A few words from the authors
T
HE compendious and complex nature of our law relating to direct taxes makes the task of professional practitioners, who have not only to understand it but have also to develop the ability to apply it in given situations, extremely onerous and difficult. They have to acquire a familiarity with, and awareness of, the nature and scope of the main provisions of the direct taxes. At the same time, they also require an up-to-date knowledge of how a statutory provision has been interpreted by different courts of law on different occasions. As such, they need a book on direct taxes which not only is comprehensive and up-to-date on both the law and its judicial interpretations but which also explains the difficult subject lucidly and through appropriate illustrations so as to render the study of direct taxes simple and easy. The present edition of the book has several unparalleled features which make it distinct from other available text books. These are : u The present edition is thoroughly revised with a view to making it more reader-friendly. u The treatment of the subject is lucid, to-the-point and the matter is painstakingly arranged in paras and sub-paras with distinct numbers to save time and energy. Besides, debatable issues have been deliberated to their logical conclusion. u Theoretical discussion is suitably supplemented by illustrations (over 600 in number and covering an exhaustive range of issues) providing solutions to the knotty problems with reference to the latest case law. u Hints are given wherever tax planning can be resorted to. u Latest circulars, notifications, amendments and the case laws are included in the discussion. All recent citations of court rulings, circulars and notifications have been highlighted. u In a nutshell, law is lucidly enumerated and its practical application is adequately explained. Our grateful thanks are due to Shri Rakesh Bhargava for his guidance and suggestions and for extending various facilities during the preparation of the manuscript of this book. Readers’ views, comments and criticism relating to the present work are most welcome. 22 Deepali, Pitampura, Delhi - 110034. Email : vks@taxmann.com Phone : 27015500, 27016686, 9810008160
VKS KS
I-5
About the Authors Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976. His fields of special interest include all facets of corporate legislation and corporate economics especially the tax laws. Associated in different capacities with several professional institutes and business houses in India and abroad, Dr. Singhania is author of many popular books and software published by Taxmann. He has to his credit more than 300 research articles which have appeared in leading journals. He has been a resource person in over 800 seminars in India and abroad. He can be reached at vks@taxmann.com. Dr. Kapil Singhania, a Fellow of the Institute of Chartered Accountants of India and belonging to the alumni of Shri Ram College of Commerce, has completed his research work for which he has been awarded Ph.D. in 2003. His fields of involvement in research work in form of articles in various reputed journals and analytical studies span across from corporate laws to direct and indirect taxation. He has authored a variety of acclaimed books on direct and indirect taxes published by Taxmann. Dr. Singhania is providing tax consultancy to a number of business organizations, which include multinational and public sector companies.
I-6
Contents PAGE u
A few words from the authors
I-5
u
About the authors
I-6
u
Section-wise Index Amendments at a glance Gist of relevant Circulars, Clarifications and Notifications issued during January 1, 2010 to February 2022 Gist of landmark rulings of Supreme Court/High Courts [2010 - Feb. 2022]
u u u
1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
22. 23. 24. 25. 26. 27. 28. 29.
I-83 I-319
Basic concepts
Assessment year Previous year Person Assessee Charge of income-tax Income Gross total income Total income and tax liability Agricultural income Difference between exemption and deduction Assessment Definition of “manufacture” Capital asset Company Fair market value Capital receipts vs. Revenue receipts Capital expenditure vs. Revenue expenditure Method of accounting Definitions of amalgamation, demerger, infrastructure capital company and infrastructure capital fund Rules of interpretation
2
I-23 I-29
1 1 5 6 6 7 17 21 23 23 23 24 24 24 24 24 31 31 32 33
Residential status and tax incidence
What is relevance of residential status Residential status - General norms Residential status of an individual Residential status of a Hindu undivided family Residential status of the firm and association of persons Residential status of a company Residential status of “every other person” Relation between residential status and incidence of tax
I-7
47 47 48 56 57 58 62 62
Contents
I-8 PAGE
Receipt of income Accrual of income Income deemed to accrue or arise in India Fund Managers in India not to constitute business connection of offshore funds Hints for tax planning in respect of residential status Problems on residential status and tax incidence
30. 31. 32. 32A. 33. 34.
3
40. 41. 42. 43. 44.
4 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. Annex
94 130 130 134 134 134 135
Salaries
Essential norms of salary income Basis of charge Place of accrual of salary income Tax treatment of different forms of salary income Allowance Perquisites Valuation of perquisites Deduction from salary income Tax on salary of non-resident technicians Salaries of other foreign citizens Employees’ provident fund Approved superannuation fund Approved gratuity fund Deduction under section 80C Relief under section 89 Meaning of salary for different computations Hints for tax planning Problems on salary income 1 : Frequently Asked Questions (FAQs) about computation of salary income
5 86. 87. 88. 89. 90.
Incomes exempt from tax
Incomes exempt under section 10 Special provisions in respect of newly established undertakings in free trade zone, etc. Special provisions in respect of newly established units in Special Economic Zone Special provisions in respect of newly established hundred per cent export-oriented undertakings Special provision in respect of export of artistic hand-made wooden articles Income exempt under section 13A Exemption to Electoral Trust
38. 39.
65 67 71 88 90 91
136 138 139 140 158 165 169 200 200 200 201 206 206 206 206 209 211 212 224
Income from house property
Chargeability Applicability of section 22 in certain typical situations Principle of mutuality vis-a-vis section 22 Property income exempt from tax Computation of income from a let out house property
225 230 232 233 233
I-9
Contents PAGE
Computation of income from self-occupied property Special provisions when unrealised rent is realised subsequently Mode of taxation of arrears of rent in the year of receipt Hints for tax planning Problems on computation of property income Frequently Asked Questions (FAQs) about mode of computation of annual value
91. 92. 93. 94. 95. App.
