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[PDF] M COM SEMESTER III DIRECT TAXES UNIT I : DEFINITIONS

77103_2Unit_1_2_3.pdf

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

M.COM.SEMESTERIII

DIRECTTAXES

UNITI:DEFINITIONS Section 2 (7): ASSESSEE Assessee means a person by whom any tax or any other sum of money is payable under this act.

ThetermAssesseeincludes:Ͳ

(a) Everypersoninrespectofwhomanyproceedingunderthisacthasbeentakenforthe assessmentofhisincomeoroftheincomeofanyotherpersoninrespectofwhichheis assessable,orofthelosssustainedbyhimorbysuchperson, oroftheamountofrefunddueto himorsuchotherperson; (b) Everypersonwhoisdeemedtobeanassessee underanyprovisionsofthisact; (c) Everypersonwhoisdeemedtobeanassesseeindefaultunderanyprovisionsofthisact.

ThetermAssesseeincludesthefollowingpersons:Ͳ

1. Apersonbywhomanyamountbywayoftax,interestorpenaltyispayableunderthisAct.

WhethertheproceedingsunderthisActhasbeentakenornotwillbeimmaterial.

2. ApersonagainstwhomtheproceedingsunderthisAct

hasbeentaken.Inthiscase,itwillbe immaterialwhethersuchapersonisliableornottopayanyamountbywayoftaxthereon.

3. Apersonwhoisrequiredtofilehisreturnoflossandwhoisnotrequiredtopayanytaxthereon.

4. A personwhoisnotliabletopaytaxonhisnettaxableincome,butsincethetaxisdeductedat source,heisentitledtoclaimforrefund.

5. Apersonwhoisdeemedtobeanassesseeandwhoisassessableinrespectofincomeorlossof

another e.g.therepresentativeofnonͲresident,thetrusteesincaseoftrust.

6. Apersonwhoisdeemedtobeanassesseeindefault.Forinstance,anemployerwhoisrequiredto

deducttaxfromsalariespaidbyhimtohisemployeesandfailstodeductsuchtaxorafter deducting taxdoesnotpayittotheGovernment.

Section 2 (24) : INCOME

Income includes: -

(a) ProfitsandGains, (b) Dividend, (c) Voluntarycontributionsreceivedby:Ͳ

1. Acharitableorreligioustrust,or,

2. Anyinstitutionestablishedwhollyorpartlyforcharitableorreligiouspurpose,or

3. Anapprovedscientificresearchassociation,or

4. Anyothernotifiedfundorinstitutionestablishedforcharitablepurposes,

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

5. Anynotifiedtrustorinstitutionwhollyforpublicreligiouspurposesorwhollyforpublic

religious&charitablepurposes. (d) Thevalueofanyperquisiteorprofitinlieuofsalarytaxableunderclauses(2)&(3)ofSection17. (e) Anyspecialallowanceorbenefit,otherthanperquisiteincludedunder subͲclause(d)specifically grantedtotheassesseetomeetexpenseswholly,necessaryandexclusivelyfortheperformance ofthedutiesofanofficeoremploymentofprofit. (f) Anyallowancegrantedtotheassesseeeithertomeethispersonalexpensesattheplacewhere thedutiesofhisoffice oremploymentofprofitareordinarilyperformedbyhimorataplace whereheordinarilyresidesortocompensatehimfortheincreasedcostofliving. (g) Thevalueofanybenefitorperquisitewhetherconvertibleintomoneyornotobtainedfroma companyeitherbyadirectororperson whohassubstantialinterestinthecompanyorrelativeof thedirectororofsuchperson.Italsoincludesanysumwhichispaidbythecompanywhich otherwisewouldhavebeenpayablebythedirectororsuchotherperson. (h) Thevalueofanybenefitorperquisitewhetherconvertible intomoneyornotobtainedbyany representativeassesseeandanysumpaidbytherepresentativeassesseeinrespectofany obligationofanybeneficiarywhichotherwisewouldhavebeenpayablebysuchbeneficiary. (i) Anysumchargeabletoincometaxasprofitsandgainsofbusinessorprofessionu/s28 (ii)and(iii) orSection41orSection59. (j) AnyprofitsonsaleofalicensegrantedundertheImports(Control)Order,1955,madeunderthe

ImportsandExports(Control)Act,taxableu/s28(iiia).

(k) Anycashassistance(bywhatevernamecalled)receivedorreceivablebyany personagainst exportsunderanyschemeoftheGovernmentofIndia,taxableu/s28(iiib). (l) AnydutyofCustomsorexciserepaidorrepayableasdrawbacktoanypersonagainstexports undertheCustomsandCentralExciseDutiesDrawbackRules,1971,taxableu/s28(iiic). (m) Thevalue ofanybenefitorperquisitetaxableunderclause(iv)ofSection28. (n) AnysumchargeabletoincomeͲtaxunderclause(v)ofsection28,suchasinterest,salary,bonus, commissionorremunerationreceivedbyapartnerofthepartnershipfirmfromsuchfirm. (o) Anycapitalgainschargeableu/s 45.
(p) ProfitorgainsofbusinessofinsurancecarriedonbyMutualInsuranceCompanyorbyacoͲ operativesocietycomputedinaccordancewiththeprovisionsofthisActu/s44. (q) Theprofits&gainsofanybusinessofbanking(includingprovidingcreditfacilities)carriedbyacoͲ operative societywithitsmembers. (r) Anywinningfromlottery,crosswordpuzzles,horseraces,cardͲgamesandothergamesofanysort orgamblingorbettingofanyformornaturewhatsoever. (s) Anysumreceivedbytheassesseefromhisemployeesascontributiontoanyprovidentfundor superannuationfund oranyfundsetundertheprovisionsofEmployeesStateInsuranceAct1948 oranyotherfundforthewelfareofsuchemployees. (t) Anysumreceivedunderthe"KeymanInsurancePolicy",meansaLifeInsurancePolicytakenbya persononthelifeofanotherpersonwhoisorwas theemployeeofthefirstmentionedpersonor isconnectedinanymannerwhatsoeverwiththebusinessofthefirstmentionedperson. (u) AnysumreceivedorreceivableincashorinkindunderNonͲcompeteagreementsorexclusive rightsagreements. (v) Amountexceeding`50,000receivedwithoutconsiderationfrom nonͲrelatedpersonofthe assessee. Theaforesaiddefinitiondoesnotdefinetheterm"income"butmerelydescribesvariousreceiptsas income.It,therefore,followsthatinadditiontotheaforesaidreceipts,anyotherreceiptistaxable undertheActifitcomeswithinthegeneralandnaturalmeaningof theterm"income".

