Business Taxation Made EzyBy CA.Chandrashekhar Shetty.S. B.com,PGDM,PGDCA, PGDFM, DIM,DISA, LL.B., ACWA, ACS, FCA Email-id:
[email protected] 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 Income Tax & Super Tax w.e.f. AY 65-66 Income Tax & w.e.f. AY 06-07 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 receipts Capital 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 income Normal Income means income other than special income. For normal income, tax rates are prescribed by the Finance Act every year. TAX RATES FOR AY 2009-10 Tax rates for individuals / HUF / AOP / BOI / Artificial juridical persons referred to in Sec 2(31)(vii) Total Income Tax rate Upto Rs.1,50,000 Nil Rs.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. 3 000 is limited to the amount by which income is more than Rs. Tax Planning vs. A the end of the financial year Rs.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.10. on the excess of income over Rs.7). V/s CTO (SC) (1985) 154 ITR 148.1. Tax Avoidance vs. In other words.10.000 20% Rs. (Refer case laws below) Tax Evasion – It means reducing the tax burden through unfair means.10. In other words.20. Ex: Sec. Such surplus can not be taxed since it is an income from mutuality. It may be legal but not ethical.20.000 p.000.00. or excess providing for expenses etc. Tax avoidance cannot be considered as tax planning. Marginal Relief Marginal relief would be provided to ensure that the additional income-tax payable. b) McDowell and Company ltd.20. It is illegal as well as immoral. Ex: Apartment owners association – the members of the association contributed Rs.(No surcharge on income of local authority) Tax rate for co-operative society Total Income Tax Rate Upto Rs.Since it is well within the script of the law. CIT v/s Bankipur Club Ltd. irrespective Taxable 4 . no one can make profit by selling to oneself.001 to Rs. including surcharge.00. it is held that “Colourable devices cannot be considered as tax planning” SCOPE OF TOTAL INCOME (Sec 5) Particulars 1 R& OR India in R but NOR Taxable NR Taxable Income received in India or deemed to be received in India (Sec. and such amount collected is spent for benefits of the members only. Normally. Tax Avoidance – It means reducing the tax burden by taking benefits of loopholes in the law. Concept of Mutuality It means the Contributories and the beneficiaries of an activity are same.000 10% Rs.10. it should be allowed.a.001 and above 30% No surcharge on income of co-operative society. There are 2 views on tax avoidance. Ex: Omitting sales bills. It is perfectly valid.80C.000/. It is bending the law without breaking it.1. Tax Evasion Tax Planning – It means reducing the tax burden by availing various benefits given in the law.00.00.10.(1997) 226 ITR 97 (SC). a) IRC v/s Duke of Westminister (1936). income from mutuality shall not be taxed. It is with the true script and moral of the law.000 surplus was remaining in the association. 5) From the view of taxation plan in such manner that assessee becomes non-resident especially for frequently traveling persons residing outside India. 2. Section 6 – Residential Status (1) Individual (Refer note 1) (2) HUF. for the purpose of employment abroad. (5) One residential status for all sources of income in an A. An Indian citizen or a person of Indian origin comes to India on a visit.Y. Firm/AOP (3) Company (4) Any other person Note 1. Income of a business controlled from India or Profession set up in India (Such business or profession referred is Taxable outside India and the income is earned/ received in India. X earns rs. 3) In case of R&OR/R in India. 1.Taxable Not .Y. 60 days shall be substituted by 180 days. (6) Addnl conditions (Refer note 2) Exception to 60 days condition In the following 2 cases. global income is taxable in India. or his parents or his grand parents have born in undivided India.Y. 4) Non-resident ends up paying tax on income earned in India or received in India.An individual is said to be a resident if a) resides in India for a period of 182 days or more in the immediately preceding PY OR b) 60 days or more in P.2 3 4 of where it is earned Income earned in India or deemed to accrue or arise in India (Sec. AND 365 days or more in 4 years immediately preceding the P.Taxable General Notes 1) Receipt here means first receipt and not the subsequent receipt / remittance. Since Income tax taxes the income earned during the P. Taxable irrespective of where it is received. 12L salary in UK. Person of Indian origin means either the assessee. or as a crew member of Indian ship. An Indian citizen leaves India. 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. 2) Past untaxed profits brought into India shall not be taxable.9). 5 . Case 1: Such salary is credited to Vijaya Bank in Chickpet. Any income earned / received outside Taxable India Taxable Taxable Taxable Taxable Not .Y. It is the not received in India. Ex: Mr. Note: 2 Resident but NOR conditions for Individuals & HUF only [Sec. Individual Resident Any one of 6(1) BUT NOR AND OR Non-Resident [None of Sec. 6(6) . AND b) Non-resident for 729 days or less out of 7 P.Conditions a) Non-resident for 9 out of 10 years.Y. 6(6)] Any one of 6(6) Refer Note 1 None of Sec. 6(6)]. 6(6) Note 1: Sec.s HUF Resident At least a part of its management is in India BUT NOR Karta satisfies 6(6) AND OR Karta satisfies none of 6(6) Non-resident Whole of its management & control is outside India 6 . Income from keyman insurance policy 7 Non-resident – at least part is not in India. defacto control. 5 male members. he was in India for 720 days. is irrelevant. 6(2). viii. Management and control means.Company Indian Company Other Companies Always resident in India Resident. 6(3) .e. and hence resident as per Sec. 2 working(working partners outside India) Firm is non-resident. Sec. karta is non-resident as per 6(1). Income u/s 56(2)(vi) vi.Income u/s 56(2)(v) viii Incomes from lotteries. The residential status of karta.Income u/s 28(va) vii. 6(2) and 6(6) independently. application of 6(1) is not required for determining residential status of HUF.Perquisites and Profits in lieu of Salary v. During PY 07-08. Sec. Instead merely apply Sec. 6(2) Firm/AOP Resident NR Part of its management & control is in India 100% of management & control is outside India Ex : 5 partners. the actual control. 3 female members. karta was in India for 30 days and during earlier 7 years. card games or games of any sort. Sec. horse race . However.Dividends iii. Comment. 1 male with 3% management power and all females were in India. while deciding the residential status of HUF.Capital Gains u/s 45 iv. Karta satisfied one of the conditions of 6(6) and hence HUF is Resident but NOR.Ex: HUF. 2(24) . in the given case. In other words. . Profits and Gains ii. Ans: Part of the management & control is in India. i.If whole of its management & control is in India.Income: It is defined to include the following: i. Received from a relative.000 is taxable. Received by an individual or HUF Without any consideration On or after 1/4/06 Consideration can be Re.As per the Indian Succession Act. Received on the occasion of marriage of individual. 3. & defer 10. it means amount received from a person who is suffering from serious disease & illness 8 . 2.000 – then.(Eveninadequate consideration is sufficient. Received by way of contemplation of death of the payer. Received by anybody other than Individual/HUF is not taxable. 1925. ESI or any other employee welfare Fund x. Plan: Defer Y to next year or take 20.1/-.000 From all persons in a P.000 only.000 & Y gave Rs. From any person/s Aggregate of whole of such sum is income Proviso to Section 56(2)(vi) The above clause is not applicable in following cases: 1. 30.ix. entire Rs. Employees contribution received by the employer towards any PF. Aggregate of which per annum Exceeds 50. Voluntary contribution received by a trust or institution or fund / university / educational institutions Note 1: Dividend from Domestic company is exempt u/s 10(34) Note 2: Section 56(2)(vi) Any sum of money Gifts received in kind does not attract this section. 60.Y. 30.000 in kind. It does not say adequate consideration.000 to next year or take 10. Ex: X gave Rs. if and only if he dies because of illness referred. 56(2)(vi) means: (a) Spouse of the individual (b) Brothers/ sisters of the 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 (c) Brothers/ sisters of the spouse of individual (g) Spouses of persons referred to in (b to f) above. 5. 10(20). Received from a trust registered u/s 12AA. HEADS OF INCOME As per Sec 14 the incomes earned by an assessee are broadly classified under the following heads: a) b) c) d) e) Income from Salaries (Sec 15 – 17) Income from House Property (Sec 22 – 27) Profits and Gains of Business or Profession (Sec 28 – 44DB) Capital Gains (Sec 45 – 55A) Income from Other Sources (Sec 56 – 59) It is the duty of the assessee to classify incomes under the respective head to ensure benefits. Such a will takes place effect. deductions prescribed in that head are availed / enjoyed by such assessee. Relative for the purpose of Sec. & expecting to die shortly. 10(23C). 9 . Received from a local authority referred to in Explanation to Sec. 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. Received from a Fund / Institution / Educational Institution / Medical Institution trust referred in Sec.4. 6. 00. 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 Salary Advance salary is taxable in the year of receipt whereas advance against salary is a loan or capital receipt. 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 be added 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.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.20. Eg: salary received by a lecturer of a college is taxed as a salary income whereas valuation fees received by lecturer of a college from the university is income from other sources. 1961. 5) Salary of directors: Unless given otherwise a) Managing Director’s salary is taxable as income from salaries.10.1. Conditions for taxing an income under the head salary 1) Employer – Employee Relationship or Master Servant Relationship: The relationship between payer and payee should be that of employer and employee or Master and Servant. Ex: Salary per month = Rs.000 x 12 months = Rs. it is not taxable. then. Salary forgone to employer is not exempt from tax .1.000 Salary surrendered = 2 months Taxable salary = 10.000. 3) Arrears of Salary – It means the additional salary received in a financial year towards service rendered in the past. such salary is exempted from tax. Hence. It is taxable in the year of receipt unless taxed earlier on due basis.000 x 10 months = Rs. Ex: Increase in salary with retrospective effect.000. 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. Similarly. Therefore tax amount paid by the employer to be added to the employee’s salary is only to the extent of: 10 . In the above example if the salary forgone was for 2 months then: Taxable salary = 10. The assessee can claim relief under Sec 89 against advance salary and arrears of salary. a) Cash salary say Basic Pay. Dearness Allowance b) Monetary perquisites say Re-imbursement of medical perquisites. The deduction is given as under only for government employees: Deduction is as follows: a) 1/5th of basic pay OR XXX b) Actual EA received OR XXX c) Statutory limit 5000 The above deduction is given irrespective of amount spent by government employee towards entertainment.e. Income from Salaries Sec 15 Charging Section Sec 16 Deductions (ii) Entertainment Allowance Sec 17 Definitions (a) Due Basis (b) Receipt Basis (c) Arrears (1) Salary (2) Perquisites (iii) Professional Tax (3) Profits in lieu of salary 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. It will be taxed as income from business or profession [Sec 28(v)] Sec 16: Deductions under the head Salaries The following are the deductions under the head salaries (i.000 11 . Explanation 2 to Sec 15 – Salary earned by a partner from a partnership firm shall not be taken as income from salary.Omitted Sec 16 (ii): Deduction for entertainment allowance Entertainment allowance is given to government employees to meet various expenses incidental to entertaining customers. Ex: Entertainment allowance given to sales representatives Entertainment allowance received is first included in the gross salary of government as well as non government employees.60. Eg: Basic pay – Rs. deductions are exhaustive in nature) Sec 16(i) . 000 Less: Deduction u/s 16(iii) 2.2.000 Professional Tax paid by the employer [Sec 17(2)(vi) 2.00.000 Gross salary = 70.000/-.000 Less: Deduction u/s 16(iii) 2.1. 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 .00.000 1.000 1. Ex.000 Sec 16(iii): Deduction for Professional tax or tax on employment Professional tax (PT) actually paid by the employee shall be allowed as a deduction.000 b) In the case of a Government Employee Basic Pay = 60.000 What will be taxable salary if assessee is: a) Non – Government empolyee b) Government employee a) In the case of a Non – Government employee Gross salary = (60.EA received – Rs.00. commission. Professional Tax – Rs.000 b) Actual EA received = 10. Basic Pay – Rs.000 + 10.000) = 70.000 c) Statutory limit = 5. If the employer pays the professional tax on behalf of the employee then.000 EA =10.000 Taxable Salary = 65.000 98.1.000 Case 2 – Professional Tax borne by employee Gross Salary .00.000 5.02.000/Case 1 – Professional Tax borne by employer Basic Pay .000 Section 17 – Definitions All 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.000 Taxable salary = 70.000 Less: Deduction u/s 16(ii) a) 1/5th of basic pay = 12.1.10. PT actually paid shall be first added to gross salary and then the deduction shall be given to the employee. past or future. “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 OR b) After ceasing to be in employment with that employer” From the above it is clear that the employer and employee relationship can be present. 13 . State Govt Local Authority Statutory corporation Govt employees covered Central Govt. RETIREMENT BENEFITS Gratuity Sec 10(10) Commuted Pension Sec10(10A) Earned Leave Sec 10(10AA) Provident Fund 10(11) & 10(12) Sec 10(11) / 10 (12) Govt employees covered Central Govt. State Govt Note: Death cum retirement gratuity.(ix) Transferred balance in RPF. State Govt Local Authority Govt employees covered Central Govt. 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 salary This section is an exception to the rule that capital receipts are normally not taxable. commuted pension and encashment of earned leave received by government employees at the time of retirement is fully exempt from tax. they are taxable as salary. even though the following amounts are capital receipts. In other words. DEATH CUM RETIREMENT GRATUITY Government Employees (Central Govt. and Local Non-Government Employees Authorities) Employees Covered by Payment of Gratuity Act.000 Employees not covered by Payment of Gratuity Act.e.3.000 Less Actual Exemption Given Earlier 14 . month of retirement to be excluded.. State Govt.50. 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.3. 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 received c) Rs. if taken for retirement benefit + Commission based on fixed percentage of turnover. Eg: 30 years 11 months = 30 years a) b) Note: When an employee receives gratuity from more than one employer: In the same financial year – Maximum exemption in that year should not exceed Rs. Eg: 30 yrs 9 months = 31 yrs 30 yrs 6 months = 30 yrs • Salary = Basic pay + DA. 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 received c) Rs.50.) • 1/2 month’s salary = Average Salary x 1/2 Fraction of year is completely ignored. 350.000/Received from second employer subsequently – While computing the exemption for gratuity received from second employer Statutory Limit = Rs. • Average salary means average of salary of 10 months immediately preceding the month of retirement (i. (Pension is taxable under the head ‘salaries’ where as family pension is taxable under other sources) However. 140.000 p. 6. 4000 p. Commission 3.m of which 20% is not taken for retirement benefits Bonus 10000 p. commission 10% of sales achieved by him.Problems on Gratuity: 1. 1972 c) he is not covered under Payment of Gratuity Act 1972 His last increment in basic pay of Rs. Special allowance 4. It is fully taxable as salary in the hands of employee. Pension is always taxable irrespective of whether the assessee is a government employee or a non-government employee or irrespective of whether it is received while in service or after service. Basic pay.m was from 1st may 2006.000. Mr.. Government here means Central Government. 10.. Mr.000. From the previous employer he has received Rs.f. 1st oct 2007 2. 