Tax Law 2023 PDF

TAX LAW INDEX DIRECT TAX SR.NO. CHAPTER PAGE NO. 1 Basic concepts of income tax 1.1-1.26 2 Residential status 2.1-2.13 Comp...

TAX LAW INDEX DIRECT TAX SR.NO. CHAPTER PAGE NO. 1 Basic concepts of income tax 1.1-1.26 2 Residential status 2.1-2.13 Computation of Income under various Heads - 3 3.1-3.32 INCOME UNDER THE HEAD SALARIES Computation of Income under various Heads - 4 4.1-4.45 INCOME UNDER THE HEAD CAPITAL GAINS Computation of Income under various Heads - 5 5.1-5.22 INCOME FROM OTHER SOURCES Computation of Income under various Heads - 6 6.1-6.16 INCOME FROM HOUSE PROPERTY 7 Computation of Income under various Heads - 7.1-7.42 PROFIT AND GAIN OF BUSINESS OR PROFESSION 8 Clubbing provisions and Set off and / or Carry 8.1-8.07 forward of losses – CLUBBING PROVISIONS 9 Clubbing provisions and Set off and / or Carry 9.1-9.05 forward of losses – SET OFF AND / OR CARRY FORWARD OF LOSSES 10 Deductions from gross total income, rebate and 10.1-10.19 relief 11 Procedural compliance - advance tax 11.1-11.4 12 Procedural compliance - returns 12.1-12.18 13 Procedural compliance - Tax deduction at 13.1-13.37 source ‘TDS’ & Tax collection at source ‘TCS’ 14 Computation of total income and tax liability of 14.1-14.16 various entities 15 Classification and tax incidence on companies 15.1-15.21 16 Incomes which do not form part of total income 16.1-16.9 17 Assessment, appeals & revision 17.1-17.10  GOODS AND SERVICE TAX SR.NO. CHAPTER PAGE NO. Concept of indirect taxes at a glance - 1 1.1-1.13 INTRODUCTION Basic overview on Integrated Goods and Service Tax (IGST), Union Territory Goods and 2 2.1-2.10 Services Tax (UTGST), and GST Compensation to States Act – CHARGE OF GST Basics of Goods and Services Tax – 3 3.1-3.17 SUPPLY Basics of Goods and Services Tax – 4 4.1-4.8 COMPOSITION SCHEME Concept of Time, Value & Place of Taxable 5 Supply – 5.1-5.7 TIME OF SUPPLY Concept of Time, Value & Place of Taxable 6 Supply – 6.1-6.8 VALUE OF SUPPLY Concept of Time, Value & Place of Taxable 7 Supply – 7.1-7.17 PLACE OF SUPPLY Procedural Compliance under GST – 8 8.1-8.30 REGISTRATION Procedural Compliance under GST – 9 9.1-9.37 RETURNS Procedural Compliance under GST – 10 10.1-10.22 PAYMENT OF TAX Procedural Compliance under GST – 11 11.1-11.19 INVOICE Input tax Credit & Computation of GST liability 12 – Overview 12.1-12.37 INPUT TAX CREDIT Procedural Compliance under GST – 13 13.1-13.8 REFUND AND AUDITS 14 CUSTOMS ACT [REFER MODULE] -  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 1. BASIC CONCEPTS OF INCOME TAX WHAT IS TAX?  Tax is NOT “Compulsory Extortion of Money” by the government.  It is the financial charge (fee) imposed by the Government on income, commodity or activity. WHY ARE TAXES LEVIED? Taxes constitute the basic source of revenue to the Government, which are utilized for meeting the expenses of Government like the one defense, provision of education, health-care, infrastructure facilities like roads, dams etc. TAXATION SYSTEM IN INDIA  In India, Constitution of India is the parent law. All other laws should be enacted (made) without exceeding the framework of Constitution & subject to the norms (T&C) laid down in it.  Article 265 of Constitution provides that no tax shall be levied or collected except by authority of law. Further, the law imposing the tax must not violate any fundamental right.  Constitution empowers Central Government (CG) & State Government to levy & collect tax on Income.  Parliament (Union) & SG are empowered to levy taxes by virtue of Article 246 of Constitution.  Entry 82 of Union List (List I to Seventh Schedule of Constitution) gives power to Parliament to levy taxes on Income other than Agricultural Income.  Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Union & SGs have the authority to make laws for the purpose of levy of taxes. The following are the lists: 1) Union List: CG has exclusive power to make laws on the matters contained in Union List. 2) State List: SG has exclusive power to make laws on matters contained in the State List. 3) Concurrent List: Both CG & SG have power to make laws on matters contained in this list. Particulars Direct Tax Indirect Tax Levied on Income/wealth of the person Price of Goods or Services Examples Income tax, Tax on undisclosed GST, Custom duty. foreign Income or Assets. Shifting of burden There is No Shifting of burden. Tax burden is shifted to  Direct Taxes are directly subsequent buyer /user. borne by taxpayer  Thus whole burden falls on final consumer. Time of Collection Collected on yearly basis Collected at the time of sale/purchase of goods or rendering of services. COMPONENTS OF INCOME TAX LAWS A. INCOME TAX ACT, 1961  It came into force on 1st April, 1962. The act contains 298 sections & XIV schedules.  A section may have sub-sections, clauses & sub-clauses. 1.1  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA  Ex: Clause (1A) of Section 2 defines “agricultural income”, Clause (1B) defines “amalgamation”.  Section 5 defining the scope of total income has two sub-sections (1) & (2).  Sub-section (1) defines the scope of total income of a resident;  Sub-section (2) defines the scope of total income of a non-resident.  A Section may also have Provisos & Explanations.  Proviso gives the exceptions to the provision contained in the respective by sub- section/clause. (Proviso gives the cases where the provision contained in the respective section/sub- section/clause would not apply or where the provision would apply with certain modification).  Explanation gives clarification relating to the provision contained in that by sub- section/clause. The Act (since it is Revenue-based Act) undergo changes every year with additions & deletions brought by the Annual Finance Act passed by the parliament ACT. B. ANNUAL FINANCE ACT  Every year, Finance Minister Introduces the Finance Bill in Parliament’s Budget session.  Part A of budget speech contains the proposed policies of government in the area.  Part B of budget speech contains the detailed tax proposals.  When the Finance Bill is passed by both the houses of the Parliament & gets the assent of the President, it becomes the Finance Act which is incorporated in the Income- Tax Act.  Amendments are made every year to the Act & other tax laws by the Finance Act. C. NOTIFICATIONS  Notifications are subordinate legislation issued by CG to give effect to the provisions of the Act.  The CBDT is also empowered to make & amend rules by issuing notifications.  They are binding on everyone. [Assessee + Income Tax department] D. INCOME TAX RULES  The CBDT is empowered to make rules for proper administration of the ACT.  Ex: Sec 32 states that depreciation will be allowed as deduction but the rates for computation of depreciation are given by Rule 5.  Rules also have sub-rules, provisos and Explanations.  The First Schedule to the Finance Act contains four parts which specify the rates of tax.  Part I: Rate of Tax applicable for the current Assessment Year.  Part II: Rate of TDS for the current Financial Year.  Part III: Rate of Advance Tax & Rate of tax to be deducted from income u/h ‘Salaries’.  Part IV: Rules for computing Net Agricultural Income. E. CIRCULARS  Circulars are issued by the CBDT to deal with certain specific problems & to clarify the doubts regarding the scope & meaning of the provisions of the law. 1.2  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA  Circulars provide guidance to the Income Tax officers & Assesses.  These circulars are binding on the department but not on the assessee.  However assessee can take advantage of beneficial circulars. F. CASE LAWS (JUDICIAL DECISIONS)  It is not possible for the parliament to provide for all possible issues that may arise in the implementation of any act. Hence the judiciary will hear the disputes between the assesses & the Income tax Department & give its decisions.  Supreme Court Decisions becomes Judicial Precedent (Law) & are binding on all the courts, Appellate Tribunal, Income Tax Authorities & on assesses.  High Court decisions are binding on the assesses & Income Tax Authorities which come under its jurisdiction unless it is overruled by a higher authority (Supreme Court).  Decision of a High Court cannot bind other High Court. LEVY / CHARGE OF INCOME TAX [SECTION 4] Income-tax is a tax levied on the total income of the Previous Year of every person (Section 4). Procedure for Computation of total income of person for levy of income tax is as follows: Step 1 - Determination of Residential Status Step 2 - Classification of Income under 5 different heads Step 3 - Computation of Income under each head. Step 4 - Clubbing of income of spouse, minor child etc. Step 5 - Set-off or carry forward and set-off of losses. Step 6 - Computation of Gross Total Income [Net Result of Step 1 – 5]. Step 7 - Deductions from Gross Total Income. [Payment based/Income Based deductions]. Step 8 - Total income [GTI – Deductions under Step 7]. Step 9 - Application of Rates of Tax on the total income. Step 10 - Surcharge / Rebate u/s 87A. Step 11 - Health & Education Cess on Income Tax. Step 12 - Advance tax & TDS. Step 13 - Tax Payable/Tax Refundable. 1.3  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA We will study all the above steps in details in the respective chapters SOME IMPORTANT DEFINITIONS  Terms defined in the Act: Section 2 gives definitions of various terms used in the Act. If a particular definition is given in the Act itself, we will have to use that definition only.  