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

EXPLANATION: -

Followingpointsshouldbenotedwhilestudyingthedefinitionofincome:Ͳ

1. Personalgiftisnotconsideredasincome,however,giftreceivedforprofessionalskillistobe

consideredasincome.

2. Incomemaybereceivedincashorinkind.Itstillremainsincome.

3. Itisimmaterialfor

incometaxpurposewhetherincomeisearnedfromlawfulmeansorunlawful means.

4. Incomemaybecalculatedonreceiptoraccrualbasisdependinguponfacts&natureofincome.

5. Incomeincludeslossi.e.lossisconsideredasminusincome.

6. Pinmoneyreceivedbywifeforherpersonalexpenses

isnottreatedasincome.

7. Incomeshouldbereal¬fictional.

8. Awardsreceivedbyaprofessionalsportsmanisanincome.

Section 2 (31): PERSON

Thetermpersonincludesthefollowing:Ͳ

i) Anindividual ii) AHinduUndividedFamily(HUF) iii) ACompany iv) Afirm v) Anassociationofpersons(AOP)orbodyofindividuals(BOI)whetherincorporatedornot. vi) Alocalauthority. vii) Everyartificialjuridicalpersonnotfallinginthecategories mentionedabove. ThesearesevencategoriesofpersonschargeabletotaxundertheAct.Theaforesaiddefinition isinclusiveandnotexhaustive.Therefore,anyperson,notfallingintheaboveͲmentionedseven categories,maystillfallinthefourcornersoftheterm"person"andaccordinglymaybeliableto tax undersection4.

EXPLANATION:Ͳ

1. Individual:Naturalhumanbeinge.g.Mr.X.

2. H.U.F.:ItisthefamilyarisingoutofHindulawconsistingofallmembers

lineallydescendedfromaHinduancestor(children&grandchildren),andtheir wives&unmarrieddaughters.E.g.Mr.AasKartaand

B,C,D&Easfamily

members.

3. Company:Undersection2(17),"company"isdefinedas-

a) anyIndiancompany;or b) anybodycorporateincorporatedunderthelawsofaforeigncountry;or c) anyinstitutionorassociationorabodywhichisassessedorwas assessable/assessedasacompanyforanyassessmentyear commencingonorbeforeApril1,1970;or

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

4 d) anyinstitution,associationorabody,whetherincorporatedornot& whetherIndianornonͲIndian,whichisdeclaredbyspecialorderofthe

CentralBoardofDirectTaxestobeacompany.

Eg.WiproLtd.;RelianceIndiaLtd.

4. Firm:Apartnershipfirme.g.Aregisteredpartnership

firmwithX,Y,Zpartners.

5. AOP/BOI:ItisanAssociationofPersonsforacommoncause,e.g.XYZ

HousingSociety.

6. LocalAuthority:Itmeansamunicipality,districtboard,grampanchayatorany

bodyentrustedbythegovernmentthecontrolandmanagement ofamunicipal orlocalfunde.g.ThaneMunicipalCorporation,

B.E.S.T.etc.

7. Artificial:Itincludesanidol,adeity,auniversity,BarCounciletc.e.g.Idolsof

JuridicalPerson Gods&Allah,Balaji,MumbaiUniversityetc.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

UNIT2:BASISOFCHARGE

Section 2 (9): ASSESSMENT YEAR

AssessmentYearmeansaperiodofTwelvemonthscommencingfrom1 st

DayofAprileveryyear.

EXPLANATION:Ͳ

Assessmentyear2016Ͳ17thusbeginson1

April2016andendson31

March2017.Thisistheyearin

whichincomerelatingtoPreviousYear2015Ͳ2016isassessedtotax. Section 2 (34), Read with Section 3 : PREVIOUS YEAR UnderSection2(34)PreviousYearmeansthe"PreviousYear"asdefinedinSection3. AsperSection3therewillbeonlyonepreviousyearforalltheassesseesendingon31 st

Marchforall

sourcesofincome.E.g.Incaseofnewlysetupbusinesspreviousyearwillbeginfromthedateofsetting upofbusiness&willendwith31 st

Marchnext.Thus,ifanewbusinessiscommencedon18

Dec.2015,

firstpreviousyearwillbefrom18 th

Dec.2015to31

March2016andwillcoveraperiodoflessthan12

months. ForIncomeTaxpurposestatusoftheassesseeisclassifiedasͲ

1. LegalStatus - Whichisdecidedonthebasisofdefinitionofperson.Eg.ForaJointStockCompany,

legalstatusiscompany.ForMr.Xlegalstatusis'individual'.

LegalStatusofanassesseedecidestherateatwhich

heisrequiredtopayincometax.

2. ResidentialStatus - Onthebasisoftheseprovisionsresidentialstatusoftheassesseeiseither-a)

Residentorb)NonͲResident.

Residentialstatusdecidesincomeonwhichassesseeissupposedtopaytax.Incomeearnedby assesseeiseitherIndianincomeor/and

Foreignincome.

Thus,legalstatusdecidesrateoftax,whereas,residentialstatusdecidesincomeonwhichtaxistobe paid.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

RESIDENTIAL STATUS

EveryassesseeisEitherResidentorNonͲResident.

