24 14. Company 24 15.
24 13.
17 8.
24 16.
21 9. Agricultural
2
22.
24 17.
47 24.
48 25.
About the
31 19.
47 23.
23 11. Assessment 23 12.
I-5
6 6. Income 7 7. Gross
31 18.
57 27.
authors I-7 Section-wise Index I-25 1
1. Assessment
62 30.
23 10. Difference
A few words from the authors
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 Receipt of income Accrual of income Income deemed to accrue or arise in India
1 2. Previous
56 26.
32 20.
Basic concepts year year of income-tax total income Total income and tax liability income between exemption and deduction Definition of “manufacture” Capital asset 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
33
PAGE I-9
71
67 32.
1 3. Person 5 4. Assessee 6 5. Charge
62 29.
65 31.
58 28.
88.
38.
53.
52.
62.
92.
51.
59.
61.
48.
42.
56.
Incomes exempt from tax Incomes exempt under section 10 94 Special provisions in respect of newly established undertakings in free trade zone, etc. 130 Special provisions in respect of newly established units in Special Economic Zone130 Special provisions in respect of newly established hundred per cent export-oriented undertakings 134 Special provision in respect of export of artistic hand-made wooden articles134 Income exempt under section 13A 134 Exemption to Electoral Trust 135
4 Salaries Essential norms of salary income 136 Basis of charge 138 Place of accrual of salary income 139 Tax treatment of different forms of salary income 140 Allowance 158 Perquisites 165 Valuation of perquisites 169 Deduction from salary income 200 Tax on salary of non-resident technicians 200 Salaries of other foreign citizens 200 Employees’ provident fund 201 Approved superannuation fund 206 Approved gratuity fund 206 Deduction under section 80C 206 Relief under section 89 206 Meaning of salary for different computations 209 Hints for tax planning 211 Problems on salary income 212 1 : Frequently Asked Questions (FAQs) about computation of salary income224
90.
58.
54.
Annex
86.
5
57.
43.
49.
87.
41.
44.
55.
46.
Income from house property Chargeability 225 Applicability of section 22 in certain typical situations 230 Principle of mutuality vis-a-vis section 22 232 Property income exempt from tax 233 Computation of income from a let out house property 233 Computation of income from self-occupied property 242 Special provisions when unrealised rent is realised subsequently 251 Mode of taxation of arrears of rent in the year of receipt 251
89.
93.
3
47.
63.
91.
40.
60.
Contents I-10 PAGE 32A. Fund Managers in India not to constitute business connection of offshore funds88 33. Hints for tax planning in respect of residential status 90 34. Problems on residential status and tax incidence 91
39.
50.
Profits and gains of business or profession
120A. Deduction for expenditure incurred on agricultural extension project 359 120B. Deduction for expenditure for skill development 359 121. Amortisation of preliminary expenses 360 121A. Amortisation of expenditure in the case of amalgamation/demerger 364 121B. Amortisation of expenditure under voluntary retirement scheme 364 122. Amortisation of expenditure on prospecting, etc., for development of certain minerals 364 123. Insurance premium 367 124. Insurance premium paid by a federal milk co-operative society 367 125. Insurance premium on health of employees 367 126. Bonus or commission to employees 367 127. Interest on borrowed capital 368 127A. Discount on zero coupon bonds 371 128. Employer’s contribution to recognised provident fund and approved superannuation fund 372 128A. Employer’s contribution to notified pension scheme 373 129. Contribution towards approved gratuity fund 373 130. Employees’ contribution towards staff welfare schemes 373
101. Chargeability 266 102. General principles governing assessment of business income 279 103. Method of accounting 285 104. Scheme of deductions and allowances 286 105. Basic principles governing admissibility of deduction under sections 30 to 44DB286 106. Deductions expressly allowed in respect of expenses/allowances 288 107. Rent, rates, taxes, repairs and insurance of building 288 108. Repairs and insurance of machinery, plant and furniture 289 109. Depreciation 290 110. Investment allowance for acquisition and installation of new plant and machinery333 110A. Investment allowance in backward area in Andhra Pradesh, Bihar, Telangana or West Bengal 333 111. Tea/coffee/rubber development account 334 112. Site restoration fund 338 113. Reserves for shipping business 339 114. Expenditure on scientific research 339 115. Expenditure on acquisition of patent rights, copyrights, know-how 350 116. Expenditure for obtaining right to use spectrum for telecommunication services350 117. Amortization of telecom licence fees 351 118. Expenditure on eligible projects or scheme 353 119. Deduction in respect of expenditure on specified business 353 120. Payment to the associations and institutions carrying out rural development programmes 358
95. Problems on computation of property income 252 App. Frequently Asked Questions (FAQs) about mode of computation of annual value262
94. Hints for tax planning 251
6
I-11 Contents PAGE
Contents I-12 PAGE
131. Write off allowance for animals 374 132. Bad debts 374 133. Provision for bad and doubtful debts relating to rural branches of commercial banks 378 134. Transfer to special reserve 381 135. Family planning expenditure 383 136. Contribution towards Exchange Risk Administration Fund 384 137. Revenue expenditure incurred by entities established under any Central, State or Provincial Act 384 137A. Contribution to credit guarantee trust fund 384 137B. Commodities transaction tax/Securities transaction tax 384 138. Expenditure for purchase of sugarcane by a co-operative society engaged in sugar manufacturing 384 138A. Marked to market loss 385 139. Expenditure on advertisement 385 140. Expenses deductible from commission earned by life insurance agents, UTI agents, post office/Government securities agents and agents of notified mutual funds 386 141. General deduction 387 142. Amounts expressly disallowed