6 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 110A. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 120A. 120B. 121. 121A. 121B. 122. 123. 124. 125. 126. 127. 127A. 128. 128A. 129. 130.
242 251 251 251 252 262
Profits and gains of business or profession
Chargeability General principles governing assessment of business income Method of accounting Scheme of deductions and allowances Basic principles governing admissibility of deduction under sections 30 to 44DB Deductions expressly allowed in respect of expenses/allowances Rent, rates, taxes, repairs and insurance of building Repairs and insurance of machinery, plant and furniture Depreciation Investment allowance for acquisition and installation of new plant and machinery Investment allowance in backward area in Andhra Pradesh, Bihar, Telangana or West Bengal Tea/coffee/rubber development account Site restoration fund Reserves for shipping business Expenditure on scientific research Expenditure on acquisition of patent rights, copyrights, know-how Expenditure for obtaining right to use spectrum for telecommunication services Amortization of telecom licence fees Expenditure on eligible projects or scheme Deduction in respect of expenditure on specified business Payment to the associations and institutions carrying out rural development programmes Deduction for expenditure incurred on agricultural extension project Deduction for expenditure for skill development Amortisation of preliminary expenses Amortisation of expenditure in the case of amalgamation/demerger Amortisation of expenditure under voluntary retirement scheme Amortisation of expenditure on prospecting, etc., for development of certain minerals Insurance premium Insurance premium paid by a federal milk co-operative society Insurance premium on health of employees Bonus or commission to employees Interest on borrowed capital Discount on zero coupon bonds Employer’s contribution to recognised provident fund and approved superannuation fund Employer’s contribution to notified pension scheme Contribution towards approved gratuity fund Employees’ contribution towards staff welfare schemes
266 279 285 286 286 288 288 289 290 333 333 334 338 339 339 350 350 351 353 353 358 359 359 360 364 364 364 367 367 367 367 368 371 372 373 373 373
Contents
I-10 PAGE
Write off allowance for animals Bad debts Provision for bad and doubtful debts relating to rural branches of commercial banks 134. Transfer to special reserve 135. Family planning expenditure 136. Contribution towards Exchange Risk Administration Fund 137. Revenue expenditure incurred by entities established under any Central, State or Provincial Act 137A. Contribution to credit guarantee trust fund 137B. Commodities transaction tax/Securities transaction tax 138. Expenditure for purchase of sugarcane by a co-operative society engaged in sugar manufacturing 138A. Marked to market loss 139. Expenditure on advertisement 140. Expenses deductible from commission earned by life insurance agents, UTI agents, post office/Government securities agents and agents of notified mutual funds 141. General deduction 142. Amounts expressly disallowed under the Act 143. Amount not deductible under section 40(a) 144. Amount not deductible in the case of partnership firm 145. Amounts not deductible in the case of an association of persons and body of individuals 146. Amount not deductible under section 40(c)/(d) 147. Payments to relative 148. Payments exceeding Rs. 10,000 paid otherwise than by account payee cheques or bank drafts 149. Expenditure on payment of salary or perquisite to employees 150. Fees for services payable to a former employee 151. Provision for payment of gratuity 152. Interest on public deposit 153. Restriction on contributions by employers to non-statutory funds 154. Disallowance of marked to market loss 155. Disallowance of unpaid liability 156. Deemed profit 157. Income from undisclosed sources 158. Maintenance of accounts by certain persons 159. Audit of accounts by certain persons 160. Special provisions consequential to changes in the rate of exchange of currency 161. Special provision for deduction in the case of trade, professional or similar associations 162. Special provisions 163. Valuation of stock 164. Hints for tax planning 165. Problems on computation of income from business/profession 131. 132. 133.
7 166. 167.
374 374 378 381 383 384 384 384 384 384 385 385 386 387 445 445 457 457 457 457 460 464 464 464 465 465 466 466 476 480 482 484 486 488 489 513 518 524
Capital gains
Chargeability Meaning of capital asset
533 533
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Contents PAGE
Types of capital assets Transfer of capital asset Computation of capital gain Full value of consideration Expenditure on transfer Cost of acquisition Cost of improvement Indexed cost of acquisition and indexed cost of improvement Computation of capital gain in certain special cases Reference to Valuation Officer Capital gains exempt from tax Capital gains arising from transfer of residential house Capital gains arising from the transfer of land used for agricultural purpose Capital gains on compulsory acquisition of land and buildings forming part of industrial undertaking 182. Capital gain not to be charged on investment in certain bonds 182A. Capital gain not to be charged on investment in units of a specified fund 183. Capital gains on transfer of a long-term capital asset other than a house property 184. Capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area 185. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone 185A. Capital gain on transfer of residential property 185B. Extension of time-limit for acquiring new asset 186. Short-term/long-term capital gains - How charged to tax 187. Hints for tax planning 188. Problems on computation of capital gains 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181.
8
619 620 623 624 630 632 633 637 638 654 656
Income from other sources
Basis of charge Relevance of method of accounting Dividend Winnings from lotteries, crossword puzzles, horse races and card games, etc. Sum received from employees as their contribution towards staff welfare schemes 196. Interest on securities 197. Income from machinery, plant or furniture let on hire 198. Income from composite letting of building, machinery, plant or furniture 199. Money/property is received without consideration or for inadequate consideration 200. Share premium in excess of fair market value 201. Advance money received in course of negotiations for transfer of a capital asset 201A. Compensation on termination of employment or modification of terms of employment 202. Interest on KVP, IVP, NSC, etc. 203. Deductions 204. Other points 205. Problems on computation of income from other sources 191. 192. 193. 194. 195.
