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Income from business/Profession

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Income from business/Profession By Prof. Augustin Amaladas M.Com., AICWA.,PGDFM., B.Ed. * 12/12/2007 12/12/2007 * Special Cases 1.a capital asset is converted by the ... – PowerPoint PPT presentation

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Title: Income from business/Profession


1
Income from business/Profession
  • By
  • Prof. Augustin Amaladas
  • M.Com., AICWA.,PGDFM., B.Ed.

2
INCOME FROM HOUSE PROPERTY
  • House property for this purpose means
  • Any building which has the characteristic
  • features of a building.
  • E.g. residential building, cinema theatres etc.

3
INCOME FROM HOUSE PROPERTY
  • Taxed on Notional Basis

4
Conditions for taxing income under the head house
property.
  • There should be a building or a land appurtenant
    there to .
  • AND
  • The property should be owned by the assessee.
  • AND
  • Such building should not be used for own business
    or profession.

5
Section 22(Charing Section)
  • The Annual Value of building or land
    appurtenant thereto is chargeable to tax in the
    hands of the owner provided the same is not used
    for own business or profession.
  • E.g. CASE 1 Mr. X lets out a HP to Mr. Y, who
    intends to carry on his private business.
    Income from HP.

6
  • CASE 2 Mr. X uses his property to carry on his
    own private business. No income from HP.

7
Exceptions to the rule that the rental income
is taxable under HP.
  • Income from sub letting Income from OTHER
    SOURCES since the assessee is not the owner.
  • Composite rent When a building has been let out
    along with the furniture , then such letting out
    is called composite letting.
  • As per sec 56(2) , when the rent is inseparable
    income from other sources.

8
  • As per CIT vs. SHAMBHU INVESTMENTS PVT. LTD.,
    (2003) (s.c) such inseparable composite rent is
    taxable under the head HP.
  • At present Supreme Court decision has to be
    followed.

9
Section 23( Annual Value)
  • Sec 23(1)(a)
  • AV Rent at which the HP is
    reasonably expected to be let out.

10
Sec 23( Annual Value)
  • Sec 23(1)(b)
  • If the house property is actually let
    out and if rent received or receivable is higher
    than the reasonable rent as per sec 23(1)(a),
    then such rent received or receivable is taken as
    the ANNUAL VALUE.

11
Sec 23( Annual Value)
  • Sec 23(1)(c)
  • If the property is actually let out and
    was vacant during the year and rent received or
    receivable is lesser due to vacancy then such
    lower rent shall be the annual value.

12
Section 23( Annual Value)
  • Sec 23(2)
  • If a HP is self occupied .
  • OR
  • If a HP couldn't be occupied for
    reasons of employment / profession elsewhere.
  • In such cases the AV NIL.

13
Sec 23( Annual Value)
  • Sec 23(3)
  • Conditions for sec 23(2)-
  • Such HP shouldn't be let out during any
    part of the year.
  • AND
  • No other income is derived from such
    property.

14
Section 23( Annual Value)
  • Sec 23(4)
  • If the assessee owns more than one Sec
    23(2) property then
  • AV of one HP at the option of the
    assessee is NIL.
  • AND
  • All the other HPs are Deemed Let Out
    Property DLOP and annual value thereof is
    decided as per sec 23.

15
Section 24 Deductions.
  • SEC 24(a)-Standard deductions _at_30 of NAV only
    for let out property and deemed let out property.
  • SEC 24(b)- interest on capital or loan borrowed
    for ACR3 (acquisition ,construction, renewal
    ,repairs and reconstruction) in respect of
  • 1. LOP/DLOP any amount is allowed
  • 2. SOP Deductions is as follows

16
SOP Deductions
  • - Normal deductions up to Rs 30000/-
  • - Special deduction up to Rs 150000/-

17
IMPORTANT NOTES
  • Interest deduction up to Rs 150000/-.It is
    available only for acquisition and construction.
    Provided
  • (a) The loan taken on / after
    01-04-1999. construction
    completed within 3 years from the end of the
    financial year in which loan is borrowed.
  • (b) For claiming deductions
    interest certificate details of principal
    outstanding, interest amount etc.
    Along with return of income.

18
Pre- Construction Period Interest
  • Allowed in five equal installments commencing
    from the year of completion.
  • PCP means period commencing from the date of loan
    or immediately preceding the March 31st of the
    year of completion which ever is earlier.

19
Section 25( amounts not deductible)
  • Interest paid outside India without TDS or
    Without having an arrangement for TDS in India is
    disallowed.

20
Section 25A( Unrealized rent recovered)
  • UR recovered is taxed in the year of receipt
    irrespective of whether assessee is the owner or
    not of such property in the year of such receipt
    . No deduction is allowed against this income.

21
Section 25B( Arrears of rent received)
  • It is taxable in the year of receipt irrespective
    of whether assessee is the owner or not of such
    property in the year of such receipt.
  • Deduction 30

22
Section 26( Property owned by Co- Owners)
  • Share of co-owners definite,
    ascertainable respective
    share is taxable in the hands of the co owner.
  • Share of co-owners not definite,
    ascertainable entire income
    is taxed as the income of AOP.

23
Important Points
  • Annual value of partly SO partly vacant

Period based (i.e. 9 months SOP 3 months
vacant) ANNUAL VALUE NIL
Usage based (i.e. 75 used as SOP 25 as
vacant) ANNUAL VALUE 25 .
24
Important Points
  • Annual value of partly SO partly LO

Period based (i.e. 9 months SOP 3 months
LOP)
Usage based (i.e. 75 used as SOP 25 as
LOP)
Treated as DLOP for entire period.
AV of LOP to be taken at 25.
AV of SOP NIL.
25
  • Presented by
  • Anirudh Prasad-05A078.
  • Amrut .V.Katwa-05A077.