under the Act 445 143. Amount not deductible under section 40(a) 445 144. Amount not deductible in the case of partnership firm 457 145. Amounts not deductible in the case of an association of persons and body of individuals 457 146. Amount not deductible under section 40(c)/(d) 457 147. Payments to relative 457 148. Payments exceeding Rs. 10,000 paid otherwise than by account payee cheques or bank drafts 460 149. Expenditure on payment of salary or perquisite to employees 464 150. Fees for services payable to a former employee 464 151. Provision for payment of gratuity 464 152. Interest on public deposit 465 153. Restriction on contributions by employers to non-statutory funds 465 154. Disallowance of marked to market loss 466 155. Disallowance of unpaid liability 466 156. Deemed profit 476 157. Income from undisclosed sources 480 158. Maintenance of accounts by certain persons 482 159. Audit of accounts by certain persons 484 160. Special provisions consequential to changes in the rate of exchange of currency 486 161. Special provision for deduction in the case of trade, professional or similar associations 488 162. Special provisions 489 163. Valuation of stock 513 164. Hints for tax planning 518 165. Problems on computation of income from business/profession 524
Capital gains 166. Chargeability 533 167. Meaning of capital asset 533
7
200. Share premium in excess of fair market value 692 201. Advance money received in course of negotiations for transfer of a capital asset695 201A. Compensation on termination of employment or modification of terms of employment 696 202. Interest on KVP, IVP, NSC, etc. 696 203. Deductions 697 204. Other points 699 205. Problems on computation of income from other sources 700
169. Transfer of capital asset 540 170. Computation of capital gain 554 171. Full value of consideration 557 172. Expenditure on transfer 559 173. Cost of acquisition 560 174. Cost of improvement 573 175. Indexed cost of acquisition and indexed cost of improvement 575 176. Computation of capital gain in certain special cases 579 177. Reference to Valuation Officer 609 178. Capital gains exempt from tax 610 179. Capital gains arising from transfer of residential house 611 180. Capital gains arising from the transfer of land used for agricultural purpose617 181. Capital gains on compulsory acquisition of land and buildings forming part of industrial undertaking 619 182. Capital gain not to be charged on investment in certain bonds 620 182A. Capital gain not to be charged on investment in units of a specified fund 623 183. Capital gains on transfer of a long-term capital asset other than a house property624 184. Capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area 630
185. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone 632 185A. Capital gain on transfer of residential property 633 185B. Extension of time-limit for acquiring new asset 637 186. Short-term/long-term capital gains - How charged to tax 638 187. Hints for tax planning 654 188. Problems on computation of capital gains 656
Income from other sources
191. Basis of charge 662 192. Relevance of method of accounting 665 193. Dividend 665 194. Winnings from lotteries, crossword puzzles, horse races and card games, etc.674 195. Sum received from employees as their contribution towards staff welfare schemes 676 196. Interest on securities 676 197. Income from machinery, plant or furniture let on hire 680 198. Income from composite letting of building, machinery, plant or furniture 680 199. Money/property is received without consideration or for inadequate consideration 682
8
168. Types of capital assets 537
I-13 Contents PAGE
211. When individual is assessable in respect of income from assets transferred to a person for the benefit of spouse 715 212. When an individual is assessable in respect of income from assets transferred to a person for the benefit of son’s wife 716
Income of other persons included in assessee’s total income
226. Mode of set off and carry forward - The three steps 726 227. Inter-source adjustment - How made 726 228. Inter-head adjustment - How made 727 229. Carry forward of loss 729 230. Loss of partnership firms 742 231. Loss of closely held companies 742 232. Carry forward and set off of loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank 742 233. Problems illustrating the provisions of set off and carry forward of losses 743
237A. Deduction in respect of contribution to a National Pension System (NPS) 759 237B. Deduction in respect of subscription to long-term infrastructure bondsWhen available under section 80CCF 761 237C. Deduction in respect of investment made under any equity saving scheme 761 238. Deduction in respect of medical insurance premia 762 239. Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available765 240. Deduction in respect of medical treatment, etc. 767 241. Deduction in respect of payment of interest on loan taken for higher studies770
210. When individual is assessable in respect of income from assets transferred to son’s wife 714
234. Essential rules governing deductions 747 235. Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. 748 235A. Deduction in respect of deposit under National Savings Scheme 756 236. Equity Linked Savings Scheme 757 237. Deduction in respect of pension fund 758
11
206. Transfer of income without transfer of assets 706 207. Revocable transfer of assets 706
Deductions from gross total income and tax liability
208. When an individual is assessable in respect of remuneration of spouse 707 209. When an individual is assessable in respect of income from assets transferred to spouse 710
9
213. Income of minor child 716 214. Conversion of self-acquired property into joint family property and subsequent partition 718 215. Other profits 719 216. Recovery of tax 719 217. Hints for tax planning 720 218. Problems explaining clubbing provisions 721
10 Set off and carry forward of losses
Contents I-14 PAGE
I-15
