Incidence of Tax

NEERAJ GUPTA CA IPCC TAX CLASSES MISC
www.ngpacollege.comAssessmentYear201314Forsmsonly9810139214 Page1

CHAPTER - 15
MISC. RESIDENTIAL STATUS
INCIDENCE OF TAX

Question 1. Need to determine Residential Status?

Total Income of an assessee can not be determined without knowing his residential status in
India because the scope of Total Income and the incidence of tax depends upon the
residential status of the assessee in India.

Total Income will be different in case of a person resident in India and a person non-
resident in India. Resident status is determined in order to compute the Total Income of the
assessee for the relevant previous year.

Indian income : It includes
1. Income earned in India
2. Income received in India
3. Income earned & received in India

Foreign income : It includes income earned and received outside India.

SUMMARISED TABLE OF INCIDENCE OF TAX

Particular of income
Whether taxable
Resident/
ROR
Not-
Ordinarily
Resident
Non
Resident
1. Income received or deemed to be received in
India whether earned in India or elsewhere.

Yes

Yes

Yes
2. Income which accrues or arises or is deemed to
accrue or arise in India during the previous year,
whether received in India or elsewhere

Yes

Yes

Yes
3. Income which accrues or arises outside India and
received outside India from a business totally or
partially controlled from India or a profession set up
in India (Means originally set up in India and later
expanded to other countries)

Yes

Yes

No
received outside India in the previous year

Yes

No

No
received outside India during the years preceding the
previous year and remitted to India during the
previous year. [Past untaxed profits]

No

No

No



INCOME RECEIVED IN INDIA:

Any income received in India is taxable for all categories of assessees viz. ROR, NOR &
NR.

What is taxable is net receipt & not gross receipt i.e. all deductions & reliefs are available.

An income can only be received once. Thus, charge on receipt basis will be attracted when
the income is received for the first time after its accrual.

As per Keshav Mills Ltd. vs CIT (1953)(SC) remittance of an already received amount
does not result in its receipt at that other place.

Thus if an assessee having received an income in a foreign country, say in Japan, remits it
to his family in India, it is not an income received in India, as the income has already been
received in Japan & after its receipt it is being merely remitted to India.

The position will not change if the Assessee having received an income outside India,
himself brings it to India during the previous year.

Now consider a case, when income is not received by assessee in foreign country but by
someone on his behalf say his agent, brother, relative, employee or even bank. If his
agent etc. remits money to him in India after having received it in a foreign country, then in a
way it is being received by assessee for the first time. But it is an established preposition
that such income will be treated as if already received in foreign country and is being
received for the second time and is hence it is not taxable as income received in India.

It is very important to note that such income i.e. earned and received outside during the
previous year is not exempt for all categories of assessees because for ROR it is taxable
even if the income is not received in India.

INCOME DEEMED TO BE RECEIVED IN INDIA: (Section 7)

The following incomes shall be deemed to be received in India in the previous year even in the
absence of actual receipt:
(i) Tax deducted at source is an income in the hands of the payee;

(ii) Interest credited to recognised provident fund, in excess of 9.5% per annum.

(iii) Contribution of the employer to a Recognised Provident Fund in excess of 12% of
the salary of the employee;

(iv) Transferred balance in a Recognised Provident fund to the extent taxable.

(v) The contribution made by the Central Govt. or any other employer to the account of an
employee under a pension scheme referred to in Section 80CCD.



INCOME ACCRUE OR ARISE IN INDIA:
Accrue means due and arise means earned.
In simple language
it means any income
which is earned
and /or
is due in India,
is taxable in India
irrespective of residential status.

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: SECTION 9

The following incomes shall be deemed to accrue or arise in India:

(1) Section 9(1)(i) Income from a business connection in India.- Where by virtue of
business connection in India, income accrues or arises outside India to any person it is
deemed to accrue or arise in India.

Business connection is very well illustrated by the following examples:
(i) Forming a local subsidiary company to sell the products of the non-resident
parent company; and

(ii) Maintaining a branch office for the sale of goods or transacting other business in
India.

(iii) Erecting a factory in India in which raw produce purchased locally is worked into
semi-finished or finished goods for export abroad.

In the case of a Non-Resident the following shall not be treated as business
connection in India:

(i) In the case of a business of which all the operations are not carried out in India, only
such part of the income as is reasonably attributable to operations carried out in India shall
be treated as deemed to accrue or arise in India.

(ii) Operations confined to purchase of goods in India for purpose of exports;

(iii) Operations confined to collection of news and views for transmission outside India by or
on behalf of Non-resident who is engaged in the business of running news agency or
publishing newspaper, magazines or journals;

(iv) Operations confined to shooting of cinematograph films in India,
if such non-resident is either an individual, who is not a citizen of India,

or a firm which does not have any partner who is a citizen of India or who is a resident in
India,
or a company which does not have any shareholder who is a citizen of India or is
resident in India.


BUSINESS CONNECTION It includes a profession connection.
Business activity carried through following agents of non resident is covered

(a) Concluding agent the agent who concludes contract on behalf of the non resident.
However, agents who only purchase goods for the non resident are not covered.

(b) Stocking agent the one who maintains stock of goods in India and also does delivery
on behalf of non resident

(c) Indenting agent the one who secures orders mainly on behalf of non resident.

INDEPENDENT BROKERS / AGENTS ARE EXCLUDED

The business connection, shall not include cases
where the non-resident carries on business
through a broker, general commission agent or any other agent
of an independent status,
provided that
such a person is acting
in the ordinary course of his business.

Where a broker, general commission agent or any other agent
works (mainly or wholly)
on behalf of a non-resident
or other non-residents under the same management,
he shall not be deemed to be
a broker, general commission agent or an agent
of an independent status.

(2) Section 9(1)(i) Income from any property, asset or source of income situated in India:

Income through or from property in India is deemed to accrue or arise in India.
For instance, the house property or machinery or furniture, situated in India, is hired
under an agreement, which makes the hire/rent payable outside India.
It is an income deemed to accrue or arise in India as the property is situated in India.
The term assets here include intangible assets like patents, copyrights etc



(3) Section 9(1)(i) - Income from the transfer of any capital asset situated in India:
Any capital gain from the transfer of a capital asset, situated in India, is deemed to
accrue or arise in India. Shares/ securities of Indian companies are Indian capital assets
for this purpose.

(4) Section 9(1)(ii) - Income under the head Salaries- Income of a non-resident which falls
under the head salaries is deemed to accrue or arise in India if it is earned in India.
For this purpose income payable for services rendered in India is regarded as income earned
in India.

Leave encashments / pensions received by a non-resident in respect of services rendered in
India is taxable in India.

(5) Section 9(1)(iii) - Income under salary head payable to a citizen of India abroad by the
government:
It is applicable to government employees who are citizens of India and are posted
abroad.
They render the services outside India and they may also be paid outside India.
But still salary is taxable by virtue of this provision.

It is important to note that by virtue of Section 10(7), all allowances and perquisites
received by such an employee is exempt in India.

(6) Section 9(1)(iv) - Dividend paid by an Indian company outside India.:-
Any dividend paid by an Indian company outside India is deemed to accrue or arise in India.
As per latest provisions, such dividend is exempt u/s 10(34) except u/s 2(22)(e).

(7) Income by way of interest, royalty and technical fees [Sec.9(1) (v)/(vi)/(vii)]- These are
deemed to accrue or arise in India in the following cases

Rule 1 When received from Government Interest royalty or technical fees received from
the Central Government/any State Government, is deemed to accrue or arise in India.

Rule 2 When received from a person resident in India Interest, royalty or technical fees
received from a resident person, is deemed to accrue or arise in India in the hands of recipient.
However, this rule is not applicable in the following cases
a. If borrowed money is utilized by the payer for carrying on a business/profession outside
India or for earning any income outside India; or
b. Payment of royalty/technical fees pertains to a business/profession carried on by the
payer outside India or earning any income outside India.
Rule 3 When received from a non-resident Interest, royalty or technical fees received
from a non-resident, is deemed to accrue or arise in India in the hands of recipient, in the
following cases
a. Borrowed money is utilized by the payer for carrying on a business/profession in India;
or
b. Payment of royalty/technical fees pertains to a business/profession carried on by the
payer in India or earning any income in India.


Provision illustrated A is a non-resident in India. Only Indian income is taxable in the hands
of A in India. During the previous year 2012-13, he receives interest on different dates as given
below. In all these cases, interest is received outside India. If in these cases, interest accrues or
arises in India, then it will be Indian income and taxable in India. Conversely, if in these cases,
interest does not deem to accrue or arise in India, it will become foreign income which will not
be taxable in the hands of A, who is non-resident

Date Nature of interest received by A Whether
deemed to
accrue or
arise in India
April 19, 2012 Rs.8,00,000 is received from the Government of Gujrat Yes
May 11, 2012 Rs.6,00,000 is received from X Ltd. (resident in India)
and X Ltd. has utilized the capital borrowed from A for
carrying on business or profession outside India or
earning any income outside India
Yes
May 22, 2012 Rs.3,00,000 is received from P Ltd. (resident in India)
and P Ltd. has utilized the capital borrowed from A for
carrying o business or profession in India or earning any
income in India
Yes
June 19, 2012 Rs.5,00,000 is received from Q Ltd. (non-resident in
India) and Q Ltd. has utilized the capital borrowed from
A for carrying on business or profession in India
Yes
June 23, 2012 Rs.4,00,000 is received from R Ltd. (non-resident in
India) and R Ltd. has utilized the capital borrowed from A
for carrying on business or profession outside India or
earning any income outside India
No

Definition of royalty [Explanation to Section 9(1)(vi)]
Royalty has been defined as the consideration for

1. The transfer of all or any rights in respect of a patent, invention, model, design, secret
formula or process or trade mark etc.

2. The imparting of any information covering the working of the use of a patent,
invention, model, design, secret formula or process or trade mark etc.

3. The use of any patent, invention, model, design, secret formula, process or trademark
etc.

4. The imparting of any information regarding technical, industrial, commercial or
scientific knowledge or skill.

5. The right to use any industrial, commercial or scientific equipment.

6. The transfer of all or any rights in respect of any copyright, literary artistic or scientific
work
7. The transfer of all or any right for use of a computer software.

8. The rendering of services in connection with any of the above activities.


Royalty includes any lumpsum consideration but excludes consideration, which is covered by
the head capital gains.

Definition of fees for technical services Explanation to Section 9(1)(vii)

It means any consideration, including any lump sum consideration, for the rendering of any
managerial, technical or consultancy services

Excludes consideration for any construction, assemble, mining or like project undertaken by the
recipient.

Also excludes consideration taxable under the head salaries.

PRACTICE QUESTIONS
Question 2. For the assessment year 2013-14, NG (whose previous year is 2012-13) receives
the following incomes :

Royalty earned in India but received on May 8, 2012 in Karachi: Rs.80,000 ; dividend from a
foreign company received in Lahore on July 9, 2012 : Rs. 50,000 ; share of profit of a business
situated in Nepal received in Dhaka on June 10, 2012, but controlled from India : Rs. 40,000 ;
rent of 2012-13 of a house property situated in Dhaka and received there on December 31,
2012 : Rs. 1,65,000 (ignore standard deduction); Determine the gross total income of NG for the
assessment year 2013-14 if he is (a) non-resident, (b) resident but not ordinarily resident, and
(c) resident and ordinarily resident.