537 540 554 557 559 560 573 575 579 609 610 611 617
662 665 665 674 676 676 680 680 682 692 695 696 696 697 699 700
Contents
I-12 PAGE
9
Transfer of income without transfer of assets Revocable transfer of assets When an individual is assessable in respect of remuneration of spouse When an individual is assessable in respect of income from assets transferred to spouse When individual is assessable in respect of income from assets transferred to son’s wife When individual is assessable in respect of income from assets transferred to a person for the benefit of spouse When an individual is assessable in respect of income from assets transferred to a person for the benefit of son’s wife Income of minor child Conversion of self-acquired property into joint family property and subsequent partition Other profits Recovery of tax Hints for tax planning Problems explaining clubbing provisions
206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.
10
233.
11 234. 235. 235A. 236. 237. 237A. 237B. 237C. 238. 239.
706 706 707 710 714 715 716 716 718 719 719 720 721
Set off and carry forward of losses
Mode of set off and carry forward - The three steps Inter-source adjustment - How made Inter-head adjustment - How made Carry forward of loss Loss of partnership firms Loss of closely held companies Carry forward and set off of loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank Problems illustrating the provisions of set off and carry forward of losses
226. 227. 228. 229. 230. 231. 232.
240. 241.
Income of other persons included in assessee’s total income
726 726 727 729 742 742 742 743
Deductions from gross total income and tax liability
Essential rules governing deductions Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. Deduction in respect of deposit under National Savings Scheme Equity Linked Savings Scheme Deduction in respect of pension fund Deduction in respect of contribution to a National Pension System (NPS) Deduction in respect of subscription to long-term infrastructure bonds When available under section 80CCF Deduction in respect of investment made under any equity saving scheme Deduction in respect of medical insurance premia Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available Deduction in respect of medical treatment, etc. Deduction in respect of payment of interest on loan taken for higher studies
747 748 756 757 758 759 761 761 762 765 767 770
I-13
Contents PAGE
241A. 241B. 241C. 242. 243. 244. 245. 246. 247. 248. 249. 250. 251. 252. 253. 253A. 253B. 254. 254A. 255. 255A. 255B. 256. 257. 258. 259. 260. 261. 262. 263. 264. 265. 266. 267. 268. 269. 270.
Deduction in respect of interest on loan taken for residential house property Deduction in respect of interest on loan taken for certain house property Deduction in respect of interest on loan taken for purchase of electric vehicle Deduction in respect of donation to certain funds, charitable institutions, etc. Deduction in respect of rent paid Deduction in respect of certain donations for scientific research or rural development Deduction in respect of contributions given by companies to political parties or electoral trust Deduction in respect of contributions given by any person to political parties or electoral trust Deduction in respect of profits and gains from projects outside India Deduction in respect of profits and gains from housing projects aided by World Bank Tax incentives for exports Deduction in respect of earnings in convertible foreign exchange Deduction in respect of profit from export of computer software Deduction in respect of profits and gains from export or transfer of films software Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. - How to find out Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Deduction in respect of eligible start-up Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail Deduction in respect of profits from housing projects Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out Deduction in the case of hotels and convention centre in NCR Deduction in respect of certain undertakings in North-Eastern States Deduction in respect of profits and gains from the business of collecting and processing of bio-degradable waste Deduction in respect of employment of new employees Deduction in respect of interest on certain securities, investments, etc. Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre Deduction in respect of inter-corporate investment Deduction in respect of income of a co-operative society Deduction in respect of certain income of producer companies Deduction in respect of royalty income of authors Deduction in respect of remuneration or professional income from certain foreign sources Deduction in respect of royalty on patents Deduction in respect of interest on deposits in savings accounts Deduction in respect of interest on deposits in case of senior citizens Deduction in case of a person with disability Deductions from tax liability Rebate for resident individuals
770 771 772 772 778 780 781 781 782 782 782 782 782 782 782 794 795 796 813 815 818 818 819 820 822 823 824 826 826 826 828 828 829 830 830 832 832
Contents
I-14 PAGE
12 278. 279. 280. 281.
Definition Income which is partly agricultural and partly from business Partially integrated taxation of non-agricultural income with income derived from agriculture Computation of net agricultural income
13 285. 286. 287. 288.
313. 314. 315. 316. 317. 318. 319. 320. 321. 322. 323. 324. 325. 326. 327.
842 843
851 851 852 856
Tax treatment of Hindu undivided families
Meaning of Hindu undivided family Hindu coparcenary Different schools of Hindu law Jain and Sikh families Assessment as Hindu undivided family - Basic conditions Taxable income - How to compute Rates of tax Partition of a Hindu undivided family Problems on Hindu undivided families
15
834 840
Typical problems on assessment of individuals
Tax incidence on individuals Taxable income - How computed Tax liability Problems on computation of taxable income
14 295. 296. 297. 298. 299. 300. 301. 302. 303.
Agricultural income
867 867 867 868 868 869 871 871 873
Special provisions governing assessment of firms and association of persons
Meaning of partnership Scheme of taxation of firms When remuneration/interest is deductible What are the conditions a firm should fulfil under section 184 What are the conditions for claiming deduction of remuneration to partners under section 40(b) What are the conditions for claiming deduction of interest to partners under section 40(b) Carry forward and set-off of loss in the case of change in the constitution of firm Computation of income of firm Computation of tax of firm Assessment of partners of a firm How to compute income of an association of persons (AOP) or body of individuals (BOI) Computation of income of an AOP/BOI Computation of tax of AOP or BOI Assessment of member of AOP/BOI Hints for tax planning
880 880 880 881 882 888 889 892 894 901 904 906 906 908 913
I-15
Contents PAGE
Problems on computation of taxable income of firms/partners and association of persons
328.