Basedonlegalstatusoftheassesseetherearedifferentprovisions,whichdecidewhetheraparticular assesseeisresidentornonͲresident. IfanassesseebecomesResidentaspertheprovisionsoftheactthenitistobedecidedfurther, whether heis

1. ResidentandOrdinaryResident

2. ResidentbutNotOrdinaryResident.

RESIDENTIAL STATUS OF AN INDIVIDUAL - SEC. 6 (1) ForanindividualtobecomeResidenthehastosatisfyanyoneofthefollowingtwoconditions:

1. HeshouldhavebeeninIndiaintheyearforwhichResidentialStatusistobedecided

foraperiod amountingto182daysormore. OR

2. Withinthe4yearsprecedingtotheyearforwhichresidentialstatusistobedecided,heshouldhave

beeninIndiaforaperiodamountingto365daysormoreandshouldhavebeeninIndiafor60days ormoreintheyearforwhichResidentialStatusistobedecided.

Exceptiontocondition2:

AnIndianCitizenoranIndianmemberofacrewofanIndianshipwholeavesIndiainany previousyearforemploymentoutsideORanIndianCitizenorapersonof

Indianoriginwhoisoutside

IndiaandcomesonavisittoIndia,inthesecondpartoftheconditionno.2thewords60daysshouldbe replacedby182days.Itisclearthatconditionno.2becomesnonͲfunctionalincaseofsuchassesses.

Apersonisdeemedto

beofIndianoriginifheoreitherofhisparentsoranyofhisgrandparents wasborninundividedIndia. IfanindividualbecomesaResidentitistobedecidedfurtherwhichtypeofResidentheis.

TheseprovisionsarediscussedinSection6(6).

Foranindividual

tobecomeResidentandOrdinaryResidenthehastosatisfyboththe conditionsgivenbelow:Ͳ

1. HeshouldhavebeenresidentinIndiaatleast2outof10previousyears,precedingtotheprevious

yearinwhichheisresident. AND

2. HeshouldhavebeeninIndiafor

aperiodamountingto730daysormorein7yearsprecedingtothe previousyearinwhichheisresident.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

7 Ifassesseedoesnotsatisfyanyoneoftheabovementionedconditions(orboth)hisResidential

StatuswillbeResidentbutNotOrdinaryResident.

PROBLEMS

1.Mr.XleftIndiaon1

st Aug.2015.Hisstayduringpreceding4yearswasasfollows:Ͳ

2014-2015 50

2013-2014 70

2012-2013 90

2011-2012 100

DeterminehisresidentialstatusfortheA.Y.2016-17.

2.Mr.SureshAhire,anIndiancitizenleftIndiaforLondonon1

August2015ashewasappointed

managerinU.K.basedhotel.DeterminehisResidentialStatusforA.Y.2016-17.

3. Mr.Advani,anIndiancitizenwhoisworkingasanassistantinatouristcompanyinPakistancameto

Indiaonholidayon15

April2015andleftforPakistanon30

June2015.

DeterminehisResidentialStatusforA.Y.2016-17.

4.Mr.XleftIndiaon15

th Oct2015.HisstayinIndiaduringprecedingyearswasasfollows:

2014Ͳ2015 220

2013Ͳ2014 185

2012Ͳ2013 90

2011Ͳ2012 320

2010Ͳ2011 100

2009Ͳ2010 200

2008Ͳ200975

2007Ͳ200855

2006Ͳ2007 365

2005Ͳ2006 200

2004Ͳ2005 320

2003Ͳ2004 300

2002Ͳ2003 120

DeterminehisresidentialstatusfortheA.Y.2016Ͳ17.

5.Mr.Xwasaprivatedetective.Priorto1

Dec,2014hehadneverbeenoutsideIndia.On1

st Dec.

2014heleftIndiaforSouthAfricaashewasaskedbytheGovernmentofIndiatofindcertaindetails

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

8 regardingirregularitiesinIPLcricketmatchesandsubmitareport.HecamebacktoIndiaon1 st June

2015andwasagainaskedtoleaveforSouthAfricaon15

June2015.Hewastocomebackon10

th Oct.2015,butunfortunatelymetwithanaccidentandwaskilled. DeterminehisResidentialStatusforA.Y.2016-2017.

6.Mrs.XcameonavisittoIndiaon10

April2015andleftIndiaon1

Sep.2015.Herstayduring

precedingyearswasasfollows:Ͳ

2014Ͳ2015 100

2013Ͳ2014 100

2012Ͳ2013 100

2011Ͳ2012 100

Placesofbirth

Mr.XͲͲͲBristol,U.K.

Mrs.XͲͲͲJamaica

FatherofMr.X-Dubai

MotherofMr.X - Hamilton

GrandmotherofMr.XͲLondon

Grandfather

ofMr.XͲNairobi

GrandmotherofMrs.XͲKarachi

GrandfatherofMrs.X-PortofSpain

Mrs.Xcelebratedher70

th birthdayon15 th

August2015.

DetermineherresidentialstatusfortheA.Y.2016Ͳ17.

7.Mr.TiwarileftforSwitzerlandon15

March2012afterstayinginIndiaforabout1yearfrom1

April2011.HecamebacktoIndiaon9

Sept2015.

DeterminehisResidentialStatusforAssessmentYear2016-17.

8.Mr.Harry,anIndianCitizenwasborninGermany.HecametoIndiaforthefirsttimewhenhe

was10andneverwentoutsideIndiatillhewas25.HeleftforGermanyagaininMay2012and againcamebacktoIndiainMarch2016.

Determinehis

ResidentialStatusforA.Y.2016-17.

RESIDENTIALSTATUSOFHUF,FIRMANDAOPORBOI

SEC. 6 (2)

HUF,FirmorAOPissaidtobeResidentinIndiainanypreviousyearifthecontroland managementthereofissituatedeitherpartlyorwhollyinIndia.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

RESIDENTIALSTATUSOFCOMPANYSEC.6 (3)

AcompanyissaidtobeResidentinIndiainanypreviousyearif:

1) ItisanIndiancompanyor

2) DuringthepreviousyearcontrolandmanagementofitsaffairsissituatedwhollyinIndia.

RESIDENTIALSTATUSOFOTHERASSESSEESSec.6(4)

Anyotherassesseeissaid

tobeResidentinIndiainanypreviousyearifthecontrol&managementofits affairsiswhollyorpartlysituatedinIndia.