Question 3. NG, a foreign national furnishes the following particulars of his income relevant for
the previous year 2012-13 :

Profit on sale of asset at Dubai (40% is received in India)
Profit on sale of plant at Delhi (one half is received in Dubai)
Salary from an Indian company received in London (70% is paid for rendering
service in India)
Interest on USA Development Bonds (entire amount is received in New York)
Income from property in London received there
Income from business in Sri Lanka received there, half of which is used for meeting
education expenses of NGs son in Sri Lanka and remaining amount is later on
remitted to India
Dividend received in London on July 26, 2012 from a company registered in India but
mainly operating in USA
Profit from a business in Agra managed from India
Rental income from a property in Dhaka deposited by the tenant in a foreign branch
of an Indian bank operating there (ignore standard deduction)
Gift in foreign currency (one-third of which is received in India and remaining amount
is used for meeting education expenses of NGs son in Sri Lanka)
1,00,000
2,00,000
50,000
1,40,000
2,30,000
4,25,000
30,000
40,000
60,000
3,00,000

Determine gross total income of NG for the assessment year 2013-14, if he is : (a) non-resident,

(b) resident but not ordinarily resident ; and (c) resident and ordinarily resident



Question 4. Discuss whether the following incomes are taxable or not in India

1. A non-resident purchases goods from India and sells these goods abroad.
2. A non-resident is engaged in the business of publication of a magazine from Karachi.
Some of the news published in the magazine are collected from India.
3. NG Ltd., a non-resident foreign company, is engaged in the business of shooting a
cinematography film in India. The firm after its completion is sold to another non-resident
outside India. None of the shareholders of NG Ltd. is an Indian citizen or resident in
India.
4. A non-resident owns a commercial building in Surat, which is transferred to another non-
resident outside India. The consideration is payable in a foreign currency outside India.
5. A non-resident owns a residential house in Noida, which is given on rent to a foreign
embassy. Rent is, however, payable outside India in a foreign currency.
6. Interest on loan is paid by the Government of India to a non-resident outside India.
7. N Ltd. a non-resident gets royalty from G Ltd. a non-resident outside India. Royalty is,
however payable by G Ltd. In relation to a business of manufacturing carried on by it
outside India.
8. N Ltd., a non-resident gets interest from G Ltd., an Indian company, outside India. The
capital was borrowed by G Ltd. for the purpose of a business carried on by it outside
India.
9. N, a non-resident Indian, is presently appointed by the Government of India in its
embassy at Sri Lanka. Salary for rendering service is paid to him in a foreign currency
outside India.
10. N, a non-resident Indian, is presently appointed by an Indian company in its foreign
branch at Dhaka. Salary is paid to him outside India in a foreign currency.

Question 5. NG furnishes the following particulars of his income earned during the previous
year relevant to the assessment year 2013 14:
Interest on UK Development Bonds (60% is received in India)
Income from agriculture in Bangladesh, received there but later on Rs. 40,000 is
remitted to India
Income from property at Australia received outside India
Income earned from business in Lahore which is controlled from Delhi (Rs. 1,50,000
is received in India)
Dividend paid by a foreign company but received in India on June 10, 2012
Past untaxed profit of 2008-09 brought to India in 2012-13
Profit from a business in Patiala and managed from outside India
Profits on sale of building in India but received in Australia
Pension from a former employer in India, received in Sri Lanka (net of standard
deduction)
Gift in foreign currency from a relative received in India
80,000
1,00,000
60,000
2,00,000
5,000
10,00,000
8,20,000
14,00,000
70,000
90,000

Find out the gross total income of NG, if he is (i) resident and ordinarily resident in India, (ii)
resident but not ordinarily resident in India, or (iii) non-resident in India for the assessment year
2013-14.



Question from Study Module

Question 6. Determine the taxability of the following incomes in the hands of a resident and
ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2013-14:

Particulars Amount
(Rs.)
Interest on UK Development Bonds, 50% of interest received in India
Income from a business in Chennai (50% is received in India)
Profits on sale of shares of an Indian company received in London
Dividend from British company received in London
Profits on sale of plant at Germany 50% of profits are received in India
Income earned from business in Germany which is controlled from Delhi
(Rs.40,000 is received in India)
Profits from business in Delhi but managed entirely from London
Rent from property in London deposited in a Indian Bank at London,
brought to India (Ignore std. deduction)
Interest for debentures in an Indian company received in London
Fees for technical services rendered in India but received in London
Profits from a business in Bombay managed from London
Pension for services rendered in Indi abut received in Burma
Income from property situated in Pakistan received there
Past foreign untaxed income brought to India during the previous year
Income from agricultural land in Nepal received there and then brought
to India
Income from profession in Kenya which was set up in India, received
there but spent in India
Gift received on the occasion of his wedding
Interest on saving bank deposit in State Bank of India
Income from a business in Russia, controlled from Russia
Dividend from Reliance Petroleum Limited, an Indian Company
Agricultural income from a land in Rajasthan
10,000
20,000
20,000
5,000
40,000
70,000
15,000
50,000
12,000
8,000
26,000
4,000
16,000
5,000
18,000
5,000
20,000
10,000
20,000
5,000
15,000



EXAMINATION QUESTIONS

PCC MAY - 2012
Question 7 (12 Marks)
Mr. Ramesh & Mr. Suresh are brothers and they earned the following incomes during the
financial year 2012-13. Mr. Ramesh settled in Canada in the year 1996 and Mr. Suresh settled
in Delhi. Compute the total income for the assessment year 2013-14

Sl.
No.
Particulars Mr. Ramesh Mr. Suresh
1. Interest on Canada Development Bond, (only 50% of
interest received in India)
35,000 40,000
2. Dividend from British company received in London 28,000 20,000
3. Profit from a business in Nagpur, but managed directly
from London
1,00,000 1,40,000
4. Short term capital gain on sale of shares of an Indian
company received in India
60,000 90,000
5. Income from a business in Chennai 80,000 70,000
6. Fees for technical services rendered in India, but
received in Canada
1,00,000 -----
7. Interest on fixed bank deposit in UCO Bank, Delhi 7,000 12,000
8. Agricultural income from a land situated in Andhra
Pradesh
55,000 45,000
9. Income under the head house property at Bhopal 1,00,000 60,000

Question 8. (4 Marks)
Discuss the correctness or otherwise of the statement Income deemed to accrue or arise in
India to a non-resident by way of interest, royalty and fees for technical services is to be taxed
irrespective of territorial nexus.

PCC NOV - 2011
Mr. David a Government employee serving in the Ministry of External Affairs left India for the
first time on 31.03.2012 due to his transfer of high Commission of Canada. He did not visit any
time during previous year 2012-13. He has received the following income for the Financial Year
2012-13.

Rs.
(i) Salary 5,00,000
(ii) Interest on fixed deposit from bank in India 1,00,000
(iii) Income from agriculture in Pakistan 2,00,000
(iv) Income from house property in Pakistan 2,50,000
Compute his gross total income for Assessment Year 2013-14.



IPCC MAY - 2011
Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practicing
in Colombo, specializing in project financing. The payment was made in Colombo. Mr.
Kulasekhara is a non-resident. The consultancy related to a project in India with possible
Ceylonese collaboration. Is this payment chargeable to tax in India in the hands of Mr.
Kulasekhara, since the services were used in India?

IPCC MAY 2010
Question 11. From the following particulars of income furnished by Mr A pertaining to the year
ended 31.3.2013, compute the total income for the AY 2013-14, if he is:
(i) ROR (ii) NOR (iii) NR

Particulars
a) Profit on sale of shares of an Indian company,
received in Germany

15,000
b) Dividend from a Japanese company, received in
Japan.

10,000
c) Income from business in London deposited in a bank
in London

75,000
d) Dividend from RP Ltd., an Indian Company

6,000
e) Agricultural income from land in Gujarat

25,000

PCC MAY - 2010
Question 12. (2 Marks each)
Answer the following with reasons having regard to the provisions of the Income-Tax Act, 1961
for the Assessment Year 2013-14:
(i) State the Scope of total income in the case of an individual, whose residential status is non-
resident with reference to section 5(2) of the Act.
(ii) Mr. X a citizen of India received salary from the Government of India for the services
rendered outside India. Is the salary income chargeable to tax?



PCC NOV - 2009
Determine the taxability of income of US based company Heli Ltd., in India on entering following
transactions during the financial year 2012-13:

(i) Rs.5 lacs received from an Indian domestic company for providing technical know how in
India.

(ii) Rs.6 lacs from an Indian firm for conducting the feasibility study for the new project in
Finland.

(iii) Rs.4 lacs from a non-resident for use of patent for a business in India.

(iv) Rs.8 lacs from a non-resident Indian for use of know how for a business in Singapore.

(v) Rs.10 lacs for supply of manuals and designs for the business to be established in
Singapore.

Explain the rate of tax applicable on taxable income for US based company, Heli Ltd., in India.

NOTE: Tax rate for domestic company is 30% and for foreign company is 40%. Surcharge, if
income is above Rs 1 crore is 5% for domestic company and 2% for foreign company.
Education cess & SHEC shall apply in normal way to both the companies.

PE-II NOV - 2009
Repeat Question of PCC MAY 2012 (10 Marks)

PE-II MAY - 2008

Choose the correct answer with reference to the provisions of the Income-tax Act, 1961:
Income accruing in Japan and received there is taxable in India in the case of
(a) Resident and ordinarily resident only
(b) Both resident and ordinarily resident and resident but not ordinarily resident
(c) Both resident and non-resident
(d) Non-resident



BASICS - EXTRA
Section Particulars
2(7) Assessee
2(9) Assessment year
2(31) Person
2(34) & 3 Previous Year defined

FEW IMPORTANT DEFINITIONS ;
Person [Section 2(31)] : Person includes:
(i) An Individual;
(ii) A Hindu Undivided Family:- Under the Income tax law, a HUF is treated as a separate
entity for the purpose of taxation.
(iii) A company(whether Indian or foreign);
(iv) A firm;
(v) An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or
not e.g. clubs, co-operative societies etc.
(vi) A local authority e.g. MCD,DDA,DVB etc;
(vii) Every artificial judicial person not falling within any of the preceding sub-clauses e.g. Delhi
University / Bar council.

Assessee [Section 2(7)] : Assessee means a person by whom any tax or any other sum of
money (penalty / interest) is payable as per this Act and includes the following:
(i) Every person in respect of whom any proceeding under the Income-tax Act has been
taken for the assessment of his income or
the income of any person in respect of which he is assessable or
to determine the loss sustained by him or by such other person, or
the amount of refund due to him or such other person.

(ii) A deemed assessee - A person who is deemed to be an assessee for some other
person, is called Deemed Assessee.
For example,(i) after the death of a person, his legal representative will be treated as an
assessee for that income of the deceased on which tax has not been paid by the
deceased before his death ; (ii) a person representing a foreigner or a minor or a lunatic
is treated as an assessee for the income of such foreigner or minor or lunatic.

(iii) Assessee who is deemed to be an assessee in default -
When a person is responsible for doing any work under the Act and if he fails to do it, he
is called an Assessee in default.
For example, if a person while making any payment to another person, is liable to
deduct income tax thereon at source, does not deduct income tax therefrom, or
having deducted it, does not deposit it in the Government Treasury, he will be
treated as an assessee in default for that income tax.
Likewise under section 218, if an assessee does not pay advance tax, he shall
be deemed to be assessee in default.


Assessment Year [Section 2(9)]: Assessment Year means the period of 12 months
commencing on the first day of April every year.
It is, therefore, the period from 1
st
April every to 31
st
of March.

