Primer on Income Tax
Income Tax Liability
1.1 The legal position discussed is as applicable for financial year 2014-15 (Assessment Year 2015-16) unless specified otherwise.
Income tax is levied under Entry No. 82 of List I of Seventh Schedule to Constitution (Union List), which reads, ‘Tax on income other than agricultural income’. Entry No. 46 of List II of Seventh Schedule to Constitution (State List) reads, ‘ Taxes on agricultural income ‘.
Income Tax Act, 1961 imposes tax on income other than agricultural income. Tax on agricultural income can be imposed only by State Governments.
Section 4 of Income Tax Act, which is the charging section, states that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income tax) of this Act (i.e. Income Tax Act) in respect of the total income of the previous year of every person.
Income tax Rates fixed under Finance Act every year – The ‘Central Act’ as referred to in section 4 of Income Tax Act is the ‘Finance Act’ enacted every year. Income Tax is payable by every assessee at the rates prescribed by Finance Act every year. The Finance Bill is presented at the time of presenting Budget, usually on last day of February every year. The relation between Finance Act and Budget is so close that often people associate budget only with taxation. Really, taxation is only one of the aspects of the Budget.
1.1-1 Who is assessee ? – Assessee means a person by whom any tax or any other sum of money is payable under Income tax Act. It includes deemed assessee [section 2(7) of Income Tax Act]
Person – ‘Person’ includes * Individual * HUF * Company * Partnership Firm * Association of Persons (AOP) or body of individuals whether incorporated or not * Local Authority like Municipality etc. * Artificial Judicial person not falling in any of the aforesaid categories e.g. a Hindu deity [section 2(31) of Income Tax Act]
1.1-2 Previous Year and Assessment Year
One very confusing aspect of Income Tax for a common man is the difference between Previous Year and Assessment Year.
Assessment year means the period of twelve months commencing on the 1st day of April every year [section 2(9) of Income Tax Act]
Previous year means the financial year immediately preceding the assessment year. If a business/profession is newly set up, previous year is the period from date of setting up that business or profession and ending with the financial year [section 3 of Income Tax Act]
The Financial Year for income tax purposes (called ‘Previous Year’) is always the year ending 31st March. The ‘assessment year’ is next to the ‘Financial Year’ or ‘Previous Year’ e.g. for Financial Year (FY) 20012-13 (1st April 2012 to 31st March 2013), the ‘Assessment Year’ (AY) is 2013-14..
It may be noted that an assessee can have separate accounting year for his own purposes e.g. a Company can close its accounts on any day of the year, an individual may start his year on Diwali or any other auspicious day. However, for income tax purposes, the accounts must be closed only on 31st March.
1.1-3 Residential status
Income tax liability depends on residential status of a person.
Income Tax liability of a person depends on the residential status. Assessees are either resident in India, or non-resident in India.
A firm, an association of persons, a company and every other person can be either a resident or a non-resident.
In case of individuals and HUF, if they are residents, they can be either resident and ordinarily resident, or resident but not ordinarily resident.
Section 6 gives the test of residence for various types of assessees e.g. an individual, a Hindu undivided family, a firm or an association of persons or a body of individuals, a company ; and every other person.
An assessee can have different residential status for different assessment years. It is possible that a person who is resident in India for income tax purposes, may be resident in any other country for the same assessment year.
Residential status of an individual – An individual is resident in India in any previous year, if he satisfies at least one of the following conditions – (a) He is in India in the previous year for a period of 182 days or more or (b) He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year [section 6(1) of Income Tax Act]
However, in case of an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship, or Indian citizen or person of Indian origin, the period of 60 days stands extended to 182 days.
In short, if a person was in India for at least 182 days in the previous year, he will be ‘resident’ for that year. Otherwise, he will be ‘non resident’.
A resident individual will be “resident and ordinarily resident” in India if (a) He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year and (b) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year [section 6(6) of Income Tax Act].
A resident who does not satisfy any one of the aforesaid conditions, will be ‘resident but not ordinarily resident’.
Residential status of a HUF – In case of HUF, if control and management of its affairs is wholly or partly situated in India, it will be ‘resident in India’. If control and management of its affairs is wholly out of India, it will be ‘non-resident in India’ [Sec. 6(2 of Income Tax Act]
A resident Hindu undivided family (HUF) can be either ordinarily resident or not ordinarily resident.
A resident Hindu undivided family will be ‘ordinarily resident in India’ if the karta or manager of the family (including successive karta) (a) has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year and (b) has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.
If even one of the conditions is not satisfied, the HUF will be ‘resident but not ordinarily resident in India’ [section 6(6)(b) of Income Tax Act].
Residential status of the firm and association of persons – A partnership firm and an association of persons will be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. If control and management of their affairs are situated wholly outside India, it will be non-resident in India. [Sec. 6(2)]
Residential status of a company – A company incorporated in India is an Indian company. It will always be ‘resident in India’. A foreign company (i.e. company incorporated abroad), is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. [Sec. 6(3) of Income Tax Act]
Residential status of “every other person” – Every other person will be resident in India if control and management of his affairs is wholly or partly situated within India during the relevant previous year. If control and management of his affairs is wholly situated outside India, it will be non-resident [Sec. 6(4) of Income Tax Act]
1.1-4 Tax liability depending on residential status
Income can be broadly classified as ‘Indian Income’ and ‘Foreign Income’.
‘Indian income’ is always taxable in India in case of all tax payers, whether resident or non-resident.
‘Foreign income’ is taxable in India if the assessee is (a) resident (in the case of a firm, AOP company and every other person) or (b) resident and ordinarily resident (in the case of an individual or a Hindu undivided family) in India.
If an individual or a HUF is resident but not ordinarily resident, foreign income is taxable only if it is (a) business income and business is controlled from India, or (b) professional income from a profession which is set up in India. Otherwise, foreign income is not taxable in the hands of resident but not ordinarily resident taxpayers [section 5(1) of Income Tax Act]
Foreign income is not taxable if the assessee is non-resident in India [section 5(2) of Income Tax Act]
Section 9 of Income Tax Act defines ‘income deemed to accrue or arise in India’. It will be ‘Indian Income’ and taxable in all the cases.
1.1-5 Different heads of income
All income is classified under following heads of income – * Salaries * Income from House property * Profits and gains of business or profession * Capital Gains * Income from other sources (e.g. interest on securities, lotteries, races) [section 14 of Income Tax Act]
Calculation of income tax – Income from each of these sources is first calculated. All this income is added to find out total income of the assessee. Permissible deductions are reduced and then income-tax payable is calculated at the prescribed rates.
Income from one head can be set off against loss from other head, unless specifically prohibited. In Rajasthan State Warehousing Corporation v. CIT 2000 AIR SCW 629, it was held that if income is derived from various heads, assessee is entitled to claim deduction permissible under respective head whether or not computation under each head results in taxable income. If income to assessee arises under any of the heads of income but from different items e.g. different house properties or different securities etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible. – . – If assessee carries business in various ventures, entire expenditure incurred on all ventures is deductible if all ventures constitute one business
Rates of Income Tax
1.2 Major types of assessees and the rates of tax applicable is summarised here.
1.2-1 Individual – An individual may get income from salary, house rent, business, profession, interest etc. He does not have to pay income tax on dividend income at all. An individual may carry out business under some different name. However, this is only for convenience of business or trade. The income of a proprietary firm is added to his income for purpose of income tax. If a person gets salary from a partnership firm where he is a partner, the income is treated as ‘business income’ though termed as ‘salary’.
