CNK & Associates LLP“Knowledge Based Solutions” with Personalized

Services

Introduction to Direct

TaxesStudents Orientation Course

Organised by Bombay Chartered

Accountants‟ Society

Friday, 24th April 2015

Saroj Maniar

Partner

1SAROJ MANIAR, CNK

Income Tax

Filing of

Income Tax

Return

Heads of

Income

Earning of

Income

Interpretation

of Statutes

Assessment of

Income

Computation

of Taxable

Income

Determination

of Residential

Status

Introduction to Income Tax – An Overview

Appeal to

Higher

Authority

2SAROJ MANIAR, CNK

Introduction to Income Tax

Income Tax is a payment made to the Government without quid

pro quo

Authority to Tax given by the Constitution of India

Present Law – Income Tax Act, 1961, Income Tax Rules, 1962

History of Income Tax Law in India

Objectives of Taxation

3SAROJ MANIAR, CNK

Definition of Income

Income is defined in Section 2(24)

It is inclusive in nature i.e. apart from items listed in the definition, any receipt which satisfies the basic condition of being income is also to be treated as income.

Income broadly includes income from business and profession, salary, allowances and perquisites, dividends, winnings from lotteries, crossword puzzles, race games, gambling or betting, capital gains, amounts received under Keyman Insurance Policy, gifts received etc

Gross total income, deductions & total income

Capital receipts exempt unless specifically included

4SAROJ MANIAR, CNK

Income (Cont’d)

Persons - Income can be earned by Individual, Hindu Undivided Family (HUF),

Company, Firm, Association of Persons, Body of Individuals, Local Authority or Artificial

Juridical Person

Heads of Income :

1. Income from Salary. (Section 15-17)

2. Income from House Property. (Section 22-27)

3. Profits and Gains from Business or Profession. (Section 28-44)

4. Capital Gains. (Section 45-55)

5. Income from Other Sources. (Section 56-59)

Taxable Income after deductions under chapter VIA of the Act

5SAROJ MANIAR, CNK

Residential Status

Types of Residential Status

Individual & Hindu

Undivided Family

Firm, Company, AOP/ BOI,

Local Authority, Other

Artificial Juridical Persons

Ordinary

Resident

Non- Ordinary

ResidentNon- Resident Resident Non- Resident

6SAROJ MANIAR, CNK

Residential Status (Cont’d)

Basic conditions to be satisfied for determination whether a person is a Resident of

India or a Non- Resident :

NO

YES

YES

*This condition is not applicable when an Indian Citizen leaves India

NO during the previous year for the purpose of employment outside India or

as a member of crew of an Indian Ship or when an Indian citizen or a

person of Indian origin who comes to India during the previous year on a

visit.

Stay in India for a period of

182 days or more in that

previous year

*Stay in India for a period of

60 days or more during that

previous year AND for a

period of 365 days or more

during the 4 years immediately

preceding the relevant previous

year

Non Resident

Resident

7SAROJ MANIAR, CNK

Residential Status (Cont’d)

Conditions to be satisfied for determination whether a person is an ordinarily resident

or a not ordinarily resident :

NO

YES

NO

YES

Resident in India for at least 2 out of 10 previous

years immediately preceding the relevant previous

year.

Stay in India for a period of 730 days or more

during 7 years immediately preceding the relevant

previous year.

Resident and

ordinarily resident

Resident but not

ordinarily resident

Resident

8SAROJ MANIAR, CNK

Taxability of Income

Income received /deemed to be received in India - always taxable in India

Income accruing/arising/deemed to accrue or arise in India - always taxable in India

Income accruing or arising outside India and received outside India - taxable as under

1. For Non-Resident : Not includable in total income.

2. For Ordinarily Resident : Included in total income.

3. For Not Ordinarily Resident : Included only if,

Derived from business controlled in India.

Derived from profession set up in India.

9SAROJ MANIAR, CNK

Computation of Taxable Income and Liability

Particulars Amt Amt

Income from House Property XX

Income from Salary XX

Profits and Gains from Business and Profession XX

Capital Gains XX

Income from Other Sources XX

Gross Total Income (GTI) XXX

Less: Deductions under Chapter VI-A (XX)

Taxable Income XXX

Tax Payable at Applicable Slab Rates XXX

Less: Tax Deducted at Source XX

Less: Advance Tax Paid XX (XX)

Net Tax Payable XXX

10SAROJ MANIAR, CNK

Income From Salary

Salary includes wages, any annuity or pension, gratuity, any fees, commissions,

perquisites or profits in lieu of or addition to any salary or wages, any advance of salary etc.