16
Taxation of companies
Definitions Taxable income and tax liability - How computed Carry forward and set-off of losses in the cases of certain companies Minimum alternate tax Tax on distributed profits of domestic companies Tax on income distributed to unitholders Tax on income received from venture capital companies and venture capital funds 337C. Additional income-tax on distributed income by company for buy-back of unlisted shares 338. Problems on computation of taxable income of a corporate-assessee 333. 334. 335. 336. 337. 337A. 337B.
17
18 343. 344. 345. 346. 347. 348. 349. 350. 351. 352. 352A. 352B. 352C. 352D.
353. 354. 355. 356.
955 955 956
980 980 981 989
Assessment of charitable and other trusts
Meaning of trust Tax exemption Charitable purpose Essential conditions for exemption How to find out exemption u/s 11 Accumulation of income Forfeiture of exemption Public charitable/religious trust - How chargeable to tax Private discretionary trust Income from property held under trust partly for religious purposes and partly for other purposes Oral trust Tax on distributed income by securitization trusts Special provisions pertaining to business trust Pass through status to Category I and Category II Alternative Investment Funds
19
926 928 930 932 954 955
Assessment of co-operative societies
Meaning of co-operative society Taxable income and tax liability - How computed Deduction in respect of income of co-operative societies Problems on computation of income of a co-operative society
339. 340. 341. 342.
920
991 991 991 995 1001 1008 1010 1020 1023 1024 1026 1026 1027 1029
Return of income and assessment
Voluntary return Return of loss Belated return Revised return
1034 1038 1038 1039
Contents
I-16 PAGE
Updated return Defective or incomplete return Modified return Scheme to facilitate submission of returns through Tax Return Preparers Power of Board to dispense with furnishing of documents Filing of return in electronic form Return by whom to be verified Permanent Account Number (PAN) Quoting of Aadhaar number What is self-assessment Inquiry before assessment Summary assessment without calling the assessee Assessment in response to notice under section 143(2) Best judgment assessment Reference to dispute resolution panel Income escaping assessment and re-assessments Issue of notice for reassessment under section 148 What are the provisions regarding rectification of mistake Time limit for completion of assessments/reassessments Provisions of section 155 Problems on return of income and assessment Obligation to furnish annual information return pertaining to financial transactions 372B. Submission of statement by a non-resident having liaison office in India 372C. Furnishing of information or document by an Indian concern 372D. Reporting by producers of cinematograph films or persons engaged in specified activities 357. 358. 358A. 359. 359A. 359B. 360. 361. 361A. 362. 363. 364. 365. 366. 366A. 367. 368. 369. 370. 371. 372. 372A.
20 373. 374. 375. 376. 377. 378. 379. 380.
381. 382. 383. 384.
385. 386.
1110
1111 1122 1142 1142 1147 1147 1150 1154
Advance payment of tax
Income liable for advance tax Advance tax liability - Under different situations Interest payable by the assessee or Government Problems illustrating advance tax provisions
22
1107 1109 1109
Penalties and prosecutions
Penalties for defaults in brief Penalty for concealment/under-reporting of Income Who can levy penalty Power of Commissioner to reduce or waive penalty Procedure for imposition of penalty Time-limit for completion of penalty proceedings Offences and prosecutions Onus of proof
21
1041 1043 1046 1046 1046 1046 1047 1048 1052 1053 1055 1059 1062 1073 1075 1077 1084 1091 1096 1102 1103
1156 1157 1158 1158
Interest
Interest payable by the assessee Interest payable to assessee
1160 1176
I-17
Contents PAGE
Procedure to be followed in calculation of interest Waiver or reduction of interest under sections 234A, 234B and 234C Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases Power of CBDT and Settlement Commission to reduce/waive interest Writ petition Problems illustrating computation of interest
387. 388. 389. 390. 391. 392.
23
1181 1181 1182 1182
Tax deduction or collection at source
Scheme of tax deduction at source Deduction of tax from salaries Tax deduction at source from withdrawal from employees provident fund scheme Deduction of tax at source from interest on securities Deduction of tax at source from dividends Deduction of tax at source from interest other than interest on securities Deduction of tax at source from winnings from lotteries or crossword puzzles 410. Deduction of tax at source from winnings from horse races 411. Deduction of tax at source from payments to contractors or sub-contractors 412. Deduction of tax at source from insurance commission 412A. Tax deduction from payment of life insurance policy 413. Payment to non-resident sportsman or sports association 414. Deduction of tax from payments in respect of National Savings Scheme 415. Deduction of tax at source on payments on account of repurchase of units by Mutual Funds or UTI 416. Deduction of tax from commission, etc., on sale of lottery tickets 417. Deduction of tax at source from commission or brokerage 418. Deduction of tax at source from income by way of rent 418A. Tax deduction at source on purchase of immovable property 418B. Tax deduction from payment of rent by certain individuals/HUFs 418C. Tax deduction from payment under joint development agreement 419. Tax deduction at source on fees for professional or technical services, royalty or directors fees 419A. Tax deduction at source in respect of income from units 420. Tax deduction from payment of compensation in certain cases 420A. Deduction of tax at source from interest payable on infrastructure debt fund 420AA. Tax deduction from income from units of business trust 420AB. Tax deduction from income in respect of units of investment fund 420ABB. Tax deduction from income in respect of investment in Securitization fund 420B. Tax deduction by an Indian specified company or business trust from interest to a non-resident/foreign company 420C. Tax deduction at source on interest on bonds/Government securities 420D. TDS on certain payments by individual/HUF 420E. TDS on payment of certain amounts in cash 420F. TDS on payment by e-commerce operator to e-commerce participants 420G. Deduction of tax in case of specified Senior Citizen 420H. Deduction of tax at source on payment for purchase of goods 420-I. Deduction of tax on benefit/perquisite pertaining to business/profession 420-J. Deduction of tax from payment on transfer of virtual digital asset 421. Deduction of tax at source from other sums 422. Tax deduction from any income payable to non-resident unit-holders of Mutual Fund 404. 405. 405A. 406. 407. 408. 409.
