Taxmann's Students' Guide to Income Tax Including GST

Preface

Income-tax is indeed a complex subject. It requires organized study constantly over a period of time to gain effective understanding and grasp of this subject unlike many other fields of study. In such backdrop, a text book on income-tax for B. Com., BBA, CA (Inter), CS (Executive) and CMA (Inter) students must necessarily be written in a simple language, explaining the provisions of law step-by-step with the help of suitable illustrations, without resorting to paraphrasing of sections and legal jargon. The present work conforms to the aforesaid criteria. Readers will find that each topic has been discussed with clarity, followed by pointwise recapitulation.

The present edition of the book is designed to bridge the gap between theory and application and stands out distinctly from others on account of the following salient features: u The present edition is thoroughly revised with a view to making it more student-friendly. It is bifurcated into two units.

Unit 1 deals with income-tax and Unit 2 covers the provisions related to GST. u The presentation of the subject is designed on teach yourself technique which enables the students to learn faster. u While the law relating to income-tax has been discussed thoroughly, the discussion on GST is equally comprehensive.

Each para (with a distinct number) starts with analytical discussion supported by well-thought out original problems. A unique style of illustrating all complex provisions has been adopted. u With a view to developing sufficient confidence amongst students to solve practical questions in examinations, every solved problem is followed by an unsolved exercise. Answers to unsolved exercises are given at the end of book in Appendix 4. u The Book contains more than 500 solved problems and an equal number of unsolved exercises. u

u u

u

The Book is amended up to December 1, 2023.

All questions set for CA (Inter/IPCC) Examinations for last 5 years are given along with solutions (of theory as well as practical questions) in accordance with the law applicable for the assessment year 2024-25 (GST questions are solved in accordance with law as amended up to December 1, 2023).

All paras, problems and exercises with ➠ symbol are primarily meant for students appearing in professional examinations, though students having meritorious outlook in undergraduate university courses may also refer to the same.

Readers views, comments and criticism relating to the present work are most welcome.

22 Deepali, Pitampura, Delhi - 110034.

Email : vks@taxmann.com Phone : 27016686, 9810008160

VKS

v

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. Monica Singhania is Professor, Faculty of Management Studies, University of Delhi. She is a post-graduate from Delhi School of Economics and a Fellow Member of the Institute of Chartered Accountants of India. She has the distinction of being placed in the merit list of the examinations conducted by both the University as well as the Institute. She has been awarded Ph.D. in the area of corporate taxation from the University of Delhi. She is the author of 7 books on direct tax laws and several research papers which have been published in leading journals.

She can be reached at monica@fms.edu

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Contents PAGE

Preface About the Authors

v vi

UNIT 1 : INCOME-TAX

1

Basic concepts that one must know

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What is an assessment year What is a previous year Who are included in person Who is regarded as assessee How to charge tax on income What is regarded as income under the Income-tax Act What is gross total income What is total income and how is it computed What is agricultural income What is difference between exemption and deduction What are capital and revenue receipts What is capital and revenue expenditure How far method of accounting is relevant in computing income Problems on basic concepts

2

Residential status and its effect on tax incidence

17.

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23.

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What is relevance of residential status What one must know for deciding residential status How to determine residential status of an individual How to find out residential status of a Hindu undivided family How to determine residential status of firm and association of persons How to find out residential status of a company How to determine residential status of every other person What is the relationship between residential status and incidence of tax Connotation of receipt of income - How is it understood What is accrual of income What is income deemed to accrue or arise in India Problems on incidence of tax Other problems

vii

1 1 3 4 4 5 9 10 15 15 15 16 16 16

24 24 25 32 33 34 34 35 37 38 38 40 45

Contents

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3 32.

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37A. 38.

4 39.

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Income that is exempt from tax

What income is exempted under section 10 What are special provisions in respect of newly-established undertakings in free trade zone, etc.

What are special provisions in respect of newly established hundred per cent export-oriented undertakings What are the special provisions in respect of profit from export of artistic hand-made wooden articles How to claim exemption in respect of income from property held for charity How can a political party claim exemption Exemption to electoral trust Problems on income exempt from tax

48 59 61 61 61 71 72 72

Income under the head Salaries and its computation

What do you understand by expression salary What is basis of charge of salary income Different forms of salary - How taxed Different forms of allowances - How taxed Perquisite - When taxable/not taxable Perquisites - How valued for tax purposes What are permissible deductions from salary income What is tax treatment of provident fund What is the tax treatment of approved superannuation fund What is special tax treatment of salary income of non-resident technicians What is the extent of exemption available to other foreign citizens in respect of salary income Deduction under section 80C - How to find out Is salaried employee entitled to relief in respect of salary in arrears, advance, etc.

What are important points which one should remember to solve practical problems under the head Salaries Problems on computation of salary income Theoretical problems on computation of salary income

5

Income under the head Income from house property and its computation

66.

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What is the basis of charge When property income is not charged to tax What is the basis of computing income from a let out house property How to compute taxable income from self-occupied property What are special provisions when unrealised rent is realised subsequently What is mode of taxation of arrears of rent Problems on computation of property income Theoretical problems on computation of property income

6

Income under the head Profits and gains of business or profession and its computation

77.

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What is the basis of charge What are the basic principles for arriving at business income Method of accounting - How far relevant for computing business income What is the scheme of business deductions/allowances What are specific deductions under the Act

74 75 78 91 98 101 127 128 132 132 132 133 138 139 140 166

176 180 180 187 194 195 195 206

208 209 211 211 213

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Contents PAGE

82.

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What are the specific disallowances under the Act What are the deemed profits and how they are charged to tax How and when undisclosed income/investments are taxed When maintenance of books of account becomes compulsory When audit of accounts by certain persons is compulsory What are special provisions for computation of business income What are the special provisions for computing income on estimated basis under sections 44AD, 44ADA and 44AE What are permissible methods of valuation of closing stock Problems on computation of income from business/profession Theoretical problems on business/profession income

7

Income under the head Capital gains and its computation

92.

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What is the basis of charge What is included in and excluded from capital asset What is transfer of capital asset Capital gains - How computed What is full value of consideration How to find out expenditure on transfer What is cost of acquisition What is cost of improvement How to convert cost of acquisition/improvement into Indexed cost of acquisition/improvement Capital gain in special cases - How to find out Valuation of capital asset - When can be referred to Valuation Officer Capital gains - When and to what extent exempt from tax How to find out tax on short-term/long-term capital gain Problems on computation of capital gains Theoretical problems on capital gains

8

Income under the head Income from other sources and its computation

107.

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116A. 116B. 116C. 117.

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What is basis of charge Relevance of method of accountancy What is regarded as dividend and how is it charged to tax Winnings from lotteries, crossword puzzles, horse races and card games, etc. - How to compute What is regarded as interest on securities How to find out income from machinery, plant or furniture let on hire How to find out income from composite letting of building, machinery, plant or furniture Money/property received without consideration or for inadequate consideration - How to find out income Share premium in excess of fair market value - How to find out income Advance money received in course of negotiations for transfer of a capital asset - When chargeable to tax Sum received by a unitholder from a business trust - When income chargeable to tax Sum received under a life insurance policy - How chargeable to tax How to find out interest on deep discount bonds What deductions are permissible from income from other sources What are other provisions Problems on computation of income from other sources

259 275 277 278 278 279 281 285 285 308

311 311 314 316 318 318 318 318 319 322 343 343 359 370 380

386 388 388 390 391 392 392 393 402 404 404 404 408 408 409 410

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9 120.

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10 132.

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11 137A. 138.

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142A. 142B. 143.

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146A. 146B. 146C. 147.

148.