10 months and he received gratuity of Rs. He has rendered service for 29 years.m. DA Rs.000 p. commutation of pension received at the time of retirement is exempt as per provisions of Sec 10(10A).000. Commutation of pension means surrendering the right to receive a periodic pension against a lump sum consideration. the salary at the time of retirement is as follows: Basic pay 6000 p.20. Exemption is as under: Government employees: fully exempt Non-government employees 15 .000.Rs. 50000 of which Rs.. Commutation of pension is exempted u/s 10(10A).e.2007.m. 500 p.m. 600. State Government. the salary at the time of retirement was as follows. Pension can be commuted wholly or partly. DA. Compute taxable gratuity if a) an employee of income tax Department b) covered by Payment of Gratuity Act.m.000 p. Commutation means surrendering the right to receive periodic pension against a lump sum consideration. 12.m. ending 31st Dec 2007 is Rs. Total sales made by him for the F. Increment in basic pay Rs.6. He has rendered service for 28 years 6 months 27 days..m. Sri Hari retired from service on 10th Jan 2008.00. was w. Prakash retired from services on 10th jan. It is taxed as income from other sources. Family pension means pension earned / received by the members of the deceased.Y. Gratuity received Rs. 1000 p. 1972 c) not covered by Payment of Gratuity Act Commutation of Pension [Sec 10(10A)]: Pension is a periodic payment received by an employee after retirement. 4. local authority and statutory corporation.000 was taxed.000 P.a. Total sales made by the employee for the financial year ending 3st dec 2006 is Rs. Compute taxable gratuity if a) he is an employee of Indian Railway b) he is covered under Payment of Gratuity Act. 300. he commuted 2/3rd of pension on 1st march 2008 and received 300. Compute taxable amount of pension if a) he receives gratuity b) does not receive gratuity 2) In the above example if employee retired on 15 June.000 d) Average salary x 10 Note: 1) Salary = Basic Pay + Dearness Allowance (if taken for retirement benefit) + Commission based on fixed percentage of turnover.A. 2007 & was eligible for 9000 p.e. In means of gratuity: B. Vivek retired from service on 1st Jan 2008 . Mr.m. Does not receive Full value of commuted pension receipt expressing the commuted value of pension in terms of 100% Exemption= 1/3 x full value of gratuity: commuted pension Exemption= 1/2 x full Summary: 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) PROBLEM: Q. Encashment of Earned Leave [Sec 10(10AA)]: Earned leave means leave granted but not availed or taken by the employee.000. The exemption is as under: 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. However encashment of earned leave received at the time of retirement is exempt as per the provisions of Sec 10(10A). 2) Average salary means average of salary of 10 months immediately preceding the date of retirement (i. based on average salary calculated at a rate not exceeding 30 days p. including month of retirement unlike in case of gratuity) 16 . b) actual earned leave received c) statutory limit of Rs.m. The employee can encash such leave not taken.a. he is eligible for pension of 6000 p. Encashment of earned leave received while in service is fully taxable (both for government and for nongovernment). This is called encashment of earned leave. Salary at the time of retirement was as under: Basic pay: 4000 p. Encashment of earned leave u/s 10(10AA).000 towards encashment of earned leave.. Salary details are as follows: Basic pay Rs. VRS computations: Salary = Basic Pay + Dearness Allowance. commission 5% on sales ( sales for the last 12 months effected by her is 9. 10th oct 2006 Compute taxable earned leave Q. Ltd. statutory limit has to be reduced by such exemption. Mrs. 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. Shruthi retired from service on 30th nov 2007 after rendering service for a period of 28 years in ABC Pvt. 1972: Salary = Basic Pay + All kinds of Dearness allowance ] Problems: Q. Contribution to RPF. in totality) 5) If an exemption has been claimed during earlier years towards encashment of earned leave then. She received Rs.m. For Gratuity covered under PGA. if taken for retirement benefit + commission based on Fixed percentage of turnover. DA 1200 p.e.000) last increment in basic pay of Rs. earned leave and commuted pension for A. Gratuity not covered under PGA.e. She received Rs. was w. Amount received at the time of retirement : a) gratuity.2000 p.. .60% of basic pay of which 60% is taken for retirement benefits.m.f. Shanthi retires from service on 30th nov 2007 after rendering service for 28 years.Y. Salary at the time of retirement was: Basic pay-8000 p. commission Rs. In the above question if leave is taken by the employee is 12 months.000 c) commuted pension.m.000) Last increment in basic pay of Rs.. Leave granted as per company policy 20 days.f. 2000 p. 140. 900. 2008-09 if: • leave granted as per company policy-20days • leave granted as per company policy-40 days 17 . 75. DA. 4000 p.m.1200 P. . commission 5% on sales ( sales for the last 12 months effected by her is Rs. 2000 p..e. Earned leave was 12 months.m.m.was w.312. [ For HRA u/s 10(13A). Her earned leave is 12 months.000 b) earned leave salary.A retired from service on 28th feb 2008 after rendering service for a period of 30 years. only complete years have to be considered.m.180.000( 75% commuted) compute taxable gratuity.3) While computing 30 days p.00. then what is the answer? Q. DA. 10th oct 2006 ) Compute taxable earned leave Q. He has Taken a leave of 12 months during the tenure of his service. Leave granted as per company policy was 45 days.m. Mrs. Mr. 1972.000 as encashment of earned leave.a.Rs. 75. Interest on PF Exempted balance 5. if (taxed at the taken into retirement time of refund) benefits+ commission as a fixed percentage of turnover) Interest in excess of 8. Applicability Statutory provident Recognised provident fund Unrecognised fund(SPF) (RPF provident fund (URPF) It applies to entities It is a provident fund either Neither SPF for which provisions recognised by the nor RPF of Provident Fund Commissioner of Income ACT of 1925 applies Tax or an entity for which provisions of Employees Provident fund and Miscellaneous Provisions Act of 1952 applies Included in salary and Included I gross salary and Included in hence not separately hence not separately taxed gross salary taxed and hence not separately taxed Public provident fund(PPF) It is not a provident fund in the real sense. It is a fund wherein assessee contributes It is not out of employment contract . time being contribution (salary = basic pay+ DA. Refund Exempted 6.Employer’s contribution Exempted 4.Tax Treatment of Provident Fund (PF) Particulars 1.Employee’s contribution 3.Deduction Eligible towards assessee’s contribution u/s 80C( any amount of contribution subject to 80C limits) 18 . it is applicable to any member of the general public.5% is Ignored for the Exempted taxable time being Exempted Taxable (refer Exempted note 1) Eligible Not eligible Eligible 2. It is an investment and hence question of taxation does not arise Contribution in excess of Ignored for the No such 12% of salary is taxable. REFUND 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 Allowances Section 10(13A) r/w Rule 2A House rent allowance Section 10(14) r/w Rule 2BB Special 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.g. if taken for retirement benefit (or considered for retirement benefit or forms part of salary) + Commission based on fixed percentage 19 . Chennai and Delhi] e. Job in Mumbai. Calcutta. house in Pune – 40% Note: 1) Salary = Basic Pay + Dearness allowance. Least of the following is exempt (for both government and non – government employees): a) Actual HRA received b) Rent paid less 10% of salary c) 40% of salary [50% of the salary in case the accommodation (and not the place of employment) is in Bombay. m. Personal allowances specified by law to be exempt are: a) Transport Allowance (for commuting between place of residence and office) is exempt to the extent of Rs.600p.000 = Rs.m.m.800p.000 a) Amount spent = Rs.000.000 – 4.300 p. (ii) Assessee should have actually incurred rental expenditure on accommodation occupied by him during the previous year.5. Ex: Uniform Allowance received = Rs.4.Amount specified by law to be exempt. 3) If there is a change in component of HRA computation ( say rent paid is different during two parts or assessee works for two different employers during a year ) then HRA computations have to be done separately.1.1.100 p.per child for a maximum of two children 20 . per child for a maximum of two children d) Children Hostel Allowance is exempt upto Rs. Relevant period means the period during which accommodation is occupied by the assessee. c) Children Education Allowance is exempt upto Rs. b) Transport allowance given to blind or orthopaedically handicapped allowance is exempt upto Rs.000 Taxable amount = 5. Taxable Amount = Amount Realised .m.of turnover 2) Conditions for claiming exemption u/s 10(13A) (i) Accommodation occupied by the assessee should not be owned by him. 4) Rule 2A r/w Sec 10(13A) states that HRA exemption should be given for the relevant period.500 Taxable amount = Nil (ii) Allowances given to meet personal expenses.5. b) Amount spent = Rs. Special Allowances u/s 10(14) r/w Rule 2BB: 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 (i) Allowances given to meet official expenses Taxable Amount (or allowance) = Allowance received – Amount spent. per child for 3 children Amount received(1000x12x3) 36000 Less: amount prescribed under law(100x12x2) 2400 Taxable amount 33600 3. for 3 children amount received(600x12) 7200 less: amount exempted(200x12x2) 4800 taxable amount 2400 PERQUISITES:u/s 17(2) r/w rule 3 Sec 17(2)(i) Rent free accommodation (RFA) Sec 17(2)(ii) Concessional Rent free accommodation Sec 17(2)(iii) Sec 17(2)(iv) Amenity/benefit to a Employees specified employee obligation met Refer note: 1 by employer Ex:Employees Proviso:ESOP (refer life insurance note 2) premium. income tax Explanation: use of borne by company’s vehicle employer.amount spent: Nil Taxable amount: Transport allowance received Less: amount prescribed by law Taxable amount Case 2.m.600 p. (refer note 3) Also refer sec 10(10CC) Sec 17(2)(v) Employer contributing to a fund to effect assurance on the life of assessee or contract of annuity Sec 17(2)(vi) Any other fringe benefits.1000 p. Mr.m.Problems on special allowamce: 1. children hostel allowance: amount received Rs.1000 p. for 3 children amount received(1000x12) 12000 less: amount prescribed under law(300x12x3) 7200 amount taxable: 4800 4. R received transport allowance of rs 1500 p.Amount spent : Rs. Children education allowance :amount received : Rs. children hostel allowance: amount received : Rs.m. as may be prescribed (refer note 4) Proviso to sec 17(2): medical allowance (refer note 5) 21 .1000 Transport allowance received Less: amount prescribed by law Taxable amount 1500 800 700 1500 800 700 2.m. (other than provided in chapter XII-H). Case:1. a) Interest free or concessional loan to employees b) Use of employer’s moveable assets by the employees c) 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. RFA valued at 160. 22 .000. .m. DA-3000 p.000. RFA 200. 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. i. 50000 p. staff welfare.a.e. – Rule 3(3) facility of gas.000. watchman. deduction u/s 16(iii)-2000/Calculation of monetary salary: Basic pay ( 4000x12) DA 51000 less: deduction u/s 16(iii) monetary income 48000 3000 2000 48000 as employee’s monetary income doesnot exceed 50. 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.. hospitality. 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. etc.NOTES: 1) Specified employee means : a) director employee b) an employee having substantial interest in the company. etc. They are classified as under for the purpose of taxation A) Taxable in the hands of employees . holding 20% or more of the voting power c) an employee whose monetary income under the head salary after deductions under section 16 exceeds Rs.gardener.Sec 17(2)(vi) Following are the only three fringe benefits covered under this category. EX: basic pay : 4000 p.m. electricity. gifts to employees. he is not a specified employee Ex: basic pay 5000p.a. 000 Ex: Basic pay 140. medical expenses-50.000.000 Medical expenses incurred 50. 200. Stay expense of patient and one attendant to the extent permitted by RBI c. DA -50.000 Taxable medical expenses 5.000 DA 50.000 Since GTI before including traveling expenses exceeds Rs.000 Traveling expenses 110.99% Ex: conveyance expense debited to P/L A/c RS 10L FBT= 10L x 20% x 33. Taxable perq: Rs1000 e) Medical treatment in own hospital.000 GTI 215. Ex: medical treatment in Rama nursing Home: Amount spent Rs. 2.000 Taxable salary income 305.00.000.a. 20.99% = 67980 FBT not applicable for individuals. 110.000 ( permitted by RBI Rs.000 195.000 income from other sources 20.000 23 .sec 36(1)(ib). is fully exempt d) Medical treatment in any other hospital. entire traveling expenses is taxable Statement of total income: Basic pay 140.15000 p. say.000 Less: permitted by RBI 45.e.000 DA 50..000 5. i. income from other sources –Rs.16000. Medical expense to the extent permitted by RBI b. HUF and certain prescribed trusts 4) Medical Perquisites: Medical allowances are fully taxable. Traveling expenses exempted if and only if Gross Total Income before including such traveling expenses does not exceed Rs.000 Soln: GTI (before including traveling expenses) Basic pay 140.FBT= prescribed expense x prescribed percentage x 33. 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 exempt b) Reimbursement of medical expenses in the government hospital or recognized public hospital is fully exempt c) Medical expense premia/ group medical insurance premia borne by the employer. private hospital is exempt upto Rs. 45000).000.000. hospital owned and maintained by employer is fully exempt II) Medical treatment outside India: The following three expenses are exempted a. traveling expenses Rs. taxation also fails. Rule 3 is not applicable. sisters Wholly or mainly dependant on the individual Valuation of Perquisites . Family for this purpose and sec 10(5) means: Spouse of individual Any two children. – held in B. When a director. Srinivas Shetty Vs.m. Children and their spouses d. Servants and dependants of the employee Valuation of free or concessional educational facility. Further such RFA may not be taxable in the hands of director.100 p. Spouse(s) b.Income from other sources GTI 20. CIT (SC) Member of house hold include: a.000 Note: Medical perquisites can be availed by employee or any of his/her family members. non-employee is provided with a RFA. If such cost does not exceed Rs. per child. When computation fails.Rule 3 Rule 3 is applicable for any benefit derived by any employee or any member of his household by reason of such employment. brothers. then there will not be any perquisites.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.C. Parents c. In other words all these perquisites are taxable only in the hands of employees. parents. (no restriction on number of children for IT purpose) 24 . since there is no computation provision given in law.000 325. Government employee Perq = X+Y-Z Hotel Accommodation (Government / Non -Government) License fees as determined by concerned Government Rules.Hotel accommodation may be for I or II. NonGovernment employee I.Valuation Of RFA/ CRFA Sec 17(2) (i). Accommodation rented or hired by employer Perq = X+Y-Z Here X means If population is exceeding 25 L as per 2001 census 15% of salary If population is ≤10L 7.5% of salary If population is >10L but ≤25L 10% of salary 15% of salary OR Actual rent WIL On transfer Other than transfer (Even for one day) Upto 15 days in aggregate NIL More than 15 days Perquisites X-Y Here X means 24% of salary OR Actual hotel charges. 25 . Perq = X+Y-Z B. Accommodation owned by the employer.(ii) read with rule 3(1) II. W I L NOTE 1:. A. Further there is no Y here. TV. actual hire charges of the If the above items are owned by furnishes employer10% of original cost NOTE 3:. Note 4:. refrigerator etc. Located in remote area atleast 40 KM away from a town having population not exceeding 20. when any one of the following two conditions are satisfied: Condition 1 Condition 2 Temporary construction AND Plinth area not exceeding 800 Square feet AND Is located not less than 8 KM away from the local limits of municipality or cantonment board. if any. Upto1st 90 days After 90 days RFA of House 1 OR WEL Say P RFA of House 2 2 RFA of House 1 Q RFA of House 2 R Taxable perquisites = P+Q+R Note 6:- 26 . while retaining accommodation at old place of posting.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. Note: 5.Y means perquisites value of furnishing say furniture.NOTE 2:.000 based on latest published all India census. More than one accommodation given on transfer:-When an accommodation is given in the new place of posting. if any provided.Z means Rent recoverable from or payable by the assessee towards RFA + Hire Charges payable for Furniture and Fixtures. air conditioner. If hired. DA not taken for retirement benefit.Accommodation includes a house. Ex: Transport allowance 1000 per month .50% 10.Y. Sweeper salary paid by employer Rs. service apartment. the taxable perquisites gets reduced by such amount.Above 5 yrs but upto 15 years Interest rates p. 20 Lakhs . 