Previous Year [Section 2 (34) & 3]: According to section save as otherwise provided in this
section, previous year means the financial year immediately preceding the assessment year.
Income-tax is payable on the income earned during the previous year and it is assessed
in the immediately succeeding financial year which is called an assessment year.
Therefore, the income earned during the previous year 1
st
April 2012 to 31
st
March, 2013
will be assessed or charged to tax in the assessment year 2013 2014.
W.e.f. assessment year 198990, all assesses are required to follow a uniform previous
year i.e. the financial year (1
st
April to 31
st
March) as their previous year .i.e. they cannot
choose calendar year as their previous year.

First previous year for a business/profession newly set-up during the financial year or for
a new source of income:
In such a case the period beginning from the date of setting up of the business or from
the date the new source came into existence, and
Ending on the last day of that financial year i.e. 31
st
of March shall be first previous year
for that business or source of income.

Case where income of previous year is assessed in the same year; As a normal rule, the
income earned during any Previous year is assessed or charged to tax in the immediately
succeeding assessment year.
However, in the following circumstances the income is taxed in the same year in which it is
earned:
1. Non-resident shipping business (Section 172)
2. Assessment of persons leaving India (Section 174)
3. Associations/ bodies formed for short duration (Sec. 174A)
4. Assessment of person trying to alienate his assets with a view to avoid tax
(Section 175)
5. Discontinued business (Section 176)

Section 172 : Non resident shipping business: Section 172 is applicable if the following
conditions are satisfied:
(a) the taxpayer is a non-resident ;
(b) he owns a ship or ship is chartered by the non-resident taxpayer ;
(c) the ship carries passengers, livestock, mail or goods shipped at a port in India ; and
(d) the non-resident taxpayer may (or may not) have an agent / representative in India.

If all the aforesaid conditions are satisfied, 7.5 per cent of amount paid (or payable) on account
of such carriage (including demurrage charge or handling charge or similar amount) to the non-
resident taxpayer shall be deemed to be the income of the taxpayer.


Departure after approval & tax payment only:-For this purpose, the master of the ship shall
submit a return of income before the departure of the ship from the Indian port (such return may
be submitted within 30 days of the departure of the ship, if the Assessment Officer is satisfied
that it will be difficult to submit the return before departure and if satisfactory arrangement for
payment of tax has been made).
Unless the tax has been paid (or satisfactory arrangements have been made for payment
thereof), a port clearance shall not be granted by the Collector of Customs.
In case covered by this section, the income of a previous year is charged in the same
year and not in the immediately following assessment year.

Double taxation avoidance agreements: This section, however, does not apply in a
case where the non-resident belongs to a country that has an agreement on avoidance
of double taxation with India, in which case such earnings are taxed in accordance with
that agreement.

In cases where ships are owned by an enterprise belonging to a country with which India
has entered into an Agreement of Avoidance of Double Taxation, and the Agreement
provides for taxation of shipping profits only in the country of which the enterprise is a
resident, no tax is payable by such ships at the Indian ports.

Section 174 Assessment of Persons Leaving India

When it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry, and that he has no present intention
of returning to India, the total income of the individual for the period noted below is
charged to tax in that assessment year :
commencing from first day of assessment year, and
up to the probable date of his departure from India.

Separate assessments are made for each completed previous year or part thereof.

Example : A, a foreign citizen is residing in India since 2001. While completing assessment for
the AY 2012-13, on Feb 10, 2013, the AO comes to know that A will leave India on April 15,
2013 with no intention of returning. In this case, the Assessing Officer will make three
assessments for the AY 2012-13:
1. Regular assessment for PY 2011-12
2. Assessment u/s 174 for PY 2012-13
3. Assessment u/s 174 for the period 1/4/2013 to 15/4/2013.
All assessments shall be completed separately. Income shall not be aggregated. Relevant rates
of tax shall be applicable.
Section 174A Association/ bodies formed for short duration

Section 174A has been inserted from the assessment year 2002 03. This section is
applicable as follows-

1. There is an association of persons or a body of individuals or an artificial judicial person,
formed or established or incorporated for a particular event or purpose.


2. It appears to the Assessing Officer that the above mentioned association, body etc., is likely
to be dissolved in the assessment year in which such association of persons or body of
individuals or artificial person was formed or established or incorporated or immediately after
such assessment year.

3. The total income of such association for the period from the expiry of the previous year for
that assessment year up to the date of its dissolution shall be chargeable to tax in that
assessment year.

Provision illustrated:- X co. is an association of two individuals X & Y. It is formed on April 22,
2011 for the purpose of completing a contract given by a German company in India. It is likely to
be dissolved on October 5, 2012. While processing the return submitted by the association for
the assessment year 2012 13, the assessing officer comes to know on August 16, 2012 about
the probable date of dissolution. In this case, the Assessing Officer will make two assessments
for the assessment year 2012 13
a. regular assessment for the previous year 2011 12 (i.e. income of the period April 22, 2011
to March 31, 2012); and
b. assessment for the income of the period April 1, 2012 to October 5, 2012.

The above two income assessments shall be completed separately. For the first assessment,
tax shall be chargeable at the rates applicable for the assessment year 2012 13. For the
second assessment tax shall be chargeable at the rates applicable for the assessment year
2013 14.

Section 175 Assessment of Persons Likely to Transfer Property to Avoid Tax
If it appears to the Assessing Officer that any person is likely to sell, transfer, dispose of
or otherwise part with any of his assets, with a view to avoiding payment of any liability,
the total income of such person for the specified period is taxed in the assessment year
in which it so appears to the Assessing Officer.

Specified period is the period commencing from the first day of assessment year and up
to the date when the Assessing Officer commences proceedings under this section.

Separate assessments are made for each completed previous year or part thereof
included in the above period. Therefore, income for such periods cannot be aggregated
for the purposes of assessment.

Section 176 Discontinued Business
This section covers any business or profession that is discontinued in any assessment year,
i.e., the business is ceased.

Implications of such discontinuance in terms of sub-sections (1) and (2) are as follows :
The income for the specified period is taxed in the assessment year of
discontinuance. Specified period is the period commencing from the first day of
assessment year and up to the date of discontinuance.
Such income is charged to tax at the discretion of the Assessing Officer. If such
discretion is not exercised, the income of the discontinued business is taxed in


the normal way in the assessment year immediately following the previous year
of discontinuance.
Separate assessments are made for each completed previous year or part
thereof included in the above period [income for such periods cannot be
aggregated].

Related procedures may be stated as follows :
Any person discontinuing the business or profession has to give notice of such
discontinuance to the Assessing Officer within 15 days of the discontinuance.
The Assessing Officer may serve a notice on the following persons to furnish a
return within the specified time [not being less than 7 days]:
The person whose income is to be assessed.
In case of a firm, any person who was partner of the firm at the time of
discontinuance.
In the case of a company, the principal officer.

It may be noted that while in first four cases their is no choice i.e. it is mandatory for the
Assessing Officer to follow the process discussed above but in the last case, their is a
choice for the assessing officer i.e. if he wish he can assess the case or alternatively he
can wait till the assessment year.

Some important principle which explain the concept of income for Income-tax purpose are
given below:
(i) Regularity of Income:
To be taxable it is not necessary that a particular source of income is regular.
Thus even casual incomes like lotteries, winnings from races etc. are taxable.

(ii) Form of Income:
Income can be received in cash or in kind i.e. in the form of money or money worth.
Wherever income is received in kind like perquisites then its value has to be found as
per the rules prescribed and this value shall be taken to be the income.

(iii) Legal Vs. Illegal Income:
For purposes of Income -tax, there is no difference between legal and illegal income.
Even illegal income is taxed just like any legal income.
For example the income earned from smuggling activities would also be taxable
under the Act.
If this were not so then the illegal activity would be put at a premium because a
person carrying on this activity would get immunity from payment of taxes, while an
honest tax-payer carrying on a legal business would be paying taxes on his income.

(iv) Disputed Income:
Any dispute regarding the title of the income cannot hold up the assessment of the
income in the hands of the recipient.
In such cases it is the assessing officer who decides regarding the taxability of such
disputed income.



(v) Basis of Income:
Income can be taxed on receipt basis or on accrual basis.
In case of income from business or income from other sources the taxability would
depend upon the method of accounting adopted by the assessee.
Income from salaries is taxable on due or received basis, whichever is earlier.
While in other cases, it would generally be taxed on accrual basis.

Lumpsum Receipt:
If a receipt is an income then whether it is received in lump sum or in installments
would not affect its taxability; for example if a person receives arrears of salary in a
lump sum amount, it would still be his income.

(vi) Revenue Receipt vs. Capital Receipt:
Generally a revenue receipt is taxable as income.
However, there are certain provisions under which such receipt may be exempted
from tax (e.g. under section 10).
A capital receipt on the other hand is normally not taxable.
unless it has been specifically provided for, like in the case of capital gains.

(ix) Casual Income:
It is a casual receipt, received by chance, not anticipated, of non-recurring nature.
Gifts from relatives being of personal nature are exempt unless they can be regarded
as an addition to salary or
where they arise from the exercise of a business or profession.

Following receipts are chargeable to tax, even if they are casual and non-recurring in nature.
- capital gains
- Lottery income, winning from horse races etc.
- Receipts arising from business or exercise of a profession or occupation.
- Receipts by way of addition of remuneration of an employee e.g. arrears of bonus or salary
etc.

Diversion of income by overriding title vs. Application of income Any
expenditure/investment, after income is received, is application of income. Income under the
Income-tax Act, which is chargeable to tax, is income before application of income. Any
expenditure/investment out of such income is deductible only if it is permitted by a provision
under the Income-tax Act or Income-tax Rules.

Diversion of income is where by an obligation, income is diverted to some other person. When
an assessee on behalf of some other person receives income and later on it is diverted to such
person, it is known as diversion of income and, consequently, it is not chargeable to tax. For
example remuneration received by first author (written by two or more persons) for writing an
article in the newspaper. In this case, though total amount may be received by first person and
later on apportioned but still it will be proportionately taxable.



What is amalgamation [ Sec. 2(1B)]
For a merger to qualify as an amalgamation for the purpose of the Income-tax Act, it has to
satisfy the following conditions :
Condition 1 All the properties of the amalgamating company immediately before
the amalgamation should become the property of the amalgamated
company by virtue of the amalgamation
Condition 2 All liabilities of the amalgamating company immediately before the
amalgamation should become the liabilities of the amalgamated
company by virtue of the amalgamation
Condition 3 Shareholder holding not less than three-fourths (in value) of the
shares in the amalgamating company (other than shares already held
by the amalgamated company or by its nominee) should become
shareholder of the amalgamated company by virtue of the
amalgamation

To illustrate the aforesaid condition (3), where A Ltd. merges with X Ltd. in a scheme of
amalgamation, and immediately before the amalgamation, X Ltd. held 20 percent of the shares
in A Ltd. the abovementioned condition will be satisfied if shareholder holding not less than
(in value) of the remaining 80 per cent of the shares in A Ltd., i.e. 60 per cent thereof (3/4 x 80),
become shareholder of X Ltd. by virtue of the amalgamation. Where, however, the whole of the
share capital of a company is held by another company, the merger of the two companies will
qualify as an amalgamation within section 2(1B), if all other conditions are fulfilled.

Transactions not treated as amalgamation Section 2(1B) specifically provides that in the
following two cases there is no amalgamation for the purpose of the Income-tax Act, though
the element of merger exists :
a. Where the property of the company which mergers is sold to the other company and the
merger is a result of a transaction of sale;
b. Where the company which merges is wound up in liquidation and the liquidator
distributes its property to the other company.
In these two cases, there would not be an amalgamation with in the meaning of section
2(1B).