1180 1180
1189 1193 1198 1201 1202 1203 1208 1208 1208 1215 1215 1216 1217 1217 1217 1218 1220 1225 1225 1226 1227 1231 1231 1232 1232 1233 1233 1234 1235 1236 1237 1238 1239 1240 1243 1244 1245 1251
Contents
I-18 PAGE
423. 424. 425. 426. 427. 428. 429.
Deduction of tax at source in respect of units referred to in section 115AB Deduction of tax from income or long-term capital gain from foreign currency bonds/Global Depository Receipts Deduction of tax from income of Foreign Institutional Investors from securities Payment without tax deduction or with deduction at lower rate Processing of statements of tax deducted at source Other points for consideration Tax collection at source
24 430. 431. 432. 433.
435. 436. 437. 438. 439. 440. 441. 442. 443. 444.
445. 446.
457. 458. 459.
471.
1279 1279 1280 1293 1301 1313 1319 1320 1321 1322
1324 1324
Settlement Commission and Dispute Resolution Committee
Settlement Commission Discontinuation of Income-tax Settlement Commission Dispute Resolution Committee
28
1276 1276 1276 1277
Income-tax authorities
Tax authorities Central Board of Direct Taxes
27
1252 1252 1256 1256 1265
Appeals and revisions
Meaning of appeal Appellate hierarchy Appeal to the Commissioner (Appeals) Revision by the Commissioner of Income-tax Appeal to the Appellate Tribunal Appeal to High Court Appeal to the Supreme Court Provision for avoiding repetitive appeals Procedure for appeal by revenue when an identical question of law is pending before High Court/Supreme Court Consequence of non-filing of appeal in respect of cases where the tax effect is less than the prescribed monetary limit
26
1251
Refund of excess payments
Right to claim refund - When arises Who can claim refund How to claim refund Other points
25
1251
1328 1328 1332
Special measures in respect of transactions with persons located in notified jurisdictional area
Special measures in respect of certain transactions
1334
I-19
Contents PAGE
Notified jurisdictional area Applicability of transfer pricing provisions Disallowance of payment to financial institutions located in notified jurisdictional area Disallowance of other expenditure Amount received to be treated as income in some cases TDS at higher rate Provisions illustrated
472. 473. 474. 475. 476. 477. 478.
29
30
1335 1335 1335 1335 1335
General Anti-avoidance Rule
Applicability of general anti-avoidance rule Impermissible avoidance arrangement Procedure for invoking GAAR Clarifications given by Board
480. 481. 482. 483.
1334 1334
1338 1338 1340 1340
Advance ruling
485.
Constitution of the Board for Advance Ruling
1342
486.
Advance ruling
1344
487.
Procedure for filing application
1345
488.
Procedure on receipt of application
1347
489.
Applicability of advance ruling
1349
490.
Advance ruling to be void in certain circumstances
1350
491.
Powers of authority
1350
491A. Authority for advance rulings
31 492. 493. 494. 495. 496. 497. 498. 498A. 499. 500.
Search, seizure and assessment
Powers regarding discovery, production of evidence, etc. Search and seizure Requisitioning of books of account, etc. Application of assets seized or requisitioned Power to call for information Power of survey Power to collect certain information Power to call for information by prescribed income-tax authority Scheme of assessment in case of search or requisition Prior approval in the case of search
32
1350
1352 1353 1361 1362 1363 1364 1367 1367 1368 1375
Transfer pricing
506.
Taxation of international transaction
1376
507.
Computation of the arm’s length price
1380
508.
Arm’s length price - Computation of
1381
Contents
I-20 PAGE
509.
Computation of arm’s length price in cases where more than one price is determined under most appropriate method
1388
510.
Reference to transfer pricing officer
1398
510A. Power of Board to make Safe Harbour Rules
1401
Maintenance of books of account and furnishing of report in respect of international group
1404
512.
Report from accountant
1409
513.
Specified domestic transactions
1409
514.
Advance Pricing Agreement (APA)
1410
511.
514A. Secondary adjustment in certain international transactions
1412
514B. Provisions pertaining to thin capitalisation
1416
514C. Important judicial rulings
1419
33 515. 516. 517. 518. 519. 520. 521. 522. 523.
Restructuring business Amalgamation Demerger Conversion of sole proprietary business into company Conversion of firm into company Slump sale Transfer of assets between holding and subsidiary companies Amalgamation or demerger of co-operative banks Conversion of private company/unlisted public company into Limited Liability Partnership (LLP)
34 531. 532. 533. 534. 535. 536. 537. 538. 539. 540. 541. 542. 543. 544. 545. 546. 547.