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Clubbing of income

Transfer of income without transfer of asset - When income therefrom is regarded as that of transferor Revocable transfer of assets - When income therefrom is regarded as that of transferor 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 an individual is assessable in respect of income from assets transferred to son s wife When an 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 When an individual is assessable in respect of income of his minor child What is tax implication of conversion of self-acquired property into joint family property and subsequent partition Other points Problems on clubbing of income

419 419 420 422 425 426 426 427 428 429 430

Set off and carry forward of losses

What is the mode of set off and carry forward Inter-source adjustment - How made Inter-head adjustment - How made Carry forward of loss - How to set off Carry forward and set-off of business loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank Problems on set off and carry forward of losses

434 434 435 436 442 443

Permissible deductions from gross total income

What are the basic rules governing deductions under sections 80C to 80U 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 National Savings Scheme - To what extent available Equity Linked Savings Scheme - When deduction is available Deduction in respect of pension fund - When available Deduction in respect of contribution to a National Pension System (NPS) Deduction in respect of investment made under any equity saving scheme Deduction in respect of contribution to Agnipath Scheme - When available Deduction in respect of medical insurance premia - When and to what extent available 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. - To what extent available Deduction in respect of payment of interest on loan taken for higher education - When and to what extent available Deduction in respect of interest on loan taken for residential house property Deduction in respect of interest on loan taken for certain house property - When available Deduction in respect of interest on loan taken for purchase of electric vehicle - When available Deduction in respect of donations to certain funds, charitable institutions, etc. - How arrived at Deduction in respect of rent paid - To whom and to what extent available Deduction in respect of certain donations for scientific research or rural development - When eligible

453 454 457 457 457 458 460 460 460 462 464 466 466 467 467 467 472 474

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150.

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153A. 154.

154A. 155.

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160A. 161.

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12 185.

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13 192.

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14 201.

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Deduction in respect of contributions given to political parties or electoral trust - To what extent deductible Deduction in respect of earnings in convertible foreign exchange - How to find out Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development, etc. - How to find out Deduction 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 respect of profits and gains from business of hotel/convention centre in NCR How to find out Deduction in respect of certain undertakings in North-Eastern States - How to determine Deduction in respect of business of processing of bio-degradable waste - How to determine Deduction in respect of Employment of new Employees Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre - To what extent available Deduction in respect of Inter-Corporate Investment - To what extent available Deduction in respect of income of a co-operative society - To what extent available Deduction in respect of certain income of producer companies - To what extent available Deduction in respect of royalty income of authors - To what extent available Deduction in respect of royalty on patents - To what extent available Deduction in respect of interest on deposits in savings accounts - When available Deduction in respect of interest on deposits in case of senior citizens - To what extent available Deduction in the case of a person with disability - To what extent available Deductions from tax liability - How to determine Rebate for resident individuals - How to find out Problems on computation of total income

475 475 475 477 477 478 479 480 480 480 481 481 483 483 484 485 485 486 487 488 488 489 490 493

Meaning of agricultural income and its tax treatment

What is agricultural income What are instances of income held to be agricultural/non-agricultural income What is the tax treatment of income which is partly agricultural and partly from business What is the scheme of partial integration of non-agricultural income with agricultural income

503 505 506 507

Individuals - Computation of taxable income

What is included in income of an individual Taxable income - How computed Tax liability - How calculated Problems on computation of taxable income

513 513 514 525

Hindu undivided families - Computation of taxable income

What is understood by Hindu undivided family What are the basic conditions for assessment of Hindu undivided family What is the basis of computation of taxable income of HUF What is tax implication of partition of a Hindu undivided family Problems on computation of taxable income of HUF

548 548 549 549 550

Contents

xii PAGE

15 212.

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16 240.

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17 266.

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268A.

18 269.

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270A. 271.

Firms and associations of persons - Computation of taxable income

What is partnership What is the scheme of taxation of firms When remuneration/interest paid or payable to partners is deductible What are the conditions a firm should fulfil under section 184 What are the conditions for claiming deduction of remuneration of 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 How to find out income of a firm How to find out tax liability of firm How to find out taxable income of partners Problems on computation of taxable income of a firm and partners How to find out income and tax of AOP/BOI and members Problems on firms and partners

554 554 554 555 555 559 559 560 560 560 561 564 568

Return of income

Who has to submit his/its return of income on voluntary basis as a statutory obligation When return of loss should be filed Can return be filed beyond time Can revised return be filed What is updated return What is a defective or incomplete return What is modified return What is Permanent Account Number (PAN) When and how aadhaar number is to be quoted What is Scheme to facilitate submission of returns through Tax Return Preparers Return by whom to be verified What is self-assessment What is inquiry before assessment under section 142 or 142A What is summary assessment without calling the assessee What is scrutiny assessment under section 143(3) What is best judgment assessment What is income escaping assessment When can mistake be rectified What is time-limit for completion of assessment/reassessment Who is under an obligation to furnish statement of financial transaction What is the requirement of submission of statement by a non-resident having liaison office in India Problem on return of income and assessment

571 574 574 575 575 577 578 578 579 580 580 581 582 582 583 583 584 585 585 586 586 586

Advance payment of tax

When a person becomes liable to pay advance tax When advance tax payment becomes due How advance tax is computed What are the consequences when advance tax is not paid

589 590 590 593

Deduction and collection of tax at source

What is the scheme of tax deduction at source (TDS) When and how tax is to be deducted at source from salary When and how tax is to be deducted at source from withdrawal from employees provident fund scheme When and how tax is to be deducted at source from interest on securities

594 596 598 598

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Contents PAGE

272.

273.

274.

274A. 275.

276.

277.

277A. 278.

When and how tax is to be deducted at source from dividends When and how tax is to be deducted at source from interest other than interest on securities When and how tax is to be deducted at source from winnings from lotteries or crossword puzzles When and how tax is to be deducted from winnings from online games When and how tax is to be deducted at source from winnings from horse races When and how tax is to be deducted at source from payments to contractors or sub-contractors When and how tax is to be deducted at source from insurance commission When and how tax to be deducted at source from payment of life insurance policy When and how tax is deductible at source from payment to non-resident sportsmen or sports associations 279. When and how tax is deductible from payments in respect of National Savings Scheme 280. When and how tax is deductible on payments on account of repurchase of units of Mutual Funds or UTI 281. When tax is deductible from commission, etc., on sale of lottery tickets 282. When and how to deduct tax at source from commission or brokerage 283. When and how tax is deductible from rent 283A. When and how tax is deductible from payment on transfer of certain immovable properties under section 194-IA 283B. When and how tax is deductible from rent by certain individuals/HUFs under section 194-IB 283C. When and how tax is deductible from payment under joint development agreement under section 194-IC 284. When tax is deductible at source on fees for professional or technical services 284A. When tax is deductible at source in respect of income from units 284B. When and how to deduct tax at source from payment of compensation on acquisition of certain immovable property 284C. When and how tax is to be deducted at source from interest payable on infrastructure debt fund 284D. When and how tax is to be deducted at source from income from units of business trust 284E. When and how tax is deductible from income in respect of units of investment fund 284F. When and how tax is deductible from income in respect of investment in securitization fund 284G. When and how tax is to be deducted by an Indian company from interest to a non-resident/ Foreign Citizen 284H. When and how tax is to be deducted from interest on bonds/Government securities under section 194LD 284-I. When and how tax is deductible on certain payments by individual/HUF 284J. When and how tax is deductible on payment of certain amounts in cash 284K. When tax is deductible at source in respect of payment by e-commerce operator to e-commerce participants 284L. When and how tax is to be deducted in the case of specified senior citizen 284M. When and how tax is to be deducted on payment for purchase of goods 284N. When and how tax is deductible on benefit/perquisite pertaining to business/profession 284-O. When and how tax is deductible from payment on transfer of virtual digital asset 285. When and how tax is to be deducted at source from other sums 285A. When tax is deductible at source from any income payable to non-resident unitholders 286. When and how tax is deductible from units or long-term capital gain under section 196B 287. When tax is deductible from income or long-term capital gain from foreign currency bonds/Global Depository Receipts 288. When tax is deductible at source from income of Foreign Institutional Investors from securities 289. What are other points for consideration 290. Tax collection at source

19

Interest payable by assessee/Government

296.

297.

298.

299.

When interest becomes payable by assessee Interest payable to assessee Procedure to be followed in calculation of interest Is it possible to reduce/waive interest

599 599 601 601 602 602 604 604 605 605 605 606 606 606 607 607 608 608 610 610 610 611 611 611 612 612 613 613 614 615 615 616 618 619 620 620 620 621 621 627

632 643 643 643

Contents

xiv PAGE

300.