12000/-p. guest house. 10.12000.50% 27 . Perquisites in the hands of employee is Rs. service apartment or guest house. Note 7:. Allowance exempted 3. 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 employee Taxable in the hands of employees.25% 10.a. mobile home. or any other monetary payment Allowance to the extend of taxable. 2. 20 Lakhs .Upto 5 years .Salary for the purpose of rule 3 means: Basic pay DA taken for retirement benefit All kinds of commission Bonus. flat. Hotel includes licensed accommodation in the nature of motel.Taxable allowance 200 per month.Upto 5 years . The rates applicable for A. 2009-10 are: Particulars 1.25% 10. 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.Above 5 yrs but upto 15 years . Housing: • Upto Rs.Y. As of now. Employers contribution to PF 4.Above 15 yrs but upto 25 years • Above Rs. caravan. Further if any amount is recovered from the employee. Salary does not include: 1. farm house or part thereof or accommodation in a hotel or motel.00% 10. following are the only three perquisites which are taxable in the hands of employees I) Interest free or concessional loan: Perquisite = maximum outstanding monthly balance of loan x interest rate – Z Note: 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. Fees.a. or other floating structure. a.75% 11.000 p.20. 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 XXX Less depreciation as per prescribed rates XXX (Refer note 1) Book value XXX Less: sale value (amount received from employee) XXX Perquisites XXX Note1: Depreciation rates for this purpose: computers and electronic items:.75% 12. Sec 10(10B) : Exemption towards Retrenchment compensation Least of the following is exempted u/s 10(10B) 28 . II) Use of moveable assets (other than computers and laptops) belonging to employer. Depreciation = 4L Note 2: Electronic items does not include TVs.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. i. for every completed year of usage under SLM Eg: Furn – 10L.owens.5 lakhs) • Above 3 yrs and upto 5 yrs • Above 5 yrs but upto 7 yrs 3.e. Car loan for new car • Upto 3 yrs (Rs.Above 15 yrs but upto 25 years 2. used for 4 yrs 11 months..25% 15.20% of WDV other assets :.a. Two-wheeler loan 4. Personal loan 10. etc General note: when asset is more than 10 years old there won’t be any perquisite.00% 16.50% 11. Education loan • Upto 4L • Above 4L 5.75% 12..7.7. AC. micro. Refrigerators. etc. printers.5 lakhs and above) • Upto 3 yrs (below Rs. or b) when the assets are taken on hire.50% of WDV motor car:. washing machines. by the employee: Perquisites = Y.25% 13.10% p. a) when such asset is owned by the employer 10 of original cost.75% 11. electronics items include digital diaries. Calendar year 1986(i. then all such children & first child • Parents. 1947 3) statutory limit XXX XXX 5. he shall be allowed to carry forward one LTC to be claimed in the first year of the immediately succeeding block Example: block 2006-09 Case 1: No LTC in the above block is availed. Ans.1990 to 1993 and so on If an employee has not availed any LTC in a block of 4 years.e.2012. whichever is higher XXX 5.00. LTC is availed in 2011. The block commenced w.2013. Family as per sec 10(5) • • Spouse Two surviving children of the individual( if 2nd issue is a multiple birth.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 2) Statutory limit 3) Completed years of service x last drawn salary x 3 times: or balance period of service in months x last drawn salary.f.000 XXX Salary = Basic pay + DA( if taken for retirement benefits) + commission based on fixed % on turnover executed by employee Section 10(5):. Case 2: In the above case.: Exemption is only for two LTC Sec 10(5) exemption is given for LTC of self and family.00.e.Leave Travel Concession The exemption is towards expenditure on travel incurred twice in a block of four years. 1st Jan 1986) 1st block: 1986 to 1989 2nd block.1) Actual compensation received 2) amount prescribed U/S 25(F) of Industrial Disputes Act. Employee avails LTC in 2010-13 Ans: It can be availed. sisters and brothers who are wholly and mainly dependent on the assessee 29 . e.1.Rs.000 & advance tax Rs. (iii) Motor car owned by the company (with engine c.Rs.c.2008 to 30. DA .000 (iv) National Highway Authority of India Bonds .33. f.14% Interest credited to PF balance @ 11% .70 per day for 210 days.600 p.6ltrs) along with chauffeur for official & personal use.1.3.200 (private hospital) PT of employee paid by employer .400 p. Transport allowance . r. j.m & FD interest 600000/Compute taxable salary & tax payable.3.Rs.3.000.Rs. Car is used for both purposes.e.6.Rs.20. CCA . Mr.m.400 w.6. for 3 children Children hostel allowance .f.8CC. Bonus Rs.2004.000.300 p.50.000 and afterwards Rs. Rent paid by employee 3000 p.000 Employer contribution to RPF .700 (i.4.000.2.m. TDS on salary .5. DA . c.000. (20% unspent) Children education allowance .) Interest free loan for purchasing home appliances (amount Rs.000 p.000 (vi) LIP of friend .m.m. Amount outstanding between 1.000 (v) PPF . (ii) Value of furniture therein Rs. b.m. m. HRA . X. 2.000 p. Salary falls due on the last day of each month.500 p. Mr.2008 .10.Problems 1.00.14% (ii) Unit linked insurance policy .m. less than 1. 30 . 1.3. e. an employee of ABC Ltd furnishes the following information : Basic pay Rs. (iv) Sweeper salary paid by the company Rs.Rs. p. g.500 .000.Rs.Rs.000) He has been provided with a motor car of 1.4. q. d.5.50. per child for 2 children Leave travel concession .60% of basic pay of which 75% enters into retirement benefit.14.000 (iii) NSC .25.500 p.400 .2001.300 .4.m.Rs. He has been provided with 2 watchmen (salary Rs.22.000 p.Rs.700 p.Rs.12.25.11. a.Rs. per person) Reimbursement of medical expenses Rs. amount is directly paid to the canteen by the employer.76.2008 and was paid the following emoluments and allowed perquisites as under : Emoluments : Basic pay Rs. n. i.Rs. date of taking the loan 1.Rs.20.500 .000 (vii) Repayment of housing loan taken from Vijaya bank (Principal) Rs.Rs.Rs.m.7.40.20.Ullas joined a company on 1. He contributed : (i) Towards RPF . (v) Watchman salary paid by the company l.31.m.1.000 Perquisites : (i) Furnished accommodation owned by the employer and provided free of cost.000 Free meal at the place of work .Rs. (vi) Educational facility for 2 children provided free of cost. Suitable assumptions may be made. The initial fee of Rs.00.000 given 1.50.00.1. 31 .1. (vii) Interest free loan of Rs. Ullas paid the bills for his use of club facilities.2008 for purchase of a house. wherever necessary.000 repayable within 7 years given on 1. You are required to compute the income of Ullas under Salaries in respect of AY 2009-10. No repayment was made during the year. No repayment was made during the year.Rs.000 was paid by the company.5. (viii) Interest free loan for purchase of computer Rs.2007.500 p. (ix) Corporate membership of a club.m.1. The school is owned and maintained by the company.10. X lets out a HP to Mr. commercial building.1: Mr. (Profit on sale of building is taxable under the head ‘Capital Gains’). In this House Property income is Rs. Ex.2000. taxed even there is no income. However. (S. Income from sub letting – Income from Other Sources since assessee is not the owner.10000. Income from house property is the only head of income which is taxed on notional basis i.10000 and Business / Other Sources income is Rs. Composite Rent – When a building has been let out along with the furniture. Ex: Mr. Conditions for taxing income under the head house property: 1) There should be a building or a land appurtenant thereto i.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’. Ltd. 12000 – for building Rs. b) As per CIT vs Shambhu Investments Pvt. It includes residential building. then such letting out is called composite letting.e. X uses his property to carry on Pan Beeda business – NO Income from House Property.e.) (2003) such inseparable composite rent is taxable under House Property. Exceptions to the rule that the rental income of the building is taxable under the head House Property:1. At present Supreme Court decision has to be followed. furniture Rs. 2. cinema theatres etc. a) As per section 56(2) when the rent is inseparable then entire rent is taxable under other sources.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.. who intends to carry on pan beeda business – Income from House Property. 1: Mr.C.2000. 2: Mr. A lets out building along with furniture for Rs. House Property for this purpose means any building which has the characteristic features of a building.Y. 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. attached to such building AND 2) Assessee should be owner of such property AND 3) 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. Ex. 32 . 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.Ex. 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. c) Such tenant should not be in occupation of any other property belonging to the same owner d) Legal proceedings should have been initiated against the tenant..2: In the above example if rent is inseparable Rs. 4. 33 .Assessment done hitherto shall be continued as it is. b) The tenant should have actually vacated the property or steps should have been taken to vacate the property. 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. However. Building let out for Bank or Post Office. 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. Case 1: The Court decides Mukesh is the owner :. 2) Holder of an impartible estate shall be the deemed owner. Courier Agency etc.12000 is taxable under House Property. (c) If the property is let out and was vacant and rent received or receivable is lesser than (a) due to such vacancy then such rent received or receivable shall be the annual value. 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. Ex: Mukesh and Anil disputing for a property. Assessing officer decides Mukesh the owner of the property. it should be not be a month to month lease or lease period should not exceed one year. 3. (b) If the property is let out and rent received or receivable is higher than (a) then such rent received or receivable is the annual value. 3) Disputed Ownership – Assessing officer shall decide the ownership of the property depending upon the facts and circumstances of the case. 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. Section 23 – Annual Value Sec 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). 1882. Section 27 – Owner In the following cases even the persons other than registered owners shall be deemed to be the owners. When a building has been let out to Employees/Directors – Income from Business. wherein letting out is incidental and subservient to the business – Income from Business. 6) In case of lease for a period not less than 12 months lessee shall be the deemed owner. 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 nil b) Annual value of the other properties (i.000/(ii) Special deduction upto Rs.30.e.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 AND b) No other benefit is derived from such property. 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) Sec 24(b) – Interest on capital or loan borrowed for acquisition. the annual value of LOP / DLOP is computed as under: Municipal Value Which ever is higher (a) Fair Rental value Whichever is less (c) Standard Rent (b) Actual Rent Received / Receivable (d) Less: Unrealised Rent Note: 1) Only if (e) > (d) vacancy allowance has to be considered. whichever is higher. CIT). repairs and reconstruction in respect of a) LOP / DLOP – Any amount is allowed b) SOP – Deduction is as follows: (i) Normal deduction upto Rs. (Sheila Kaushish vs.1. 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. if actual rent received is the highest figure then the same should be taken as annual value.000/. 3) FRV cannot exceed the standard rental value Hence. (Otherwise it is ignored) 2) Annual value of the property cannot exceed standard rent as per Rent Control Act.50. However. 2) Fair Rental Value (FRV) means rental value of a similar house in a similar locality or near by locality OR municipal value. GAV (e) = (c) or (d) whichever is higher 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. construction.(Refer Note 1 below) 34 . renewal. then entire income is taxed as income of an AOP. b) If the share of each co-owner is not definite and ascertainable. b) For claiming deduction the interest certificate giving details of interest amount.50. Sec 25B – Arrears of rent received It 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. No deduction is allowed against this income. 3) Penal interest on interest is not allowed u/s 24. 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. principal outstanding etc. Points to be noted: 1) Annual value of partly self-occupied and partly vacant property (one property) Period Based (i. 9 months – SOP and 3 months vacant) – Annual Value is Nil. Sec 25 – Amounts not deductible Interest paid outside India without TDS or without having an arrangement for TDS in India is disallowed. Sec 26 – Property owner by Co-Owners a) When the share of each co-owner is definite and ascertainable.04.Explanation – Pre-Construction Period (Refer Note 2 below) Note: 1) Interest deduction upto Rs. the following conditions must be satisfied: a) The loan should have been taken on or after 01. Deduction of 30% shall be given against this income. However. 4) Loan can be taken from friends and relatives also 5) Unpaid purchase price is considered as loan 6) Interest is allowed on accrual basis and not on cash basis. Usage based (i.e. It is available only for acquisition and construction.1999 and construction should have been completed within 3 years from the end of the financial year in which loan is borrowed.e. 2) Pre-Construction Period Interest – Pre-Construction Period interest is allowed in 5 equal annual instalments commencing from the year of completion. has to be attached along with return of income.000/-. 75% used as SOP and 25% is vacant) – Annual Value is Nil 35 . Sec 25AA – Unrealised rent recovered Unrealised 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.1. whichever is earlier. then respective share is taxable in the hands of each such co-owner. as the case may be) should be taken as SOP.e. 36 .e.30. 9 months – SOP and 3 months LOP) Usage based (i.1. 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.e.50.2) Annual value of partly self-occupied and partly let out (one property) Period Based (i.000/. 75% used as SOP and 25% is LOP) Treated as DLOP for entire period Annual Value of SOP is Nil Annual Value of LOP to be taken at 25% 3) Selection of one 23(2) property out of several 23(2) properties a) A property having higher GAV should be taken as SOP b) A property having lesser interest (i. upto Rs.000 or Rs. Knowledge Eg: Medicine. repairs. 2. It means application of skill. commission or fees by what ever name called received by a partner from a partnership firm (PFAS or PFAOP). The provisions of this head of income are same for business as well as profession. Deduction under the head business income: Specific Deduction (Sec 30 – 36) General Deduction [Sec 37(i)] 1. Actors etc.Profit and gains of business or profession carried out at any time during the previous year. 4. interest. Chartered Accountant.Any benefit / perquisite in cash / kind arising in the course of business or profession. to the extent allowed in the hands of partnership firm u/s 40(b) 5. Further the motive of the enterprise is irrelevant i. rent. As per Sec 2 (36) "Profession includes vocation". insurance etc. rate. insurance of building Revenue expenditure on repair (current repair). Sec 32 – Depreciation 32(1)(i) SLM 32(1)(ii) WDV 32(1)(iia) Additional Depreciation 32(1)(iii) Terminal Depreciation 37 . Sec 31 – Repairs and insurance of machinery.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. in certain cases even a single transaction can constitute a business. plant and furniture Revenue expenditure on repair.Any amount received by the employer from keyman insurance policy including bonus. Ex: Joint venture for export. Sec 28 – Charging Section: The following incomes are chargeable under this head: 1. insurance etc. commerce or manufacture". whether profit motive or non profit motive of the enterprise.Chapter IV-D .Any salary. on these assets are allowed as deduction. 3.Income received by any person (including managing agency) for managing the affairs of business in India including any receipt on termination of such service of management. Lawyers. However. Normally to constitute a business there should be a series of transactions. Specific Deduction Sec 30 – Rent. It is still chargeable under Chapter IV D.e. Rs.2. Rs. Since it is an option given to these undertakings / entities. However option once selected cannot be reversed. 