Terms not defined under the Act: If a particular definition is not given in the Act, reference is to be made to the General Clauses Act or dictionaries, day-to-day meanings. 1. INDIA [SECTION 2(25A)]  The term 'India' means –  Territory of India as per Article 1 of the Constitution,  Territorial Waters of India (TWI), seabed and subsoil underlying such waters,  Continental Shelf,  Exclusive Economic Zone  Any other specified maritime zone & air space above its territory & TWI. Specified maritime zone means the maritime zone as referred to in Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976. 2. ASSESSEE - [SECTION 2(7)]  Any person by whom any tax or any other sum of money is payable under this Act.  It includes – a) Tax Payable: Every Person by whom any tax or any other sum of money is payable under this Act whether or not any proceeding under this act has started against him. b) Proceeding started: Any Person in respect of whom any proceeding under the act has been taken whether or not any tax, interest or penalty is payable by him under this act. Proceeding may be taken for/of –  Assessment of his income (or loss) sustained by him;  Income (or loss) of any other person in respect of whom he is assessable;  Refund due to him or to such other person.  Assessment of Fringe Benefits. c) Deemed Assessee: Sometimes, a person becomes assessable in respect of the income of some other persons. In such a case, he may be deemed as an assessee. d) Representative Assessee: Sometimes a person may be assessed for Income of another person. Such person is known as representative assessee. 1.4  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA Ex: Legal Heir is assessable for the income of deceased person. e) Assessee in default: Any person who does not deduct tax at source or after deducting tax, fails to pay deducted tax to the government or who fails to pay advance tax is deemed to be assessee in default u/s [201(1)]/218. 3. ASSESSMENT [SECTION 2(8)]  This is the procedure by which the income of an assessee is determined by AO.  It may be normal assessment or by way of reassessment of an income previously assessed. 4. PERSON [SECTION 2(31)] AN INDIVIDUAL Individual means only A Natural Human Being (Male/Female/Minor/Unsound Mind). Note: Income of Minor & Person of unsound Mind → Assessed in hands of Manager/Guardian u/s 161(1). COMPANY [SECTION 2(17)] ‘Company’ has a much wider meaning under Income Tax Act than Companies Act. It means:  Any Indian Company defined in section 2(26);  Any Body Corporate incorporated under the foreign laws [Foreign company];  Any institution, association or body (incorporated/not) whether indian or non-Indian,  which is declared by general or special order of CBDT to be a company A FIRM [SECTION 2(23)]  A firm includes a partnership firm (registered or not) & shall include a LLP.  “Partnership firm” has same meanings as assigned to them in Indian Partnership Act.  However, for IT purposes, a minor admitted to the benefits of existing partnership would also be treated as partner. This is specified u/s 2(23) of the Act.  Same Tax Treatment would be applicable for both General Partnerships & LLPs. ASSOCIATION OF PERSONS (AOP)  When two or more persons combine together for promotion of joint enterprise, they are 1.5  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA assessable as an AOP when they do not constitute a partnership legally.  Conditions to form AOP: Persons must join in a common purpose, common action & their object must be to produce Income, but they should not form a partnership.  Co-heirs, co-donees joining together for common purpose would be chargeable as AOP. BODY OF INDIVIDUALS (BOI) Persons who merely receive the income jointly & who may be assessable in like manner & to the same extent as the beneficiaries individually. (Ex: Executors/trustees).  Co-Executors/Co-trustees are assessable as BOI since their title & interest are indivisible.  Note: Tax is not payable by the assessee on share of Income received by him from BOI on which the tax has already been paid by such BOI. [To avoid Double Taxation] LOCAL AUTHORITY Municipal committee, district board, Municipality, body of port commissioners etc. legally entitled/entrusted by Government with control & management of Municipal/ local fund. Note: Income of LA is taxable only if it is derived from the business of supply of commodity/service (other than water & electricity) outside its own jurisdictional area. Income arising from supply of water & electricity even outside its own jurisdictional areas → Exempt. EVERY OTHER ARTIFICIAL JURIDICAL PERSON (not falling within above categories)  This is a residuary clause. If the assessee does not fall in any of the first six categories, he is assessed under this clause. Ex: An idol, or deity. Q. What is the difference between AOP & BOI? Answer: The difference between AOP & BOI is that whereas an association implies a voluntary getting together for a definite purpose, a body of individuals would be just a body without an intention to get-together. Moreover, members of BOI can be individuals only but members of AOP can be individual or non-individuals (i.e. artificial persons). 5. CLASSES OF COMPANIES HINDU UNDIVIDED FAMILY  HUF is not defined under IT Act. However, it is treated as separate entity under IT Act.  As per Hindu Law, it consists of all males lineally descended from a common ancestor & includes their wives & unmarried daughters. 1.6  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA  The Status in HUF is received by birth & not by operation of law.  Even a single male member can have HUF (w.e.f 6/9/2005).  Only Co-parceners have the right to Partition. Coparceners → HUF may contain many members, but only members within 4 degrees including KARTA are called co-parceners (including daughters w.e.f 6/9/2005). Note: wife/ daughter-in-law cannot be co-parceners; however they can be members.  Jain & Sikh undivided families would also be assessed as a HUF under IT Act.. DOMESTIC COMPANY [SECTION 2(22A)]  An Indian company or  Any other company, which has made prescribed arrangements for declaration & payment of dividends within India payable out of the taxable Income in India. 6. PERSON HAVING SUBSTANTIAL INTEREST IN THE COMPANY [Section 2(32)]  Any person who is the beneficial owner of shares (not being shares entitled to fixed rate of dividend), whether participating in profit or not, carrying at least 20% of total voting power. 7. AVERAGE RATE OF TAX [SECTION 2(10)]  Generally, the word ‘Income’ covers receipts in the shape of money or money’s worth, which arise with certain regularity.  Average Rate of Tax = Amount of Income Tax calculated on Total Income using applicable slab rate/Total Income 8. MAXIMUM MARGINAL RATE OF TAX [SECTION 2(29C)]  Rate of Income Tax (including SC) applicable in relation to Highest Slab of Income specified in the Finance Act of the relevant Previous Year, in the case of (i) An Individual, or (ii) An AOP /BOI. INCOME & ITS CONSTITUENTS [SECTION 2(24)] 1) MEANING & DEFINITION OF INCOME  Income is a periodical monetary return with some sort of regularity. However, all receipts do not form the basis of taxation under the Act. Income for the purpose of Income Tax Act includes: [Each of these will be covered in respective chapter] 1.7  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA S. No. Income under Section 2(24) Head Of Income 1. Profits and gains PGBP 2. Dividend Other Sources 3. Voluntary contributions received by a trust/institution created Generally exempt wholly or partly for charitable or religious purposes or by under Section 11 and certain research association or universities and other 12 educational institutions or hospitals and other medical institutions or an electoral trust. 4. The value of any perquisite or profit in lieu of salary taxable Salary 5. Any special allowance or benefit specifically granted to the Salary (Generally assessee to meet expenses wholly, necessarily and exclusively exempt) for the performance of the duties of an office or employment of profit. 6. City Compensatory Allowance/ Dearness allowance : any Salary allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living. 7. Benefit or Perquisite to a Director : The value of any benefit Salary (if as per or perquisite, whether convertible into money or not, obtained employment from a company by. (a) a director, or (b) a person having agreement) else substantial interest in the company, or (c) a relative of the under Other Sources director or of the person having substantial interest, and any (if not in the terms of sum paid by any such company in respect of any obligation employment which, but for such payment, would have been payable by the agreement) director or other person aforesaid; 8. Any Benefit or perquisite to a Representative Assessee : Other Sources the value of any benefit or perquisite (whether convertible into money or not) obtained by any representative assessee under Section 160(1) (iii)/ (iv) or beneficiary, or any amount paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary; 9. Deemed profits chargeable to tax under section 28 or section 41 PGBP or section 59 10. Capital Gain : any capital gains chargeable to tax under Capital Gains Section 45; since the definition of income in Section 2(24) is inclusive and not exhaustive capital gains chargeable under Section 46(2) are also assessable as income. 