Tax rates are not given under the Income-tax Act, 1961 but by the annual Finance Act,
Discuss.
Provisions for computation of taxable income are given by the Income-tax Act.
Tax rates are not given by the Income-tax Act, but by the Finance Act which is passes by
Parliament along with budget for the Central Government every year.
Apart from making various amendments in the Income-tax Act (and other direct/indirect tax
laws) every Finance Act specifies (in the First Schedule) income-tax rates for the current
assessment year and advance tax rates for the next assessment year.
For instance, the Finance Act, 2012, provides tax rates in the First Schedule (Parts I, II and III)
as follows

Part I of the First Schedule to the Finance Act, 2012 It gives income tax rates for different
assessees for the assessment year 2012-13.



Part II of the First Schedule to the Finance Act, 2012 It gives rates for deduction of tax at
source applicable for the financial year 2012-13. To put it differently, if a person is
responsible for making a payment on which he is supposed to deduct tax at source during
the financial year 2012-13,then tax has to be deducted at source during 2012-13 at the rates
given in Par II of the Fist Schedule to the Finance Act, 2012. However, rate for tax deduction
from salary is given by Part III.

Part III of the First Schedule to the Finance Act, 2012 It gives tax rates for different
assesses for payment of advance tax during the financial year 2012-13 (i.e., for the
assessment year 2013-14). The same rates are applicable, for the tax deduction from salary
payment during the financial year 2012-13.

Generally, Part III of the Fist Schedule of a Finance Act becomes Part I of the Fist Schedule
of the subsequent Finance Act. For instance, Part III of the first Schedule to the Finance Act,
2012 will become Part I of the First Schedule to the Finance Act, 2013.

Maximum marginal rate of tax It is defined by section 2 (29C) as the rate of income tax
(including surcharge) applicable in relation to the highest slab of income in the case of an
individual as specified by the relevant Finance Act. For instance, for the assessment year
2013-14, the maximum marginal rate of tax is 30.9%.



DEFINITION OF INCOME U/S 2(24)

The term Income specifically includes the following:
1. Profits and gains: Income includes profits and gains.
2. Dividend
3. Voluntary contributions received by trust : Voluntary contributions received by following
is income :
Charitable or religious trust
Scientific research association
University or educational institution or hospital
Electoral trust i.e. trusts of political parties approved by CBDT
4. Perquisites or profits in lieu of salary
5. Official or personal allowances
6. CCA & DA
7. Benefits to Directors or persons substantially interested in the concern
8. Benefit or Perquisite to a representative Assessee : e.g. a trustee appointed under a
trust. Suppose A is one of the trustee of a charitable trust. The trust provides him a
residential flat. The perquisite value of the flat is treated as income of A.
9. Compensations : Like for termination of agency contracts, Non competing
compensations etc. Export incentives like Duty drawback, sale of import licence, cash
assistance etc are also treated like income. Salary and interest received by a partner
from his firm is also covered.
10. Capital gains
11. Insurance profits : Profits generated by business of insurance
12. Banking income of a cooperative society
13. Winning from lottery, horse races etc.
14. Employees contribution towards PF etc received by employer
15. Amount received under keyman insurance policy
16. Taxable gifts



INCOME EXEMPT FROM TAX

1. Agricultural income Section 10(1)
2. Share of profit received by a member from HUF Section 10(2)
3. Share of profit received by a partner from partnership firm Section 10(2A)
4. Interest received by a person who is resident outside India on amounts credited in the
Non resident (External) Account Section 10(4)
5. LTC Section 10(5)
6. Remuneration received by foreign diplomats Section 10(6)
7. Salary received by a foreign citizen as an employee of a foreign enterprise provided his
total stay in India does not exceed 90 days Section 10(6)
8. Salary received by a non resident foreign citizen as a member of ships crew provided
his total stay in India does not exceed 90 days Section 10(6)
9. Remuneration received by an employee, being a foreign national, of a foreign Govt
deputed in India for training in a Govt establishment or public sector undertaking
Section 10(6)
10. Foreign allowances and perquisites granted by the Govt of India to its employees posted
abroad Section 10(7)
11. Remuneration received by Non residents from a foreign Govt in connection with
Cooperative Technical assistance programme in India Section 10(8)
12. Gratuity Section 10(10)
13. Commuted pension Section 10(10A)
14. Leave salary at retirement Section 10(10AA)
15. Retrenchment Compensation Section 10(10B)
16. Compensation from the Central Govt or a state govt or a local authority received by an
Individual or his legal heir on account of any disaster Section 10(10BC)
17. VRS Section 10(10C)
18. Tax on perquisite paid by employer Section 10(10CC)
19. Amount received on Life Insurance policy (including bonus) Section 10(10D)
The main provisions are as follows:
a. Amount received u/s 80DD : Deposits for physically handicapped dependent relative
taxable
b. Amount received under Keyman Insurance Policy : Taxable
c. Amount received on death of person Exempt


d. Amount received under policy issued before 1/4/2003 Exempt
e. Amount received under policy issued On or after 1.4.2003 but upto 31.3.2012
Exempt if premium paid is upto 20% of sum insured
f. Amount received under policy issued on or after 1.4.2012 Exempt if premium paid
is upto 10% of sum insured
20. Amount received at the time of retirement from SPF Section 10(11)
21. Amount received at the time of retirement from RPF Section 10(12)
22. Amount received from Superannuation fund Section 10(13)
23. HRA Section 10(13A)
24. Special allowances Section 10(14)
25. Interest from specified bonds like Capital investment bonds, NRI bonds, Relief bonds etc
Section 10(15) Discussed in the chapter of IFOS
26. Educational scholarships by any employer or any other person Section 10(16)
27. Daily allowance & Constituency allowance for MLAs and MPs Section 10(17)
28. Rewards given by the Central or state Government
For literary, scientific or artistic work or
For service for alleviating the distress of the poor or the weak and the ailing or
For proficiency in sports and games or
Gallantry awards approved by Govt
Section 10(17A)
29. Pension and family pension of Gallantry award winners Section 10(18)
30. Family pension received by family members of armed forces (who died in the course of
operational duties) Section 10(19)
31. Income of Local Authorities Section 10(20)
32. Any income of housing boards constituted in India for planning, development or
improvement of cities, towns or villages Section 10(20A)
33. Any income of approved research associations 10(21)
34. Income of Professional institutions established in India for the purpose of control,
supervision, regulation or encouragement of the profession of law, accountancy,
engineering, architecture, company secretary etc. Section 10(23A). Income from
house property or income by way of interest or dividend etc is not exempt.



35. Income of a welfare fund is exempt from tax if it is approved by Commissioner Income
Tax and the benefits are being provided to member employee / family members in the
event of
Death / retirement of the member employee
Cost of education of his dependent children
Medical treatments /check ups
Section 10(23AAA)
36. Income of an authority established for development of Khadi and Village Industries
Section 10(23BB)
37. Income of PM National Relief Fund Section 10(23C)(i)
38. Income of a University or educational institution It is exempt if
a. Wholly or substantially financed by Govt; or
b. Existing for non-profit reasons and if annual receipts are upto Rs 1 crore; or
c. Existing for non-profit reasons and approved by Chief Commissioner of Income tax.
Section 10(23C)
39. Income of Hospital It is exempt if hospital existing for non-profit reasons (philanthropic
purposes) and is
a) Wholly or substantially financed by Govt; or
b) Existing for non-profit reasons and if annual receipts are upto Rs 1 crore; or
c) Existing for non-profit reasons and approved by Chief Commissioner of Income tax.
Section 10(23C)
40. Income of Investor Protection fund Section 10(23EA)
41. Income of Venture Capital Funds and Venture Capital companies [both Registered with
SEBI and acquiring shares of Venture Capital undertakings] Section 10(23FB)

Venture Capital undertaking means a domestic company whose shares are not listed
in a recognized stock exchange in India. They can be in business of providing services
or in production or manufacture of article or things. These should not be engaged in
activities not permitted under Industrial policy of the Govt.
It is important to note here that the exemption shall continue even if the shares of the
venture capital undertaking are subsequently listed in a recognized stock exchange in
India.
42. Income by way of interest on securities, property income and income from other sources
of a registered trade union or an association of registered trade unions Section 10(24)
43. Incomes of SPF, RPF, Approved Superannuation Fund, Approved Gratuity Fund
Section 10(25)


44. Income of Employees State Insurance Fund Section 10(25A)
45. Income of a member of a Scheduled Tribe, residing in Nagaland, Manipur, Tripura,
Arunachal Pradesh, Mizoram, Ladakh or in Sikkim by working in these states or income
by way of dividend or interest in securities Section 10(26)/(26AAA)
46. Any income of a statutory corporation or of a body /institution, financed by the Govt
formed for promoting the interest of scheduled castes / tribes Section 10(26B)
47. Income of a cooperative society formed for promoting interest of members of SC/ST
Section 10(27)
48. Income of minor being clubbed Section 10(32)
49. Dividend from domestic company Section 10(34)
50. Interest on Units of UTI / Mutual Funds Section 10(35)
51. Capital gain on compensation received on compulsory acquisition of urban agricultural
land Section 10(37)
52. LTCG on transfer of Listed equity shares after paying STT Section 10(38)
53. Any amount received by an individual as a loan (either in lump sum or installment) in a
transaction of reverse mortgage Section 10(43)
54. Perquisites / Allowances to Chairman / Members of UPSC Section 10(45)
55. Income from units in SEZ Section 10AA



INCOME OF CHARITABLE & RELIGIOUS TRUST

Question 1 : Explain the provisions regarding taxation of charitable trusts.

Ans: Income of Charitable Trusts is exempt u/s 11

In order to claim exemption, a Charitable or Religious trust should fulfill the below conditions

Trust should be created for a lawful purpose
Trust should be for charitable or religious purpose
Property should be held under trust
Trust should be registered with CIT (Commissioner of Income Tax) u/s 12AA
Accounts should be audited if Total Income before exemption u/s11 & 12 Exceeds
exemption amount (i.e. Rs.2,00,000)
Trust should not be created for the benefit of particular community or caste
Trust can carry out business activities if the business activities are incidental to the
attainment of its objectives & separate books are maintained.
Funds of the trust should be invested or deposited as per Section 11(5)
Taxable income of the trust shall be computed as per normal tax provisions. Tax rates
applicable to individuals are applicable to the Charitable trusts.
A trust should apply its income from trust property & voluntary contributions to the extent
of at least 85% during the financial year itself.

BASIC CONCEPTS OF APPLICATION OF INCOME
1. It is any expenditure to achieve the objects of the trust. It can be a revenue or capital
expenditure.
2. Repayment of loan taken to fulfill one of the objectives of trust is treated as an
application of income for charitable purpose.
3. Granting of loan to students is an application of income. Though in the year of
repayment it shall be constituted like income again.
4. Even payment of taxes shall be treated like application of income.
5. Donation given by a trust is an application of income.
6. Utilisation of income for meeting expenses of earlier years is an application.