241A. Deduction in respect of interest on loan taken for residential house property770 241B. Deduction in respect of interest on loan taken for certain house property 771 241C. Deduction in respect of interest on loan taken for purchase of electric vehicle772 242. Deduction in respect of donation to certain funds, charitable institutions, etc.772 243. Deduction in respect of rent paid 778 244. Deduction in respect of certain donations for scientific research or rural development 780 245. Deduction in respect of contributions given by companies to political parties or electoral trust 781 246. Deduction in respect of contributions given by any person to political parties or electoral trust 781 247. Deduction in respect of profits and gains from projects outside India 782 248. Deduction in respect of profits and gains from housing projects aided by World Bank 782 249. Tax incentives for exports 782 250. Deduction in respect of earnings in convertible foreign exchange 782 251. Deduction in respect of profit from export of computer software 782 252. Deduction in respect of profits and gains from export or transfer of films software 782 253. Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. - How to find out 782 253A. Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone 794 253B. Deduction in respect of eligible start-up 795 254. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail 796 254A. Deduction in respect of profits from housing projects 813 255. Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out 815 255A. Deduction in the case of hotels and convention centre in NCR 818 255B. Deduction in respect of certain undertakings in North-Eastern States 818 256. Deduction in respect of profits and gains from the business of collecting and processing of bio-degradable waste 819 257. Deduction in respect of employment of new employees 820 258. Deduction in respect of interest on certain securities, investments, etc. 822 259. Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre 823 260. Deduction in respect of inter-corporate investment 824 261. Deduction in respect of income of a co-operative society 826 262. Deduction in respect of certain income of producer companies 826 263. Deduction in respect of royalty income of authors 826 264. Deduction in respect of remuneration or professional income from certain foreign sources 828 265. Deduction in respect of royalty on patents 828 266. Deduction in respect of interest on deposits in savings accounts 829 267. Deduction in respect of interest on deposits in case of senior citizens 830 268. Deduction in case of a person with disability 830 269. Deductions from tax liability 832 270. Rebate for resident individuals 832 Contents
PAGE
Tax treatment of Hindu undivided families
PAGE Contents I-16
14
Agricultural income
12
295. Meaning of Hindu undivided family 867 296. Hindu coparcenary 867 297. Different schools of Hindu law 867 298. Jain and Sikh families 868 299. Assessment as Hindu undivided family - Basic conditions 868 300. Taxable income - How to compute 869 301. Rates of tax 871 302. Partition of a Hindu undivided family 871 303. Problems on Hindu undivided families 873
285. Tax incidence on individuals 851 286. Taxable income - How computed 851 287. Tax liability 852 288. Problems on computation of taxable income 856
Special provisions governing assessment of firms and association of persons
278. Definition 834 279. Income which is partly agricultural and partly from business 840 280. Partially integrated taxation of non-agricultural income with income derived from agriculture 842 281. Computation of net agricultural income 843
13
15
313. Meaning of partnership 880 314. Scheme of taxation of firms 880 315. When remuneration/interest is deductible 880 316. What are the conditions a firm should fulfil under section 184 881 317. What are the conditions for claiming deduction of remuneration to partners under section 40(b) 882 318. What are the conditions for claiming deduction of interest to partners under section 40(b) 888 319. Carry forward and set-off of loss in the case of change in the constitution of firm889 320. Computation of income of firm 892 321. Computation of tax of firm 894 322. Assessment of partners of a firm 901 323. How to compute income of an association of persons (AOP) or body of individuals (BOI) 904 324. Computation of income of an AOP/BOI 906 325. Computation of tax of AOP or BOI 906 326. Assessment of member of AOP/BOI 908 327. Hints for tax planning 913
Typical problems on assessment of individuals
18
339. Meaning of co-operative society 980 340. Taxable income and tax liability - How computed 980 341. Deduction in respect of income of co-operative societies 981 342. Problems on computation of income of a co-operative society 989
Taxation of companies
17
343. Meaning of trust 991 344. Tax exemption 991 345. Charitable purpose 991 346. Essential conditions for exemption 995 347. How to find out exemption u/s 11 1001 348. Accumulation of income 1008 349. Forfeiture of exemption 1010 350. Public charitable/religious trust - How chargeable to tax 1020 351. Private discretionary trust 1023 352. Income from property held under trust partly for religious purposes and partly for other purposes 1024 352A. Oral trust 1026 352B. Tax on distributed income by securitization trusts 1026 352C. Special provisions pertaining to business trust 1027 352D. Pass through status to Category I and Category II Alternative Investment Funds 1029
Assessment of charitable and other trusts
328. Problems on computation of taxable income of firms/partners and association of persons 920
I-17 Contents PAGE
16
Assessment of co-operative societies
333. Definitions 926 334. Taxable income and tax liability - How computed 928 335. Carry forward and set-off of losses in the cases of certain companies 930 336. Minimum alternate tax 932 337. Tax on distributed profits of domestic companies 954 337A. Tax on income distributed to unitholders 955 337B. Tax on income received from venture capital companies and venture capital funds 955 337C. Additional income-tax on distributed income by company for buy-back of unlisted shares 955 338. Problems on computation of taxable income of a corporate-assessee 956
