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DIRECT TAX

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  1. DIRECT TAX

    BY CA SWATI GODBOLE
  2. DIRECT TAX Charged directly on an individual, firm, company etc. Tax on earning INDIRECT TAX Charged indirectly on everybody, whether rich or poor Tax on purchases MEANING
  3. QUESTIONS Whose income is charged to tax? What is charged to tax? When is liability for tax is computed? Income earned during what period is taxed? Who is liable to pay tax? How is income & tax computed?
  4. PERSON – Section 2(31) Includes An Individual A H.U.F. A Company A Firm An A.O.P/ B.O.I A Local Authority Every other artificial juridical person
  5. Problems
  6. INCOME – Section 2(24) Includes Profit Dividends Perquisites Allowance such as D.A Profit on sale of Import License Export Cash Assistance Refund of Excise or Customs duty Remuneration received by partner of a firm
  7. Contd. Capital Gain Profit of any business of insurance Winning from lotteries, crossword puzzles, horse race, card games etc.
  8. Important Points Periodical Return Illegal Income Cash or Kind Real Income (Remittance) Mutual Activity- from outside source
  9. Problems
  10. ASSESSMENT YEAR The period of Twelve months Commencing on the first day of April every year Ending on March Year in which income is taxed
  11. PREVIOUS YEAR A Financial year Immediately preceding the assessment year Newly started business Period beginning with date of setting up the business till March
  12. ASSESSEE A person by whom any tax, interest, penalty is due Whose assessment of income, loss or refund is pending A deemed assessee – a representative assessee An assessee in default
  13. Problems
  14. ASSESSMENT A PROCESS Determining, Computing Amount of Income Fixing the tax dues
  15. Capital and revenue expenditure Not defined under the act, but one has to follow the natural meaning & decided cases. Acquisition of fixed asset against routine expenditure Capital expenditure means expenses incurred while purchasing a fixed assets, as against revenue expenditure is recurring or incurred during the normal course of business
  16. Contd. Benefit over several years against one year Capital expenditure benefits us for several years (life of the asset) as against revenue expenditure is consumed within a year. Improvement as against maintenance Capital expenditure leads to increasing the efficiency or earning capacity of the fixed asset. Whereas revenue expenditure helps in running the business smoothly.
  17. Contd. Lump sum payment as against periodic payments To decide whether Capital expenditure or revenue expenditure, whether payment was made in lump sum or periodic cannot be deciding factor.
  18. Company Section 2(17) defines Company to mean An Indian company or A body Corporate incorporated under the laws of a foreign country Any institution, association or a body, whether incorporated or not and whether Indian or non Indian, which is declared by general or special order of the CBDT to be a Company
  19. Indian Company Indian Company – Section 2(26) A company formed and registered under the Indian Companies act of 1956 A company formed and registered under any law in force in the state of Jammu and Kashmir Any institution , association or body which is declared by the board to be a Company under section 2(17)
  20. Dividend Section 2(22) Under Section 2(22) – following payments or distribution by a company to its shareholders are deemed as dividend to the extent of accumulated profits of the company Any distribution entailing the release of company’s assets. Any distribution of debentures, debenture stock, deposit certificates and bonus to preference share holders Distribution on liquidation of company
  21. Contd. Distribution on reduction of Capital Any payment by way of loan or advance by a closely held company to a shareholder, holding substantial interest; provided the loan should not have been made in the ordinary course of business and money lending should not be substantial part of the company’s business
  22. Total Income & its computation It is- Gross total Income ***** Less: Permissible deduction u/s.80 ***** ( section 80 C to 80 U) Net taxable income ***** Tax is calculated on the Net taxable income as per the applicable rates. The net taxable income is rounded off as per the provisions of section 288A and the tax payable is rounded off to as per provisions of section 288B
  23. RESIDENTIAL STATUS
  24. BASIC CONDITIONS STAY IN INDIA IN PREVIOUS YEAR 182 DAYS OR MORE OR 60 DAYS IN PREVIOUS YEAR & PRECEDING PREVIOUS 4 YEARS 365 DAYS
  25. EXCEPTIONS An Individual Indian citizen, leaves India in previous year, as a crew member of an Indian Ship OR For employment An Individual Who is person of an Indian Origin or Who is an Indian Citizen Stayed outside India Comes on a visit to India Does not mean leaving India for taking employment outside India, need not be an unemployed person who leaves India
  26. CONDITIONS FOR R & OR Preceding previous 10 years, Resident at-least for two years AND Stay in India in preceding previous seven years 730 days.