Business restructuring 1420 1420 1429 1439 1440 1442 1448 1453 1455
Alternative tax regime
Alternative tax regime available under different sections Manufacturing domestic companies under section 115BA Tax on income of certain domestic companies Conditions and restrictions Tax rate Option MAT not applicable Case studies New manufacturing domestic companies Conditions Mode of computation of income Computation of tax liability under section 115BAB Option MAT not applicable Case study Income of individuals and Hindu undivided family Rate of income-tax under the alternative tax regime
1460 1462 1463 1463 1464 1464 1464 1464 1468 1468 1469 1469 1470 1470 1471 1471 1472
I-21
Contents PAGE
548. 549. 550. 551. 552. 553. 554.
Conditions and restrictions Option Case studies Tax on certain resident co-operative societies Conditions and restrictions under section 115BAD Tax rate Option
35 565. 566. 567. 568. 569. 570. 571.
572. 573. 574. 575. 577. 578. 580. 581. 582. 583.
Tax planning
Tax planning Tax planning with reference to setting up of a new business Tax planning with reference to financial management decisions Tax planning with reference to specific managerial decisions Tax planning in respect of employees’ remuneration Tax planning in respect of non-residents Tax planning in respect of amalgamation or demerger of companies or business restructuring
36
1472 1474 1475 1478 1478 1479 1479
1480 1482 1484 1485 1489 1491 1496
Miscellaneous
Introduction of Tonnage Tax Securities Transaction Tax Tax clearance certificate Equalisation levy Provisions pertaining to successor entity subsequent to business reorganization Commodities transaction tax Facility for electronic communication Introduction of Document Identification Number Power to withdraw approvals Restriction on cash transactions
1497 1500 1502 1504 1508 1509 1510 1510 1510 1510
ANNEXURES 1. 2. 3. 4. 5.
Tax rates Rates of depreciation The Eleventh Schedule, Thirteenth Schedule, Fourteenth Schedule/ Investment ceiling in the case of small scale industrial undertaking Notified backward districts Case Studies
1514 1538 1545 1552 1554
Para 420E.2
Income-tax - Tax deduction or collection at source
1238
-
Such other person or class of persons notified by the Central Government in consultation with RBI†. ■ Tax deducted under section 194N, not to be treated as deemed receipt - Tax deducted (under section 194N) shall not be deemed to be income received (for the purpose of section 198) for computing income of recipient. 420E.2 Applicable from July 1, 2020 - Section 194N has been substituted by a new section with effect from July 1, 2020. The new section provides different tax rates for different persons. Threshold limit and TDS rates (under the old and new TDS regime) are given in the table below – Time of payment
Threshold limit for payment in cash (to be calculated for a financial TDS rate year)
During September 1, 2019 and June 30, 2020
Exceeding Rs. 1 crore.
On or after July 1, 2020
❑
❑
Case 1 - It covers a defaulter who has not submitted return in past [see Note]. In this case, threshold limit is as follows – a. exceeding Rs. 20 lakh but not exceeding Rs. 1 crore b. exceeding Rs. 1 crore Case 2 - It covers any case other than Case 1. Threshold limit is exceeding Rs. 1 crore
2%
2% 5% 2%
Note - The recipient has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time-limit to file return of income under section 139(1) has expired, immediately preceding the previous year in which the payment is made in cash. The exclusion earlier provided under the old version of section 194N shall be continued in the new version. The Central Government may, however, notify recipients to whom provisions of section 194N shall not apply or apply at such reduced rate as may be specified.
TDS on payment by e-commerce operator to e-commerce participants [Sec. 194-O] 420F. Section 194-O has been inserted with effect from October 1, 2020. Provisions of this section are given below – †The Central Government has specified the following persons for this purpose – Persons specified by the Central Government (these persons can withdraw cash without TDS under section 194N)
TDS provisions of section 194N are not applicable only if these conditions are satisfied –
1. Cash Replenishment Agencies (CRA’s) and franchise agents of White Label Automated Teller Machine Operators (WLATMO’s)
These persons maintain a separate bank account from which cash withdrawal is made only for the purposes of replenishing cash in ATM operated by such WLATMO’s and the WLATMO have furnished a monthly certificate to the bank certifying that cash withdrawal has been reconciled with the amount of cash deposited in the ATMs.
2. The commission agent/trader, operating under Agriculture Produce Market Committee (APMC) and registered under any law relating to APM of the concerned State
If these persons have certified to the banking company/co-operative society/post office that cash withdrawal (in excess of Rs. 1 crore in the previous year) is for the purpose of making payments to the farmers on account of purchase of agriculture produce.
3. An authorised foreign exchange dealer (and its franchise agent/ sub-agent). 4. Full-Fledged Money Changer (FFMC) licensed by RBI (and its franchise agent).
If cash withdrawal is made only for the purpose of purchase of foreign currency from foreign tourists or non-residents visiting India or from resident Indians on their return to India, in cash as per the RBI directions or guidelines. Moreover, these persons are not subject to TDS provisions of section 194N if cash withdrawal is made by these persons for the purpose of disbursement of inward remittances to the recipient beneficiaries in India in cash under Money Transfer Service Scheme (MTSS) of RBI.
1239
Deduction of tax in case of specified senior citizen
Para 420G
Who is responsible for tax deduction at source - Where sale of goods/services of an e-commerce participants is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called), such e-commerce operator is required to deduct tax at source under section 194-O. For this purpose, “e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce. “e-Commerce participant” means a person resident in India selling goods/services (including digital products) through digital or electronic facility or platform for electronic commerce. “Services”, for this purpose, include fees for technical services/professional services. For the purpose of this section, e-commerce operator shall be deemed to be the person responsible for paying to e-commerce participant.