19
Return of income and assessment
353. Voluntary return 1034 354. Return of loss 1038 355. Belated return 1038 356. Revised return 1039
385. Interest payable by the assessee 1160 386. Interest payable to assessee 1176
373. Penalties for defaults in brief 1111 374. Penalty for concealment/under-reporting of Income 1122 375. Who can levy penalty 1142 376. Power of Commissioner to reduce or waive penalty 1142 377. Procedure for imposition of penalty 1147 378. Time-limit for completion of penalty proceedings 1147 379. Offences and prosecutions 1150 380. Onus of proof 1154
381. Income liable for advance tax 1156 382. Advance tax liability - Under different situations 1157 383. Interest payable by the assessee or Government 1158 384. Problems illustrating advance tax provisions 1158
357. Updated return 1041 358. Defective or incomplete return 1043 358A. Modified return 1046 359. Scheme to facilitate submission of returns through Tax Return Preparers 1046 359A. Power of Board to dispense with furnishing of documents 1046 359B. Filing of return in electronic form 1046 360. Return by whom to be verified 1047 361. Permanent Account Number (PAN) 1048 361A. Quoting of Aadhaar number 1052 362. What is self-assessment 1053 363. Inquiry before assessment 1055 364. Summary assessment without calling the assessee 1059 365. Assessment in response to notice under section 143(2) 1062 366. Best judgment assessment 1073 366A. Reference to dispute resolution panel 1075 367. Income escaping assessment and re-assessments 1077 368. Issue of notice for reassessment under section 148 1084 369. What are the provisions regarding rectification of mistake 1091 370. Time limit for completion of assessments/reassessments 1096 371. Provisions of section 155 1102 372. Problems on return of income and assessment 1103 372A. Obligation to furnish annual information return pertaining to financial transactions 1107 372B. Submission of statement by a non-resident having liaison office in India 1109 372C. Furnishing of information or document by an Indian concern 1109 372D. Reporting by producers of cinematograph films or persons engaged in specified activities 1110
Advance payment of tax
Contents I-18 PAGE
22 Interest
20 Penalties and prosecutions
21
420ABB. Tax deduction from income in respect of investment in Securitization fund 1233 420B. Tax deduction by an Indian specified company or business trust from interest to a non-resident/foreign company 1234 420C. Tax deduction at source on interest on bonds/Government securities 1235 420D. TDS on certain payments by individual/HUF 1236 420E. TDS on payment of certain amounts in cash 1237 420F. TDS on payment by e-commerce operator to e-commerce participants 1238 420G. Deduction of tax in case of specified Senior Citizen 1239 420H. Deduction of tax at source on payment for purchase of goods 1240 420-I. Deduction of tax on benefit/perquisite pertaining to business/profession 1243 420-J. Deduction of tax from payment on transfer of virtual digital asset 1244 421. Deduction of tax at source from other sums 1245 422. Tax deduction from any income payable to non-resident unit-holders of Mutual Fund 1251
23
Tax deduction or collection at source
387. Procedure to be followed in calculation of interest 1180 388. Waiver or reduction of interest under sections 234A, 234B and 234C 1180 389. Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases 1181 390. Power of CBDT and Settlement Commission to reduce/waive interest 1181 391. Writ petition 1182 392. Problems illustrating computation of interest 1182
404. Scheme of tax deduction at source 1189 405. Deduction of tax from salaries 1193 405A. Tax deduction at source from withdrawal from employees provident fund scheme 1198 406. Deduction of tax at source from interest on securities 1201 407. Deduction of tax at source from dividends 1202 408. Deduction of tax at source from interest other than interest on securities 1203 409. Deduction of tax at source from winnings from lotteries or crossword puzzles 1208 410. Deduction of tax at source from winnings from horse races 1208 411. Deduction of tax at source from payments to contractors or sub-contractors 1208 412. Deduction of tax at source from insurance commission 1215 412A. Tax deduction from payment of life insurance policy 1215 413. Payment to non-resident sportsman or sports association 1216 414. Deduction of tax from payments in respect of National Savings Scheme 1217 415. Deduction of tax at source on payments on account of repurchase of units by Mutual Funds or UTI 1217 416. Deduction of tax from commission, etc., on sale of lottery tickets 1217 417. Deduction of tax at source from commission or brokerage 1218 418. Deduction of tax at source from income by way of rent 1220 418A. Tax deduction at source on purchase of immovable property 1225 418B. Tax deduction from payment of rent by certain individuals/HUFs 1225 418C. Tax deduction from payment under joint development agreement 1226 419. Tax deduction at source on fees for professional or technical services, royalty or directors fees 1227 419A. Tax deduction at source in respect of income from units 1231 420. Tax deduction from payment of compensation in certain cases 1231 420A. Deduction of tax at source from interest payable on infrastructure debt fund 1232 420AA. Tax deduction from income from units of business trust 1232 420AB. Tax deduction from income in respect of units of investment fund 1233
I-19 Contents PAGE
27
457. Settlement Commission 1328 458. Discontinuation of Income-tax Settlement Commission 1328 459. Dispute Resolution Committee 1332
Income-tax authorities
435. Meaning of appeal 1279 436. Appellate hierarchy 1279 437. Appeal to the Commissioner (Appeals) 1280 438. Revision by the Commissioner of Income-tax 1293 439. Appeal to the Appellate Tribunal 1301 440. Appeal to High Court 1313 441. Appeal to the Supreme Court 1319 442. Provision for avoiding repetitive appeals 1320 443. Procedure for appeal by revenue when an identical question of law is pending before High Court/Supreme Court 1321 444. Consequence of non-filing of appeal in respect of cases where the tax effect is less than the prescribed monetary limit 1322