301.

302.

Is it possible for Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases Can Central Board of Direct Taxes make relaxation Writ petition - Is it maintainable against levy of interest

643 643 644

UNIT 2 : GST

20 401.

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21 410.

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22 425.

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23 435.

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24 444.

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450.

Basic concepts of GST

What is the difference between direct tax and indirect tax What was pre-GST indirect tax structure in India What are different abbreviations used in the book What one should know before beginning study of law regulating GST What are relevant definitions which a beginner should know

645 645 646 646 652

Concept of Supply

What is taxable event What is supply What is the significance of consideration What are activities or transactions which are treated as supply under Schedule II What are activities which are treated as supply under Schedule I even if consideration is absent What are activities given in negative list (neither supply of goods nor supply of services) What is the significance of expression supply made in the course or furtherance of business What is relevant to attract GST - Supply by a person or supply by a taxable person What are different types of supply Problems on supply

656 657 659 661 667 670 672 672 672 675

Levy of GST

What is the basis of charge of GST How GST is levied in the case of inter-State supply How GST is levied in the case of intra-State supply What are GST rates notified for supply of various goods What are GST rates notified for supply of various services

681 681 682 683 685

Exemptions from GST

Power to grant exemption - How to exercise What are exempted goods under exemption notification What are services given in exemption notification Problems on exemption notifications

698 698 701 717

Place of supply

Why one should find out location of supplier and place of supply Location of supplier of goods - How to find out Location of supplier of services - How to find out Location of recipient of services - How to find out How to find out place of supply of goods How to find out place of supply of services Problems on place of supply

733 733 733 734 734 735 744

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25 455.

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26 464.

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27 481.

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28 492.

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29 511.

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Time of supply

Time of supply - How to determine and its significance What are the rules for determination of time of supply of goods What are the rules for determination of time of supply of services How to find out time of supply in case of change in GST rate

748 749 753 756

Value of taxable supply

What are different methods of calculation of value of taxable supply When value of supply shall be the transaction value How to determine value of supply when valuation under aforesaid provisions is not possible How to determine value of supply where the consideration is not wholly in money How to determine value of supply between distinct persons or related person How to determine value of supply of goods made or received through an agent How to determine value of supply of goods/services based on cost What is mode for determination of value of supply under rule 31 How to determine value of certain supplies given under rule 32 How to determine value of supply of services in the case of pure agent What are other modes of determination of value of taxable supply Rate of exchange of currency - How to determine Value of supply inclusive of GST - How to determine taxable value

760 761 764 764 765 766 766 767 767 770 771 771 772

Reverse charge mechanism

What is reverse charge mechanism When reverse charge mechanism is applicable When reverse charge mechanism is applicable on supply by unregistered person to registered person Problems on reverse charge mechanism

773 773 776 777

Input tax credit

What one should know before beginning study of input tax credit provisions What are conditions for taking input tax credit How input tax credit is allowed for payment of CGST, SGST, UTGST and IGST Apportionment of credit - How to determine What is the mode of computation of input tax credit pertaining to capital goods and reversal thereof What is the mode of distribution of credit by Input Service Distributor (ISD) What is the mode of claiming input tax credit by a banking company What is the mode of availability of credit in special circumstances under section 18 How to take input tax credit in respect of inputs/capital goods sent for job work Problems on input tax credit

782 783 791 794 795 796 797 797 801 802

Composition Scheme and Alternative Composition Scheme

Is there any threshold limit for small taxpayers What is composition levy What are the conditions which one has to satisfy What are specified GST rates under Composition Scheme What are other relevant considerations which one has to keep in mind Problems on Composition Scheme What is Alternative Composition Scheme for small service providers

813 813 813 816 818 819 822

Contents

xvi PAGE

518.

519.

30

What are salient features of Alternative Composition Scheme What are special features for GST payments under Alternative Composition Scheme Registration

521.

522.

523.

What is the significance of registration Who is liable for registration under GST What is the procedure for registration

31

Tax invoice, credit and debit notes

531.

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32 551.

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33 570.

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822 824

What is invoice under GST What is importance of tax invoice under GST When tax invoice/bill of supply be issued by a registered person What are the contents of tax invoice What are the contents of bill of supply What are the contents of receipt voucher What are the contents of refund voucher What are the contents of payment voucher What are the contents of revised tax invoice What are the provisions regarding tax invoice in special cases given under rule 54 What are provisions of transportation of goods without issue of invoice What are provisions pertaining to collection of tax and its indication in invoice What are credit and debit notes Problems on tax invoice, credit and debit notes

827 827 833

843 843 843 844 849 849 850 850 851 851 853 853 854 855

Returns, tax payment and interest

What are the basic features of GST returns mechanism What are different GST returns What is matching, reversal and reclaim of input tax credit What is electronic liability ledger What is electronic credit ledger What is electronic cash ledger What are different assessments under GST When interest and late fee are applicable under GST When a person is liable for penalty under GST What is the significance of national anti-profiteering authority in GST What are the provisions regulating e-way bill in GST What are the provisions regulating e-commerce What is the mechanism of tax deduction at source (TDS) under GST What are provisions regulating audit in GST

858 861 865 865 866 867 868 870 872 873 875 880 883 885

Provisions governing Real Estate Services

What one should know before beginning study of GST law pertaining to real estate services What are important definitions What are GST provisions regulating real estate projects with effect from April 1, 2019 What is GST on transfer of development rights (TDR), FSI, upfront amount in real estate transactions

887 888 889 896

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34

Problems on GST

581.

Problems on GST

1

APPENDIX

Tax rates

2

929

APPENDIX

Depreciation rates for power generating units

4

912

APPENDIX

Questions set for CA (Intermediate) Examinations and Answers

3

899

1043

APPENDIX

Answers to unsolved exercises

1044

CHAPTER 2

Residential status and its effect on tax incidence

T

ax incidence on an assessee depends on his residential status. For instance, whether an income, accrued to an individual outside India, is taxable in India depends upon the residential status of the individual in India. Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India, depends on the residential status of the individual, rather than on his citizenship. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability.

nn WHAT IS RELEVANCE OF RESIDENTIAL STATUS 17. 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.

nn WHAT ONE MUST KNOW FOR DECIDING RESIDENTIAL STATUS 18. The following norms one has to keep in mind while deciding residential status of an assessee : p Different taxable entities - All taxable entities are divided in the following categories for the purpose of determining residential status : a. an individual ; b. a Hindu undivided family ; c. a firm or an association of persons ; d. a joint stock company ; and e. every other person. p Different residential status - An assessee is either : (a) resident in India, or (b) non-resident in India. However, a resident individual or a Hindu undivided family has to be (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. Therefore, an individual and a Hindu undivided family can either be : a. resident and ordinarily resident in India ; or b. resident but not ordinarily resident in India ; or c. non-resident in India All other assessees (viz., a firm, an association of persons, a joint stock company and every other person) can either be : a. resident in India ; or b. non-resident in India.

The table given below highlights the same

Category 1

Resident in India

Category 2

Non-resident in India

▼

Individual/Hindu undivided family Ordinarily resident

▼

Category

Not-ordinarily resident

Firm, association of persons, joint stock company and every other person Resident in India Non-resident in India

24

25

Resident and ordinarily resident

Para 19.1

Residential status for each previous year - Residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year. p Different residential status for different previous years in same assessment year not possible - 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 [sec. 6(5)]. See problem 19-P10. p

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. p 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 two (or more) countries at the same time. It is, therefore, not necessary that a person who is resident in India will be non-resident in all other countries for the same assessment year. p

nn HOW TO DETERMINE RESIDENTIAL STATUS OF AN INDIVIDUAL [SEC. 6] 19. An individual may be (a) resident and ordinarily resident in India, (b) resident but not ordinarily resident in India, or (c) non-resident in India.

19.1 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 Step 1

First find out whether such individual is resident in India.