Section 11(5) (options of accumulation of money)
i. Central/State Government Securities
ii. Govt saving certificates
iii. Deposits/Bonds of Financial Corporation providing long-term finance for
industrial development


iv. Deposits/Bonds of public company providing long term finance for
residential houses or urban infrastructure
v. Units of UTI, Mutual funds
vi. Deposits with IDBI
vii. Deposit with Schedule Bank, Co-op Bank, Post Office Saving Bank.
viii. Immovable property
ix. Investment in debentures or bonds of any corporate body, where repayment
of principle and interest is guaranteed by Central or State Govt.
x. Investment or deposit in any public sector company
xi. Deposit with housing authority or authority for development of towns and
cities
xii. Acquiring shares of National skill development corporation
xiii. Investment in shares of a depository
xiv. Any other mode of investment as may be prescribed

Various types of Income of a Trust
1. Income from property held under trust
2. Voluntary contributions (donations) not forming part of Corpus
3. Voluntary contributions (donations) forming part of Corpus. (Just like capital of
company). It is fully exempt. Assessee has to prove that voluntary contribution
received is forming corpus of the trust. Condition of 85% application is not applicable
on such contributions / donations received.
4. Business Income

Section 11(1)

15% is the accumulation allowed for future. No time limit for usage. Funds should
be invested as per Section 11(5).

1 + 2 + 4 (Mentioned above)
APPLIED for Charitable or Religious
purpose in India
Amount of Exemption
Income applied is atleast 85% : 100%
I Income applied less than 85% : Amount
applied + 15%
Applied for Charitable Purpose outside India
Exempt, provided such trust created for
Promoting INTERNATIONAL WELFARE in
which India is interested
15% accumulation not allowed here.



Question 2: A registered charitable trust discloses the following particulars for PY 12-13.
Gross receipts from property held under trust : 10,00,000
Expenditure for charitable & religious purpose in India
Case 1 : 9,00,000
Case 2 : 5,00,000
Determine the Total Income for A/Y 13-14.

INCOME APPLIED for charitable or religious purpose means

Income actually applied for Charitable or Religious purposes in India

Income deemed to be applied for Charitable or Religious purpose in India

Income deemed to be applied

A) Where income not applied due to non-receipt of Income during previous year:

Such income should be applied for Charitable & Religious purpose during P/Y of actual
receipt or during next P/Y

B) Where income not applied due to other reasons (e.g. received very near to closing of
financial year)
Such income should be applied for Charitable & Religious purpose during P/Y next to previous
year to which such income relates

Note:
To avail the facility of the above extended period of application of income, the trust
has to exercise an option in writing (No form prescribed). Such option has to be
exercised before the expiry of the time allowed u/s 139(1) for submission of returns.

Question 3 : Assume in question 1, case 2, Rs.2,50,000 could not be applied upto 31.3.2013
because
a) Amount was not received upto 31.3.2013 & finally received on 11.9.2015.
b) Due to other reasons (like amount received on 30.3.2013)

Section 11(2): Additional exemption for Income accumulated or set apart in excess
of 15%

Where 85% income not applied (actual or deemed) for charitable &religious purpose
then additional exemption shall be available for such amount
which is accumulated or set apart for application in future year

Provided
Notice is given to A.O is in Form 10 on or before 139(1) date, specifying period and purpose for
which such income is accumulated.

However, period cannot exceed 5 yrs from P/Y in which such income is derived and
Money so accumulated or set apart is invested or deposited in mode specified in Sec.11(5)



Note : In computing the period of 5 years, the period during which the income could not be
applied for the purposes for which it is accumulated, due to an order of any court, shall be
excluded.

CONSEQUENCES OF DEFAULT IN ABOVE SITUATION

1. Funds not used for the purpose for which accumulated Taxable in the FY of misuse
2. Funds does not remain invested as per 11(5) Taxable in FY of default
3. Funds non utilized or under utilized in prescribed period of 5 Years + one extn year
allowed for using these accumulated funds Taxable in the Extn FY e.g. Rs 5 lacs
saved in FY 2012-13 for utilizing them upto next 5 years i.e. upto 2017-18. If such funds
are not fully utilized upto 2017-18 & extn year 2018-19, then unutilized amount shall be
taxable in FY 2018-19 (AY 2019-20).
4. Such accumulated amount can not be paid to other trusts / institutions as donation
(Though it can be done in the year of dissolution of the trust).
5. If funds cannot be utilized due to reasons, beyond the control of trustees, AO, on
application, may allow funds to be utilized for other objects of the trust.

Question 4 : A registered charitable trust discloses the following particulars for PY 12-13.
Gross receipts from property held under trust : 10,00,000
Expenditure for charitable & religious purpose in India : 5,00,000

The trust wants to set apart 2,00,000 for application for Charitable or religious purpose in
future years (5 years). Determine the conditions to be fulfilled and what will be the total Income
for AY 13-14 if such conditions are fulfilled.

What shall be the consequences if out of accumulated funds of Rs 2,00,000 above, only Rs
1,35,000 is utilized till 31.3.2019.

Section 13: Cases when Exemption u/s. 11 or 12 Not Available

[FORFEITURE OF EXEMPTION]

Income used
for private
religious
purpose, not for
public benefit
Trust created
for benefit of
particular
religious
community
See Note 1
According to the
terms of trust,
Income is to applied
for benefit of
specified persons
u/s. 13(3)
See Note 2
During previous
year income used
for benefit of
specified person
u/s. 13(3)
See note 3 &4
Funds not
invested
u/s. 11(5)
See note 5
In above cases, exemption shall be lost & trust shall be taxable at maximum marginal rate of tax
i.e. 30.9%

Note 1 : A trust or institution created or established for the benefit of Scheduled Castes,
Backward classes, Scheduled tribes or women and children shall not be deemed to be a trust or
institution created or established for the benefit of a religious community or caste for this
purpose.


Note 2 : Sec. 13(3): Specified Persons
1. Author of Trust.
2. Person contributed greater than 50,000/- during P/Y
3. Where person above (in point 1 or 2) is a HUF, any member of such HUF
4. Trustee/Manager of trust
5. Relatives of (persons under points 1, 2, 3, 4, )
6. Concern in which (persons under points 1, 2, 3, 4, 5) has Substantial interest
(i.e. HOLDING 20% of equity shares or 20% of profits of the concern whether held
singly or jointly with other persons mentioned above)

Relative :
a. Spouse of the individual
b. Brother or sister of the individual
c. Any lineal ascendant or descendant of the individual
d. Any lineal ascendant or descendant of the spouse of the individual
e. Spouse of the person referred to in (b), (c), (d) or (e) above;
f. Any lineal ascendant or descendant of a brother or sister of either the individual or of the
spouse of the individual.

Note 3 : If any medical or educational facility is provided to the specified persons, the whole
exemption shall not be lost. Only the value of benefit shall become taxable.

Note 4 : WHAT IS MEANT BY GIVING BENEFIT TO INTERSTED PERSONS

1. Loan is given without adequate security or adequate rate of interest
2. Property is given without adequate rent
3. Excess salary is being provided
4. Services of trust being provided at inadequate consideration
5. Any share or property is purchased from interest persons at higher price or sold to them
at lower price
6. Any income or property is given to them above Rs 1000 p.a.
7. Investment exceeding 5% Of capital of a concern in which such persons have
substantial interest.

Note 5 : Convert the non confirming assets / funds

Acceptance of donations in kind or acquiring any asset not confirming to the provisions of
section 11(5) will not make the fund or trust or institution lose tax exemption. The trust or
institution shall be required to dispose of or convert the asset not confirming to the requirement
of section 11(5) into permissible investment within one year from the end of the financial year in
which such assets are acquired.


Concept of anonymous donation Section 115BBC

It means a donation where the information about the name and address of the donor is not
available.

The provisions:
1. For Wholly Religious entities Section 115BBC not applicable (Normal provisions apply
i.e. 15% deduction allowed plus 85% should be applied in FY itself)

2. For educational / medical institutions / charitable entities / partly religious & partly
charitable entities :
a. Exempt if upto Rs 1 lac p.a
b. Exempt if upto 5% of total donations (other than corpus donations)
c. If higher amounts then higher of Rs 1 lac or 5% of total donations is exempt and
balance amount taxable u/s 115BBC @ 30% flat. Actual expenditure shall not be
relevant. Please note that this exemption of 5% etc is at the time of computing tax
and not at the time of computing income.
d. 15% standard deduction not allowed against such donations if received by
educational / medical institutions / charitable entities.

Example : One such trust has received total donations of Rs 100,00,000 out of which
anonymous donations are Rs 30,00,000, in this case, exemption allowed shall be 5% of Rs
100,00,000 or Rs 1,00,000 whichever is higher i.e. Rs 5,00,000 and balance anonymous
donations i.e. Rs 25,00,000 (30,00,000 5,00,000) shall be taxable @ 30%. Rs 5,00,000
shall not be taxable at all.

Amount spended for charitable purposes out of anonymous donation is not relevant. In this
example, suppose anonymous donation received is only say Rs 80,000 or only upto 5% of
total say Rs 3,50,000 than normal provisions shall apply.

Treatment of capital gains
It shall be computed as per normal provisions. If the net consideration is invested for acquiring
net capital asset within FY then exemption = Investment (-) Cost / Indexed cost of acquisition.

Meaning of Charitable Purpose Section 2(15)
Charitable purpose includes
- relief of the poor,
- education,
- medical relief,
- preservation of environment (including forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest,
- advancement of any other object of general public utility
Advancement of any other object of general public utility should not be in the nature of
business however if the gross receipt is upto `25,00,000, it will be considered to be charitable
purpose but if gross receipt is exceeding `25,00,000, it will not be considered as charitable
purpose.


Example
One charitable trust has the business of publishing of books on social and religious
matters and gross receipt is Rs 24,00,000, in this case, it will be considered to be charitable
purpose but if gross receipt is more than Rs25,00,000, entire income shall be taxable.

Similarly, one such trust is running a coaching centre for music & drama and gross receipt is
Rs 18,00,000, in this case, it will be considered to be charitable purpose but if gross receipt is
exceeding `25,00,000, entire income shall be taxable.

Any trust having the above objectives shall be considered to be charitable or religious trust.

Trust will include any other institutions or organizations also i.e. it will include even Society
registered under Societies Registration Act, 1860, company registered under section 25 of
Companies Act, 1956, or other similar institutions, provided they are for charitable purpose.

Return of income of charitable or religious trust or institution Section 139(4A)

If the total income of a charitable or religious trust or institution before exemption under sections
11 and 12 exceeds the maximum amount not chargeable to tax, then the trust or institution is
under an obligation to furnish the return of income within the time allowed under section 139(1)
and all provisions of the Income-tax Act shall apply as if it were a return furnished under section
139(1).

Note 1: The tax rates applicable to a religious/ charitable trust/ institution are the same as
applicable to an individual.

Note 2: As per section 12A, exemption under section 11 & 12 is available only if the trust /
institution gets its accounts audited in case the total income of the trust/ institution before
exemption under section 11 & 12 exceeds Rs2,00,000/-. Audit report should be submitted under
rule 17B in form No. 10B.

Note 3: The due date for filing of return under section 139(4A) is 30
th
September of the
assessment year.

Note 4: Return furnished under section 139(4A) is deemed to be return furnished under section
139(1) and can therefore be revised under section 139(5).

Few other points relating to Assessment of charitable trusts

1. Excess expenditure in one year may be set off against next years incomeCIT v
Maharana of Mewar Charitable Foundation, (1987) (Raj.).

2. Board has clarified that promotion of sports and games shall be considered to be
charitable.

3. Relief to poor : Relief must not be only to a group of private individuals rather it should
be a relief to the poor in general. Similarly for educational help also.