26
Charging SectionSec.28
  • Profits and gains of any profession/profession
  • Any compensation received related business
  • Income received from members of similar
    profession
  • Any benefit or perquisites from business
    /profession
  • Export incentives from government

27
Charging -Continue
  • Any interest, salary, bonus, commission or
    remuneration received by a partner from firm.
  • Sum received(compensation) from other company not
    to carry on any business for know how, patent,
    copy right, trademark.
  • Profits and gains of managing agency

28
Meaning of business
  • Profit motive
  • Business and rendering services to others
  • Business cannot be carried on with oneself

29
Export incentives
  • Duty drawback import entitilement licences
  • Are taxable u/s 28-Business/profession

30
Business income not taxable u/s 28
  • 1. Rental income in case of dealer in property
    taxable under the head income from house
    propertyu/s22.
  • 2. Dividend on shares in case of a dealer in
    shares- taxed under income from other sources
    u/s 56.
  • 3. winning from lotteries (lottery business)
    taxed u/s 56-income from other sources.

31
Losses deductible from business income
  • Loss due to natural calamity
  • Loss due to non acceptance of goods
  • Reduction in value of foreign currency which is
    meant for purchase of stock.
  • Loss of cash/goods due to embezzelment, burglary,
    forfeiture of deposits.
  • Loss of forgoing advance given by sugar
    industries to formers due to monsoon failure

32
Loss not deductible from business
  • Loss due to destruction of Capital asset.
  • Loss on sale of investments held as investment.
  • Loss of advance to set up a business but business
    could not be started.
  • Depreciation in value of foreign currency for
    capital purpose
  • Anticipated future losses.
  • Loss of discontinued business
  • Loss from illegal businessT.A.Qureshiv.CIT(2006)S
    C

33
Computation of assessable profits/loss for tax
  • Net profit as per P/L Account
  • Add Amount debited to P/L A/c in respect of the
    following
  • Loss of earlier years
  • Capital losses
  • Personal expenses (such as drawings)
  • Income tax, surtax, wealth tax, gift tax, estate
    dutyDirect taxes, tax penalty, penal interest,
    fine.

34
Continues
  • Add Charity and donation
  • Gifts and presents to others
  • All reserves/provisions such as tax provision,
    Reserve for dividend, provision for bad debts
    except provision for depreciation
  • All expenses related to other heads of income

35
Continues
  • Add Expenses not deductible u/s 40 and 40A
  • Expenses debited to P/L A/C not admissible u/s 30
    to 40A
  • Add Amount not credited to P/L A/c
  • Deemed income
  • Deduct Income credited to P/L A/c but not
    chargeable under other heads

36
Continues
  • Less
  • Salary income( income from salary(u/s 15)
  • Rental incomeIncome from House property(u/s22)
  • Capital gain(u/s 45)
  • Dividend Income from other sources(56)
  • Direct taxes refund such as Income tax, Wealth
    tax, estate duty, surtax refunds
  • Bad debts, excise duty recovered not allowed as
    expenditure preceding previous years
  • Deduct
  • Expenses not debited to P/L A/c but allowed u/s
    30 to 40A
  • Depreciation u/s 32
  • Income chargeable under income from
    business/profession.

37
Specific deductions expressly allowed u/s 30 to 37
  • 1.Rent (Sec.30)
  • Repairs(including painting of a house )
  • Land revenue, local taxes and municipal taxes
  • Insurance against risk of damage or destruction
  • Not allowed a) arrears of rent b) share of
    profit instead of rent c.

38
Repairs and insurance of machinery, plant and
furniture(sec.31)
  • Revenue repair-allowed
  • Capital expenditure not allowed
  • Quantum of expenditure is not important

39
Depreciation Allowances(sec.32)
  • Conditions
  • Asset must be owned by the assessee(Registration
    is not important),full control over asset,right
    to retain the possession and defend are
    characteristics of ownership.
  • Used or ready to use for business purpose
  • Used in the previous year
  • Both tangible and intangible assets
  • Right on occupancy on Lease property is entitled
    for depreciation
  • If hirer purchaser has right over asset and hire
    seller will loose all rights- Depreciation is
    allowed.

40
Depreciation-Continues
  • Insurance premium, repairs and other expenditure
    incurred on leased business asset are deductible
    in the hands of lessor.
  • If any asset is fully controlled such as lease
    the capital expenditure incurred by lessee can
    provide depreciation32(1)(ii).

41
Lease property
  • Registered ownership is not necessary Sec. 53A of
    the transfer of property Act.
  • If the assessee can be the co-owner to claim
    depreciation
  • Any capital expenditure incurred by the person
    who takes building can provide depreciation on
    capital expenditure.
  • Rules of Accounting Standard (AS19) not
    applicable for depreciation as per IT Act.

42
Hire purchase
  • Conditions
  • Hire purchaser can provide depreciation if hire
    purchaser has uninterrupted right over the asset.
  • The seller looses his right
  • Who can provide depreciation?
  • Hire purchaser.

43
Residential quarters
  • If used by the assessees employees
    depreciation is allowed.

44
50 of rate of depreciation
  • If an asset acquired during the previous year.
  • Put into use or ready to use for less than 180
    days.
  • Exceptions1. Put into use for less than 180 days
    but ready to use for more than 180 days full
    rate of depreciation
  • If asset purchased in the preceding year to
    current previous year but put into use for less
    than 180 days during the current previous year
    what is the rate of depreciation rate?
  • If an asset is not used at all-No depreciation
    not only for first year but also for subsequent
    period

45
  • Full rate of depreciation.
  • Can depreciation be provided on intangible assets
    such as know- how, patent rights, copy right,
    trade mark, licences, franchises etc.
    depreciation?