The income tax rates are as follows :
Tax rates for the assessment year 2015-16 (FY 2014-15) are as follows –
For resident senior citizen (who is 60 years or more at any time during the previous year but less than 80 years i.e born during 1-4-1935 to 31-3-1955), rates are as follows –
|Net income||Income-tax rates|
|Up to Rs. 3,00,000||Nil|
|Rs. 3,00,000 – Rs. 5,00,000||10% of (total income minus Rs. 3,00,000) plus 3% Education Cess|
|Rs. 5,00,000 – Rs. 10,00,000||Rs. 20,000 + 20% of (total income minus Rs. 5,00,000) plus 3% Education Cess|
|Rs 10,00,000 – Rs 1,00,00,000||Rs. 1,20,000 + 30% of (total income minus Rs. 10,00,000) plus 3% Education Cess|
|Above Rs 1,00,00,000||Rs 28,20,000 + 30% of (total income minus 1,00,00,000) plus 10% surcharge subject to marginal relief plus 3% Education Cess|
For resident super senior citizen (who is 80 years or more at any time during the previous year i.e. born before 1-4-1935), rates are as follows –
|Net income range||Income-tax rates|
|Up to Rs. 5,00,000||Nil|
|Rs. 5,00,000 – Rs. 10,00,000||20% of (total income minus Rs. 5,00,000) plus 3% Education Cess|
|Rs 10,00,000 – Rs 1,00,00,000||Rs. 1,00,000 + 30% of (total income minus Rs. 10,00,000) plus 3% Education Cess|
|Above Rs 1,00,00,000||Rs 28,00,000 + 30% of (total income minus 1,00,00,000) plus 10% surcharge subject to marginal relief plus 3% Education Cess|
For any other individual (born after 1-4-1955, every HUF/AOP/BOI/artificial juridical person, rates are as follows –
|Net income range||Income-tax rates|
|Up to Rs. 2,50,000||Nil|
|Rs. 2,50,000 – Rs. 5,00,000||10% of (total income minus Rs. 2,50,000) plus 3% Education Cess|
|Rs. 5,00,000 – Rs. 10,00,000||Rs. 25,000 + 20% of (total income minus Rs. 10,00,000)|
|Rs 10,00,000 – Rs 1,00,00,000||Rs. 1,25,000 + 30% of (total income minus Rs. 10,00,000) plus 3% Education Cess|
|Above Rs 1,00,00,000||Rs 28,25,000 + 30% of (total income minus 1,00,00,000) plus 10% surcharge subject to marginal relief plus 3% Education Cess|
Education cess and SAH Education Cess – Education cess payable is 2 per cent of income-tax and surcharge. Secondary and higher education cess is 1 per cent of income-tax. This is in addition to income tax.
1.2-2 HUF – An Hindu Undivided Family (HUF) consists of all persons lineally descended from a common male ancestor. It is assessable in respect of income derived from the joint family corpus. However, income earned by individual members of HUF in their individual and personal capacities is taxed as their personal income. Such income is not treated as income of HUF. Thus, it is possible to have an income from a proprietary firm (in individual capacity) as well as income from a business of HUF. Both are eligible for separate tax exemptions. Business of HUF can, of course, be conducted in a different name. In such case, the HUF will be proprietor of the firm in the name of which business is being conducted.
It may be noted that there is no question of ‘forming’ an HUF, as every male Hindu automatically has ‘HUF’. A Hindu male can have his own separate HUF even if his father or son has separate HUF. One HUF with only one male member is permissible. Any ‘HUF’ can have business run by head of the HUF called ‘karta’.
If an individual throws his separate property into the property of HUF, income from such converted property will be included in the total income of such individual. Hence, the HUF business should be from independent source of capital and not from the funds provided by an individual member of the HUF. Thus, if an HUF intends to conduct a business, its financial resources have to be carefully planned.
HUF should start business with loans / gifts from unrelated persons / bankers. Accounts and finances of HUF business should be kept separate. Otherwise, there is a possibility that income of HUF will be clubbed with the income of an individual.
The income of HUF is chargeable at the same rate as individual income as stated above. Thus, if an individual splits his business – partly in his individual capacity and partly in name of firm owned by HUF, considerable tax saving is possible, if done systematically and carefully.
1.2-3 Partnership Firm and LLP – Income of the partnership firm has to be calculated after deducting salary and interest payable to partners at prescribed rates. Specific provisions in respect of partnership firm have been explained later.
A firm is taxable at the rate of 30 per cent for the assessment year 2014-15 and 2015-16. Surcharge @ 10% applies if net income exceeds Rs one crore. In addition, Education cess is 2 per cent of income-tax and Secondary and higher education cess is 1 per cent of income-tax.
In case of LLP, they are liable to alternate minimum tax for AY 2013-14, which cannot be less than 18.5% plus 3% education cess of ‘adjusted total income’ calculated as per section 115JC.
1.2-4 Company – The tax on income is as follows –
In case of domestic company, income tax is @ 30% for assessment year 2014-15 and 2015-16. In addition, surcharge @ 5% of income tax is payable, if net income exceeds Rs. one crore and @ 10% if net income exceeds Rs ten crores.
In case of foreign company, income tax is @ 40% for assessment year 2014-15 and 2015-16. In addition, surcharge @ 2% of income tax is payable, if net income exceeds Rs. 1 crore and @ 10% if net income exceeds Rs ten crores.
Marginal relief is available where net income exceeds Rs. 1 crore.
In addition, Education cess is 2 per cent of income-tax and Secondary and higher education cess is 1 per cent of income-tax and surcharge.
The companies are liable to Minimum Alternate Tax for AY 2015-16, which cannot be less than 18.5% plus 3% education cess plus surcharge (if above Rs one crore).
Dividend Distribution Tax – A domestic company paying dividend will have to pay dividend distribution tax u/s 115-O. The rate applicable for FY 2014-15 (AY 2015-16) is 19.99% w.e.f. 1-10-2014, as it has to be grossed up.
Dividend distribution tax is payable within 14 days from date of declaration/distribution/payment of dividend whichever is earlier. The dividend will be tax free at the hands of assessees.
Mutual funds have to pay dividend distribution tax u/s 115R of Income Tax Act.
1.2-5 Minimum Alternate Tax
Many companies charge depreciation in their books on straight line method. Thus, the profit shown is higher in the accounts maintained for company law purposes and they can declare dividend. However, for income tax purposes, they charge depreciation on WDV which is higher. Thus, for income tax purposes, they may show low profit or even loss, while in balance sheet prepared for company law purposes, they will show high profits, which is called ‘book profits. Hence, such companies have to pay minimum income tax [section 115JB]. This tax is termed as ‘Minimum Alternate Tax’ (MAT).
In Apollo Tyres v. CIT (2002) 122 Taxman 562 = 255 ITR 273 (SC 3 member bench), it was held that the assessing officer cannot reopen the accounts certified by auditors and adopted in general meeting. He has limited powers of making additions and reductions as provided in the section. [In this case, it was held that assessing officer cannot add back the depreciation for earlier years provided in accounts] – followed in Malayala Manorama Co. v. CIT (2008) 169 Taxman 471 (SC), where it was held that ITO cannot rework profit of assessee by substituting rate of depreciation prescribed under Schedule XIV of Companies Act, when assessee was consistently providing depreciation at rates prescribed in Income Tax Rules.
In CIT v. HCL Comnet Systems (2008) 172 Taxman 217 (Del HC DB), it has been held that provision for bad and doubtful debts is an ascertained liability and hence not includible in book profit u/s 115JA – view confirmed in CIT v. HCL Comnet Systems (2008) 174 Taxman 118 (SC).
1.2-6 Co-operative societies – Following rates are applicable to a co-operative society for the assessment year 2014-15 and 15-16
Rate of income-tax
|Up to Rs. 10,000||
|Rs. 10,000 – Rs. 20,000||
|Rs. 20,000 and above||
Surcharge @ 10% applies, if net income exceeds Rs obe crore. Education cess @ 2% of tax and SAH education cess @ 1% of tax is payable.
The cooperative societies are liable to Alternate Minimum tax of 18.5% of adjusted total income plus 3% education cess under section 115JC of Income Tax Act.
Various exemptions are available to cooperative societies u/s 80P of Income Tax Act. However, there is no exemption to urban cooperative banks.
1.7 Local authorities
Tax rate is 30%. Surcharge @ 10% if income exceeds Rs one crore. Education cess @ 2% of tax and SAH education cess @ 1% of tax is payable.
1.2-7 Capital gains
In case of short term gains covered under section 111A of Income Tax Act, the rate is 15% for Assessment Year 2015-16. Section 111A is applicable in respect of securities transactions which are subject to securities transaction tax.
In case of long term capital gains, tax rate is 20% for AY 2015-16 with indexation [section 112].
In addition, education cess @ 2% of tax and SAH education cess @ 1% of tax is payable.
Wealth tax for individual, HUF or a company is 1% in respect of wealth over Rs 30 lakhs for Assessment Year 2014-15 and 2013-14. There is no surcharge or education cess.