See para 19.1-1

Step 2

If such individual is resident in India, then find out whether he is ordinarily resident in India. However, if such individual is a non-resident in India, then no further investigation is necessary.

See para 19.1-2

19.1-1 BASIC CONDITIONS TO TEST AS TO WHEN AN INDIVIDUAL IS RESIDENT IN INDIA - 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 Basic condition (a)

He is in India in the previous year for a period of 182 days or more1

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

19.1-1a EXCEPTIONS - The aforesaid rule of residence is subject to the following exceptions p Exception one (Special Case 1) - In Special Case 1, the period of 60 days referred to in Basic condition (b) above has been extended to 182 days2 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. He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Alternatively, he may be an unemployed person who goes outside India to take an employment outside India.

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 days2.

Exception two (Special Case 2) - In Special Case 2, the period of 60 days referred to in Basic condition (b) above has been extended to 182 days2 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. p

1. 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, in respect of such voyage, 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.

2. This provision is subject to one exception. It is applicable from the assessment year 2021-22. For this exception, see para 19.3-1.

Para 19.1

Residential status and its effect on tax incidence

26

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 days3. p 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 19.3-1.

19.1-2 ADDITIONAL CONDITIONS TO TEST AS TO WHEN A RESIDENT INDIVIDUAL IS ORDINARILY RESIDENT IN INDIA - Under section 6(6), a resident individual is treated as resident and ordinarily resident in India if he satisfies the following two additional conditions Additional condition (i)

He has been resident4 in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.

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.

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 [i.e., (a) or (b)] and the two additional conditions [i.e., (i) and (ii)]. p Exceptions - For a few exceptions, see para 19.3-1.

19.1-3 OTHER POINTS - It is worthwhile to note the following propositions p It is not essential that the stay should be at the same place. It is equally not necessary that the stay should be continuous. Similarly, the place of stay or the purpose of stay is not material. p 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. 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.

19.2 Resident but not ordinarily resident [Sec. 6(1), (6)(a)] - An individual who satisfies at least one of the basic conditions [i.e., condition (a) or (b) mentioned in para 19.1-1] but does not satisfy the two additional conditions [i.e., conditions (i) and (ii) mentioned in para 19.1-2], 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 : Case 1

If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 19.1-1] but none of the additional conditions [i.e., (i) and (ii) of para 19.1-2]

Case 2

If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 19.1-1] and one of the two additional conditions [i.e., (i) and (ii) of para 19.1-2]

Exceptions - For a few exceptions, see para 19.3-1.

19.3 Non-resident - An individual is a non-resident in India if he satisfies none of the basic conditions [i.e., condition (a) or (b) of para 19.1-1]. In the case of non-resident, additional conditions [i.e., (i) and (ii) of para 19.1-2] are not relevant.

19.3-1 EXCEPTIONS - 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 p 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 a. he is an Indian citizen; b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,0005 during the relevant previous year, and 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.

The rule given by above exception is not applicable in the case of an individual who becomes resident in India by satisfying any of the basic conditions given by section 6(1) [see para 19.1]. Moreover, the above exception is not applicable in the case of a foreign citizen (even if he is a person of Indian origin). p

3. This provision is subject to one exception. It is applicable from the assessment year 2021-22. For this exception, see para 19.3-1.

4. According to the basic conditions.

5. 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.

27

Rule of residence for an individual in brief

Para 19.4

p 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 a. he is an Indian citizen or a person of Indian origin; b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,0006 during the relevant previous year; 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.

19.3-1a OTHER POINTS - For the aforesaid two exceptions, the following should be kept in view p 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. p 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 been exempted from such liability under the law of that country. p 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.

19.4 Rule of residence for an individual in brief - The tables given below summarise the rule of residence for the assessment year 2024-25 :

RULE OF RESIDENCE AT A GLANCE

Who is resident and ordinarily resident in India

He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)]. At the same time, he should also satisfy the two additional conditions.

Who is resident but not ordinarily resident in India

He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)]. He may satisfy one or none of the additional conditions. [See Note]

Who is non-resident resident in India

He satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a) and basic condition (b)]. Additional conditions are not relevant in the case of a nonresident.

Note - Besides the provisions summarised in the above table, an individual becomes resident but not ordinarily resident in India if he comes within the two exceptions mentioned in para 19.3-1.

BASIC CONDITIONS AT A GLANCE

In the case of an Indian citizen who leaves India during the previous year for the purpose of employment (or as a member of the crew of an Indian ship)

In the case of an Indian citizen or a person of Indian origin (who is abroad) who comes on a visit to India during the previous year

In the case of an individual [other than that mentioned in columns (1) and (2)]

(1)

(2)

(3)

a. Presence of at least 182 days in India during the previous year 2023-24

a. Presence of at least 182 days in India during the previous year 2023-24

a. Presence of at least 182 days in India during the previous year 2023-24

b. Non-functional.

b. Non-functional7.

b. Presence of at least 60 days in India during the previous year 2023-24 and 365 days during 4 years immediately preceding the relevant previous year (i.e., during April 1, 2019 and March 31, 2023).

6. 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.

7. However, this condition has been activated from the assessment year 2021-22, in a few cases. See para 19.3-1.

Para 19.4

Residential status and its effect on tax incidence

28

ADDITIONAL CONDITIONS AT A GLANCE

i. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., 2013-14 to 2022-23)]. ii. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e., during April 1, 2016 and March 31, 2023).

Problems 19-P1 X left India for the first time on May 20, 2021. During the financial year 2023-24, he came to India once on May 27 for a period of 53 days. Determine his residential status for the assessment year 2024-25.

Solution : Since X comes to India only for 53 days in the previous year 2023-24, he does not satisfy any of the basic conditions laid down in section 6(1). He is, therefore, non-resident in India for the assessment year 2024-25.

19-E1 [P2.32]* X, a German tourist, comes to India for the first time on May 17, 2023. He leaves India on September 10, 2023.

Determine his residential status for the assessment year 2024-25. Does it make any difference if he comes to India on a business trip or if he is an Indian citizen ?

19-P2 X comes to India, for the first time, on April 16, 2021. During his stay in India up to October 5, 2023, he stays at Delhi up to April 10, 2023 and thereafter remains in Chennai till his departure from India. Determine his residential status for the assessment year 2024-25.

Solution : During the previous year 2023-24, X was in India for 188 days (i.e., April 2023 : 30 days ; May 2023 : 31 days; June 2023 : 30 days ; July 2023 : 31 days ; August 2023 : 31 days ; September 2023 : 30 days and October 2023 : 5 days). He is in India for more than 182 days during the previous year and, thus, he satisfies condition (a) mentioned in para 19.1-1.

Consequently, he becomes resident in India. A resident individual is either ordinarily resident or not ordinarily resident.

To determine whether X is ordinarily resident or not, one has to test the two additional conditions as laid down by section 6(6)(a) [see conditions (i) and (ii), para 19.1-2].

Condition (i) of para 19.1-2 - This condition requires that X should be resident in India in at least 2 years out of 10 years preceding the relevant previous year. X is resident in India for the previous years 2021-22 and 2022-23.

Condition (ii) of para 19.1-2 - This condition requires that X should be in India for at least 730 days during 7 years immediately preceding the previous year. X is in India from April 16, 2021 to March 31, 2023 (i.e., 716 days).

X satisfies one of the basic conditions and only one of the two additional conditions. X is, therefore, resident but not ordinarily resident in India for the assessment year 2024-25.

Note : In order to determine the residential status, it is not necessary that a person should continuously stay in India at the same place. Therefore, the information that X is in Delhi up to April 10, 2023 is irrelevant.

19-E2 [P2.33]* X, an Italian citizen, comes to India for the first time (after 25 years) on May 28, 2023 and stays up to December 5, 2023. Determine his residential status for the assessment year 2024-25.

19-P3 X was born in Chennai in 1992. Later on he migrated to Canada in June 2017 and took the citizenship of that country with effect from December 26, 2022. His parents were born in Bengal in 1960 and his grandparents were born in India in 1946. He comes to India during 2023-24 for a visit of 115 days. During earlier 4 years (i.e., April 1, 2019 to March 31, 2023) he was in India for 400 days. Find out the residential status of X for the assessment year 2024-25.