4. Trust can also be in the name of some private person.



Section 12A : Registration of Trust
Every trust wanting to claim exemption of its income u/s 11 or 12 shall make an application for
registration of the trust in the prescribed form & manner to CIT. There is no time limit as such
within which the trust has to apply for registration. It can be done any time.

Section 12AA : Procedure for Registration
The CIT on receipt of an application for registration u/s 12A
Shall call for documents & information from the trust
In order to satisfy himself about the genuineness about the activities of the trust
After being satisfied that trust is genuine
Pass an order in writing registering the trust

Refusal : If CIT is not satisfied, he may refuse the registration after giving an opportunity of
being heard and mentioning the reasons of refusal in the order.

Special Point:
Every order granting registration or refusing registration shall be passed before expiry of 6
months from the end of month in which application was received

Sec. 12AA(3)
Where trust/institution has been granted registration and
Subsequently CIT is satisfied that activities of charitable trust or institution
are not genuine or are not being carried in accordance to the object.
Pass order in writing canceling the registration of such trust or Institution



Income of Political Parties

Income which are Exempt [Section 13A]
The following incomes derived by a political party are not included in computing its total income
:
(i) Income which is chargeable under the head Income from house property; or
(ii) Income chargeable under the head Income from other sources.
(iii) Any income by way of voluntary contribution from any person
(iv) Any income by way of capital gains.

Requisite conditions : The exemption of the above income shall be available only when the
following conditions are satisfied:
(i) the political party keeps and maintains such books of accounts and other documents
as will enable the Assessing Officer to property deduce its income therefrom ;
(ii) where the voluntary contributions from a person exceeds Rs.20,000, it keeps and
maintains a record of such contribution and the name and address of the person who
has made such contribution.
(iii) Audit done by CA
(iv) Report mentioning contribution received in excess of Rs 20,000 should be submitted
upto the date of submitting the return of income to the Election Commission.

Political party should be registered with the Election commission of India.

Illustration: The books of account maintained by a National Political Party registered with
Election Commissioner for the year ending March 31
st
, 2013 disclose the following receipts:

Rent of property let out to a Factory at Noida 4,00,000

Interest on deposits 6,00,000

Contributions from 10 persons (who have secreted their names)
of Rs90,000 each 9,00,000

Contribution @ 10,000each from 80 members in cash 8,00,000

Net Profit of Small shop run in the premises at Noida 2,00,000

Compute the total income of the political party for the assessment year 2013-14, with reasons
for inclusion or otherwise.



Solution:
Computation of Total Income for Assessment Year 2013-14
Rent of property (Exempt under section 13A) Nil
Interest on deposits (Exempt under section 13A) Nil
Contribution exceeding Rs.20,000
(Names of persons marking contribution not available) 9,00,000
Contribution not exceeding Rs.20,000 Nil
Net Profit of small shop assessable as business income 2,00,000
Total Income 11,00,000

Return of income of Political Party Section 139(4B)

If the total income of a political party before exemption under section 13A exceeds the
maximum amount not chargeable to tax, then the political party is under an obligation to furnish
the return of income within the time allowed under section 139(1) and all provisions of the
Income-tax Act shall apply as if it were a return furnished under section 139(1).
Note 1: The tax rates applicable to a political party are the same as applicable to an individual.

Note 2: For claiming exemption under section 13A, audit is compulsory.

Note 3: The due date of filing of return under section 139(4B) is 30
th
September of the
assessment year.

Income Of Electoral Trust Section 13B

Any voluntary contributions received by an electoral trust shall not be included in the total
income of the previous year of such electoral trust, if

(a)such electoral trust distributes to any political party, registered under section 29A of the
Representation of the People Act, 1951, during the said previous year, ninety-five per cent of
the aggregate donations received by it during the said previous year along with the surplus, if
any, brought forward from any earlier previous year; and

(b)such electoral trust functions in accordance with the rules made by the Central Government.



EXAMINATION QUESTIONS

PCC MAY - 2012

Will a charitable trust be forfeited of tax exemption granted to it, if it holds shares in a public
sector company? Will a charitable trust having business receipt and income of Rs.20,00,000 and
Rs.2,00,000 respectively be denied the tax exemption?

PCC NOV - 2010

Can a political party claim exemption of its income under section 13A of the Income tax Act,
1961?

IPCC MAY - 2010

What is the time limit for filing application seeking registration in the case of Charitable Trusts/
Institutions under section 12AA of the Act?

What are the conditions to be fulfilled by a Charitable Trust under section 12A for applicability of
exemption provisions contained in section 11 and 12?

PCC MAY - 2012

State whether the following are chargeable to tax and the amount liable to tax.

(i) Arvind received Rs.20,000 as his share from the income of the HUF.

(ii) Mr. Xavier a Param Vir Chakra awardee received a pension of Rs.2,20,000 during
the financial year 2012-13.

(iii) Interest on enhanced compensation of Rs.50,000 was received as per court decree
in December 2012 by Mr. Yogesh. Out of the said amount a sum of `35,000 relates
to preceding financial years.

(iv) A political party registered under section 29A of the Representation of the People
Act, 1951 earned rental income of Rs.6,00,000 by letting out premises.



IPCC MAY - 2011

Nathan Aviation Ltd. is running two industrial undertakings, one in a SEZ (Unit S) and another in
a normal area (Unit N). The brief summarized details for the year ended 31.03.2013 are as
under:
(Rs. in lacs)
S N

Domestic turnover 10 100
Export turnover 120 Nil
Gross profit 20 10
Less: Expenses and depreciation 7 6
Profits derived from the unit 13 4

The brought forward business loss pertaining to Unit N is Rs.2 lacs. Briefly compute the
business income of the assessee.

PCC MAY - 2011

Question 11 (4 MARKS)
Y Co. Ltd. Furnishes you the following information for the year ended 31.03.2013:
Rs.
Total turnover of Unit A located in Special Economic Zone 100 lakhs
Profit of the business of Unit A 30 lakhs

Export turnover of Unit A 50 lakhs

Total turnover of Unit B located in Domestic Tariff Area (DTA) 200 lakhs

Profit of the business of Unit B 20 lakhs

Compute deduction under section 10AA for the assessment year 2013-14.



ALTERNATE MINIMUM TAX [SECTION 115JC to 115JF]

The main features are as follows:
1. It is applicable on non-corporate assessee viz Individual, HUF, AOP, BOI, Artificial
Juridical person, Firm including LLP etc.
2. It is applicable only in those cases where assessee has claimed deduction from sections
80IA to 80RRB (Except 80P) i.e. 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE, 80JJA, 80JJAA,
80QQB, 80RRB or Section 10AA.
3. In case of individual, HUF, AOP, BOI etc it is applicable if net adjusted income is more
than Rs 20 lacs.
4. Adjusted total income means Total income plus deductions discussed above (80IA to
80RRB) plus exemption u/s 10AA.
5. If above provisions applicable AMT = higher of the two
a. Normal tax liability
b. 18.5% plus cess @ 3% of 18.5% i.e. 19.055% of Adjusted total income
6. Credit of excess payment is available in next assessment years (Maximum 10).
7. Tax credit shall be allowed to be set off for an AY in which the regular income tax
exceeds the AMT to the extent of excess of the regular income tax over the AMT.
8. Report of CA required in form 29C.

Question :
Net profit of a partnership firm after exemption u/s 10AA : Rs 4,00,000
Exemption u/s 10AA : Rs 6,00,000
Compute tax payable & Tax credit available.
What shall be your answer if it is a case of sole proprietorship.



ASSESSMENT OF HINDU UNDIVIDED FAMILY

Question 1 : Explain the tax treatment of HUF as per Income tax Act, 1961.

Ans : Meaning : A Hindu undivided family (HUF) is an assessable entity under this Act. It is
treated as a person under section 2(31). However, it is not defined in the Act. Thus, its
meaning has to be understood in a sense in which it is used under the personal law of Hindus.
A Hindu joint family consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughters. Thus, it does not consist of married daughters.

Status : Thus, a HUF may consist of male or female members who may be minor or major. It
should be noted that membership of a HUF does not arise out of a contract. It arises by virtue of
status of being a member of the family. That means both male / female are coparceners & both
can enforce a partition.

Jain / Sikh : A Jain or a Sikh family is treated as a HUF under the Act even though these
families are not governed by the Hindu law.

What is joint family property?
Joint family property : Joint family property is the property consisting of :
(i) ancestral property, or
(ii) property transferred by the members, or
(iii) property acquired with the aid of ancestral family property or with the aid of property
transferred by the members.

Ancestral property : Ancestral property is the property which is inherited from the father,
grandfather or great-grandfather. Property inherited from any other person does not qualify as
ancestral property, for instance, the property inherited from uncle or brother.

What are the different schools of Hindu Law?
Two schools : There are two principal schools of Hindu law, viz., Dayabhaga and Mitakshara.

Dayabhaga school of law
Law : This school of law prevails in West Bengal and Assam. Under this school of law the son
does not become coparcener of the HUF on his birth. Thus, he does not acquire any interest in
the joint family of the property and also the right to claim partition of the family. He acquires
such rights only on the death of the father. Thus, the father has the sole right to dispose off
the property of the family as per his will. He is the absolute owner of the property. After his
death, his sons acquire the right in such property. They become the coparceners of the
property inherited by them and a HUF comes into existence. Income from such property is,
thus, assessed in their hands as a HUF.
Mitakshara school of law
Law : This school of law prevails in the whole of India except West Bengal and Assam. Under
this school of law, the son acquires an equal right in the property of the family by virtue of his
birth. Thus, the coparcenery of the family fluctuates on every death or birth of a male member.



What is the tax treatment for different kinds of income?
Nature of income Tax treatment

Incomes included in the total income of the HUF

1.

2.
Income of the HUF itself.

The funds of the HUF
invested in a firm or a
company in which the member
of the HUF becomes a partner
or director. He receives any
remuneration from such firm or
company.
Income is included in the total income.

If such remuneration is received by virtue of the
investment made by the HUF in the firm or company, it is
included in the total income of the HUF and not in the
total income of such member. If it is received on account
of personal services rendered by him to the firm or
company or on account of his personal qualifications and
exertions and not on account of the family funds, it is
taxable in the hands of such member and not in the
hands of the HUF (K.S. Subbiah Pillai v. CIT [1999] 237
ITR 11(SC).

Incomes not included in the total income of the HUF

1.

2.

3.

4.
Income covered under section 10.

Member of the HUF converts his property into
the property belonging to the family without
adequate consideration

Personal incomes of the members of HUF e.g.
salary, professional income etc.

Stridhan. (Gifts received by her either at the
time of marriage or before/after marriage. Also
includes income earned by her and inherited
incomes / properties)

Income is not included in the total income.

Till the partition of HUF, income from
such property is not included in the total
income of the HUF, but in the income of
the individual transferor.

Such income is included in the total
income of the members and not in the
total income of the HUF.

Such income is not included in the total
income of the HUF as it is the absolute
and personal property of the woman who
owns it.
Is remuneration paid to karta or manager deductible?
Conditions :Remuneration to the karta or the Manager of the HUF is allowed as a deduction in
computing the income of the HUF if the following conditions are satisfied (Jugal Kishore Baldeo
Sahai v. CIT [1967] 63 ITR 238 (SC).
(i) It is paid in consideration of services rendered by him for managing the affairs of the
HUF;
(ii) It is paid under a bona fide and valid agreement;
(iii) Such payment is in the interest of, and expedient for, the business of the family;
(iv) It is genuine and is not an excessive amount.