One house or part of house belonging to an individual or HUF is excluded for purpose of wealth tax. The assets have to be valued as per Valuation Rules.
Income from salary
1.3 Income under the head ‘salary’ comprises of remuneration in any form (including perquisites) received by an employee from employer. Thus, there should be contractual employer-employee relationship. The contract may be express, oral or implied.
Salary is chargeable on due or receipt basis. Arrears of salary paid or allowed are includible if not charged to income tax for any earlier previous year [section 15 of Income Tax Act]
‘Salary’ includes * wages * dearness allowance * Bonus * gratuity * annuity or pension * advance of salary * Fees / Commissions perquisites/ profits received from employer in addition to salary * Leave encashment while in service * Employer’s contribution to provident fund in excess of 12% of salary of employee * profit in lieu of salary [section 17(1) of Income Tax Act]
In Karamchari Union v. UOI 2000 AIR SCW 806 = AIR 2000 SC 1226 = (2000) 109 Taxman 1 = 2000 LLR 897 = 243 ITR 143 (SC), it has been held that CCA (City Compensatory Allowance), DA (Dearness Allowance) and HRA (House Rent Allowance) are in nature of income forming part and parcel of salary and are taxable.
House rent allowance – Exemption will be lowest of (a) 50% of salary where residential accommodation is in Mumbai, Kolkata, Delhi or Chennai and 40% of at other place (b) Excess of rent paid over 10% of salary (c) Actual allowance paid. There will be no exemption if the residential accommodation is owned by employee or employee has not paid any rent for residential accommodation used by him [section 10(13A) of Income Tax Act and rule 2A]
Salary means basic plus DA (if forming part of retirement benefits) plus commission (if fixed as a percentage of turnover).
Gratuity – Gratuity for Government employees is fully exempt [section 10(10)(i)]. In case of employees covered under Payment of Gratuity Act, exemption is upto Rs 10,00,000 or 15 days salary for every completed year of service, whichever is lower.. Salary means basic plus DA (if forming part of retirement benefits) [section 10(10)(ii) of Income Tax Act] Any other gratuity is also exempt to same extent [section 10(10(iii)]of Income Tax Act]
Leave encashment – Encashment of earned leave on retirement of employees of Central/State Govt is fully exempt [section 10(10AA)(i) of Income Tax Act] . Leave encashment while in service is treated as part of salary. In other cases, leave encashment of earned leave on retirement will be lowest of 10 months’ salary, Rs three lakhs or actual sum received [section 10(10AA)(ii) of Income Tax Act]
LTA/LTC – Leave Travel Assistance/Leave Travel Concession is allowed twice in a block of four years. It is limited to amount actually spent on travelling of employee and his family members. It is limited to economy class of air fare or AC first class fare [section 10(5) of Income Tax Act and rule 2B]
The allowance is exempt subject to amount of expenses actually incurred by the employee for such travel. The employee will have to keep account of actual expenses incurred. It appears that actual travel by air or AC is not required, but the overall ceiling on expenses is subject to limit of air fare / rail fare.
In CIT v. Larsen & Toubro Ltd. (2009) 181 Taxman 71 (SC), it has been held that employer is under no statutory obligation to collect evidence to show that employee has actually utilised the amount paid towards LTA/conveyance allowance – same view in CIT v. ITI Ltd. (2009) 183 Taxman 219 (SC).
VRS (Voluntary Retirement) – It is exempt upto Rs five lakhs if VRS is as per prescribed conditions.
Medical treatment – Reimbursement of amount actually spent for medical treatment upto Rs 15,000 is exempt in a financial year. In addition, reimbursement of insurance premium for self, spouse, children and dependent brothers, sisters and parents is exempt.
In case of treatment in Government or approved hospital, or expenditure on medical treatment outside India, reimbursement of medical expenses is exempt without any ceiling.
1.3-2 Valuation of perquisites
The employer often gives some perquisites to the employees. Value of these perquisites is added to the income of employees. The valuation of perquisites is done as follows w.e.f. 1-4-2009 (Rule 3 of Income-tax Rules inserted vide Notification dated 18-12-2009):
Rent Free unfurnished Accommodation – – In case of private sector employees, value of perquisite of rent free unfurnished accommodation is taken as follows – (a) If owned by employer – If population of city exceeds 25 lakhs – 15%, if population exceeds 10 lakhs but below 25 lakhs – 10% (c) In other cases – 7.5%, as reduced by rent paid by employee.
If employer had taken accommodation on lease or rent, value of perquisite will be actual amount of lease rent paid or payable by employer or 15% of salary as reduced by actual rent paid by employee.
If accommodation is provided in a hotel, value of perquisite will be 24% of salary paid or actual charges paid/payable to the hotel, whichever is lower (The perquisite will not apply if employee is provided accommodation in a hotel upto 15 days on his transfer from one place to other).
In case of Government Employees, value will be rent as per rules framed by Government, as reduced by sum actually paid by employee
Salary includes basic, DA (if taken into account for retirement benefit), employer’s contribution to PF, bonus, commission, fees and all taxable allowances (except those covered under section 17(2) of Income Tax Act).
Value of accommodation will be Nil if provided in remote area, project site, dam site, power generation site or off-shore site, if it is temporary in nature and plinth area is less than 800 Sq. Ft.
Valuation of furnished accommodation – If accommodation is furnished, in addition to above, 10% of cost of furniture (including TV, radio, refrigerator, AC etc.), if owned by employer, will be treated as perquisite. If the furniture is hired from third party, actual hire charges less any amount recovered from employee will be the perquisite [applies to both Government and private sector employees).
Gas electricity or water supply – Some benefits like gas, electricity, water are valued at actual cost to employer. If these are provided from own sources, value will be manufacturing cost incurred per unit, less amount recovered from employee.
Domestic servants – Actual cost to employer for sweeper, gardener, watchman or personal attendant less amount paid by employee, will be value of perquisite.
Use of movable assets – If some movable asset is provided to employee, perquisite will be @ 10% of the cost of asset or rent paid, as reduced by sum paid by employee.
Loans to employees at concessional rate – Calculate interest on basis of SBI lending rates, reduced interest paid by employee and difference will be the value of perquisite. Loan upto Rs 25,000 for medical treatment will not be considered as perquisite.
Educational facilities – Educational facilities to member of household will be equal to expenditure incurred by employer. If employer himself is running the education institution, value will be equal to cost of such education is similar institution in nearby locality.
Valuation of motor car -.If car is owned or hired by employer and provided for personal purposes of employees, valuation will be expenditure incurred by employer on running and maintenance plus remuneration of chauffer plus normal wear and tear of motor car calculated @ 10% of actual cost of motor car or cars, less amount charged to employees.
If motor car is owned or hired by the employer and is partly for official and partly for personal purposes and expenses are reimbursed by employer, perquisite value per month is Rs 1,800 per month if engine cubic capacity is upto 1.6 liters and Rs 2,400 per month if cubic capacity of engine exceeds 1.6 liters. If chauffer is provided, value of perquisite will be Rs 900 per month.
If motor car is owned by employee and used partly for official and partly for personal purposes and expenses are met by employer, perquisite value per month is actual expenditure incurred by employer as reduced by Rs 1,800 (if engine cc is upto 1.6 litres) and Rs 2,400 if engine capacity exceeds 1.6 litre.
Proper records of use of motor car should be maintained.
Other amounts paid – Club fees paid on behalf of employee, free food and non-alcoholic beverages, insurance premiums paid on behalf of employee, income tax paid on behalf of employee are all treated as perquisites and its cost is added to income of employee.
Movable asset transferred/given on hire to employee – If any movable asset is transferred to employee, valuation of perquisite will be actual cost less depreciation @ 10% per annum on straight line method (depreciation will be 20% in case of motor cars and 50% in case of computers and electronic items on reducing balance method).
If movable asset is given for use, value of perquisite will be 10% of actual cost of asset (except in case of laptops and computers)
Gifts – Gifts upto Rs 5,000 per year are exempt.
Valuation of sweat equity – If employee is given specified security or sweat equity share, fair market value as required under section 17(2)(vi) of Income Tax Act will be calculated as per rule 3(8) and 3(9) of Income Tax Rules.