46
Meaning of Building and Plant
  • Building means Super structure only. It does
    not include site.
  • Plant Includes ships, vehicle, books, technical
    know-how report, scientific apparatus and
    surgical equipment.
  • It does not include tea bushes or livestock or
    building or furniture and fittings.
  • If assessee does not claim depreciation whether
    is depreciation available?

47
Method of depreciation
  • Yes.
  • Block asset method.
  • What is block asset method?
  • Similar nature of asset having the same rate of
    depreciation are clubbed together.

48
100 depreciation?
  • 1. Building acquired on or after September 1,
    2002 forming part of water supply project
  • 2. Pollution control equipments
  • 3. waste control equipment
  • 4.wooden parts used in artificial silk
    manufacturing machine
  • 5.cinimatograph films
  • 6. Books

49
Commercial vehicle
  • If acquired and used before 31,March 2002. -Rate
    of depreciation is 50 .

50
calculation of depreciation
  • Block value in the beginning
  • Add- Purchase of asset of the same block
  • Less- Net sale value of the consideration
    received/receivable in cash /cheque/draft if any
    of the block of assets sold during the year

51
Continuation
  • Calculate depreciation of the balance amount.
  • If it reaches to Zero value no more depreciation
    is allowed.
  • If net sale consideration exceeds the block it
    amounts to short term capital gain.

52
continues
  • Once asset is depreciated the gain on sale of
    block never be a long term gain
  • Index can not be used for the calculation of
    capital gain.
  • If all assets of the assets sold out but block
    continues it amounts to short term capital loss.

53
Intangible assets
  • Depreciation is allowed at the rate of 25
  • Include know- how, patent rights, copy rights,
    trade mark, licenses, franchises etc.

54
Imported Cars
  • Purchased between March 1, 1975 and March 31,
    2001 for hire for tourist- no depreciation is
    allowed if used in India for business purposes
    other than for hire for tourist
  • Used outside india for business-alowed
  • For hire for tourist-allowed
  • After 31st March 2001- all purposes depreciation
    is allowed

55
Change in the ownership in any part of the year
due to amalgamation , absorption or demerger
  • Calculate depreciation for the previous year as
    if no amalgamation/re-organization taken place
  • Apportion between the companies on time basis.

56
Computation of additional depreciation
  • Manufacture or production of any article
  • Purchased entirely new machinery Not used any
    part of the world
  • Acquired and installed after March 31, 2005
  • Rate-20
  • If used less than 180 days-Half of the rate
  • Excludes ships and aircrafts, used in the guest
    house, or office road transport vehicles

57
Actual Cost
  • Total cost-subsidy
  • Includes interest on money borrowed before the
    asset is put into use
  • Bank charges
  • Loading
  • Unloading

58
Actual cost-continues
  • Modification before first put into use
  • Training of staff to operate the machine
  • Other related expenses required such as cold
    storage.
  • Traveling expenses to acquire the asset

59
Un-absorbed depreciation
  • Deduct the depreciation of the previous year from
    income from business or profession
  • Deduct it from other heads of income except
    salary
  • If not able to absorb-carry over to subsequent
    assessment year (s) No time limit.

60
Subsequent assessment years
  • Order of priority to set off
  • 1. current depreciation
  • 2.Brought forward business losses
  • 3. Un-absorbed depreciation
  • Note Continuity of business is not relevant.
  • The same assessee only can carry forward

61
Depreciation on Straight Line basis/WDV
  • Applicable to Power units(generating and
    distribution of power)
  • Assets acquired after 31st march 1997.

62
Terminal depreciation
  • If straight line depreciation method followed on
    power generating units
  • sold after the use of such asset more than one
    previous year
  • Terminal depreciationWDVgt Net Sale consideration
  • Capital gainNet salegtWDV

63
Tea, coffee and rubber development
accountSec.33AB
  • Deposit with NABARD or Deposit account of tea,
    coffee or rubber Board
  • With in 6 months from the end of the previous
    year or before the last date of filing of returns
    whichever earlier
  • Exemption
  • Amount deposited or 40 of profit whichever is
    less
  • Can amount be withdrawn?

64
withdrawal
  • Only for the purpose stated
  • If unutilised within the previous year it is
    treated as income
  • If business closed or dissolved-treated as
    taxable profit
  • If death of the taxpayer/partition of
    HUF/liquidation of company will not be treated as
    income
  • Purpose installed in plant and machinery in low
    priority sector or entitled to get 100
    depreciation.
  • Maximum 8 years

65
Site restoration fundsec.33ABA
  • Production of Petroleum /Natural gas in India
  • Deposit with SBI/account opened as per petrolem
    and Natural Gas Commission In a scheme specified
  • Before the end of the previous year
  • Amount withdrawn should be used for low priority
    sector/100 depreciated and utiled within 8 years
    at the end of previous year.

66
Scientific researchSec.35 In house research
  • All Revenue expenditure and Capital expenditure
    related to ones business during the current
    previous year or even 3 preceding previous
    years allowed Except Land
  • Even asset is not put into use it is allowed.
  • No depreciation is allowed on such capital asset
  • If such asset is sold what could be the
    consequences?

67
If scientific asset sold?
  • If not used for any other purpose
  • Sale or deduction already allowed whichever is
    less taxed as business profit.
  • Capital gainSale-Cost (index if required)

68
Contribution to National laboratory
  • Including University, IIT
  • Weighted deduction 1.25 times of contribution
    can be treated as Expenditure.
  • Even approval is withdrawn after the payment
    to such institution the assesssee who contributed
    can enjoy the benefit

69
Expenditure on Patent rights and copy rights35A
  • Capital Expenditure incurred before 1st April
    1998
  • 14 instalments
  • After 1st April 1998-Depreciation can be
    claimed-25
  • Revenue expenditure-Fully allowed expenditure in
    the year such expenditure incurred.