Interest : It should also be noted that interest payment made to a coparcener (member of HUF)
on the amounts lent by him to the HUF is not deductible (CIT v. Gopal Bansilal Inani [2000]
245 ITR 2 (SC).

Revision of concept covered in the chapter clubbing of income

INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED TO JOINT-FAMILY
PROPERTY [SECTION 64(2)]
Where an individual,
who is a member of Hindu Undivided family,
converts his private property as a property of HUF
otherwise than for adequate consideration,
then the income from such property
shall continue to be included
in the total income of the individual.

In other words, if self-acquired property of an individual is treated/ converted into joint family
property without adequate consideration, the income derived by the joint family on account of
such property shall be included in the total income of the individual who was the owner of such
self-acquired property.

For example, X owns a house property from which he derives an income of Rs 3 lacs per
annum. With effect from 1.4.2007, he converts this property as the property of an HUF of which
he is a member. Although the income shall from now be received by the HUF but it shall be
deemed to be the individual income of X and shall be included in computation of his total
income under the head Income from house property.

Implication in the case of subsequent partition: Where the converted property has been the
subject matter of partition, amongst the members of the family, the income derived from such
converted property as is received by the spouse on partition shall be clubbed in the hands of the
transferor.
Such income shall be deemed to arise to the spouse from assets transferred indirectly by
the individual to the spouse, without adequate consideration.

In the example given above if there is a partition in the family and there are four members
entitled to share in the HUF property i.e. X, Mrs. X, a minor child and a major child, assuming
they decide to share the property equally, then the income from the property shall be treated as
follows:
income from 1/4
th
share of X Rs 75,000 (taxable for X)
income from 1/4
th
share of Mrs. X - Rs 75,000 ( to be clubbed with the income of Mr. X)
income from 1/4
th
share of minor child of X Rs 75,000 ( to be clubbed with the income of X
u/s 64(1A). However, X can claim exemption upto Rs 1,500 u/s 10(32).
Income share of Major child shall be treated as his personal income and he will submit his
return of income separately along with other incomes, if any.

Rate of tax on normal income
Same as that for individuals. No surcharge. Normal cess provisions apply.



Question 2
X is the karta of a Hindu undivided family : X and Brothers. The family consists of X (68 years),
the karta and his two younger brothers Y and Z as coparceners. The family and the coparceners
had the following incomes for the year ended March 31, 2013
Salary of X as manager of a company : Rs. 1,80,000.

Interest on securities :
Interest in the name of X Rs. 2,00,000, on Government securities purchased out of his
salary.
Interest on Government securities in the names of all coparceners Rs. 40,000 investments
made out of the family income.

Property income by way of rent:
Ancestral house : Rs. 90,000.
House in the name of X (bought in 1954 out of family funds) : Rs. 20,000.

Business :
Family business income : Rs. 2,00,000.
Half share of income in a firm in which X is a partner as a representative of the family :
Rs. 40,000.
Income of Z as a lawyer : Rs. 80,000.
Income of Y as a doctor : Rs. 90,000.

Capital gain :
On sale of long-term capital assets of the family Rs. 50,000
On sale of long-term equity shares (securities transaction tax is applicable) Rs. 30,000
On sale of short-term equity shares (securities transaction tax is levied) Rs. 60,000
On sale of long-term property by X Rs. 80,000

Interest on Government securities :
In the name of X, bought out of family funds : Rs. 70,000 (gross).
In the name of Xs wife, bought out of her stridhan : Rs. 1,70,000 (gross).

Compute the total income & tax liability of the family and its members for the assessment year
2013-14 on the assumption that the family pays health insurance premia of Rs. 19,000 for the
benefit of members of the family (out of which Rs. 4,000 is on the health of X) and deposits Rs.
50,000 in public provident fund account. Y pays Rs. 18,000 to LIC on account of pension fund.
Mrs. X pays insurance premium on life of her husband (Rs. 6,000). Z deposits Rs. 25,000 in
National Saving Scheme.



SCHEME OF TAXATION OF FIRMS [INCLUDING LLP]

SPECIAL POINTS :

1) Firm will be taxed as a separate entity.
2) There is no distinction between registered and unregistered firms
3) Share of partner in the income of the firm will not be included in computing his total
income [Sec.10 (2A)]
4) Any salary, bonus, commission or remuneration by whatever name called (which is due
to or received by partner) will be allowed as a deduction for the firm subject to certain
restrictions. [Amount which is allowed as deduction for the firm shall be taxable for
partners as business income]
5) Deduction of Interest paid is allowed maximum upto of 12% p.a. subject to conditions.
[taxable for partners as business income]
6) Rate of Tax is 30% (Flat). For Long-term capital gain it is 20% and for lotteries etc. it is
30%. STCG covered u/s 111A taxable @ 15%.
7) Surcharge is not applicable and education cess applicable as per relevant provisions.

When remuneration / interest paid / payable to partners is deductible

To claim deduction requirements of section 184 & Section 40(b) should be satisfied:

Requirements of section 184

1. The firm must be evidenced by partnership deed
2. Individual share of partners must be specified in partnership deed
3. Certified copy of partnership deed should be submitted. (Means kept ready to be
submitted to AO, as and when demanded)
4. The revised copy of partnership deep should be submitted whenever there is change in
the constitution of firm/ profit sharing ration / remuneration / interest.

Change in the constitution of firm :

It is said to take place, if one or more of the partners cease to be partners or one or
more new partners are admitted, provided that at least one of the partners before the
change continues as partner after the change (It does not cover a case where a firm is
dissolved on the death of any of its partners)

5. There should not be any failure as mentioned in section 144. It includes
(i) Return of income is not filed
(ii) Terms of notice u/s 142(1) or of audit u/s 142(2A) not followed.
(iii) Terms of notice u/s 143(2) for scrutiny assessment not followed.
(iv) If the AO is not satisfied about the correctness or the completeness of the
accounts of the Assessee or if no method of accounting has been regularly
employed by the assessee.



Deduction for remuneration paid to partners [Section 40(b)]
Deduction is available only to working partners. For this purpose, a working partner
means an individual who is actively engaged in conducting the affairs of the business or
profession of the firm of which he is a partner.

A person who has no knowledge of business and does not take any interest is not a
working partner though be may be a partner due to the fact of Capital contribution or
other relationship.

Temporary partner in place of regular working partner is not a working partner.

Remuneration must be authorised by the partnership deed Moreover paid as per terms
of Partnership deed.

Remuneration should not pertain to period prior to above authorisation in partnership
deed.

Remuneration should not exceed the permissible limit as per Sec 40 (b) mentioned
below:

Book profit Maximum deduction permissible
If the book profit is negative Rs 1,50,000
In case book profit is
positive
-on first 3 lac of book profit
-on balance of book profit

Rs 1,50,000 or 90% of book profit, whichever is more
60% of book profit

Question 1 : Find out how much is deductible by way of remuneration to partners in following
situations:
Book profit Actual remuneration
(-)40,000 2,00,000
(-)70,000 1,30,000
90,000 1,20,000
1,66,667 1,60,000
2,00,000 2,50,000
2,00,000 1,70,000
5,00,000 4,00,000

How to calculate Book Profit
Step 1 : Take profit as per Profit & loss account
Step 2 : Add: Income not credited in P & L account but taxable under this head
Step 3 : Less: Income credited to P & L account but not taxable under this head
Step 4 : Add: Expenditure debited to P & L account but not deductible as per Income tax act
Step 5 : Less: Expenditure allowed as deductible but not debited in P & L account.
Step 6 : Add : Interest allowed to partners in excess of 12% p.a.
Step 7 : Add: Remuneration to partners if debited to P & L account
Step 8 : Less: Unabsorbed brought forward depreciation
Balance amount is the book profit. Ignore deduction u/s 80C to 80U.



Interest Payable to partnersSpecific conditions U/s 40 (b)
(1) Payment of interest should be authorised by partnership deed.

(2) Payment of Interest should pertain to the period after the partnership deed authorises
above payment.

(3) Rate of Interest should not exceed 12% p.a.

Computation of net income of PFAS (Partnership firm assessed as such)
Book profit (-) deduction on account of remuneration = Income from business
Income from business (+) Income from house property (+) Capital gains (+) Income from other
sources = GTI (-) Deductions u/s 80 = Net income of partnership firm.

Question 2: Profit and Loss account of AB & Co. [A firm of A, B & C] for the year ending March
31,2013 is as follows:

Rs Rs
Cost of goods sold 30,00,000 Sales 65,00,000
Remuneration to partners
A
B
C
6,00,000
4,00,000
1,00,000
Interest on debentures
LTCG
STCG U/S 111A
OTHER STCG
10,000
12,000
8,000
10,000
Interest to partners @ 14%
A
B
C
1,40,000
2,80,000
70,000

Other expenses 16,40,000
Net Profit 3,10,000
65,40,000 65,40,000

Other informations:
1. Out of other expenses, 8000 is not deductible.
2. C is a non-working partner.
Find the net income and tax liability of firm and its partners.



MISC PROVISIONS

DEFINITION OF COMPANY SECTION 2(17)
It means:
1) Any Indian company
2) Any foreign company incorporated by or under the laws of a country outside India
3) Any institution, association or body, whether incorporated or not and whether Indian or
non-indian, which is declared by a general or special order of the CBDT to be a
company for such assessment years as may be specified in the CBDTs order.
DEFINITION OF DOMESTIC COMPANY SECTION 2(22A)
It means an Indian company or any other company which, in respect of its income liable to
income tax, has made the prescribed arrangements for the declaration and payment of
dividends (including dividends on preference shares) within India.

FOREIGN COMPANY SECTION 2(23A)
It means a company which is not a domestic company.

DEFINITION OF INDIAN COMPANY SECTION 2(26)
Two conditions should be satisfied so that a company can be regarded as an Indian Company
a) The company should have been formed and registered under any law relating to
companies which was or is in force in any part of India, and
b) The registered office or the principal office of the company should be in India
The expression Indian company includes :
1. A corporation established by or under a Central, State or Provincial Act like LIC, SBI etc
2. An institution or association or body which is declared by the Board to be a company
provided its registered office is in India.
3. In the case of the state of Jammu and Kashmir, a company and registered under any
law for the time being in force in that state
4. In the case of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu,
and Pondicherry, a company formed and registered under any law for the time being in
force in that Union territory.
COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED SECTION 2(18)
1. A company owned by
Central or State Govt
RBI
Minimum 40% shares held by Govt or RBI or Corporation owned by RBI
2. Company which is registered u/s 25 of the Companies Act, 1956 (formed for promoting
commerce, arts, science, religion, charity or any other useful object)


3. Declared by the CBDT to be such a company
4. Public limited listed companies
5. Public Limited companies whose at least 50% voting power is held by Govt or statutory
corporations or companies in which public are substantially interested. The limit is 40%
for Industrial companies
6. A company which carries on its principal business of accepting deposits from its
members and which is declared by the Central Govt u/s 620A of the companies Act to
be Nidhi or a Mutual Benefit Society
7. A company whose at least 50% voting power is with one or more cooperative socities.
CLOSELY HELD COMPANIES a company in which public is not substantially interested.