1.8  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 11. Insurance Profit : The profits and gains of any Insurance PGBP business carried on by a mutual insurance company or by a co- operative society computed in accordance with the provisions of Section 44 or any surplus taken to be such profits and gains by virtue of the profits contained in the First Schedule to the income-tax act 12. Banking income of a Co-operative Society: The profits and PGBP gains of any business of banking (including) providing credit facilities carried on by a cooperative society with its members. 13. Winnings from Lottery: any winnings from lotteries, Other Sources crossword puzzles, races, including horse-races, card- games and games of any sort or from gambling or betting of any form. 14. Employees Contribution Towards Provident Fund : any PGBP if not deposited sum received by the assessee from his employees as by the assessee to the contributions to any provident fund or superannuation specified fund fund or any fund set-up under the provisions of the employees State insurance act, 1948 (34 of 1948) or any other fund for the welfare of such employees. 15. Amount Received under keyman Insurance Policy: any PGBP sum received under a Keyman insurance Policy including the sum allocated by way of bonus on such policy. Keyman insurance Policy means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected with the business of the first mentioned person in any manner whatsoever. 16. Amount received for not carrying out any activity : any PGBP sum referred to in Section 28(va), i.e. any sum, whether received or receivable in cash or kind, under an agreement for - (i) not carrying out any activity in relation to any business or profession; [amendment vide Finance act, 2016] (ii) not sharing any know-how, patent, copyright, trade- mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services 17. any sum referred to in clause (v) or (vi) of sub-section (2) Other sources of section 56 1.9  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 18. Gift received for an amount exceeding Rs. 50,000 : any Other sources sum of money or value of property referred to in clause (vii) or clause (viia) of sub-section (2) of Section 56 19. any consideration received for issue of shares as exceeds Other sources the fair market value of the shares referred in section 56(2)(viib). 20. amount received as an advance or otherwise in the course Other sources of negotiation for transfer of a capital asset referred to in clause (ix) of section 56(2). 21. any sum of money or value of property received without Other sources consideration or for inadequate consideration as referred to in clause (x) of Section 56(2) 22. any compensation or payment in connection with Other sources termination of employment as referred under clause (xi) of Section 56(2). 23. assistance in the form of a subsidy or grant or cash PGBP incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of explanation 10 to clause (1) of section 43. 2) REGULARITY OF INCOME  Income means periodical monetary return coming from definite source with some sort of regularity.  However, this does not mean that income, which does not arise regularly, will not be treated as income for tax purposes. Ex: Winnings from lotteries, card games, etc. which do not arise from definite source & do not have element of regularity are specifically included in Income under IT Act.  Even a single transaction can constitute business. Repetition of such transactions is not necessary under Income Tax Act. 3) CASH/KIND  The income received by the assessee need not be in the form of cash only.  It may also be some other property or right which has monetary value.  Wherever income is received in kind (like perquisites), then their value has to be found as per 1.10  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA the prescribed rules & this value shall be taken to be the income. 4) ILLEGAL/ TAINTED INCOME  Income is income, though tainted. Thus, illegal Income is also taxed.  For purposes of Income-tax, there is no difference between legal & tainted income. Case Law: If smuggling activity can be regarded as a business, confiscation of currency notes by customs authorities is a loss which is directly relatable to carrying of business & thus is permissible as deduction 5) DISPUTED INCOME  Any dispute regarding the title of the income cannot stop the assessment of the income in the hands of the recipient.  Thus, disputed income is taxable in the hands of recipient though there may be rival claims to the income. 6) CONTINGENT INCOME  A contingent income is not income. Until the contingency has happened, it cannot be assumed that income has accrued or has arisen to the assessee. 7) PERSONAL GIFTS  Gifts of personal nature do not constitute income upto Rs. 50,000 received in cash  However, Gifts in kind having FMV > Rs. 50,000 is wholly taxable. [To be studied in IFOS]. 8) COMPOSITE INCOME  Income-tax is a tax on all incomes received by or arising to a taxpayer during a FY. 9) PIN MONEY  Pin money received by a woman (Moneys given to a woman by her husband for running the expenses of the kitchen) would not be income in the eyes of the law.  Any property acquired using such money/savings is a Capital Asset of the lady. 10) LUMPSUM RECEIPT  Receipt in lumpsum or in instalments would not affect its taxability.  Ex: If a person receives arrears of salary in a lump sum amount, it would still be his income. 11) INCOME MUST COME FROM OUTSIDE  A person cannot earn income from himself  In case of mutual activities, where some people contribute to the common fund & are entitled to participate in the fund & a surplus arises which are distributed to the contributors of the fund, such surplus cannot be called income. 1.11  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 12) RELEVANCE OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE HEADS Relevant Method of Accounting Salaries (15-17) ▪ Taxable on due basis or on receipt basis whichever is earlier. ▪ Method of accounting followed by the assessee is irrelevant HP (22-27) Taxable on Accrual basis. Method of accounting of assessee is irrelevant. PGBP PGBP Income is taxable as per method of accounting followed by assessee. (28-44DB) If assessee follows Accrual basis of accounting → Income taxed on accrual basis. If assessee follows Cash basis of accounting → Income taxed on Cash basis.  Certain payments are allowable only on Payment basis. [Refer PGBP] Cap. Gain (45 – Taxable in the PY in which the capital asset is transferred. 55A)  Method of accounting followed by the assessee is irrelevant. IFOS (56 – 59) Same as PGBP. 13) CAPITAL & REVENUE RECEIPTS Particular Capital Receipts Revenue Receipts Meaning ▪ Receipt referable to fixed capital. ▪ Receipt referable to ▪ Receipts towards substitution of circulating capital. source of income. ▪ Any receipt toward substitution ▪ Amount received as compensation of Income. for surrender of any right of ▪ Any compensation received for ownership the Loss of future profit. Tax ▪ Not Taxable unless ▪ Taxable. Treatment expressly provided. Ex: Profits arising from sale of Ex: Profit from Sale of Capital Asset is Trading Asset is taxable as Business chargeable to tax u/h Capital Gains u/s Income 45. Q. How to determine whether a receipt is a Revenue receipt or Capital receipt?  If the Income-generating activity is within the normal dealing of the assessee → Revenue receipt.  If the Income-generating activity is outside the normal dealing of the assessee (although connected to business) → Capital receipt. 1.12  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA Ex: Profit on sale of shares & securities held by a bank as investments would be of Capital Nature. But Profit on sale of shares & securities held by a stock broker as SIT would be of Revenue Nature. Note: Where profits arise from transactions which are outside the normal dealing of the assessee, although connected with his business, taxability would depend upon the fact whether transactions constitute trading activity for the Assessee. CRUX: Only Revenue Receipt is taxable. Capital Receipts are normally Exempt. But certain capital receipts which have been specifically included in the definition of “Income u/s 2(24) are taxable. 14) CAPITAL EXPENDITURE & REVENUE EXPENDITURE Capital Expenditure Revenue Expenditure 1. Cost of acquisition & installation charges 1. Purchase price of a current Asset for of Fixed Asset. resale or manufacture. 2. Incurred to increase operating capacity. 2. Incurred to maintain the asset. 