70
Technical know how
  • Only depreciation
  • 25 allowed

71
Amortisation of telecom license fees35ABB
  • Conditions
  • Capital Expenditure
  • Acquiring any right to operate telecommunication
    services
  • Incurred before or after commencement of Business
  • Mainly incurred to obtain license.
  • If conditions fulfilled claim can be done u/s
    35ABB otherwise u/s 37(1) as business
    expenditure.

72
Payment to associations and institution for rural
development program
  • Institutions approved before 1st March 1983
  • Deduction up to the amount paid

73
Amortisation of preliminary expenses
  • Indian Company or resident non corporate assessee
  • Foreign company excluded
  • Legal charges on MOA, AOA,printing of MOA,
    AOA,Registration fees,expenses connected to issue
    of shares or debentures
  • Is there any limit?

74
Limit of preliminary expenses
Corporate assessee Non-Corporate assessee
5 of cost of project or 5 of capital employed Whichever is More(dil monge more) 5 of the cost of the project
Actual cost costs incurred initially and
additional costs after commencement Of business
75
Preliminary Exp. Continue
  • The value on the last day of the previous year in
    which the business of the assessee commences.
  • Deduction 1/5 of the qualifying expenditure

76
Expenses on issue of shares/Debentures
  • New company even Old industrial company issue
    shares - u/s 35 D
  • Old company-- u/s 37(1) except issue of shares)
  • Old industrial company issue shares-35D
  • Non industrial company All expenses related to
    bonus issue, issue of debentures or raising of
    long term or short term loans
  • Note old non industrial company- Expenditure
    related to issue of shares can not be claimed

77
Amortisation of expenditure incurred for
amalgamation35DD
  • Indian company
  • Deductions in five successive installments

78
Amortisation of expenditure under voluntary
retirement scheme35DDA
  • Any assessee
  • Deduction 1/5 every year
  • Voluntary retirement scheme need not be
    accordance with guidelines prescribed under
    section 10(10C)

79
Amartisation of expenditure on development of
certain minerals35E
  • Indian companies and Resident assessee
  • I/10 every year allowed

80
Insurance premium to protect the asset or
employees36(1)(i)
  • Allowed
  • Bonus to employees36(1)(ii)

81
Interest on borrowed capital36 (1)(iii)
  • Interest on own capital is not allowed.
  • Interest paid by a firm to partner is deductible-
    12 per annum Simple interest
  • Interest paid to wife and daughter- allowed
  • Interest before the asset is put into use to be
    capitalised

82
Interest paid outside India without deducting TDS
  • Not allowed

83
Discount on Zeeero coupon Discount
Bonds36(1)(iiia)
  • Issued after June 1, 2005
  • Minimum 10 years and Maximum 20 years
  • Deduction on pro rata basis.

84
Unpaid liabilities
  • Includes
  • Local taxes, duty cess or fee under any law
  • Sum payable to employees such PF, Gratuity,
    superannuation fund to employees, BONUS, OR
    COMMISSION
  • Interest on loan borrowed from public financial
    institution such as ICICI,IFCI, IDBI,LIC AND UTI
    ONLY
  • DEDUCTION ALLOWED ON PAYMENT BASIS OR ACCRUAL
    BASIS?

85
Payment/ Accrual?????
  • No payment- Not allowed
  • If depositedEVEN before the last date of filing
    of returns with Proof for payment-fully
    allowed(page 336)

86
Employees contribution towards staff welfare
scheme such as PF36(1)(va)
  • Amount received by employer-
  • Included with the assessees Income
  • If Paid to the employeess account???

87
If paid !!!!!
  • Due date as per the PF rules or Gratuity
    rules Usually with in a month of deduction from
    employees.
  • not as per IT rules

88
Written off of allowance for animals 36(1)(vi)
  • If died /useless
  • Used as capital asset
  • Allowed loss Original cost- Carcasses
    or ( sale of animals)
  • No depreciation is allowed any time on animals

89
Bad debts 36(1)(vii) !!!
  • If actual- allowed
  • Provision Never allowed
  • If recovered41(4)-----If earlier allowed it is
    taxable
  • If earlier denied - not taxable

90
Provision for Bad and doubtful debts to rural
branches of scheduled and non scheduled
commercial banks36(1)(vii)
  • bank and Institution bank
  • Non scheduled
  • Scheduled Financial Foreign
  • 7.5 of income 5 5
  • 10 of advances --- ---
  • made by rural
  • branchs

91
Transfer to SPECIAL RESERVE 36(1)(viii)
  • Long term (5 years or more) financial
    corporation/public company/government company
  • Finance for industry/agriculture/infrastructure
    facilities in India.
  • Deduction Whichever is less
  • 1. amount transferred to such account or
  • 2. 40 of profit from business activities before
    such deductions
  • 3. 200 of paid up capital and reserve on the
    last day of PY(- )amount in special reserve
    account in the beginning of the PY

92
Family planning expenditure 36(1)(ix)
  • For Company assessee
  • Revenue expenditure- Fully allowed
  • Capital Expenditure - 1/5th every year
  • Non-corporate assessee can claim u/s
    32(Depreciation on capital expenditure) and
    37(1)(Revenue expenditure)

93
Advertisement Expenditure37(2B)
  • Advertisement In publication of political
    party------Not allowed
  • All advertisements --Allowed

94
Expenses incurred by commission agent from
insurance UTI agents etc.If commission less than
60,000
commission Adhoc deduction Max. deduction
1 2 3
LIC first year Renewal commission First renewal Commission Bonus commission UTI/agents of specified securities, mutual funds authorised agent 50 of commission 15 OF THE COMMISSION 33 1/3 No deduction 50 20,000
95
Contribution towards Exchange risk Administration
fund 36(1)(x)
  • By Public financial institution
  • Deductible upto the assessment year 2007-08

96
Benefits to public financial institutions
97
General deductions37(1)
  • It should not be a capital expenditure or
  • Not personal
  • Not prohibited by law such as fine, penalty
  • Not be an illegal expenditure
  • Can we see some of the expenditures allowed as
    per various case laws?