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. This is the Short Term Capital Gain u/s 50A.000 (Sale Value < Original Cost) Soln: Profit = Rs.1.3 Lac = Rs. Straight Line Method It is the option given to power generating or power generating and distribution undertakings. Note: 1) SLM method of depreciation is not applicable for entities engaged in mere distribution of power (Eg: KPTCL).12 Lac – Rs. Depreciation under this method = Cost of asset x Depreciation rates prescribed in appendix 1A of IT Rules. This is considered as balance – in – charge u/s 41(2) and taxed as business income (iii) Rs. This is Balance in charge (business income) u/s 41(2).10 Lac or Rs.5.00.12 Lac – Rs. (Loss = Book value – Sale value) ii) When sale value is greater than book value Sale Value – Original cost = Short Term Capital Gain u/s 50A.5 Lac – Rs. Methods of Depreciation: Straight Line Method Written Down Value Method 1. 38 . (Sale Value or Original Cost.000 Soln: Profit = Rs.3 lacs The asset is sold for: (i) Rs. 1962.9 Lac A. This is the Balance in Charge (Recovery of depreciation). Ex: Original Cost of asset – Rs.2 Lac. covered under this type of depreciation.00. whichever is less) – Book Value. they can also opt for Written Down Value Method. In the year of sale of asset. Book Value – Rs.e.3 Lac = Rs.12 Lac WEL i. 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.10 Lac = Rs.00.2 Lac.000 Soln: Rs.10 lacs.12.32(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.7 Lac.3 Lac = Rs.00.000 can be claimed as terminal depreciation under Sec 32(1)(iii) provided same is written off in the books (ii) Rs. Rs. B.10 Lac – Rs. 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 Depreciation 1. machinery/plant whole of cost of which is allowed as deduction under any other provisions of business income. aircraft.” Intangible assets include know-how. 3. license. Depreciation = WDV as on that date x Prescribed % as per Appendix I 3. It is applicable only for plant / machinery. It is an additional depreciation in the year of purchase / construction. road transport vehicles. 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. However under each category of tangible assets there may be various blocks of assets. 39 . machinery / plant installed in accommodation or guest house. It is applicable for WDV method. No additional depreciation in the following cases – Ship. iv) As per 43(6) WDV is computed as under: WDV as on 1st April of PY XXX Add: Actual cost of additions during the year XXX Less: Sale value on sale/Insurance money received on destruction of asset XXX WDV as on 31st March of PY before depreciation XXX Less: Depreciation u/s 32 XXX WDV to be carried forward to next year XXX Notes: 1. However date of purchase is relevant for the purpose of Point (v) below. Date of sale is absolutely irrelevant. machinery / plant which is used before installation outside or within India. 2. 4. machinery.2. copyright. furniture and plant OR intangible assets AND having same rate of depreciation. ii) As per Sec 2(11) Block of assets means “tangible assets namely building. Written Down Value Method i) Depreciation under this method is charged on basis of block of asset concept. Additional depreciation = 20% of the actual cost of asset. trademarks. franchise or any other asset of similar nature. 5. 2. iii) Depreciation is calculated based on WDV as on 31st March of the previous year. Normally for all intangible assets only one block of asset (since the rate of depreciation is equal). v) When an asset is used for a period less than 180 days then the depreciation is restricted to half . patents. office appliances. 1. Sec 35ABB – Expenditure on obtaining tele-communication license – It is allowed equally over license period commencing from the year of commencement of business. MOA. AOA. The new asset should be acquired and installed after 31st March 2005. Any contribution/donation to a university. 40 . Such institution need not carry research related to the business of the assessee. preparation of project report. electronic equipments.communication equipment etc or any other article notified by CBDT. 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. pharmaceuticals. 3. [Sec 35(2AB)]. [Building can be claimed under Sec 35(2) as a deduction. Capital employed = Issued Share Capital + Debentures + Long Term Borrowing as on last day of PY in which business is commenced. 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. expenditure incurred on land or building shall not be allowed. Depreciation is allowed in the year of installation & not purchase. In case of companies engaged in the business of bio-technology or engaged in the business of manufacture or production of drugs. Additional depreciation is applicable only for industrial undertaking engaged in manufacture or production of any article or thing. Preliminary expenses include expenditure on feasibility study. 7. If the assessee carries out in-house R & D 150% of such expenditure is allowed as deduction. legal fees etc. approved scientific research association/institution is entitled for a deduction of 125% of contribution. tele. 2. computers. Notes: 1. Normally depreciation can be claimed in the year in which asset is ready to use.6. Note: Provision of less than 180 days is applicable even for additional depreciation. Sec 35 – Expenditure on scientific research Revenue 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. However in case of Indian Companies higher of Cost of the project and capital employed is considered for ascertaining the 5% criteria. Contribution to National Laboratory. IIT is also eligible for 125% of deduction [Sec 35(2AA)] 4. Sec 35D – Preliminary expenses only for Indian Company or Non-corporate resident assessee. Long term borrowings also include creditors for Fixed Asset imported from abroad. wherein the credit period exceeding 7 years. Cost of the project includes cost of fixed assets as on last day of PY in which business is commenced. 3. However. Deduction per year = 1/5th of preliminary expenses Preliminary expenses allowed is Actual amount OR 5% of cost of the project WEL. (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. Any interest on capital borrowed till the date asset is put to use cannot be claimed as a deduction as that amount is capitalised. 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. belonging to a political party shall not be allowed. 36(1)(iii) – Interest on borrowed capital – It is allowed as a deduction. on health of employees. compensatory penalties are allowed. 36(1)(iv) – Employer’s contribution to RPF and/or approved super annuation fund 36(1)(v) – Contribution (by employer) towards approved gratuity fund. It is applicable only to Indian Companies and any person. Explanation: Any fine or penalty paid towards any offence or an activity prohibited by law shall not be allowed as a deduction. pamphlet. 3. It should not have been specifically covered u/s 30-36. Sec 37(2B) – Any advertisement in a journal. Sec 37(1) – General Deductions Any expenditure incidental to the business shall be allowed as a deduction provided the following conditions are satisfied: 1. 2. However. 36(1)(ii) – Bonus or commission payable to employees subject to Sec 43B. not being a company. 41 .Sec 35 DD – Expenditure on amalgamation / de-merger – Deduction is 1/5 th of such expenses (only for companies) Sec 35DDA – Expenditure incurred on VRS compensation – Deduction is 1/5th of such expenditure. by way of A/c Payee cheque. 36(1)(va) – Employees contribution to PF. Sec 36 – Specific Deductions 36(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. souvenir. resident in India. It should not be a personal expenditure. 5. tract. ESI received by the employer is considered as an income within the meaning of Sec 2(24)(x). Such expenditure should have been incurred wholly and exclusively for the purpose of business. It should have been incurred during the PY. It should not be a capital expenditure. 4. Debt should have been offered as an income or such money should have been lent in the normal course of business of money lending. 36(1)(viii) – Deduction is for a specified entity for eligible business computed under head Profits & Gains of Business or Profession.f. Bad debts recovered – 5 lacs Income u/s 41(4) is 5 lacs – 3 lacs (disallowed earlier) = 2 lacs.f. 36(1)(xi) – Omitted. 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.5% of GTI. Revenue expenditure is fully allowed whereas capital expenditure is only to the extent of 1/5th.e.e. Ex: Bad debts in the year 2002-03 – 10 Lacs.Deduction = Cost of animals – Sale value of Carcasses. 36(1)(viia) – RBD provision in case of banking company / Public Financial Institution a) Schedule or Non-Schedule Bank incorporated in India – 7. 36(1)(xii) – Any expenditure incurred by corporation or body corporate for meeting the objects of such entity. – Deduction = Special Reserve created or 20% of the profit of such business WEL. 36(1)(x) – Omitted. It does not include RBD. 36(1)(vii) – Bad debt is allowed as a deduction.4. 36(1)(ix) – Deduction towards family planning expenditure incurred by a company. It should be irrecoverable Treatment of bad debts recovered – Sec 41(4) – It should be treated as business income to the extent allowed earlier. provided conditions u/s 36(2) are satisfied. b) Banks incorporated outside India and Public Financial Institution/SFC – 5% of GTI.7 lacs. 1. 2. AY 2009-10 (CTT) Sec 36(2) – Conditions for claiming bad debts as deduction 1. 36(1)(xiv) – Contribution towards Exchange risk administration fund – Credit guarantee fund trust for small industry. 36(1)(xiii) – Banking Cash Transaction Tax is allowed. 3. 42 .08 (STT) 36(1)(xvi) – Commodity Transaction Tax w. An additional deduction of upto 10% of average rural advances made by the branches shall be allowed. It should have been written off in books. No deduction when the balance in such reserve exceeds twice paid up capital & General reserve. Note: In case of other assessee deduction can be claimed u/s 37(1)/32. 36(1)(xv) – Securities Transaction Tax w. Allowed by ITO – Rs. fees by whatever name called payable to Government / Government authorities. brokerage. Note: Salary paid to a resident in India even without TDS is allowed as deduction.. Sec 40A(7) – Provision for gratuity is disallowed.1 lac is disallowed. service tax etc.X and Mr. the following shall be allowed if and only if paid on or before due date u/s 139(1): (i) Any tax. sister. (AY – 2009-10 allowed) (ic) FBT (ii) Any amount of income tax or any other sum charged under this Act. excise duty. 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. (ib) Security transaction tax.Y are CAs having equal knowledge and experience working in Mrs.4 lacs and to Y – Rs. the amount shall be allowed in the subsequent year if TDS condition is satisfied in subsequent years. Ex: Sales tax. royalty. (v) Tax referred u/s 10(10CC) i. contract amount etc payable to a resident in India. Sec 43B – Expenses allowed only on payment basis Not withstanding anything contained in Sec 145. ESI. without TDS (in India) (iv) Any payment out of PF or any other employee welfare fund unless effective TDS arrangement has been made. Super Annuation Fund.Sec 40(a) – Amounts not deductible The following amount shall not be deducted while computing business income. As per Sec 2(41) relative to an individual means ‘spouse. (ia) Any interest. b) Provision that has become payable during current financial year. for which no TDS is made or after deducting the TDS has not been remitted to the government. Sec 40A(9) – Employer’s contribution to URPF is disallowed. rent.000 otherwise than by account payee cheque or Demand Draft – 100% of such expenditure is disallowed. Sec 40A – Expenses disallowed in certain circumstances Sec 40A(2) – Payment to relatives – Unreasonable amount is disallowed. tax paid by employer on non-monetary perquisites. commission. In such a case Rs. (iia) Wealth Tax (iii) Salary payable Outside India (resident or non-resident) To a non-resident. octroi. professional fees. technical fees. Note: In Point No.X’s firm. any lineal ascendant or descendant of that individual Ex: Mr. (1) and (2) above. entertainment tax.20. However the following amounts shall be allowed: a) Gratuity actually paid during the year. cess. entry tax. duty.e. 43 . Sec 40A(3) – Payment made in excess of Rs. (i)Any interest. (ii) Employer’s contribution to PF.3 lacs. Gratuity Fund or any other employee welfare fund. Salary paid to X – Rs. brother. State Industrial Investment Corporation. 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 XXX Less: Professional expenses actually paid during the year irrespective of the year for which it belongs to XXX Depreciation allowed u/s 32 XXX XXX Taxable professional income XXX List of expenses disallowed while computing business income: 1. Business income is computed as under: Net profit as per P & L A/c XXX Add: Expenses disallowed but debited to P&L A/c XXX Business income not credited to P&L A/c XXX XXX Less: Expenses allowed but not debited to P&L A/c XXX Non – business income credited to P&L A/c XXX XXX Taxable business income XXX Format of computation of professional income Normally professional people follow cash basis of accounting. Expenses disallowed if not paid within due date of 139(1) 44 . Rs 5L on 15. If any of the above mentioned items are paid after due date then the same shall be allowed in such year of payment. Capital expenditure (subject to sec 32) 5. 35(2AA). Rs 8L is allowed for FY 07-08 & Rs 2L for FY 08-09 Format of computation of business income Normally business people follow accrual method of accounting. 35CCB (certain donation say donation to kargil fund.9. 35CCA. Any interest on loan or borrowings from Public Financial Institution.2008. Fines & penalties (compensatory penalties are allowed) 6. 7. deducted for GTI u/s 80G) 9. Interest etc paid to resident without TDS (other than salary) 8. SFC. Cash payment in excess of Rs. Cash payment can be made for capital expenditure (any amount) 11. In-house scientific research mentioned in 35(2AB) – L & B disallowed.20. If it is paid after the due date. Bonus or commission as referred in Sec 36(1)(ii). However.08. Unreasonable payment to relatives u/s 40A(2) 10. 2L on 14. Any amount payable by employer towards earned leave. 3.3. Eg: Bonus debited to P&L A/c of 07-08-10L(A Ltd) Bonus paid Rs 3L on 10. if paid subsequently allowed in that year. Personal expenses 4.2.08. 2. it is never allowed. Donations subject to Sec 35. Scientific research capital expenditure on land. PM’s national relief fund etc are disallowed while computing business income. Employees contribution should be paid within the due date under relevant Act.000 – 20% is disallowed (only for revenue expenditure). Any interest payable on loans/advances taken from a scheduled bank. Any payment to NR without TDS.(iii) (iv) (v) (vi) Note: Employer’s contribution should be paid before the due date u/s 139(1). 75. 13. It should be mentioned in the deed. Professional Firm Substitute Rs. 3. 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. All provisions & reserves except RBD in case of banking companies / PFI. Deduction incase of partnership firm : Partnership firm can be assessed as (1) PFAS (Sec 184) (2) PFAOP PFAS – If the following conditions are satisfied then firm is assessed as PFAS 1.000 whichever is higher. FBT. Advertisement in political party journal. 2. sales tax. share of profit received by a partner of PFAOP is not exempt u/s 10(2A). custom duty.75.50.000 in place of Rs.000 – Remuneration allowed is 90% of book profit or Rs. WEL. tax referred in 10(10CC). 14. Taxes disallowed are income tax. b) On next Rs. it should be mentioned in the deed 2. 2. Further. Remuneration allowed is amount prescribed in deed or amount prescribed in Sec 40(b) whichever is less. deed should be in writing 3.000 in the above format 45 .00. octroi. salary etc paid to partner of PFAOP. salary etc allowed u/s 40(b)..1. 3. (allowed for AY 09-10)Taxes allowed are excise duty. individual shares of partners are specified in deed Deduction of interest. STT. interest allowed is interest as per deed or 12% p. Working partner means a partner who is actively engaged in the affairs of the firm. Remuneration to partners 1. service tax. this interest is applicable on any amount given by the partner (capital or loan). Sec 40(b) – Deduction towards interest & salary to the partners of PFAS : Interest : 1. wealth tax. Sec 40(ba) – no deduction is allowed towards interest.12.a. entry tax.75. Amount prescribed in Sec 40(b): Non-Professional Firm a) Book Profit upto 1st Rs.000 – 60% of book profit c) On balance of book profit – 40% of book profit. 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. It is allowed only to the working partners. Problems: 1 P & L A/c of ABC & Co. assessees have to get their accounts audited by a CA and submit the report within the specified date i.000 500.000 2. Income = Turnover or Gross receipts x 8% 2.3.1lac which ever is less.000.000.000 300.500. A B C To salary A B C 200. 31st October of AY.00 1. (c) Presumptive Tax .10 lac in current previous year.e.40 lacs (b) Profession – Gross receipts exceed Rs.5% of turnover or Rs.00 1. Turnover should not exceed Rs. 3. 44AF.00 510.000. 3CD. 44BBB and claiming lower income than prescribed. 44AE.000 180. Presumptive Taxation – Sec 44AD. In the above sections law presumes certain minimum incomes. Audit report has to submitted in Form No. 44BB.610.000 1. for year ending 31. 