RESIDENTANDORDINARYRESIDENT:Sec.6(6)

1. H.U.F.:ͲH.U.F.issaidtobeOrdinaryResidentinanypreviousyearifits'Karta'isresidentand

OrdinaryResidentinthatpreviousyear.

2. Firm,AOP,CompanyandAllOtherAssesses:ͲTheterm'OrdinaryResident'isnotapplicableto

otherassesses.TheyareeitherResidentorNonResident.

PROBLEMS

1.Duringthepreviousyear2015Ͳ16affairsofaHinduUndividedfamilyarepartlymanagedfromDelhi

andpartlyfromHongͲKong.Don,aKartaofH.U.F.,isresidentandordinaryresidentinIndiaandTan whoalsomanagestheaffairsoffamilyisanonͲresidentinIndiafor theassessmentyear2016Ͳ17. Determinetheresidentialstatusofthefamilyfortheassessmentyear2016Ͳ17.

2.AfirmhasfivepartnersallofwhomareresidentinIndia.ThefirmownsateaestateinSriLanka,

whichismanagedbyanagentwhostaysinSriLanka.Agentlooksafterthedaytodayworkingof theestate.Hetakespermissionofthepartnersbefore takinganymajordecision.Determinethe residentialstatusofthefirm.

3. AcompanyisregisteredinDubai,havingitsheadofficethere.However,themajorityofthe

directorsandmanagersresidedinIndia.Salescontractsandotherimportantbusinessfunctions werecontrolledbydirectorsinIndia.Whatistheresidentialstatusofthecompany?

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

SCOPEOFTOTALINCOME

OnwhatincomeanassesseewillpaytaxinIndiadependsuponhisresidentialstatus.Scopeoftotal incomeisexplainedinthefollowingchart:Ͳ

INCOME:Ͳ

A.INDIANINCOME

1.ReceivedordeemedtobereceivedinIndia

2.Accruingorarisingordeemedtoaccrueorarisein

India.

B.FOREIGNINCOME

ACCRUINGORARISINGOUTSIDEINDIA&RECEIVEDOUTSIDEINDIA:Ͳ

1.FromabusinessControlledfromIndiaorProfessionsetupinIndia.

2.FromabusinesscontrolledfromoutsideIndiaorprofessionsetupoutsideIndia.

Note : -Ifinrespectofanybusiness,operationsarenotcarriedoutinIndiaitwillbetreatedas ForeignincomeevenifitiscontrolledfromIndia.However,ifsuchanincomeis receivedinIndiaitwillbetreatedasIndianIncome.

TAXABILITYBASEDONRESIDENTIALSTATUS

1. ResidentandOrdinaryResident :HastopayIncomeͲtaxinIndiaontotalincome

earnedbyhim.i.e.IndianaswellasForeignIncome.

2. ResidentbutNotOrdinaryResident:HastopayIncomeͲtaxinIndiaontotalincomeearned

byhimexceptincomefrombusiness controlledfrom outsideIndiaorprofessionsetupoutsideIndia.

3. NonͲResident:HastopayIncomeͲtaxinIndiaonlyonIndianincome.

SECTION 7 : INCOMEDEEMEDTOBERECEIVEDININDIA

IncomedeemedtobereceivedinIndiainthepreviousyearisalsoincludedinthetaxable incomeoftheassessee.ThefollowingincomeshallbedeemedtobereceivedinIndia: (a) Annualaccretiontothecreditbalanceofanemployee inthecaseofrecognisedprovidentfundto theextentprovidedundertherules. (b) Excesscontributionofemployerincaseofrecognisedprovidentfundtotheextentprovidedunder therules. (c) Transferbalanceinarecognisedprovidentfundtotheextentasprovidedundertherules.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

SECTION8: DIVIDENDINCOME

Anydividenddeclaredbyacompanyordistributedorpaidbyitshallbedeemedtobetheincomeof thepreviousyearinwhichitissodeclared,distributedorpaid,asthecasemaybe;

Anyinterimdividendshallbedeemedtobetheincome

ofthepreviousyearinwhichtheamountof suchdividendisunconditionallymadeavailabletothememberwhoisentitledtoit. Thefollowingtableillustratesscopeoftotalincomeinrespectofvariousincome:Ͳ

ParticularsR&ORRbutnotORNR

1) AnyincomereceivedinIndia

ForworkdoneinIndia

ForworkdoneoutsideIndia

2) AnyincomereceivedoutsideIndia

ForworkdoneinIndia

ForworkdoneoutsideIndia

3) IncomeaccruedinIndia

ReceivedinIndia

ReceivedoutofIndia

4) IncomeaccruedoutofIndia

ReceivedinIndia

ReceivedoutofIndia

5) SalarypaidbyIndianGovernment

6) DividendorInterestpaidbyIndiancompany.

7) IncomefrompropertyinIndia

ReceivedinIndia

ReceivedoutofIndia

8) ProfitonsaleofassetsinIndia

ReceivedinIndia

ReceivedoutofIndia

9) IncomefrombusinessinIndiacontrolledfrom

India

10) IncomefrombusinessinIndiacontrolledfrom

Dubai.

Taxable

NotͲ

taxable

Taxable

NotͲtaxable

Taxable

NotͲtaxable

Taxable

NotͲtaxable

Taxable

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

SECTION 9

:INCOMEDEEMEDTOACCRUEORARISEININDIA

1) Allincomeaccruingorarisingthroughorfrom:

a.AnybusinessconnectioninIndia. b.AnypropertyinIndia. c.AnyassetorsourceofincomeinIndia. d.TransferofcapitalassetsituatedinIndia.

2) Salariespayableforservices

renderedinIndiawillbecalledIndianincome.

3) SalaryreceivedbyIndianNationalfromtheGovernmentinrespectofservicesrenderedoutside

IndiaisanIndianincome.

4) AnydividendpaidbyanIndiancompanyisconsideredasanIndianincome.

PROBLEMS

1.FromthefollowingdetailsofincomeoftheassesseefindouthisgrosstotalincomefortheA.Y.