423. Deduction of tax at source in respect of units referred to in section 115AB 1251 424. Deduction of tax from income or long-term capital gain from foreign currency bonds/Global Depository Receipts 1251 425. Deduction of tax from income of Foreign Institutional Investors from securities 1252 426. Payment without tax deduction or with deduction at lower rate 1252 427. Processing of statements of tax deducted at source 1256 428. Other points for consideration 1256 429. Tax collection at source 1265
26
Special measures in respect of transactions with persons located in notified jurisdictional area
Settlement Commission and Dispute Resolution Committee
24
Appeals and revisions
471. Special measures in respect of certain transactions
28
445. Tax authorities 1324 446. Central Board of Direct Taxes 1324
25
1334PAGE
Refund of excess payments
430. Right to claim refund - When arises 1276 431. Who can claim refund 1276 432. How to claim refund 1276 433. Other points 1277
Contents I-20
Search, seizure and assessment
492. Powers regarding discovery, production of evidence, etc. 1352 493. Search and seizure 1353 494. Requisitioning of books of account, etc. 1361 495. Application of assets seized or requisitioned 1362 496. Power to call for information 1363 497. Power of survey 1364 498. Power to collect certain information 1367 498A. Power to call for information by prescribed income-tax authority 1367 499. Scheme of assessment in case of search or requisition 1368 500. Prior approval in the case of search 1375
472. Notified jurisdictional area 1334 473. Applicability of transfer pricing provisions 1334 474. Disallowance of payment to financial institutions located in notified jurisdictional area 1335 475. Disallowance of other expenditure 1335 476. Amount received to be treated as income in some cases 1335 477. TDS at higher rate 1335 478. Provisions illustrated 1335
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 1350
30 Advance ruling
I-21 Contents PAGE
31
506. Taxation of international transaction 1376 507. Computation of the arm’s length price 1380 508. Arm’s length price - Computation of 1381
General Anti-avoidance Rule
480. Applicability of general anti-avoidance rule 1338 481. Impermissible avoidance arrangement 1338 482. Procedure for invoking GAAR 1340 483. Clarifications given by Board 1340
29
32 Transfer pricing
510. Reference to transfer pricing officer 1398 510A. Power of Board to make Safe Harbour Rules 1401 511. 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 514A. Secondary adjustment in certain international transactions 1412 514B. Provisions pertaining to thin capitalisation 1416 514C. Important judicial rulings 1419
515. Restructuring business 1420 516. Amalgamation 1420 517. Demerger 1429 518. Conversion of sole proprietary business into company 1439 519. Conversion of firm into company 1440 520. Slump sale 1442 521. Transfer of assets between holding and subsidiary companies 1448 522. Amalgamation or demerger of co-operative banks 1453 523. Conversion of private company/unlisted public company into Limited Liability Partnership (LLP) 1455
34 Alternative tax regime
1472PAGE
509. Computation of arm’s length price in cases where more than one price is determined under most appropriate method 1388
531. Alternative tax regime available under different sections 1460 532. Manufacturing domestic companies under section 115BA 1462 533. Tax on income of certain domestic companies 1463 534. Conditions and restrictions 1463 535. Tax rate 1464 536. Option 1464 537. MAT not applicable 1464 538. Case studies 1464 539. New manufacturing domestic companies 1468 540. Conditions 1468 541. Mode of computation of income 1469 542. Computation of tax liability under section 115BAB 1469 543. Option 1470 544. MAT not applicable 1470 545. Case study 1471 546. Income of individuals and Hindu undivided family 1471 547. Rate of income-tax under the alternative tax regime
Contents I-22
33 Business restructuring
572. Introduction of Tonnage Tax 1497 573. Securities Transaction Tax 1500 574. Tax clearance certificate 1502 575. Equalisation levy 1504 577. Provisions pertaining to successor entity subsequent to business reorganization 1508 578. Commodities transaction tax 1509 580. Facility for electronic communication 1510 581. Introduction of Document Identification Number 1510 582. Power to withdraw approvals 1510 583. Restriction on cash transactions 1510
2. Rates of depreciation 1538
35 Tax planning
565. Tax planning 1480 566. Tax planning with reference to setting up of a new business 1482 567. Tax planning with reference to financial management decisions 1484 568. Tax planning with reference to specific managerial decisions 1485 569. Tax planning in respect of employees’ remuneration 1489 570. Tax planning in respect of non-residents 1491 571. Tax planning in respect of amalgamation or demerger of companies or business restructuring 1496
548. Conditions and restrictions 1472 549. Option 1474 550. Case studies 1475 551. Tax on certain resident co-operative societies 1478 552. Conditions and restrictions under section 115BAD 1478 553. Tax rate 1479 554. Option 1479
Miscellaneous
5. Questions set for CA (Final) Examinations and Answers from November 2011 to December 2021
3. The Eleventh Schedule, Thirteenth Schedule, Fourteenth Schedule/ Investment ceiling in the case of small scale industrial undertaking 1545
36
1. Tax rates 1514
ANNEXURES
4. Notified backward districts 1552
1554PAGE I-23 Contents
CHAPTER TWO
23.2 Different kinds of residential status - Assessees are either (a) resident in India, or (b) nonresident in India. As far as resident individuals and Hindu undivided families are concerned, they can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessees (viz., a firm, an association of persons, a company and every other person) can simply be either a resident or a non-resident.