INFRASTRUCTURE CAPITAL COMPANY SECTION 2(26A)
It means such company which makes investments by way of acquiring shares or providing long-
term finance to
1) Any enterprise or undertaking wholly engaged in any of the following business:
Developing, operating or maintaining any infrastructure facility as discussed in the
chapter 80IA
Providing telecom services
Developing, operating or maintaining any industrial park
Generating or distributing power
Developing, operating or maintaining any SEZ referred u/s 80-IAB
2) An undertaking developing and building a housing project referred u/s 80-IB
3) Hotel project (3 star & above)
4) Hospital project (Minimum 100 beds)
INFRASTRUCTURE CAPITAL FUND SECTION 2(26B)
It is a fund registered under the Registration Act, 1908 and established to raise monies by the
trustees for investment by way of acquiring shares or providing long term finance to
1,2,3,4, discussed above

CBDT NOTIFICATION REGARDING 194J
The CBDT has notified the services rendered by following persons in relation to the sports
activities as Professional Services for the purpose of the section 194J :
a) Sports persons
b) Umpires and referees
c) Coaches and trainers
d) Team physicians and physiotherapists
e) Event managers
f) Commentators
g) Anchors
h) Sports columnists


As per study module, unless profession is properly defined in 194J, it is not subject to TDS
provisions. For example, this section will not apply to professions of teaching, sculpture, painting
etc. unless they are notified.

TDS ON INCOME FROM DEEP DISCOUNT BONDS
Circular No. 4/2004 dated 13.5.2004 issued by CBDT clarifies that tax is required to
be deducted at only at the time of redemption of such bonds. Provisions of Section
197 regarding application in Form no 13 and Section 197A regarding Declaration in
Form 15G/15H are in any case applicable.

SPECIAL PROVISIONS TO ATTRACT NRI INVESTMENTS
[SECTION 115C to 115-I]
The provisions are applicable to Non residents who are either Indian citizens or persons of
Indian origin.
A person shall be deemed to be of Indian origin if he, or either of his parents or any of his
grandparents, were born in undivided India.

Specified foreign exchange assets : It means those specified assets which the assessee has
acquired or purchased with convertible foreign exchange.
The following are specified assets:
1. Shares in an Indian company (Pubic or private)
2. Debentures issued by an Indian company which is not a private company
3. Deposits with an Indian company which is not a private company it may be even
deposit with SBI or any other banking company
4. Any security of central govt
5. Such other assets as the Central Govt may specify
Special provisions : No expense or deduction shall be allowed. Even deduction of section 80C
to 80U not allowed.
What it covers: Investment income like interest and LTCG. (indexation not allowed)

Special tax rates : Investment income Flat tax of 10% plus cess
LTCG : Flat tax of 20% plus cess

Benefit shall continue, at his option, even if subsequently the assessee becomes resident. He
can, opt out of the scheme in any year.



What are capital and revenue receipts
Receipts are of two types capital receipts and revenue receipts. The distinction between the
two is vital because capital receipts are exempt from tax unless they are expressly taxable. For
instance, capital gains are taxable under section 45 even if they are capital receipts. On the
other hand, revenue receipts are taxable, unless they are expressly exempt from tax. For
instance, income exempt under section 10.
As the Act does not define the terms capital receipts and revenue receipts, one has to
depend upon natural meaning of the concepts as well decided cases.

Circulating capital and fixed capital A receipt on account of circulating capital is a revenue
receipt, whereas a receipt on account of fixed capital is a capital receipt.

Receipt in lieu of source of income A receipt in lieu of source of income is a capital receipt.
A receipt in lieu of income is a revenue receipt. For instance, compensation for loss of
employment is a capital receipt, whereas compensation for temporary disablement is a revenue
receipt.

Income of wasting assets Profits from a capital which is exhausted or consumed during the
process of realization is chargeable to tax. Therefore, income from mines and quarries is not
realization of capital consumed but is chargeable to tax as revenue receipt.

Insurance receipt A receipt under a general insurance policy may be a capital receipt, if the
policy relates to capital asset. Alternatively, it may be a revenue receipt if the policy relates to
circulating asset. Taxability of the amount paid on settlement of claim by the insurance company
depends both on the nature of payment and purpose of insurance.

Where payment is made by an insurance company to compensate for loss of use of any goods
in which the assessee does not carry on any business it would be a capital receipt (for example,
compensation received for loss of machinery due to fire). Generally, such a capital receipt is not
taxable. In some cases, however, such capital receipt is chargeable to tax.

Changes in rate of exchange of currency If by virtue of change in exchange rate of
currency, excess amount is realized by an assessee engaged in the business of exporting
goods, the excess amount is treated as revenue receipt. On the other hand, if foreign currency
is kept as investment or to acquire a capital asset, the profit made due to change in the rate of
exchange of currency is capital receipt.

Subsidies If the purpose is to help the assessee to set up its business or complete a project
the money must be treated as having been received for capital purpose. But if money is given to
the assessee for assisting him in carrying out the business operation and the money is given
only after commencement of production, such subsidy must be treated as assistance for the
purpose of the trade and is a revenue receipt.



Provision for bad and doubtful debts of certain banks and financial
institutions [ Section 36(1)(viia)]:
In respect of any provision for bad and doubtful debts made by
(a) a scheduled bank (not being a foreign bank) or a co-operative bank or a non-scheduled
bank, a deduction shall be allowed
(i) of an amount not exceeding 7.5 of the total income (computed before making any deduction
under this clause and Chapter VIA i.e. deductions u/s 80C to 80U)
and
(ii) of an amount not exceeding 10% of the aggregate average advances made by the rural
branches (in areas having population not exceeding 10,000) of such bank computed in the
prescribed manner.
(b) a bank incorporated by or under any foreign laws or a public financial institution or a State
Financial Corporation or a State Industrial Investment Corporation, a deduction shall be allowed
of an amount not exceeding 5% of the total income (computed before making any deduction
under this clause and Chapter VIA)
No deduction shall be allowed under section 36(1) (vii) to such institution as bad debt if the
actual bad debt during the year is equal to or less than the provision for bad and doubtful debts.
However, if the actual bad debt of such institutions in the relevant previous year is more than
the provision of bad and doubtful debt, the balance shall be allowed as deduction as bad debt
under section 36(1)(vii).

Difference between Revenue expenditure
& Capital Expenditure

As the Act does not define the terms capital expenditure and revenue expenditure, one has
to depend upon its natural meaning as well as decided cases :

Acquisition of fixed assets v. Routine expenditure Capital expenditure is incurred in
acquiring, extending or improving a fixed asset, whereas revenue expenditure is incurred in the
normal course of business as a routine business expenditure.

Several previous years v. One previous year Capital expenditure produces benefits for
several previous years, whereas revenue expenditure is consumed within a previous year.

Improvement v Maintenance Capital expenditure makes improvements in earning capacity
of a business. Revenue expenditure, on the other hand, maintains the profit making capacity of
a business.

Non-recurring v Recurring Usually capital expenditure is a non-recurring outlay, whereas
revenue expenditure is normally a recurring item.

Lump sum payment v. Periodic payment In order to determine whether an expenditure is
capital or revenue in nature, the fact that it is a lump sum payment or periodic payment is not
important.



Thought the dividing line between a capital and revenue expenditure is real, yet sometimes it
becomes difficult to draw. Therefore, the distinction depends on facts and surrounding
circumstances of each case.

Changes in the rate of exchange of currency [Section 43A]

The section provides that where an assessee has acquired any asset from a foreign country for
the purpose of his business or profession, and due to a change thereafter in the exchange rate
of the two currencies involved, there is an increase or decrease in the liability (expressed in
Indian rupees) of the assessee at the time of making the payment, the following values may be
changed accordingly with respect to the increase or decrease in such liability:
(i) The actual cost of the asset under section 43(1)
(ii) The amount of capital expenditure incurred on scientific research under section 5
(1) (iv)
(iii) The amount of capital expenditure on acquisition of patents or copyrights under
section 5A
(iv) The amount of capital expenditure incurred by a company for promoting family
planning amongst its employees under section 6(1) (ix)
(v) The cost of acquisition of a non-depreciable capital asset failing under section 48.
The amount arrived at after making the above adjustment shall be taken as the amount of
capital expenditure or the cost of acquisition of the capital asset, as the case may be.

Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or
indirectly, by any other person or authority, the liability so met shall not be taken into account for
the purpose of this section.
Where the assessee has entered into a contract with a authorized dealer as defined in section 2
of the Foreign Exchange Management Act, 1999 for providing him with a specified sum in a
foreign currency on or after a stipulated future date at the rate of exchange specified in the
contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any,
for adjustment under this section shall be computed with reference to the rate of exchange
specified therein.



ASSESSMENT OF COOPERATIVE SOCIETY

TAX RATES:
Net income range Rate of income tax
Up to Rs 10,000 10%
Up to Rs 20,000 20%
Rs 20,000 and above 30%

Surcharge : Nil
Education cess : 2% of income tax
Secondary and higher education cess : 1% of income tax
Alternate minimum tax : Applicable

Deduction in respect of income of a co-operative society To what extent available
[Sec.80P]
In the case of a co-operative society, the following amounts are allowed as deductions under
this section:

1) The whole of the amount of the profits attributable to any one or more of the following
activities in the case of a co-operative society engaged in :
a. carrying on the business of banking or providing credit facilities to its members; or
b. a cottage industry (small scale manufacturing by assessee or family members at residence or
common place provided by society); or
c. marketing of the agricultural produce grown by its members; or
d. purchase of agricultural implements, seeds, livestock or other articles intended for agriculture
for the purposes of supplying them to its members; or
e. processing without the aid of power, of the agricultural produce of its members; or
f. collective disposal of the labour of its members; or
g. fishing or allied activities

2) The whole of the amount of profits in the case of a co-operative society, being a
primary society engaged in supplying milk, oilseeds, fruits or vegetable raised or grown by its
members to a federal co-operative society (being a society engaged in the business of
supplying milk, oilseeds, or vegetables) or to the Government or local authority or a
Government company or a corporation established under the Central, state or Provincial Act.

3) So much of the profits of a co-operative society, engaged in the activities other than
those mentioned above, either independently or in addition to all or any of the activities so
specified as do not exceed Rs.50,000 (Rs.1,00,000 in the case of a consumers co-operative
society). In simple language it means the deduction is Rs 50,000 or actual profits, whichever is
less.



4) The whole of the interest and dividend income derived by a co-operative society from its
investment in any other co-operative society.

5) The whole of the income derived by a co-operative society from the letting of godowns or
warehouses for storage, processing or facilitating the marketing of commodities.

6) The whole of the interest income from securities and property income provided gross
total income of such co-operative society does not exceed Rs.20,000. This deduction is not
available to a) housing society; b) an urban consumers society c)a society carrying on
transport business or d) a society engaged in manufacturing operations with the aid of power

ASSESSMENT OF INDIVIDUALS

Total income of assessee shall be computed in following steps:
Step 1: Income shall be computed in all respective five heads of incomes also considering the
clubbing provisions.
Step 2 : Adjustment of losses of the current year and earlier years shall be done.
Step 3 : Allow deduction u/s 80C to 80U.
Step 4 : Rounding Off u/s 288A in multiples of Rs 10/-
Tax payable shall be computed in following steps:
Tax on net income as per slabs
Add: Education cess @ 2% of tax as per slabs
Add: Secondary and higher education cess @1% of tax as per slabs
-------------------------------------------
Total tax
Less : Rebate or relief u/s 89, 90, 91 etc.
-------------------------------------------
Tax
Add: Interest payable u/s 234A, 234B & 234C
-------------------------------------------
Total
Less : Prepaid taxes
TDS, TCS, ADVANCE TAX
------------------------------------------
TAX PAYABLE AT THE TIME OF SUBMISSION OF ROI
-------------------------------------------
Provisions of Alternate Minimum Tax also apply.

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