3. Expenditure incurred to free oneself 3. Expenditure incurred to free oneself form a Capital Liability from a Revenue liability 4. Expenditure for acquisition of source of 4.Expenditure incurred for earning income Income Liquidated damages → Capital receipt. Amount received towards compensation for sterilization of profit earning source is not in ordinary course of business. Compensation on Termination of Agency → Capital receipt. Receipt of compensation on termination of the agency business being the only source of income by the assessee. But if the assessee has several agencies and one of them is terminated & compensation is received, the receipt would be revenue receipt since taking agencies & exploiting the same for earning income is the ordinary course of business & loss of one agency would be made good by taking another. Compensation received from the employer or from any person for premature termination of the service contract is a capital receipt but is taxable as profit in lieu of salary u/s 17(3) or IFOS u/s 56(2)(xi), respectively. Compensation received or receivable in connection with termination/modification of T&Cs of any contract relating to its business shall be taxable as business income 1.13  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 15) APPLICATION OF INCOME VS DIVERSION OF INCOME Application of Income Diversion of Income  If assessee applies his income to  If there is an overriding charge on the source of discharge his obligation such income, which diverts the income, it is  after the income reaches in the called diversion of Income. hands of the assessee,  In case of diversion of income before it reaches  it would be an application in the hands of the assessee, (apportionment) of income &  it cannot be treated as an income of the  this would result in taxation of such assessee & thus NO TAX income in the hands of the assesse ▪ Conditions: ▪ Conditions: 1. Income accrues to the assessee 1. An overriding charge/title on income & 2. Income reaches the assessee 2. Income is diverted at source. 3. Income is applied to discharge 3. Charge is on sources of income & not on the obligation (Self- Receiver. imposed/gratuitous) CONCEPT OF FINANCIAL YEAR, PREVIOUS YEAR & ASSESSMENT YEAR Financial Year. ▪ Financial year means a year starting on 1st April & ending on 31st March. PY [Sec 3] ▪ FY in which the income is earned is called “Previous Year”. ▪ PY means the Financial Year immediately preceding the AY. ▪ PY 2022-23 will commence on 1.4.2022 & will end on 31.3.2023. AY ▪ The year in which income is assessed to tax is called Assessment Year. [Sec 2(9)] ▪ AY 2023-24 will commence on 1.4.2023 & will end on 31.3.2024. ▪ Thus Income earned during PY 2022-23 will be assessed / taxed in AY 2023-24. CRUX: PY → Year in which Income is earned; AY → Next year in which income is taxed is AY. Ex: A is running a business from 2003 onwards. Determine PY for AY 2023-24. [Ans: PY = 1.4.2022 - 31.3.2023]. DUAL ROLE OF A FINANCIAL YEAR ▪ Each financial year is both Previous Year as well as Assessment Year. ▪ It is PY for income earned during that FY & AY for the income earned during the preceding FY. Financial year PREVIOUS YEAR ASSESSMENT YEAR 1.14  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 2021-22 FY 2021-22 is PY for income FY 2022-23 is AY for incomes received/accrued during 1 April earned in PY 2021-22. 2021 to 31 March 2022 2022-23 FY 2022-23 is PY for income FY 2023-24 is AY for incomes received/accrued during April 1, earned in PY 2022-23. 2022 to March 31, 2023. FIRST PREVIOUS YEAR FOR NEWLY SET-UP BUSINESS/PROFESSION DURING FY  First PY = The period beginning from the date of setting up of the business or from the date the new source came into existence & ending on the last day of that FY (31st March).  Therefore, first PY of a newly set-up business/ profession or a new source of income will be either 12 months or less than 12 months. It can never exceed a period of 12 months. Note: The same provision will be applicable for the “New Source of Income.” QUESTIONS Q1. Mr. SS set up a new business on 24.2.2022, what will be the first PY for that business? Answer: From 24.02.2022 – 31.3.2023; PY 2022-23; AY 2023-24. Q2. What will be the 2nd PY for his business? Answer: PY 2023-24; AY 2024-25. UNIFORM PREVIOUS YEAR  Assessees are required to follow Financial year as Previous Year uniformly for every year. [From 1st April to 31st March]  An Assessee may maintain books of account on calendar year basis but for Income Tax purpose, his previous year will be financial year & not the calendar year. Ex: Mr. SS can maintain books of accounts on calendar year basis, but tax will be levied on the basis of financial year only. A/cing year Income as per Splitting of income as per FY Taxable Income books of A/c. JAN-MARCH APRIL –DEC 2020 60000 18000 42000. 2021 70000 26000 44000 PY 20-21 & AY 21-22 = 68000(42000+26000) 1.15  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 2022 90000 21000 69000 PY 21-22 & AY 22-23 =65000 (44000+21000) CASES WHERE INCOME OF PREVIOUS YEAR IS ASSESSED IN SAME YEAR  General Rule: Income earned during any PY is assessed to tax in immediately succeeding AY.  However, in following circumstances, income is taxed in PY in which it is earned. Thus AY & PY in these exceptional circumstances will be the same.  These exceptions have been made to protect the interests of revenue. FOLLOWING ARE THE EXCEPTIONS: 1. SHIPPING BUSINESS OF NON-RESIDENTS [SECTION 172]  If a ship belonging to or chartered by NR carries passengers /livestock /mail /goods shipped at a port in India,  Such Ship is allowed to leave the port only when tax has been paid or satisfactory arrangement has been made for payment thereof.  Income = 7.5% of the freight paid/payable to the owner or his agent whether in India or o/s India for such carriage.  Such income is charged to tax in the same year in which it is earned. 2. PERSONS LEAVING INDIA [SECTION 174]  Where it appears to AO that any individual may leave India during the current AY or shortly after its expiry &  He has no present intention of returning to India, Then Total Income of such individual for the period from the expiry of the respective PY up to the probable date of his departure from India is chargeable to tax in that AY Ex: Suppose Mr. X is leaving India for USA on 10.6.2022 & it appears to AO that he has no intention to return. Before leaving India, Mr. X will be required to pay tax on the income earned during PY 2022-23 as well as the total income earned during the period 1.4.2022 to 10.06.2023. 3. AOP/BOI/AJP FORMED FOR A PARTICULAR EVENT OR PURPOSE [SEC 174A]  If AOP/BOI etc. is formed or established for a particular event or purpose &  AO apprehends that AOP/BOI is likely to be dissolved in the same year or in next year,  he can make assessment of the income upto date of dissolution as income of relevant AY. 4. PERSONS LIKELY TO TRANSFER PROPERTY TO AVOID TAX [SECTION 175]  During the current AY, if it appears to AO that a person is likely to charge, sell, transfer, dispose any of his assets  to avoid payment of any liability under this Act, Total income of such person for the period from the expiry of PY to the date when AO commences 1.16  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA proceedings is chargeable to tax in that assessment year. 5. DISCONTINUED BUSINESS [SECTION 176]  If any business or profession is discontinued in any AY,  Income of the period from the expiry of the PY up to the date of such discontinuance may,  at the discretion of AO may be charged to tax in that assessment year. Note: Section 176 is a Discretionary power. The Assessing Officer has the discretion of applying it. AO may choose not to apply it & wait till the end of the Assessment Year VITAL STATISTICS AND LAYOUT Contribution of Direct Taxes to Total Tax Revenue (Rs. in crore) Financial Year Direct Taxes Indirect Taxes Total Taxes Direct Tax As % Of Total Taxes 2000-01 68305 119814 188119 36.31% 2001-02 69198 117318 186516 37.10% 2002-03 83088 132608 215696 38.52% 2003-04 105088 148608 253696 41.42% 2004-05 132771 170936 303707 43.72% 2005-06 165216 199348 364564 45.32% 2006-07 230181 241538 471719 48.80% 2007-08 314330 279031 593361 52.97% 2008-09 333818 269433 603251 55.34% 2009-10 378063 243939 622002 60.78% 2010-11 445995 343716 789711 56.48% 2011-12 493987 390953 884940 55.82% 2012-13 558989 472915 1031904 54.17% 2013-14 638596 495347 1133943 56.32% 2014-15 695792 543215 1239007 56.16% 2015-16 741945 711885 1454180 51.03% 2016-17 849818 861515 1711333 49.66% 2017-18 1002037 915256 1918210 52.24% 2018-19* 1137685 939018 2076703 54.78% 1.17  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE Particulars Amount (Rs.) Income under the head : + income from Salaries XXX + income from House Property XXX + Profits and gains of business or profession XXX + Capital gains XXX + income from other sources XXX Adjustment in respect of : + Clubbing of income XXX – Set off and carry forward of losses (XXX) = Gross Total Income xxx – deductions under section 80C to 80U (or Chapter Via) (XXX) = Total Income xxx TAX RATES FOR FY 2022-23 i.e. AY 2023-24 Calculation of tax on income  tax rate depends upon the category of person  amount of income  residential status of person  age of individual  type of income Components of tax are Education Tax Tax Surcharge SHEC Cess Payable Tax Rates for Different types of person depending upon various parameters: 1. For :  resident individual of the age below 60 years  Non-Residents individual  Hindu undivided family  association of Persons  Body of individuals (other than Co-operative society)  Artificial Juridical Person 1.18  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA Total Income (Rs.) Tax Rate Tax liability (Rs.) upto 2,50,000 Nil Nil 2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000) 5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500 above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500 2. Applicable for : Resident individual of the age of 60 years or more but less than eighty years at any time during the previous year Total Income (Rs.) Tax Rate Tax liability (Rs.) upto 3,00,000 Nil Nil 3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000) 5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000 above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,10,000 3. Applicable for : Resident individual of the age of 80 years or more at anytime during the previous year Total Income (Rs.) Tax Rate Tax liability (Rs.) upto 5,00,000 Nil Nil 5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,00,000 CBDT has clarified vide Circular No. 28/2016 27.07.2016, that a person born on 1st April would be considered to have attained a particular age on 31st March, the day preceding the anniversary of his birthday. Therefore a resident individual, whose 60th / 80th birthday falls on 1st April, 2023 would be treated as having attained the age of 60 years/80 years in the P. Yr. 2022-23. 