22. There are two types of taxpayers—resident in India and non-resident in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India.
Residential status and tax incidence
23.1 Different taxable entities - Section 6 lays down the test of residence for the following taxable entities :
In the case of V.VR. N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168, the Supreme Court held that section 6(2) makes a presumption that a Hindu undivided family, a firm or association of persons has to be a resident in India and the onus of proving that they are not residents is on them. However,
23.3 Different residential status in respect of different previous years of the same assessment year not possible [Sec. 6(5)] - If a person is resident in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year(s) relevant to the same assessment year in respect of each of his other sources of income [ see problem 24-P9].
What is relevance of residential status
23.5 Resident in India and abroad - It is not necessary that a person who is resident in India, cannot become resident in any other country for the same assessment year. A person may be resident in more than one country at the same time for tax purposes, though he cannot have two domiciles simultaneously. It is, therefore, not necessary that a person, who is resident in India, will be nonresident for all other countries for the same assessment year.
47
23. One has to keep in mind the following norms while deciding the residential status of an assessee :
23.4 Different residential status for different assessment years - An assessee may enjoy different residential status for different assessment years. For instance, an individual who has been regularly assessed as resident and ordinarily resident, has to be treated as non-resident in a particular assessment year if he satisfies none of the conditions of section 6(1) in that year [see para 24.1].
a. an individual ; b. a Hindu undivided family ; c. a firm or an association of persons or a body of individuals ; d. a company ; and e. every other person.
23.6 Onus of proof - Whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities—Rai Bahadur Seth Teomal v. CIT [1963] 48 ITR 170 (Cal.).
Residential status - General norms
24.1-1 - Under section 6(1) an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions—
† Vide Circular No. 2/2021, dated March 3, 2021, CBDT has provided that if any individual is facing double taxation even after taking into account the relief provided by the relevant Double Taxation Avoidance Agreement (DTAA), he/ she may furnish the specified information by March 31, 2021 in Form-NR annexed to the said Circular. This form is to be submitted electronically to the Principal Chief CIT (International Taxation).
See para 24.1-1
Income-tax - Residential status and tax incidence
48
‡In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, not include the period given in rule 126. Under rule 126, the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage, shall not be included in the period of stay in India.
24. An individual may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident.
Basic condition (b) He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
Basic condition (a) He is in India in the previous year for a period of 182 days or more.
■ Exception two (Special Case 2) - In Special Case 2, the period of “60 days” referred to in (b) above has been extended to 182 days# by virtue of Explanation 1(b) to section 6(1). However, Special Case 2 covers an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents.
24.1-1a - The aforesaid rule of residence is subject to the following exceptions—
Para 24
24.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)] - To find out whether an individual is “resident and ordinarily resident” in India, one has to proceed as follows
the burden of proving that an individual or a company is resident in India lies on the department— Moosa S. Madha & Azam S. Madha v. CIT [1973] 89 ITR 65 (SC).
■ Exception one (Special Case 1) - In Special Case 1, the period of “60 days” referred to in (b) above has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, Special Case 1 is available in the case of an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship‡. For this purpose, the requirement is not leaving India for taking employment outside India but leaving India for the purposes of employment (the employment may be in India or may be outside India). To put it differently, the individual need not be an unemployed person—British Gas India (P.) Ltd., In re [2006] 155 Taxman 326 (AAR - New Delhi). He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Travelling abroad on business visa to take up any employment or for any business carried outside India, is sufficient to prove this condition— K. Sambasiva Rao v. ITO [2014] 42 taxmann.com 115 (Hyd.). Alternatively, he may be an unemployed person who goes outside India to take an employment outside India.
If such individual is “resident” in India, then find out whether he is “ordinarily See para 24.1-2 resident” in India. However, if such individual is a “non-resident” in India, then no further investigation is necessary.
In Special Case 1, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days.