Solution : X is presently a foreign citizen. His grand parents were born in undivided India. He is a person of Indian origin.

During the previous year 2023-24, he was in India for a visit of 115 days. He is covered by Special Case 2. He cannot satisfy basic condition (a). Basic condition (b) is not relevant in his case. Consequently, he is non-resident in India for the assessment year 2024-25.

19-E3 [P2.34]* X, a foreign citizen, comes to India for the first time on June 20, 2023. On September 6, 2023, he leaves India for Burma on a business trip. He comes back on January 1, 2024. He maintains a dwelling place in India from the date of his arrival in India (i.e., June 20, 2023) till January 15, 2024 when he leaves for Kuwait. Determine his residential status for the assessment year 2024-25. Does it make any difference if X is a person of Indian origin ?

19-P4 X, a foreign national (not being a person of Indian origin), comes to India for the first time on April 15, 2019. During the financial years 2019-20, 2020-21, 2021-22, 2022-23 and 2023-24, he is in India for 130 days, 80 days, 13 days, 210 days and 75 days respectively.

Determine the residential status of X for the assessment year 2024-25.

Solution : For the assessment year 2024-25, financial year 2023-24 is the previous year. During the previous year 2023-24, X is in India for a period of 75 days. During 4 years immediately preceding the previous year (2019-20 to 2022-23), X is in India for a period of 433 days (i.e., 130 + 80 + 13 + 210 days). Thus, he satisfies condition (b) mentioned in para 19.1-1 (namely,

*The number given in brackets represents a similar solved Problem No. of another book entitled Students Guide to Income-tax - Problems & Solutions , November 2023 edition. This book includes many more solved problems focusing on contemporary issues.

29

Rule of residence for an individual in brief

Para 19.4

presence of at least 60 days during the previous year and 365 days during 4 years immediately preceding the relevant previous year). He, therefore, becomes resident in India.

A resident individual may either be an ordinarily resident or not ordinarily resident. To determine whether he is ordinarily resident or not ordinarily resident, one has to test the two additional conditions laid down by section 6(6) [i.e., conditions (i) and (ii) mentioned in para 19.1-2]. During 10 years preceding the previous year 2023-24, X is resident in India only for the year 2022-23 and during 7 years preceding the previous year 2023-24, he is present in India for 433 days. Thus, he does not satisfy the two additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2024-25.

19-E4 [P2.35]* X, a foreign citizen, comes to India for the first time on June 22, 2018. From June 22, 2018 to March 31, 2025, he is present in India for 1795 days (2018-19 : 183 days ; 2019-20 : 366 days ; 2020-21 : 365 days; 2021-22 : 365 days ; 2022-23 : 365 days ; 2023-24 : 59 days and 2024-25 : 92 days). Determine the residential status of X for the assessment year 2024-25.

19-P5 X, a foreign citizen (not being a person of Indian origin), leaves India for the first time in the last 20 years on November 20, 2021.

During the calendar year 2022, he comes to India on September 1 for a period of 30 days. During the calendar year 2023, he does not visit India at all but comes to India on January 16, 2024. Determine the residential status of X for the assessment year 2024-25.

Solution : During the previous year 2023-24, the assessee is present in India for 75 days [i.e., January 2024 : 16 days, February 2024 : 28 days and March 2024 : 31 days] and during four years preceding the previous year, he is present in India for 994 days (2022-23 : 30 days, 2021-22 : 234 days, 2020-21 : 365 days and 2019-20 : 365 days). Thus, he satisfies one of the basic conditions laid down in section 6(1) for being treated as resident in India. In addition, the assessee also satisfies the two additional conditions laid down in section 6(6) as he is resident in India in 2 years out of 10 years immediately preceding the previous year 2023-24 (during the period 2013-2023, he is resident in India in all the years except 2022-23) and during 7 years preceding the previous year 2023-24, he is present in India for 2,090 days. He will, therefore, be treated as resident and ordinarily resident in India for the assessment year 2024-25.

19-E5 [P2.36]* X, a foreign citizen (not being a person of Indian origin), leaves India for the first time in the last 12 years, on June 15, 2021. During the calendar year 2022, he comes to India on November 20 for a period of 46 days. During the calendar year 2023, he does not come to India at all. He finally comes back on January 30, 2024 at 10.30 p.m. Determine his residential status for the assessment year 2024-25.

19-P6 X is a foreign citizen (not being a person of Indian origin). During the financial year 2023-24, he came to India for 70 days.

Determine his residential status for the assessment year 2024-25 on the assumption that during financial years 2009-10 to 2022-23, he was present in India as follows : 2022-23 100 days 2015-16 181 days 2021-22 80 days 2014-15 90 days 2020-21 60 days 2013-14 71 days 2019-20 126 days 2012-13 4 days 2018-19 80 days 2011-12 8 days 2017-18 70 days 2010-11 55 days 2016-17 23 days 2009-10 298 days Solution : X is a foreign citizen (not being a person of Indian origin). He is not covered by Special Case 1 or Special Case 2.

During the previous year 2023-24, X is in India for a period of 70 days and during four years preceding the previous year he is in India for 366 days. Thus, he satisfies basic condition (b) and, consequently, he becomes resident in India.

A resident individual may either be an ordinarily resident or not ordinarily resident. To determine whether X is ordinarily resident or not ordinarily resident, one has to test two additional conditions. Information in the Table given below may be used to test the additional conditions : Year

2022-23 2021-22 2020-21 2019-20 2018-19 2017-18 2016-17 2015-16 2014-15

Presence in India (number of days) 100 80 60 126 80 70 23 181 90

Resident (R) or non-resident (NR) NR NR NR NR NR R NR NR NR

Which of the conditions (a)/(b) is satisfied to become resident or non-resident None None None None None (b) None None None

*The number given in brackets represents a similar solved Problem No. of another book entitled Students Guide to Income-tax - Problems & Solutions , November 2023 edition. This book includes many more solved problems focusing on contemporary issues.

Para 19.4 Year

2013-14 2012-13 2011-12 2010-11 2009-10

Residential status and its effect on tax incidence

30

Presence in India (number of days)

Resident (R) or non-resident (NR)

Which of the conditions (a)/(b) is satisfied to become resident or non-resident

71 4 8 55 298

R

(b)

Not necessary to determine

Additional condition (i) - This condition requires that an individual should be resident in India for at least 2 out of 10 years preceding the relevant previous year. X in the present case, is resident in India for 2 years out of 10 years. He satisfies this condition.

Additional condition (ii) - This condition requires that an individual should be present in India for at least 730 days during 7 years preceding the relevant previous year. X was in India for 539 days during 2016-17 to 2022-23. He cannot satisfy this condition.

X satisfies one of the basic conditions and one of the additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2024-25.

19-E6 [P2.37]* During the previous year 2023-24, X, a foreign national (not being a person of Indian origin), visits India for 64 days. Determine his residential status for the assessment year 2024-25 on the basis of the following information : a. During 2019-20, X is present in India for 365 days. b. During 2017-18 and 2016-17, X is in India for 40 and 365 days respectively. c. Mrs. X is non-resident in India for the assessment year 2024-25.

19-P7 X, an Indian citizen, who is appointed as senior taxation officer by the Government of Nigeria, leaves India, for the first time, on September 26, 2023 for joining his duties in Nigeria. During the previous year 2024-25, he comes to India for 116 days. Determine the residential status of X for the assessment years 2024-25 and 2025-26.

Solution : During the previous year 2023-24, X is in India for 179 days and during four years preceding the previous year 2023-24, he was in India for more than 365 days. He will be non-resident for the assessment year 2024-25 (since an Indian citizen, leaving India for the purpose of employment, will be treated as resident in India only if he has been in India in that year for at least 182 days).

During the previous year 2024-25 (for the assessment year 2025-26), X comes to India for 116 days. He will be treated as nonresident in India for the assessment year 2025-26 (since an Indian citizen who comes on a visit to India during the previous year, will be treated as resident in India only if he has been in India in that year for at least 182 days).