98
Expenses allowed
  • Litigation expenses to protect the trade or
    business /asset/or to retain title of asset
  • Legal expenses to receive loan
  • Litigation expenses in restoring trade mark
  • Legal expenses to alter the AOA in conformity
    with the changes brought about
  • in the companies ACT
  • Damages paid to workers/fulfil the contract
  • Damages for breach of contract

99
Expenses allowed
  • Contribution to the union formed to oppose the
    nationalisation of assessees business
  • Expenses incurred during festival
  • Premium paid for loss of profit
  • Professional tax paid
  • All maintenance expenditure
  • Expenses incurred to register trade marks
  • Entertainment expenses
  • Periodical payment for the use of goodwill

100
Expenses allowed-case laws
  • Estimated probable liability for free
    maintenance CIT vs Modi Olovetti ltd.(2004)
  • Expenditure to car even it is hugeCIT vs
    Mangalchand premchand co.2004
  • Repairs to maintain building taken on lease
    Sumitomo Corpn. India (p) ltd.
  • Expenditure on civil work on leased asset Hero
    Honda motors vs CIT
  • Interest on delayed payment of Provident
    fundCIT vs Ishwari Khetan Sugar Mills (P0
    ltd.(2004)

101
Important notes controversial issues
  • Expenditure to issue of shares fees paid to
    Registrar to increase the authorised capital
    disallowedBrook Bond India ltd Vs CIT(SC)
  • Retrenchment compensation payable at the time of
    partial closure of business Is deductible. But
    at the time of closure of industry is not
    deductibleCIT vs MGF India(2004)

102
Expenses allowed
  • Expenditure to issue of debentures
  • bonus shares allowed

103
Controversial Continues
  • Foreign study expenses incurred by the company
    even though the employee is a directors
    son-allowed J.B Advani co Vs CIT(2005)

104
Controversial Continues
  • Medical expenses of wife employee of cine
    actor-Allowed Ajay Singh Deol Vs CIT
  • Payment on account of membership fees for health
    club and also paid membership fees for an another
    club-Allowed Sterlite Industries (India) Vs
    CIT(2006)

105
Controversial- Continues
  • Provision made for contribution towards
    Provident Fund maintained by Government of
    Tamilnadu sent on deputation to the assessee
    corporation-allowed CIT Vs Kattabomman Transport
    Corporation Ltd.(2004)

106
Controversial Continues
  • Interest on arrears of tax , sales tax
    compensatory in nature and not penal
    allowed(Lachmandas Vs CIT(SC) (2002)
  • Interest paid for late payment of tax is
    disallowed. Even Income-tax itself disallowed.

107
Disallowed Expenditure
  • Interest paid on borrowed funds to pay
    Income tax is disallowed
  • Interest paid on installment of the price of
    property
  • Expenditure to raise capital
  • Expenditure on shifting of registered office

108
Penalty/fine /interest on penalty
  • Disallowed

109
Important question to be asked!!!
  • Protecting Business or protecting the title
    to capital asset.
  • Capital Expenditure or revenue expenditure

110
Expressly disallowed expenditures
  • Interest, Royalty, fees for technical services
    payable outside India
  • TAX TO BE DEDUCTED AND PAID WITHIN 7 DAYS FROM
    THE LAST DAY OF THE MONTH IN WHICH TAX WAS
    DEDUCTED OR

111
Expressly disallowed expenditures
  • AMOUNT PAID TO GOVERNMENT IN THE FINANCIAL YEAR
    IF NOT PAID WITHIN 7 DAYS FROM THE LAST DAY OF
    THE MONTH.
  • Anything paid after the financial year and after
    the expiry of 7 days FROM THE LAST DAY OF THE
    MONTH -deductible only in the year of payment.

112
Fringe benefit tax
  • Fringe benefit tax, Income tax, wealth tax,
    securities transaction tax- Not Taxable

113
Salary payable outside India without TDS
  • Outside India both resident and non-resident
  • In India to NON-REDIDENT
  • NOT ALLOWED

114
Payment from provident fund
  • If TDS not done- Not allowed

115
Tax on perquisites paid by the employer
  • Tax paid by employer- Not taxable to employees
  • Perquisites paid- Not deductible to employer
  • (Non monetary)
  • See illustration- para 82.1.8- page 328

116
Payment to relatives Sec. 40A(2)
  • Excess or unreasonable - disallowed
  • Relative husband, wife, brother or sister or
    lineal ascendant or descendant of that
    individual.
  • Substantial interest- at least 20 of equity or
    20 profits of a concern at any time during the
    year

117
Expenditure exceeding Rs. 20,000
  • Should be paid account payee crossed cheque or
    account payee demand draft.
  • If not - 20 of such payment is disallowed.
  • Note on the same day any number of cheques less
    than 20,000 each can be given
  • Partly cash, partly cheque without account payee
    crossed cheque without exceeding 20,000 each.

118
Payment to unapproved gratuity by employer
  • Not deductible expenditure.

119
Recovery of earlier deductions
  • If recovered in the subsequent assessment years
    it is taxable even there is no business and taxed
    in the hands of recepient.

120
Undisclosed income
  • Cash creditsec.68
  • Undisclosed investmentsec.69
  • Unexplained money sec. 69A
  • Amount of investments not fully disclosed
    sec.69B
  • Unexplained expenditure sec.69C
  • Amount borrowed or repaid on hundisec.69D
  • They are deemed income of the current previous
    year.