2016-17ifheis:Ͳ

a)R&ORb)RbutnotORc)NonResident (1) DividendfromIndiancompaniescreditedtobankaccountinIraq` 12,000. (2) IncomefrombusinessinSriLankacontrolledfromMumbai` 18,000. (3) IncomeaccruedinAfghanistan&receivedinPakistan` 31,000. (4) IncomefrompropertyinAustraliareceivedinBhutan` 12,000. (5) InterestcreditedinBankaccountinSwitzerland` 50,000. (6) RentfrompropertyinAustraliareceivedinNepal` 24,000. (7) IncomefrombusinessinMumbaicontrolledfromDubai` 1,00,000. (8) PastuntaxedprofitbroughttoIndia` 40,000.

2. Mr.Balvinder,anIndiancitizen,furnishesthefollowingparticularsofhisincomeearnedduringthe

previousyearrelevanttoassessmentyear,2016Ͳ17. (a) PensionfromanIndianemployerreceivedinSudan` 36,000. (b) ProfitfrombusinessatPuneandmanagedfromBritain` 48,000. (c) Incomeearnedfrombusinessin KuwaitwhichiscontrolledfromMumbai(` 30,000receivedin

India)` 54,000.

(d) PastuntaxedprofitbroughttoIndia` 1,00,000.

(e) IncomefromagriculturallandinSriLanka` 10,000receivedinIndia.11) IncomefrombusinessinDubaicontrolledfrom

U.S.A.

12) IncomefrombusinessinDubaicontrolledfrom

India.

13) Remittanceofpastuntaxedamounts.Taxable

Taxable

NotͲtaxableNotͲtaxable

Taxable

NotͲtaxableNotͲtaxable

NotͲtaxable

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

13 (f) ProfitonsaleofplantatBhopal(1/2receivedinU.S.A.)` 38,000. (g) DividendfromGermancompanyreceivedinIndia` 5,000. (h) ProfitfrombusinessinRajasthancontrolledfromMaharashtra` 74,000. (i) SalaryearnedandreceivedinSaudiArabia` 48,000. (j) InterestonBhutanDevelopmentBonds(entire amountreceivedinSudan)` 40,000. DeterminethegrosstotalincomeofMr.Balvinderfortheassessmentyear2016Ͳ17ifheis,(i) ResidentandordinarilyResident(ii)ResidentbutnotordinarilyResident(iii)NonͲResident.

3.FollowingistheincomeofMr.Khanforthepreviousyearrelevanttoassessmentyear2016-17.

i)InterestfromIndiancompaniesreceivedinIraqandcreditedtobankaccountinIraq`12,000. ii)IncomefrombusinessinSriLankacontrolledfromKerala` 18,000. iii)IncomeaccruedinNepaland receivedinPakistan`31,000. iv)IncomefrompropertyinJapanreceivedinTibet`12,000. v)InterestcreditedfromBankaccountinSwitzerland`50,000. vi)RentfrompropertyinAustraliareceivedinFrance`24,000. vii)IncomeaccruedinSwitzerlandandnotreceivedinIndia` 10,000. viii) IncomeearnedinU.S.A.inpastbutbroughtinIndiaduringtheyear` 20,000.

Findouthisgrosstotalincomeresident:

i)Residentandordinarilyresident; ii)Residentbutnotordinarilyresident; iii)NonͲResidentinIndia. 4. ThefollowingarethesourcesofincomeofShriManoharfortheassessmentyear2016Ͳ2017. Determinehistotaltaxableincomeassumingalternativelythatheis: i)ResidentandOrdinarilyResident. ii)NotOrdinarilyResident iii)NonͲResident. (a)Salaryfromacompany(Gross)`52,000.(EarnedinIndia) (b)

IncomefromprofessioncarriedinIndia`57,000.

(c)IncomeaccruedinU.K.andbroughtinIndia` 3,000. (d)IncomefromabusinessinGermany` 81,000(ThebusinessiscontrolledfromIndia). (e)` 10,000receivedfromabankinFrance.Themoneywasdepositedinthebankaccountbyhis brotherbeingtheinterestanddividendearnedbyMr.ManoharinAmerica. (f)` 20,000salaryearnedinIndiadepositedbyhisemployerdirectlyinthebankinSwitzerland. (g)` 2000ProfessionalfeesearnedandreceivedinNewYorkbutlaterremittedtoIndia. (h)` 10,000incomefrombusiness,which iscarriedoninHongKongbutcontrolledfromNewYork.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

UNIT3:EXCLUSIONSFROMTOTALINCOME(SECTION10)

UnderSection10ofIncomeTaxActof1961certainincomeisexemptedfromtaxeitherfullyor partially.InotherwordsitisalistoftaxͲfreeincomeinthehandsoftheassesseeandthoughitis anincomeoftheyearassesseeisnotrequiredto paytaxonit.

1. AgriculturalincomeSec.10(1):ͲForanincometobecalledanagriculturalincomeconditionstobe

satisfiedareͲ (a) Rentorrevenueshouldbederivedfromland. (b) Landshouldbeusedforagriculturalpurpose. (c) ThelandshouldbesituatedinIndia.

Examples:

1. Incomefromleaseofagriculturalland.

2. Incomefromlandusedforagriculturalpurposee.g.producegrownforconsumptionbyman

(grains,vegetablesorfruits)oranimals(grassorpastures);cashcrops(cottonjuteetc.), luxuryitemssuchascoffee,tobacco;cropsgrownforselfͲconsumptionetc;

3. Compensation

receivedfromInsuranceCompanyfordamagetoteagarden.

4. Incomefromgrowingflowers.

5. Salaryorinterestoncapitalreceivedbyapartnerfromafirmengagedinagriculture(assalary

orinterestisonlyawayofdistributingprofits).

ExamplesofNonagriculturalincome:Ͳ

1. Incomenotdirectly

derivedfromland:Interestonarrearsofrent;dairyfarming,poultry farming,dividendreceivedfromalimitedcompanyhavingonlyagriculturalincome;salaryof amanagerofanagriculturalestate,rentforlandusedforstoringcrops;manufactureofsalt fromseaͲwater.

2. Incomewithoutperformingbasicagriculturaloperations:

Saleofplantswhichhavegrown

spontaneously(ontheirownwithoutanysowingofseedse.g.mushrooms);saleoftrees whichwerealreadystandingontheagriculturalestatewhenpurchased.