  27. Problems
  28. Resident Control & Management of affairs is exercised Either completely or partially from India R & OR Status of Karta of HUF? R & OR OR NR or R but NOR HUF & RESIDENTIAL STATUS
  29. Control & Management Refers to Head and Brain – which direct the affairs of the business i.e. the policies, finance, disposal of profits, vital things concerning the management of the business
  30. Problems
  31. AOP/BOI/FIRM/Local authority/Artificial person R & OR Control & Management of affairs is exercised Either completely or partially from India COMPANY Indian always R & OR Any other company R & OR Control & Management of affairs is exercised Completely in India COMPANY/AOP/BOI/FIRMAND RESIDENTIAL STATUS
  32. Relationship between residential status & incidence of tax Incidence of tax on a tax payer depends on his residential status and also on the place & time of accrual or receipt of income.
  33. Indian Income If income is received in India & also accrues in India (deemed to received & accrues in India) If Income is received in India but accrues outside India If Income is received outside India but accrues in India Foreign Income Income is not received in India ( not deemed to receive in India) Income does not accrue or arise in India. Indian Income & Foreign Income
  34. INCOME DEEMED TO RECEIVE AND ACCRUE IN INDIA Examples of Income deemed to receive Contribution by the employer to the EPF account in excess of 12% of employee’s salary Annual interest credited to the employee’s PF account in excess of 9.5% Examples of Income deemed to Accrue All income accruing or arising whether directly or indirectly through / from Any business connection in India or Property in India or Asset or source of income in India or Transfer of Capital asset in India
  35. Contd. Salary payable for services rendered in India Salary received by Indian national from Government in respect of services rendered outside India is deemed to accrue or arise in India Any dividend paid by an Indian Company outside India Etc.
  36. SCOPE OF INCOME
  37. Contd.
  38. Any Other Taxpayer
  39. Problems
  40. HEADS OF INCOME Income from Salary Income from House Property Profits & gains from Business & Profession Capital Gain Income from other sources
  41. INCOME FROM HOUSE PROPERTY Basic Conditions There should be a House Property Should be owned by the assessee Should not be used for the business of the assessee, the income from which is taxable
  42. HOUSE PROPERTY Meaning Building And / or Land attached to or connected to the building Commercial as well as Residential
  43. OWNERSHIP Actual Deemed Transfer by Husband to wife without adequate consideration (except to leave apart) Part performance of an agreement
  44. TYPES OF H.P FLOP PLOP VLOP DLOP SOP/UOP
  45. CALCULATION OF INCOME GAV LESS MUNICIPAL TAX NAV LESS DEDUCTION U/S. 24 ADD ADDITION U/S. 25
  46. FLOP/ PLOP/DLOP R.L.V FAIR RENT MUNCIPAL VALUTION STANDARD RENT ACTUAL RENT S.O.P/ U. O. P Nil VLOP If A.R lower than R.L.V. due to Vacancy G.A.V
  47. EXAMPLE FOR RLV FAIR RENT OR MUNCIPAL VALUTION WHICH EVER IS HIGHER
  48. SECTION 24 Standard Deduction 30% of G.A.V. Interest on Loan borrowed for the H.P. Pre-construction Post-construction
  49. EXAMPLE FOR PRE-CONSTRUCTION INTEREST Loan taken on 1st April 2000 Rs.10,00,000 @ 12% Construction completed on 2nd July 2002 Pre construction period=1/4/2000 to 31/3/2002 Pre construction interest = 2,40,000 Deduction over next five years starting from 1/4/2002 to 31/3/2007 (20% each year) in addition of the annual interest
  50. FLOP/PLOP/VLOP/ DLOP Loan taken for construction/ purchase of the property No Limit SOP/ UOP Loan taken for construction/purchase of the property Rs.1,50,000 (Loan taken after 1-4.99) Rs.30000 (For prior period) Limit incl. repair loan repayment EXAMPLE FOR POST-CONSTRUCTION INTEREST
  51. SECTION 25 Unrealized Rent Arrears of Rent
  52. CAPITAL GAINS Basic Conditions There must be a Capital Asset. There must be Transfer of the asset. Transfer During the previous year. Due to transfer Gain/ Profit arises.