121
Maintenance of books compulsorySec.44AA
  • Legal medical, engineering, architectural,
    accountancy, Film artist technical consultancy,
    or interior decoration and other notified
    profession Specified professional
  • If gross receipts exceed 1,50,000 in any of the
    three years preceding the previous year.
  • Non-specified professional- Income exceed Rs.
    1,20,000 and total gross receipts exceed
    10,00,000
  • What are those books maintained?

122
Specified Books to be maintained
  • Cash book
  • A Journal on mercantile basis
  • Ledger
  • Carbon copies of machine numbered bills exceeding
    Rs. 25 issued by the person
  • Original bills if exceed Rs. 50. If bills are not
    issued payment vouchers signed by the person

123
Medical practitioner
  • Additional books required
  • Daily cash register showing date, patients name,
    nature of professional services rendered, fees
    received and date of receipt
  • Stock register for medicines and other consumable
    accessories .

124
Audit of Accountssec.44AB if crossed limit
  • Business-Gross receipts /sales exceed 40 lakhs
  • Profession- gross receipts exceed 10 lakhs

125
Audit compulsory with out any limit of
income/receipt
  • Person engaged in
  • 1. civil construction44AD- 8 of gross receipts
  • 2.Business of plying, leasing or hiring
    trucks44AE- Heavy vehicles Rs. 3500 pm (owned
    months), other vehicles- 3150 pm (not owned more
    than 10 vehicles any time during the previous
    year.-No expenditure is deductible .
  • Retail traders44AF- 5 of turnover is
    considered as income

126
Important points to solve problems
  • Bonus-before last date of filing
  • Depreciation- permitted as per income tax
  • Direct taxes-disallowed
  • Indirect taxes-allowed if paid before due date of
    filing
  • Capital expenditure-disallowed
  • Bad debts recovered-if allowed earlier taxable
  • Income from other heads such as salary, house
    property etc-if included in the P/L /A/c deduct.

127
Points to solve problems
  • Outstanding statutory liability-before due date
    to be paid
  • statutory penalty-disallowed
  • Contractual penalty-allowed
  • Personal expenditure-disallowed

128
Points to solve problems
  • Entertainment expenditure-fully allowed
  • Maintenance of guest house-fully allowed
  • Revenue advertisement including gift to
    customers-fully allowed.

129
Points to solve problems
  • Capital expenditure on advertisement-depreciation
    is allowed.
  • Amount paid for expenses beyond 20,000 without
    crossed a/c payee cheque or draft -20
    disallowed
  • Any expenditure incurred (traveling) out side
    india allowed to the extent of RBIs permission

130
Points to solve problems
  • paid on borrowing-Not allowed Expenditure to
    audit-allowed
  • Expenditure to prepare accounts for IT allowed
  • interest

131
Points to solve problems
  • Interest on borrowing to pay direct tax such as
    Income tax-disallowed
  • Copy right , technical know how, patent right-
    amount paid disallowed but depreciation 25 only
    allowed.
  • Employees contribution to PF- treated as income
  • If such employees contribution is paid before
    due date as per the PF act- allowed.

132
Points to solve problems
  • Capital expenditure on travelling-disallowed
  • Traveling expenditure to buy stock-allowed
  • Insurance to asset or employees-fully allowed
    expenditure
  • Profit on sale of capital asset which is included
    in the P/L /a/c- disallowed

133
Points to solve problems
  • Rent received from outsider other than employee-
    credited to P/L A/c-disallowed income-subtract
    from net profit-Income from House property.
  • Any payment to workers/Government-Before the last
    date of filing returns is allowed

134
Points to solve problems
  • All reserves/provision except depreciation
    provision-disallowed
  • Interest on own capital-disallowed
  • Direct taxes refund like It refund shown in P/L
    A/C disallowed income subtract from profit
  • Revenue repair to building , furniture even
    leasehold allowed expenditure

135
Points to solve problems
  • Capital expenditure on family planning- 1/5 is
    allowed
  • Loss of cash, goods-allowed.
  • Donation and charity-disallowed
  • Fringe benefit tax-disalowed
  • Expenditure on issue of shares-disallowed where
    as expenditure on issue of debentures,
    arrangement of loan (borrowed capital)- allowed

136
Points to solve problems
  • Income from other heads-inadmissible income
  • Advance payment of tax, provision for tax, income
    tax refund-disalloed
  • Life insurance premium of owner paid from
    business-disallowed
  • Scientific Research (in house)-fully allowed
    including capital expenditure
  • Family planning revenue expenditure-allowed

137
Points to solve problems
  • Unapproved statutory funds-disallowed
  • Closing stock and opening stock to be valued in
    the same manner

138
Profit and loss account
particulars Amount Rupees particulars Amount Rupees
Salaries Rent and rates Office expenses Stock destroyed Depreciation Discount Advertisement Interest on loan Scientific research expenses Bad debts RBD Insurance on building Insurance stock Income tax Gross profit Interest on bonds Dividend received Rent Rent paid in advance Profit on sale of investment discount 10,00,000

139
  • Closing stock is 10 less than the actual value
  • Opening stock was over valued by 8
  • Advance payment of tax
  • provision for tax
  • income tax refund
  • Loss of cash, goods
  • Capital expenditure on family planning
  • Loss of cash, goods
  • Donation and charity
  • Fringe benefit tax
  • Expenditure on issue of shares
  • expenditure on issue of debentures,
  • arrangement of loan on borrowed capital
  • Bonus paid on 2nd september
  • Copy right
  • technical know how
  • patent rights
  • Cash Amount paid for expenses 25000

140
  • Bad debts written off recovered (earlier
    disallowed)
  • statutory penalty
  • Contractual penalty
  • Personal expenditure
  • Interest paid on borrowed funds to pay Income tax
  • Interest paid on installment of the price of
    property
  • Expenditure to raise capital
  • Expenditure on shifting of registered office