3. Incomefromproducesoldbyothersandnotbythecultivator:Saleofagriculturalproduce

receivedasinterestonloan; receivedaspriceforwatersuppliedtoagriculturalland;saleof agriculturalproducebyabroker.

2. ReceiptfromH.U.F.Sec.10(2):AnyamountreceivedbymemberofH.U.F.outofthefamilyincome

isexemptfromtax.

3. PartnersShareintheprofitsofthefirmSec.

10(2A):Partnerofthefirmisnotrequiredtopaytaxin

individualcapacityonhisshareinprofitsofthefirm.

4. LeaveTravelConcessionSec.10(5):Itistheamountgivenbytheemployertotheemployeefor

travelingwhileonleaveortosettleat anyplaceinIndiaafterretirement.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

15 Subjecttocertainrestrictionsthisincomeisexemptfromtaxinrespectoftravelconcession receivedbyanassesseefromhisemployerorformeremployer: (a) Forhimself&hisfamilyinconnectionwithhisproceedingtoanyplaceinIndia. (b) Forhimself&hisfamilyinconnectionwithhis proceedingtoanyplaceinIndiaafter retirementfromserviceorafterterminationofhisservice. However,exemptionunderthissectionisrestrictedtoamountactuallyspentbythe assessee. ForthepurposeofthissectionFamilyinrelationtoanyindividualmeans: i.Thespouseandchildrenof theindividual. ii.Theparents,brothers&sistersoftheindividualoranyofthemwhollyormainlydependent ontheindividual. Exemptionunderthissectionisavailableinrespectof2journeysperformedinablockof4calendar yearscommencingfrom1986.

LeavetravelActualamountspentExemptionTaxable

amount allowancesreceivedbyemployee

10,000 ͲͲͲͲͲͲNil10,000

10,0002,0002,0008,000

10,0009,0009,0001,000

10,00010,00010,000Nil

10,00015,00010,000Nil

5. Foreignallowances&perquisitestoGovernmentemployeesoutsideIndiaSec.10(7).

6. Section10(10)Gratuity:Gratuityisthelumpsumpaymentmadebytheemployer,tothe

employeeatthetimeofhisretirement,ortothefamilymembersofemployeeincaseofhisdeath. For incometaxpurpose,Gratuityisconsideredsalaryincome.However,entireamountreceivedas gratuityisnottaxable.Amountthatisexemptfromtaxiscoveredbyfollowingprovisions:Ͳ (a) Gratuityreceivedbygovernmentemployees:Itisfullyexemptfromtax. (b) IncaseofemployeescoveredbythePayment ofGratuityAct,1972:ͲAnygratuityreceivedby anemployeecoveredbythepaymentofGratuityAct,1972isexemptfromtaxtotheextentof leastofthefollowing:Ͳ i)15dayssalary(7daysinthecaseofemployeesofaseasonalestablishment)basedon salarylastdrawnfor everycompletedyearofserviceorpartthereofinexcessofsix months;

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

16 ii)`10,00,000w.e.ffrom24/05/2010 iii)Gratuityactuallyreceived (c)ForemployeesnotcoveredbythePaymentofGratuityAct,1972:Forotheremployees,

Gratuityreceivedisexemptasperthefollowing:Ͳ

i)Halfmonth'ssalaryforeachcompletedyearofservicecalculatedonthebasisof average salarydrawnfor10monthsimmediatelyprecedingthemonthofretirementordeath,OR. ii)Actualamountreceivedasgratuity,OR iii)Amountfixedbythegovernmentfromtimetotimewhichatpresentisincreasedto`

10,00,000w.e.ffrom24/05/2010whicheverisless.

Followingpointsshouldbe

noted:Ͳ

1. SalaryforthispurposemeansBasic+D.A.for(b)above&Basic+D.A.+Commissionatfixed

percentagefor(c)above.

2. 26daysrefertoworkingdayspermonth.Thisisimportanttocalculate15days(or7days)

salary.

PROBLEMS

1. Mr.X,nonͲgovernmentemployeenotcoveredbyPaymentGratuityAct1972retiredfromservices

ofKedarAutomobileson31 st August2015andreceived` 96,000asGratuityafteraserviceof40 yearsand3months.Hisaveragesalaryduringlast10monthsimmediatelyprecedinghisretirement was` 4,500permonth.Computehistaxablegratuityifany.

2.Mr.YwasanonͲgovernmentemployeenotcoveredbyPaymentofGratuityAct.Heretiredon1

May2015afteraserviceof35yearsand11months.Since1

Jan.2013hewasdrawingamonthly

salaryof` 5,500.Salarywasdueforincrementon1 st

Jan.everyyear@10%.Onretirementhe

received` 60,000asgratuity.ComputetaxableGratuityifany.

3. Mr.A,Incometaxofficerreceives` 2,00,000asgratuitywhileheisstillworking.Isthisgratuity

taxable?

4. Mr.A,Incometaxofficerreceivesgratuityof` 2,00,000atthetimeofretirement.Isthisgratuity

taxable?

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

5. Mr.DwhoisworkinginRelianceIndustriesLtd.receivedGratuityworth` 5,00,000whilein

service.Isthisgratuitytaxable? 6. Mr.FretiredfromXLtd.towhomgratuityactisnotapplicable.Receivedgratuityof` 6,00,000. Hisserviceperiodis35years11monthsandaveragesalaryis` 10,000.Isthisgratuitytaxable?

7. Section10(10A)CommutationofPension:Pensionisaperiodicalpaymentmadebyemployerto

theemployeeafterretirement.Thissectionisalsoapplicableinrespectofanypaymentreceivedby wayofcommutationofpensionreceivedbyanindividualoutofannuityplanoftheL.I.C.froma fundsetupbythecorporation.