Employer – employee relationship is a must.

Taxable on due or receipt basis whichever is earlier.

Computation of salary and payment of taxes thereon done by employer.

Salary to partner of a Firm or LLP is taxable as business income.

11SAROJ MANIAR, CNK

Income from Salary (Cont’d)

Perquisites

Casual emolument or benefit attached to an office or position in addition to salary or

wages. Perquisites need not only be in kind. It can be in cash as well.

Example: Car & Driver, Rent free accommodation.

Valuation Rules – Rule 3

Allowances

Part of Salary such as HRA, Medical, Conveyance, LTA

Exemptions – section 10

Deduction from salary

Profession Tax

12SAROJ MANIAR, CNK

Income from House Property

Important terms –

House Property

Owner

Annual Value

House Property includes both residential and commercial property. Includes land

appurtenant to the building but not only plot of land.

Owners normally refer to legal owners. Exceptions individuals gifting property to spouse or

minor child, member of co-operative society etc.

Annual Value – sum chargeable to tax being the higher of actual rent received/ receivable

and the annual letting value.

13SAROJ MANIAR, CNK

Income from House Property (Cont’d)

Deemed to be Let Out Property (DLOP) situation:

If the assessee owns more than one house property, any one house property is Self

Occupied Property (SOP) and the other property/ properties shall be Deemed to be Let Out

Properties (DLOP).

Gross annual value from SOP NIL, whereas the gross annual value of DLOP would be

annual rent that would be receivable had the property been let out.

Income from Sub letting ????

Income from rent of land ????

14SAROJ MANIAR, CNK

Income from House Property (Cont’d)

Deductions from Annual Value :

Municipal taxes – on actual payment basis

30% Standard Deduction of Annual Value less Municipal taxes

Interest on borrowed capital

15SAROJ MANIAR, CNK

Income from House Property (Cont’d)

Practical Case Study:

Mr. X owns 2 houses in Mumbai, both of which are occupied by him and his family.

House 1 was purchased for Rs 70 lakhs. Loan on the house is Rs 30 lakhs. Interest on the

loan is Rs 2,75,000.

House 2 was purchased for Rs 60 lakhs with a loan of Rs 40 lakhs. Interest on the loan is Rs

3,40,000.

If X lets out House 1, he will earn an annual rent of Rs 3,00,000. If he lets out House 2, he

will earn an annual rent of Rs 3,60,000.

Municipal Taxes paid by him for both the houses are the same of Rs 10,000 each.

16SAROJ MANIAR, CNK

Income from House Property (Cont’d)

OPTION 1 : Treat House 1 as SELF OCCUPIED and House 2 as LET OUT.

House 1

Gross Annual Value Nil

Less: Municipal Taxes Nil

Net Annual Value Nil

Less: Interest allowed (2,00,000)

Loss from House Property (A) (2,00,000)

House 2

Gross Annual Value 3,60,000

Less : Municipal Taxes (10,000)

Net Annual Value 3,50,000

Less: Standard Deduction @ 30% (1,05,000)

Less: Interest allowed (no limit) (3,40,000)

Loss from House Property (B) (1,00,000)

Total Loss from House Property (A) + (B) (3,00,000)

17SAROJ MANIAR, CNK

Income from House Property (Cont’d)

OPTION 2 : Treat House 2 as SELF OCCUPIED and House 1 as LET OUT.

House 2

Gross Annual Value Nil

Less: Municipal Taxes Nil

Net Annual Value Nil

Less: Interest allowed (2,00,000)

Loss from House Property (A) (2,00,000)

House 1

Gross Annual Value 3,00,000

Less : Municipal Taxes (10,000)

Net Annual Value 2,90,000

Less: Standard Deduction @ 30% (87,000)

Less: Interest allowed (no limit) (2,75,000)

Loss from House Property (B) (72,000)

Total Loss from House Property (A) + (B) (2,72,000)

Since loss

under option 1

is more, we

conclude that

considering

house 1 as SOP

would be

beneficial.