3CA or 3CB along with statement of particulars in Form No.44AD.000.3.000 By gross profit By dividend received By Net loss 3.40 lacs. Asset taken on hire purchase or installment are deemed to be owned. Sec 44AD – Profits and gains from civil construction including works contract 1. Sec 44AE – Profits and gains from goods carriage vehicles 1. In all the 3 cases. It should be pure retail business. Sec 44AE and Sec 44AF.000.Sec 44AB – Tax Audit: (a) Business – Turnover / Gross receipts in the current previous year exceed Rs.000 46 .500. If there is a default under this section the penalty is 0.000. For heavy goods vehicle Rs.500 per month or part of the month Other vehicles – Rs.000 2.09 : To general expenses To depreciation To donation To interest to partners at 18% p.a.40 lakhs Sec 44AF – Profits and gains of retail business Minimum income = Turnover x 5%.150 per month or part of the month 2.00 90.00 240. 44AD is applicable if and only if turnover does not exceed Rs.000. Assessee should not own more than 10 vehicles at any time during the previous year.40 lacs.3.000 400. Gross receipts may be over Rs.000. 42.00.500 80.000 Adjustments : i) Depreciation u/s 32 .500 190.000 77.000 directly credited to partners capital. the following: a) Value of benefits received from clients during the course of profession is Rs.Gautham is a Chartered Accountant practising at Mangalore.3.500 1.000 2.Insurance .000.6.000 2 Mr.Collection Charges By Balance c /d 326. d) Salary outstanding – 6000/e) 40% of the car is used for personal expenses. iii)FD Interest 3L 6.500 42.2006: Receipts To Balance b /d To Professional Income To House Rent for 8 months To Share of Income from HUF To share of profit from firm To LIC policy matured with bonus Amount 9. Office Expenses By Purchase of Car By Advance Income-tax By Personal Expenses By Entertainment Expenses By House Property Expenses .750 Payments By Salaries By Rent By Telephone Expenses By Professional Expenses By Motor Car Expenses By Misc.000 12. in lakhs) Amount 5 2 2 1 2 47 .000/-.400 17. c) Municipal value of house property is Rs.Repairs .000 32.500 3.500 Amount 64.010.500 Compute Mr. 6. The following is the analysis of his Receipts and Payments Account for the year ending 31. b) Allowable rate of depreciation on motor car is 15%.000 600 70.00.Municipal Taxes .Gautham's Gross Total Income after taking into account.250 11.000 12.500 2.000 5.000 6.Sindhu was as follows: Receipts Amount To Balance b/d 4 To Visiting Fees 12 To Consultancy Fess 4 To Sale of Medicines & Drugs 5 To Gifts from Patients 2 Payments By Salaries By Printing & Stationery By Medicine purchased By Advertisement By Car Expenses (Rs. Compute income of firm & partners & tax.03. The house was self-occupied for residence for 4 months during the year.010. Receipts & Payments A/c of Dr.000 326.000 7.5.3.000 B/f depreciation loss 1 L & Business loss-2L ii) Commission received .000 3. 40% h) Depreciation: Car . silver coins or bar used for pooja are capital assets.Rs. bowls. (iii) Non – urban agricultural land. Special Bearer Bonds 1991 issued by Central Government (v) Gold deposit Bonds of 1999 issued by Central Government. raw materials and consumables used in the business or profession. silver. Urban agricultural land is one which is situated within (a) Municipality limits or cantonment limits and having population not less than 10. However.Rs.e.To Gift received from brother To Gift received from Nephew To Sale of Shares 4 1 4 36 By Surgical Equipment By General Expenses By Balance c/d 5 2 17 36 Adjustments a) Closing Stock of medicines . (ii) Personal effects i. spoons etc used for personal use are not capital assets.0. irrespective of its form..2 Lakh c) Rent Outstanding .20. whether used in business or profession or not.000 as per latest census.2 Lakh b) Salary Outstanding .3 Lakh f) Visiting Fees include 20% of Financial year 2004-05 g) Car used for personal purpose . National Defence Gold Bonds 1980.3 Lakh d) Advertisement includes payment for bill Financial Year 2003-04 . but does not include: (i) Stock – in – trade. (iv) 6.000 e) Consultancy Fees outstanding . Note 1: Jewellery is always a capital asset. 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 set in any furniture or wearing apparel. gold.5% Gold Bonds 1977. Note 3: Silver utensils like plates. 48 . platinum or any other precious or semi – precious metals/stones and also includes stones or precious stones as such.15% CAPITAL GAINS Chapter 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.0. Note 2: Jewellery includes ornaments made of gold. 7% Gold Bonds 1980. Surgical Equipment . movable property (including wearing apparel and furniture but excluding Jewellery) held for the personal use of the assessee or dependent family members. OR (b) 8 Kms of local limits from such cantonment / Municipality.Rs.2 Lakh. unless specifically exempt u/s 54 to 54H. f. Long Term Capital Gain (LTCG – Sec 2(29B)) Capital Gain arising on the transfer of Long Term Capital Asset. in the following cases. (iv) Zero coupon bonds (w.f. 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.e. <= 36 months) However. i. AY 2006-07) Short Term Capital Gain (STCG – Sec 2(42B)) Capital Gain arising on the transfer of Short Term Capital Asset. 12 months is considered instead of 36 months (i) Shares (listed or unlisted). 49 . AOP etc. (iii) Units of UTI or Mutual fund as specified in 10(23D).e. (ix) Maturity or redemption of a Zero Coupon Bond (w. Company.e.e.TYPES OF CAPITAL ASSETS 1) 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. 1882. (ii) Other listed securities. cost of acquisition and improvement have to be indexed. (i. commission etc. 2) Long Term Capital Asset (LTCA – Sec 2(29A)) Any capital asset other than Short Term Capital Asset is called Long Term Capital Asset. (vii) Transactions allowing possession of an immovable property as referred in Sec 53A of Transfer of Property Act. to give the benefit of inflation and change in the time value of money. Net sale consideration Less: Cost/Indexed cost of acquisition XXX Less: Cost/Indexed cost of improvement STCG/LTCG XXX XXX XXX XXX XXX XXX Note 1: In the case of LTCA. 06-07) Sec 48: COMPUTAION OF CAPITAL GAINS (FORMAT): Full value of sale consideration (Money and/or money’s worth) Less: Expenses incidental to transfer such as Brokerage. (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. (vi) Conversion of capital asset into stock-in-trade. 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 Inflation Index (CII) for various years are given below: Previous Year 81.82 82.83 83.84 84.85 85.86 86.87 87.88 88.89 89.90 90.91 91.92 92.93 05-06 06-07 CII 100 109 116 125 133 140 150 161 172 182 199 223 497 519 Previous Year 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 07-08 08-09 CII 259 281 305 331 351 389 406 426 447 463 480 551 582 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: Share capital P&L A/c CRR Debentures Creditors O/S Expenses Balance Sheet 8L 4L 1L 6L 5L 3L 27L Land Building Machinery Stock Debtors Preliminary expenses 10L 8L 4L 3L 1L 1L 27L Market value of land – 15L; Building – 7L WDV 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 7L Machinery 3L Stock 3L Debtors 1L (a) 24L Less: Liabilities Debentures 6L Creditors 5L O/S Expenses 3L (b) 14L Net worth (a) – (b) 10L Therefore, 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 Applicable only for sale of land or building or both. 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.15L Less: cost Rs.10L 51 STCG Rs.5L (b) 15L or 20L, WEH = Rs.20L Less: cost Rs.10L STCG Rs.10L Eg2: In the above Eg1, if reference is made to valuation officer, what is sale value If value is (a) 18L (b) 22L (c) 12L (a) 15L or 20L, WEH = 20L 20L or 18L, WEL = 18L => Sale value = 18L (b) 15L or 20L, WEH = 20L 20L or 22L, WEL = 20L => Sale value = 20L (c) 15L or 20L, WEH = 20L 20L or 12L, WEL = 12L Sale value = 15L as it is the actual sale value. Sec 51: ADVANCE MONEY RECEIVED and FORFEITED Advance 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 GAINS SHORT-TERM (Normal) Sec 111-A: Note – 1 Others – 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 b income being below taxable (same as 111-A above) (b) Chapter VI-A deductions cannot be given. 52 (b) Asset transferred should be LTCA. Solution: Tax = 90. being residential house property. Sec 54B: Exemption in respect of capital gain on the transfer of urban agricultural land used for agriculture (a) Applicable only for individuals. Note: While computing GTI. CGAS in not applicable.10 b) For construction (completion of construction) : 1. If listed securities are sold without undergoing STT then exemption u/s10(38) is not available.Cess @ 2% = 360 18. Mr.1.* Construction: Within 3 years from date of transfer. * Date of sale: 1/1/08.1.000 X 20% = 18.11 Construction can be by the assessee himself or by any third party i. (e) Period of investment: Purchase: Within 1 year before or 2 years after the date of transfer. listed securities etc.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.08 to 1.000. (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. 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.000. There is no restriction on number of house properties to be invested.07 to 1. 53 . whichever is less. Note: The relaxation. Only while computing tax. Note: Commencement of construction is not relevant rather completion date is relevant.(However law uses the word ‘a house property’) (d) Amount of exemption is LTCG or amount invested. LTCG – 90. the assessee can claim exemption iff he deposits the CG in CGAS on or before due date u/s 139(1). (a) Applicable only for individuals or HUF. exemption etc are for shares. Eg1: BI – 30.20. the above option should be exercised.1.360 [Deficit of Rs.1. (c) The assessee should invest LTCG in a residential house property. time limit permitted a) For purchase 1. the following option is given: (i) Tax @ 20% after indexing the cost or (ii) Tax @ 10% without indexation. Else.(c) Incase of transfer of listed securities including equity shares [if not covered u/s 10(38)].X (Non-resident). the income to be taken is always after indexation.000 cannot be adjusted since.000 (+) E. (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 immediately preceding 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 date of 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 Investment NSC (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 gains Where 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 / HUF 54B - 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 is proportionate 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 Charging Any 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 Charging The 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 All these exceptions shall apply if the transferor does not derive any income from such asset directly or indirectly. 57 . technical know-how etc if not taxed u/s 28. (d) Deduction similar to Sec 37(1)[Sec 57(iii)] Sec 58: Expenses not deductible The following amounts shall not be deducted: (a) Interest.000. it is taxed either as Business Income or Other Sources and normal deductions are available against such income. whichever is less (c) The deductions prescribed u/s 30.P. Note: Lottery. (a) Family pension (b) Salary of M. (b) Personal expenses of the assessee. If income is from owning and maintaining racehorses. Sec 61: Revocable transfer of assets Taxable in the hands of transferor.(vi) Apart from the incomes given in Sec 56(2). the income of other person. the following incomes are always taxed under other sources. (b) In respect of family pension. Transfer made before 1/4/61 which is not revocable for a period exceeding 6 yrs. except in special cases such as Sec 64(1A). 1/3rd of such pension or Rs. (c) Honorarium (d) Royalties (e) Copyrights. furniture etc.15. Basic intention of clubbing is to reduce tax evasions. which is not revocable during the lifetime of beneficiary. Sec 62: Exceptions to Sec 61 There wont be any clubbing in the following cases: (i) Transfer is by way of a trust. horserace incomes are taxed @ flat rate of 30% (Sec 115-BB). Sec 59: Deemed Income It is equal to Sec 41(1). (ii) Transfer by other mode (other than through trust which is not revocable during the lifetime of transferee). (d) No expenditure shall be allowed in respect of casual income. salary payable outside without TDS. (f) Bank interest etc. Sec 60: Transfer of income without transferring the assets Eg: Right to receive rent of machinery transferred without transferring machinery. CLUBBING OF INCOME Sec 60 – Sec 64 It means including in one’s income. (c) The provisions of sec 40A shall be applicable ‘Mutatis Mutandis’. Sec 57: Deductions The following deductions are available under the head income from other sources: (a) Collection charges of interest/dividend (unless exempted). 31 and 32 shall be applicable in respect of letting of machinery. clubbing is made in the hands of guardian. the assessing officer may shift the clubbing to other parent in the subsequent year. no clubbing if the remuneration etc is solely attributable to application of his/her technical or professional qualification. agreement or arrangement. directly or indirectly through trust or association without adequate consideration is clubbed in the hands of transferor. Sec 69: Unexplained Investment Investments found with the assessee but not recorded in the books are deemed income. DEEMED INCOMES Sec 68 to 69D Sec 68: Cash Credit If 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. (ii) Son’s wife (Daughter-in-Law): (a) Any transfer to son’s wife. However. However. Sec 64: Income of spouse. Revocable Transfer: It means transfer which can be retransferred to the transferor or the transferor gets the right to reassume powers. (ii) If the parents are not alive.Sec 63: Definition of transfer & revocable transfer Transfer: It includes any settlement. (b) and (c) above. trust. (i) Spouse: (a) Income of the spouse by way of salary. In the subsequent yrs. then clubbing shall be made in the hands of such parent who is maintaining child. minor child etc. (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. it is clubbed with the same parent irrespective of total income of other parent. (b) Transfer of asset to spouse otherwise than for adequate consideration or without having an agreement to live apart (subject to Sec 27). (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. such amount shall be taxed as cash credit. 58 (i) . minor child himself shall be the assessee and parent/guardian shall be deemed u/s 2(7). 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. (c) Clubbing shall be made subject to additional provisions If the marriage of parent does not subsist. Sec 64(1A): Clubbing of income of minor child Minor’s income is clubbed in the hands of parent having highest total income in the 1st year of clubbing. if there is a reason to do so only after giving opportunity of being heard. commission. However. directly or indirectly. fees etc from a concern where the assessee has a substantial interest. (not specifically provided in law) In the case of (a). jewellery. bullions etc. (c) Loss from racehorse. Speculation loss/capital loss cannot be adjusted against any other head of income.e. except. (b) Speculation losses cannot be adjusted against non-speculation income. the same shall be deemed to be income. depreciation loss may be adjusted). (b) Speculation losses cannot be adjusted against other heads of income including non-speculation business income. Sec 72: Carry forward of Non-Speculation business losses 8 subsequent years to be adjusted against business income only. (c) Loss from activity of owning and maintaining race horses. partly disclosed in the books Deemed income – to the extent not disclosed in the books. losses from any other head can be adjusted against speculative profit /capital gain. (a) LTCL can be adjusted only against LTCG. 59 . SET-OFF & CARRY FORWARD OF LOSSES (Sec 70 – Sec 80) Sec 70: Inter source / Intra head adjustment It is possible in all cases except. Sec 69C: Unexplained Expenditure If the assessee offers no explanation or unsatisfactory explanation about the expenditure incurred then. Whereas. Same as Sec 69. A. CARRY FORWARD OF LOSSES (Sec 71B – Sec 80) Sec 71B: Unabsorbed HP loss Carry forward for 8 subsequent years. demerger etc (a) The losses to be carried forward are: (i) Unabsorbed depreciation allowance. (the same business need not be carried) It can be adjusted against speculative and non-speculative incomes.f. 05-06) (However. No deduction shall be allowed against such income under any head of income. It is taxable either at the time of borrower or at the time of repayment (including interest). (w.Sec 69A: Unexplained money.Y. Sec 72A: Carry forward of losses incase of amalgamation. can be adjusted only against HP income in subsequent years. But. jewellery. (a) Capital losses cannot adjusted against other head of income. Sec 69B: Investments. (It means STCL can be adjusted against ST or LT capital gain). bullion etc. Sec 69D: Amount borrowed or repaid in Hundi Hundi means Bill of Exchange in vernacular language. Sec 71: Inter head adjustment It is possible in all cases. (d) Business losses cannot be adjusted against Salary Income. (ii) Demerger: The resulting company can carry forward and set-off such losses for balance period only.1. However.