Therearetwooptionsregardingthispayment:Ͳ

(a) UncommutedPension:Itisthepensionthatistobereceivedperiodically.Itisfullytaxableassalary incomeincaseofalltheemployees. (b) CommutedPension:Itisamountreceivedinlumpsuminlieuofperiodicalpension.Regarding commutation,optionsavailableare:Ͳa)Commutationoffullpension,wherenoperiodicalpayment willbemade,entirepensionwillbepaidinlumpsum.b)Partofthe pensioncanbecommuted whereinrespectofuncommutedpensionperiodicalpaymentwillbemade.

TAXABILITY OF COMMUTED PENSION

1. AnypaymentoncommutationofpensionreceivedbyallCentralandStateGovernment

Employeesisfullyexemptfromtax.

2. Incaseofotheremployeestaxabilitydependsonwhetheremployeereceivedgratuityalsoon

retirement.

Exemptionisrestrictedtothefollowing:Ͳ

1. Incasewhereemployeereceivedanygratuity,

commutedvalueof1/3 rd pensionisexempt.

2. Incasewhereemployeedidnotreceivegratuity(i.e.hereceivedonlypension)commutedvalueof

halfofpensionisexempt. Anypaymentreceivedbywayofcommutationofpensionfromafundunderclauses23AAB(i.e. fundsetupbyLICofIndia vizJeevanSuraksha)underpensionschemeapprovedbycontrollerof

Insuranceisfullyexemptfromtax.

NewPensionSchemeforCentralGovt.Employees

NewpensionschemeisapplicabletonewentrantstoGovernmentservice.Aspertheschemeitis mandatoryforpersonsenteringtheserviceoftheCentralGovernmenton orafterJanuary1,2004,to contribute10percentofsalaryeverymonthtowardstheirpensionaccount.Amatchingcontributionis requiredtobemadebytheGovernmenttothesaidaccount.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

Thetaxtreatmentunderthenewschemeisasfollows-

1. ContributionbytheCentralGovernmenttothepensionschemeisfirstincludedunderthehead

"Salaries"inhandsoftheemployee.

2. Suchcontributionisdeductible(totheextentof10percentofthesalaryofthe

employee)under section80CCD.

3. Employee'scontributiontothepensionscheme(totheextentof10percentofthesalaryofthe

employee)isalsodeductibleundersection80CCD.

4. Whenpensionisreceivedoutoftheaforesaidamount,itwillbechargeabletotaxinthehandsof

therecipient.

5. Theaggregateamountofdeductionundersections80C,80CCC&80CCDcannotexceed`1,50,000.

6. "Salary"forthepurposeofpoints2and3(supra)includesbasicsalaryanddearnessallowances(if

thetermsofemploymentsoprovide)butexcludesallotherallowancesandperquisites. 7. Nodeductionwillbeallowedundersection80Cinrespectofamountsonwhichdeductionhasbeen claimedundersection80CCD.

PROBLEMS

1. Mr.AretiredfromthedepartmentofSalesTaxon1

April2015.HewasentitledtoMonthly

pension`3000&receivedgratuityworth`2,00,000.On1 st

Oct2015hecommuted50%ofthe

pensionfor`2,00,000.Findouthistaxablepensionforpreviousyear2015-16.

2.Mr.DretiredfromthedepartmentofCentralExciseon1

Dec.2015.Monthlypension` 10,000

30%ofthepensionhecommutedfor` 4,00,000.Healsoreceivedgratuityof`5,00,000.

Findouthistaxablepension,ifany.

3.Mr.AretiredfromGaneshLtd.on1

April2015.Monthlypension` 6,000.70%ofthepensionhe

commutedfor` 4,20,000on1 st Oct.2015.Hehasreceivedgratuityalso.Findouttaxablepension

4. Mr.XretiredfromParagLtd.on1

st May2015.Hedidnotreceivegratuity.MonthlyPension` 6,000. On1 st

Sep.30%ofthepensionwascommutedfor` 3,00,000.

Findouttaxablepension.

5. Mr.AretiredfromKBCLtd.on1

st Jan.2016.Hewasentitledtoamonthlypensionof`6,000butgot

80%pensioncommutedfor` 2,10,000.Hewasalsoentitledtoreceivegratuityasperthetermsof

hisemployment.FindouttaxablepensionforA.Y.2016-17.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

6Mr.AretiredfromChiragLtd.on1

st April2015.Serviceperiod40years,6months.Averagesalaryat thetimeofretirement` 10,000p.m.Gratuityreceived` 3,00,000.Pensionpermonth` 7,500.On 1 st April2015hecommuted50%ofthepensionfor`3,00,000.Findouthistaxablepension& gratuityforthepreviousyear2015Ͳ16.HeisnotcoveredbyGratuityAct.

8.LeaveSalarySection10(10AA):Leavesalaryistaxableunderthehead'IncomefromSalary'.

However,incertain

casesLeaveSalaryisexemptfromincometax.Detailsofthisexemptionare givenbelow: a.LeaveSalaryreceivedbyanemployeeofCentralorStateGovernmentatthetimeof retirementistotallyexemptfromtax. b.Forotheremployees,ifleavesalaryisreceivedatthetimeofretirement, leastofthe followingisexempt:

1. Periodofearnedleave(inmonths)tothecreditofemployeeatthetimeofleavingthejobbut

notexceeding30dayspereachcompletedyearofserviceAveragemonthlysalary

2. Leavesalaryfortheperiod10monthsbased

onaveragesalarydrawninlast10months precedingtothedate ofretirementor

3. AmountasspecifiedbyCentralGovernmentfromtimetotimewhichatpresentis` 3,00,000.

4. Actualamountreceivedasleaveencashment.

SalaryforthispurposeisBasic+DA+Commissionatfixedpercentage. Notifiedlimitof`3,00,000appliestoallsuchamountreceivedfromoneormoreemployers/current orearlieryears.Therefore,forsubsequentclaimsamountexemptedearlierwillbedeductedfrom thelimit.

9.RetrenchmentCompensationSection10(10B):Retrenchmentcompensationreceivedbyaworker

underIndustrialDisputesActof1947 oranyotheractisexemptonthefollowingbasis: a.AmountascalculatedaccordingtotheprovisionsoftheActor b.Amountasspecified(notlessthan50,000)bytheCentralGovernment.Foraworkerretrenched after31.12.1996amountspecifiedis` 5,00,000or c.Amountreceived.Whichever isless.