141
ALTERNATIVE WORK IS REST
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No bad day. It depends upon our mind set
Enjoy whatever you do
Two sides in a coin. One is failure(50 ) Other
is success(50)
Happiness by giving but not receiving
Accepting failure leads to success
142
Capital gains
  • By
  • Augustin Amaladas.Lourduswamy
  • M.Com.,AICWA.,B.Ed.,PGDFM

143
Capital Assets
  • Any stock-in-trade, consumable stores or raw
    materials held for the purpose of his business or
    profession
  • Personal effects, i.e., movable property
    (including wearing apparel and furniture,
    excluding jewellery), held for personal use by
    the assessee or any member of his family
    dependent on him.
  • Agricultural land in India, not being land
    situated in the following-
  • In any area which is comprised within the
    jurisdiction of a municipality (whether known as
    a municipality, municipal corporation, notified
    area committee, town area committee, town
    committee, or by any other name) or a cantonment
    board and, which has a population of not less
    than ten thousand according to the last preceding
    census.
  • In any area within such distance, not being more
    than eight kilometers, from the local limits of
    any municipality or cantonment board referred to
    in item

144
Capital assets
  • 6.5 per cent Gold Bonds 1977, or 7 per cent Gold
    Bonds 1980, National, Defence Gold Bonds, 1980,
    issued by the Central Government
  • Special Bearer Bonds, 1991, issued by the Central
    Government
  • Gold Deposit Bonds issued under the Gold Deposit
    Scheme, 1999 notified by the Central Government.

145
transfer of house property
  • Under S 54, exempt from tax provided
  • The following conditions are satisfied
  • The house is a residential house is taxable under
    the head "income form house property"
  • The house property, which may be self-occupied or
    let out, is a long term capital asset (i.e. held
    for a period of more than 36 months before sale
    or transfer.)
  • 12 or 3
  • Invest upto capital gain in the same nature of
    asset
  • The house property, so purchased or constructed,
    has not been transferred within a period of 3
    years from the date of purchase or construction.

146
consequences if a new house is transferred within
3 years?
  • the amount of capital gain that arise, together
    with the amount of capital gains exempted
    earlier, will be chargeable to tax in the year of
    the sale of the new house property.

147
If new house transferred?
  • The gain along with exempted gain is taxed as
    short term

148
Short term capital gain
Computation of Short-term capital gain 1. Find
out the full value of consideration 2. Deduct
the following   a. Expenditure incurred wholly
and exclusively in connection with such
transfer.   b. Cost of acquisition. c. Cost of
improvement3. From the resulting sum deduct
the exemption provided by section 54B, 54D and
54G.4. The balancing amount is the short-term
capital gain.
149
Computation of Long-term capital gain
  • 1. Find out the full value of consideration2.
    Deduct the following  a. Expenditure incurred
    wholly and exclusively in connection with such
    transfer  b. Indexed Cost of acquisition  c.
    Indexed Cost of improvement.3. From the
    resulting sum deduct the exemption provided by
    section 54, 54B, 54D, 54EC,, 54F and 54G, and
    54GA.4. The balancing amount is the long-term
    capital gain.

150
How IS long term capital gain taxed?
  • Flat rate-20SurchargeEducational cess
    Secondary and higher education cess.
  • Surcharge-10 if net income exceed Rs.10,00,000
    for individual,HUF,AOP,BOI
  • Educational cess-2 on tax
  • Companies -10 if net income does not exceed 1
    crore rupees. 2 educational cess
  • For Assesment year 2008-09 secondary and higer
    education cess-1 on( taxsurcharge)

151
Indexed cost of acquisition
  • Formula
  • Cost Index of the year of sale/index of the year
    of acquisition of the present owner
  • cost cost of acquisition of the present owner or
  • Cost of acquisition of the previous owner in case
    of will or gift

152
indexed cost of acquisition?
  • S 48 defines "indexed cost of acquisition" as the
    amount, which bears to the cost of acquisition
    the same proportion as Cost Inflation Index for
    the year, in which the asset is transferred,
    bears to the Cost Inflation Index for the first
    year in which the asset was held by the assessee
    or for the year beginning on the 1st day of
    April, 1981, whichever is later. The Cost
    Inflation Index, in relation to a previous year,
    means such Index as the Central Government may,
    having regard to 75 of average rise in the
    Consumer Price Index for urban non-manual
    employees for the immediately preceding previous
    year to such previous year, by notification in
    the Official Gazette.

153
tax shelter for avoiding capital gains tax?
  • The Income Tax Act grants total/partial exemption
    of capital gains under Sec.- 54, 54B, 54D, 54EC,
    54F, 54G and 54H.

154
Under S 54
  • Under S 54, exempt from tax provided
  • The following conditions are satisfied
  • The house is a residential house is taxable under
    the head "income form house property"
  • The house property, which may be self-occupied or
    let out, is a long term capital asset (i.e. held
    for a period of more than 36 months before sale
    or transfer.)
  • 12 or 3
  • Invest upto capital gain in the same nature of
    asset
  • The house property, so purchased or constructed,
    has not been transferred within a period of 3
    years from the date of purchase or construction.

155
Under S 54B
  • Individuals
  • agricultural land used for atleast for 2 years
    before transfer
  • provided the assessee has purchased another land
    for agricultural purpose within a period of 2
    years from the date of such transfer.
  • In the case of compulsory acquisition, It is
    exempted from tax as per section 10(37) with
    effect from assessment year 2005-06 onwards.