  53. CAPITAL ASSET Meaning Section 2 (14) Property of any kind Tangible or Intangible Whether connected to business or not Held by Assessee Subject to certain exceptions
  54. Exceptions Stock in trade, consumables or raw material held for business. Agricultural Land in rural area Special bearer bonds 1991 6.5 % Gold Bonds 1977, 7% Gold Bonds 1980, National Defence gold bonds
  55. Contd. Personal effects of the assessee i.e. Movable property including furniture, wearing apparel , held for personal use of assessee or his dependents Excluding Gold, Silver, Semi Precious Stone, Real Stone, Metal Jewellery, Ornaments
  56. TRANSFER 2(47) Sale or Exchange or Relinquishment Extinguishment (like due to fire, theft etc.) Compulsory Acquisition Conversion into stock Transfer of capital asset by a person to a firm in which he is a partner Distribution of capital assets on dissolution of firm
  57. PREVIOUS YEAR To decide the previous year Date of Transfer is Important except In case of receipt of insurance claim – Date of Receipt In case of conversion of Capital asset into stock – Date of sale of Stock In case of Compulsory Acquisition – Date of receipt of compensation.
  58. Short term asset Asset held for less than 36 months Subject to exception Long term asset Asset held for more than 36 months Subject to exception TYPES OF ASSETS
  59. EXCEPTION With respect to Equity shares/ Pref. shares any Co. Securities such as Deb. & others of Govt. listed on Stock Exchange Units of Unit Trust of India (Quoted or not) Units of Mutual Funds specified U/s.10 (23D) (Quoted or not) Held for a period less than 12 months- Short Term otherwise Long Term
  60. Problems
  61. Short Term Gain Full value of consideration Less: Transfer Exp. Less: Cost of Acquisition Less: Cost of Improvement Long term Gain Full value of consideration Less: Transfer Exp. Less: Indexed Cost of Acquisition Less: Indexed Cost of Improvement Computation of Gain
  62. Full Consideration Full = Gross Means Sale consideration / Sale price / Value received or receivable on transfer. Special cases Transfer of asset between firm and partners (amount in firm’s book) Conversion of capital asset into stock (F.M.V. on date of conversion) Compulsory acquisition (Amount of compensation)
  63. Cost of Acquisition Actual Cost Deemed Cost Transfer of asset under will/gift/inheritance holding & subsidiary etc. [49(1)] Amalgamation of companies- cost for amalgamated company Conversion of Debentures (Cost of Debentures) Assets received by a member on liquidation (F.M.V.)