1.3-3 Perquisites which will be added to salary
Perquisites like motor car, lunch, refreshment, travelling, touring, gift, credit card, club etc. will be added to salary of individual.
1.3-4 Deductions from Salary Income – Following deductions are permissible from salary income –
Professional Tax paid to State Government is allowable as deduction
Entertainment allowance upto Rs 5,000 is allowable to Government employees.
1.3-3 Exemptions for salary income – Following are exempt from income tax-
Transport allowance upto Rs 800 per month granted to an employee to meet his expenditure for the purpose of commuting between place of residence and the place of his duty.
Conveyance and transport allowance granted to employee to meet cost of travel on tour are exempt. Allowance granted to meet expenditure incurred on conveyance in performance of duties of an office or employment are exempt. In LIC Officers v. LIC of India (2000) 112 Taxman 227 (Bom HC DB), it was held that conveyance allowance is exempt only if expended for meeting expenses wholly and necessarily incurred or to be incurred in performance of duties of office. Conveyance allowance at flat rate irrespective of place of residence, work and posting will not be exempt from income tax.
In CIT v. Larsen & Toubro Ltd. (2009) 181 Taxman 71 (SC), it has been held that employer is under no statutory obligation to collect evidence to show that employee has actually utilised the amount paid towards LTA/conveyance allowance.
Conveyance and transport allowance granted to employee to meet cost of travel on transfer are exempt. Expenses granted to meet cost of travel on transfer and cost of packing and transportation of personal effects on such transfer are exempt.
Use of employer’s vehicle or transport provided for journey of employee from residence to his place of work and back is not treated as perquisite and its cost is not treated as income.
Refreshments during office hours to employees and recreational facilities provided to group of employees are not treated as perquisites.
Income from House Property
1.5 Income from house property consists of buildings and/or lands appurtenant thereto. However, income only from vacant plot or land is treated as ‘income from other sources’. Following should be noted.
In case of let out property, income will be ‘fair annual value’ i.e. sum reasonably expected to be received from letting or ‘actual rent received’ whichever is higher. Deduction is allowable for unrealized rent.
‘Annual Value or Property’ is the sum for which the property could reasonably be expected to let from year to year. Municipal Valuation of ratable value can be taken as one of the tests to determine bonafide value of the property. If the house property is given on rent, actual rent received will be the ‘annual value of the house property’.
From the ‘Annual Value of House Property’, in case of let out property, following will be allowed as deduction – (a) Municipal tax – The deduction will be permitted on actual payment basis (b) Standard deduction of 30% of (gross annual value less municipal tax) [section 24(a) of Income Tax Act] (c) Interest on capital borrowed to acquire or construct the house property subject to limit explained below [section 24(b) of Income Tax Act]
Annual Value of a self-occupied property is taken as ‘Nil’, if it is not let out. In such cases, none of the aforesaid expenses are allowed as deduction. However, if the self-occupied property is acquired or constructed or repaired from borrowed funds, interest payable on such funds upto Rs 1,50,000 per annum is allowed as deduction. Interest on borrowed capital for repairs is allowable as deduction upto Rs 30,000.
Naturally, this will be a ‘loss’ as the annual value of self occupied property is ‘Nil’. This ‘loss’ can be set off against any other income of the assessee. In other words, if funds are borrowed to acquire or construct or repair self-occupied property, interest upto Rs 1,50,000/30,000 paid per annum is allowable as deduction from any other income.
House property or any portion thereof occupied by the owner for purpose of his business or profession is excluded and any expense of current repairs, municipal taxes, depreciation on property etc. is allowable as business expenditure.
Profits and Gains of Business or Profession
1.5 Profit and gains of business as specified in section 28 of Income tax Act are taxable.
The term ‘business’ includes trade, commerce or manufacture or adventure or concern in nature of trade, commerce or manufacture [section 2(13) of Income Tax Act]
‘Professional Income’ is income from exercise of any profession or vocation which calls for an intellectual or manual skill. It covers doctor, lawyers, accountants, consulting engineers, artists, musicians, singers etc.
Profits of business or gains from profession are calculated after allowing all legitimate business expenditure. Some important deductions admissible in computing income from business or profession are as follows [sections 30 to 36 of Income Tax Act] —
* Rent, rates, taxes, repairs and insurance for business or professional premises [section 30 of Income Tax Act]
* Current repairs and insurance of machinery, plant and furniture [section 31 of Income Tax Act]
* Depreciation on building, machinery, plant or furniture [section 32 of Income Tax Act] (discussed below)
* Revenue expenditure on scientific research [section 35(1) of Income Tax Act]
* Capital expenditure on scientific research related to business (except land) [section 35(2) of Income Tax Act]
* Preliminary expenses in relation to formation of a company or in connection with extension of an undertaking or setting up of a new industrial unit can be amortised in 5 equal installments over 5 years. The preliminary expenditure is permitted only upto 5% of cost of project [section 35D]
* Insurance expenses [section 36(1)(i) of Income Tax Act]
* Insurance premium on health of employees [section 36(1)(ib) of Income Tax Act]
* Bonus or commission to employees [section 36(1)(ii) of Income Tax Act]
* Interest on borrowed capital [section 36(1)(iii) of Income Tax Act]
* Contributions towards approved provident fund, superannuation fund and gratuity fund [section 36(1)(iv) and 36(1)(v) of Income Tax Act]
* Bad debts in respect of income considered in previous years can be written off and allowable as deduction [section 36(1)(viii) of Income Tax Act]. In CIT v. Autometers Ltd. (2008) 167 Taxman 286 (Del HC DB), it has been held that once assessee writes off bad debt, it is allowed as deduction. It is not necessary to prove that efforts were made to recover the amount. In Director of Income Tax v. Oman International Bank (2009) 184 Taxman 314 (Bom HC DB), it has been held that it is neither obligatory nor is there any burden on assessee to prove that debt written off by him is indeed a bad debt as long as it is bona fide and is based on commercial wisdom or expediency.
* Banking cash transaction tax [section 36(1)(xiii) of Income Tax Act]
* Advertisement expenditure is fully allowed as deduction. However, expenditure incurred on advertisement in any souvenir, brochure, pamphlet etc. of a political party is not allowed as a deduction [section 37(2B) of Income Tax Act]
* Expenditure in maintenance of guest house is permissible as deduction [section 36(1)(i) of Income Tax Act]
* Any other expenditure which is not of capital nature or personal expenses of the assessee is allowed if it is expended wholly and exclusively for the purposes of business or profession. However, it should not have been for purpose which is an offence or is prohibited by any law [section 37 of Income Tax Act]
In Rotork Controls India P Ltd. v. CIT (2009) 180 Taxman 422 = 314 ITR 62 (SC), it was held that provision for warranty in respect of goods sold is allowable as business expenditure if it is reliable estimate of obligation based on historical trend.
In CIT v. Ericssion Communications (2009) 318 ITR 340 (Del HC DB), it was held that provision for warranty charges made on scientific basis is allowable as deduction under income tax.
Depreciation means diminution in value of an asset on account of wear and tear and obsolescence.
In any business, raw material is used fully and immediately, while plant and machinery is used slowly over a period of time. After the estimated life of machinery, its value becomes Nil. Hence, it is fair that cost of machinery is charged over the period of its estimated useful life. This is the basic principle of depreciation on capital goods. Since land does not depreciate, no depreciation is allowed on land.
Under Income Tax Act, depreciation is calculated on the basis of ‘block of assets’. ‘Block of assets’ means a group of assets falling within a class of assets, in respect of which the same % of depreciation rate has been prescribed. e.g. all machinery having rate of depreciation as 25% will form one block of asset, machinery having 40% rate of depreciation will form another ‘block of asset’ and so on.
Depreciation is allowed on actual cost of the asset. Interest paid on borrowed funds and capitalised as pre-commencement expenses before the asset is commissioned is added to cost of the asset and depreciation claimed on such expenditure. Thus, pre-production expenditure can be included in cost of the machinery and depreciation can be charged on such ‘actual cost’. In Chellapalli Sugar v. CIT AIR 1975 SC 97 = 98 ITR 167 (SC), it as held that it includes all expenditure necessary to bring such asset into existence. [Thus, it will include installation charges]. It was held that interest on loans upto date of commencement of business forms part of ‘actual cost’ of plant for purpose of depreciation.