19-E7 [P2.38]* X, an Indian citizen, is appointed as senior taxation officer by the Government of Libya. He leaves India, for the first time, on November 3, 2023 for joining his duties in Libya. During the previous year 2024-25, he comes to India on December 8, 2024 for 190 days. Determine the residential status of X for the assessment years 2024-25 and 2025-26.

19-P8 X, an Indian citizen, leaves India for the first time on September 20, 2021 for the purpose of employment. He comes to India for a visit of 146 days on April 10, 2022. He finally comes back on May 16, 2023. Find out the residential status of X for the assessment year 2024-25.

Solution : During the previous year 2023-24 (and the ten preceding years) X is in India as follows Previous year 2023-24 2022-23 2021-22 2020-21 2019-20 2018-19 2017-18 2016-17 2015-16 2014-15 2013-14

Presence in India (number of days)

Resident (R) or non-resident (NR)

Presence for minimum days to become resident

320 146 173 366 365 365 365 366 365 365 365

R NR NR R R R R R R R R

182 182

Since X is in India for a period of 320 days during the previous year 2023-24, he is resident in India. *The number given in brackets represents a similar solved Problem No. of another book entitled Students Guide to Income-tax - Problems & Solutions , November 2023 edition. This book includes many more solved problems focusing on contemporary issues.

31

Rule of residence for an individual in brief

Para 19.4

Besides, he is in India for 2,146 days during 7 years prior to 2023-24 (i.e., during April 1, 2016 and March 31, 2023). Moreover, he is resident in India for 8 years out of 10 years. He is, therefore, resident and ordinarily resident in India for the assessment year 2024-25 (X satisfies two additional conditions).

19-E8 In problem 19-P8, assume that X finally comes back on December 16, 2023 (and not on May 16, 2023), find out the residential status for the assessment year 2024-25.

19-P9 X is a foreign citizen (not being a person of Indian origin). Since 1981, he visits India every year in the month of April for 100 days. Find out the residential status of X for the assessment year 2024-25.

Solution : During the previous year 2023-24, X is in India for 100 days and during 4 years immediately preceding the year 2023-24 (i.e., 2019-20 to 2022-23), he is in India for 400 days. Thus, he satisfies basic condition (b) to become resident in India.

To determine, whether a resident individual is ordinarily resident or not ordinarily resident, one has to test the two additional conditions as laid down by section 6(6)(a).

Condition (i) of para 19.1-2 - This condition requires that an individual should be resident in India for at least 2 out of 10 years preceding the relevant previous year. Every year X satisfies basic condition (b), as he is in India for 100 days during the relevant previous year and 400 days during 4 years immediately preceding the previous year. Therefore, he satisfies this condition.

Condition (ii) of para 19.1-2 - This condition requires that X should be in India for 730 days during 7 years immediately prior to the relevant previous year. X is in India for 700 days during 7 years prior to the previous year 2023-24. He does not satisfy this condition.

X satisfies one of the basic conditions and one of the two additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2024-25.

19-E9 [P2.39]* X is a foreign citizen. Since 1981, he comes to India every year in the month of April for 105 days. Find out the residential status of X for the assessment year 2024-25 if (a) X is not a person of Indian origin, (b) X was born in Lahore on March 8, 1945, (c) grandmother of X was born in Dhaka in 1870, or (d) X was born in Pune in 1945.

à19-P10 X (a foreign citizens not a person of Indian Origin) comes to India for the first time on September 1, 2023. On September 15,

2023, he joins a company on monthly salary of Rs. 56,000, as a part-time production consultant (duty hours : 6.30 p.m. to 9.30 p.m.).

He does not have any source of income up to September 14, 2023. On October 9, 2023, he starts a trading business in computer hardware after obtaining the approval of his employer. For the previous year ending March 31, 2024, he has the following income Salary from the part-time employment : Rs. 3,64,000 ; income earned in India from the business of trading in computer hardware : Rs. 1,86,000 ; and foreign income from the same business : $ 40,000. Find out the residential status of X for the assessment year 2024-25.

Solution : For the assessment year 2024-25, X has the following sources of income in India : Sources of income Salary income Business income

Previous year September 15, 2023 to March 31, 2024 October 9, 2023 to March 31, 2024

Number of days when X was in India 198 days 174 days

For the first source of income, X becomes resident in India by satisfying one of the basic conditions. As he comes to India for the first time in 2023, he is unable to satisfy any of the additional conditions. Thus, he is a resident but not ordinarily resident in India for the first previous year.

For the second previous year, X is a non-resident, as he satisfies none of the basic conditions. It may be noted that he is nonresident in India for the business income and resident but not ordinarily resident for the salary income. In view of section 6(5), if a person is resident in India for one of the sources of income, he will be deemed to be resident in India for all other sources of income in the same assessment year. In respect of the assessment year 2024-25, X will, therefore, be regarded as resident but not ordinarily resident for all sources of income.

19-E10 X (a foreign citizens not a person of Indian Origin) comes to India for the first time on October 10, 2023. On October 15, 2023, he starts a publishing business (income of the previous year ending March 31, 2024 : Rs. 44,06,000). On November 1, 2023, he joins an Indian company as a part-time accountant on monthly salary of Rs. 92,000. He does want to leave India before December 31, 2024. Find out the residential status of X for the assessment year 2024-25 (assume that X does have any source of income before October 15, 2023).

19-P11 X is an Indian citizen. Currently, he is in employment with an overseas company located in Dubai. During different years, he is in India as follows Previous year 2023-24 2022-23 2021-22

Presence in India 55 days 190 days 200 days

Previous year 2020-21 2019-20 2018-19

Presence in India 170 days 200 days 250 days

Previous year 2017-18 2016-17 2015-16

Presence in India 70 days 71 days 72 days

*The number given in brackets represents a similar solved Problem No. of another book entitled Students Guide to Income-tax - Problems & Solutions , November 2023 edition. This book includes many more solved problems focusing on contemporary issues.

Para 20

Residential status and its effect on tax incidence

32

For the previous year 2023-24, X is not taxable in Dubai or in any other country/territory by reason of his domicile or residence. Income of X (other than income from foreign sources) for the previous year 2023-24 is Rs. 16,00,000. Find out the residential status of X for the assessment year 2024-25.

Solution : X is in India for 55 days during the previous year 2023-24. He is unable to satisfy any of the basic condition given by section 6(1). However, he satisfies the following 3 conditions given by section 6(1A) a. X is an Indian citizen; b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year, and 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.

He is deemed to be resident but not ordinarily resident in India [as per section 6(1A) read with section 6(6)(d)]. The information given in the above table pertaining to earlier years, is not relevant in this case.

19-E11 In the above problem, find out the residential status in the two different situations given below Situation 1 - Income of X (other than the income from foreign sources) for the previous year 2023-24 is Rs. 14,00,000 (no other change in the information given above).

Situation 2 - Income of X (other than the income from foreign sources) for the previous year 2023-24 is Rs. 32,00,000 but he is liable to pay income-tax in other countries.

19-P12 X is an Indian citizen. Currently, he is in employment with a multinational company and posted in Singapore. During the previous year 2023-24, he comes to India for a visit of 145 days. In earlier 4 years, he is in India for more than 900 days. X wants to know his residential status for the assessment year 2024-25. His annual income for the previous year 2023-24 is as follows Income from salary, rent, consultancy and interest earned and received in Singapore Income from business (accrued and received outside India, controlled from Singapore) Income from another business (accrued and received outside India, controlled from India) Interest on bank fixed deposits in India Any other income in India or outside India Life insurance premium paid in India

Rs. 29,00,000 21,00,000 8,00,000 11,00,000 Nil 2,60,000

Solution : In the previous year 2023-24, X is in India for 145 days. Total income of X (other than income from foreign sources) is Rs. 17,50,000 (i.e., Rs. 8,00,000 + Rs. 11,00,000 deduction under section 80C : Rs. 1,50,000). X satisfies 4 conditions of second exception [see para 19.3-1] as follows a. X is an Indian citizen or a person of Indian origin; b. total income of X (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year; c. he comes to India on a visit during the previous year 2023-24, and d. he is in India for 145 days (i.e., his Indian visit is 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.