■
Time of tax deduction at source - Tax is deductible by e-commerce operator at the time of credit of amount of sale of goods/services to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier.
■
Rate of TDS - Tax is deductible at the rate of 1 per cent (0.75 per cent up to March 31, 2021) of the gross amount of such sale of goods/services. For this purpose, any payment made by a purchaser of goods/services directly to an e-commerce participant for the sale of goods/services, facilitated by an e-commerce operator, shall be deemed to be the amount credited/paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sale or services for the purpose of tax deduction.
■
If the recipient does not have PAN, tax is deductible (by virtue of section 206AA) at the rate of 5 per cent. When tax is not deductible - Tax is not deductible under section 194-O if the following conditions are satisfied – ■
a. e-commerce participant is an individual or HUF; b. gross amount of such sale of goods/services through e-commerce operator during the previous year does not exceed Rs. 5 lakh; and c. such e-commerce participant has furnished his PAN or Aadhaar number to the e-commerce operator. TDS under any other section - Not possible - If tax is deductible under section 194-O (or not deductible because of threshold limit of Rs. 5 lakh given above), tax cannot be deducted under any other provisions of the Act. However, this rule is not applicable in the case of amount received/ receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale of goods/services given above. ■
■ Lower TDS certificate - Lower/nil TDS certificate can be obtained by e-commerce participants by submitting Form No. 13 within the parameters of section 197 [see para 426.2].
Removing difficulty - If any difficulty arises in giving effect to the provisions of this section, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty. These guidelines shall be laid before each House of Parliament and shall be binding on the income-tax authorities and on the e-commerce operator.†
■
Deduction of tax in case of specified senior citizen [Sec. 194P] 420G. The provisions of section 194P (inserted with effect from April 1, 2021) are given below – Specified senior citizen - Under section 194P, tax is deductible only in the case of “specified senior citizen”. For this purpose, specified senior citizen is an individual who satisfies the following conditions –
■
1. He is a resident individual.
† For a few clarifications issued by the Board vide Circular No. 13, dated June 30, 2021, see para 420H.1.
Para 420H
Income-tax - Tax deduction or collection at source
1240
2. He is 75 years or more at any time during the previous year (for the previous year 2022-23, a resident individual shall be treated as “specified senior citizen” only if he was born before April 2, 1948). 3. He has income from pension which is credited in his pension account with “specified bank”. 4. He has no other income except interest received/receivable from any account maintained by such individual in the same “specified bank” in which he gets pension income. 5. He shall be required to furnish a declaration to the “specified bank”. The declaration shall contain such particulars, in such form and verified in such manner, as may be prescribed. ■ Specified bank - “Specified bank” means a banking company as notified by the Central Government†. ■ Tax deduction by specified bank - Once the declaration is furnished by the specified senior citizen, the specified bank would be required to compute the income of such senior citizen. For computing total income, deduction under sections 80C to 80U should be given along with rebate under section 87A. The specified bank shall deduct income-tax on such total income on the basis of rates in force. For calculating tax liability, normal tax rates are applicable. Section 194P is applicable even if deductee has opted for the alternative tax regime under section 115BAC. ■
At what time tax is deductible by specified bank - It is not given in section 194P.
Return under section 139(1) not required - The provisions pertaining to submission of return of income under section 139, shall not apply to the specified senior citizen for the assessment year relevant to the previous year in which tax is deducted under section 194P.
■
Deduction of tax at source on payment for purchase of goods [Sec. 194Q] 420H. The provisions of section 194Q (inserted with effect from July 1, 2021) are given below – Who is buyer - Under section 194Q, tax is deductible by buyer of goods. “Buyer” for this purpose, means a person whose total sales, gross receipts or turnover from the business carried on by him exceed Rs. 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out. However, “buyer” does not include a person notified by the Central Government (subject to such conditions as may be specified therein‡). ■
Who is responsible for tax deduction - Any person (being a buyer) who is responsible for paying any sum to any resident seller for purchase of any goods of the value (or aggregate of such value) exceeding Rs. 50 lakh in any previous year, is required to deduct tax at source under section 194Q with effect from July 1, 2021.
■
■ At what time tax is deductible - Tax should be deducted by buyer, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier. Where, however, the above sum is credited to any account (whether called “suspense account” or by any other name) in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Rate of TDS - Tax is deductible by buyer at the rate of 0.1 per cent of the amount paid or payable exceeding Rs. 50 lakh (in no PAN cases, tax is deductible at the rate of 5 per cent). ■
■
Threshold limit - Threshold limit is Rs. 50 lakh.
■
When tax is not available - Tax is not deductible in the following cases –
† As per Notification No. S.O. 3595(E), dated September 2, 2021, “specified bank” means a banking company which is a scheduled bank and has been appointed as agents of RBI under section 45 of the Reserve Bank of India Act. ‡ In exercise of this power, the Central Government has specified that Air India Assets Holding Ltd. shall not be considered as “buyer” for this purpose in case of transfer of goods by Air India Ltd. to it under a plan approved by the Central Government – Notification No. S.O. 3680(E), dated September 10, 2021.
1241 Cases when TDS under section 194Q not applicable
Clarifications by CBDT
Para 420H.I
Comments
Case 1 - If tax is deductible under any other section
If tax is deductible under any other section, then tax shall be deducted under that section and not under section 194Q. Even when tax is deductible under any other section (but not actually deducted by the payer), TDS provisions of that section will apply and not TDS under section 194Q.