Depreciation is calculated on Written Down Value (WDV) method. If the asset is put to use for purpose of business for less than 180 days, only 50% of normal depreciation is permissible. In other words, full depreciation for the year is permissible only if asset is commissioned before 30th September of that year.
If depreciation cannot be fully claimed in a particular year for want of profits, the un-absorbed depreciation can be carried forward for any number of succeeding assessment years. [section 32(2)].
The depreciation rates in respect of some important assets are as follows :
* Residential building – 5%. Others (including hotels and boarding houses) – 10%. Purely temporary structures – 100%.
* Furniture and fittings including electrical fittings – 10%
* Motor cars 15% . Buses, lorries, and taxis used in business of running them on hire – 30%,
* Pollution control equipment and specified energy saving devises – 100%
* General machinery – 15%, aeroplane – 40%, Ships – 20%
* Computers including software – 60%.
* Books by professionals – 100% for annual subscription and 60% for others – books in library – 100%.
* Intangible assets – know-how, patents, copyrights, trade marks, licenses, franchises or any other right of similar nature – 25%.
In Mysore Minerals v. CIT 1999 AIR SCW 3146 = 1999(5) SCALE 340 = 239 ITR 775 = AIR 1999 SC 3185 = 106 Taxman 166 (SC), it was held that claimant of depreciation need not be owner of asset in legal sense. Person in whom for the time being vests the dominion over the asset and who is entitled to use it in his own right is eligible to claim depreciation. – followed in Dalmia Cement v. CIT 2000 AIR SCW 4198 (SC 3 member bench).
However, if assessee has not acquired dominion over the asset, he will not be entitled to depreciation on that asset. – Tamilnadu Civil Supplies v. CIT (2001) 116 Taxman 369 = 2001 AIR SCW 4777 (SC 3 member bench).
Depreciation compulsory – As per Explanation 5 to section 32(1)(ii), inserted w.e.f. 11.5.2001, depreciation is compulsory in computing total income even if assessee had not claimed the same. This amendment applies to AY 2002-03 onwards. [In CIT v. Mahendra Mills (2000) 2 SCALE 384 = AIR 2000 SC 1960 = 243 ITR 56 = (2000) 109 Taxman 225 (SC), it was held that assessee has option to claim or not to claim depreciation. The depreciation cannot be thrust upon him. Now, this judgement is ineffective from AY 2002-03]
Depreciation in case of imported machinery obtained on loan in foreign currency – If machinery is imported on loan repayable in foreign currency, the amount payable in rupees will go on changing due to fluctuations in foreign exchange rates, as the installments and interest are spread over a period. In such case, the value of machinery should be increased on basis of entire loan outstanding and not merely installments of loans that fell due during the accounting period. – CIT v. Arvind Mills (1992) 193 ITR 255 = 60 Taxman 192 (SC) – quoted and followed in CIT v. Madras Fertilizers (2002) 124 Taxman 581 (Mad HC DB).
1.5-2 Expenditure not allowed as deduction
Following expenditures are not allowed as deduction for purpose of income tax.
Deduction of taxes, interest etc. Only on actual payment basis – Tax, duty, cess, fees payable under any law, Employer’s contribution to provident fund or ESIC, bonus to employees, commission to employees, interest on any loan or borrowing from financial institutions, banks, SFC, leave encashment are eligible as deduction only if they are paid on ‘due dates’ on which these were payable. Even if these are not paid on due dates but are paid before filing of return, these are allowed as deduction, if proof of payment is filed along with the return. However, in case of employer’s contribution to provident fund, superannuation fund or gratuity fund, the same is allowed as deduction only if it was paid before due date of payment [section 43B of Income Tax Act]
Expenditure in excess of Rs 20,000 in cash fully disallowed – If expenditure is incurred in business or profession by payment of cash over Rs 20,000 in a day, entire expenditure is disallowed (Rs 35,000 in case of transporters w.e.f. 1-10-2009). All cash transactions in a day to a party should not exceed Rs 20,000 (Rs 35,000 in case of transporters).
Payment over Rs 20,000 should be made by cheque or demand draft.
In case of payment to transporters, the limit is increased to Rs 35,000 w.e.f. 1-10-2009.
This restriction is not applicable in case of payments to # RBI, other banks and financial institutions, LIC # Government payments, payment by book adjustment, railway freight * Payment for agricultural produce, poultry, fish etc. to the cultivator, grower or producer (i.e. payments to middlemen are not excluded from this provision) [rule 6DD]
Similarly, a person can accept loans or deposits of Rs 20,000 or more only by account payee bank draft or cheque.
Interest on delayed payment to small industries – Interest on delayed payment made to Small Scale Industries is not allowable as deduction.
Expenditure for any purpose which is an offence in law – Section 37(1) of Income Tax Act states that any expenditure incurred for any purpose which is an offence or which is prohibited by law shall not be allowed as deduction.
1.5-3 Different accounting for balance sheet and income tax purposes
Method of depreciation, valuation of stock etc. is different under Companies Act and Income Tax Act. Hence, one method of accounting for income tax and other for Companies Act is permitted. The practice has been specifically approved in United Commercial Bank v. CIT 1999 AIR SCW 4050 = AIR 2000 SC 94 = 106 Taxman 601 (SC).
Accounting profits and assessable profits are conceptually different. – CIT v. Bipinchandra Maganlal (1961) 41 ITR 290 (SC).
Other important provisions in respect of business income
1.6 Some important provisions in relation to income from business or profession are as follows –
Maintenance of books of account – In respect of professional in legal, medical, engineering, architecture, accountancy or technical consultancy must maintain books, if their gross receipts are less that Rs 1.50 lakhs, they have to maintain such books of account as may enable Income Tax Officer to compute their taxable Income. If their gross receipts exceed Rs 1.50 lakhs, they have to maintain books of account as specified in rule 6F i.e. cash book, journal, ledger, copies of bills exceeding Rs 25 issued by him, original bills in respect of expenditure and payment vouchers etc. Person carrying on medical profession has to maintain additional books as prescribed. [Section 44AA and rule 6F]
Persons carrying on business or professionals other than those mentioned above have to maintain books of accounts if annual income exceeds Rs 1,20,000 or gross receipts or turnover exceed Rs. ten lakhs in case of business also have to maintain books of account.
Accounts on mercantile or cash basis – Accounts should be maintained either on mercantile basis or cash basis. Hybrid i.e. mixed system is not permitted. [In cash system, income or expenditure is considered only when it is actually received / paid. In mercantile system, income/expenditure is considered on accrual and payable basis. Actual receipt or payment may occur in subsequent financial year and may not happen in that particular year.]
Income tax audit report – If gross receipts or turnover of business exceeds Rs 60 lakhs per annum, the accounts have to be compulsorily audited. In case of professional income, accounts have to be audited if gross receipts exceed Rs 15 lakhs. This audit report should be submitted along with income tax return, before 30th September. [section 44AB] [The limit was Rs 40 lakhs and 10 lakhs respectively upto AY 2010-11].
In T D Venkata Rao v. UOI (1999) 103 Taxman 621 = 237 ITR 315 = AIR 1999 SC 2242, provision of audit u/s 44AB of Income Tax Act only by Chartered Accountants was upheld and it was observed that Chartered Accountants, by reasons of their special training have special aptitude in the matter of audits – quoted in Sales Tax Practitioners’ Association of Maharashtra v. State of Maharashtra (2008) 170 Taxman 371 (Bom HC DB).
In Ghai Construction v. State of Maharashtra (2009) 184 Taxman 52 (Bom HC DB), it was held that in case of individual carrying on business as a sole proprietor, it is necessary to comply with section 44AB only in respect of business income and not in respect of his other income.
1.7 Capital gains means any profit or gains arising from transfer of a capital asset. Such capital asset may be building, non-agricultural land, machinery, shares, jewellery etc. However, stock in trade, agricultural land in rural area and personal effects (other than jewellery) are not ‘capital assets’.
From AY 2008-09, archaeological collections, paintings, sculptures will not be treated as ‘capital assets’.
Broadly, ‘capital gain’ is the difference between the price at which the asset was acquired and the price at which the same asset was sold. In technical terms, capital gain is the difference between cost of acquisition and the full value of consideration. Incidental expenditure and cost of improvement is allowable as deduction.