18SAROJ MANIAR, CNK

Profits and Gains of Business and Profession

Net profit from business-

Business includes trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture

Example: manufacturers, retailers or commission agents

Net income from profession-

Profession involves application of intellectual skill and includes vocation -Example: Doctor, Lawyer, Management consultant

Speculation & non-speculation business

19SAROJ MANIAR, CNK

Profits and Gains of Business and Profession (Cont’d)

Method of Accounting

Business Income & Other Sources – option to assessee – cash or mercantile regularly employed

Can employ cash for one source of income and accrual for the other

Even under same head of income, for different sources of income, different methods of accounting can be employed subject of course to regularity/ consistency

20SAROJ MANIAR, CNK

Profits and Gains of Business and Profession (Cont’d)

Deductions & Allowances

Deductions allowable:

Specific u/s.29 to s.36

Residuary business exp u/s.37- exclusively for business, not capital and not personal

Expenses not allowable:

S.40, s.40A

Only on payment-s.43B

Depreciation:

Block concept

21SAROJ MANIAR, CNK

Profits and Gains from Business and Profession

(Cont’d)

Presumptive Income under section 44AD

Presumptive income considered @ 8% of total turnover if the turnover is less than Rs. 1

crore.

This section is applicable to all businesses except the business of plying, hiring or leasing

goods as these have already been covered under section 44AE.

As the section specifically mentions the word business, it cannot be applied in case of

professionals.

Incase an assessee is carrying more than one business, the total turnover of all the

businesses should be taken into account.

Not applicable to corporate assessees and LLPs.

If income is below 8%, the tax audit mandatory.

22SAROJ MANIAR, CNK

Capital Gains

Excess of sale proceeds received or receivable on transfer of a capital asset over its cost of acquisition.

Capital asset is property of every kind excluding stock-in-trade, personal belongings excluding jewellery or ornaments, urban agricultural land and cash.

Types

Short term – period of holding -shares <=12 months , other <=36 months

Shares/ Equity oriented mutual funds –STT paid @ 15%

Other slab rate

Long term - other than short term

Equity Share STT paid – exempt

Other flat rate of 20%

Indexation for cost of acquisition

23SAROJ MANIAR, CNK

Capital Gains Exempt from Tax

Points Section 54 Section 54B Section 54D Section 54EC Section 54F Section 54G Section 54GA

Who can

claim

exemption?

Individual/

HUF

Individual/

HUF

Any person Any person Individual/

HUF

Any person Any Person

Type of

capital asset

eligible?

Long-term Short-term/

Long-term

Short-term/

Long-term

Long-term Long-term Short-term/

Long-term

Short-term/

Long-term

Which

specific asset

is eligible?

Residential

House

Property

Agricultural

land

Land or

building

compulsorily

acquired by

the Govt.

Any long-term

asset

Any long-term

asset (other

than a

residential

house

property)

Land,

Building, Plant

and Machinery

(Shifting to

rural area.)

Land,

Building, Plant

and Machinery

(Shifting to

SEZ.)

Which

specific asset

to be

acquired?

Residential

House

Property

Agricultural

Land

Land or

Building for

industrial

purposes.

Bonds of REC/

NHAI.

Residential

House

Property.

Land,

Building, Plant

and Machinery

Land,

Building, Plant

and Machinery

Exemption Investment in

new asset or

capital gain,

lower of two.

Investment in

new asset or

capital gain,

lower of two.

Investment in

new asset or

capital gain,

lower of two.

Investment in

new asset or

capital gain,

lower of two.

(max Rs 50

lacs)

Capital gain x

(Investment in

new asset/ Net

consideration)

Investment in

new asset or

capital gain,

lower of two.

Investment in

new asset or

capital gain,

lower of two.

24SAROJ MANIAR, CNK

Income from Other Sources

Residuary Head

Foreign dividend income

Keyman insurance receipt by Legal heirs

Interest income

Family Pension – Standard deduction is available upto maximum Rs.15,000/-

[Sec.57 (iia)]

Letting out of Plant & Machinery (if not taxable as business income)

Gifts

Winnings from lotteries

Restrictive expense deduction [Sec 57 (iii)]

25SAROJ MANIAR, CNK

Slab Rates for A.Y. 2015-16

Particulars Individual, HUF,

AOP &BOI, Co-

op Society, Firm

(LLP Included)

Domestic

Company

Foreign

Company

Upto 1 Crore Rate of

Surcharge

NIL NIL NIL

Effective Tax

Rate

30.90% 30.90% 41.20%

Above 1 crore

and Upto 10

crore

Rate of

Surcharge

10% 5% 2%

Effective Tax

Rate

33.99% 32.445% 42.024%

Above 10 Crore Rate of

Surcharge

10% 10% 5%

Effective Tax

Rate

33.99% 33.99% 43.26%

26SAROJ MANIAR, CNK

Slab Rates for A.Y. 2016-17

Particulars Individual, HUF, AOP

&BOI, Co-op Society,

Firm (LLP Included)