Step 1 First find out whether such individual is “resident” in India.
Residential status of an individual [Sec. 6]†
Step 2
■ Stay at the same place not necessary - It is not essential that the stay should be at the same place— Kinloch v. IRC 14 TC 736. It is equally not necessary that the stay should be continuous. Similarly place of stay or purpose of stay is not material.
# This provision is subject to one exception. It is applicable from the assessment year 2021-22. For this exception, see para †According24.3-1. to basic conditions given in para 24.1-1.
■ Exception three - Exception three is given by section 6(1A). It is applicable from the assessment year 2021-22. For the provisions of this section, see para 24.3-1.
24.1-3 - In determining the residential status of an assessee, the following settled propositions have to be borne in mind :
24.3 Non-resident - An individual is a non-resident in India if he satisfies none of the basic conditions [para 24.1-1]. In the case of non-resident, the additional conditions [i.e., (i) and (ii) of para 24.1-2] are not relevant.
Additional condition (ii)He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
■ Stay in territorial waters - A stay by an individual on a yacht moored in the territorial waters of India would be treated as his presence in India for the purpose of this section— Baryard Brown v. Burt 5 TC 667.
Case 1 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 24.1-1] but none of the additional conditions [i.e., (i) and (ii) of para 24.1-2].
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions and the two additional conditions [i.e., (i) and (ii)].
■ Involuntary stay - Involuntary stay of a person in India caused by unauthorized impounding of passport must be excluded for determining his residential status under section 6— CIT v. Suresh Nanda [2015] 233 Taxman 4 (Delhi).
Case 2 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 24.1-1] and one of the two additional conditions [i.e., (i) and (ii) of para 24.1-2].
■ Exceptions - For a few exceptions, see para 24.3-1.
Additional condition (i)He has been resident† in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.
49 Non-resident Para 24.3
24.2 Resident but not ordinarily resident [Sec. 6(1), 6(6)(a)] - An individual who satisfies at least one of the basic conditions mentioned in para 24.1-1 but does not satisfy the two additional conditions [i.e., conditions (i) and (ii) mentioned in para 24.1-2], is treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances :
■ Exceptions - For a few exceptions, see para 24.3-1.
In Special Case 2, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days#.
■ Presence for a part of a day - Where a person is in India only for a part of a day, the calculation of physical presence in India in respect of such broken period should be made on an hourly basis. A total of 24 hours of stay spread over a number of days is to be counted as being equivalent to the stay of one day—Walkie v. IRC [1952] 1 AER 92. If, however, data is not available to calculate the period of stay of an individual in India in terms of hours, then the day on which he enters India as well as the day on which he leaves India shall be taken into account as stay of the individual in India— Advance Ruling P. No.7 of 1995 , In re [1997] 90 Taxman 62 (AAR - New Delhi).
24.1-2 - Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions—
Who is resident and ordinarilyHe must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. At the same resident in India time, he should also satisfy the two additional conditions.
c. he comes to India on a visit during the relevant previous year, and d. he is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.
Who is non-resident residentHe satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a) in India and basic condition (b)*]. Additional conditions are not relevant in the case of a nonresident.
c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
■ First exception - This exception is given under section 6(1A) read with section 6(6)(d) and applicable from the assessment year 2021-22. Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions –
*In the two special cases mentioned in para 24.1-1, basic condition (b) is not relevant.
■ Second exception - This exception is given by section 6(6)(c) read with Explanation 1(b) to section 6(1) and applicable from the assessment year 2021-22. Under this exception, an individual shall be deemed to be resident but not ordinarily resident in India if he satisfies the following 4 conditions –
† For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into consideration even if it is derived/received in India. 24.3
Para
a. he is an Indian citizen or a person of Indian origin;
■ Liable to tax - “Liable to tax” (in relation to a person and with reference to a country) means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently being exempted from such liability under the law of that country.
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 † during the relevant previous year, and
24.4 Rule of residence in brief - The Table given below summarises the rule of residence for the assessment year 2022-23—
a. he is an Indian citizen;
50
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 † during the relevant previous year;
RULE OF RESIDENCE
This exception is not applicable in the case of a foreign citizen, even if he is a person of Indian origin.
24.3-1 - Even if an individual satisfies none of the two basic conditions, he is deemed to be resident but not ordinarily resident in the cases given below –
■ Person of Indian origin - A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.
Income-tax - Residential status and tax incidence
Who is resident but notHe must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. He may ordinarily resident in Indiasatisfy one or none of the additional conditions.
■ How to find out total income of Rs. 15,00,000 - Total income for the ceiling of Rs. 15,00,000 is calculated after ignoring income from foreign sources. “Income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). Income which is deemed to accrue or arise in India shall be included in computation of the ceiling of Rs. 15,00,000.