4. For firm and local authroties: Types of person Tax Rates i. Firms (including LLP) 30% of total Income ii. Local authorities 30% of total Income Good to know: Entity or individual other than a company whose adjusted total income exceeds Rs.20 lakhs is liable to pay Alternate Minimum tax @ 18.5%. 1.19  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA 5. FOR COMPANY Domestic Company Assessment Year 2023-24  Where it opted for Section 115BA 25%  Where it opted for Section 115BAA 22% [This benefit shall be available when total income of the company is computed without claiming specified deductions, incentives, exemptions and additional depreciation available under the income-tax act.]  Where it opted for Section 115BAB 15% [This regime shall be available only for the manufacturing companies incorporated in India on or after 01-10-2019. Hence, old companies will not be able to take the benefit of this section.]  Where it has not opted for Section 115BAA and the total turnover 25% or Gross receipts of the company in the last previous year does not exceeds 400 crore rupees  any other domestic company 30% Foreign Company 40% Good to know: A company is liable to pay MAT @ 15%. 6. For Co-operative Society : Income Slabs Tax Rates i. Where the taxable income does not exceed rs. 10% of the income 10,000/- ii. Where the taxable income exceeds rs. 10,000/- Rs. 1,000/- + 20% of income in excess but does not exceed rs. 20,000/- of Rs. 10,000/- Where the taxable income exceeds rs. 20,000/- Rs. 3.000/- + 30% of the amount by which the taxable income exceeds rs. 20,000/- Surcharge Surcharge is an additional tax imposed on certain cases. it is imposed over the basic tax rate calculated on the income. For example : Suppose total taxable income of an individual of 45 years is rs. 1,30,00,000, then Base tax will be : Rs. 1,12,500 + 30% of (1,20,00,000)= Rs. 37,12,500. 1.20  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA Surcharge @12%* of Rs. 37,12,500 = Rs. 4,45,500. There are different rate of surcharge prescribed in the following manner : Types of person Surcharge Rates i. individuals, HUF, AOP, BOI if income exceeds Rs. 50 lakhs but 10% of income does not exceed Rs. 1 crore tax if income exceeds Rs. 1 crore but 15% of income does not exceed Rs. 2 crore tax if income exceeds Rs. 2 crore but 25% of income does not exceed Rs. 5 crore tax if total income exceeds Rs. 5 crore 37% of income tax ii Firm / local authority / Co- if income exceeds Rs. 1 crore 12% of income operative Society tax iii. domestic Companies* if income exceeds Rs. 1 crore but does 7% of income tax not exceed Rs. 10 crores if income exceeds Rs. 10 crore 12% of income tax iv. Companies other than a if income exceeds Rs. 1 crore but does 2% of income tax domestic company not exceed Rs. 10 crores if income exceeds Rs. 10 crore 5% of income tax *The rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BaB shall be 10% irrespective of amount of total income. Marginal Relief in Surcharge : When an assessee’s taxable income exceeds rs. 1 crore, he is liable to pay Surcharge at prescribed rates mentioned above on income tax payable by him. However, the amount of income tax and surcharge on total income shall not exceed the amount of income that exceeds rs. 1 crore. Example : Suppose Mr. ram an individual assessee of 42 years is having taxable income of rs. 1,00,01,000/- 1. income tax Rs. 28,12,800 2. Surcharge @15% of Income Tax Rs. 4,21,920 3. income tax on income of rs. 1 crore Rs. 28,12,500 4. Maximum Surcharge payable (income over rs. 1 crore i.e. rs. Rs. 1,000 1,000) 5. (income tax + Surcharge) payable Rs. 28,13,500 Thus, in the above case, though the surcharge @15% is Rs. 421920. However, since the income of Mr. Ram exceeds rs. 1 crore by just rs. 1,000, ram will be eligible for marginal relief and maximum surcharge will be restricted to rs. 1,000 only. 1.21  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA CESS  Governments resort to imposition of cess for meeting specific expenditure  education Cess and Senior and Higher education Cess are additional levy on the basic tax liability + surcharge, if applicable.  Rate of Education Cess is 2%  Rate of SHEC is 1%.  Rate of Health Cess is 1%. Special Tax Regime for Individual and HUFs [Section 115BAC) The Finance act, 2021, has provided an option to individuals and HUF for payment of taxes at the following reduced rates from assessment year 2022-23 and onwards: Total Income (Rs) Rate up to 2,50,000 Nil From 2,50,001 to 5,00,000 5% From 5,00,001 to 7,50,000 10% From 7,50,001 to 10,00,000 15% From 10,00,001 to 12,50,000 20% From 12,50,001 to 15,00,000 25% above 15,00,000 30% Surcharge: Surcharge is levied on the amount of income-tax at following rates if total income of an assessee exceeds specified limits: Rs. 50 Rs. 1 Crore to Rs.2 Rs. 2 Crores to Rs. Rs. 5 crores to exceeding Rs. lakhs to Rs. Crores 5 Crores Rs. 10 Crores 10 Crores 1 Crore 10% 15% 25% 37% 37% Note: Marginal relief is available from surcharge. Health and Education Cess: Health and Education Cess is levied at the rate of 4% on the amount of income-tax plus surcharge. AMENDMENTS  In case of Individual, HUF, AOP, BOI, AJP maximum surcharge limit is 15% on tax calculated on LTCG 112A, STCG 111A and Dividend Income. From AY 23-24 it is proposed to include LTCG 112 also, so from AY 23-24 maximum surcharge limit of 15% applicable on all type of LTCG.  In the case of co-operative societies, there is change in the rate of surcharge. The amount of income-tax shall be increased by a surcharge at the rate of 7% of such income-tax in case the total income exceeds one crore rupees but does not exceed ten crore rupees. Surcharge at the 1.22  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA rate of 12% of shall continue to be levied in case of a co-operative society having a total income exceeding ten crore rupees. Alternate Minimum tax: The assessee opting for this scheme have been kept out of the purview of alternate Minimum Tax (AMT). Further the provision relating to the computation, carry forward and set off of AMT credit shall not apply to these assessees. Conditions to be satisfied: 1. The option to pay tax at lower rates shall be available only if the total income of individual or HUFs is computed without claiming following exemptions or deductions: a) Leave travel concession [Section 10(5)] b) House rent allowance [Section 10(13a)] c) Official and personal allowances (other than those as may be prescribed) [Section 10(14)] d) allowances to MPs/MLAs [Section 10(17)] e) allowances for income of minor [Section 10(32)] f) deduction for units established in Special economic Zones (SEZ) [Section 10aa]; g) Standard deduction [Section 16(ia)] h) entertainment allowance [Section 16((ii)] i) Professional tax [Section 16(iii)] j) interest on housing loan [Section 24(b)] k) additional depreciation in respect of new plant and machinery [Section 32(1)(iia)]; l) Deduction for investment in new plant and machinery in notified backward areas [Section 32AD]; m) Deduction in respect of tea, coffee or rubber business [Section 33AB]; n) deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India [Section 33ABA]; o) Deduction for donation made to approved scientific research association, university college or other institutes for doing scientific research which may or may not be related to business [Section 35(1) (ii)]; p) Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business [Section 35(1)(iia)]; q) deduction for donation made to university, college, or other institution for doing research in social science or statistical research [Section 35(1) (iii)]; r) Deduction for donation made for or expenditure on scientific research [Section 35(2AA)]; s) Deduction in respect of capital expenditure incurred in respect of certain specified 1.23  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA businesses, i.e., cold chain facility, warehousing facility, etc. [Section 35ad]; t) deduction for expenditure on agriculture extension project [Section 35CCC]; u) deduction for family Pension [Section 57(iia)] v) Deduction in respect of certain incomes other than specified under Section 80JJAA, 80CCD(2) and deduction under section 80la for unit located in iFSC [Part C of Chapter Vi-a]. 2. total income of the assessee is calculated after claiming depreciation under section 32, other than additional depreciation, and without adjusting brought forward losses and depreciation from any earlier year (if such loss or depreciation pertains to any deduction under the aforesaid sections). Further, loss under the head house property can’t be set off against other heads of Income. Moreover, such loss and depreciation will not be carried forward. 3. if the assessee has any unabsorbed depreciation, relating to additional depreciation, which has not been given full effect, the corresponding adjustment shall be made to WDV of the block of assets in the prescribed manner. 