Domestic

Company

Foreign Company

Upto 1 Crore Rate of

Surcharge

NIL NIL NIL

Effective Tax

Rate

30.90% 30.90% 41.20%

Above 1 crore

and Upto 10

crore

Rate of

Surcharge

12% 7% 2%

Effective Tax

Rate

34.608% 33.063% 42.024%

Above 10

Crore

Rate of

Surcharge

12% 12% 5%

Effective Tax

Rate

34.608% 34.608% 43.26%

27SAROJ MANIAR, CNK

Filing of Income Tax Return

Individual, HUF, AOP, BOI having gross total income exceeding threshold exemption

limit. (Taxable income may be less than threshold exemption).

Any firm or company.

Assessee incurring Loss under the head “Income from House Property or Business

Profession, Capital Gains or Other Sources” in order to carry forward the losses in the

next assessment years.

Resident Indian having any foreign asset/financial interest in any organization based out

of India.

28SAROJ MANIAR, CNK

Income Tax Return Utilities (A.Y. 2015-16)

The Income Tax Department provides assessee with income tax return (ITR) utilities on

www.incometaxindiaefiling.gov.in which is it‟s official website. Details about ITR utilities

are as follows:

ITR Description

ITR 1 (Sahaj) For Individuals having income from Salary and Interest.

ITR 2 For Individuals and HUF‟s not having Income from Business and Profession.

ITR 3 For Individuals/ HUF‟s being partners in firms and not carrying out business or

profession under any proprietorship.

ITR 4 For Individuals & HUF‟s having income from a proprietory business or

profession.

ITR 4S (Sugam) For Individuals/ HUF having income under presumptive business.

ITR 5 For firms, AOP‟s, BOI‟s and LLP.

ITR 6 For Companies other than companies claiming exemption under section 11.

ITR 7 For persons including companies required to furnish return under section 139(4A),

139(4B), 139(4C) or 139(4D).

29SAROJ MANIAR, CNK

Consequences of Non Filing of Return

1. Consequences for not filing within due date under section 139(1):

Interest under section 234A will be charged at 1% per month or part thereof on tax

payable on self assessment.

The benefit of carry forward of losses is lost.

The right to revise return under section 139(5) is lost.

2. Consequences when return is not filed:

Where the assessee is required to file return of income under section 139(1) or proviso to

section 139(1) and the same is not filed before the end of relevant assessment year, he is

liable to pay a penalty of Rs. 5000/- under section 271F.

Best Judgment Assessment can be made under section 144.

Prosecution under section 276CC can be attracted which includes fine as well as

imprisonment.

30SAROJ MANIAR, CNK

Assessment Procedures under Income Tax Act, 1961

Section 2(8)- “assessment’ includes reassessment.

Assessment

Self Assessment

Summary Assessment

Scrutiny Assessment

Best Judgment

Assessment

Protective Assessment

31SAROJ MANIAR, CNK

Inquiry before Assessment- Section 142

For the purpose of making assessment, the Assessing Officer can:

Serve a notice under section 142(1)(i) for furnishing the return of income.

Serve a notice under section 142(1)(ii) to produce such documents or accounts as the

assessing officer may require.

Serve a notice under section 142(1)(iii) to call for information he may require including

statement of assets and liabilities.

32SAROJ MANIAR, CNK

Summary Assessment- Section 143(1)

Where the return is made under section 139(1) or in response to notice under section 142(1),

The Total Income shall be adjusted for any arithmetical error or an apparently incorrect

claim.

Tax and interest will be computed after adjusting TDS/ TCS, advance tax, relief under

section 90/ 91 etc.

Intimation shall be sent within 1 year from the end of the financial year in which the

return is made.

Practical Questions:

1. Whether the „intimation‟ issued under section 143(1) is an order?

2. Can a return be revised after processing under section 143(1)?

33SAROJ MANIAR, CNK

Service of Notice- Section 143(2)

Assessing Officer may serve a notice for scrutiny assessment if:

The assessee has filed a return of income under section 139 or in response to a notice

issued under section 142(1).

He considers it necessary to do so, in order to ensure that the assessee has not under-

stated the income, or computed excessive loss, or underpaid tax in any manner.

Notice has to be served before the expiry of 6 months from the end of the financial year

in which the return is furnished.

Notice must be served and mere issue is not sufficient.

34SAROJ MANIAR, CNK

Notice u/s. 142(1) vs. Notice u/s. 143(2)

142(1) 143(2)

Assessment not possible. Assessment only if the notice is served.