156
Capital gains exemted U/S 10para 95.2
  • 1. Capital gain on transfer of US 64Section
    10(36)- both long term and short term
  • 2. Long term capital gain on transfer of BSE-500
    Equity Shares10(36)-long term
  • 3.Compulsory acquisition of urban agriculture
    land10(37)-longterm and short term.-individual
    and HUF.
  • 4. Securities not chargeable to tax if covered
    under transaction tax-such as mutual fund equity
    linked issued by domestic companies.
  • 5. Capital gain arising in the reconstruction or
    revival of power generation business 10(41)

157
Under S 54D,
  1. capital gains, arising on compulsory acquisition
    of any land or building forming part of an
    industrial undertaking, is exempt from tax,
    provided such land or building was used by the
    assessee for the purpose of the industrial
    undertaking for at least 2 years preceding the
    date of compulsory acquisition and, the assessee
    has, within a period of 3 years after that date,
    purchased any other land or building or right in
    any other land/ building or constructed any other
    building for the purpose of shifting or
    reestablishing the said undertaking or setting up
    another industrial undertaking.

158
Under S 54EC
  • where the capital gain arises from the transfer
    of a long-term capital asset before the 1st day
    of April, 2000, and the assessee has, at any time
    within a period of six months after the date of
    such transfer invested the whole or any part of
    capital gains, in any of the assets,
  • Bonds in NHAI, Rural Electrification

159
Under S 54 F
  • where, in the case of an assessee being an
    individual or a Hindu undivided family,
  • the capital gain arises from the transfer of any
    long-term capital asset,
  • not being a residential house,
  • within a period of one year before
  • or two years after the date on which the
    transfer took place purchased, or has within a
    period of three years after that date
    constructed, a residential house.

160
S 54 G Voluntary transfer of industry
  • The shifting of such industrial undertaking to
    any area other than an urban area, and
  • the assessee has, within a period of 1 year
    ,before
  • or 3 years after the date on which the transfer
    took place, purchased a new machinery or plant
    for the purposes of business of the industrial
    undertaking

161
Sec.54GA Shifting from urban to Special Economic
Zone
  • Industry
  • 1year before or 3 years after transfer
  • New asset can not be transferred with in 3 years.

162
Special Cases
  • 1.a capital asset is converted by the owner
    thereof into (or is treated by him as)
    stock-in-trade of a business that is carried on
    by him, such conversion (or treatment) of the
    capital asset shall also be treated as "transfer
    of the asset" and hence chargeable to income tax

163
How is it computed?
  • Sec.45(2) Conversion amount to transfer in the
    year of conversion.
  • But taxed in the year such stock is sold.
  • Capital gainFMV on the date of conversion into
    stock in trade cost(Index) of acquisition.
  • Business gainsale-FMV

164
Transfer of personal asset to partnership firm
  • Sec.45(3),(4)
  • It amounts to transfer in the year of transfer to
    partnership firm.
  • Capital GainAmount entered in the books of the
    firm-cost (Index).
  • If retransferred to partners
  • Capital gainFMV-Book value in the partnership
    firm

165
Capital gain on self generated assets(Sec.115F)
  • Like goodwill, tenancy right, route permit
  • Cost of acquisition is NIL
  • Cost of improvement is considered
  • Fair market value on 1stApril 1981 is irrelevant

166
Bonus Shares
  • If alloted before 1981 cost of acquisition is
    FMV on 1st April 1981.
  • If aquired after 1st April 1981 cost of
    acquisition is NIL

167
Right shares
  • Cost of acquiring right shares cost of
    acquisition like any other assets

168
S 54H relaxation of time due to delay in
compensation
  • , the period of acquiring the new asset under S
    54, 54B, 54D, 54EC and 54F by the assessee or the
    period for depositing or investing the amount of
    capital gain shall be extended in relation to
    such amount of compensation as is not received on
    the date of transfer. The extended period shall
    be reckoned from the date of receipt of the
    amount of compensation.

169
Inherited by the assessee or gifted to the
assessee
  • the cost of acquisition of the asset for which
    the previous owner acquired it, shall be deemed
    to be the cost of acquisition of the asset as
    increased by the cost of improvement of the
    assets if any, incurred or borne by the previous
    owner or the assessee as the case may be.

170
Amalgamation
  • cost of acquisition of the asset shall be deemed
    to be the cost of acquisition to him of the
    shares(s) in the amalgamating company.(old
    company )

171
conversion of bonds or debentures,
debenture-stock
  • the cost of acquisition of the asset to the
    assessee shall be deemed to be that part of the
    cost of debenture, debenture- stock or deposit
    certificates in relation to which such asset is
    acquired by the assessee.

172
Demerger
  • The cost of acquisition of the shares in the
    resulting company shall be the amount which bears
    to the cost of acquisition of shares, held by the
    assessee in the demerged company

173
Compensation for loss of capital asset(Insurance
claim)
  • It amounts to extinguishment of right
  • Sec.45(1A)
  • Taxable in the year of compensation

174
Compensation for revenue asset-stock in trade
  • It amounts to revenue receipt u/s-28 from
    business
  • Or income from other sources u/s 56

175
Buy back of shares
  • Sec.46A
  • Transfer in the year of buy back
  • Capital gainconsideration received minus cost of
    acquisition(Index if long term)

176
Slump sale50B
  • Assets are not sold individually but collectively
  • Capital gainSale- Net worth
  • Net worth Assetsliabilities appearing in the
    books of accounts
  • No index

177
Advanced money received and forfeited
  • Negotiation failed advance money forfeited by
    the current owner
  • Deduct from the original cost of acquisition
    before calculating index cost of acquisition
  • Amount forfeited by the previous owner is not
    deductible

178
Computation of capital gain on land and
Building50C
  • Both for depreciable and non depreciable asset
  • SaleThe stamp duty valuation all purposes
  • If disputed FMV if it is lower than Stamp duty
    value.

179
No Index please!!!
  • Depreciated asset
  • BondsDebentures
  • Short term assets

180
Personal effect
  • Only Movable assets used by the assessee or by
    the family members
  • Not a capital asset-No capital gain and will not
    be taxed under any other heads
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