  64. Intangible Assets Nil Tangible Asset Exp. Which are Capital in nature Incurred to do additions or alterations to the asset Allowed only if incurred after1st April 1981. Cost of Improvement 55(1)(b)
  65. Formula Cost of acq.* index no. of year of transfer/ index no of yearof acquisition No indexing possible Short term gain Transfer of Debentures or bonds Transfer by NRI Indexing
  66. Problems
  67. Shares & Capital Gain Initial Shares Right Shares Bonus Share Sale of Right to Right Shares
  68. Depreciable Assets (Sec.50) Depreciation under Income tax Previous year last day , W.D.V. of block zero [50(1)] Block of the assets is empty on last day of previous year [50(2)]
  69. Problems
  70. Conversion of assets into stock Date of sale of Stock = year of taxability of gain Full consideration on conversation = Fair market value as on conversation For indexing year of conversation to be considered Actual sale of Stock = Business income
  71. Income from Salary Basic Conditions Master And servant or employer and employee relationship Contract of employment is important
  72. BASIS OF CHARGE Either accrual or receipt (which ever is earlier) Salary due from an existing and/or former employer Salary paid or allowed by the employer though not due Arrears of salary paid or allowed
  73. SALARY COMPONENTS Basic salary Advance salary Arrears of salary Bonus Allowances Leave encashment on retirement
  74. COMPONENTS Retrenchment compensation Pension Gratuity Voluntary retirement payments Perquisites Provident fund payments
  75. CONCEPT Gross salary Deductions such as G.P.F., P.T. Net salary
  76. COMPUTATION Gross salary Less:- exemption us. 10 Less:-deduction us. 16 Net salary Deduction under chapter VI-A Net taxable salary
  77. EXEMPTION UNDER SECTION 10 FOR SALARY LEAVE ENCASHMENT 10(10AA) GRATUITY 10(10) PENSION 10(10A) HOUSE RENT PAID 10(13A) TRANSPORT ALLOWANCE 10(14) –RULE 2BB LEAVE TRAVEL CONCESSION 10(5)
  78. Leave Encashment Sec.10(10AA) Meaning – Leave Salary Salary standing / accumulated to the credit of an employee at the time of retirement is Leave Salary Encashment of the same at the time of retirement is referred to as leave encashment Tax treatment for the same – next slide
  79. Leave encashment – tax treatment
  80. Non government Employee exemption - detail In case of non-government employee (including an employee of local authority or public sector undertaking – exemption is least of the followings.
  81. Gratuity – Section 10 (10) It is a retirement benefit. Payable at the time of cessation of employment & on the duration of service. Government employees i.e. Central Government employees, State government employees, employees of local authority but not of statutory corporations Tax treatment - next slide
  82. Tax treatment
  83. Employees covered by Payment of Gratuity Act, 1972 Any gratuity received is exempt to the least of the following:
  84. Employees not covered by Payment of Gratuity Act, 1972 In case of other employee gratuity received is exempt to the least of the following:
  85. Pension Pension received from UNO by an employee or his family members is not chargeable to tax. Family pension received by the family members of armed forces is exempt under section 10(19). Family pension received by others (not covered in 2 above) after the death of the employee is taxable in their hands under section 56 – income from other sources.
  86. Contd. Un-commuted Pension – It is periodical payment of pension- i.e. monthly pension Commuted Pension – It is the lump sum payment in lieu of periodical payment.
  87. Commuted pension & non government employee
  88. HRA Section 10(13A) & Rule 2A Least of the following is exempt Salary = Basic + D.A.( if terms of employment so provide)
  89. Transport Allowance –10(14) Rule 2BB Allowance is granted to an employee to meet his expenditure for the purposes of commuting between the place of his residence and the place of his duty It is exempt up to Rs.800 per month In case of blind or orthopaedically handicapped it is Rs.1600 per month.
  90. Leave Travel Concession 10(5) Leave Travel assistance extended by an employer for going anywhere in India along with his family is exempt on the basis of the provisions given in table. Family includes spouse, children, parents , brothers and sisters (who are dependent on the employee) Only two journeys in a Block of Four years is exempt. Amount of exemption is limited to the actual expenditure
  91. Contd.
  92. Perquisites - Taxable Any residential accommodation given to the employee without charging any rent or at a concessional rate Free supply of gas , electricity or water for household consumption Wages paid by the employer for the domestic servants employed by the employee Value of free boarding & lodging expenses. Free educational facilities to the children
  93. Contd. Subscription & Bills paid to the club houses by the employer Vacation at the holiday homes or holiday trips at the cost of the employer Income tax due on salary but paid by employer Use of motor car with or without a driver at the cost of the employer for personal use.