24.3-1a - For the aforesaid two exceptions, the following should be kept in view –
ADDITIONAL CONDITIONS AT A GLANCE
a. Presence for at least 182 days in India during the previous year 2021-22
In the case of an Indian citizen who leaves India during the previous year for the purpose of employment or who leaves India as a member of the crew of an Indian ship
(1) (2) (3)
24.5 Clarification in respect of residency under section 6 - In order to avoid genuine hardship due to suspension of international flights, CBDT vide Circular No. 11/2020, dated May 8, 2020 has decided that for the purpose of determining the residential status under section 6 during the previous year 2020-21 in respect of an individual who has come to India on a visit before March 22, 2021 and –
a. has been unable to leave India on or before March 31, 2021, his period of stay in India from March 22, 2021 to March 31, 2021 shall not be taken into account; or b. has been quarantined in India on account of outbreak of COVID-19 on or after March 1, 2021 and has departed on an evacuation flight on or before March 31, 2021 or has been unable to leave India on or before March 31, 2021, his period of stay from the beginning of his quarantine to his date of departure or March 31, 2021, as the case may be, shall not be taken into account; or c. has departed on an evacuation flight on or before March 31, 2021, his period of stay in India from March 22, 2021 to his date of departure shall not be taken into account.
BASIC CONDITIONS AT A GLANCE
a. Presence for at least 182 days in India during the previous year 2021-22.
b.Not functional†
† However, this condition has been activated from the assessment year 2021-22, in a few cases. See para 24.3-1.
Clarification in respect of residency
a. Presence for at least 182 days in India during the previous year 2021-22.
b. Presence in India for at least 60 days during the previous year 2021-22 and 365 days during 4 years immediately preceding the previous year (i.e., during April 1, 2017 and March 31, 2021).
In the case of an Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the previous year
b.Not functional
i. Resident in India in at least 2 out of 10 years immediately preceding the previous year [ i.e., he must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years ( i.e., during previous years 2010-11 and 2019-20)].
ii. Presence in India for at least 730 days during 7 years immediately preceding the previous year ( i.e., during April 1, 2013 and March 31, 2020).
51
Para 24.5
In the case of an individual [other than that mentioned in columns (1) and (2)]
Para 24.5 Income-tax - Residential status and tax incidence 52
53 Clarification in respect of residency Para 24.5
Para 24.5 Income-tax - Residential status and tax incidence 54
55 Clarification in respect of residency Para 24.5
25.2 When a resident Hindu undivided family is ordinarily resident in India - A resident Hindu undivided family is ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6( 6)(b) :
Place of control Residential status of familyOrdinarily resident or not Control and management of the affairs of a Hindu undivided family is —
Additional Karta has been present in India for a period of 730 days or more during 7 years immediately condition (ii)preceding the previous year.
■ Broad propositions - The following propositions can be stated on the basis of the rulings given in Subbayya Chettiar v. CIT [1951] 19 ITR 163 (SC) and Narasimha Rao Bahadur v. CIT [1950] 18 ITR 181 (Mad.)—
Para 25
■ Wholly out of India Non-resident
56
The table given below highlights the same proposition —
Additional Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition (i)condition mentioned in para 24.1-1] immediately preceding the relevant previous year
If the karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
■ Residence of HUF in India - The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family, unless the decisions concerning the affairs of the family are taken at that place. The mere fact of the absence of karta from India does not make the family non-resident—Annamalai Chettiar v. ITO [1958] 34 ITR 88 (Mad.).
■ Place of control and management - Control and management is situated at a place where the head, the seat and the directing power are situated. The head and brain is situated where vital decisions concerning the policies of the business, such as, raising finance and its appropriation for specific purposes, appointment and removal of staff, expansion, extension, or diversification of business, etc., are taken—San Paulo (Brazilian) Railway Co. v. Carter [1886] AC 31 (HL).
25.1-1 - Different courts have defined the term “control and management” as follows —
1. Generally, HUF shall be taken to be resident in India unless control and management of its affairs is situated wholly outside India.
25.1 When a Hindu undivided family is resident or non-resident - A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.
■ Partly in India and partly outside India Resident See para 25.2
Income-tax - Residential status and tax incidence
■ Wholly in India Resident See para 25.2
■ De facto control - Control and management means de facto control and management and not merely the right to control or manage— CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC).
Note - In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is “ordinarily resident”—see para 25.2.
2. HUF may be residing in one place and doing a great deal of business in other place.
Residential status of a Hindu undivided family [Sec. 6( 2)]
25. A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
3. Occasional visit of a non-resident karta to the place of HUF’s business in India would be insufficient to make HUF ordinarily resident in India.
26. A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.
Place of control
■ The above rule may be summarised as follows —
❑
26.1 What is “control and management” - While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in the principal officer. Control and management means de facto control and management and not merely the right to control or manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated. Where the partners of a firm are resident in India the normal presumption is that the firm is resident in India. This presumption can, however, be effectively rebutted by showing that the control and management of the affairs of the firm is situated wholly outside India. The onus of rebutting the presumption is on the assessee.
Residential status
❑
Note - A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential status of the partners/members of the firm/association is not relevant in determining the status of the firm/ association.
❑
57 What is control and management Para 26.1
Residential status of the firm and association of persons [Sec. 6(2)]
Control and management of the affairs of a firm/association of persons is — Wholly in India Resident Wholly outside India Non-resident Partly in India and partly outside India Resident
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AUTHOR : Vinod K. Singhania , Kapil Singhania
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