(ii) Unabsorbed business loss only. (ii) Succession: If any person carrying business/profession has been succeeded in such capacity by another person otherwise than by inheritance. (a) STCL against ST or LT capital gain. in the year of incurring such losses. Only for 4 subsequent years and can be adjusted only against such income. 35(4). this Sec is not applicable incase of carry forward of allowances under Sections 32(2). Sec 75: Carry forward of losses of firm It can be carried forward only by firm and not by partners. Deduction in respect of payments Section Nature of Payment 80C (1) Actual amount paid towards Life Insurance Policy Premium 60 Deduction Upto Rs. Sec 74: Carry forward of capital losses 8 subsequent years. Sec 74A: Losses from the activity of owning and maintaining race horse. 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. 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.00. (b) LTCL only against LTCG.Y.000 . Sec 80: Return of losses For claiming carry forward of losses. Sec 79: Carry forward or set-off of losses incase of company in which public are not substantially interested Carry 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. Chapter VI A Deductions A. the return of losses has to be compulsorily filed within due date u/s 139(1). No losses can be carried by the successor. (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. Sec 73: Carry forward of speculative loss 4 subsequent years and only against speculation income. 36(1)(ix) and 71B. However. in which carry forward or set-off is to be claimed. (9) Repayment of loan taken from Government Approved Institution or Specified Employer or any Board or a Corporation or any other body established under Central or State Act or a notified Institution.e. borrowed for the purpose of purchase or construction of residential house. (11) Contribution to 10 / 15 year account under Post Office Savings Bank (Cumulative Time Deposit) Rules.80CCC (2) Contribution to Public Provident Fund (3) Investments in National Savings Certificates (4) Subscription to any approved units of mutual fund referred to in Sec 10(23D) (5) Contribution by an employee to a recognised provident fund (6) Contribution by an employee to an super annuation fund (7) Contribution to Unit Linked Insurance Plan. 1959 w.1. 1971 (8) Payment made as tuition fees to any university. Any expenditure incurred towards stamp duty.00. (10) Amount Contributed towards a contract for deferred annuity. Central Government Pension Scheme Upto Rs.f AY 07-08 FD in a scheduled bank for a period of 5 years Annuity or Pension Fund (LIC or other Insurer) . college or school or other educational institution situated in India for the purpose of full time education in respect of any two children of the assessee.e. registration charges for purchase of the house is also eligible.000 80CCD a) Employer's Contribution 10% of salary or actual amount paid by the employee b) 10% of salary or actual amount contributed by 61 .f AY 08-09 Bonds of NABARDS w. 000 Others .00.000 (Irrespective of amount spent) Senior Citizen.75.000 80DD Normal Disability .000 Others .1.40.000 Severe Disability .Upto Rs.Rs.Rs. paid by any mode of payment other than by cash) Medical treatment and maintenance of dependant with disability Senior Citizen .Upto Rs. aggregate of deductions under Sec 80C.000 80D Medical Insurance Premium paid by cheque only (w.Rs.f AY 0809.50.60.20.e. [Salary = Basic Pay + DA (If taken for retirement benefit) Note: According to Sec 80CCE.15.Central Government.000 No Limit I(A) + I(B) + II(A) + II(B) 80DDB Treatment of Specified disease or ailment 80E 80G Interest on loan for higher education (Interest only) Eligible Donations I. Without Limit Donations (A) Eligible for 100% deduction a) Contribution to National Relief Fund b) Contribution to Africa Fund c) 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 Trust c) Contribution to Rajiv Gandhi Foundation (Contribution to Gandhi Family Funds) d) Contribution to National Relief Fund e) Contribution to PM Drought Relief Fund 62 .Rs. Sec 80CCC and Sec 80CCD is limited to Rs. Rs.II. b) Contribution to religious and charitable trust [With limit donation means that aggregate of donations under this category should not exceed 10% of Adjusted Gross Total Income Adjusted Gross Total Income = GTI . With Limit Donations (A) Eligible for 100% deduction a) Contribution to Indian Olympic Association b) Contribution to Government or Local Authority for family planning. 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. ceiling Total Income means Gross Total Income as reduced by deductions under Chapter VIA except u/s 80GG 80U Individual who suffers from disability (The first in which the assessee claims deduction.m. 115AC.Deductions under Chapter VIA excluding Deduction under this section .Special Income u/s 115A. he should furnish a certificate from the Government doctor) Severe Disability . 115AD.000 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.75.000 Normal Disability . 1961.Rs. 115AB.LTCG . (B) Eligible for 50% deduction a) Contribution to Government or Local Authority for purpose other family planning.Exempted Income .000 p. The following are the objectives of TDS: 63 .2.50. 115BB and 115D 80GG Rent Paid Least of the following: a) Rent in excess of 10% of Total Income b) 25% of total income c) Rs. 000/- At the time of .000/Firms and Domestic Companies where total amount paid or credited under relevant provisions does not exceed Rs.10.1.00. AOP. HUF.10.1 crore Firms and Domestic Companies where total amount paid or credited under relevant provisions exceeds Rs.00. Gist of TDS Provisions (AY 2008-09) Section Nature of Payment Rate of TDS Threshold limit When should deducted? tax be 192 Salaries Average Rate 64 Rs.1 crore Foreign Companies TDS TDS TDS TDS Nil 10% Nil 10% 2. Only in case of salary payment.5% Items covered under TDS provisions are exhaustive in nature and not indicative.000/Individual.10.a) To collect income tax at the earliest opportunity b) To provide information about the tax – payer (i. the person from whom tax is deducted) Rates of TDS Different rates of TDS are provided under respective sections for various payments made. the employer shall apply the income tax rates applicable for individual assessee. BOI where total amount paid or credited under relevant provisions exceeds Rs. In addition to TDS rates. HUF. surcharge shall be applied as follows: Rate Status of the Payee of Su rch arg e Individual.e. BOI where total amount paid or credited under relevant provisions does not exceed Rs. AOP. 5.5.1.000/Rs.a Rs.payment 193 Interest on securities Company – 20% Rs.000/- Professional or technical 10% services Compensation on acquisition of certain 10% immovable property Rate as per Payment to non-resident Agreement At the payment time of Finance Act or u/s 90 or Nil At the time of credit or payment whichever is earlier 65 .2.20.2.20.500/- At the payment time of 194A 194B 194BB Interest other than interest on securities Company – 20% Non-Company – 10% Rs.00.1.000 p.000/Rs.000/Nil Rs.500/Nil Rs.2.2.20.500/- At the time of credit or payment whichever is earlier At the time of credit or payment whichever is earlier 10% 20% At the payment At the payment time time of of Payments on account of repurchase of units by 20% Mutual Fund or Unit Trust of India Commission on sale of 10% lottery tickets Commission or brokerage Rent 10% (As per below)* table At the time of credit or payment whichever is earlier At the time of credit or payment whichever is earlier At the time of credit or payment whichever is earlier At the time of credit or payment whichever is earlier Rs.000/or aggregate of payments exceeding Rs.500/- Others – 10% Non-Company At the time of credit or payment whichever is earlier Assesses 194 Dividend a) Resident – 20% b) Non-Resident – 30% Company Assessees a) Domestic – 20% b) Foreign – 40% Rs.000/in a financial year At the time of credit or payment whichever is earlier At the time of payment Winnings from lottery or 30% crossword puzzle Winnings from horse race Payments to contractors / sub-contractors Insurance Commission Non-resident sportsman or sports association Payment in respect of deposit under NSS 30% Advertising Contract – 2% Non-Advertising Contract – 1% Sub-Contract – 1% Resident other company – 10% Domestic Company – 20% At the payment time of 194C At the time of credit or payment whichever is earlier 194D 194E 194EE 194F 194G 194H 194I 194J 194LA 195 than Rs.1.500/Single payment exceeding Rs.50.000/Rs.2.5.000/Rs. land appurtenant to a building (including factory) or furniture or fittings Payee Any Payee Individual or HUF Rate TDS 10% 15% of A person other than an individual or 20% HUF INCOME TAX AUTHORITIES Sec.05.2007 Asset (i) For use of any machinery or plant or Equipment (ii) For use of any land or building (including factory building).06.Agreement u/s 90A 196B 196C 196D Payment to offshore fund income from mutual fund 10% units Payment of income on foreign currency bonds or 10% shares of Indian Company Payment of income to FIIS on securities 20% Nil Nil Nil At the time of credit or payment whichever is earlier At the time of credit or payment whichever is earlier At the time of credit or payment whichever is earlier * Rate of TDS a) Upto 31. land appurtenant to a building (including factory) or furniture or fittings (iii) For use of any land or building (including factory building). 116 66 . b) From 01.2007 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. 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 – tax iii) 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-tax vii) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax viii) Income-tax officers ix) Tax Recovery Officers x) Inspectors of Income-tax ASSESSMENT Section 139: filing return of income: 1. 67 . 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. Others: 31st July of AY 2.such employer shall furnish return of income within due date 3. then no carry forward of losses • However. 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. 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. CD-ROM 4. whichever is earlier. Section 139(4).belated return • If ROI is not filed within 139(1) or within 142(1). 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 AY b.32(2) 5. Section 139(1): 1) Who should file ROI? • Company/firm. such non-filing shall not affect carry forward of losses u/s 71B. Section 139(1B): • Filing of returns in e-form is equivalent to return filed u/s 139(1) • E-form includes floppy. magnetic cartridge. Section 139(1A): filing of bulk return of income by salaried employee to their employer:. Sec 139(4D) – University/College/Institution approved for Scientific Research. 10. Sec 139(4A) – Return by trust • If income exceeds Rs.(iii).(vi). due date is July 31st of relevant AY.6.(v).00. (ii). 11. then there is no benefit under this section. (iiib). 68 . Thus due date is October31st of relevant AY. 7.000 . 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. 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. 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. Note: Return of Income to be filed if total income exceeds basic exemption limit.1. • If no audit is attracted. 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. o Return of income is not accompanied by : Statement showing computation of tax Proof of TDS . (via) o Sec 10(24) • The following institutions need not file return of income: o Sec 10(23C)(i).return to be filed within due date give u/s 139(1). 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).(iiic) 9. 8.due date is October 31st of relevant AY. (iv). (iiia). then audit is attracted u/s 11.(iiiae). on or before 31st May of AY o Persons carrying on business or profession whose turnover is 500. Sec 139A: Permanent account Number.Apply before the end of PY o Persons required to file return of income u/s 139(4A). 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 India o A Chartered accountant o 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 authorized o Educational and other qualifications to be possessed and training and other conditions required to be fulfilled by TRP o Code of conduct by TRP o Duties and obligations of TRP o Circumstances under which the authorization given to a TRP may be withdrawn o Any other relevant matter as may be prescribed by the scheme 14. Sec 140 .apply before the end of PY o Persons registered under CST Act/ GST Act or export assessee of appropriate state 13. 12. 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 . or o 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.• 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.000 or more in a previous year.rule 114 • Submitted in Form No.Return by whom to be signed Sl No Person 1 • Individual • When he is absent from India/ Signatory 69 Himself Guardian/agent . 49A • Following persons should apply for PAN o Person assessable to tax. any other adult member of the family MD Any other director Person having power of attorney Liquidator Principal officer 4 5 6 7 8 Managing partner or any other major partner chief executive officer any member or principal officer principal officer 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). 16. assessee is required to compute tax after considering the following o Tax paid under the provisions of the Act o TDS and TCS o 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 default Assessment means verifying the correctness of total income shown in the return &accordingly determining the tax payable/refundable & issue notice/intimation accordingly. 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 income o 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 .2 • mentally retarded or any other reason HUF • Company • Where MD is unable to sign or no MD • When company is nonresident in India • When company is in liquidation • When company’s management is taken over by the government • Partnership firm • • • • political party association of persons local authority any other person 3 Karta When he is absent. acknowledgement issued at the time of filing of return of income shall be deemed to be the intimation. Re-assessment 147 & 148 • Enquiry. Self assessment 140A 2. In all other cases. Section 143: assessment According to this section.Types of assessment : 1.sec 142(2A) o AO can direct assessee to get accounts audited and furnish the audit report o Prior approval of CCIT to be obtained o Audit to be done by a CA nominated by CCIT/CIT o Audit to be done even if accounts are audited already o Expenses of audit is determined by CCIT and is paid by assessee 17. 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. 71 . Scrutiny assessment 143 3.sec 142(2) AO can make enquiry to collect full income information of any person • Special audit. Best Judgement 144 4. Based on the committee’s recommendations.SERVICE TAX Taxes are mainly of two types: a) Direct Tax b) Indirect Tax. Raja J Chelliah. but the government’s eye was also on services being rendered as service sector’s contribution to India’s GDP was substantial. 1994. calling or employment but is in respect of services rendered. central excise duty. Generally speaking service means.) Nature of Service Tax Service Tax is a tax on services. trade. wealth tax etc. there is no tax. some intangible activity being rendered which can be only felt. SOURCES OF SERVICE TAX LAW 72 . service tax was introduced through the Finance Act 1994 (There is no separate Act for service tax unlike other taxation laws like income tax. Sales Tax is in existence for collection of taxes on sale of goods for several decades. service tax. Indirect tax is a tax wherein the incidence and impact of tax is on two different persons. As per dictionary terms ‘Service’ means a useful result or product of labour. To tax these services. Finance Act 1994 The statutory provisions relating to service tax were first promulgated through Chapter V of the Finance Act. The main contributories to indirect tax revenue are sales tax / VAT. which is not a tangible commodity. a committee was formed which was headed by Dr. This is not a tax on profession. luxury tax etc. If there is no service. as levy of Service Tax extends to whole of India except Jammu & Kashmir and India includes territorial waters. Three Important Section of Finance Act. 11. The levy applies to taxable services provided or to be provided. for the applicability of Service Tax. 1994 Sec 65(105) – It gives a list of services covered under service tax net. the service will be liable to Service Tax. Indian territorial waters extends upto 12 nautical miles from the Indian land mass. a) The charge is on the services provided or to be provided b) The services provided or to be provided must be the one which is covered in Sec 65(105) 73 .Value of taxable service CHARGE OF SERVICE TAX [SECTION 66] The rate of service tax prescribed by section 66 is 12% + Cess on service tax is 3% w.f. If the service is provided from Jammu & Kashmir to any other part of India.e. Levy of Service Tax extends to services rendered in designated areas in the continental shelf and exclusive economic zone. location of service provided is relevant. i. Thus. Hence.e 2% Education Cess and 1% Secondary Higher Education Cess. The Exclusive Economic Zone extends upto 200 nautical miles inside the sea from base line.2007. Section 65(105) provides that taxable service shall not only include service provided but also the “service to be provided”.05. If the service is provided in Jammu & Kashmir Service Tax is not applicable. If a service doesn’t feature here then it cannot be taxed. Service provided within the territorial waters will be liable to Service Tax.Finance Acts Notifications Circulars or Office letters (Instructions) Orders Trade Notices Rules EXTENT OF SERVICE TAX [SECTION 64] The Act applies to whole of India except the state of Jammu & Kashmir. meaning the list is exhaustive in nature Sec 66 – Charging Section Sec 67 . the burden is on the customer & SEZ being favoured by all. 2006 GENERAL EXEMPTIONS FROM SERVICE TAX FOR ALL SERVICES Section 93 of the finance act. 