  94. DEDUCTIONS FROM SALARY ENTERTAINMENT ALLOWANCE [16(2)] If granted by the employer it is included in the Salary income From A.Y. 2002-03 the allowance deduction is allowed only to Government employees. The least of the following is exempt Actual amount received Rs.5000 per year 1/5th of the basic salary
  95. DEDUCTIONS FROM SALARY PROFESSIONAL TAX [16(3)] Tax deducted from the Salary under Maharashtra State Tax on professions, trade, callings and Employment Act 1975.
  96. Income from Business & Profession Basic conditions Any activity carried out with the intention of profit Not necessary to carry on business continuously Activity may be in the nature of business i.e Trade or Commerce or profession or Vocation An adventure in the nature of Trade , commerce or manufacture
  97. Basis of Charge (Section 28) Deals with the classes of Income to be included in the profits and gains of business. For e.g. Profits and gains of any business or profession Any compensation or other payment received or due for loss of agency Any profit on sale of a license granted under Imports (Control) Order, 1955 etc. Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm
  98. Contd. Any sum received under Key-man Insurance Policy including the sum allocated by way of bonus on such policy. The value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of profession like present received by a doctor.
  99. Business income – computation (Section 29) 1. Determine the profit or loss from business & profession 2. Do adjustments related to expenses – allowable or not allowable (as per section 30 to 43D) 3. Do the adjustments related to income - to be considered separately etc.
  100. 3 Statements for Profitability Calculation Income and Expenditure Account {Income and Expenditure Format.xlsx} Profit & Loss Account {Profit and Loss account format.xlsx} Receipts and Payment Account {Receipt and Payment Format.xlsx}
  101. Section 37 – General Expenditure Any expenditure other than mentioned in Section 30 – 36 = General expenditure Allowed as deduction so long as Revenue in nature Incurred for the business of the assessee Should not be personal in nature Should not be prohibited by law E.g. Purchase of raw Material, Wages, Salaries etc.
  102. Expenses expressly disallowed Donations , Charity , Presents Income Tax , advance Tax, Wealth Tax, Estate Duty Legal expenses incurred to defend criminal liability Fines , penalty resulting from contravention of law Drawings by the proprietor Expenses of capital nature Any kind of provision or reserves not allowed
  103. Contd. Any expenditure incurred by an assessee on the advertisement in any souvenir, brochure, tract, pamphlet etc published by apolitical party will not be allowed as deduction -Section 37(2B) Payments made to the relatives of the assessee who is an individual or Director , Partner or a person having substantial interest in the business, which is unreasonable or in excess in the opinion of the I.T.O , will be disallowed.- Section 40A(2)
  104. Contd. Payment made in excess of Rs.20000 otherwise than by a crossed cheque or Draft – Section 40A(3) & 40A (4) Payment made to a person in a day in excess of Rs.20000 otherwise than by a crossed cheque or draft than such expenditure is fully disallowed. Any provision made for the future liability towards Gratuity is disallowed , however any gratuity that becomes payable during the previous year is allowed
  105. Deductions allowed only on payment Section 43B Any sum payable by way of Tax, Cess, Duty or fee under any law for the time being in force. Any sum payable by way of contribution to any provident fund or superannuation fund for the welfare of the employee. Any sum payable as bonus or commission to employee for services rendered. Any sum payable as interest on loans & advances taken from a schedule Bank, Public financial institution, State financial corporation