Case 2 - If tax is collectible under the provisions of section 206C [but other than sub-section (1H)]
If a particular transaction is covered by TCS provisions of section 206C [other than sub-section (1H)], then tax will be collected by the seller (and tax is not deductible by the buyer under section 194Q). If a particular transaction is covered by section 194Q as well as section 206C(1H), then TDS under section 194Q will apply and not TCS under section 206C(1H).
Removing difficulty - If any difficulty arises in giving effect to the provisions of section 194Q, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty. These guidelines shall be laid before each House of Parliament and shall be binding on the income-tax authorities and on the person liable to deduct tax.
■
420H.1 Clarifications by CBDT - Vide Circular No. 13/2021, dated June 30, 2021 and Circular No. 20/2021, dated November 25, 2021, the following clarifications are given by the Board pertaining to section 194Q – ■ Transactions in securities - Section 194Q shall not be applicable in relation to, – a. transactions in securities and commodities which are traded through recognized exchanges; b. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges. ■ Adjustment for GST and other State levies - When tax is deducted at the time of credit of amount in the account of seller and in terms of the agreement or contract between the buyer and the seller, the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted under section 194Q on the amount credited without including such GST. If, however, the tax is deducted on payment basis (because the payment is earlier than the credit) the tax would be deducted on the whole amount as it is not possible to identify that payment with GST component of the amount to be invoiced in future. The above clarification will also be applicable in the case of purchase/sale of goods which are not covered by GST but covered by other State levies (i.e., VAT, excise duty, etc.). ■ Purchase returns - Tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus, before purchase return happens, the tax must have already been deducted under section 194Q on that purchase. If that is the case and against this purchase return the money is refunded by the seller, then this tax deducted may be adjusted against the next purchase against the same seller. No adjustment is required if the purchase return is replaced by the goods by the seller as in that case the purchase on which tax was deducted under section 194Q has been completed with goods replaced. ■ Whether non-resident can be buyer under section 194Q - The provisions of section 194Q shall not apply to a non-resident whose purchase of goods from seller resident in India is not effectively connected with the permanent establishment of such non-resident in India. ■ Whether tax is to be deducted when the seller is a person whose income is exempt - The provisions of section 194Q shall not apply on purchase of goods from a person (being a seller) who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament. However, this clarification would not apply if only part of the income of the seller is exempt. ■ Whether tax is to be deducted on advance payment - Since the provisions of section 194Q apply on payment or credit whichever is earlier, TDS shall apply to advance payment made by the buyer to the seller.
Para 420H.1
Income-tax - Tax deduction or collection at source
1242
■ Whether provisions of section 194Q shall apply to buyer in the year of incorporation - Under section
194Q a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs. 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Since this condition would not be satisfied in the year of incorporation, the provisions of section 194Q shall not apply in the year of incorporation. ■ Whether provisions of section 194Q shall apply to buyer if the turnover from business is Rs. 10 crore or less - For the purposes of section 194Q, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs. 10 crore during the immediately preceding financial year. Consequently, the sales or gross receipts or turnover from business carried on by him must exceed Rs. 10 crore. His turnover or receipts from non-business activity is not to be counted for this purpose. ■ Cross application of section 194-O, section 206C(1H) section 194Q - Under section 194Q(5), the provision of this section shall not apply to a transaction on which – a. tax is deductible under any of the provisions of this Act; and b. tax is collectible under the provisions of section 206C [other than a transactions on which subsection (1H)] applies. After conjoint reading of all these provisions the following clarifications are given by the Board – 1. If tax has been deducted by the e-commerce operator on a transaction under section 194-O [including transactions on which tax is not deducted on account of sub-section (2) of section 194-O], that transaction shall not be subjected to tax deduction under section 194Q. 2. Section 206C(1H) provides exemption from TCS if the buyer has deducted tax at source on goods purchased by him. To remove difficulties, it has been clarified that this exemption would also cover a situation where instead of the buyer, the e-commerce operator has deducted tax at source on that transaction of sale of goods by seller to buyer through e-commerce operator. 3. If a transaction is both within the purview of section 194-O as well as section 194Q, tax is required to be deducted under section 194-O and not under section 194Q. 4. Similarly, if a transaction is both within the purview of section 194-O as well as section 206C(1H), tax is required to be deducted under section 194-O. The transaction shall come out of the purview of section 206C(1H) after tax has been deducted by the e-commerce operator on that transaction. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under section 206C(1H) on the same transaction. Primary responsibility is on ecommerce operator to deduct the tax under section 194-O and that responsibility cannot be condoned if the seller has collected the tax under section 206C(1H). This is for the reason that the rate of TDS under section 194-O is higher than rate of TCS under section 206C(1H). 5. If a transaction is both within the purview of section 194Q as well as section 206C(1H), the tax is required to be deducted under section 194Q. The transaction shall come out of the purview of section 206C(1H) after tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under section 206C(1H) on the same transaction. If, however, for any reason, tax has been collected by the seller under section 206C(1H), before the buyer could deduct tax under section 194Q on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. ■ E-auction services carried out through electronic portal - The provisions of section 194-O shall not apply in relation to e-auction activities carried out by e-auctioneers if the following parameters are satisfying – a. the e-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported to the client; b. the price so discovered through e-auction process is not necessarily the price at which the transaction takes place and it is up to the discretion of the client to accept the price or to directly negotiate with the counter-party; c. the transaction of purchase/sale takes place directly between the buyer and the seller outside the electronic portal maintained by the e-auctioneer and price discovery only acts as the starting point for negotiation and conclusion of purchase/sale;
Direct Taxes Law & Practice | Professional Edition AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE
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