Allows for deductions on purchase of raw

materials and components as well as depreciation on capital

goods.

Allows for deduction on all business

purchases including capital assets.

89

45,000

These variants can be further distinguished according to their method of calculation, viz., Addition method & Subtraction method. Subtraction method could be further divided into: (a) Direct, (b) Intermediate, and (c) Indirect subtraction method.

METHODS FOR COMPUTATION OF TAX:

There are several methods to calculate the ‘Value Added’ to the goods for levy of tax. The three commonly used methods are:(a) Addition Method(b) Invoice Method(c) Subtraction Method

Addition Method:This method aggregates all the factor payments including profits to arrive at the total value addition on which the rate is applied to calculate the tax.

Invoice Method:(Tax credit method or Voucher method)This is the most common and popular method for computing the tax liability under VAT system.Under this method, tax is imposed at each stage of sales on the entire sales value and the tax paid at the earlier stage is allowed as Set Off. In other words, out of tax so calculated, tax paid at the earlier stage i.e. at the stage of purchases is Set Off, and at every stage differential tax is being paid,

Subtraction Method:While the above stated Invoice or Tax-Credit method is the most common method of VAT, another method to determine the liability of a taxable person is the cost subtraction method, which is also a simple method. Under this method, the tax is charged only on the value added at each stage of the sale of goods. Since, the total value of goods sold is not taken into account, the question of grant of claim for set off of or tax credit does not arise.

MERITS AND DEMERITS OF VAT:Merits: No tax evasion: VAT credit can be claimed against the liability on the final product manufactured or

sold. Proper records need to be maintained to claim credit. A perfect system of VAT will be a perfect chain where tax evasion is difficult.

Neutrality: Whatever be the source of purchase set-off is equally available. All purchases carry credit and hence the system has anti-cascading effect. Thus neutrality is ensured in the selection of source of purchases.

Certainty: The system is transaction based. VAT is applicable to all sales. No need to seek interpretation on turnover, sale, sale price etc.

The simple equation is as follows: VAT payable = Tax on sale – Tax on purchase. Transparency : The amount of tax should be clearly indicated in the invoice. The buyer knows the

amount he pays as tax. Government also knows the amount it gets as tax in every transaction. Better revenue collection and stability: The Government will receive its due tax on the final consumer /

retail sale price. There will be a minimum possibility of revenue leakage, since the tax credit will be given only if the proof of tax paid at an earlier stage is produced. Thus an invoice of VAT will be self enforcing and will induce business to demand invoices from the suppliers.

90

Effect on retail price : VAT does not have any inflationary impact as it merely replaces the existing equal Sales tax. With the introduction of VAT, the tax impact on the raw materials is to be totally eliminated. Therefore, there may not be any increase in prices.

Demerits: There are varying rates and some goods are out of VAT. Composition schemes and exemption. Composition schemes and exemption schemes are also available. Thus 100% benefit of VAT is not gained because there are varying VAT rates and some goods are out of VAT system. It will be difficult to put the purchases from other states at par with the state purchases. The accounting costs will increase. The burden of this increase may not be commensurate with the benefit to traders and small firms. It would increase the working capital requirements and interest burden on the same. VAT tends to be regressive: Being a consumption tax, the burden of tax is the same for the poor as well the rich. Any consumption tax is bound to suffer from this weakness. Administration cost to the state can increase significantly.

1. Compute the invoice value to be charged and amount of tax payable under VAT by a dealer who had purchased goods for Rs 120000 and after adding for expenses of 10,000/- and of profit Rs 15000/- had sold out the same. The rate of VAT on purchases and sales is 12.5%.

Solution:Computation of invoice value

Particulars RsCost of Goods PurchasedAdd: Additional expensesAdd: Profit Share

1200001000015000

Total Invoice Value 145000

Computation of Tax PayableParticulars RsVAT on invoice value @ 12.5%Less: Input tax credit – VAT on purchases @ 12.5 % (120000x12.5%)

18125(15000)

VAT Payable 3125

ALL THE BEST

91

(Specified Rate + Y) - Z