4. in case the assessee has business or professional income, this option shall be exercised on or before the due date for furnishing the returns of income. 5. Once the assessee has exercised the option for any previous year, it cannot be subsequently withdrawn for the same or any other previous year. The option once exercised for any previous year can be withdrawn only once in subsequent previous year (other than the year in which it was exercised) and thereafter, he shall never be eligible to exercise this option again except where such person ceases to have any business income. 6. if assessee does not have business or professional income, the option must be exercised along with the return of income for every previous year. if an assessee, after opting for Section 115BaC, claims any of prescribed deduction or allowance in any previous year, then the option to pay tax at concessional rate shall become invalid for that year. SPECIAL TAX REGIME APPLICABLE TO A CO-OPERATIVE SOCIETIES [SECTION 115BAD] The Finance act, 2020 has inserted a new section 115Bad in income-tax act to provide an option to the resident co-operative societies to get taxed at the rate of 22% plus 10% surcharge and 4% cess. The resident co- operative societies have an option to opt for taxation under newly section 115BAD of the act w.e.f. assessment year 2021-22. The option once exercised under this section cannot be subsequently withdrawn for the same or any other previous year. if the new regime of Section 115Bad is opted by a co-operative society, its income shall be computed without providing for specified exemption, deduction or incentive available under the Act. The societies opting for this section have been kept out of the purview of alternate Minimum Tax (AMT). Further, the provision relating to computation, carry forward and set-off of AMT credit shall not apply to these assessees. The option to pay tax at lower rates shall be available only if the total income of cooperative society is computed without claiming following exemptions or deductions: a) deduction for units established in Special economic Zones (SEZ) [Section 10aa]; 1.24  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA b) additional depreciation in respect of new plant and machinery [Section 32(1)(iia)]; c) Deduction for investment in new plant and machinery in notified backward areas [Section 32AD]; d) Deduction in respect of tea, coffee or rubber business [Section 33AB]; e) deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India [Section 33ABA]; f) Deduction for donation made to approved scientific research association, university college or other institutes for doing scientific research which may or may not be related to business [Section 35(1) (ii)]; g) Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business [Section 35(1)(iia)]; h) deduction for donation made to university, college, or other institution for doing research in social science or statistical research [Section 35(1) (iii)]; i) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may or may not be related to business [Section 35(2aa)]; j) Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing facility, etc. [Section 35ad]; k) deduction for expenditure on agriculture extension project [Section 35CCC]; l) Deduction in respect of certain incomes other than specified under Section 80JJAA [Part C of Chapter Vi-a]. Where a co-operative society exercises option for availing benefit of lower tax rate under section 115BAD, it shall not be allowed to claim set-off of any brought forward losses or depreciation attributable to any restricted exemption or deduction in the assessment year for which the option has been exercised and for any subsequent assessment year. 1.25  BASIC CONCEPT OF INCOME TAX SSGURU CA SURAJ SATIJA Rebate under section 87A An assessee, being an individual resident in India, whose total income does not exceed Rs. 5,00,000 shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to 100% of such income-tax or an amount of Rs. 12,500, whichever is less. Steps involved in calculation of Tax on Total Income Particulars Amount Rs. Tax on Special Incomes @ specified tax rates (Long term capital gains @ 20%; Casual Income @ 30% and Short-term capital gains (on Securities transaction tax XXX paid securities) @ 15%; add : Tax on Balance income @ Slab rate/Flat rate (as applicable) XXX Total Tax xxx XXX add : Surcharge, if any (XXX) less : Marginal relief, if applicable xxx Tax including Surcharge XXX Add : Education Cess @ 2% on tax including surcharge XXX Add : SHEC @ 1% on tax including surcharge Add : Health Cess @ 1% on tax including surcharge xxx (Combinedly Health and Education Cess on income tax is levied @ 4%) XXX Tax liability add : interest under Section 234a/234B/234C xxx Net tax liability Less : Taxes paid by way of : (XXX) – Tax deducted at source (TDS) (XXX) – advance tax – Self-assessment tax (XXX) – Double taxation relief (XXX) Tax Payable/Refundable xxx 1.26  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA 2. RESIDENTIAL STATUS AND SCOPE OF TOTAL INCOME Basics of Residential Status [RS] 1. Total income of an assessee cannot be computed unless we know residential status of the assessee during the previous year. 2. RS is determined for each category of person separately. 3. RS always determined for P.Y. because we have to determine the total income of the previous year only. 4. It is calculated for every year because it may change year to year. 5. A person can be resident of more than one country for any P.Y 6. Citizenship of a country and residential status of that country are different concept. 7. Onus of Proof RESIDENTIAL STATUS IS DETERMINED FOR Residential Status of Individual Determination of Residential Status [Sec. 6(1)] 1. General Conditions [Sec.6(l)]: An Individual is Resident in India in any Previous Year - (a) If the Individual stayed in India for a period of 182 days or more during the Relevant Previous Year (RPY) - he is Resident of India (OR) (b) If he stayed in India for a period of 60 days or more during Relevant Previous Year (RPY) and 365 days or more during the four preceding previous years. If the above conditions are not satisfied, then he is a Non-Resident. 2.1  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA Note: The day on which he enters India, as well as the day on which he leaves India, shall be taken into account as the stay of the Individual in India. 2. Deemed to be Resident [Sec. 6(1A)]: An Individual, being a citizen of India, having Total Income, other than the Income from Foreign Sources, exceeding ₹ 15 Lakhs during the Previous Year shall be deemed to be Resident in India in that Previous Year, if 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. Note: If Indian Citizen or Person of Indian Origin is becoming Resident under Point (1), then Point (2) is not applicable. 3. Special Situations for determination of Residential Status: [Sec. 6(1) Expln.] Person shall be considered Resident only if - Indian Citizen leaving India for employment they are in India for 182 days or more outside India or being a Crew Member of an Indian during the Relevant Previous Year Ship leaving India (RPY) Indian Citizen or person of Indian Origin having (a) If he stayed in India for a period of Total Income, other than the Income from Foreign 182 days or more during RPY (OR) Sources, exceeding ₹ 15 Lakhs during the Previous (b) If he stayed in India for a period of Year 120 days or more during RPY and 365 days or more during 4 preceding previous years. Indian Citizen or Person Indian Origin, visiting they are in India for 182 days or more Indian (other than mentioned above) during the Relevant Previous Year (RPY) Note 1-Period of stay in India in respect of voyage will be determined in the manner and subject to conditions which may be prescribed. Note 2- A person is said to be of Indian Origin, if he or either of his parents or either of his grandparents were bom in undivided India. [Sec.115C(e)] Other Points: If the above persons stayed in India for less than 182 days, they will be considered as Non- Resident, i.e. any person leaving India for employment / Crew Member of Indian Ship leaving on or before 28.09.2019 is always NR, provided he does not return to India before the end of relevant previous year. Leaving India for Employment outside India also includes Self-Employment outside India. [CIT vs O. Abdul Razak (2011) 337 ITR 267 (Ker.)] 2.2  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA 4. Determination of Residential Status of Crew Member of a Ship: In the case of an Individual, being a Indian Citizen and a Member of the Crew of a Foreign-bound Ship leaving India, the period(s) of stay in India shall, in respect of such voyage shall be determined in the manner and subject to such prescribed conditions. For determining the period of Stay in India, the following period shall not be included- Period beginning From Period ending to Date entered into the Continuous date entered into Continuous Discharge Certificate Discharge Certificate in respect of in respect of the signing off by that individual joining the ship by the said individual from the ship in respect of such voyage. for the eligible voyage 5. Meaning of Terms: (a) Continuous Discharge Certificate shall have the meaning assigned to it in the Merchant Shipping (Continuous Discharge Certificate - Cum-Seafarer’s Identity Document) Rules, 2001 under Merchant Shipping Act, 1958. (b) Eligible Voyage shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where- (i) For the voyage having originated from any port in India, has its destination as any port outside India and (ii) For the voyage Originated from any port outside India, has its destination as any port in India. 