  106. Contd. Any sum payable by an employer in lieu of leave at the credit of his employee.
  107. Approach to solve the problem Which statement of account is given ? If Profit and Loss account OR Income & Expenditure Account Reverse Approach – Start from Net Profit / Surplus Add: Disallowed Expenditure Less: Income to be considered separately Less: Depreciation as per Income Tax
  108. Contd. If Receipt and Payment Statement given Then Pick Up Approach Pick Up Business Income from Receipts side Pick Up Business Expenses from Payment side Business Receipt Minus Business Expenses – Depreciation as per Income Tax
  109. INCOME FROM OTHER SOURCES (SECTION 56 TO 59) Basis of charges Income of any kind which is not to be excluded from total income & not chargeable under any of the specified heads = income from other sources – Section 56(1)
  110. Section 56 (2) Income chargeable to tax – example: Dividend (except exempt u/s.10(34) & 10(35) Winnings from lotteries, crossword puzzles, races including horse races, card games & other games of any sort Income by way of interest on securities Any sum of money exceeding Rs.50000 received without consideration i.e. Gift by an individual or HUF from any person on or after 1.4.2006 but before 1.10.2009 the whole of the amount = income from other sources
  111. Contd. A sum of money/ property is received by an individual or HUF without consideration on after 1.10.2009 (i.e. Gift) then— Any sum of money in cash/ cheque/ draft from one or more persons exceeding Rs.50000 then the entire total value will be chargeable to tax Immovable Property without consideration and the stamp duty value of which exceed Rs.50000, then Stamp duty value will be chargeable to tax. Movable property received without consideration Fair Market value of which is exceeding Rs.50000 – whole FMV of the Property = Income
  112. Contd. Interest on Bank deposit, NSC, Loans, deposits with companies Income from Royalty Director’s fees Income from sub letting of property Examination remuneration received by a teacher or lecturer from an university Rent of Plot of Land Income from undisclosed sources.
  113. CHAPTER VI-A SECTION 80 C , 80CCC & 80CCD (Limit of Rs.1,00,000) Life insurance Premium Payment , Pension Funds Contribution to statutory PF, PPF, Recognized PF Post office Term Deposit – 10 to 15 years account NSS, NSC- VIII Issue , ULIP of UTI or LIC Annuity Plan – Jeevan Dhara & Jeevan Akshay Equity linked saving scheme of any mutual fund Tuition fees of any 2 children Principal Repayment in case of housing loan
  114. 80-D – Mediclaim Medical Insurance Premium paid by cheque or any mode other than Cash is allowed as deduction The premium is for the policy covering spouse, dependent childern . Even the premium of the policy of parents is also covered. In case of HUF – policy taken for the members of the HUF is allowed Maximum allowed is Rs.15000 – for Assessee other than Senior citizen For senior citizen it is Rs.20000
  115. 80 DD – Deduction in respect of maintenance including medical treatment Deduction available to Resident Individual & HUF Deduction for expenditure incurred for medical treatment of a dependent person of disability A fixed amount of Rs.50000 / Rs.100000 ( Severe disability = 80% & above) is allowed A copy of certificate issued by medical authority along with return of income a must to claim.
  116. 80 E -Deduction for interest on loan taken for higher education Deduction available to an individual Loan is taken for the purpose of his education or his relatives Amount of deduction = interest paid out of income chargeable to tax Period of deduction = from the start of the previous year + 7 assessment year or till interest is paid in full whichever is earlier.
  117. 80 G – Donations Donations made to notified bodies or institute or funds qualifies for deductions. Four categories – A, B, C, D For A categories – 100 % of amount as deduction without any limit For B categories – 50 % of amount as deduction without any limit For C categories – 100 % of amount as deduction subject to qualifying limit For D categories – 50 % of amount as deduction subject to qualifying limit
  118. 80 U Disable Assessee Deduction for individual – resident in India Individual suffering from disability – action, cerebral palsy, multiple disability blindness etc Deduction = Rs. 50000 / Rs. 100000 (for severe disability = 80% and above disability) to the assessee
  119. Computation of Total Income
  120. THANK YOU