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. such an exemption is subject to the following conditions. 16/2002 ST. dated 02.02 The recipient of the service should be SEZ. The exemptions are: (a) Exemption to all services provided to United Nations or International Organisation – Notification No. as the case may be. 74 .11.02 (b) Exemption to services provided to a developer or units of special economic zone Notification No. operate and maintain the special economic zone. 17/2002 ST. dated 21. The unit of special economic zone has been approved by the Development Commissioner or Board of Approvals. Since Service Tax being an indirect tax.08. 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.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. namely: The developer has been approved by the Board of Approvals to develop. for consumption of the services within such special economic zone. it is exempted. 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. 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. are exempt from the whole of service tax leviable therein under section 66 of the act. 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.000 from FY 2008-09) in any financial year. 75 .03 so much of the value of all the taxable services. b) Consideration includes any amount that is payable for the taxable service provided.05: Service tax is fully exempt in respect of the taxable services of aggregate value not exceeding Rs.f 1. c) The gross amount charged for the taxable service shall include any amount received towards the taxable service before.03.07. However. with the addition of ST charged. is equal to the gross amount charged. is equivalent to the consideration Value shall be determined in the prescribed manner Value shall be such amount as. 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. 6/2005 ST dated 01.00. NOTE: a) The service provided above should be taxable service.00. during or after the provisions of such service.e.03 W. Valuation of taxable services (Sec 67) Consideration wholly in money Consideration partly in terms of money Consideration not ascertainable Consideration inclusive of ST payable Value of such service will be such money charged Value shall be such amount in money.10.000 (Rs.00. with the addition of ST payable. 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.06. 12/2003 ST.8.4.000 from FY 2007-08 & Rs. dated 20.(c) Exemption to goods and materials sold by service provider to recipient of service – Notification No. (d) Exemption for small service providers – Notification No. 00.36 = 11000 FY 2010-11 o Amount billed – 10.00.00. letter of credit.000x 12.000 Service Tax on entire 4.00.000 Amount Received 10.00. travellers cheque. Note: Subject to the provisions mentioned above.00. pay order.000 Option1 : Send separately a debit note of Rs 1. deduction from account and any form of payment by issue of credit notes or debit noted and book adjustment.000 x 12.d) Money includes any currency.000.000 It is eligible for SSP exemption but taxation is on amount received i.000 o Amount received – 7.00.00.e.50.00.000 i.00. 1.000 No SSP eligibility since billed amount exceeded 10.000 is presumed to be cum-tax (inclusive). cheque.90.36% =49440 - . Eg: FY 2008-09 Amount Billed – 9.000 FY 2011-12 o Billed amount – 12.000 Amount Received – 7.000 Option 2: 1.00.00.000 Amount Received . the value of taxable services shall be determined in such manner as may be prescribed.7.e from 1.00.00.000 x 12. ST = 1. e) Gross amount charged includes payment by cheque. postal remittance and other similar instruments but does not include that is held for its numismatic value.000 x 12.000 9.00.000 76 Service tax 50.36% = 6118 4. credit card. However.000 4.00.00.00. promissory note.000 is taxable 1. money order.FY 2009-10 Billed amount – 9.000 FY 2008-09 2009-10 Amount Billed 11.00.000 o Amount received – 4.36% = 12360/- ST = 1. .00. there is no tax since he has eligibility in preceding year & amount received in CY is less than 10.000 Eligible for Small Service Providers (SSP) exemption & no tax.36 112.00. draft. 000 Nil Used for self occupation Let out to employees for residence Let out for business Service Tax is applicable for I & II i.00.2010-11 Building V IV III II I 7.000 9. PERSONS REQUIRED TO GET REGISTERED UNDER 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 Persons liable to pay service tax Service provider Specified persons as per rule 2(1)(d) of service tax rules 77 .e building used by occupier for commercial purpose.00. the person liable to pay service tax is the insurer or reinsurer.2006) make provisions for valuation even when consideration is not ascertainable. Any society registered under the Societies Registration Act. Any corporation established by or under any law.(including service tax of Rs. Any co-operative society established by or under any law. by or under any law.e.1. However. However. 19. Thus. if a chartered accountant raises a bill for outstanding services say. 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. 1994 are: a) In relation to general insurance business. b) In relation to insurance auxiliary service provided by an insurance agent. e) In relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor or an agent. the person liable to pay ST is the recipient of such service. d) In relation to taxable service provided by a goods transport agency. 2006 (as inserted w. the perso liable to pay ST is the person carrying on general insurance business or the life insurance business as the case may be.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. or a partnership fir registered. as the case may be.12. these provisions apply only when there is consideration.04.12. receiving such service. as the case may be. 1944 or the rules made thereunder. on 15th December. where the consignor or consignee of goods is: Any factory registered under or governed by Factories Act. 2007 for Rs. f) In relation to sponsorship service provided to body corporate or firm. as the case be.f. the person liable for paying ST is mutual fund or asset management company. 1860 or under any law corresponding to that Act in force in any part of India. 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. in India. Any company formed or registered under Companies Act. recipient of services. as the case may be. the service tax is payable to the government only when the value of taxable services is ‘received’.e. Any dealer of excisable goods. 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. 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. the person liable to pay ST is the body corporate or firm.360/. or Any body corporate established. who receives such sponsors service. SERVICE TAX NOT PAYABLE ON FREE SERVICES: Section 67(1) (iii) and Service Tax (Determination of value) Rules. 78 . the liability to pay service tax to the government would arise only in February 2008.360/-) and the client pays his bill only in February 2008. whois registered under the central excise act. 1956. 1948. providing such service. ST is to be paid on the amount of Income Tax deducted at source also. 79 . SERVICE TAX LIABLE TO BE PAID EVEN IF NOT COLLECTED FROM THE 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). during or after the provision of taxable service. service tax is not applicable in such cases.If there is no consideration i. asseessee must have refunded the value of taxable service and the ST thereon to the person from whom it was received. subject to realization of cheque. the date of payment is the date on which cash is tendered to the designated bank. section 67 and Service Tax (Determination of Value) Rules. The statutory liability does not get extinguished if the service provider fails to realize or charge the service tax fro the service receiver. in case of free service. for carrying out such adjustment.e. However. d) Payment should be rounded off in multiple of rupees. Therefore. form part of the gross amount charged for the taxable services. b) Where the amount of ST is paid in cash. Therefore. the date of presentation of cheque to the bank designated by Central Board of Excise & Customs shall be considered as the date of payment. ADJUSTMENT OF SERVICE TAX PAID An asseessee may adjust excess payment of ST against his liability of ST for subsequent periods. This liability is not contingent upon the service provider realizing or charging the service tax at the prevailing rate. 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. 2006 cannot apply. SERVICE TAX PAYABLE ON ADVANCE RECEIVED Service tax is payable as soon as any advance is received as: Taxable services includes “services to be provided” Payments received before. Any income tax deducted at source is included in the charged amount. Payment of ST into non-designated bank does not amount to payment of ST c) In case the amount of ST is paid by cheque. POINTS TO BE REMEMBERED WHILE PAYING SERVICE TAX The 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. While making the payment of service tax to the credit of Central Government. which is not required to be collected as service tax. It is to be noted that adjustment of excess payment of ST is not allowed per se. INTEREST ON DELAYED PAYMENT OF SERVICE TAX If the assessee fails to deposit the tax within the stipulated time. is required to deposit such amount to the credit of Central Government. the asseessee is required to file details in respect of such suo motu adjustments done by him at the time of filing ST returns. account head of education cess should be shown separately. the asseessee has to claim the refund of excess tax paid. in form ST-3 should be filed on half yearly basis by the 25 th of the month following the particular half year. 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. There is no provision to waive this interest on delayed payment of service tax. The list of such Banks and Branches is available in every Commissionerate of Central Excise. The due dates on this basis are tabulated as under: 80 . In the challan. For computing the period of delay in payment. 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)] Quarterly once By an individual or a proprietary firm or a Payable by the 5th of the month immediately partnership firm following the said quarter Monthly once In other cases (company and HUF) Payable by the 5th of the month immediately following the said calendar month DUE DATE FOR FILING OF SERVICE TAX RETURNS: The service tax return. A multiple service provider (a service provider rendering more than one taxable service) can use single GAR-7 challan for payment of service tax on different services. Different heads of accounts have been specified for different taxable service by the Government under which payment has to be made. the person who liable to pay such amount shall. MANNER OF PAYMENT OF SERVICE TAX Service 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. in addition to the amount.In such cases of adjustment. INTEREST ON AMOUNT COLLECTED IN EXCESS: [SECTION 73B] Where an amount is collected in excess of the service tax assessed or determined. the month is counted from the next day of the month on which the payment of service tax was due. he shall be liable to pay simple interest at the rate of 13% per annum. say due to clerical mistake etc. be liable to pay interest. head of account should be correctly and properly indicated under major and minor heads and sub-heads to avoid misclassification. Interest shall also be payable by a person who has collected any amount. The return form ST-3 also provides for enclosure for documentary evidence for adjustment of such excess ST paid. in such cases. the assessee has to file a nil return within the prescribed time limit.nic.e. by using a computer. E-filing of returns is an assessee facilitation measure of the department in continuation of its modernization and simplification program. It is an alternative to the manual filing of returns. through the Internet.e.HALF YEAR 1st April to 30th September 1st October to 30th March DUE DATE 25th October 25th April When the due date falls on public holiday: Incase the due date of the filing of return i.in in the address bar of the browser. E-FILING E-filing is a facility for the electronic filing of service tax returns by the assessee from his office. This facility is available to all service providers. Service Tax Law does not contain any provision for filing a late return. either 25 th October or 25th April falls on public holiday. REVISED RETURN [RULE 7B OF SERVICE TAX RULES]: W. If the return is not filed within the prescribed time. the assessee can file the return on the immediately succeeding working day. 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. a penalty is leviable. The assessee can go to the e-filing site ‘Home Page’ by typing the address http://servicetaxefiling. LATE RETURN [70(1)]: Unlike Income Tax. Form ST-3A is to be attached only when the assessee opts for provisional payment of service tax. ADMINISTRATION OF SERVICE TAX MINISTRY OF FINANCE (1) DEPARTMENT OF REVENUE (2) DIRECTOR GENERAL OF SERVICE TAX (COORDINATOR BETWEEN 3 & 5) 81 . residence or any other place of choice.f 1/3/07. 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/quarters covered in the half year return (ii) A memorandum in Form ST-3A giving full details of difference between the amount of provisional amount of tax deposited and the actual amount payable for each month.. 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. ‘General Insurance business’ means fire.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 tax b) To study the staff requirement at field level for proper and effective implementation of service tax c) 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 procedures d) 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 thereon e) 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. 1972. 1938]. in any manner. 1949 and includes any concern engaged in rendering services in the field of chartered accountancy. PRACTICING CHARTERED ACCOUNTANT’S SERVICES Effective Date: 16th Oct 1998.1984 Definitions: `‘General insurance business’ has the meaning assigned to it in clause (g) of Section 3 of the General Insurance Business (Nationalization) Act. GENERAL INSURANC SERVICS Effective Date: 01. 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.07. 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. ‘Insurer’ means any person carrying on the general insurance business and includes re-insurer. 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. 1972] ‘Policy holder’ includes a person to whom the whole of interest of policy holder in the policy is assigned once and for all. 82 . f.12 / 2003 ST. entertainment or recreation b) Hotels and event management companies holding seminars are liable for service tax in respect of the charges levied towards holding of such seminars.Scope: The service shall include any service provided to a policyholder or any person. c) Services provided by mandap keeper may appear similar to convention services but there is a subtle distinction between the type of events (official. Points to be noted: a) Stage shows. RENT-A-CAB SCHEME OPERATOR’S SERVICES Effective date: 16th July.e. Here ‘catering service’ means a supply of substantial and satisfying meal. However. (ii) The service provider has availed the benefit under the Notification No. music concerts. Definition: ‘Convention’ means a formal meeting or assembly which is not open to the general public. 2001. by any person in relation to holding of any convention in any manner. to a policyholder in relation to General insurance business provided under the Universal Health Insurance Scheme is exempt from the service tax leviable thereon. OHPs. entertainment or recreation. carrying on general insurance business. by an insurer. W. CONVETION SERVICES Effective Date: 16th July. dated 20. including re-insurer carrying on general insurance business in relation to general business. an abatement of 40% is allowed on the gross amount charged in the bill. 