The ‘cost of acquisition of capital asset’ is to be increased by Cost Inflation Index. The index is announced by Central Government every year. The index was 100 for 1981-82, 172 for 1989-90, 244 for 1993-94, 331 for 1997-98, 351 for 1998-99, 389 for 1999-2000, 406 for 2000-01, 426 for 2001-02, 447 for 2002-03, 463 for 2003-04 and 480 for 2004-05, 519 for 2006-07, 551 for 2007-08, 582 for 2008-09, 632 for 2009-10, 711 for 2010-11 and 785 for 2011-12, 852 for FY 2012-13 and 939 for FY 2013-14. It is 1024 for FY 2014-15.
The cost of acquisition will be adjusted on basis of the above index and then capital gain will be calculated. The formula is Cost of acquisition x Cost Inflation Index of the year in which the asset is transferred / Cost Inflation Index of the year of acquisition. If the asset was acquired before 1.4.1981, the Cost Inflation Index of that year will be treated as 100. Thus, if an asset was brought in 1989-90 for Rs one lakh and sold in 1997-98 for Rs three lakhs, the adjusted cost of acquisition will be (1,00,000 x 331)/172 i.e. Rs 1,92,442, and capital gains will be Rs 1,07,558 (3,00,000 – 1,92,442). Such adjustment is permissible only for long term capital gains and not for short term capital gains.
Expenditure incurred on any improvement in asset is permitted as deduction and that cost can also be adjusted on the same principles as above.
If a company issues bonus shares, the cost of acquisition of bonus shares will be treated as ‘Nil’. Thus, if the bonus shares are sold, net sale proceeds of bonus shares will be liable to capital gains.
Expenditure incurred in connection with transfer (like stamp duty, registration charges, legal fees, brokerage etc.) are allowed as deduction. Capital gain is charged as income of the financial year in which the transfer took place.
Capital gain can be classified as ‘short term’ or ‘long term’. A short term capital gain is when the asset was held by the assessee for a period of upto 36 months. If the asset was held for more than 36 months, the gain will be long term gain. The period is only 12 months (instead of 36 months) in case of shares or any other security listed in stock exchange or units of UTI or units of mutual fund.
The income tax rate is 20% on long term capital gains, while calculating the long term capital gains, indexation of purchase price is required. Tax on long term capital gain shall be subject to ceiling of 10% of capital gains calculated without indexing.
The short term gains are added in other income of the assessee and the income tax is payable according to the normal rate applicable to the assessee.
Capital gains arising from sale of residential house is exempt if the original asset (i.e. the house) was held for more than three years and a new house was purchased within one year before or two years after the sale of original asset, or a new residential house is constructed within three years. The cost of new asset (residential house) should be more than the amount of capital gains [section 54 of Income Tax Act]
Any other long term capital gain is exempt if the capital gains are invested within 6 months in 3 year bonds issued by REC or NHAI and that investment is retained for three years. Investment cannot exceed Rs 50 lakhs – section 54EC of Income Tax Act.
Income from other sources
1.8 All income other than income from salary, house property, business and profession or capital gains is covered under ‘Income from other sources’. Provisions in respect of some important sources of ‘other income’ are summarised below.
Dividends – Dividends on shares of domestic companies or units of UTI or mutual fund received from a company on or after 1-4-2003 will not be taxable at the hands of the assessee [section 10(34) and 10(35)]. [The dividend distribution tax will be payable by company/mutual fund u/s 115-O] However, deemed dividend as defined in section 2(22) of Income Tax Act will be considered as ‘income from other sources’.
Winning from lotteries, races etc. – Winning from lotteries, card games, horse races are taxable as other income. This is taxable @ 30.3% without claiming any allowance or expenditure.
Interest on securities, bank deposits and loans – Interest on bank deposits and loans is treated as ‘other income’, if not taxable u/s 28.
Gifts – Gifts in a year exceeding Rs 50,000, except gifts from certain relatives and gifts on certain specified occasions will be taxable [section 56(2)(vi) of Income Tax Act]
Income from letting – Income from letting of furniture, machinery, plant and building which is not separable fro, composite letting with machineries is taxable as other income. Current repairs, insurance and depreciation are allowed as deductions [section 56(2)(ii) and (iii) of Income Tax Act]
Rebate / Exemption from Income Tax Liability
1.9 Following rebates / exemptions are available.
1.9-1 Deductions under chapter VI-A and rebates
Investments and deposits – Investments in PPF, Provident Fund, LIC, repayment of housing loans, NSIC, 5 year FDR with scheduled banks, 5 year time deposit in post office, deposit in Senior Citizens Saving Scheme etc. are allowed as deduction upto ` 1,50,000 under section 80C for Assessment Year 2015-16 [It was Rs 1,00,000 for AY 2014-15 and earlier years].
The maximum amount that can be invested in PPF per annum as been increased to ` 1,00,000 per annum w.e.f. 1-12-2011 (earlier, the limit was ` 70,000).
Investment in infrastructure bonds – From AY 2011-12 (AY 2010-11), investment in notified infrastructure bonds upto Rs 20,000 would be exempt u/s 80CCF.
Deduction of medical insurance premium, pension fund – Following deductions are permissible – (a) Medical insurance premium upto Rs 15,000. additional deduction of Rs 15,000 will be allowed if insurance policy of parents is taken. Additional deduction of Rs 5,000 if mediclaim policy of senior citizen is taken (section 80D). (b) Contribution to pension fund within overall ceiling of Rs one lakh (section 80CCC)
Donations – Contribution to approved charitable institutions – in some cases 50% of amount paid is allowed as deduction, while in some cases, 100% amount paid is allowed as deduction (section 80G).
Exemption to EOU, SEZ – Income In case of EOU, STP, EHTP and BTP, the concession will continue upto 31-3-2010. In case of SEZ, exemption is for larger period.
Other provisions of Income Tax
1.10 Certain other important provisions of income tax are discussed here.
1.10-1 Clubbing of Income – Often salary or other expenses from business are shown in name of close relatives like spouse (wife / husband) or minor child, to reduce tax liability. In such case, if the individual has a substantial interest in the concern, the income of such wife, husband or minor child will be added to the income of such individual. This is termed as ‘clubbing of income’.
The clubbing provision is not applicable if spouse possesses technical or professional qualifications and the income is solely due to application of his / her technical knowledge and experience [section 64(1)(ii) of Income Tax Act]
If an asset is transferred to the spouse, income from such asset is also treated as income of the individual. [e.g. by transferring shares, house property etc.].
Similarly, if an individual throws his separate property into the property of HUF, income from such converted property will be included in the total income of such individual [section 64(2) of Income Tax Act]
The clubbing provision has obviously been made to plug avoidance of income tax liability, by ‘showing’ some income in the name of spouse / minor child / HUF.
1.10-2 Set off and carry forward of loss
Carry forward of loss other than speculation loss – Carry forward of loss is permitted only when return is filed in time. In case of closely held company, unabsorbed loss can be carried forward only if at least 51% of shares are held beneficially by same persons who were holding them in previous year.
Unabsorbed depreciation – Unabsorbed depreciation can be set ff against any head of income other than salary. It can be carried forward to any number of years. It can be carried forward by same assessee except in case of amalgamation, demerger and business reorganization.
Speculative loss – Loss from speculative transactions involves sale and purchase of commodities including stocks and shares. It can be set off against speculative profits only and can be carried forward for four years.
1.10-3 Permanent Account Number – Every person whose total sales, turnover or gross receipts are over Rs 5,00,000 are required to apply and obtain a Permanent Account Number (PAN) [section 139A].
Any other person can obtain PAN voluntarily.
In addition, ITO can allot PAN suo moto to a person by whom income tax is payable.
Government has decided to use PAN as a common business identification number to be used by various agencies and departments like customs, excise, DGFT, SEBI etc.
1.10-4 Advance Income Tax – Tax is deducted from salary payable to an employee. Since a businessman or professional earns his own income, there is no TDS (Tax Deduction at Source). Hence, he is liable to pay advance tax as he earns income. This is ‘Pay Tax as you Earn’. Thus, advance tax is payable on the basis of estimated income of the current financial year. [The income is ‘estimated’ because, actual income will be known only after the financial year is over].