Consequently, for the previous year 2023-24 (i.e., assessment year 2024-25), X is resident but not ordinarily resident in India.

19-E12 In the above problem, find out the residential status in the two different situations given below Situation 1 - Interest income of X from bank deposits in India is Rs. 4,00,000 (and not Rs. 11,00,000) (no other change in the information given above).

Situation 2 - X is a foreign citizen but his maternal grandfather was born in a village near Karachi in 1946 (no other change in data given above).

nn HOW TO FIND OUT RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILY [SEC. 6(2)] 20. 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.

20.1 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.

The table given below highlights the same proposition Place of control Control and management of the affairs of a Hindu undivided family is w Wholly in India

Residential status of family

Ordinarily resident or not

Resident

See para 20.2

33

Residential status of firm and AOPs Place of control w Wholly out of India

w Partly in India and partly outside India

Para 21

Residential status of family

Ordinarily resident or not

Non-resident Resident

See para 20.2

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 20.2.

What is control and management - Control and management is situated at a place where the head, the seat and the directing power are situated. 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.

20.2 When a resident Hindu undivided family is ordinarily resident in India - A resident Hindu undivided family is an ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b) :

p

Additional condition (i)

Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in para 19.1-1] immediately preceding the relevant previous year

Additional condition (ii)

Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year

If 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.

Problems 20-P1 X, an individual, is resident but not ordinarily resident in India for the assessment year 2024-25 (previous year 2023-24). During the previous year 2023-24, the affairs of X (HUF), a Hindu undivided family, whose karta is X since 1960, are partly managed from Delhi and partly from Nepal. Determine the residential status of X (HUF) for the assessment year 2024-25.

Solution : As during the previous year 2023-24, the affairs of X (HUF) are partly managed from India, the family will be treated as resident in India. A resident family may be ordinarily resident if karta of the family satisfies the following two additional conditions laid down in section 6(6)(b) a. he has been resident in India in at least 2 out of 10 years immediately preceding the relevant previous year ; and b. he is in India for at least 730 days during 7 years immediately preceding the relevant previous year.

If karta does not satisfy these additional conditions, a resident Hindu undivided family is treated as resident but not ordinarily resident in India. Similarly, if a resident individual does not satisfy the aforesaid additional conditions, the individual is treated as a resident but not ordinarily resident in India. As X is resident but not ordinarily resident in India for the assessment year 2024-25 in his individual capacity, he is unable to satisfy the aforesaid additional conditions as karta of X (HUF). X (HUF) is, therefore, resident but not ordinarily resident in India for the assessment year 2024-25.

20-E1 The Head Office of XY, a Hindu undivided family, is situated in Hong Kong. The family is managed by Y (since 1980) who is resident in India in 3 out of 10 years immediately preceding the previous year 2023-24 and who is present in India for more than 729 days during last 7 years. Determine the residential status of the family for the assessment year 2024-25 if affairs of the family business are (a) wholly controlled from Hong Kong, (b) partly controlled from India.

nn HOW TO DETERMINE RESIDENTIAL STATUS OF FIRM AND ASSOCIATION OF PERSONS [SEC. 6(2)] 21. 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.

The above rule may be summarised as follows Place of control Control and management of the affairs of a firm/association of persons is w Wholly in India w Wholly outside India w Partly in India and partly outside India

Residential status Resident Non-resident Resident

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.

Para 22

Residential status and its effect on tax incidence

34

p 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 principal officer. Control and management means de facto control and management and not merely the right to control or management. Control and management is usually situated at a place where the head, the seat and the directing power are situated.

nn HOW TO FIND OUT RESIDENTIAL STATUS OF A COMPANY [SEC. 6(3)] 22. Residential status of a company is determined as follows Section 6(3)(i) 6(3)(ii)

6(3)(ii)

Company Indian company A foreign company (whose turnover/gross receipt in the previous year is more than Rs. 50 crore) A foreign company (whose turnover/gross receipt in the previous year is Rs. 50 crore or less)

Residential status Always resident in India [Note 1] It will be resident in India if its place of effective management (POEM), during the relevant previous year, is in India [Note 2] Always non-resident in India [Note 3]

Notes 1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India (or even if shareholders of an Indian company controlling more than 51 per cent voting power are non-resident and/or located outside India), the Indian company is resident in India. An Indian company can never be non-resident.

2. A foreign company is resident in India if its place of effective management (POEM), during the relevant previous year, is in India. For this purpose, the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose, a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in Circular No. 6/2017, dated January 24, 2017.

3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less in a financial year Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India.

Problems 22-P1 X Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident in India. The business of the company is fully controlled from outside India. Find out the residential status of X Ltd. for the assessment year 2024-25.

Solution : X Ltd. is an Indian company. An Indian company is always resident in India. This rule is equally applicable even if shareholders are foreign citizens as well as non-resident or even if business is controlled from outside India.

22-E1 Suppose in problem 22-P1, one of the shareholder in X Ltd. is the Government of Japan which holds 70 per cent equity share capital.

22-P2 Y Ltd. is a company incorporated in Mauritius (turnover more than Rs. 50 crore). It has 10 shareholders who are Indian citizens and resident in India. The company has active business outside India and is controlled wholly from outside India by a team of professionals. What is the residential status of Y Ltd. for the assessment year 2024-25.

Solution : Y Ltd. is a foreign company. It is controlled wholly from outside India (POEM is outside India). It is, therefore, non-resident in India for the assessment year 2024-25. Residential status of shareholders is irrelevant. Likewise, the nationality of shareholders is not taken into consideration.

22-E2 Suppose in problem 22-P2, turnover of Y Ltd. is Rs. 35 crore.

22-P3 Z Ltd. is incorporated in Japan. It has 15 shareholders (10 are Indian citizens and resident in India). The company has no active business in Japan. Gross annual turnover of the company for the previous year 2023-24 is Rs. 48 crore mainly from operations conducted from Korea, Sri Lanka and India. The company is managed by a team of professionals from India. Find out the residential status of Z Ltd. for the assessment year 2024-25.

Solution : Z Ltd. is a foreign company. Gross turnover of the company for the relevant previous year is Rs. 48 crore. A foreign company (whose turnover/gross receipts is not more than Rs. 50 crore) is treated as non-resident in India.

22-E3 Suppose in problem 22-P3, one of the shareholder in Z Ltd. is the Government of State of Kerala which holds 51 per cent equity share capital.

nn HOW TO DETERMINE RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC. 6(4)] 23. Every other person is resident in India if control and management of its affairs is, wholly or partly, situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.

35

Conclusions

Para 24.3

nn WHAT IS THE RELATIONSHIP BETWEEN RESIDENTIAL STATUS AND INCIDENCE OF TAX [SEC. 5] 24. Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income.

24.1 Indian income and foreign income - In order to understand the relationship between residential status and tax liability, one must understand the meaning of Indian income and foreign income .

24.1-1 INDIAN INCOME - Any of the following three is an Indian income 1. If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year.

2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year.

3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.

24.1-2 FOREIGN INCOME - If the following two conditions are satisfied, then such income is foreign income a. income is not received (or not deemed to be received) in India; and b. income does not accrue or arise (or does not deem to accrue or arise) in India8.

24.1-3 PROVISIONS IN BRIEF - The above provisions may be explained in brief as follows : Whether income is received (or deemed to be received) in India during the relevant year

Whether income accrues (or arises or is deemed to accrue or arise) in India during the relevant year

Status of the income

Yes Yes No No

Yes No Yes No

Indian income Indian income Indian income Foreign income

24.2 Incidence of tax for different taxpayers - Tax incidence of different taxpayers is as follows Individual and Hindu undivided family Resident and ordinarily resident in India

Resident but not ordinarily resident in India

Non-resident in India

p Indian income

Taxable in India

Taxable in India

Taxable in India

p Foreign income

Taxable in India

Only two types of foreign incomes (i.e., Case 1 Not taxable in India and Case 2 given below) are taxable in India Any other foreign income is not taxable in India

The following foreign incomes are taxable in the hands of a resident but not ordinarily resident in India Case 1 - If it is business income and business is controlled wholly or partly from India.