6. General Cut-off Date for Resident / Non-Resident: (a) Cut-off date for leaving India for employment outside India: Any person leaving India for the first time during the previous year either on 29th September or subsequently during any previous year shall always be Resident. (b) Cut-off date for visiting India by Indian Citizen or Person of Indian Origin: Any person arriving in India either on or before 1st October (2nd October in case of Leap Year) and subsequently not left India during the Previous Year, shall always be Resident. (c) General Cut-off date for Non-Resident: Any person leaving India before 30th May or arriving in India after 31st January (1st February in case of Leap year) shall always be Non- Resident. 7. Resident Ordinarily Resident or Not Ordinarily Resident [Sec.6(6)]: (a) This provision is applicable to Individuals who are Residents u/s 6(1) as above. (b) If the Assessees fulfill any one of the following conditions, they are Resident Not Ordinarily Resident. If none of the conditions are fulfilled, they are Resident Ordinarily Resident. 2.3  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA He should be a Non-Resident in India u/s 6(1) for atleast 9 out of 10 preceding previous years, or He should be in India for a period of 729 days or less in the 7 preceding previous years. In simpler terms: An Individual is said to be a Resident and Ordinarily Resident if he satisfies both the following conditions - 1. He is a Resident in any 2 out of the last 10 years preceding the relevant previous year, and 2. His total stay in India in the last 7 years preceding the relevant previous year is 730 days or more. When an Individual satisfies both conditions, he is Resident and Ordinarily Resident. When an Individual does not satisfy any one or both the conditions, he is Resident but not Ordinarily Resident. 8. Determination of Residential Status of Indian Citizen / Persons of Indian Origin: A Person is said to be “not ordinarily resident” in India in any Previous Year, if such person is - A Citizen of India, or a Person of Indian origin Who has been in India for a periods being Resident u/s 6(1) [Note] amounting in all to 120 days or more but less than 182 days. A Citizen of India who is deemed to be Shall be Not Ordinarily Resident Resident in India u/s 6 (1A) Note: Above referred person having Total Income, other than the Income from Foreign Sources, exceeding ₹ 15 Lakhs during the Previous Year. Meaning of the term Income from Foreign Sources: It means Income which accrues or arises outside India (except Income derived from a business controlled in or a Profession set up in India). 9. Always Not Ordinarily Resident: Any person to whom the exception u/s 6(1) does not apply, can stay in India for 104 days in every previous year, and can continuously enjoy the status of Not Ordinarily Resident. 10. India [Sec.2(25A)]: The term India means - (a) the Territory of India as per Article 1 of the Constitution, (b) its Territorial Waters, Seabed and Subsoil underlying such waters, (c) Continental Shelf, (d) Exclusive Economic Zone, or (e) any other specified Maritime Zone, and (f) the air space above its Territory and Territorial Waters. 2.4  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA Seamen of foreign-going Indian Ship outside the Territorial Waters of India Circular No. for 182 days or more, shall be taxed only in respect of earnings received in 586 / 28.11.99 India or earnings for the period working within Indian Waters or Coastal Ships. Important Concepts / Points to be considered 1. Continuity not required: It is not necessary that the stay should be for a continuous period or at any one place in India. 2. Official Tours: Official Tours abroad in connection with employment in India shall not be regarded as employment outside India. 3. Citizenship not equal to Residential Status: Citizenship of a country and Residential Status of that country are separate concepts. A person may be an Indian National / Citizen, but he may not be a Resident in India, and vice-versa. Illustrations - Residential Status Situation Issue involved / Answer 1. Brett Lee, an Australian Cricket Player, visits India for 100 days in every Financial Year. This has been his practice for the past 10 Financial Years. Find out his Residential Status for the Assessment Year 2023-2024. 2. Mr. Ram, an Indian Citizen, left India on 22.09.2022 for the first time to work as an Officer of a Company in Germany. Determine the Residential Status of Ram for the Assessment Year 2023-2024 and explain the conditions to be fulfilled for the same under the Income Tax Act, 1961. 3. Mr. Dey, a Non-Resident, residing in US since 1981, came back to India on 01.04.2022 for permanent settlement. What will be his Residential Status for the Assessment Years 2023-2024 and 2024- 2025? Residential Status of HUF / Firm / AOP / Company / Others Residential Status of HUF 1. Step 1: Resident vs Non-Resident: If Control and Management of its affairs is - Residential Status 2.5  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA (a) Wholly or partly inside India Resident (b) Wholly outside India Non-Resident 2. Step 2: Ordinarily vs Not Ordinarily Resident: (a) This provision is applicable to HUF which is a Resident u/s 6(2) as above. (b) If the Karta or Manager of the HUF fulfills any one of the following conditions, then the HUF is Resident Not Ordinarily Resident. If both the conditions are not fulfilled, then it is Resident Ordinarily Resident. Should be a Non-Resident in India u/s 6(2) for at least 9 out of 10 preceding previous years, or Should be in India for a period of 729 days or less in the 7 preceding previous years. Residential Status of Firm / AOP /Local Authorities/ AJP If Control and Management of its affairs is - Residential Status 1. Wholly or partly inside India Resident 2. Wholly outside India Non-Resident Residential Status of a Company [Sec.6(3)] 1. Indian Company Always Resident. 2. Other Companies - If its Place of Effective Management in that year is (a) In India Resident. (b) Outside India Non-Resident. (a) Place of effective management: “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. There are also steps provided by the CBDT for determining POEM vide [C. NO.6 /2017]. (b) The existing provision of Sec.6(3)(ii) for determining the Place of Effective Management of a Company for deciding the residential status, shall not apply to a Company having turnover of gross receipts of ₹ 50 Crores or less in a financial year. [Circular No. 8/2017] Control and Management u/s 6(2)/ 6(4) Control and Management means only de facto control, and not de jure control. De 1. De facto control and management refers to where the decision regarding Facto affairs is being taken, i.e. where the directive power or head and brain of the 2.6  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA Control adventure is situated. 2. For example, the business may be done from outside India and yet its control and management may be wholly within India. In such case, de facto control is in India. 3. The Place of Control may be different from the usual place of running the business, and sometimes even the Registered Office of the Assessee. 4. Control and Management do imply the functioning of the controlling and directing power at a particular place with some degree of permanence. De Jure De Jure Control means merely the right to control and manage the affairs. It does Control not refer to the actual exercise of that right. 2.7  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA SCOPE OF TOTAL INCOME-SECTION 5 The scope (taxability) of total income of an assessee depends upon the following factors: a) Residential Status of the assessee. b) Place of Accrual/Receipt of Income. c) Point of time at which income had accrued/received by the assessee or his agent. To understand the scope of Total Income, we must first understand some terms INDIAN INCOME Income Received or deemed to be received in India OR Income Accrued or deemed to be accrued in India. FOREIGN INCOME Income which is NEITHER Received in India NOR Accrued in India. SCOPE OF TOTAL INCOME I. INDIVIDUAL/HUF Nature of Income Tax Treatment ROR RNOR NR Indian Income TAXABLE TAXABLE TAXABLE Foreign Income TAXABLE Only 2 types of Foreign Incomes are Not Taxable taxable** Others foreign incomes are not taxable in India. ** Following Foreign Incomes are taxable in the hands of RNOR: 1. Business Income which is controlled wholly/partly from India. 2. Income from Profession set up in India. Above 2 Incomes must be included in TI of RNOR even if they accrues/arises outside India. Note: No other foreign Income (Salary, Rent, Interest etc.) is taxable in India to RNOR. II. Other than INDIVIDUAL/HUF Nature of Income Tax Treatment ROR NR Indian Income TAXABLE TAXABLE Foreign Income TAXABLE NOT TAXABLE Points to Remember:  Indian Income → Taxable to EVERYONE (R/NR).  