10.CompensationonretirementofanemployeeofapublicsectorcompanySection10(10C):

Paymentreceivedbyanemployeeof:Ͳ

1.AnauthorityestablishedunderCentral/State/ProvincialAct.

2.Localauthority.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

3.University(underUGCAct)

4.IIT.

5.AnyStateorCentralGovernment

6.PublicSectorCompany

7.AnyotherCompany

8.CoͲoperativesociety

9.AnyInstitutespecifiedbytheGovernmentforthispurpose.

10.AnyinstituteofmanagementastheCentralGovernmentmaynotify.

Undervoluntaryretirementor

terminationofserviceschemeapprovedbytheGovernmentamount isexemptfromincometaxupto` 5,00,000.

11.Taxonperquisitespaidbyemployer.Section10(10CC)

12.AmountreceivedunderaLifeInsurancePolicySection10(10D):Policyamountaswellasbonusis

fullyexemptfromtaxexceptamount receivedunderKeymanInsurancePolicyandundersection

80DDor80DDA(3)andanysumreceivedunderpolicyissuedonorafter1.4.2003wherepremium

payableinanyyearexceeds20%ofsumassured.Howeverinsuchcasessumreceivedondeathofa personshallcontinuetobeexempt.

13. Payment

fromProvidentFundSection10(11).Fordetailsreferchapter'Salary'.

14.AccumulatedbalancefromarecognisedProvidentFundSec.10(12).

15. PaymentfromanapprovedSuperAnnuationFundSection10(13).

16. HouseRentAllowance(Section10(13A)andrule2A):

Theleastofthefollowingisexemptfromtax:

(a)Anamountequalto50percentofsalary,whereresidentialhouseissituatedatMumbai,Kolkata, DelhiorChennaiandanamountequalto40percentofsalarywhereresidentialhouseissituated atanyotherplace;OR (b)Houserentallowancereceivedbytheemployeeinrespect oftheperiodduringwhichrental accommodationisoccupiedbytheemployeeduringthepreviousyear;OR (c)Theexcessofrentpaidover10percentofsalary."Salary"fortheaforesaidpurposesmeansbasic salaryandincludesdearnessallowanceiftermsofemploymentsoprovide.Italsoincludes commissionbasedonafixedpercentageofturnoverachievedbyanemployeeaspertermsof contractofemployment,butexcludesallotherallowancesandperquisites.

17. SpecialAllowanceforexpensesSection10(14):

Anyspecialallowancegrantedbyemployertoemployeetomeettheexpensesshallbeexemptfrom taxtotheextentspentbyanemployeeonexpensesortotheextentspecifiedintheAct.e.g.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

21
EducationAllowanceisexempt@` 100permonthperchildUpto2children,TransportAllowance isexemptupto` 800permonth.Children'shostelAllowance@` 300Permonthupto2children.

18.CertainincomebywayofinterestSection10(15):

e.g.a)InterestonP.P.F. b)InterestonPostOfficeSavingsAccount. c)InterestonNotifiedGovernmentSecurities&Debentures. d)InterestonTaxͲfreeRBIbondsetc.

19. ScholarshipsgrantedtomeetthecostofeducationSection10(16).

20. AllowancereceivedbythemembersofparliamentorstatelegislatureSection10(17).

a)Dailyallowancefullyexempt. b)Allowancereceivedundermembersofparliament(constituencyallowance)Rulesof1986fully exempt. c)Anyconstituencyallowanceisfullyexempt.

21. Section10(17A)Awards:

Awardsreceived(incashorkind)areexemptinrespectofAwardinstitutedinthepublicinterest byCentralorStateGovernmentoranybodyapprovedbytheGovernment.

22.Section10(18):AnyincomebywayofͲ

a.PensionreceivedbyanindividualwhohasbeenintheserviceoftheCentralorState Governmentandhasbeenawarded"ParamVirChakra"or"MahaVirChakra"or"Vir

Chakra"

orsuchothergallantryawardastheCentralGovernmentmay,bynotificationintheOfficial

Gazette,specifyinthisbehalf;

b.Familypensionreceivedbyanymemberofthefamilyofanindividualreferredtoin subͲclause(i)

23.Incomeofamemberofascheduledtriberesidinginareaspecifiedintheconstitutionorinthe

statesofNagaland,Manipur&Tripura&intheUnionTerritoriesofArunachalPradesh&Mizoram orareascoveredbyNotificationissuedbyGovernorofAssam.Section10(26).

24.Incomeofresident

ofLadakhDistrict.Section10(26A).Thisexemptionisavailablesubjectto certainrestrictions.

25.ClubbedincomeofaminorchildSection10(32):Incaseincomeofaminorchildisclubbedwith

thatoftheparentundersection64(1A)suchincomeisexemptfromtaxuptomaximumof`

1,500inrespectofeachminorchild.

M.Com.ͲSemIII/2016Ͳ17/DirectTaxes

26.Section10(33):AnyincomearisingfromtransferofunitsoftheUS64wheretransfertakesplace

onorafter1.4.2002.

27.Section10(34):Dividend-Anyincomebywayofdividendreferredtoinsection115ͲO.

28. Section10(35):AnyincomeinrespectofMutualFundspecifiedunder

clause23D.

29.Section10(36):Anyincomefromtransferoflongtermcapitalassetbeingeligibleequityshares

purchasedonorafter1.3.2003butbefore1.3.2004.

30.Section10(37):Capitalgainoncompulsoryacquisitionofurbanagriculturallandifcompensationis

receivedafter31.3.2004&landwasusedbytheassessee (oranyofhisparents)foragricultural purposeduring2yearsimmediatelyprecedingtotransfer.

31.Section10(38):LongTermCapitalGainontransferofequityshares/unitscoveredbySecurities

TransactionTax(STT).

32. Section10(39):IncomearisingfrominternationalsportingeventheldinIndiawhereintwoor

more countriesareparticipating.

33. Section10(44):AnyincomereceivedbyanypersonfororonbehalfoftheNewPension

SystemTrust.

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