Case 2 - If it is income from profession which is set up in India.

No other foreign income (like salary, rent, interest, etc.) is taxable in India in the hands of a resident but not ordinarily resident taxpayer.

Any other taxpayer (like company, firm, co-operative society, association of persons, body of individual, etc.)

Indian income Foreign income

Resident in India Taxable in India Taxable in India

Non-resident in India Taxable in India Not taxable in India

24.3 Conclusions - The following broad conclusions can be drawn 1. Indian income - Indian income is always taxable in India irrespective of the residential status of the taxpayer.

8. Salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer Circular No. 13/2017, dated April 11, 2017.

Para 24.4

Residential status and its effect on tax incidence

36

2. Foreign income - Foreign income is taxable in the hands of resident (in case of a firm, an association of persons, a joint stock company and every other person) or resident and ordinarily resident (in case of an individual and a Hindu undivided family) in India. Foreign income is not taxable in the hands of non-resident in India.

In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable only if it is (a) business income and business is controlled wholly or partly from India, or (b) professional income from a profession which is set up in India. In any other case, foreign income is not taxable in the hands of resident but not ordinarily resident taxpayers.

24.4 Provisions illustrated - Different situations are covered in the table given below Nature of income

Reasons

Conclusions - Is it taxable in India for the assessment year 2024-25 Resident9 or Resident Nonresident and but not resident ordinarily ordinarily resident10 resident10

1. Rental income of Rs. 36,000 is received in India on May 10, 2023 (it may accrue outside India or in India) 2. Interest income of Rs. 46,000 accrues in India on March 31, 2024 (it may be received in India or outside India) 3. Income of Rs. 56,000 is deemed to be received in India on April 20, 2023 (it may accrue outside India or in India) 4. Income of Rs. 66,000 is deemed to accrue or arise in India during the previous year 2023-24 (it may be received in India or outside India) 5. Business income/professional income of Rs. 76,000 is received and accrued outside India during the previous year 2023-24 (business is controlled from outside India or profession is set up outside India) 6. In situation 5, suppose business is controlled from India or profession is set up in India 7. Rental income or salary income or interest income of Rs. 86,000 is received outside India in the previous year 2023-24 and at the same time it accrues or arises outside India 8. Gift11 of Rs. 2 lakh received outside India by an individual on November 6, 2023 from a friend

It is Indian income. Indian income is always taxable

Yes

Yes

Yes

It is Indian income. Indian income is always taxable

Yes

Yes

Yes

It is Indian income. Indian income is always taxable

Yes

Yes

Yes

It is Indian income. It is always taxable

Yes

Yes

Yes

It is foreign income. It is taxable in the case of resident and ordinarily resident taxpayer.

It is not taxable in the case of a non-resident.

Since it is business/profession income and business is controlled from outside India or profession is set up outside India, it is not taxable in the case of resident but not ordinarily resident taxpayer It is foreign income. Since it is business/ professional income and the business is controlled from India or profession is set up in India, it is taxable in all cases except nonresident It is foreign income. It is taxable in the case of resident and ordinarily resident taxpayer.

It is not taxable in the case of non-resident.

Since it is foreign income which is neither business income nor professional income, it is not taxable in the case of resident but not ordinarily resident It is foreign income. It is taxable in the case of resident and ordinarily resident taxpayer.

It is not taxable in the case of non-resident.

Yes

No

No

Yes

Yes

No

Yes

No

No

Yes

No

No

9. In case of a firm, an association of persons, a joint stock company and every other person.

10. In case of an individual and a Hindu undivided family.

11. If aggregate amount of gift (a sum of money or property) received by a person during a financial year exceeds Rs. 50,000, it is taxable as income . This rule is, however, not applicable if gift is received by an individual from a relative or at the time of marriage or by will see para 114 for detailed discussion.

37

Actual receipt vs. Deemed receipt Nature of income

Reasons

Para 25.4 Conclusions - Is it taxable in India for the assessment year 2024-25 NonResident12 or Resident resident and but not resident ordinarily ordinarily resident13 resident13

9. Gift14 of Rs. 1 lakh received in Delhi by an individual on November 30, 2023 from a friend 10. Income of Rs. 96,000 earned and received outside India in 2019-20 but later on remitted to India in 2023-24

Since it is foreign income which is neither business income nor professional income, is not taxable in the case of resident but not ordinarily resident It is Indian income. It is taxable This income pertains to the previous year 2019-20. It cannot be taxed at the time of remittance in 2023-24

Yes

Yes

Yes

No

No

No

nn CONNOTATION OF RECEIPT OF INCOME - HOW IS IT UNDERSTOOD 25. Income received in India is taxable in all cases irrespective of residential status of an assessee. The following points are worth mentioning in this respect : 25.1 Receipts vs. Remittance - The receipt of income refers to the first occasion when the recipient gets the money under his control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in receipt at the other place.

Provisions illustrated An assessee receives $10,000 in USA on May 16, 2023. Out of $10,000, he remits Rs. 50,000 to India on May 18, 2023. In this case, income is received outside India on May 16, 2023.

Conclusions - An assessee after receiving an income outside India cannot be said to have received the same again when he brings or remits the same to India. The position remains the same if income is received outside India by an agent of the assessee (maybe a bank or some other person) who later on remits the same to India. Income after the first receipt merely moves as a remittance of money. The same income cannot be received by the same person twice, once outside India and again within India.

25.2 Cash vs. Kind - It is not necessary that income should be received in cash. Income may be received in cash or in kind. For instance, value of a free residential house provided to an employee is taxable as salary in the hands of the employee though the income is not received in cash.

25.3 Receipt vs. Accrual - Receipt is not the sole test of chargeability to tax. If an income is not taxable on receipt basis, it may be taxable on accrual basis.

25.4 Actual receipt vs. Deemed receipt - It is not necessary that an income should be actually received in India in order to attract tax liability. An income deemed to be received in India in the previous year is also included in the taxable income of the assessee. The Act enumerates the following as income deemed to be received in India : p Interest credited to recognised provident fund account of an employee in excess of 9.5 per cent. p Excess contribution of employer in the case of recognised provident fund (i.e., the amount contributed in excess of 12 per cent of salary). p Transfer balance [see problem 54-P4]. p

p Contribution by the Central Government or any other employer to the account of an employee under a notified pension

scheme referred to in section 80CCD.

p

Tax deducted at source.

12. In case of a firm, an association of persons, a joint stock company and every other person.

13. In case of an individual and a Hindu undivided family.

14. If aggregate amount of gift (a sum of money or property) received by a person during a financial year exceeds Rs. 50,000, it is taxable as income . This rule is, however, not applicable if gift is received by an individual from a relative or at the time of marriage or by will see para 114 for detailed discussion.

Students’ Guide to Income Tax Including GST AUTHOR : PUBLISHER : DATE OF PUBLICATION : EDITION : ISBN NO : NO. OF PAGES : BINDING TYPE :

VINOD K. SINGHANIA, MONICA SINGHANIA TAXMANN DECEMBER 2023 70TH EDITION 9789357788649 1072 PAPERBACK

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Description Taxmann’s flagship publication for Students on Income Tax & GST Law(s) has been designed to bridge the gap between theory and application. This book is written in simple language, explaining the provision of the law in a step-by-step manner with the help of suitable illustrations, without resorting to paraphrasing of sections and legal jargons.

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The Present Publication is the 70th Edition and amended upto 1st December 2023. This book is authored by Dr Vinod K. Singhania & Dr Monica Singhania, with the following noteworthy features: u

[Coverage] of this book includes: 

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

Unit 2 – GST

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[500+ Solved Problems] and an equal number of unsolved exercises

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[Question set for CA (Inter/IPCC) Examination] for the last five years is given along with solutions for theory as well as practical questions

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Answers to Income Tax problems are solved as per the law applicable for A.Y. 2024-25

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