ROR → Every Income (Indian/Foreign) is Taxable. Circular: Clarification regarding liability to Tax in India of NR Seafarer receiving Remuneration in NRE (Non-Resident External) A/c maintained with an Indian Bank Income by way of salary, received by non-resident seafarers, for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) & received into NRE bank A/c maintained with an Indian bank shall not be included in the total income. MEANING OF SOME IMPORTANT TERMS I. RECEIPT OF INCOME 2.8  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA Income Received in India Receipt → First occasion(time) when the recipient gets money under his control. Any Further Remittance/Transmission of the received amount to another place/person does not result in “Receipt” in the hands of subsequent recipient Income Deemed to be 1. Employer’s Contribution to RPF in excess of 12% of salary. Received in India 2. Interest credited to RPF of the Employee in excess of 9.5% p.a. 3. Amount transferred from URPF to RPF (Employer’s contribution & its interest). 4. Contribution made by CG/ other employer in PY under Pension scheme [80CCD] to the account of employee. 5. Any Tax deducted at source Q. Discuss the taxability of the following items of receipt in the case of RNOR: 1. Rs. 1,00,000 was earned from a business in the USA but the profit have been remitted to India. The assessee used to attend to the business only when he was in the USA. 2. Remuneration of Rs. 20,000 due to him for services rendered in Russia was credited to his bank account in Russia & immediately thereafter remitted to India. Solution: 1. Remittance of profit to India does not mean that business is controlled in India. For RNOR, income accruing outside India is taxable only when it is from a business controlled from India or from a profession set up in India. Thus, income of Rs. 1,00,000 is not taxable in India. 2. Salary accrues where services are rendered. In the present case services were rendered in Russia & income received there, it is income accruing outside India & received outside India. Hence it is not taxable in India. ACCRUAL OF INCOME Accrue means the right to receive income. Due means the right to enforce payment of the accrued income. Examples: 1. Salary for work done in December will accrue throughout the month, day to day, but will become due on the salary bill being passed on 31st Dec or 1st Jan. 2. Interest on Government securities payable on specified dates arise during the period of holding but will become due for payment on specified dates. Explanation 1 to Section 5: Income accruing/arising outside India shall not be deemed to be received in India merely because it is taken into account in Balance Sheet prepared in India. Class Note: Explanation 2 to Section 5: Income taxed on Accrual basis cannot be assessed again on Receipt basis, as it will amount to double taxation. INCOMES DEEMED TO ACCRUE OR ARISE IN INDIA [SECTION 9]  Some Incomes are deemed to accrue/arise in India even though they actually accrue o/s India. 2.9  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA 1. INCOME FROM BUSINESS CONNECTION IN INDIA  Conditions for Taxability of Income from Business Connection: a) Assessed has a “Business Connection” in India. b) Income arises outside India by virtue of such Business Connection to the assessee.  Meaning of Business Connection: Business connection includes any Business Activity carried out through a person acting on behalf of NR. Person Acting on behalf of NR (Agent) must satisfy the following conditions: Agent of NR must have Authority to conclude contracts on behalf of NR. Such contract  Should be in the name of NR.  Should be for Provision of Services by that NR.  Should be for the transfer of ownership of Property owned by that NR.  Should be for granting of Right to use Property owned by that NR/under control of NR. If agent does not have the above Authorities but he habitually maintains stock of goods/ merchandise from which he regularly deliver goods/merchandise in India on behalf of NR. Where he habitually secures orders in India for NR.  Examples of Business Connection: a) Branch office in India or Agent of a NR in India or An organization/factory of a NR in India. b) Appointing an agent in India for systematic & regular purchase of Raw Material or for sale of NR’s goods for other business purpose. c) Formation of subsidiary company in India to carry on business of NR parent company. d) Any profit of NR which can be reasonably attributable to such part of operations carried out in India through business connections in India are deemed to be earned in India. NOTE: If agent’s authority is limited to purchase of goods or merchandise for the non- resident, there will be NO business connection.  There may be situations when a person acting on behalf of NR secures order for another NR too. In such situation, business connection for other NR is established if: a) such other NR controls the NR or b) such other NR is controlled by the NR or c) such other NR is subject to same control as that of NR. In all 3 situations above, business connection is established where a person habitually secures orders in India, mainly or wholly for such non-residents.  Independent Agent: Agent who do not work mainly or wholly for the NR. Where NR carries on business through broker/commission agent, there will be NO business connection if such a person is acting in ordinary course of his business.  Significant Economic Presence of NR in India Constitute Business Connection [Amd] [Explanation 2A to section 9(1)(i)] Significant Economic Presence means NATURE OF TRANSACTION CONDITION 2.10  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA (a) in respect of any goods, services Aggregate of payments arising or property carried out by a non- from such transaction or resident with any person in India transactions during the including provision of download previous year should exceed ₹ 2 of data or software in India crores. (b) systematic and continuous The number of users should be at soliciting of business activities or least 3 lakhs. engaging in interaction with users in India Further, the above transactions or activities shall constitute significant economic presence in India, whether or not,— (i) the agreement for such transactions or activities is entered in India; (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India: However, where a business connection is established by reason of significant economic presence in India, only so much of income as is attributable to the transactions or activities referred to in (a) or (b) above shall be deemed to accrue or arise in India. FOLLOWING SHALL NOT BE TREATED AS BUSINESS CONNECTION IN INDIA (a) Business whose All operations are not  Part of Income attributable to the operations carried out in India carried out in India shall be deemed to accrue or arise in India.  Income which cannot be attributed to the operations in India shall not be deemed to accrue/arise in India. (b) Purchase of Goods in India for Export by  No Income shall be deemed to accrue in India NR from operations which are confined to purchase of goods in India for Export by NR. (c) person engaged in business of News  If a person engaged in business of News agency agency etc, Income from activities which are confined to the collection of news & views in India for transmission out of India is not deemed to accrue in India. (d) Shooting of Cinematograph films in India  Income from operations confined to shooting by NR of any cinematograph film in India, if such NR is: a) Individual, who is not a citizen of India or b) Firm which does not have any partner who is a Citizen of India or who is Resident in India; c) Company which does not have any Shareholder who is a Citizen of India or who is Resident in India (e) Display of Rough Diamonds in SNZ by  Income from the activities carried out by foreign company. Foreign Company which are confined to display of uncut & unassorted diamonds (without any sorting or Sale) in any SNZ notified by CG. 2.11  RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME SSGURU CA SURAJ SATIJA 2. INCOME FROM PROPERTY OR ASSET OR SOURCE OF INCOME IN INDIA  Income from Property/Asset situated in India → Deemed to accrue in India. Ex: (1) Rent paid o/s India for use of machinery/buildings situated in India is deemed to accrue in India. (2) Deposits with an Indian company for which interest is received o/s India. 3. CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA  Capital Gain on Transfer of Capital Asset situated in India is deemed to accrue in India even if:  Place of Registration of Document of Transfer is in India or outside India; &  Place of Payment of consideration for transfer is in India or outside India.  Capital asset (being any Share / Interest in company registered/incorporated o/s India) shall be deemed to be situated in India, if Share/Interest derives its value substantially from the assets located in India.  Declaration of Dividend by a foreign company outside India does not have the effect of transfer of any underlying assets located in India. Thus Dividends declared & paid by Foreign Company outside India in respect of shares which derive their value substantially from assets situated in India would NOT be deemed to be income accruing in India. 4. DIVIDEND INCOME FROM INDIAN COMPANY  Dividends paid by Indian company outside India → Deemed to Accrue in India.  Watch out for Section 10(34) & Section 115BBDA. 5. INCOME FROM SALARIES  Salary is deemed to accrue/arise at the place where the services are rendered.  If the services are rendered in India, salary shall be deemed to accrue in India.  Salaries payable by Government to a citizen of India for services rendered outside Ind