Advance tax is payable only in cases where tax payable is in excess of Rs 10,000 (Till 31-3-2009, the limit was Rs 5,000). The assessee has to pay advance tax on his own accord and no notice will be issued to him. The advance tax is payable in installments as follows –
In case of company – # 15% on or before 15th June # 30% on or before 15th September # 30% on or before 15th December # Remaining 25% on or before 15th March. If there was shortfall in earlier installment, it should be made up in subsequent installment.
* In case of partnership firms, proprietors, professionals etc. – # 30% on or before 15th September # 30% on or before 15th December # Remaining 40% on or before 15th March. If there was shortfall in earlier installment, it should be made up in subsequent installment.
Thus, 100% income tax in respect of estimated income of current financial year is payable by 15th March. If any instalment is not paid on due date, it can be paid subsequently.
If advance tax is not paid or short paid on due dates, mandatory interest is payable as follows :
* If advance tax was not paid before 31st March of the financial year, or advance tax paid was less than 90% of the assessed tax, interest @ 1% per month or part thereof is payable from 1st April till the month of payment. [section 234B]. The interest is not payable if total tax liability is less than Rs 5,000 or if at least 90% of assessed tax was paid before 31st March.
* If installments of advance tax are not paid on due dates, interest on shortfall is payable @ 1% per month. In case of last instalment which is due on 15th March, interest @ 1% is payable for one month if tax is not paid at all or is paid after 15th March. [section 234C]. Note that this interest is calculated only upto 31st March, as from 1st April, interest @ 1% becomes payable on entire tax due under section 234B.
This interest is mandatory and there is no provision to grant exemption form payment of this interest.
If the return is not filed within due date, interest @ 1% is payable u/s 234B. In addition, interest @ 1% is payable u/s 234A. Thus, if return is not filed on or before due date, interest payable is 2% for every subsequent month.
1.10-5 Special provisions in respect of Partnership firm
A partnership firm is presently assessed on the lines similar to the assessment of a company. The firm can pay salary and interest on capital to the partners. Income tax is payable on profits calculated after deducting salary and interest paid to partners. The salary paid to partners is treated as ‘business income’ in their hands and is taxable accordingly.
The partnership firm may or may not be registered. However, the partnership must be evidenced by a partnership deed. The deed should indicate * individual shares of the partners * Salary payable to working partners * Interest payable to partners.
A true copy of partnership deed certified and signed by all the partners should be filed along with the first return of income. Subsequently, the copy is not required to be filed along with every return. However, if there is any change in the partnership agreement, a fresh copy has to be filed.
Return of partnership firm can be signed by managing partner.
Salary to working partners – The salary payable to partners is as follows –
The salary can be paid only to working partners. Such payment should be authorised by partnership deed. This salary is allowed as deduction from income of the partnership firm and is taken as business income of the individual partner. Salary allowable as deduction w.e.f. 1-4-2009 is as follows –
As per section 40(b) of Income Tax Act, maximum amount deductible in respect of remuneration to partner is as follows, w.e.f. 1-4-2009 – (a) If book profit is negative or less than Rs 1,66,667– Rs 1,50,000 (b) If book profit is Rs 1,66,667 or more – On first 3 lakhs 90% and on balance 60%.
The amount deductible from income of partnership firm will be the amount given above or amount actually debited to profit and loss account of partnership firm, whichever is lower.
Remuneration paid/credited to partner will be allowable as deduction to firm and it will be taxed at the hands of partner of the firm.
Till 31-3-2009, the salary allowable was as follows –
* Professional partnership firms – # upto book profit of Rs 1,00,000 – 90% of book profit – minimum Rs 50,000 # On next Rs 1,00,000 book profit – 60% # On balance of book-profit – 40%.
* Other than professional partnership firms (i.e. business firms) – # upto book profit of Rs 75,000 – 90% of book profit – minimum Rs 50,000 # On next Rs 75,000 book profit – 60% # On balance of book-profit – 40%.
Interest to partners – Income Tax Act provides that interest upto 12% paid to the partners will be allowable as deduction from income of partnership firm [section 40(b)((iv) of Income Tax Act]. [The interest rate was 18% upto 31-5-2002]. Such payment should be authorised by partnership deed. This interest is allowed as deduction from income of the partnership firm and is taken as ‘other income’ of the individual partner.
1.10-6 Tax deduction at source (TDS)
A person is under liability to deduct income tax at source and pay it to Government. He should issue a certificate to the person from whom tax is deducted, so that the person can submit the same to Income Tax authorities. Tax deducted at source should be paid to Government within one week from date of deduction. At the end of the year, a return in prescribed form has to be filed with ITO.
TDS is rightly called ‘tedious’, but not deducting tax at source can invite penalties.
As can be seen from following, if the person making payment is individual or HUF, he is exempt from the provisions of TDS in most of the cases, if he is not required to submit income tax audit report u/s 44AB. However, TDS provisions apply to (a) salary payments made by an individual or HUF even if he is not required to submit any income tax audit report u/s 44AB (b) If the individual/HUF is required to submit Income Tax Audit report.
TDS from salary – Every employer has to deduct tax from salary of employees. Payer should calculate tax payable on salary at the appropriate rates [section 192].
While deducting tax at source, the employer can consider the investments made by employee which qualify for exemption, payment for purchase or construction of house, mediclaim insurance premium etc. Income tax is to be deducted every month and should be paid to Government within a week after deduction. The employer can adjust deductions from month to month so that total deductions from salary of the whole year is equal to tax payable by employee on salary income.
Deduction under section 80G is not to be considered by employer (except some specified funds like PM Relief Fund etc.) while calculating tax liability of employee. The tax relief has to be claimed by employee through tax return.
The employer has to file an annual return of tax deducted at source from all employees.
TDS from Interest other than interest on securities – Tax should be deducted from interest paid if interest payable in financial year exceeds Rs 10,000 [section 194A].
Interest on securities is 10% under section 193 of Income Tax Act.
If the deductee (person entitled to receive the amount on which tax is deductible) does not furnish his PAN number, TDS will be @ 20% w.e.f. 1-4-2010 [section 206AA of Income Tax Act] (what happens if he gives incorrect PAN number?]
An individual who is 65 years of age or above can get interest without deduction of tax at source, if he submits a self-declaration to the payer in duplicate, in form No. 15H. Others have to submit declaration in form 15G.
Individuals and HUF are required to deduct tax on interest payment, if they are required to submit income tax audit report under section 44AB. Provisions of making payment of TDS do not apply to small HUF and individuals who do not have to submit income tax audit report.
TDS from Payments to contractors, sub-contractors – TDS provisions apply if contract value exceeds Rs 30,000 for single payment or Rs 75,000 in aggregate for a financial year [section 194C].
TDS on contract is as follows – (a) 1% in case of individual or HUF (b) 2% in case of other than individual or HUF. There is no surcharge or education cess.
If the deductee (person entitled to receive the amount on which tax is deductible) does not furnish his PAN number, TDS will be @ 20% w.e.f. 1-4-2010 [section 206AA of Income Tax Act] (what happens if he gives incorrect PAN number?)
TDS is also required to be deducted, if payment to contractors/sub-contractors is made by an individual or HUF, who is required to submit income tax audit report under section 44AB. Provisions of making payment of TDS do not apply to small HUF and individuals who do not have to submit income tax audit report.
TDS from payment on advertising contracts – See above. Provision of TDS applies when client makes payment to advertising agency and not when advertising agency makes payment to the media i.e. print media or electronic media.
TDS from contractor in transport business – TDS from contractor or sub-contractor in transport business is Nil. However, if the transporter does not furnish his PAN number, TDS will be @ 20% w.e.f. 1-4-2010 [section 206AA of Income Tax Act] (what happens if he gives incorrect PAN number?]
TDS from commission / brokerage – TDS applies in respect of payment of commission or brokerage to resident. There is no TDS if commission / brokerage paid during the financial year is less than Rs 5,000. [section 194H].
If the deductee (person entitled to receive the amount on which tax is deductible) does not furnish his PAN number, TDS will be @ 20% w.e.f. 1-4-2010 [section 206AA of Income Tax Act] (what happens if he gives incorrect PAN number?]
TDS from Payments of Rent – TDS provisions apply if aggregate sum of rent paid exceeds Rs 1,80,000 per annum [section 194-I].