Books of accounts can be called for 3 years. No such provisions. Assessing Officer can

invoke section 131 and call for earlier

records.

Notice can be issued even if the return of

income is not filed.

Notice can be issued only if the return is

filed.

Non compliance is an offence liable for

prosecution.

Non compliance is not an offence.

35SAROJ MANIAR, CNK

Best Judgment Assessment- Section 144

Best judgment assessment can be made if any person:

Fails to file return of income under section 139(1) and has not made a belated return

under section 139(4) or revised return under section 139(5) or

Fails to comply with all the terms of notice under section 142 or fails to comply with the

directions for special audit under section 142(2A).

Having made a return, fails to comply with all the terms of notice under section 143(2).

36SAROJ MANIAR, CNK

Rejection of Books- Section 145(3)

Assessing Officer can reject the books of accounts if not satisfied with the correctness/

completeness of accounts or

Where the method of accounting under section 145(1) is not followed or

Where the accounting standards prescribed under section 145(2) have not been followed.

37SAROJ MANIAR, CNK

Notice of Demand- Section 156

When any tax, interest, penalty, fine or any other sum is payable in consequence of any

order passed under this Act, the Assessing Officer shall serve upon the assessee a notice

of demand in the prescribed form specifying the sum so payable.

Provided that where any sum is determined to be payable by the assessee under section

143(1), the intimation shall be deemed to be a notice of demand for the purposes of this

section.

38SAROJ MANIAR, CNK

Income Tax Proceedings

Income tax officer (ITO)

Commissionerof Income Tax(CIT)

Income Tax Appellate Tribunal (ITAT)

State High Court (HC)

Supreme Court of India (SC)

39SAROJ MANIAR, CNK

Income Computation and Disclosure Standards (ICDS)

CBDT vide its Notification No: 32/2015 dated 31-03-2015 notified 10 Income

Computation and Disclosure Standards(ICDS) which is to be followed by all assesses at

the time of computation of income chargeable to income tax under the head “Profit and

gains of business or profession” or “ Income from other sources”.

The effective dates of such ICDS are 01st April, 2015 and shall accordingly apply to the

Assessment Year 2016-17 and subsequent assessment years.

Section-145 (2) of Income tax Act,1961 empowers Central Government(CG) to issue

Accounting Standards for computation of Income.

ICDS NO NAMEEquivalent New IND

AS NoEquivalent AS No

I Accounting Policies 1 & 8 1

II Valuation of Inventories 2 2

III Construction Contract 11 7

IV Revenue Recognition 18 9

V Tangible Fixed Asset 16 10

VI Effects of changes in foreign exchange rates 21 11

VII Government Grants 20 12

VIII Securities 32 30

IX Borrowing Costs 23 16

X provisions, contingent liabilities and contingent assets 37 29

40SAROJ MANIAR, CNK

Key Features of ICDS

Effective Date of ICDS is 01st April, 2015 i.e. FY:2015-16 & AY: 2016-17.

ICDS applicable to all Assesses i.e. Corporate & Non Corporate Assesses.

No Net Worth or Turnover Criteria Prescribed for applicability.

Entity need not to maintain Books of accounts for ICDS. ICDS is only for computation

of income under the head “Profit and gains of business or profession” or “Income

from other sources”.

ICDS is meant for normal computation of income not for Minimum Alternate Tax(MAT)

Calculation.

In the case of conflict between the provisions of the Income‐tax Act, 1961 and Income

Computation and Disclosure Standard, the provisions of the Act shall prevail to that

extent.

The ICDS in general do not have prudence as a fundamental assumption, and

accordingly in several situations this would result in earlier recognition of income or

gains or later recognition of expenses as compared to that under the accounting

standards; this would potentially have a direct impact on the timing of tax related cash

outflows.

41CNK

Principles of Interpretation of the Statute

The object of all constructing or interpretation is to ascertain the intention of the law-

makers and to make it effective.

The true function of the court is to interpret the law and not to make it.

If two interpretations to a statute are possible, then the interpretation that upholds the

constitutionality or advances the object of the enactment should be favoured.

In order to interpret a statute in case of ambiguity, a contextual meaning must be

provided.

Additionally, all the limbs of a section must be read harmoniously.

If a case appears to be governed by more than one provision, then it is clearly the right of

the assessee to claim that he should be assessed under that one which leaves him with a

lighter burden.

„Casus Omissus‟ means a matter not provided by the court cannot be supplied by the

Court.

An amendment may be made by the legislature not only to change the law but also to

clarify the position.

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