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. a mandap keeper already paying service tax is not liable to pay service tax again under the category of convention services and vice-versa. microphones etc. 11. Scope: The service shall include any service provided or to be provided to a client. 2004. and does not include a meeting or assembly the principle purpose of which is to provide any type of amusement. However. apart from providing space for holding a convention.07. Service can be providing rooms / halls for the convention or providing other facilities such as video conferencing. sports events are not considered as convention since these events provide some type of amusement. used for providing such taxable service. speakers. 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.2003.06. has been taken under Cenvat Credit Rules. Service tax is payable only on the total amount of the premium charged by the insurer carrying on general insurance business. social or business in case of mandap keeper as opposed to a formal meeting in case of convention service).2003 the taxable service provided by the insurer. 1997 Definitions 83 . circus. whether pre-fabricated or otherwise. commissioning or installation of plant. education.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.2007 Definition ‘Renting of immovable property’ includes renting. other than a commercial training or coaching centre. tents and camping facilities. it also includes common areas and facilities relating thereto. farming. holiday accommodation. Scope: The service shall include any service provided or to be provided to any person. forestry. heating. In the case of a building located in a complex or industrial estate. leasing. the common or shared areas and facilities. equipment or structures. sports.06. SERVICE INVOLED IN EXECUTION OF WORKS CONTRACT Effective date: 01. the land incidental to the use of such building. drain lying or other installations for transport of fluids.06. installation of electrical and electronic devices. Abatement is not available in the following cases: a) The credit of duty paid on inputs or capital goods has not been availed b) Exemption has not been availed for the cost of material used in providing services. thermal 84 . Scope: The taxable service shall include service provide or to be provided to any person. b) Building used solely for residential purposes and buildings used for the purposes of accommodation. 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. 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. [Maxi cab and motor cab have the same meanings as defined in the Motor Vehicles Act. by any other person in relation to renting of immovable property for use in the course or fur therance business or commerce. letting. aqualculture.‘Rent-a-cab scheme operator’ means any person engaged in the business of renting of cabs ‘Cab’ means a motor cab or maxi cab. boarding houses. imparting skill or knowledge or lessons on any subject to or field. RENTING OF IMMOVABLE PROPERTY SERVICE Effective date: 01. duct work and sheet metal work. plumbing. machinery. ventilation or air-c. entertainment and parking purposes. 1988. within such complex or estate. animal husbandry. ‘Immovable property’ means building and its parts. onditioning including related pipe work. including hotels. It excludes: a) Vacant land solely used for agriculture. hostels. mining purposes. during the calendar month or quarter. railways. billed in February. or of a pipeline or conduit. renovation or restoration of. Such value would be determined on actual basis based on the records maintained by the assessee.2006 Advance received in September. lift and escalator. Such an option is not available when: a) the entire premium paid by the policy holder is only towards risk cover in life insurance. sound insulation. or (c) construction of a new residential complex or part thereof. in relation to (b) or (c). or similar services. fire escape staircases or elevators. primarily for the purpose of commerce or industry. repair.insulation. Assessees opting for the composition scheme would not be entitled to avail cenvat credit of capital gods.6% of the basic fare in the case of domestic bookings b) 1. The following are the chronological events: Contract for services entered into on 31.000 85 . 2007 2. procurement and construction or commissioning (EPC) projects Scope: The taxable service shall include service provided or to be provided to any person. Note: There is a composition scheme for the service providers involved in the execution of 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.10. by any other person in relation to the execution of a works contract excluding works contract in respect of roads. airports. tunnels and dams. 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 circumstances The 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 BUSINESS An 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%. input and input services required for use in the works contract.2% of basic fare in the case of international bookings of passage for travel by air. The scheme gives an option to the assessee to pay 2% of the total value of the works contract as service tax.000 Total value of services. 2006 towards all services 60. Guru. fire proofing or water proofing. bridges. alteration. towards the discharge of his service tax liability instead of service tax @ 12%. or (b) construction of new building or a civil structure or part thereof. SPECIAL PROVISIONS FOR PAYMENT OF SERVICE TAX IN CASE OF AIR TRAVEL AGENT The 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. or (d) completion and finishing services. has agreed to render services to Mr. as the case may be.8. Problems 1) Ajay Ltd. transport terminals. or b) 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. or (e) turnkey projects including engineering. 2006.1.Above includes non-taxable services of 70. Further.05.000 Balance amount is received in March.240 2) MN Ltd.2006 for rendering services. The contract contains clear details of services.000 Service tax @ 12% (since.10.000 (ii) Total value of services billed to OP Ltd. has entered into a contract with OP Ltd. The following information is also available: (i) Advance received in June 2006 from OP Ltd.000) Service tax @ 12% = 1.40.000/ 2.20. before during or after the provision of taxable services form part of the gross amount charged for the taxable services.10.1.000 = 1.60.20.000 = 12. on 31.800 Education Cess @ 2% = 96 Total service tax liability = 4. Soln: The liability to pay service tax arises at the time of receipt of advance in September.000/2. 2007 When does the liability to pay service tax arise and for what amount? Contract contains clear details of services. the due date for payment of service tax will be 5th October.896 In this case.000) = 40. towards all services Rs.000 x (1. before during or after the provision of taxable services form part of the gross .000 Balance consideration for services is received in December 2006.000 = 240 = 12.000 = 1.000 (iii) Non-taxable services billed to OP Ltd.000 Amount received towards taxable services = 1. = 1. as mutually agreed upon. Service tax is payable as soon as any advance is received as the taxable service includes “service to be provided” and payments received. 2007.00.50. 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.10. consideration and service tax are charged separately.000 x (1.4.000 – Rs. the liability to pay service tax arises only upon the receipt of the value of taxable services and not when the bill is raised.Balance amount received in March 2007 = 2.000 Advance received towards taxable services = 60. 86 . in August 2006 Rs. Consideration and service tax are charged separately.000 x 12% Education Cess @ 2% Total service tax liability In this case.40.000 – 70.000 x 12% = 4.(included in (ii) above) Rs. 2006 = 60.000 Amount billed for taxable services = 2.00.40.50.10.40. (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. service tax is charged separately) = 40. Balance portion . 2006 and at the time of receipt of balance consideration in March 2007. Advance portion Advance received towards all services in September. the due date for payment of service tax will be 31st March. 01.000 Advance received towards taxable services = 1.000) = 80.352 87 .000 Add: Advance received for the services to be provided in October ’07 (note 3) 70.000 x 12% Education cess @ 2% = 24. Advance received in June 2006 = 1.20. 70.The liability to pay service tax arises again when the balance consideration is received.000 x 12% = 9. The due date for payment of service tax in respect of receipt of balance consideration is 05.000 were not received till 30.1.000 – 1.20.000 x (2.2006.20.000 was raised on an approved International Organisation and payments of bills for Rs.000 – Rs.400 1. 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.000 Less: Bills for which payment has not been realized (note 2) 1.80.000 was received as an advance from MNO Ltd.000 Taxable value of services 8.20. gives the following particulars relating to the services provided to various clients by them for the half-year ended on 30. the due date for payment of service tax in respect of receipt of advance is 05. Therefore.20.480 (iii) In case of a company.600 Education cess @ 2% = 9. (a) Advance portion Rs.01.00. 3) PQ Ltd.50.968 984 1.000 Amount received towards taxable services = 3.000 Amount billed for taxable services = 4.09. (ii) Amount of Rs.09.50.000 Service tax @ 12% (since service tax is charged separately) = 80. for the half year ending on 30.00.2007: Total bills raised 9.00.07: (i) Total bills raised for Rs.20.000) Service tax @ 12% = 2.000 x (2.000 98.20.000 Less: Bill raised on an approved International organisation (note 1) 50.20.50.80.20. service tax for a calendar month is payable by the 5th of the month immediately following the said calendar month.000 = 24.80.07 to whom the services were to be provided in October’07.000/4.000 7. 50.50. 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.07.09.000 2. = 3.000/4.000 Computation of service tax payable Taxable value of services Service tax @ 12% Add: Education cess @ 2% Add: Secondary and Higher Education cess @ 1% Total Service tax payable 8.07. 9.000 out of which bill for Rs.00.000 = 2.600 x 2% = 192 Total service tax liability 9792 (b) Balance portion Balance consideration has been received in December 2006 Balance amount received in December 2006 = 4.00. (ii) Contract contains clear break up of taxable and other services. on 25. 1.40.50. So advance received should also be bifurcated.09.2007.000 = 2.000 x 2% Total service tax liability = Rs.000 = 480 24. Service tax is payable on advance received for taxable services (Section 67 of the Finance Act. Services provided to approved International Organisation are exempt from the service tax vide Notification No. 4 & 12. it has been spreading all over the world.2002.08. 16/2002 ST dated 02. he will pay VAT as under: 88 . 1994]. In other words the various taxes paid on inputs purchased will be allowed as a credit. sales-purchases) which is equivalent to wages plus interest.e. As VAT is less distortive and more revenue-productive. 3.5% ad valorem. He imports his stock-in-trade as well as purchases the same in the local markets.5% VAT Multi-point Tax on Value addition Collected at different stages of sales Provision for set-off for tax at the previous stage ILLUSTRATION ON HOW VAT OPERATES: A is a trader selling raw materials to the manufacturer of finished products. Tariff contains four rates only viz. 0..Notes: 1. VAT (VALUE ADDED TAX) The Value Added Tax (VAT) is a multistage tax levied as a proportion of value added (i. If the rate of VAT is assumed to be 12. 1. other costs and profits. 2. Service tax is payable only on the value of taxable services received [Rule 6(1) of Service Tax Rules. 1994). 750 40.2500. Allows for deductions on purchase of raw materials and components as well as depreciation on capital goods.5% (Approx) 10.1250 duty on the above.000 45. but no deduction is allowed for taxes on capital inputs.000 8. interest etc.000 -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.(i) A’s cost of imported materials (from other states) (A will deposit rs.. Allows for deduction on all business purchases including capital assets. B I. this is not a state VAT it will form a cost of input) (ii) A’s cost of local materials (VAT charged by local suppliers Rs.000 (vi) Invoice value charged by A to the Manufacturer.000 5.000 1.) incurred and profit earned by A (iv) Sale price of goods (v) VAT on the above @ 12. A’s liability for VAT Tax on the sales price Less: Set-off VAT paid on purchases On imported goods On local goods Net Tax Payable 5. viz. transport. VARIANTS OF VAT: VAT has three variants. Gross product variant Income variant Consumption variant Allows deductions for taxes on all purchases of raw materials & components.500 2.250 20. 89 . Since. since the credit of this would be available it will not be included in cost of input) (iii) Other expenditure (such as storage.500 2. All purchases carry credit and hence the system has anti-cascading effect. tax paid at the earlier stage i. Addition method & Subtraction method. Better revenue collection and stability: The Government will receive its due tax on the final consumer / retail sale price. which is also a simple method. Invoice Method:(Tax credit method or Voucher method) This is the most common and popular method for computing the tax liability under VAT system. Thus neutrality is ensured in the selection of source of purchases. The simple equation is as follows: VAT payable = Tax on sale – Tax on purchase. since the tax credit will be given only if the proof of tax paid at an earlier stage is produced. A perfect system of VAT will be a perfect chain where tax evasion is difficult. sale price etc. 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. Under this method. MERITS AND DEMERITS OF VAT: Merits: No tax evasion: VAT credit can be claimed against the liability on the final product manufactured or sold. sale.These variants can be further distinguished according to their method of calculation. No need to seek interpretation on turnover. Transparency : The amount of tax should be clearly indicated in the invoice. (b) Intermediate. Certainty: The system is transaction based. at the stage of purchases is Set Off. The buyer knows the amount he pays as 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. out of tax so calculated. and (c) Indirect subtraction method. the total value of goods sold is not taken into account. In other words. Under this method.. Government also knows the amount it gets as tax in every transaction. VAT is applicable to all sales. There will be a minimum possibility of revenue leakage. Thus an invoice of VAT will be self enforcing and will induce business to demand invoices from the suppliers. viz. 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.e. 90 . METHODS FOR COMPUTATION OF TAX: There are several methods to calculate the ‘Value Added’ to the goods for levy of tax. Since. the question of grant of claim for set off of or tax credit does not arise. Neutrality: Whatever be the source of purchase set-off is equally available. the tax is charged only on the value added at each stage of the sale of goods. Proper records need to be maintained to claim credit. another method to determine the liability of a taxable person is the cost subtraction method. Subtraction method could be further divided into: (a) Direct. Solution: Computation of invoice value Particulars Cost of Goods Purchased Add: Additional expenses Add: Profit Share Total Invoice Value Computation of Tax Payable Particulars VAT on invoice value @ 12. The burden of this increase may not be commensurate with the benefit to traders and small firms. 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. Composition schemes and exemption schemes are also available. there may not be any increase in prices.and of profit Rs 15000/. Effect on retail price : VAT does not have any inflationary impact as it merely replaces the existing equal Sales tax.5%. Demerits: There are varying rates and some goods are out of VAT.had sold out 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. Composition schemes and exemption. Thus 100% benefit of VAT is not gained because there are varying VAT rates and some goods are out of VAT system.5%) VAT Payable Rs 120000 10000 15000 145000 Rs 18125 (15000) 3125 ALL THE BEST 91 . With the introduction of VAT. Any consumption tax is bound to suffer from this weakness. the tax impact on the raw materials is to be totally eliminated. Z 1. It would increase the working capital requirements and interest burden on the same. Therefore.5 % (120000x12. The rate of VAT on purchases and sales is 12. Rate + Y) .000/. (Specified Administration cost to the state can increase significantly. It will be difficult to put the purchases from other states at par with the state purchases. The accounting costs will increase.5% Less: Input tax credit – VAT on purchases @ 12.