TDS is at following rates – Rent of plant and machinery – 2%. Rent of land or building or furniture or fitting – 10%.
If the deductee (person entitled to receive the amount on which tax is deductible) does not furnish his PAN number, TDS will be @ 20% w.e.f. 1-4-2010 [section 206AA of Income Tax Act] (what happens if he gives incorrect PAN number?]
TDS provisions are applicable, if payment of rent is made by an individual or HUF, who is required to submit income tax audit report u/s 44AB. Provisions of making payment of TDS do not apply to small HUF and individuals who do not have to submit income tax audit report.
TDS from Payments for professional or technical services – TDS provisions apply if aggregate sum paid for professional or technical services exceed Rs 30,000 per annum [section 194J].
TDS rate is 10%.
TDS should be on total payment including reimbursement of expenses, as per CCBDT circular No. 715 dated 8-8-1995. However, in ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71 (ITAT), it has been held that reimbursement of expenses for which bill is separately raised did not attract the provisions of section 194J.
TDS provisions are applicable, if payment for professional or technical services is made by an individual or HUF, who is required to submit income tax audit report u/s 44AB. Provisions of making TDS payment do not apply to small HUF and individuals who do not have to submit income tax audit report.
TAN number – Assessee should obtain TAN (Tax Deduction Account Number) which is required to be quoted on all TDS returns. It is a 10 digit alphanumeric code.
TDS Return – Person who has deducted tax at source is required to file return to Income Tax department on annual basis. In case of companies, the return is to be filed on computer media, i.e. for them, filing of e-TDS is compulsory. The form has been prescribed. ‘Electronic Filing of Returns of Tax Deducted at Source Scheme, 2003’ has been notified by CBDT for this purpose. The return has to be filed in prescribed form in floppy. NSDL (National Securities Depository Ltd.) has been given task of handling e-TDS returns.
1.10-7 No income tax clearance certificate
Income Tax department has discontinued giving Income Tax Clearance Certificates for various purposes like filing tender, bidding contracts etc. No such certificate will be issued by Income Tax department. The contractors etc. should quote PAN – CBDT circular No. 2/2004 dated 10-2-2004.
Income Tax Returns
1.11 Every assessee should file an annual return in prescribed form. The prescribed forms are as follows –
|Form No.||Applicable to||Details|
|ITR 1 [Sahaj]||Individuals||Salary and one house property|
|ITR 2||Individuals and HUF||Any income other than business income|
|ITR 3||Individuals and HUF||Who are partners in firm but not carrying on business or profession as proprietor|
|ITR 4||Individuals and HUF||Who are proprietors having income from business or profession|
|ITR 5||Firm, AOP, BOI|
|ITR 6||Companies except charitable companies claiming exemption u/s 11|
|ITR 7||Charitable trusts etc. including cases covered by section 139(4A) to 129(4D)|
|ITR-V||All except charitable trusts who have filed return electronically without digital signature||Verification form for persons who have filed return electronically but without digital signature|
The income tax return is really a self assessment memorandum. The assessee should calculate the tax and interest payable by him and pay it by challan. The payment will of course be after deducting the advance tax which he might have already paid.
No enclosures with the return – It has been clarified that the return has to be annexure-less. No enclosure like TDS or TCS certificates etc. should be attached with return. These should be kept by assessee with himself – CBDT circular No. 6/2008 dated 18-7-2008.
E-return – Beginning has been made in 2003 for electronic filing of return under Electronic Furnishing of returns of Income Scheme, 2003. Filing of e-return is compulsory for corporate employees.
When electronic return is filed, form ITR-V is to be submitted to Income Tax Department, CPC, Post Bag No. 1, Electronic City Post Office, Bangalore – 560 100 (Karnataka) by ordinary post and not by speed post, registered post or courier. Form ITR-V cannot be submitted to local office of Income Tax.
Due dates for filing return – The due dates for filing return are as follows –
* (a) Individuals having only salary income (b) Non-corporate assessees (Individuals, HUF, partnership firms or societies) having income from business or profession but who do not have to get their accounts audited under Income Tax or any other law – 31st July.
* (a) Non corporate assessees (Individuals, HUF, partnership firms or societies) having income from business or profession and who have to get their accounts audited (b) A working partner where the firm in which he is a working partner has to get its accounts audited (c) Corporate Assessee (d) Persons who have to file return under one by six scheme – 30th September.
The dates are mandatory and there is no provision to extend the due date. If the return is filed beyond due date, mandatory interest @ 1% per month of tax due is payable. Belated return upto one year beyond due date is permissible. Mandatory interest is payable, but no penalty is payable. Thus, if no tax was due, belated return upto one year can be submitted without payment of any interest.
A loss return must be filed in time. Otherwise, the carry forward of loss is not permitted. However, CBDT can grant extension for submitting return by a loss making company.
Signature on return – The return should be signed by individual, karta of HUF, managing partner, managing director etc. In some cases, return can be signed by authorised representative.
No intimation will be sent by Income Tax Officer, if any tax / interest / refund is not due on the basis of return of income / wealth filed.
Correction of arithmetical mistakes and incorrect claims – Arithmetical mistakes and incorrect claim apparent from the return can be corrected by department and intimation sent to assessee within one year from end of financial year in which return is made [section 143(1) amended vide Finance Act, 2008]. If no such intimation is made, acknowledgment of return will be deemed to be an intimation.
Scrutiny of returns – Some of the returns are taken by ITO for detailed scrutiny. Notice for scrutiny has to be served within 6 months from close of financial year in which return is furnished i.e. by 30th September. The ITO can require assessee to attend his office or produce evidence in support of the return filed [section 143(2) of Income Tax Act]
Payment of tax – The advance tax and self-assessment tax should be paid vide prescribed challan. Facility of e-payment is available.
Major heads – Corporation Tax – 0020, Income tax other than corporation tax – 0021, Wealth tax – 0032, Gift tax – 0033, FBT – 0026, BCT – 0036
E-payment – Website for e-payment of Income-tax is –
About 27 Banks provide facility of e-payment. You have to first open an account with Bank and obtain password. Then you can access the aforesaid website and make payment through menu driven programme. Your PAN/TAN number is the base.
In case of following persons, e-payment is mandatory w.e.f. 1-4-2008 – (i) company and (ii) a person (other than company) to whom provisions of section 44AB are applicable – Notification No. SO 493(E) [34/2008] dated 13-3-2008 issued by CBDT.
It is clarified that the provision applies to TDS as well as TCS. If assessee is facing difficulty in making e-payment, he can make e-payment from account of any other person. It is not necessary that he must have own account in authorised Bank – CBDT circular No. 5/2008 dated 14-7-2008.
1.11-1 Important websites
INCOME TAX DEPARTMENT (INDIA)
INCOME TAX DEPARTMENT (INDIA) Efiling division
http://incometaxind iaefiling. gov.in/portal/
TIN facilitation centers
http://tin.nsdl. com/TINFaciliCen ter.asp
BSR Code Search
http://tin.nsdl. com/OLTASListOfB SR.asp
http://incometaxind iaefiling. gov.in/knowpan/ knowpan.do
https://onlineservi ces.tin.nsdl. com/TIN/PANVerif ication.do
PAN Status Enquiry
UTI : https://tin. tin.nsdl. com/tan/StatusTr ack.html
UTITSL : http://myutitsl. co.in/intra/ web/pantrack. jsp
http://incometaxind iaefiling. gov.in/knowtan/ knowtan.jsp
TAN Status Inquiry (NSDL)
https://tin. tin.nsdl. com/tan/StatusTr ack.html
Challan Status Inquiry (Tax Payer Based)
https://tin. tin.nsdl. com/oltas/ servlet/QueryTax payer
e-Payment of Income-tax
https://onlineservices.tin.nsdl. com/etaxnew/ tdsnontds.jsp
Know your Assessing Officer
http://www.incometa xindia.gov. in/ao/Firstlevel .asp
PAN AO Codes
http://tin.nsdl. com/aocode. asp
TAN AO Codes
https://tin. tin.nsdl. com/tan/servlet/ TanAOSearch? display=Y
Office of the Director General of Income Tax (Systems)
http://incometaxind iaefiling. gov.in/portal/ contact_info. do